UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended September 30, 1998,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-93124
SGI International
(Exact name of registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of November
12, 1998, was 19,915,973.
<PAGE>
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introductory Note 11
Results of Operations 11
Liquidity and Capital Resources 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
PART III. SIGNATURES 18
2
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, December 31,
1998 1997
(Unaudited)
==============================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 117,016 $ 429,232
Restricted time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 67,503 26,066
Trade accounts receivable, less allowance for
doubtful accounts of $84,460 481,111 346,763
Costs and estimated earnings in
excess of billings on contracts 262,439 146,364
Inventories 64,644 64,843
Prepaid expenses and other current assets 74,029 232,977
- ----------------------------------------------------------------------------------------------
Total current assets 1,469,242 1,648,745
- ----------------------------------------------------------------------------------------------
LFC Process related assets:
Notes receivable, net 150,000 150,000
Royalty rights, net 1,335,562 1,571,250
LFC cogeneration project, net 342,174 421,137
Investment in TEK-KOL Partnership 394,820 481,685
Australia LFC project, net 94,117 115,836
Other technological assets, net 25,192 29,598
- ----------------------------------------------------------------------------------------------
2,341,865 2,769,506
Property and equipment, net of accumulated
depreciation of $819,188 and $589,789 858,931 788,740
Goodwill, net of accumulated amortization
of $132,738 and $96,790 347,506 383,454
- ----------------------------------------------------------------------------------------------
$ 5,017,544 $ 5,590,445
==============================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 542,839 $ 287,458
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and
estimated earnings on contracts 118,615 193,792
Current maturities of long-term notes payable 3,311,875 3,061,875
12% convertible debentures 976,573 976,573
Accrued salaries, benefits and related taxes 176,448 240,368
Payable to TEK-KOL Partnership - 100,000
Interest payable 485,443 483,930
Other accrued expenses 119,754 189,308
- ----------------------------------------------------------------------------------------------
Total current liabilities 6,131,547 5,933,304
Long-term notes payable, less current maturities 107,125 114,250
- ----------------------------------------------------------------------------------------------
Total liabilities 6,238,672 6,047,554
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' deficiency
Convertible preferred stock 650 910
Common stock 44,516,275 39,927,760
Paid-in capital 8,728,852 8,511,878
Accumulated deficit (54,466,905) (48,897,657)
- ----------------------------------------------------------------------------------------------
Total stockholders' deficiency (1,221,128) (457,109)
- ----------------------------------------------------------------------------------------------
$ 5,017,544 $ 5,590,445
==============================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months Nine months
ended September 30, ended September 30,
- -------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
=======================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,107,021 $ 1,195,745 $ 3,696,209 $ 3,779,897
Other 7,923 10,239 35,261 29,753
- -------------------------------------------------------------------------------------------------------
1,114,944 1,205,984 3,731,470 3,809,650
Expenses:
Cost of sales 833,019 888,226 2,811,129 2,893,349
Engineering, research and consulting 283,796 388,178 789,972 939,479
Loss from investment in TEK-KOL 100,576 326,212 527,865 657,960
Selling, general and administrative 540,665 719,698 2,018,859 1,874,244
Legal and accounting 156,930 106,064 510,488 411,137
Depreciation and amortization 220,623 198,943 608,498 550,624
Interest 138,134 160,858 599,016 429,801
- -------------------------------------------------------------------------------------------------------
2,273,743 2,788,179 7,865,827 7,756,594
- -------------------------------------------------------------------------------------------------------
Net loss (1,158,799) (1,582,195) (4,134,357) (3,946,944)
Imputed preferred stock dividends for
Series 97B 8%, 97D 7%, 97G 8%, and
98A 6% convertible preferred stock 122,372 381,073 1,434,891 381,073
- -------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,281,171) $(1,963,268) $(5,569,248) $(4,328,017)
- -------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.08) $ (0.26) $ (0.42) $ (0.63)
=======================================================================================================
Weighted average common shares outstanding 15,259,805 7,472,958 13,123,331 6,851,470
=======================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Preferred convertible
stock Common stock Total
----------------------- ------------------------- Accumulated stockholders'
Shares Amount Shares Amount Paid-in capital deficit deficiency
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 90,997 $ 910 9,258,250 $39,927,760 $ 8,511,878 $(48,897,657) $ (457,109)
Issuance of common stock
for cash 194,502 156,800 156,800
Exercise of warrants
for cash 25,000 15,000 15,000
Issuance of common stock
for services and
operating activities 166,571 162,665 162,665
Issuance of preferred
stock for cash 3,300 33 2,803,167 2,803,200
Conversion of preferred
stock (29,285) (293) 6,820,163 4,254,050 (4,253,757) -
Issuance of warrants to
purchase common stock to
non-employees 44,640 44,640
Interest expense related
to warrant issue 188,033 188,033
Net loss (4,134,357) (4,134,357)
Preferred Series 97G and
98A imputed dividends 1,434,891 (1,434,891) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 65,012 $ 650 16,464,486 $44,516,275 $ 8,728,852 $(54,466,905) $(1,221,128)
===================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine months ended September 30, 1998 1997
============================================================================================================
<S> <C> <C>
Operating activities:
Net loss $ (4,134,357) $ (3,946,944)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of TEK-KOL Partnership 527,865 657,960
Depreciation and amortization 608,498 550,624
Common stock issued for interest, services,
and other operating activities 162,665 249,401
Non-employee compensation expense on issuance of warrants 44,640 -
Imputed interest on warrants issued to note holders 188,033 -
Changes in operating assets and liabilities:
Receivable from TEK-KOL Partnership (41,437) (29,529)
Trade accounts receivable (250,423) (38,999)
Inventories 199 1,830
Other current assets 158,948 (279,774)
Accounts payable 255,381 165,902
Billings in excess of costs and estimated
earnings on contracts (75,177) (186,672)
Accrued salaries, benefits and related taxes (63,920) 218,314
Interest payable 1,513 125,029
Other accrued expenses (69,554) 198,135
- ------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,687,126) (2,314,723)
- ------------------------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Investment in TEK-KOL Partnership (441,000) (650,000)
Payable to TEK-KOL Partnership (100,000) 116,748
Purchase of property and equipment (299,590) (348,847)
Other assets (2,375) (4,765)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (842,965) (886,864)
- ------------------------------------------------------------------------------------------------------------
Financing activities:
Borrowings on line-of-credit - 100,000
Payments of notes payable (7,125) (28,750)
Proceeds from issuance of debt 250,000 -
Proceeds from issuance of common stock 171,800 1,165,970
Proceeds from issuance of preferred stock 2,803,200 1,372,162
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,217,875 2,609,382
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash (312,216) (592,205)
Cash at beginning of period 429,232 740,018
- ------------------------------------------------------------------------------------------------------------
Cash at end of period $ 117,016 $ 147,813
============================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 338,452 $ 217,451
Supplemental disclosure of non-cash activities:
Common stock issued for services and other operating activities $ 162,665 $ 249,401
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three and nine month
periods ended September 30, 1998, and 1997, are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements reflect all adjustments, consisting of only normal recurring
adjustments which, in the opinion of management, are necessary for a fair
statement of the consolidated financial position as of September 30, 1998, and
the consolidated results of operations for the three and nine month periods
ended September 30, 1998, and 1997. The results of operations for the three and
nine month periods ended September 30, 1998, are not necessarily indicative of
the results to be expected for the year ending December 31, 1998. For more
complete financial information, these financial statements, and the notes
thereto, should be read in conjunction with the consolidated audited financial
statements for the year ended December 31, 1997, included in the Company's Form
10-K/A filed with the Securities and Exchange Commission.
(2) ORGANIZATION AND BUSINESS
The principal businesses of the Company are developing, commercializing, and
licensing new energy technologies; and manufacturing automated assembly
equipment.
The recovery of amounts invested in the Company's principal assets, the LFC
Process related assets, is dependent upon the Company's ability to successfully
attract sufficient additional equity, debt, third party financing or other
collaboration arrangements to complete the commercialization of the LFC Process.
The Company is engaged in continuing negotiations to secure additional capital
financing and collaboration arrangements, and while management believes these
negotiations will be successful, there is no assurance thereof.
On May 11, 1998, the Company gave notice to Bluegrass Coal Holding Company
("Bluegrass") a subsidiary of Zeigler Coal Holding Company, in accordance with
the TEK-KOL Partnership Agreement (the "Partnership Agreement"), that it was
unilaterally terminating the Partnership Agreement effective six months from the
date of the notice. Upon termination, the parties are required to take those
steps necessary to dissolve the partnership and wind up all partnership affairs.
All tangible assets are to be sold or otherwise disposed of and all intangible
assets comprising intellectual property are transferred to both parties such
that each party owns an undivided 50% interest in all patents, trade secrets,
trademarks, and all other intellectual property. However, upon termination, the
Company has a worldwide exclusive through April 12, 2000, to market and license
the LFC Technology. After April 12, 2000, both parties have the right to market
and license the present technology worldwide. Bluegrass may continue to use the
LFC Technology on any of its sole projects.
Royalties earned on licenses entered into through the term of the Company's
exclusive period ending on April 12, 2000, are paid 80% to the Company and 20%
to Bluegrass, up to a date 10 years from the date of dissolution. For licenses
entered into after April 12, 2000, royalties are divided equally between the
parties for a period of 10 years after the date of dissolution. Both the Company
and Bluegrass are obligated to continue funding the TEK-KOL Partnership until
dissolution. While not anticipated, the termination of the Partnership Agreement
could have a material adverse impact on the business and operations of the
Company.
7
<PAGE>
On August 6, 1998, the Company entered into a Letter of Intent with Mitsubishi
Corporation ("Mitsubishi") to form a joint venture. The Letter of Intent
provides for the formation of a new company (the "Joint Venture") to be owned
equally by Mitsubishi and SGI. The Joint Venture's primary objective is to
develop LFC projects in the Powder River Basin of Wyoming and further develop
and market the LFC Technology and its products. This is a non-binding Letter of
Intent and contemplates the parties will negotiate the additional terms of and
enter into a definitive Joint Venture and other agreements.
In accordance with the Letter of Intent, SGI is to provide the Joint Venture
with personnel for engineering, LFC project development, and technology and
product marketing in the United States. In addition, SGI is to develop strategic
relationships and refine the CDL upgrading process. In consideration for these
services, Mitsubishi is to pay SGI a set annual fee per year for at least two
years or until the parties transition the Joint Venture into an operating
entity.
Pursuant to the Letter of Intent, Mitsubishi is to provide to the Joint Venture,
engineering to optimize the LFC technology, to reduce the cost of LFC plant
equipment, to optimize the CDL upgrading process, and to market the technology
and products outside of the United States. Upon the occurrence of certain
events, the parties have agreed to convert the Joint Venture to an operating
entity, and SGI is to then transfer the LFC patents to this entity for an agreed
upon payment from Mitsubishi.
All agreements between the parties pertaining to the Joint Venture have been
prepared and are currently under review prior to execution. However, there can
be no assurance that a Joint Venture or other definitive agreement will
eventually be executed.
(3) EQUITY TRANSACTIONS
The common stock of the Company is currently traded and prices quoted on the
NASD OTC Bulletin Board under the symbol SGII. In the course of accounting for
the issuance of its various equity securities the Company frequently refers to
the closing bid price of its common stock, as quoted on the OTC Bulletin Board.
The Company believes that the OTC Bulletin Board quoted bid price is the best
indication of the stock's fair market value. This belief is premised on the
stock's daily trading volumes which averaged approximately 76,000, 53,000, and
38,000 shares for the years 1995, 1996 and 1997, respectively. Average daily
trading volume for the nine months ended September 30, 1998 was approximately
163,000 shares.
(4) NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share" ("EPS"). Basic EPS includes no dilution and is computed by dividing net
loss available to common stockholders by the weighted-average number of common
shares outstanding for the period. For purposes of computing the net loss
available to common stockholders, preferred stock dividends are deducted from
the net loss. Preferred stock dividends include "imputed dividends" for
preferred stock issued with a non-detachable beneficial conversion feature near
the date of issuance. Imputed dividends represent the aggregate difference
between conversion price and the fair market value of the common stock as of the
date of issuance of the preferred stock, without regard to the actual date on
which the preferred stock may be converted. Shares issuable upon conversion of
preferred stock, convertible debentures and upon exercise of outstanding stock
options and warrants are not included since the effects would be anti-dilutive.
Diluted EPS reflects the potential dilution from securities that could share in
the earnings of the Company, similar to fully diluted EPS under APB No. 15. The
Statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures. All per share amounts for all periods presented must
be restated to conform to SFAS No. 128 requirements. No restatement of the
previously determined per share amounts is necessary as the effects of the
outstanding convertible securities, warrants and options would be anti-dilutive.
8
<PAGE>
(5) RECENT ACCOUNTING PRONOUNCEMENTS
Statement No. 130 of the Financial Accounting Standards Board, "Reporting
Comprehensive Income," (SFAS No. 130) establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
Comprehensive income includes items such as unrealized gains on
available-for-sale securities that are not included in net income. SFAS No. 130
requires that all items required to be recognized under accounting standards as
components of comprehensive income, be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective in 1998 and had no material impact on the Company's results of
operations or related disclosures for the nine months ended September 30, 1998.
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS No. 131) is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to stockholders. SFAS No. 131 requires the
disclosure of financial information on operating segments on the basis used by
management in evaluating performance and deciding how to allocate resources.
SFAS No. 131 will first be reflected in the Company's 10-K for the year ending
December 31, 1998.
(6) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Property and Equipment
<TABLE>
September 30, December 31,
1998 1997
==============================================================================
<S> <C> <C>
Office furniture and fixtures $ 115,000 $ 109,000
Laboratory equipment 1,021,000 836,000
Machinery and equipment 121,000 118,000
Computer equipment 369,000 295,000
Leasehold improvements 52,000 21,000
- ------------------------------------------------------------------------------
1,678,000 1,379,000
Less accumulated depreciation (819,000) (590,000)
- ------------------------------------------------------------------------------
Net property and equipment $ 859,000 $ 789,000
==============================================================================
</TABLE>
(7) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation. These changes had no impact on previously reported results
of operations, cash flows or stockholder's equity.
(8) Subsequent Events
On October 1, 1998, the Company issued incentive stock options to employees, at
fair market value pursuant to its 1996 Omnibus Stock Plan. The incentive options
are exercisable for a total of 205,000 shares of common stock at $0.265 per
share, the closing bid price on the date of grant, to employees of the Company.
The options expire on October 1, 2003, and are not exercisable until either a
registration statement under the Securities Act shall be effective at the time
of exercise, or the common shares underlying the option are issuable under an
applicable exemption from the registration requirements of the Securities Act.
The incentive options were granted in reliance upon exemptions from registration
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
9
<PAGE>
As provided in related service or consulting agreements, the Company on October
1, 1998, granted six warrants to purchase an aggregate 130,000 common shares to
two consultants and four directors for services rendered, pursuant to the
exemptions provided by Section 4(2) of the Securities Act and Regulation D.
Investment representations were obtained from the individuals and legends were
placed on the certificates. The exercise prices were not lower than the closing
bid price on the grant date and expire on October 1, 2003. The warrants are
first exercisable one year from the date of grant at $0.265 per share.
On October 30, 1998, the Company was able to extend or exchange approximately
$4.4 million in existing debt for new securities of the Company including
amended or new convertible debt securities, preferred stock and also paid
approximately $30,000 in existing debt. The Company retired approximately
$3,650,416 in existing 10%, 11% and 12% interest bearing notes and convertible
debentures which were required to be paid prior to October 31, 1998, in exchange
for new or amended 12% convertible debentures, in the same amount, due September
30, 1999. These debentures may be prepaid by the Company, in whole or in part,
at any time prior to September 30, 1999. The debentures are convertible at the
option of the holder subsequent to November 13, 1998, in whole or in part, at
the lower of a calculated number as of the closing date ($0.406), or the average
of the ten day closing bid price of the Company's common stock prior to the date
the notice of conversion is received by the Company. The Company obtained an
extension to September 30, 1999, of approximately $724,000 of debt, and in
connection therewith, agreed to grant 69 Series 98D preferred shares convertible
with no further payment into an aggregate of approximately 48,000 shares of the
common stock. These securities were issued only to existing debt holders
pursuant to the exemptions provided by Sections 3(a)(9) and Section 4(2) of the
Securities Act and Regulation D.
On November 4, 1998, the Company issued 950 shares of $0.01 par value, 6%
Convertible Preferred Series 98C and six warrants to four foreign investors for
cash and notes payable. The Company received net proceeds of $918,000
representing the completion of the first tranche of this Preferred series. The
securities were issued by the Company in reliance upon exemptions from
registration provided by Section 4(2) of the Securities Act and the provisions
of Regulation D. These shares have a liquidation preference of $1,000 per share
and accrue dividends at the rate of 6% per annum which are cumulative. The
number of shares of common stock to be issued upon conversion of the 98C
Preferred Shares will be the lesser of $0.46 or 75% of the five lowest closing
bid prices of the common stock during the Lookback Period. The Lookback Period
is defined as the five trading days immediately preceding the date the notice of
conversion is received by the Company. After the last trading day of each month
that the Series 98C Preferred Stock remains outstanding, starting on the first
day of the fourth month after November 4, 1998, the Lookback Period will be
increased by two trading days per month until the Lookback Period equals a
maximum of 30 trading days. The 98C Preferred Stock is redeemable at the option
of the Company, in whole or in part, in cash, at 125% of the Liquidation value
plus accrued and unpaid dividends. In the event the 98C Preferred Stock is not
converted two years from the Closing Date then the outstanding 98C Preferred
Stock shall be redeemed by the Company as if the Company voluntarily elected
such redemption. The six warrants which are convertible into 47,500 shares of
common stock, contain an exercise price equal to 110% of the average closing bid
price for the five trading days preceding the closing date. The warrants are
exercisable two days following the closing date and expire on November 4, 2003.
The shares of common stock underlying the 98C Preferred shares and warrants are
subject to a Registration Rights Agreement, which requires the Company to file a
registration statement for these securities with the Securities and Exchange
Commission ("SEC"), within thirty calendar days after the closing date (November
4, 1998). In the event the registration statement is not filed, by the Company,
by the 30th calendar day after closing date, or if the registration statement is
not declared effective by the SEC by the 90th day after the closing date, then
the Company will pay, in cash, to the holders thereof on a pro-rata basis, as
liquidated damages 1.5% of the investment amount for the first month late and 2%
thereafter. In the event the registration statement is not declared effective
prior to the 180th calendar day after the closing date the Company must redeem
the 98C Preferred Stock.
In connection with the sale of the 98C Preferred Shares, the Company paid an
unaffiliated placement agent (Settondown Capital International, Ltd.) a fee
consisting of $25,000 in cash, 70 shares of 98C Preferred Stock having a value
of $70,000 and warrants to purchase 47,500 shares of common stock as
compensation for
10
<PAGE>
placement services. The securities were issued by the Company in reliance upon
exemptions from registration provided by Section 4(2) of the Securities Act and
the provisions of Regulation D. The warrants are exercisable at 110% of the
average closing bid price for the five trading days preceding the closing date.
The warrants are exercisable two days following the closing date and expire on
November 4, 2003. In addition to the placement agent fees the Company paid
$7,000 in cash for legal and escrow fees incurred in connection with this
transaction. The net proceeds of this transaction will be used for working
capital purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on form 10-Q contains statements relative to (i)
projections, (ii) estimates, (iii) future research plans and expenditures, (iv)
potential collaborative arrangements, (v) opinions of management and (vi) the
need for and availability of additional financing which may be considered
"forward-looking statements."
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports including this form 10-Q, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
RESULTS OF OPERATIONS
Net Loss per Common Share. Net loss per common share for the three and nine
month periods ended September 30, 1998, decreased approximately $0.14 per share
and $0.26 per share, respectively, over the same prior year periods after
excluding non-recurring imputed dividends. The imputed dividends are related to
the beneficial conversion feature associated with the issuance of the Series 97G
and 98A convertible preferred stock. Also see Note 4 "Net Loss per Share" to the
condensed consolidated financial statements. The decrease in net loss per share
for the three month period is attributable to an increase in the weighted
average number of common shares outstanding and a net loss decrease of
approximately $423,000 over the same prior year period. The decrease in net loss
per share for the nine month period is primarily attributable to an increase in
the weighted average number of common shares outstanding, as the overall net
loss increased approximately $187,000 over the same prior year period.
Sales and Cost of Sales. Sales and cost of sales for the three months ended
September 30, 1998, decreased 7% and 6%, respectively, over the same prior year
periods. Sales and cost of sales are primarily attributable to AMS and are
recorded using the percentage of completion method. Sales and cost of sales for
the three and nine months ended September 30, 1998, remained relatively flat,
showing a small decline of 2% and 3%, respectively, over the same prior year
periods. The Company believes this decline in sales is primarily the result of
the General Motors strikes which began in early June and ended in late July,
impacting third quarter orders for automated assembly equipment in the
automotive sector. The Company does not anticipate any significant long-term
11
<PAGE>
effects on future sales to this sector. Furthermore, due to the Asian-Pacific
regions reported economic instability certain domestic customers in the
electronics or high-tech sectors, who have seen their Asian-Pacific revenues
decline, are expected to reduce their orders for automated assembly equipment.
The Company does not anticipate an improvement in this sector before the end of
calendar 1998. Consequently, the Company is no longer confident that its 1998
revenues will exceed 1997's record results.
Other Income. Other income for the three and nine months ended September 30,
1998, remained substantially unchanged over the same prior year periods. The
small fluctuations are directly related to the cash balances maintained and the
interest rates available for short term deposits earned over the same prior year
periods.
Loss on Investment in TEK-KOL. The Company's share of the TEK-KOL loss for the
three months ended September 30, 1998, decreased 69% over the same prior year
period. The Company's share of the TEK-KOL loss for the nine month period ended
September 30, 1998, decreased approximately 20% over the same prior year period.
The overall decrease for both periods is primarily attributable to a significant
amount of development work being performed on CDL upgrading in the third quarter
of 1997. During the third quarter of 1997 the CDL enhancement program was in
full swing and TEK-KOL spent approximately $362,000 during that time period,
compared to only $42,000 in 1998. This decrease in expenses is primarily
attributable to the results obtained from the program in 1997 which allowed the
parties to narrow their development focus. CDL enhancement efforts by the
Company and TEK-KOL are continuing alone and in collaboration with other outside
third parties who are absorbing some of the costs of development.
Engineering Research and Consulting Expenses. Engineering research and
development expenses are essentially related to the Company's activities
pertaining to the OCET and LFC technologies. Engineering research and
development expenses for the three month period ended September 30, 1998,
decreased 27% over the same prior year period. The decrease is primarily
attributable to a 38% reduction in the number of employees working at the
Company's OCET laboratory compared to the previous period. Engineering research
and development expenses for the nine month period ended September 30, 1998,
decreased 16% over the same prior year period. The decrease is primarily
attributable to a 38% reduction in the number of employees working at the
Company's OCET laboratory which is partially offset by an increase in laboratory
costs, as the Company endeavors to bring the process development unit on line.
Start-up and testing of the Process Development Unit (PDU) commenced during this
current period and the Company expects laboratory costs to increase in the next
quarter as the PDU becomes fully operational.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1998, decreased
25% over the same prior year period. The decrease is essentially related to a
$92,000 reduction in financial consulting and public relation expenses, and a
non-recurring charge of approximately $70,000, ocurring in 1997, for payroll
related expenses. In addition, selling, general and administrative expenses for
AMS decreased approximately $28,000 over the prior year period due primarily to
a reduction in administrative personnel.
Selling, general and administrative expenses for the nine months ended September
30, 1998, increased 8% over the same prior year period. The increase is related
to the Company agreeing to issue an additional 110,000 shares of restricted
common stock, valued at approximately $105,000, to the 97D convertible preferred
stock investors, an increase of approximately $50,000 in insurance costs for
improved coverage and approximately $50,000 of financial penalties associated
with delays in registering the common shares underlying certain securities of
the Company. These 1998 charges are offset in part by a $107,000 reduction in
financial consulting and public relation expenses. In addition, selling, general
and administrative expenses for AMS increased approximately $20,000 over the
prior year period due to an increase in marketing personnel and related
expenses.
Legal and Accounting Expenses. Legal and accounting expenses for both the three
and nine months ended September 30, 1998, increased 48% and 24%, respectively,
over the same prior year periods. The increase is related primarily to legal and
accounting expenses incurred in preparing and filing the Company's registration
statement on Form S-2 with the Securities and Exchange Commission.
12
<PAGE>
Depreciation and Amortization Expenses. Depreciation and amortization expenses
for the both three and nine months ended September 30, 1998, increased 11% over
the same prior year periods. The increase for both periods is due primarily to
purchases and construction of additional equipment at the OCET laboratory and
AMS.
Interest Expense. Interest expense for the three month period ended September
30, 1998, remained substantially unchanged, after excluding a non-recurring
charge of approximately $23,000 occurring in 1997.
Interest expense for the nine month period ended September 30, 1998, increased
39% over the same prior year period. The increase of approximately $188,000 for
the nine month period was due to imputed interest expense associated with the
issuance of warrants to certain debt holders participating in the Company's 1997
debt restructuring. The warrants are granted and issued quarterly in arrears,
with the last issuance taking place on September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had assets totaling $5.0 million,
including restricted cash of $0.4 million, and a working capital deficiency of
$4.7 million. The Company anticipates continued operating losses over the next
twelve months and has both short-term and long-term liquidity deficiencies as of
September 30, 1998. Current notes payable and associated accrued interest
aggregating $4.5 million required to be paid prior to October 31, 1998,
primarily contribute to the Company's short-term deficiency at September 30,
1998. The Company satisfied these liabilities subsequent to September 30, 1998,
through its 98D exchange offering. This exchange offering extended the due date
of these liabilities to September 30, 1999, in exchange for primarily
convertible debt and equity securities. (See Note 8 to the condensed
consolidated financial statements.) Other short-term liquidity requirements are
expected to be satisfied from existing cash balances, proceeds from the sale of
future equity securities or other collaborative arrangements. Negotiations are
on-going for the public and private placement of equity securities, the proceeds
of which are intended to be used to satisfy the short-term liquidity deficiency.
In the event that the Company is unable to finance operations at the current
level, various administrative activities would be curtailed and certain research
and development efforts would be reduced. The Company will not be able to
sustain operations if it is unsuccessful in securing sufficient financing and/or
generating revenues from operations.
The Company had long-term liquidity deficiencies at September 30, 1998. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and development activities and ultimately to commercialize,
with or without the assistance of corporate partners, any of its proposed
technologies. The Company believes the long-term liquidity deficiency will be
satisfied through future equity sales, increased positive cash flows from
operations, and research or other collaborative agreements, until such time, if
ever, as the commercialization of the LFC and OCET Processes result in positive
cash flows. The Company is seeking collaborative or other arrangements with
larger well capitalized companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non-exclusive
licenses or other rights to certain technologies and products the Company is
developing. Although the Company is presently engaged in discussions with a
number of suitable candidate companies, there can be no assurance that an
agreement or agreements will arise from these discussions in a timely manner, or
at all, or that revenues that may be generated thereby will offset operating
expenses sufficiently to reduce the Company's short-term or long-term funding
requirements.
Cash used in operating activities increased 16% over the same prior year period.
The use of funds from operating activities is essentially attributable to the
Company's net loss of approximately $4.1 million, incurred primarily in pursuing
its administrative and development activities.
The Company's investing activities amounted to approximately $843,000 for the
nine month period ended September 30, 1998. The funds were utilized primarily in
the funding of the TEK-KOL Partnership's operations, acquisition and
construction of equipment at the OCET laboratory and the acquisition of
equipment
13
<PAGE>
at AMS. Additional capital contributions to the TEK-KOL Partnership are expected
to be required from time to time prior to its final pending dissolution. The
Company is required to contribute one-half of any such required capital
contributions. Management presently estimates that the Company will be required
to contribute between $0.75 million and $1.0 million in 1998 with year-to-date
contributions totaling approximately $0.5 million. This estimate is based in
part on the Company's pending joint venture with Mitsubishi Corporation, which
in accordance with the August 6, 1998, letter of intent will assist in the
funding of the Company's LFC development and marketing activities. In the event
the joint venture is not consummated, the Company does not anticipate any
significant change in its estimate as certain activities and expenses will be
curtailed until funds are available or other collaborative arrangements with
third parties are made. The amount of funds used for investing activities in a
given period are directly related to development requirements and funds
availability. The Company does not have material commitments for capital
expenditures as of September 30, 1998.
The Company's financing activities raised approximately $3.2 million for the
nine month period ended September 30, 1998. These funds were raised primarily
through the private placement of equity securities and the issuance of a
$250,000 note payable. The amount of money raised during a given period is
dependent upon financial market conditions, technological progress and the
Company's projected funding requirements. The Company anticipates that future
financing activities will be influenced by the aforementioned factors.
As noted previously, significant future financing activities will be required to
fund future operating and investing activities and to maintain debt service.
While the Company is engaged in continuing negotiations to secure additional
capital and financing, there is no assurance such funding will be available or
if received will be adequate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[Not Applicable]
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. The only lawsuit
currently pending against the Company is Walsh vs. AMS, filed on September 7,
1997, in the San Diego Superior Court. The Walsh case relates to events
occurring prior to the acquisition of AMS by the Company. The lawsuit asserts
claims, for among other things, breach of contract relating to a loan of
approximately $300,000. AMS has filed an answer denying liability and discovery
is proceeding. In the opinion of the Company, the pending litigation, if
adversely decided, should not have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
On July 28, 1998, the Company, for net proceeds of $490,000, issued 550 shares
of Series 98A 6% Convertible Preferred Stock pursuant to the provisions of
Section 4(2) of the Securities Act and Regulation D, to two accredited
investors. The 98A Preferred Shares accrue dividends at a rate of 6% per annum
and are cumulative. The dividend is only payable in common stock of the Company.
The Company also issued warrants to purchase a total of 70,000 common shares at
$1.18 per share to these investors. The Series 98A Preferred Stock is
convertible, at the earlier of the date the underlying common shares are
included in a registration statement which has been declared effective by the
SEC, or sixty days from the closing date, July 28, 1998. Each Series 98A
Preferred Share is convertible into the number of shares of common stock derived
by dividing the conversion rate by the conversion price. The conversion rate is
the liquidation preference of $1,000 per share of the Series 98A Preferred
Stock. The conversion price is determined based on the date the conversion
notice is received and is equal to the lesser of (a) the average closing bid
price of the common stock over the five day trading period prior to March 6,
1998, or (b) 75% of the average of the closing bid price of the common stock on
the five trading days ending on the date preceding the conversion notice. No
sale can occur absent an effective registration statement for the underlying
stock. The warrants were exercisable 10 days after issuance and expire on March
6, 2003. The 98A Preferred Shares are redeemable at the option of the Company,
in whole or in part, in cash, at 130% of the Liquidation Value plus accrued and
unpaid dividends. The 98A Preferred Shares will automatically convert into
common stock two years from the closing date. The Company has included the
common shares underlying the warrants and preferred stock in an amendment to its
S-2 registration statement effective July 22, 1998. These securities were issued
pursuant to the exemptions provided by Section 4(2) of the Securities Act and
Regulation D. Investment representations were obtained from the investors and
legends were placed on the certificates.
On August 19, 1998, the Company issued 40,000 restricted common shares to two
consultants in accordance with their related service agreements pursuant to the
exemptions provided by Section 4(2) of the Securities Act and Regulation D,
valued at approximately $34,500. Investment representations were obtained from
the individuals and legends were placed on the certificate.
On September 9, 1998, the Company issued a 12% short term note payable for
$250,000 to a foreign corporation pursuant to the exemptions provided by Section
4(2) of the Securities Act and Regulation D. The note was satisfied on November
4, 1998, when by agreement, it was exchanged for 250 shares of 98C Preferred
Stock. (See Note 8 to condensed consolidated financial statements for details.)
On September 30, 1998, the Company granted certain debt holders, pursuant to the
Company's 1997 debt restructuring, warrants to purchase an aggregate of 152,500
restricted common shares exercisable on or before December 31, 1999, at an
exercise price of $1.20 per share. The warrants were issued to existing security
holders of the Company in reliance upon exemptions from registration pursuant to
Sections 3(a)(9) and 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder.
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual Meeting of Stockholders was scheduled on June 19, 1998. The Company
did not receive sufficient proxies to constitute a quorum and the meeting was
adjourned to August 28, 1998, at which time a quorum was obtained. At that
meeting the following matters were submitted to a vote of the stockholders of
SGI International:
1998 SGI International Annual Meeting
Final Voting Results
Proposal
Item No. 1 Election of Directors
The following nominees for director received the number of votes set opposite
their respective names:
<TABLE>
Voting Results
------------------------------
Votes Percent
------------ ------------
<S> <C> <C> <C>
Dr. Ernest P. Esztergar For 7,096,187 97.00%
Withhold 219,470 3.00%
William R. Harris For 7,111,045 97.20%
Withhold 204,612 2.80%
</TABLE>
Directors Bernard V. Baus, Norman A. Grant, William A. Kerr and Joseph A.
Savoca, whose terms of office had not expired, continued in their respective
capacities as directors.
Item No. 2 Ratification of Selection of J.H. Cohn LLP, as Independent Public
Accountants
<TABLE>
Voting Results
--------------------------
Votes Percent
----------- ----------
<S> <C> <C>
For 7,220,108 98.7%
Against 61,452 .8%
Abstain 34,097 .5%
</TABLE>
ITEM 5. OTHER INFORMATION
On October 26, 1998, AMS filed a lawsuit against Anatol Automation and Anatol
Manufacturing in Orange County Superior Court. The lawsuit seeks approximately
$600,000 in compensatory damages and in excess of $2,000,000 in punitive damages
for interference with advantageous business relationships, interference with
contract, and appropriation of trade secrets in violation of the California
Uniform Trade Secret Act.
In addition, see Note 8 to the condensed consolidated financial statements
specifically pertaining to the October 30 and November 4, 1998, transactions.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
3.1 Amended Certificate of Secretary re: Designation of Series 98C
Preferred Stock.(1)
3.2 Amended Certificate of Secretary re: Designation of Series 98A
Preferred Stock.(2)
3.3 Amended Certificate of Secretary re: Designation of Series 98D
Preferred Stock.(1)
4.1 Form of Stock Purchase Warrant re: Series 98C Preferred Stock dated
November 4, 1998. (1)
4.2 Form of Series 98C Convertible Preferred Stock Subscription
Agreement dated November 4, 1998, between the Registrant and the
holders thereof. (1)
4.3 Form of Registration Rights Agreement re: Series 98C Preferred Stock
dated November 4, 1998, between the Registrant and the holders
thereof. (1)
4.4 Form of Series 98D Convertible Preferred Stock.(1)
4.5 Form of Series 98D Convertible Debentures.(1)
4.6 Form of Stock Purchase Warrant re: Series 98A Preferred Stock dated
July 28, 1998.(2)
4.7 Form of Series 98A Convertible Preferred Stock Subscription
Agreement dated July 28, 1998, between the Registrant and the
holders thereof.(2)
4.8 Form of Registration Rights Agreement re: Series 98A Preferred Stock
dated July 28, 1998, between the Registrant and the holders
thereof.(2)
4.9 Form of Stock Purchase Warrant re: Series 97E.(3)
4.10 $250,000 Promissory Note dated September 9, 1998.(1)
27.1 Financial Data Schedule.(1)
----------------
(1) Filed herewith.
(2) Incorporated by reference to Report on Form 10-Q (File No. 2-93124)
for the quarter ending June 30, 1998.
(3) Incorporated by reference to Exhibit 4 in Registration Statement on
Form S-2 (File No. 2-93124) filed on January 23, 1998.
2. Reports on Form 8K: [NONE]
17
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SGI INTERNATIONAL
/s/ JOSEPH A. SAVOCA November 13, 1998
- ------------------------------------
Joseph A. Savoca,
Chief Executive Officer
Chief Financial Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ JOSEPH A. SAVOCA November 13, 1998
- ------------------------------------
Joseph A. Savoca,
Chief Executive Officer
Chief Financial Officer
and Chairman of the Board
18
EXHIBIT 3.1
AMENDED CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a
Resolution passed by the SGI Board of Directors on October 16, 1998,
amending the established Series 98-C Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on October 16, 1998.
/s/ JOHN R. TAYLOR
- -----------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Two Thousand Two Hundred (2,200) shares, out of Twenty Million
(20,000,000) shares of Preferred Stock which the Company has authority to issue,
be, and the same hereby is, authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restriction thereof, of the
shares of such series (in addition to the powers, designations, preferences, and
relative, participating, optional or to other special rights and the
qualification, limitations or restrictions thereof, set forth in the Certificate
of Incorporation which may be applicable to the Preferred Stock) authorized by
this resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 98-C Six Percent (6%) Convertible Preferred Stock (the
"Series 98-C Preferred Stock"). The Series 98-C Preferred Stock shall have a
liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
Dollars per share. The Series 98-C Preferred Stock shall rank prior to the
Company's Common Stock and to all other classes and series of equity securities
of the Company now or hereafter authorized, issued, or outstanding, other than
any classes or series of equity securities of the Company ranking on a parity
with or senior to the Series 98-C Preferred Stock as to dividend rights or
rights upon liquidation, winding up or dissolution of the Company. The Series
98-C Preferred Stock shall be junior to all previous Series of Preferred Stock
as to both the payment of dividends and the distribution of assets upon
liquidation, dissolution, or winding up of the Company, and shall be junior to
all outstanding debt of the Company. The Series 98-C Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 98-C Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 98-C Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to six percent (6%) per annum of the amount of the
respective Liquidation Preference of the Series 98-C Preferred Stock as set
forth in Section (a) hereof, payable upon conversion. Any dividends payable
pursuant to the provisions of this paragraph shall, at the Company's option, be
payable in cash, or unrestricted shares of Common Stock of the Company within
five (5) business days of when due. In the event the Company chooses to issue
Common Stock as payment of the dividends, but at such time such Common Stock has
not been included in an effective registration statement, the Company may delay
issuance of the Common Stock until such time as these shares of Common Stock are
subject to an effective registration statement. Dividends, as set forth above,
will continue to accrue on any unpaid and/or delayed dividends until such time
as such Common Stock is issued, and the Company shall issue such additional
number of shares of Common Stock for such additional dividends. If the Company
elects to pay the dividends in shares of Common Stock and if these shares of
Common Stock are not subject to an effective registration statement within one
hundred eighty (180) calendar days after the Company has received payment for
the Series 98-C Preferred Stock (the "Closing Date"), the Company will pay to
the holder, on or before the 183rd calendar day after the Closing Date all
accrued and unpaid dividends in immediately available funds, in accordance with
the mandatory redemption provisions contained herein. The number of shares of
Common Stock to be issued by the Company in lieu of a cash payment for dividends
due as set forth herein shall be equal to the number of shares of Common Stock
resulting from dividing the dollar amount of dividends owed by the Conversion
Price (as defined below).
(2) Such dividends shall accrue on each share of Series 98-C
Preferred Stock from the Closing Date, and shall accrue from day to day whether
or not earned or declared. Such dividends shall be cumulative so that if such
dividends in respect of any previous or current annual dividend period, at the
annual rate specified above, shall not have been paid or declared and a sum
sufficient for the payment thereof set apart, for all Series 98-C Preferred
Stock at the time outstanding, the deficiency shall first be fully paid before
any dividend or other distribution shall be paid on or declared or set apart for
the Series 98-C Preferred Stock or Common Stock. Dividends on the Series 98-C
Preferred Stock shall be non-participating and the holders of the Series 98-C
Preferred Stock shall not be entitled to participate in any other dividends
beyond the cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 98-C Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 98-C Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 98-C Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
98-C Preferred Stock, the remaining assets shall be paid in accordance with the
laws of the State of Utah. Written notice of such liquidation, dissolution or
winding up, stating a payment date, the amount of the payment and the place
where the amounts distributable shall be payable, shall be mailed by certified
or registered mail, return receipt requested, not less than 60 calendar days
prior to the payment date stated therein, to each record holder of any share of
Series 98-C Preferred Stock. Neither the consolidation or merger of the Company
into or with any other company or companies, nor the sale or transfer by the
Company of all or any part of its assets, nor the reduction of the capital stock
of the Company, shall be deemed to be a liquidation, dissolution, or winding up
of the Company for purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 98-C Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 98-C
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 98-C Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 98-C may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 98-C Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate of Secretary, the "Conversion Rate"
shall mean the Liquidation Preference of One Thousand ($1,000) Dollars per share
of Series 98-C Preferred Stock. For purposes hereof, the "Conversion Price"
shall be determined as of the business date the notice of conversion is received
by the Company via facsimile ("Conversion Date") and shall be equal to the
lesser of: (a) one hundred percent (100%) of the Closing Bid Price (as defined
below) of the shares of Common Stock on the trading day immediately preceding
the Closing Date, or (b) seventy five percent (75%) of the Market Price, where
the "Market Price" is defined as the average of the five lowest Closing Bid
Prices of the Common Stock during the five trading days immediately preceding
the Conversion Date (such five trading day period is hereby referred to as the
"Lookback Period"). After the last trading day of each month that the Series
98-C Preferred Stock remains outstanding, starting on the first day of the
fourth month after the Closing Date the Lookback Period will be increased by two
trading days until the Lookback Period equals a maximum of 30 trading days. The
"Closing Bid Price" of the Common Stock shall be deemed to be the reported last
bid price as reported by Bloomberg LP or if unavailable, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading, or if the Common Stock is not listed or admitted to trading on any
national securities exchange, the closing bid price as reported by NASDAQ or
such other system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded. If certificates for Common Stock are not delivered within five (5)
business days of the Conversion Date, then the holder of the Series 98-C
Preferred Stock will be entitled to revoke the relevant notice of conversion by
delivering a notice to such effect to the Company whereupon the Company and the
holder shall each be restored to their respective positions immediately prior to
the delivery of such notice of conversion or be entitled to liquidated damages
as set forth in (e) 3 below.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 98-C Preferred Stock shall first
be convertible at the earlier of: (i) the date the Form S-2 or S-3 registration
statement (the "Registration Statement") filed by the Company, which includes
the shares of Common Stock underlying the Series 98-C Preferred Stock, is
declared effective by the Securities and Exchange Commission, or (ii) the sixty
first (61st) calendar day after the Closing Date. The holder of the Series 98-C
Preferred Stock agrees that it shall not convert any portion of the Series 98-C
Preferred Stock, which would result in such holder being deemed the owner, at
any specific point in time, of more than 4.99% of the then outstanding shares of
Common Stock. The preceding sentence shall not interfere with such holder's
right, over time, to convert the full face value of the 98-C Preferred Stock,
into more than 4.99% of the then outstanding shares of Common Stock in the
aggregate. In no event shall the aforementioned 4.99% restriction apply in the
event of an Event of Default (as defined below) has occurred and remains uncured
for ten business days.
An "Event of Default" shall have occurred upon the following:
(i) failure on the part of the Company to observe or
perform any material covenant contained in any agreement between the
Company and the holder of the Series 98-C Preferred Stock for 30
calendar days from the date of such occurrence;
(ii) the trading in the Common Stock shall have been
suspended by the SEC or by the OTC Bulletin Board (or if the Common
Stock is then listed and approved for trading on either the New York
Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market's
Small Cap Stock Market, or the NASDAQ Stock Market's National Market
and then have been so suspended, and has not within ten trading days
after such suspension been listed on the OTC Bulletin Board) except for
any suspension or trading of limited duration solely to permit
dissemination of material information regarding the Company and except
if, at the time there is any suspension, the Common Stock is then
listed and approved for trading on either the OTC Bulletin Board, the
New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock
Market's Small Cap Stock Market, or the NASDAQ Stock Market's National
Market within ten (10) trading days thereof;
(iii) failure of the Company to file listing
applications within twenty (20) business days of the Company being
required to do so by the market or exchange in which the Common Stock
is then so listed, which failure is not cured within five (5) business
days of such failure;
(iv) the Company shall have its Common Stock delisted
from the OTC Bulletin Board for at least ten (10) consecutive trading
days and is unable to obtain a listing on either the New York Stock
Exchange, the American Stock Exchange, the NASDAQ Stock Market's Small
Cap Stock Market or the NASDAQ Stock Market's National Market within
such ten (10) trading days;
(v) the Registration Statement shall not have been
declared effective by the SEC within 180 calendar days after the
Closing Date, or such effectiveness shall not be maintained until (i)
the date that all of the shares of Common Stock underlying the Series
98-C Preferred Stock have been sold pursuant to the Registration
Statement, (ii) the date that the shares of Common Stock underlying the
Series 98-C Preferred Stock may be sold under the provisions of Rule
144, without volume limitation, or (iii) two (2) years after the
effective date of the Registration Statement;
(vi) the Company or any material subsidiary has
commenced a voluntary case or other proceeding seeking liquidation,
winding-up, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency, moratorium or other similar
law now or hereafter in effect of seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or has consented to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or has
made a general assignment for the benefit of creditors, or has failed
generally to pay its material debts as they become due, or has taken
any corporate action or has taken any corporate action to authorize any
of the foregoing;
(vii) an involuntary case or other proceeding has
been commenced against the Company or any material subsidiary seeking
liquidation, winding-up, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency, moratorium or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period
of 60 calendar days, or an order for relief has been entered against
the Company or any subsidiary under the federal bankruptcy laws as now
or hereafter in effect;
(viii) default in any material provision (including
payment) of any agreement governing the terms of any debt of the
Company or any subsidiary in excess of $1,000,000, which has not been
cured, extended, or otherwise agreed to, within any applicable period
of grace associated therewith;
(ix) judgments or orders for the payment of money
which in the aggregate at any one time exceed $1,000,000 and are not
covered by insurance have been rendered against the Company or any
subsidiary by a court of competent jurisdiction and such judgments or
orders shall continue unsatisfied and unstayed for a period of 60
calendar days; or
(x) any material representation, warranty,
certification or statement made by the Company in any agreement entered
into between the Company and any holder of Series 98-C Preferred Stock,
or which is contained in any certificate, document or financial or
other statement furnished at any time under or in connection with any
such agreement shall prove to have been untrue in any material respect
when made.
3. Mechanics of Conversion. The holder of the Series 98-C
Preferred Stock shall exercise its right to convert the Series 98-C Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion to the Company by
express courier. The holder of the Series 98-C Preferred Stock shall be required
to deliver the original Series 98-C Preferred Stock certificate to the Company,
provided the full face value of the Series 98-C Preferred Stock certificate has
been fully converted. The notice of conversion shall be deemed effective upon
facsimile receipt by the Company. Each business date on which a notice of
conversion is telecopied to and received by the Company in accordance with the
provisions hereof shall be deemed a Conversion Date. The Company will use its
best efforts to transmit the certificates representing shares of Common Stock
issuable upon conversion of any Series 98-C Preferred Stock to the holder via
express courier, by electronic transfer or otherwise within three business days
after the Conversion Date, provided the Company has received the original duly
executed notice of conversion prior to such time. The person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock as of such date. Each fully converted Series 98-C Preferred Stock
certificate shall be sent to Company within three business days of such
Conversion Date. In the event that a holder partially converts a Series 98-C
Preferred Stock certificate such holder shall fully convert the remaining
balance of such certificate prior to converting any part of another certificate
in holder's possession. In the event that the Common Stock issuable upon
conversion of the Series 98-C Preferred Stock is not delivered within five
business days of the Conversion Date, the Company shall pay to such holder, in
immediately available funds, immediately upon demand, as liquidated damages for
such failure and not as a penalty, for each $100,000 principal amount of the
Series 98-C Preferred Stock sought to be converted, $500 for each of the first
ten calendar days late, and $1,000 per calendar day thereafter that the shares
of Common Stock issuable upon conversion of the Series 98-C Preferred Stock are
not delivered, which liquidated damages shall run from the sixth business day
after the Conversion Date. Any and all payments required pursuant to this
paragraph shall be payable only in cash, and shall not relieve the Company of
any of its obligations created hereunder, including but not limited to, delivery
of the shares of Common Stock due upon conversion of the Series 98-C Preferred
Stock.
4. Adjustment Provisions. The number of shares of Common Stock
issuable upon the conversion of the Series 98-C Preferred Stock and the
Conversion Price shall be subject to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common Stock
or securities convertible into, exchangeable for or otherwise entitling a holder
thereof to receive Common Stock, (ii) declare a dividend payable in cash on its
Common Stock and at substantially the same time offer its shareholder a right to
purchase new Common Stock (or securities convertible into, exchangeable for or
other security entitling a holder thereof to receive Common Stock) from proceeds
of such dividend (all Common Stock so issued shall be deemed to have been issued
as a stock dividend), (iii) subdivide its outstanding shares of Common Stock
into a greater number of shares of Common Stock, (iv) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (v)
issue by reclassification of its Common Stock any shares of Common Stock of the
Company, the number of shares of Common Stock issuable upon conversion of the
Series 98-C Preferred Stock immediately prior thereto shall be adjusted so that
the holders of the Series 98-C Preferred Stock shall be entitled to receive
after the happening of any of the events described above that number and kind of
shares as the holders would have received had such Series 98-C Preferred Stock
been converted immediately prior to the happening of such event or any record
date with respect thereto. Any adjustment made pursuant to this subdivision
shall become effective immediately after the close of business on the record
date in the case of a stock dividend and shall become effective immediately
after the close of business on the record date in the case of a stock split,
subdivision, combination or reclassification.
(ii) Any adjustment in the numbers of shares of
Common Stock issuable hereunder otherwise required to
be made by this Section (e)(4) will not have to be made if such adjustment would
not require an increase or decrease in one percent (1%) or more in the number of
shares of Common Stock issuable upon conversion of the Series 98-C Preferred
Stock. No adjustment in the number of shares of Common Stock issuable upon
conversion will be made for the issuance of shares of capital stock to
directors, employees or independent contractors pursuant to the Company's or any
of its subsidiaries' stock option, stock ownership or other benefit plans or
arrangements or trusts related thereto or for issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock
issuable upon the conversion of the Series 98-C
Preferred Stock is adjusted, as herein provided, the Conversion Price shall be
adjusted (to the nearest cent) by multiplying such Conversion Price immediately
prior to such adjustment by a fraction of which the numerator shall be the
number of shares of Common Stock issuable upon the exercise of each share of
Series 98-C Preferred Stock immediately prior to such adjustment, and of which
the denominator shall be the number of shares of Common Stock issuable
immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 98-C Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
98-C Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 98-C Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 98-C Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 98-C Preferred Stock against impairment.
7. Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series 98-C Preferred Stock. Any
fractional shares issuable upon conversion of the Series 98-C Preferred Stock
shall be rounded up to the nearest whole share or, at the election of the
Company, the Company shall pay the holder thereof an amount in cash equal to the
closing bid price thereof.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 98-C Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 98-C Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 98-C Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 98-C Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 98-C Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 98-C Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 98-C Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(f) Redemption
1. Optional Redemption by the Company. For so long as no Event
of Default shall have occurred, and be continuing, and the Company has not
received a notice of conversion for such shares, the Company may, at its option,
repay, in whole or in part, the Series 98-C Preferred Stock shares at the
Redemption Price as defined below. The Series 98-C Preferred Stock is redeemable
as a series, in whole or in part, by the Company by providing written notice
(the "Redemption Notice") to the holder of the Series 98-C Preferred Stock via
facsimile at his or her address as the same shall appear on the books of the
Company (the business date and time, between the hours of 9:00 a.m. and 5:00
eastern time, the Redemption Notice is received by the holders of the Series
98-C Preferred Stock via facsimile is defined to be the "Redemption Notice
Date"). Within three business days after the Redemption Notice Date the Company
shall arrange payment of the Redemption Price (as defined below) in immediately
available funds to the holder for the shares of Series 98-C Preferred Stock
which are the subject of the Redemption Notice (such date of payment referred to
as the "Redemption Date"). Partial redemptions shall be in an aggregate
principal amount of at least $100,000. If fewer than all of the outstanding
shares of Series 98-C Preferred Stock are to be redeemed, the Company will
select those to be redeemed pro-rata amongst the then holders of the Series 98-C
Preferred Stock.
2. Mandatory Redemption. In the event the Series 98-C
Preferred Stock has not been converted two (2) years from the Closing Date, or
such next business date thereafter (the "Mandatory Redemption Date"), the Series
98-C Preferred Stock shall automatically be redeemed by the Company as if the
Company voluntarily elected such redemption in accordance with the procedure,
terms and conditions set forth in this Certificate of Secretary, with the
Mandatory Redemption Date being deemed a Redemption Date.
3. Notice of Redemption. The Notice of Redemption shall set
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
"Redemption Price", which shall be equal to one hundred twenty five percent
(125%) of the Liquidation Value which Liquidation Value shall include cumulative
dividends as provided herein which have accrued and are unpaid through the
Redemption Date, and (iii) a statement that dividends on the shares of Series
98-C Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof. If fewer than all the shares of the Series 98-C Preferred
Stock owned by such holder are then to be redeemed, the notice shall specify the
number of shares thereof that are to be redeemed and, if practicable, the
numbers of the certificates representing such shares. Within three business days
of the Notice of Redemption Date, the Company shall wire transfer the
appropriate amount of funds into the escrow account of Goldstein, Goldstein &
Reis, LLP who shall disburse such funds to the holders of the Series 98-C
Preferred Stock which are the subject of the Notice of Redemption upon
confirmation from the Company and the holders of the Series 98-C Preferred Stock
that the redemption provisions have been complied with. If the Company fails to
comply with the aforementioned redemption provisions in any manner whatsoever on
two separate occasions, it shall waive its rights in the future to serve a
Redemption Notice upon the holders of the Series 98-C Preferred Stock at any
time. The holders may serve a notice of conversion upon the Company up until the
Redemption Date, and any time thereafter. In the event the Company receives a
notice of conversion during the time period between the Notice of Redemption
Date and the Redemption Date, and the Company has complied with all of the
redemption procedures set forth herein, the aforementioned notice of conversion
shall be deemed null and void. In the event the aforementioned occurs and the
Company has not complied with all of the redemption provisions set forth herein
the Company must comply with the delivery requirements upon conversion as set
forth herein.
4. Mechanics of Redemption. Subject to the occurrence of the
wire transfer of the Redemption Price as described in Section (f)(3) above, each
share of Series 98-C Preferred Stock to be redeemed shall be automatically
canceled and converted into a right to receive the Redemption Price, and all
rights of the Series 98-C Preferred Stock, including the right to conversion
shall cease without further action.
5. Adjustment of Redemption Price. The Redemption Price shall
be adjusted proportionally upon any adjustment of the Conversion Price under
Section (e) (4) hereof and in the event of any stock dividend, stock split,
combination of shares or similar event.
(g) Liquidated Damages. Upon the occurrence of any of the following
events the Company shall, within five business days after facsimile written
request of the majority of the then holders of the Series 98-C Preferred Stock,
pay to such requesting holders of the then outstanding shares of Series 98-C
Preferred Stock in immediately available funds, one hundred twenty five percent
(125%) of the Liquidation Preference in accordance with the procedures set forth
in Section (f) above. The parties hereby agree that the damages Holders could
suffer as a result of any of the below events are not reasonably ascertainable.
The damages agreed to by the parties herein constitute their best estimate of
the loss Holders would suffer as a result of any of such events.
(i) the occurrence of a change of control which is defined as:
(a) any person who acquires directly or indirectly, more than 50% of the
outstanding shares of any class of voting securities of the Company, and (b)
where the individuals constituting the Board of Directors on the Closing Date
shall cease to constitute a majority of the Board of Directors, unless the
election of each director who was not a director prior thereto was approved by a
majority vote of the directors then in office of the Company;
(ii) a transfer of all or substantially all of the assets of
the Company to any person in a single transaction or series of related
transactions;
(iii) a consolidation, merger or amalgamation of the Company
with or into another person in which the Company is not the surviving entity
(other than a merger which is effected solely to change the jurisdiction of
incorporation of the Company and results in a reclassification, conversion or
exchange of outstanding shares of Common Stock solely into shares of Common
Stock);
(iv) the Registration Statement has been declared effective by
the SEC and subsequently effectiveness is suspended, which suspension lasts for
a period of more than forty five (45) calendar days;
(v) the issuance of the maximum number of shares of Common
Stock called for in the Registration Statement and the failure within ninety
(90) days thereafter to issue additional shares of Common Stock;
(vi) the consummation by the Company of one or more equity
financings which result in net proceeds to the Company in excess of $4,000,000;
or
(vii) an Event of Default has occurred.
Up until the date that the aforementioned liquidated damages are paid
to the requesting holders, the holders shall retain all rights, preferences, and
privileges contained in this Certificate of Secretary, including, but not
limited to, the conversion rights set forth herein. Notwithstanding the above,
the Company has no obligation to honor a conversion notice for the Series 98-C
Preferred Stock for which the Company has paid liquidated damages as set forth
in this Section. In any event, the non-requesting holders shall retain all
rights preferences and privileges contained in this Certificate of Secretary,
including, but not limited to, the conversion rights set forth herein.
(h) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of the 98-C Preferred Stock to or upon
the Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 98-C Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 98-C Preferred Stock shall be sufficiently given or
made if sent by mail, postage prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
(i) Status of Redeemed, Converted or Retired Shares. Shares of Series
98-C Preferred Stock either (i) redeemed, (ii) purchased, (iii) elected by the
holders thereof to be the subject of liquidated damages which have been paid by
the Company as set forth above, or (iv) otherwise acquired for value by the
Company or converted by the holder (including the payment of liquidated damages
as set forth in Section (g) above), , shall after such acquisition, have the
status of canceled shares of Preferred Stock. In the event any shares of Series
98-C Preferred Stock shall be converted or redeemed pursuant to the conversion
and/or redemption terms contained herein, the shares so converted shall be
canceled and shall not be issuable by the Company, shall have the status of
authorized but unissued shares of Preferred Stock and may be reissued by the
Company at anytime as shares of any series of Preferred Stock other than Series
98-C Preferred Stock.
IN WITNESS WHEREOF, SGI International, has caused this Amended Certificate of
Secretary to be signed by its Vice President, and attested to by its Secretary,
this 16th day of October, 1998.
SGI INTERNATIONAL
/s/ RICHARD J. GIBBENS
By:_______________________________
Title: VP Operations
Attest:
/s/ JOHN R. TAYLOR
- -----------------------------
John R. Taylor, Secretary
EXHIBIT 3.3
AMENDED CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI
International, a Utah Corporation.
2. The Resolution set forth below is a true and correct copy of a
Resolution passed by the SGI Board of Directors on November 4, 1998.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on November 4, 1998.
/s/ JOHN R. TAYLOR
- -------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Seventy-Five (75) shares, out of Twenty Million (20,000,000)
shares of Preferred Stock which the Company has authority to issue, be, and the
same hereby is, authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restriction thereof, of the shares of such
series (in addition to the powers, designations, preferences, and relative,
participating, optional or to other special rights and the qualification,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the Preferred Stock) authorized by this
resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 98-D Convertible Preferred Stock (the "Series 98-D Preferred
Stock"). The maximum number of shares of Series 98-D Preferred Stock shall not
have any liquidation preference (the "Liquidation Preference"). The Series 98-D
Preferred Stock shall rank prior to the Company's Common Stock and to all other
classes and series of equity securities of the Company now or hereafter
authorized, issued, or outstanding, other than any classes or series of equity
securities of the Company ranking on a parity with or senior to the Series 98-D
Preferred Stock as to dividend rights or rights upon liquidation, winding up or
dissolution of the Company. The Series 98-D Preferred Stock shall be junior to
all previous Series of Preferred Stock as to both the payment of dividends and
the distribution of assets upon liquidation, dissolution, or winding up of the
Company, and shall be junior to all outstanding debt of the Company. The Series
98-D Preferred Stock shall be subject to the creation of senior stock, parity
stock and junior stock to the extent not expressly prohibited by the Company's
Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 98-D Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 98-D Preferred Stock shall not be
entitled to receive any dividends.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 98-D Preferred Stock shall not be
entitled to be paid out of the assets of the Company available for distribution
to stockholders, before any distribution or payment is made upon any Common
Stock or any other stock ranking as to the distribution of assets upon
liquidation, dissolution or winding up of the Company junior to the Series 98-D
Preferred Stock. Neither the consolidation or merger of the Company into or with
any other company or companies, nor the sale or transfer by the Company of all
or any part of its assets, nor the reduction of the capital stock of the
Company, shall be deemed to be a liquidation, dissolution, or winding up of the
Company for purposes hereof.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 98-D Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
700 shares of fully paid and nonassessable shares of Common Stock.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, all of the Series 98-D shall first be
convertible at the option of the holder at any time after fifteen (15) days from
October 30, 1998 (the "Closing Date"). Subject to the limitations described in
this paragraph regarding the period of time when the 98-D Preferred Stock shall
first be convertible, the Series 98-D Preferred Stock shall be convertible for
two (2) years from the Closing Date, and all of the Series 98-D shall be deemed
converted as if the second anniversary of the Closing Date was a Conversion
Date. The holder of the Series 98-D Preferred Stock shall further be prohibited
from converting any portion of the Series 98-D Preferred Stock which would
result in the holder being deemed the beneficial owner in accordance with the
provisions of Rule 13d-3 of the Securities Act of 1934, as amended, of 4.99% or
more of the issued and outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 98-D
Preferred Stock shall exercise its right to convert the Series 98-D Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 98-D Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 98-D Preferred Stock (together with the certificates representing the
Series 98-D Preferred Stock not so converted) to the holder, by electronic
transfer or otherwise within five business days after the Conversion Date if the
Company has received the original duly executed notice of conversion and Series
98-D Preferred Stock certificate being so converted by such date. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If certificates for Common Stock
are not delivered within five (5) business days of actual receipt of a duly
completed election to convert and the certificate to be converted, then the
purchaser of the Series 98-D Preferred Stock will be entitled to revoke the
relevant notice of conversion by delivering a notice to such effect to the
Company whereupon the Company and the purchaser shall each be restored to their
respective positions immediately prior to the delivery of such notice of
conversion.
4. Adjustment Provisions. The number of shares of Common Stock
issuable upon the conversion of the Preferred Stock and the Conversion Price
shall be subject to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in
Common Stock or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock, (ii) declare a dividend
payable in cash on its Common Stock and at substantially the same time offer its
shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other entitling a holder thereof to receive Common
Stock) from proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend), (iii) subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, (iv)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, or (v) issue by reclassification of its Common Stock any shares
of Common Stock of the Company, the number of shares of Common Stock issuable
upon conversion of the Series 98-D Preferred Stock immediately prior thereto
shall be adjusted so that the holders of the Series 98-D Preferred Stock shall
be entitled to receive after the happening of any of the events described above
that number and kind of shares as the holders would have received had such
Series 98-D Preferred Stock been converted immediately prior to the happening of
such event or any record date with respect thereto. Any adjustment made
pursuant to this subdivision shall become effective immediately after the
close of business on the record date in the case of a stock dividend
and shall become effective immediately after the close of business
on the record date in the case of a stock split, subdivision, combination
or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock
issuable hereunder otherwise required to be made by this Section (e)(4)
will not have to be made if such adjustment would not require an increase or
decrease in one (1%) percent or more in the number of shares of Common Stock
issuable upon conversion of the Series 98-D Preferred Stock. No adjustment in
the Conversion Rate will be made for the issuance of shares of capital stock to
directors, employees or independent contractors pursuant to the Company's or
any of its subsidiaries' stock option, stock ownership or other benefit plans
or arrangements or trusts related thereto or for issuance of any shares of
Common Stock pursuant to any plan providing for the reinvestment of
dividends or interest payable on securities of the Company and the
investment of additional optional amounts in shares of Common Stock
under such plan.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 98-D Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
98-D Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 98-D Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 98-D Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 98-D Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 98-D Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 98-D Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to Section (e)(4), the Company, at its
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of such Series 98-D
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment are
based. The Company shall, upon written request at any time of any holder of
Series 98-D Preferred Stock, furnish or cause to be furnished to such holder a
certificate setting forth the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of Series 98-D Preferred Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 98-D Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 98-D Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 98-D Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 98-D Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall have the status of
authorized but unissued shares of Preferred Stock and may be reissued by the
Company at anytime as shares of any series of Preferred Stock other than Series
98-D Preferred Stock.
11. Status of Retired Shares. Shares of Series 98-D Preferred
Stock, purchased or otherwise acquired for value by the Company, or converted by
the holder, shall after such acquisition, have the status of authorized and
unissued shares of Preferred Stock and may be reissued by the Company at any
time as shares of any Series of Preferred Stock other than as shares of Series
98-D Preferred Stock.
(f) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 98-D Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 98-D Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
4th day of November, 1998.
SGI INTERNATIONAL
/s/ JOSEPH A. SAVOCA
By:_______________________________
Joseph A. Savoca
Chairman/CEO
Attest:
/s/ JOHN R. TAYLOR
_____________________________
John R. Taylor, Secretary
EXHIBIT 4.1
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH,
EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY.
STOCK PURCHASE WARRANT
To Purchase ____ Shares of Common Stock of
SGI INTERNATIONAL
THIS CERTIFIES that, for value received, ________(the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time or times after the second calendar day after
the date hereof (the "Exercise Commencement Date") and on or prior to November
2, 2003 (the "Termination Date", with the time period between the Exercise
Commencement Date and the Termination Date hereinafter referred to as the
"Exercise Period") but not thereafter, to subscribe for and purchase from SGI
INTERNATIONAL, a Utah corporation (the "Company"), ____ (___) shares of Common
Stock (the "Warrant Shares"). The purchase price of one share of Common Stock
(the "Exercise Price") under this Warrant shall be One Hundred Ten percent
(110%) of the average closing bid price on the OTC BULLETIN BOARD, over the five
(5) day trading period immediately prior to November 2, 1998 (the "Closing
Date"). The Exercise Price and the number of shares for which the Warrant is
exercisable shall be subject to adjustment as provided herein. This Warrant is
being issued in connection with the 6% Convertible Preferred Stock Series 98-C
Subscription Agreement dated on or about November 2, 1998, in the amount of up
to Two Million ($2,000,000) Dollars (the "Agreement") between the Company and
Investor (and other entities) and is subject to its terms. In the event of any
conflict between the terms of this Warrant and the Agreement, the Agreement
shall control.
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. Exercise of Warrant. This Warrant may be exercised in whole
or in part (but not as to a fractional share of Common Stock), at any time and
from time to time during the Exercise Period by the holder hereof by delivery of
a notice of exercise (a "Notice of Exercise") substantially in the form attached
hereto as Exhibit A via facsimile to the Company. Promptly thereafter the holder
shall surrender this Warrant to the Company at its principal office, accompanied
by payment of the Exercise Price multiplied by the number of shares of Common
Stock for which this Warrant is being exercised. Payment of the Exercise Price
shall be made, at the option of the holder, (i) by certified check or bank draft
payable to the order of the Company, or (ii) by wire transfer to the account of
the Company. If the amount of the payment received by the Company is more than
the Exercise Price, the Company will promptly refund the excess to the holder.
Upon exercise, the holder shall be entitled to receive, within five business
days after payment in full, one or more certificates, issued in the holder's
name or in such name or names as the holder may direct, subject to the
limitations on transfer contained herein, for the number of shares of Common
Stock so purchased. The shares of Common Stock so purchased shall be deemed to
be issued as of the close of business on the date on which the Company shall
have received from the holder payment in full of the Exercise Price (the
"Exercise Date"). In the event that the Common Stock is not received by the
holder within five (5) business days after the Exercise Date, and the Company
has received the original Notice of Exercise and Warrant and payment of the
Exercise Price, the Company shall pay to the holder, in immediately available
funds, upon demand, as liquidated damages for such failure and not as a penalty,
for each one thousand (1,000) shares of Common Stock sought to be exercised
under the Warrant, $7.50 for each of the first ten (10) days and $15 per day
thereafter that the shares of Common Stock underlying the Warrant are not
delivered, which liquidated damages shall run from the sixth business day after
the Exercise Date. Any and all payments required pursuant to this paragraph
shall be payable only in cash, and shall not relieve the Company's obligation to
deliver shares of Common Stock pursuant to the provisions set forth herein and
to comply with the terms of this Warrant.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant. Any fractional shares issuable upon exercise of this Warrant shall be
rounded up to the nearest whole share.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant and any Warrant Shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of except as follows:
(i) to a person who, in the opinion of counsel to the Company, is a person to
whom this Warrant or the Warrant Shares may legally be transferred without
registration and without the delivery of a current prospectus under the
Securities Act of 1933 as amended (the "Securities Act"), with respect thereto,
and then only against receipt of an agreement of such person to comply with the
provisions of this Section 6(a) with respect to any resale or other disposition
of such securities; or (ii) to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the offering
thereof for such sale or disposition, and thereafter to all successive
assignees.
(b) Unless the Warrant Shares have been registered under the
Act, or exempt from registration, upon exercise of any portion of the Warrant
and the issuance of any of the Warrant Shares, all certificates representing
Warrant Shares shall bear on the face thereof substantially the following
legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
Without limiting such holders right to transfer, assign,
pledge or sell this Warrant or the Warrant Shares, the holder of this Warrant
agrees and acknowledges that the Warrant is being purchased for the holder's own
account, for investment purposes only, and not for the account of any other
person, and not with a view to distribution, assignment, pledge or resale to
others or to fractionalization in whole or in part. The holder further
represents, warrants and agrees as follows: no other person has or will have a
direct or indirect beneficial interest in this Warrant and the holder will not
sell, hypothecate or otherwise transfer the Warrant except in accordance with
the Act thereunder and applicable state securities laws or unless, in the
opinion of counsel for the holder acceptable to the Company, an exemption from
the registration requirements of the Act and such laws is available.
7. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares of Common Stock so purchased shall
be and be deemed to be issued to such holder as the record owner of such shares
as of the close of business on the date on which this Warrant shall have been
exercised.
9. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
12. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
or securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company,
Then and in each such event the Company will mail or cause to be
mailed to the holder of this Warrant a notice specifying (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, and (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up is to take place, and the time, if any, as of which the holders of
record of Common Stock (or other securities) shall be entitled to exchange their
share of Common Stock (or other securities) for securities or other property
deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up. Such
notice shall be mailed at least 20 calendar days prior to the date specified in
such notice on which any action is to be taken.
13. Effect of Certain Events. If at any time the Company
proposes (i) to sell or otherwise convey all or substantially all of its assets,
(ii) to effect a transaction (by merger or otherwise) in which more than 50% of
the voting power of the Company is disposed of (collectively, a "Sale or Merger
Transaction"), in which the consideration to be received by the Company or its
shareholders consists solely of cash, or (iii) in case the Company shall at any
time effect a Sale or Merger Transaction in which the consideration to be
received by the Company or its shareholders consists of consideration other than
cash, the holder of this Warrant shall have the right thereafter to purchase, by
exercise of this Warrant and payment of the aggregate Exercise Price in effect
immediately prior to such action, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such transaction had this Warrant been exercised
immediately prior thereto.
14. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
15. Negotiability. This Warrant is issued upon the following
terms, to all of which each holder or owner hereof by the taking hereof consents
and agrees:
(a) title to this Warrant may be transferred by endorsement and
delivery in the same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is empowered to
transfer absolute title hereto by endorsement and delivery hereof to a bona fide
purchaser hereof for value; each prior taker or owner waives and renounces all
of his equities or rights in this Warrant in favor of each such bona fide
purchaser and each bona fide purchaser shall acquire absolute title hereto and
to all rights represented hereby;
(c) until this Warrant is transferred on the books of the Company, the
Company may treat the registered holder hereof as the absolute owner hereof for
all purposes, notwithstanding any notice to the contrary; and
(d) notwithstanding the foregoing, this Warrant may not be sold,
transferred or assigned except pursuant to an effective registration statement
under the Securities Act or pursuant to an applicable exemption therefrom.
16. Voluntary Adjustment by the Company. The Company may at
its discretion, at any time during the term of this Warrant, reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
17. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
18. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange or market upon which the
Common Stock may be listed.
19. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on the exercise of this Warrant above the amount payable therefor on
such exercise, (b) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the exercise of this Warrant, and (c) will not
transfer all or substantially all of its properties and assets to any other
person (corporate or otherwise), or consolidate with or merge into any other
person or permit any such person to consolidate with or merge into the Company
(if the Company is not the surviving person), unless such other person shall
expressly assume in writing and will be bound by all the terms of this Warrant.
20. Regulation D Restrictions. Without limiting such holders
right to transfer, assign, pledge or sell this Warrant or the Warrant Shares,
the holder hereof represents and warrants to the Company that it has acquired
this Warrant and anticipates acquiring the shares of Common Stock issuable upon
exercise of the Warrant solely for its own account for investment purposes and
not with a view to or for resale of such securities unless such resale has been
registered with the Commission or an applicable exemption is available therefor.
At the time this Warrant is exercised, the Company may require the holder to
state in the Notice of Exercise such representations concerning the holder as
are necessary or appropriate to assure compliance by the holder with the
Securities Act.
21. Company Acknowledgment. The Company will, at the time of
the exercise of this Warrant, upon request of the holder hereof, acknowledge in
writing its continuing obligation to afford to such holder the registration
rights to which such holder shall continue to be entitled after such exercise in
accordance with the provisions of a Registration Rights Agreement dated the date
hereof. If the holder shall fail to make any such request, such failure shall
not affect the continuing obligation of the Company to afford such holder any
such rights.
22. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules. Each of the
parties consents to the jurisdiction of the federal courts whose districts
encompass any part of the State of New York in connection with any dispute
arising under this Warrant and hereby waive, to the maximum extent permitted by
law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Warrant obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Warrant irrevocably consents to the service
of process in any such proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, to such party at its address set forth
herein. Nothing herein shall affect the right of any party to serve process in
any other manner permitted by law.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: October , 1998 SGI INTERNATIONAL
/s/ JOHN R. TAYLOR
By:___________________________
Title: Senior Vice President
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase shares of Common
Stock of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
- -------------------------------
(Name)
- -------------------------------
(Address)
- -------------------------------
Dated:
- ------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to ______________________________________________
whose address is _____________________________________________________________.
______________________________________________________________________________
Dated: ______________, _____
Holder's Signature: _____________________________
Holder's Address:_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
EXHIBIT 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
6% CONVERTIBLE PREFERRED STOCK SERIES 98-C
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 6% Convertible Preferred Stock
Series 98-C (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock and the other terms of the
Preferred Stock are set forth in the Certificate of Secretary of the 6%
Convertible Preferred Stock Series 98-C (the "Certificate of Secretary" annexed
hereto as Exhibit A). In addition, the Company will sell to the Subscribers
warrants (individually the "Warrant" and collectively the "Warrants") to
purchase an aggregate of 50,000 shares of Common Stock of the Company for a
period of five years from the Closing Date (as defined herein), as per the terms
of a separate Stock Purchase Warrant (Exhibit B annexed hereto) per Million
($1,000,000) Dollars funded to the Company pursuant to the terms of this
Agreement. This Subscription and, if accepted by the Company, the offer and sale
of the Preferred Stock, Warrants and the Common Stock underlying the Warrant and
Preferred Stock (collectively the "Securities"), are being made in reliance upon
the provisions of Regulation D under the Act. The term "Agreement" when used
throughout this document shall be deemed to include this agreement and all
agreements and documents annexed hereto.
The Closing Date shall be determined in accordance with Sections 1.1
and 14 herein.
The "Subscribers" (collectively GCA Strategic Investment Fund
Limited, Manchester Asset Management, Ltd., Gilston Corporation, Ltd., and
Avalon Capital, Ltd., with Manchester Asset Management, Ltd., Gilston
Corporation, Ltd., and Avalon Capital, Ltd. included in the definition of
Subscribers, but also collectively referred to as the "Note Subscribers"),
hereby represent and warrant to, and agree with the Company as follows:
Section 1. Agreement to Subscribe; Purchase Price.
1.1 Closing. The Company will sell, and the Subscribers will
buy, on the Closing Date, up to an aggregate of 2,000 shares of Preferred Stock
for an aggregate purchase price of up to Two Million ($2,000,000) U.S. Dollars
(the "Purchase Price") based on U.S.$1,000 per share, and Warrants to purchase
50,000 shares of Common Stock of the Company per One Million ($1,000,000)
Dollars funded to the Company hereunder, and Warrants to purchase a pro rata
number of shares of Common Stock based upon the dollar amount funded to the
Company in excess of One Million ($1,000,000) Dollars. Dividends on the
Preferred Stock will accrue and be paid at the rate of six (6%) percent as per
the terms of the Certificate of Secretary. The Preferred Stock shall be issued
in increments of not greater than 50 shares per Preferred Stock certificate if
so requested by any Subscriber. Each Subscriber may close their portion of this
transaction on one or more occasions, however, the "Closing Date" as defined
below, shall be as of the payment to the Company of Five Hundred Thousand
($500,000) Dollars and cancellation of the Notes.
1.2 Form of Payment. Subscribers (except for the Note
Subscribers) shall pay their portion of the Purchase Price by delivering good
funds in United States Dollars by wire transfer to Goldstein, Goldstein & Reis,
LLP, hereinafter referred to as the "Escrow Agent", against delivery of the
original shares of Preferred Stock and Warrants by the Company. The Note
Subscribers shall pay their portion of the Purchase Price by returning the
promissory note dated September 9, 1998 in the principal amount of $250,000, and
the promissory note dated October 9, 1998 in the principal amount of $100,000
(both of the aforementioned promissory notes are hereinafter referred to as the
"Notes"), to the Company marked "Paid" for cancellation, in exchange for that
number of shares of Preferred Stock equal to the aggregate principal amount of
the Notes being exchanged hereby. The parties have entered into an Escrow
Agreement annexed hereto as Exhibit C and the delivery of the Securities and the
Purchase Price therefor shall be governed by the terms of such Escrow Agreement.
1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein &
Reis, LLP are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
Section 2. Representations and Warranties of the Subscribers.
Subscribers acknowledge, represent, warrant and agree as follows:
2.1 Organization and Authorization. Each of the Subscribers is
duly incorporated or organized and validly existing in the state or country of
its incorporation or organization and has all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by each of the Subscribers, the performance by each
of the Subscribers of its obligations hereunder and the consummation by each of
the Subscribers of the transactions contemplated hereby have been duly
authorized and requires no other proceedings on the part of each of the
Subscribers. Each of the undersigned's signatory has all right, power and
authority to execute and deliver this Agreement on behalf of each of the
Subscribers. This Agreement has been duly executed and delivered by each of the
Subscribers and, assuming the execution and delivery hereof and acceptance
thereof by the Company, will constitute the legal, valid and binding obligations
of each of the Subscribers, enforceable against each of the Subscribers in
accordance with its terms and each of the Subscribers can afford the complete
loss of its investment.
2.2 Evaluation of Risks. Each of the Subscribers has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of, and bearing the economic risks entailed by,
an investment in the Company and of protecting its interests in connection with
this transaction. They recognize that their investment in the Company involves a
high degree of risk.
2.3 Independent Counsel. Each of the Subscribers acknowledges
that it has been advised to consult with its own attorney regarding legal
matters concerning the Company and to consult with its tax advisor regarding the
tax consequences of acquiring the Securities.
2.4 Disclosure Documentation. Each of the Subscribers has
received and reviewed copies of the Company's reports filed under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the Act, including its
10-K's, 10-Q's, 8-K's, registration statements, and other publicly available
documents filed by the Company since December 31, 1997, (collectively, the
"Reports"). Except for the Reports, the Subscribers are not relying on any other
information relating to the offer and sale of the Securities. Each of the
Subscribers acknowledges that the Company has offered to make available any
additional public information that such Subscriber may reasonably request,
including technical information, and other material information about the
Company, and each of the Subscribers has been offered Company's full and
unconditional cooperation in making such information available to each of the
Subscribers, and each of the Subscribers acknowledges that the Company has
recommended that each of the Subscribers request and review such information
prior to making an investment decision. No oral or written representations have
been made, or oral or written information furnished to the undersigned or its
advisors, if any, in connection with the offering of the Securities which were
or are in any way inconsistent with the Reports.
2.5 Opportunity to Ask Questions. Each of the Subscribers has
had a reasonable opportunity to ask questions of and receive answers from the
Company concerning the Company and the offering, and all such questions, if any,
have been answered to the full satisfaction of each of the Subscribers.
2.6 Reports Constitute Sole Representations. Except as set
forth in the Reports, no representations or warranties have been made to any of
the Subscribers by (a) the Company or any agent, employee or affiliate of the
Company, or (b) any other person, and in entering into this transaction the
Subscribers are not relying upon any information, other than that contained in
the Reports and the results of independent investigation by each of the
Subscribers.
2.7 Each of the Subscribers are Accredited Investors. Each of
the undersigned is an Accredited Investor as defined below who represents and
warrants it is included within one or more of the following categories of
Accredited Investors.
(i) Any bank as defined in Section 3(a)(2) of the Act, or any savings
and loan associated or other institution as defined in Section 3(a)(5)A of the
Act whether acting in it individual or fiduciary capacity; any broker or dealer
registered pursuant to Section 15 of the 1934 Act; any insurance company as
defined in Section 2(13) of the Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the Small
Business Act of 1958; any plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivision, for the benefits of its employees if such plan has total
assets in excess of $5,000,000; and employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association, insurance company, or
registered investment advisor, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
(ii) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
2.8 No Registration, Review or Approval. Each of the
Subscribers acknowledges and understands that the limited private offering and
sale of Securities pursuant to this Agreement has not been reviewed or approved
by the SEC or by any state securities commission, authority or agency, and is
not registered under the Act or under the securities or "blue sky" laws, rules
or regulations of any state. Each of the Subscribers acknowledges, understands
and agrees that the Securities are being offered and sold hereunder pursuant to
(i) a private placement exemption to the registration provisions of the Act
pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D
promulgated under such Act, and (ii) a similar exemption to the registration
provisions of applicable state securities laws. Each of the Subscribers
understands that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
each Subscriber set forth herein in order to determine the applicability of such
exemptions and the suitability of each of the Subscribers to acquire the
Securities. Each of the Subscribers will advise the Company of the state of its
residence, upon request of the Company, to enable the Company to comply with
applicable "blue sky" laws.
2.9 Investment Intent. Without limiting their ability to
resell the Securities pursuant to an effective registration statement, each of
the Subscribers is acquiring the Securities solely for its own account and not
with a view to the distribution, assignment or resale to others. Each of the
Subscribers understands and agrees that it may bear the economic risk of its
investment in the Securities for an indefinite period of time. None of the
Subscribers now have any short position or hedge position in the Company's
Common Stock, nor will any of the Subscribers make any promissory notes and/or
pledges to that effect on the Company's Common Stock.
2.10 No Advertisements. The Subscribers are not subscribing
for the Securities as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or presented at any seminar or
meeting.
2.11 Registration Rights. The parties have entered into a Registration
Rights Agreement (Exhibit D).
2.12 Payment of Liquidated Damages Pursuant to Section (g) of
the Certificate of Secretary. The Company's obligation to pay the liquidated
damages as provided in Section (g) of the Certificate of Secretary is subject to
the Company's receipt of the original Preferred Stock certificate which is the
subject of such payment of liquidated damages.
2.13 Ownership of Notes. The Note Subscribers represent that
they have not pledged, hypothecated or otherwise granted a security interest or
lien with respect to any portion of the Notes.
Section 3. Representations and Warranties of the Company. For
so long as any Securities held by any of the Subscribers remain outstanding, the
Company acknowledges, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company and each of its
subsidiaries is a corporation (or other legal entity) duly organized and validly
existing under the laws of the State of Utah and is in good standing under such
laws. The Company has all requisite corporate power and authority to own, lease
and operate its properties and assets, and to carry on its business as presently
conducted. The Company and each of its material subsidiaries is qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership of its property or the nature of its business requires
such qualification, except where failure to so qualify would not (i) have a
material adverse effect on the condition (financial or otherwise), operations,
results of operations, or on earnings, business affairs, properties or assets of
the Company, or (ii) materially and adversely affect the ability of the Company
to perform its obligations pursuant to this Agreement.
3.2 SEC Filings/Full Disclosure. To the best of its knowledge,
the Company is in compliance, to the extent applicable, with all reporting
obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act, and
shall use its best efforts to maintain such status on a timely basis. The
Company has registered its Common Stock pursuant to Section 12 of the 1934 Act
and the Common Stock is listed and trades on the OTC Bulletin Board. The Company
has filed all material required to be filed pursuant to all reporting
obligations, under either Section 13(a) or 15(d) of the 1934 Act for a period of
at least twelve (12) months immediately preceding the offer and sale of the
Securities (or for such shorter period that the Company has been required to
file such material). There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been publicly
disclosed by the Company or disclosed in writing to the Subscribers which (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or on earnings, business affairs, properties or assets
of the Company, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company to perform its obligations pursuant to this
Agreement.
3.3 Accuracy of Reports and Information. For a period of at
least twelve (12) months immediately preceding this offer and sale, to the best
of the Company's knowledge (i) none of the Company's filings with the SEC
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not misleading, and
(ii) the Company has timely filed all requisite forms, reports and exhibits
thereto with the SEC.
3.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement, and all
agreements related hereto, and to consummate the transactions contemplated
hereby. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Agreement by the Company, the authorization, sale, issuance
and delivery of the Securities and the performance of the Company's obligations
hereunder has been taken, and no further consent or authorization of the
Company, its board of directors or its shareholders is required. This Agreement
has been duly executed and delivered by the Company and constitutes a legal,
valid and binding obligation of the Company enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies, and to limitations of public
policy as they may apply to the indemnification provisions set forth in this
Agreement. Upon their issuance and delivery pursuant to this Agreement, the
Securities will be validly issued, fully paid and nonassessable and will be free
of any liens or encumbrances; provided, however, that the Securities are subject
to restrictions on transfer under state and/or federal securities laws. The
issuance and sale of the Securities will not give rise to any preemptive right
or right of first refusal or right of participation on behalf of any person.
3.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, stockholders agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would (i) have a material
adverse effect on the condition (financial or otherwise) or on earnings,
business affairs, properties or assets of the Company, or (ii) reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement.
3.6 No Undisclosed Liabilities or Events. The Company has no
material liabilities or obligations other than those disclosed in the Reports,
this Agreement or those incurred in the ordinary course of the Company's
business since June 30, 1998, and which individually or in the aggregate, do not
or would not (i) reasonably be expected to have a material adverse effect on the
condition (financial or otherwise) or on earnings, business affairs, properties
or assets of the Company, or (ii) reasonably be expected to materially and
adversely affect the ability of the Company to perform its obligations pursuant
to this Agreement. No event or circumstances has occurred or exists with respect
to the Company or its properties, business, condition (financial or otherwise),
results of operations or prospects, which, under applicable law, rule or
regulation, requires public disclosure or announcement prior to the date hereof
by the Company but which has not been publicly announced or disclosed.
3.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion or exercise provision of the Preferred Stock and Warrants, will
conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under, any
material indenture, mortgage, deed of trust or other material agreement
applicable to the Company or instrument to which the Company is a party or by
which it is bound or any statute or the Articles of the Company, or any decree,
judgment, order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or its properties, or the Company's listing
agreement for its Common Stock.
3.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreements to which the Company is a party or as defined below, and no event
which, with the giving of notice or the passage of time or both, would become an
Event of Default (as so defined), has occurred and is continuing, which would
have a material adverse effect on the Company's business, properties, prospects,
condition (financial or otherwise) or results of operations.
3.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except as may be required by applicable securities laws.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which (i) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) or on earnings, business
affairs, properties or assets of the Company, or (ii) could reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement.
3.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect, and the Company is not in material
breach or material default under any of such agreements.
3.12 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any (i) material adverse effect on the condition (financial or
otherwise) or on earnings, business affairs, properties or assets of the
Company, or (ii) material and adverse affect the ability of the Company to
perform its obligations pursuant to this Agreement.. The Company is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
3.15 Required Governmental Permits. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
3.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Stock and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
3.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, the Company has no outstanding restricted
shares, or shares of Common Stock sold under Regulation S, Regulation D or
outstanding under any other exemption from registration, which are available for
sale as unrestricted ("free trading") stock.
3.18 Registration Alternative. The Company covenants and
agrees that for so long as any of the shares remain outstanding and continue to
be "restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Subscribers shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable.
3.20 Dilution. The Company is aware and acknowledges that
conversion of the Preferred Stock, and/or exercise of the Warrant, would cause
dilution to existing shareholders and could significantly increase the
outstanding number of shares of Common Stock.
3.21 Use of Proceeds. The proceeds from the issuance and sale
of the Securities by the Company shall be used to finance the Company's current
operations and for other working capital purposes. None of the proceeds from the
issuance and sale of the Securities by the Company pursuant to this Agreement
will be used directly or indirectly for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any "margin stock" within the
meaning of Regulation G of the Board of Governors of the Federal Reserve System.
3.22 Reserved Shares and Listings.
(a) The Company shall at all times have authorized, and reserved for
the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion and exercise of the outstanding Securities and
issuance of the shares of Common Stock underlying the Preferred Stock (the
"Conversion Shares") and Warrants (the "Warrant Shares") (based on the
conversion price of the Preferred Stock in effect from time to time) and the
exercise in full of the Warrants and the issuance of the Warrant Shares (based
on the exercise price of the Warrants) (collectively, the "Reserved Amount").
The Company shall not reduce the Reserved Amount without the prior written
consent of each Subscriber. With respect to all Securities which contain an
indeterminate number or shares of Common Stock issuable in connection therewith
(such as the Preferred Stock), the Company shall include in the Reserved Amount,
no less than two (2) times the number of shares that is then actually issuable
upon conversion or exercise of such Securities. If at any time the number of
shares of Common Stock authorized and reserved for issuance is below the number
of Conversion Shares issued or issuable upon conversion of the Preferred Stock
and exercise of the Warrants, the Company will promptly take all corporate
action reasonably necessary to authorize and reserve a sufficient number of
shares, including, without limitation, either (x) calling a special meeting of
shareholders to authorize additional shares, in the case of an insufficient
number of authorized shares, or (y) in lieu of (x) above, consummating the
immediate redemption of the Preferred Stock (pursuant to the provisions of the
Certificate of Secretary) as permitted under the laws of the State of Utah.
(b) The Company shall promptly file all listing applications
and secure the listing of the Conversion Shares and Warrant Shares upon any
national securities exchange or automated quotation system, if any, upon which
the shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Conversion Shares and Warrant Shares from time
to time issuable upon conversion or exercise of the Preferred Stock and
Warrants. The Company will use its best efforts to maintain the listing and
trading of its Common Stock on the OTC Bulletin Board, and in the event the
Common Stock, at some later date becomes listed on the NASDAQ National Market,
the NASDAQ Small Cap Market, the New York Stock Exchange, Inc., or the American
Stock Exchange Inc. The Company shall use its best efforts to maintain the
listing of the Common Stock thereon, and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers, Inc. (the "NASD") and such
exchanges, as applicable. The Company shall promptly provide to each Subscriber
copies of any notices it receives regarding the continued eligibility of the
Common Stock for listing. In the event the Common Stock is delisted from the OTC
Bulletin Board the Company will immediately apply to have the Common Stock
listed on the "Pink Sheets". In the event the Common Stock is, at a later date,
during the time that the Securities are owned by the Subscribers, traded on
another exchange or market beside the OTC Bulletin Board or Pink Sheets, and is
later delisted from such exchange or market, the Company agrees to immediately
apply for listing of the Common Stock on the OTC Bulletin Board.
3.23 Irrevocable Instructions. Upon receipt of a Notice of
Conversion (in the form annexed hereto as Exhibit E) or Notice of Exercise (in
the form annexed as Exhibit A to the Warrant), as applicable, the Company shall
in accordance with the Certificate of Secretary and Warrant, immediately issue
irrevocable instructions to its transfer agent to issue Common Stock
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares or Warrant Shares, as applicable, in such amounts as specified
from time to time by each Subscriber to the Company upon proper conversion of
the Preferred Stock and/or exercise of the Warrants. Upon conversion of any
share of Preferred Stock in accordance with their terms and/or exercise of any
Warrants in accordance with their terms, the Company will, and will cause its
transfer agent to issue one or more certificates representing shares of Common
Stock in such name or names and in such denominations specified by a Subscriber
in a Notice of Conversion and/or Notice of Exercise, as the case may be. As long
as the Registration Statement contemplated by the Registration Rights Agreement
shall remain effective with the SEC and in the applicable states, the shares of
Common Stock issuable upon conversion of any Preferred Stock or exercise of any
Warrants shall be issued to any transferee of such shares from a Subscriber
without any restrictive legend. The Company further warrants and agrees that no
instructions other than these instructions have been or will be given to its
transfer agent. Nothing in this Section shall affect in any way a Subscriber's
obligation to comply with all securities laws applicable to such Subscriber upon
resale of such shares of Common Stock, including any prospectus delivery
requirements.
3.24 Merger or Consolidation. During the time that the
Securities are outstanding, the Company will not, in a single transaction or a
series of related transactions, (i) consolidate with, or merge with, or into any
other person or entity, or (ii) permit any other person or entity to consolidate
with or merge into it, unless the Company shall be the survivor of such merger
or consolidation, and (x) immediately before and immediately after giving effect
to such transaction (including any indebtedness incurred or anticipated to be
incurred in connection with the transaction), no default or Event of Default (as
defined below) shall have occurred and be continuing; (y) the surviving entity
expressly assumes the obligations contained in this Agreement, and (z) the
Company has delivered to the Subscribers an Officer's certificate stating that
such consolidation, merger or transfer complies with this Agreement, and that
all conditions precedent in this Agreement relating to such transaction have
been justified.
Section 4. Further Representations and Warranties of the
Company. For so long as any Securities held by the Subscribers remain
outstanding, the Company acknowledges, represents, warrants and agrees as
follows:
(i) It will reserve from its authorized but unissued
shares of Common Stock a sufficient number of shares of Common Stock to
permit the conversion and exercise in full of the outstanding
Securities.
(ii) It will use its best efforts to maintain the
listing of its Common Stock on the OTC Bulletin Board.
(iii) It will permit each Subscriber to exercise its
right to convert the Preferred Stock and/or exercise the Warrants, and
be subject to the liquidated damage provisions set forth in the
Certificate of Secretary and Warrant.
Section 5. Opinion of Counsel at Closing. Subscribers shall,
upon the Closing, receive an opinion letter from counsel to the Company in the
form annexed hereto as Exhibit F.
Section 6. Opinion of Counsel Upon Conversion and/or Exercise.
The Company shall have their counsel provide, at the Company's expense, an
opinion of counsel acceptable to the transfer agent (if required) in order to
perfect conversion of the Preferred Stock and/or exercise of Warrants, upon
receipt of Notice of Conversion and/or Notice of Exercise, and receipt by
Counsel of such representations, warranties, and documents as are determined to
be necessary to comply with applicable securities laws, duly executed by the
Subscribers which shall be satisfactory to the Transfer Agent, directing the
Transfer Agent to remove any restrictive legend that is contained on the
underlying Common Stock certificate.
Section 7. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the 1934 Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to each Subscriber forthwith upon
request a written statement by the Company as to its compliance with
the reporting requirements of said Rule 144, and of the Act and the
1934 Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as such Subscriber may reasonably request in availing itself of
any rule or regulation of the SEC allowing such Subscriber to sell any
such Securities without registration.
Section 8. Representations and Warranties of the Company and
Subscriber. Each of the Subscribers on the one hand, and the Company on the
other, represent to the other the following with respect to itself:
8.1 Subscription Agreement. This Agreement has been duly
authorized, validly executed and delivered on behalf of the Company and each
Subscriber and is a valid and binding agreement in accordance with its terms,
subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally.
8.2 No-Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation, and any amendments thereto,
Bylaws and any amendments thereto of the Company or any material mortgage,
indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree statute, law, ordinance, rule or
regulation applicable to the Company, its properties or assets.
8.3 Approvals. Neither the Company nor any Subscriber is aware
of any authorization, approval or consent of any governmental body which is
legally required for the issuance and sale of the Securities.
8.4 Indemnification. Each of the Company on the one hand, and
each of the Subscribers on the other, agrees to indemnify the other and to hold
the other harmless from and against any and all losses, damages, liabilities,
costs and expenses (including reasonable attorneys' fees) which the other may
sustain or incur in connection with the breach by the indemnifying party of any
representation, warranty or covenant made by it in this Agreement.
8.5 Transfer Restrictions/Conversion Holding Period. Refer to
Certificate of Secretary (Exhibit A).
8.6 Conversions. Notwithstanding anything to the contrary set
forth herein, upon conversion of a portion of the Preferred Stock in accordance
with the terms contained in the Certificate of Secretary, the holder shall not
be required to physically surrender the original Preferred Stock certificate to
the Company. Rather, only upon full conversion of each Preferred Stock
certificate issued at the Closing shall the holder thereof be required to
physically surrender the original Preferred Stock certificate to the Company.
8.7 Laws and Regulations. Each party hereto shall comply with all
laws and regulations applicable to them and this transaction.
Section 9. Restrictions on Conversion and Exercise. Each
Subscriber agrees that it shall not convert any portion of the Preferred Stock,
and/or exercise any portion of the Warrants, which would result in such
Subscriber being deemed the owner, at any specific point in time, more than
4.99% of the then outstanding shares of Common Stock. The preceding sentence
shall not interfere with such Subscriber's right over time, to convert the full
face value of the Preferred Stock, and/or exercise any portion of the Warrants
into more than 4.99% of the then outstanding shares of Common Stock in the
aggregate. In no event shall the aforementioned 4.99% restriction apply in the
event an Event of Default (as described in Section 18 below) has occurred and
remains uncured for ten business days.
Section 10. [Intentionally left blank]
Section 11. Registration or Exemption Requirements. Each
Subscriber acknowledges and understands that the Securities may not be resold or
otherwise transferred except in a transaction registered under the Act and any
applicable state securities laws or unless an exemption from such registration
is available. Each Subscriber understands that the Preferred Stock and Warrant
certificates will be imprinted with a legend that prohibits the transfer of the
Securities unless (i) they are registered or such registration is not required,
and (ii) if the transfer is pursuant to an exemption from registration other
than Rule 144 under the Act and, if the Company shall so request in writing, an
opinion of counsel reasonably satisfactory to the Company is obtained to the
effect that the transaction is so exempt.
Section 12. Legend. The certificates representing the Preferred Stock
and Warrants shall be subject to a legend restricting transfer under the Act,
such legend to be substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
Section 13. Stock Delivery Instructions. The original Preferred Stock
and Warrants shall be delivered to the Subscribers on a delivery versus payment
basis as set forth in the Escrow Agreement.
Section 14. Closing Date. The date the Escrow Agent receives
the original Preferred Stock and Warrants being purchased by the Subscribers and
the appropriate Purchase Price therefor, and each of the conditions set forth in
Sections 15 and 16 herein and the terms and conditions of the Escrow Agreement
(Exhibit C) herein are satisfied or waived shall constitute the Closing (the
"Closing Date"), and all acts, deliveries and confirmations comprising the
Closing Date regardless of chronological sequence, shall be deemed to occur
contemporaneously and simultaneously upon the occurrence of the last act,
delivery, or confirmation of the Closing Date, and such acts, deliveries, or
confirmations shall not be effective unless and until the last of same shall
have occurred, and as shall be mutually agreed upon as to time and place.
Section 15. Conditions to the Company's Obligation to Sell.
Each Subscriber understands that the Company's obligation to sell the Preferred
Stock and Warrants are conditioned upon:
(i) The receipt and acceptance by the Company of this
Subscription Agreement and all duly executed Exhibits thereto by an
authorized officer of the Company;
(ii) Delivery into escrow by wire to the Escrow Agent
by the Subscribers of good cleared funds (in an amount of not less than
Five Hundred Thousand ($500,000) Dollars), and the original Notes
marked canceled, as payment for the corresponding aggregate principal
amount of Preferred Stock and Warrants;
(iii) All representations and warranties of the
Subscribers contained herein shall be true and correct as of the date
when made and remain true and correct as of the Closing Date as though
made at such time (except for representations and warranties that speak
as of a specific date) and the Subscribers shall have performed,
satisfied and complied with all covenants, agreements and conditions
required by such agreements to be performed, satisfied or complied with
by them at or prior to the Closing Date;
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, Warrants, and the proposed issuance of the Common
Stock underlying the Preferred Stock, and Warrants shall be legally
permitted by all laws and regulations to which the Subscribers and the
Company are subject;
(v) The Subscribers shall have received all
governmental, Board of Directors members, managers, partners,
shareholders and third-party consents and approvals necessary or
desirable in connection with the issuance and sale of the Securities,
and the entering into of this Agreement and the agreements referenced
herein;
(vi) No law or regulation shall have been imposed or
enacted that, in the reasonable judgment of the Company could
materially and adversely affect the transactions set forth herein or in
the other agreements annexed hereto, and no law or regulation shall
have been proposed that in the reasonable judgment of the Company could
reasonably have any such effect;
(vii) There shall exist no action, suit,
investigation, litigation or proceeding pending or threatened in any
court or before any arbitrator or governmental instrumentality that
challenges the validity of or purports to affect this Agreement or any
other agreement annexed hereto, or other transaction contemplated
hereby or thereby or that could reasonably be expected to have a any
material adverse effect on the enforceability of this agreement or any
other agreement annexed hereto, or the Securities or the rights of the
holders of the Securities or the Subscribers hereunder; and
(viii) The Certificate of Secretary for the Preferred
Stock shall have been filed with the Utah Secretary of State.
Section 16. Conditions to Subscriber's Obligation to Purchase.
The Company understands that Subscriber's obligation to purchase the Preferred
Stock, and Warrants is conditioned upon the satisfaction, on or before the
Closing Date, of each of the following:
(i) The Company shall have executed this Agreement and all agreements
annexed hereto and delivered same to the Subscribers;
(ii) Acceptance by Subscribers of a satisfactory Subscription
Agreement and all duly executed Exhibits hereto for the sale of the Securities;
(iii) Delivery of the original Preferred Stock and Warrants as
described herein;
(iv) All representations and warranties of the
Company contained herein shall remain true and correct as of the date
when made and as of the Closing Date as though made at such time
(except for representations and warranties that speak as of a specified
date) and the Company shall have performed, satisfied and complied with
all covenants, agreements and conditions required by such agreements to
be performed, satisfied or complied with by it at or prior to the
Closing Date. The Subscribers shall have received an Officer's
Certificate (in the form annexed hereto as Exhibit G) executed by the
chief executive officer of the Company dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably
requested by the Subscribers, including, but not limited to,
certificates with respect to the corporate documents (the "Corporate
Documents", including, but not limited to, the charter, bylaws, and
Certificate of Incorporation), resolutions relating to the transactions
contemplated hereby and the incumbencies of certain officers and
directors of the Company;
(v) The Company shall have received all governmental,
Board of Directors members, shareholders and third-party consents and
approvals necessary or desirable in connection with the issuance and
sale of the Securities, and the entering into of this Agreement and the
agreements referenced herein, except for SEC approval and review of the
registration of the Securities;
(vi) All applicable waiting periods in respect to the
issuance and sale of the Securities shall have expired without any
action having been taken by any competent authority that could
restrain, prevent or impose any materially adverse conditions thereon
or that could seek or threaten any of the foregoing;
(vii) No law or regulation shall have been imposed or
enacted that, in the reasonable judgment of the Subscribers could
materially and adversely affect the transactions set forth herein or in
the other agreements annexed hereto, and no law or regulation shall
have been proposed that in the reasonable judgment of Subscribers could
reasonably have any such effect;
(viii) All fees and expenses due and payable by the
Company relating to the Securities on or prior to the Closing Date
shall have been paid;
(ix) The Company's Corporate Documents and any of the
Company's subsidiaries Corporate Documents, if any, shall be in full
force and effect and no material term or condition thereof shall have
been amended, waived or otherwise modified without the prior written
consent of the Subscribers;
(x) There shall have occurred no material adverse
change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Company or any subsidiary
that has not been disclosed in the Reports;
(xi) There shall exist no action, suit,
investigation, litigation or proceeding pending or threatened in any
court or before any arbitrator or governmental instrumentality that
challenges the validity of or purports to affect this Agreement or any
other agreement annexed hereto, or other transaction contemplated
hereby or thereby or that could reasonably be expected to have a
material adverse effect or any material adverse effect on the
enforceability of this agreement or any other agreement annexed hereto,
or the Securities or the rights of the holders of the Securities or the
Subscribers hereunder;
(xii) Since October 7, 1998 there shall not have
occurred any material disruption or material adverse change in the
United States financial or capital markets generally, or in the market
for the Common Stock (including but not limited to any suspension or
delisting), which the Subscribers reasonably deem materially adverse in
connection with the purchase of the Securities;
(xiii) The Subscribers shall have received all other
opinions, resolutions, certificates, instruments, agreements or other
documents as they shall reasonably request;
(xiv) Receipt of opinion of counsel dated as of the
Closing Date, in the form annexed hereto as Exhibit F, and proof that
the Certificate of Secretary has been filed with the Utah Secretary of
State; and
(xv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock, and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Company and Subscribers are subject.
Section 17. Affirmative Covenants. The Company hereby agrees
that, from and after the date hereof for so long as any of the Securities remain
outstanding and for the benefit of the Subscribers, the Company will deliver the
following to each holder of the Securities:
(i) promptly upon the filing thereof, copies of (a)
all registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent), and (b) all
reports on Forms 10-K, 10-Q and 8-K (or their equivalent) which the
Company or any subsidiary has filed with the SEC;
(ii) simultaneously with the delivery of each item
referred to in clause (i) above, a certificate from an officer of the
Company stating that no default of this Agreement or Event of Default
(as defined below) has occurred and is continuing, or, if as of the
date of such delivery a default shall have occurred and be continuing,
a certificate from the Company setting forth the details of such
default or Event of Default and the action which the Company is taking
or proposes to take with respect thereto;
(iii) within two (2) business days after any officer
of the Company obtains knowledge of a default or Event of Default (as
defined below), or that any person has given any notice or taken any
action with respect to a claimed default hereunder, a certificate of an
officer of the Company setting forth the details thereof and the action
which the Company is taking or proposes to take with respect thereto;
(iv) promptly upon the mailing thereof to the
shareholders of the Company generally, copies of all financial
statements, reports and proxy statements so mailed and any other
document generally distributed to shareholders; and
(v) promptly following the commencement thereof,
notice and a description in reasonable detail of any litigation or
proceeding to which the Company or any subsidiary is a party in which
the amount involved is $250,000 or more and not covered by insurance or
in which injunctive or similar relief is sought or which the Company is
required to disclose in its SEC Reports.
Section 18. Events of Default. If one or more of the following events
(each an "Event of Default") shall have occurred and be continuing:
(i) failure on the part of the Company to observe or
perform any material covenant contained in this Agreement or any
Exhibit annexed hereto for 30 calendar days from the date of such
occurrence;
(ii) the trading in the Common Stock shall have been
suspended by the SEC or by the OTC Bulletin Board (or if the Common
Stock is then listed and approved for trading on either the New York
Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market's
Small Cap Stock Market, or the NASDAQ Stock Market's National Market
and then have been so suspended, and has not within ten trading days
after such suspension been listed on the OTC Bulletin Board) except for
any suspension or trading of limited duration solely to permit
dissemination of material information regarding the Company and except
if, at the time there is any suspension, the Common Stock is then
listed and approved for trading on either the OTC Bulletin Board, the
New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock
Market's Small Cap Stock Market, or the NASDAQ Stock Market's National
Market within ten (10) trading days thereof;
(iii) failure of the Company to file listing
applications within twenty (20) business days of the Company being
required to do so by the market or exchange in which the Common Stock
is then so listed, which failure is not cured within five (5) business
days of such failure;
(iv) the Company shall have its Common Stock delisted
from the OTC Bulletin Board for at least ten (10) consecutive trading
days and is unable to obtain a listing on either the New York Stock
Exchange, the American Stock Exchange, the NASDAQ Stock Market's Small
Cap Stock Market or the NASDAQ Stock Market's National Market within
such ten (10) trading days;
(v) the Registration Statement shall not have been
declared effective by the SEC within 180 calendar days after the
Closing Date,, or such effectiveness shall not be maintained until (i)
the date that all of the shares of Common Stock underlying the Series
98-C Preferred Stock have been sold pursuant to the Registration
Statement, (ii) the date that the shares of Common Stock underlying the
Series 98-C Preferred Stock may be sold under the provisions of Rule
144, without volume limitation, or (iii) two (2) years after the
effective date of the Registration Statement;
(vi) the Company or any material subsidiary has
commenced a voluntary case or other proceeding seeking liquidation,
winding-up, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency, moratorium or other similar
law now or hereafter in effect of seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or has consented to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or has
made a general assignment for the benefit of creditors, or has failed
generally to pay its material debts as they become due, or has taken
any corporate action or has taken any corporate action to authorize any
of the foregoing;
(vii) an involuntary case or other proceeding has
been commenced against the Company or any material subsidiary seeking
liquidation, winding-up, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency, moratorium or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period
of 60 calendar days, or an order for relief has been entered against
the Company or any subsidiary under the federal bankruptcy laws as now
or hereafter in effect;
(viii) default in any material provision (including
payment) of any agreement governing the terms of any debt of the
Company or any subsidiary in excess of $1,000,000, which has not been
cured, extended, or otherwise agreed to, within any applicable period
of grace associated therewith;
(ix) judgments or orders for the payment of money
which in the aggregate at any one time exceed $1,000,000 and are not
covered by insurance have been rendered against the Company or any
subsidiary by a court of competent jurisdiction and such judgments or
orders shall continue unsatisfied and unstayed for a period of 60
calendar days; or
(x) any material representation, warranty,
certification or statement made by the Company in any agreement entered
into between the Company and any of the Subscribers, or which is
contained in any certificate, document or financial or other statement
furnished at any time under or in connection with any such agreement
shall prove to have been untrue in any material respect when made.
Then, and in every such occurrence, any Subscriber may, by written
notice to the Company, declare the Company in default of this Agreement, and the
redemption provision in the Certificate of Secretary shall become immediately
due and payable with respect to such Subscriber; provided that in the case of
any of the Events of Default specified in paragraph (viii) or (ix) above with
respect the Company or any subsidiary, then, without any notice to the Company
or any other act by any Subscriber may proceed to protect and enforce the rights
of such Subscriber by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement contained
herein or in the Certificate of Secretary, or for an injunction against a
violation of any of the terms hereof or thereof, or in aid of the exercise of
any power granted hereby or thereby or by law or otherwise, and provided
further, in the case of any Event of Default, the amount declared due and
payable on the Preferred Stock shall be the Redemption Price (as defined in the
Certificate of Secretary) thereof.
Section 19. Miscellaneous.
19.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York in connection with any dispute arising under this Agreement and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens, to the bringing of any such proceeding
in such jurisdictions. Each party hereby agrees that if another party to this
Agreement obtains a judgment against it in such a proceeding, the party which
obtained such judgment may enforce same by summary judgment in the courts of any
state or country having jurisdiction over the party against whom such judgment
was obtained, and each party hereby waives any defenses available to it under
local law and agrees to the enforcement of such a judgment. Each party to this
Agreement irrevocably consents to the service of process in any such proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to such party at its address set forth herein. Nothing herein shall
affect the right of any party to serve process in any other manner permitted by
law.
19.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
19.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and the Exhibits annexed hereto constitute the entire agreement
between the Subscribers and the Company with respect to the subject matter
hereof. This Agreement may be amended only by a writing executed by all parties.
19.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
19.5 Reliance by Company. The Subscribers represent to the
Company that the representations and warranties of the Subscribers contained
herein are complete and accurate and may be relied upon by the Company in
determining the availability of an exemption from registration under federal and
state securities laws in connection with a private offering of securities.
19.6 Confidentiality. Each of the Company and the Subscriber
agrees to keep confidential and not to disclose to or use for the benefit of any
third party the terms of this Agreement (including any Exhibit annexed hereto)
or any other information which at any time is communicated by the other party as
being confidential without the prior written approval of the other party;
provided, however, that this provision shall not apply to information which, at
the time of disclosure, is already part of the public domain (except by breach
of this Agreement) and information which is required to be disclosed by law.
19.7 Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby except that the Company shall (i) pay
one (1%) percent of the Purchase Price minus $2,500, out of escrow, to
Goldstein, Goldstein & Reis, LLP for legal, administrative and escrow fees; and
(ii) issue to Settondown Capital International, Ltd., as placement agent, for
services rendered in connection with this transaction, that number of shares of
Preferred Stock equal to ten percent of the total number of shares of Preferred
Stock sold to the Subscribers pursuant to this Agreement, and Warrants to
purchase fifty thousand (50,000) shares of Common Stock per $1,000,000 principal
amount of Securities sold to the Subscribers pursuant to this Agreement.
19.8 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
IN WITNESS WHEREOF, this Subscription Agreement was duly
executed on the date first written below.
Agreed to and Accepted on
this 3rd day of November 1998
SGI INTERNATIONAL
/s/ JOSEPH A. SAVOCA
By____________________________
Name: Joseph A. Savoca
Title: Chairman/CEO
MANCHESTER ASSET MANAGEMENT
/s/ DAWN E. DAVIES
By__________________________________
Name: Dawn E. Davies
Title: Director
Executed this 3rd day of November 1998
GILSTON CORPORATION, LTD.
/s/ DAWN E. DAVIES
By__________________________________
Name: Dawn E. Davies
Title: Director
Executed this 3rd day of November 1998
AVALON CAPITAL, LTD.
/s/ GLORA LAVIE
By___________________________
Name: Glora Lavie
Title: Attorney-In-Fact
Executed this 3rd day of November 1998
GCA STRATEGIC INVESTMENT FUND LIMITED
/s/ MICHAEL S. BROWN
By___________________________
Name: Michael S. Brown
Title: Director
Executed this 3rd day of November 1998
<PAGE>
SCHEDULE A
1. Manchester Asset Management, Ltd.
Investment Amount: $150,000
2. Gilston Corporation, Ltd.
Investment Amount: $100,000
3. Avalon Capital, Ltd.
Investment Amount: $100,000
4. GCA Strategic Investment Fund Limited c/o Prime Management Limited
Mechanics Building 12 Church Street Hamilton HM 11, Bermuda
Investment Amount: $500,000
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 2nd day of
November, 1998, between the "Purchasers" (collectively GCA Strategic Investment
Fund Limited, Manchester Asset Management, Ltd., Gilston Corporation, Ltd., and
Avalon Capital, Ltd.), Settondown Capital International, Ltd., located at c/o
Charlotte House, Charlotte Street, Nassau, Bahamas, a limited liability company
organized under the laws of Bahamas, a non-USA jurisdiction (the "Finder") (the
Purchasers and the Finder are collectively referred to as "Holder" or
"Holders"), issued pursuant to the 6% Convertible Preferred Stock Series 98-C
Subscription Agreement of even date herewith (the "Subscription Agreement"), and
SGI INTERNATIONAL, INC., a Utah corporation having its principal place of
business at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchasers are purchasing from the Company, pursuant to the
Subscription Agreement up to 2,000 shares of Preferred Stock, and Warrants to
purchase up to 100,000 shares of Common Stock. The Common Stock of the Company
underlying the Preferred Stock is referred to as the "Conversion Shares", and
the Common Stock of the Company underlying the Warrants is referred to as the
"Warrant Shares" (capitalized terms defined in the Subscription Agreement and
not otherwise defined herein have the meanings specified in the Subscription
Agreement); and
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Finder is receiving from the Company, pursuant to the
Subscription Agreement, up to 200 shares of the Preferred Stock, and Warrants to
purchase 100,000 shares of Common Stock; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto, (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security as a result of the provisions of Rule 144,
or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holders acknowledge
and understand that prior to the registration of the Securities as provided
herein, the Securities are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. The Holders understand that no disposition
or transfer of the Securities may be made by Holders in the absence of (i) an
opinion of counsel reasonably satisfactory to the Company that such transfer may
be made or (ii) a registration statement under the Securities Act including the
Registrable Securities is then in effect with respect thereto.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), within thirty calendar days after
the Closing Date, a registration statement on Form S-2 or Form S-3 (the
"Registration Statement"), at the sole expense of the Company (except as
provided in Section 3(c) hereof), in respect of all holders of Registrable
Securities, so as to permit a non-underwritten public offering and sale of the
Registrable Securities under the Securities Act, provided, the Company shall not
be obligated to take any action to effect any such registration, qualification
or compliance pursuant to this Section 3(a) in any jurisdiction in which the
Company would be required to qualify as a dealer in securities, under the
securities or blue sky laws of such jurisdiction. The Company agrees that it
will use its best efforts to cause the Registration Statement to become
effective within ninety (90) days after the Closing Date. The number of
Registrable Securities to be registered shall be two hundred (200%) percent of
the number of shares that would be required if all of the Registrable Securities
were converted in accordance with the Certificate of Secretary, on a date which
is five (5) business days prior to the filing of the Registration Statement. The
Company must declare the Registration Statement effective at the earlier to
occur of: five business days after it has been informed by the SEC that it may
declare the Registration Statement effective: or five business days of receipt
of a no review letter from the SEC. The Company agrees that it shall use its
best efforts to respond to comments and/or questions by the SEC regarding the
Registration Statement within ten business days after receipt of such comment
and/or question.
(b) The Company will use its best efforts to maintain the
Registration Statement or post-effective amendment filed under this Section 3
hereof current under the Securities Act until the earlier of (i) the date that
all of the Registrable Securities have been sold pursuant to the Registration
Statement, (ii) the date that the Registrable Securities may be sold under the
provisions of Rule 144, without volume limitation, or (iii) two (2) years after
the effective date of the Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Registration Statement under Section 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys'
fees) shall be borne by the Company. The Holders shall bear the cost of the fees
and expenses applicable to registration of the Registrable Securities, including
of its fees and expenses of its counsel. The Company shall use its best efforts
to qualify any of the securities for sale in such states as such Holder
reasonably designates and shall furnish indemnification in the manner provided
in Section 9 hereof. The Company at its expense will supply the Holders with
copies of such Registration Statement and the prospectus or offering circular
included therein and other related documents in such quantities as may be
reasonably requested by the Holders.
(d) The Company shall not be required by this Section 3 to
include Holder's Registrable Securities in the Registration Statement which is
to be filed if, in the opinion of counsel for both the Holder and the Company
(or, should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holders and the Company)
the proposed offering or other transfer as to which such registration is
requested is exempt from applicable federal and state securities laws and would
result in all purchasers or transferees obtaining securities which are not
restricted securities, as defined in Rule 144 under the Securities Act.
(e) In the event the Registration Statement to be filed by the
Company pursuant to Section 3(a) above is not filed by the Company by the 30th
calendar day after the Closing Date, or if the Registration Statement is not
declared effective by the SEC by the 90th calendar day after the Closing Date
(the "Effective Date"), for any reason whatsoever, then the Company will pay, in
cash, to the Holders on a pro-rata basis by wire transfer, as liquidated damages
for such failure and not as a penalty, one and one-half (1.5%) percent of the
principal amount of the Securities for the first month late, and two (2%)
percent of the principal amount of the Securities each month thereafter until
the Registration Statement has been filed and/or declared effective. Liquidated
damages shall cease to accrue upon the earlier of the Effective Date or
redemption. In the event the Registration Statement is not declared effective
prior to the 180th calendar day after the Closing Date the Company must redeem
the Preferred Stock pursuant to the terms of the Certificate of Secretary.
If the Company does not remit the damages to the Holders as
set forth above, the Company will pay the Holders reasonable costs of
collection, including attorneys fees, in addition to the liquidated damages.
Such payment shall be made to the Holders in cash immediately if the
registration of the Securities are not effected; provided, however, that the
payment of such liquidated damages shall not relieve the Company from its
obligations to register the Securities pursuant to this Section. The
registration of the Securities pursuant to this provision shall not affect or
limit Holder's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is
required by the provisions of this Agreement to effect the registration of any
of the Registrable Securities under the Securities Act, the Company shall
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holders, shall reasonably request,
and do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holders under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer of
the rights granted under this Agreement, the transferring Holder agrees that the
Company may require that the transferee comply with reasonable conditions as
determined in the discretion of the Company. This Agreement is binding upon and
inures to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
Section 7. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferees or assignees) upon the occurrence of any of the following:
(a) all Holder's securities subject to this Agreement have been
registered;
(b) such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k), without volume limitations.
Section 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Holders and each officer and director of the Holders or person, if any, who
controls the Holders within the meaning of the Securities Act (the "Distributing
Holders") against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), to which
the Distributing Holders may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
or any related preliminary prospectus, final prospectus, offering circular,
notification or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, preliminary prospectus, final
prospectus, offering circular, notification or amendment, or supplement thereto
in reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holders, specifically for use in the preparation
thereof. This Section shall not inure to the benefit of any Distributing Holder
with respect to any person asserting such loss, claim, damage or liability who
purchased the Registrable Securities which are the subject thereof if the
Distributing Holder failed to send or give (in violation of the Securities Act
or the rules and regulations promulgated thereunder) a copy of the prospectus
contained in the Registration Statement to such person at or prior to the
written confirmation to such person of the sale of such Registrable Securities,
where the Distributing Holder was obligated to do so under the Securities Act or
the rules and regulations promulgated hereunder. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer and director of the Company or
person, if any, who controls the Company within the meaning of the Securities
Act, against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement prepared by the Company, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such Distributing Holder, specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the distributing
Holders may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 9. Contribution. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder, or the Company, makes a claim for indemnification, but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Agreement provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, or the Company, then the
Company and the applicable Distributing Holder shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Distributing Holder agree that
it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. Any notice pursuant to this Agreement by
the Company or by the Holders shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
(b) If to the Holders, to their respective address set forth
on Schedule A annexed hereto or to such other address as any such party may
designate by notice to the other party.
(c) If to the Finder, at the address set forth herein, or to such
other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered
personally or five (5) days after they are mailed in the manner set forth above.
Section 11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 13. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non conveniens, to the bringing of any
such proceeding in such jurisdictions. Each party hereby agrees that if another
party to this Agreement obtains a judgment against it in such a proceeding, the
party which obtained such judgment may enforce same by summary judgment in the
courts of any state or country having jurisdiction over the party against whom
such judgment was obtained, and each party hereby waives any defenses available
to it under local law and agrees to the enforcement of such a judgment. Each
party to this Agreement irrevocably consents to the service of process in any
such proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid, to such party at its address set forth herein. Nothing
herein shall affect the right of any party to serve process in any other manner
permitted by law.
Section 14. Severability/Defined Terms. If any provision of
this Agreement shall for any reason be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereof and
this Agreement shall be construed as if such invalid or unenforceable provision
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the Subscription Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
SGI INTERNATIONAL
/s/ JOSEPH A. SAVOCA
By_________________________
Name: Joseph A. Savoca
Title: Chairman/CEO
MANCHESTER ASSET MANAGEMENT
/s/ DAWN E. DAVIES
By__________________________________
Name: Dawn E. Davies
Title: Director
GILSTON CORPORATION, LTD.
/s/ DAWN E. DAVIES
By_______________________________
Name: Dawn E. Davies
Title: Director
AVALON CAPITAL, LTD.
/s/ GLORA LAVIE
By___________________________
Name: Glora Lavie
Title: Attorney-In-Fact
GCA STRATEGIC INVESTMENT FUND LIMITED
/s/ MICHAEL S. BROWN
By__________________________________________
Name: Michael S. Brown
Title: Director
SETTONDOWN CAPITAL INTERNATIONAL, LTD.
/s/ DAWN E. DAVIES
By____________________________________________
Name: Dawn E. Davies
Title: Director
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
6% Convertible Preferred Stock)
The undersigned hereby irrevocably elects to convert Preferred Stock Certificate
No. ___ into shares of Common Stock of SGI INTERNATIONAL (the "Company")
according to the conditions hereof, as of the date written below.
The undersigned represents and warrants that:
(i) that all offers and sales by the undersigned of the shares of
Common Stock issuable to the undersigned upon conversion of
the Preferred Stock shall be made pursuant to an exemption
from registration under the Securities Act of 1933, as amended
(the "Act"), or pursuant to registration of the Common Stock
under the Act, subject to any restrictions on sale or transfer
set forth in the Subscription Agreement between the Company
and the original holder of the Preferred Stock submitted
herewith for conversion;
(ii) the undersigned has not engaged in any transaction or series
of transaction that is a part of or a plan or scheme to evade
the registration requirements of the Act; and
(iii) upon conversion pursuant to this Notice of Conversion, the
undersigned will not hold 4.99% or more of the then issued and
outstanding shares of the Company.
- ---------------------------------- ---------------------------------
Date of Conversion Applicable Conversion Price
- ---------------------------------- ---------------------------------
Number of Common Shares upon Conversion $ Amount of Conversion
- ---------------------------------- ---------------------------------
Signature Name
Address: Delivery of Shares to:
* This original Preferred Stock and Notice of Conversion must be received by the
Company by the third business day following the Date of Conversion.
Incorporated Under the Laws of Utah
Number Shares
98-D-000 ***
This certifies that: _______________________
_______________________
_______________________
is the registered Holder of ________
FULLY PAID AND NON-ASSESSABLE SERIES 98-D PREFERRED SHARE(S),
$.01 PAR VALUE, OF
SGI INTERNATIONAL
1.Each Series 98-D Preferred Share evidenced by this Certificate is
transferrable on the books of the Corporation by the Holder hereof, in
person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed.
2.On or after fifteen (15) days from October 30, 1998 or upon effective
registration with the Securities and Exchange Commisison, each Series
98-D Convertible Preferred Share may be converted into Seven Hundred
(700) SGI International Common Shares but shall be deemed to be
converted in any event on October 30, 2000, if not earlier converted.
3.Series 98-D Preferred Shares have no voting or dividend rights.
4.Series 98-D Preferred Shares and the Common Stock into which they are
convertible will, upon issuance, be fully paid and non-assessable.
5.In the event that the Corporation shall at any time after issuance of
a Series 98-D Preferred Share: (i) declare or pay to the holders of the
Common Stock a dividend payable in any kind of shares of stock of the
Corporation; or (ii) split, reverse split or otherwise reclassify its
Common Stock into the same or a different number of shares with or
without par value or into shares of any class or classes; or (iii)
consolidate or merge with or transfer its property as an entirety or
substantially as an entirety to any other corporation; or (iv) make any
distribution of its assets to holders of its Common Stock as a
liquidation or partial liquidation dividend or by way of return of
capital; then, upon subsequent conversion of a Series 98-D Preferred
Share, a shareholder shall receive in exchange for a Series 98-D
Preferred Share, in addition to, in reduction of, or in substitution
for, the shares of Common Stock to which he would otherwise be entitled
upon such exercise, such additional shares of Common Stock, or lesser
number of shares of Common Stock, as the case may be, or stock or
script of the Corporation, or such reclassified shares of stock of the
Corporation, or such shares or securities or property of the
Corporation resulting from such consolidation or merger or transfer, or
such assets of the Corporation, so that the value so received by the
shareholder is equivalent to the value which would have been received
(and the total consideration exchangeable by the shareholder is
equivalent to the total consideration which would otherwise have been
exchangeable) had the shareholder converted a Series 98-D Preferred
Share into shares of Common Stock immediately prior to the happening of
any of the foregoing events.
6. THE SERIES 98-D PREFERRED SHARE(S) REPRESENTED BY THIS CERTIFICATE AND
THE COMMON STOCK INTO WHICH THEY ARE CONVERTIBLE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARE(S) HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE SECURITIES ACT OF 1933, OR A PRIOR OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER, THAT REGISTRATION IS NOT REQUIRED
UNDER THAT ACT.
7. In the event of the voluntary liquidation, dissolution or other
termination of the Corporation, the holders of the Series 98-D
Preferred Shares shall not be entitled to recover any cash payment for
the Series 98-D Preferred Share.
In witness whereof the said Corporation has caused this Certificate to be signed
by its duly authorized officers and its Corporate Seal to be affixed hereto this
_____day of _________, 1998.
/s/ JOSEPH A. SAVOCA /s/ JOHN R. TAYLOR
______________________________ __________________________
CHAIRMAN OF THE BOARD SECRETARY
EXHIBIT 4.5
98-D DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, OR UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES ARE
RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR PURSUANT
TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF
WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
No._________ US $______________
SGI International
98-D 12% CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 1999
THIS DEBENTURE is one of a duly authorized issue of $3,590,000.00 in
Debentures of SGI International, a corporation organized and existing under the
laws of Utah (the "Company") designated as the Series 98-D 12% Convertible
Debentures (the "98-D Debentures"), due on September 30, 1999.
FOR VALUE RECEIVED, the Company promises to pay to
_____________________________, the registered holder hereof (the "Holder"), the
principal sum of ($_________) Dollars on September 30, 1999 (the "Maturity
Date") and to pay interest on the principal sum outstanding from time to time in
arrears as provided herein quarterly, beginning on October 1, 1998 at the rate
of 12% per annum accruing from the date of initial issuance. Accrual of interest
shall commence on the first such business day to occur after the date hereof
until payment in full of the principal sum has been made or other consideration
paid in accordance with Paragraph 4. Subject to the provisions of paragraph 4
below, the principal of, and interest on, this 98-D Debenture are convertible 15
days after the Closing Date as defined in the September 9, 1998, Private
Placement Memorandum (the "Memorandum" or "Exchange Offering") in whole or in
part at the option of the Holder, into shares of common stock of the Company.
The Company will pay the principal of and interest upon this 98-D Debenture on
the Maturity Date, less any amounts converted or required by law to be deducted,
to the Holder of this 98-D Debenture, and addressed to such Holder. The
forwarding of such check or other consideration in accordance with Paragraph 4
shall constitute a full payment of principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Debenture
to the extent of the sum represented by such check plus any amounts so deducted.
This 98-D Debenture is subject to the following additional provisions:
1. The 98-D Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This 98-D Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act"), and other applicable state and foreign securities laws. In the event of
any proposed transfer of this 98-D Debenture, the Company may require, prior to
issuance of a new Debenture in the name of such other person, that it receive
reasonable transfer documentation including legal opinions that the issuance of
the 98-D Debenture in such other name does not and will not cause a violation of
the Act or any applicable state or foreign securities laws. Prior to due
presentment for transfer of this 98-D Debenture, the Company and any agent of
the Company may treat the person in whose name this 98-D Debenture is duly
registered on the Company's Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this 98-D Debenture be overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
4. The Holder of this 98-D Debenture is entitled, at its option, to
convert at any time commencing fifteen (15) days after the Closing Date, as
defined in the Memorandum, the principal amount of this 98-D Debenture, and any
and all interest payable thereon, provided that the principal amount is at least
US $5,000 (unless if at the time of such election to convert the aggregate
principal amount of all Debentures registered to the Holder is less than Five
Thousand Dollars (US $5,000), then the whole amount thereof). The 98-D Debenture
will, at the option of the Holder, 15 days after the Closing Date, in whole or
in part convert unto the number of shares of SGI International common stock
determined by dividing the face amount of the Debenture or any part thereof in
an amount of $5,000 or more, and all interest payable thereon, by the lesser of
(i) the average of the closing bid price of the Company's common stock for the
ten days prior to the close of the Exchange Offering or (ii) the average of the
ten day closing bid price of the Company's common stock prior to the date the
notice of conversion is received by the Company. In the event that the Debenture
is not converted by Holder by September 30, 1999, then SGI International shall
on September 30, 1999, pay the full amount owing under the 98-D Debenture, which
shall be the face amount plus all accrued and unpaid interest payable thereon,
less any amount converted into common stock. Conversion shall be effectuated by
surrendering the 98-D Debentures to be converted to SGI International at 1200
Prospect, Suite 325, La Jolla, Calif. 92037, with the form of conversion notice
attached hereto as Exhibit A, executed by the Holder of the 98-D Debenture
evidencing such Holder's intention to convert this Debenture (as above provided)
hereof, and accompanied, if required by the Company, by proper assignment hereof
in blank. No fraction of shares or certificates representing fractions of shares
will be issued on conversion, but the number of shares issuable shall be rounded
to the nearest whole share. The date on which notice of conversion is given (the
"Conversion Date") shall be deemed to be the date on which the Company receives
the conversion notice duly executed, provided the Debenture is received by the
Company within 5 business days thereafter. In the event the original Debenture
is not received within such 5 business days, the notice of conversion shall be
considered void. Facsimile delivery of the conversion notice shall be accepted
by the Company at facsimile number (619) 551-0247; Attn: Controller).
Certificates representing Common stock issued upon conversion, will be delivered
within 5 days or as soon as practicable from the date the notice of conversion
and the original Debenture, is delivered to the Company. No payment or
adjustment shall be made upon conversion with respect to any interest accrued on
any Debenture guaranteed for conversion prior to an interest payment date or to
any dividend on the common stock delivered upon conversion. (Such notice shall
be effective when mailed to last known address on date mailed.)
5. Company may prepay this Debenture, in whole or in part, at any time
without incurring any penalty for such prepayment. After Company gives Holder
notice of its intent to prepay, Holder may not therefore convert any part of
this Debenture. No provision of this 98-D Debenture, except as is specifically
described in Paragraph 4, shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, and interest on,
this 98-D Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This 98-D Debenture and all other Debentures now or hereafter
issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this 98-D Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common stock are entitled to receive stock, securities or
property in respect of or in exchange for Common stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the 98-D Debenture may thereafter
be converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a Holder of the number of shares of Common
stock into which this 98-D Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, subject to adjustments
which shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right
to convert by delivering a Notice of Conversion to the Company within fifteen
(15) days of receipt of notice of such Sale from the Company.
8. The Holder of the 98-D Debenture, by acceptance hereof, agrees that
this 98-D Debenture is being acquired for investment and that, notwithstanding
any other provision of this 98-D Debenture, such Holder will not offer, sell or
otherwise dispose of this 98-D Debenture or the Shares of Common stock issuable
upon conversion thereof, except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky or foreign laws or similar
laws relating to the sale of securities.
9. This 98-D Debenture shall be governed by and construed in accordance
with the laws of the State of Utah. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of San Diego or the state courts of the State of California sitting in the
City of San Diego in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non coveniens, to the bringing of any
such proceeding in such jurisdictions.
10. The following shall constitute an "Event of Default":
a. The Company shall fail to make any payment due under
this 98-D Debenture and the same shall continue for a
period of more than thirty (30) days; or
b. The Company shall make (1) an assignment for the
benefit of creditors or commence proceedings for its
dissolution; or (2) apply for or consent to the
appointment of a trustee, liquidator or receiver for
its or for a substantial part of its property or
business; or
c. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within sixty (60) days after such
appointment; or
d. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be
dismissed within sixty (60) days after such
institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations
of, or default in answering a petition filed in any
such proceeding; or
In the Event of Default or at any time thereafter, and in each and every such
case, unless such Event of Default shall have been waived in writing by the
Holder (which waiver shall not be deemed to be a waiver of any subsequent
default) at the option of the Holder and in the Holder's sole discretion, the
Holder may consider this 98-D Debenture immediately due and payable, without
presentment, demand, protest or notice of any kinds, all of which are hereby
expressly waived, anything herein or in any note or other instruments contained
to the contrary notwithstanding, and the Holder may immediately enforce any and
all of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law.
11. Nothing contained in this 98-D Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: __________________, 1998
SGI INTERNATIONAL
/s/ JOSEPH A. SAVOCA
By:_______________________________
Joseph A. Savoca
<PAGE>
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert of the principal
amount and any interest due thereon of the above Debenture No. ___ into Shares
of common stock of SGI INTERNATIONAL (the "Company") according to the conditions
hereof, as of the date written below.
Date of Conversion* ___________________________________________________________
Signature: ____________________________________________________________________
Name: _________________________________________________________________________
Address: ______________________________________________________________________
* This original Debenture and Notice of Conversion must be received by the
Company's transfer agent by the fifth business date following the Date of
Conversion.
The signature on this Notice of Conversion must correspond with the name as
written on the face of this Debenture in every particular without alteration,
enlargement or any change whatsoever.
EXHIBIT 4.10
PROMISSORY NOTE
$250,000
SECTION ONE
TERMS OF NOTE
FOR VALUE RECEIVED, SGI INTERNATIONAL, OTC Bulletin Board symbol "SGII"
("the "Debtor"), of 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises
to pay to the order of SETTONDOWN CAPITAL INTERNATIONAL, LTD. (hereinafter
"SETTONDOWN") of Charlotte House, Charlotte Street, P.O. Box 9204, Nassau,
Bahamas, the principal sum of Two Hundred Fifty Thousand ($250,000) Dollars with
interest thereon at the rate of twelve percent per annum, payable on October 9,
1998 in cash or unrestricted shares of Common Stock of the Debtor at the closing
bid price per share of the Common Stock on the trading date immediately
preceding the day such interest is paid.
SECTION TWO
PREPAYMENT OF NOTE
Prepayment of the full principal balance, along with all unpaid
interest, or any portion of the principal balance, along with any portion
thereof of unpaid interest, is permitted at any time without penalty.
SECTION THREE
EFFECT OF WAIVER OF RIGHTS BY SETTONDOWN
SETTONDOWN is not under any obligation to exercise any of its rights
under this note, and failure to exercise its rights under this note or to delay
in exercising any of its rights shall not be deemed a waiver of or in any manner
impair any of the rights of SETTONDOWN.
SECTION FOUR
CUMULATIVE RIGHTS AND REMEDIES
The rights and remedies of SETTONDOWN specified in this note are
cumulative and do note exclude any other rights or remedies it may otherwise
have.
SECTION FIVE
ACCELERATION ON INSOLVENCY OF DEBTOR
If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy,
or have a petition in bankruptcy filed against him, this note shall become due
and payable immediately without demand or notice.
SECTION SIX
WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR
Debtor hereby waives all acts on the part of SETTONDOWN required in
fixing the liability of the party, including among other things presentment,
demand, notice of dishonor, protest, notice of protest, notice of nonpayment,
and any other notice.
SECTION SEVEN
CHOICE OF LAWS
This note shall be governed by and construed in accordance with the
laws of New York in all respects, including matters of construction, validity
and performance.
SECTION EIGHT
COSTS OF COLLECTION
Debtor shall pay on demand all costs of collection, including legal
expenses and attorney fees, incurred by SETTONDOWN in enforcing this note on
default.
SECTION NINE
INTEREST CHARGES
If a law, which applies to this note and which sets the maximum
interest amount, is finally interpreted so that the interest in connection with
this note exceed the permitted limits, then: (1) any such interest shall be
reduced by the amount necessary to reduce the interest to the permitted limit;
and (2) any sums already collected (if any) from the Debtor which exceed the
permitted limits will be refunded to the Debtor. The note holder may choose to
make this refund by reducing the principal Debtor owes under this note or by
making a direct payment to the Debtor. If a refund reduces the principal, the
reduction will be treated as a partial payment.
SECTION TEN
CONFESSION OF JUDGMENT
The Debtor authorizes any attorney at law to appear in any court of
record in the State of New York or any other state or territory of the United
States after this note becomes due, by acceleration, or otherwise, and admit the
maturity of this note, waive the issuing and service of process, and confess
judgment against Debtor in favor of SETTONDOWN or any other holder of this note
for the amount then appearing due and the costs of collection, including,
reasonable attorneys fees and legal costs. The Debtor shall also waive all
errors, rights of appeal, and stays of execution. This is a warrant of attorney.
However, if the inclusion of a confession of judgment provision affects the
validity, negotiability, or enforceability of this instrument, the provision
shall be treated as if it did not appear in this instrument; but all remaining
terms and provisions of this instrument shall subsist and be fully effective
according to the tenor of this instrument, as if the confession of judgment
provision had never been included.
Dated: September 9, 1998 SGI INTERNATIONAL
By /s/ JOSEPH A. SAVOCA
________________________
Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-Q for the nine month period ended September 30, 1998,
and is qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 117,016
<SECURITIES> 402,500
<RECEIVABLES> 811,053
<ALLOWANCES> 84,460
<INVENTORY> 64,644
<CURRENT-ASSETS> 1,469,242
<PP&E> 1,678,119
<DEPRECIATION> 819,188
<TOTAL-ASSETS> 5,017,544
<CURRENT-LIABILITIES> 6,131,547
<BONDS> 0
0
650
<COMMON> 44,516,275
<OTHER-SE> (45,738,053)
<TOTAL-LIABILITY-AND-EQUITY> 5,017,544
<SALES> 3,696,209
<TOTAL-REVENUES> 3,731,470
<CGS> 2,811,129
<TOTAL-COSTS> 2,811,129
<OTHER-EXPENSES> 3,847,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599,016
<INCOME-PRETAX> (4,134,357)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,134,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,134,357)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
