As filed with the Securities and Exchange Commission on April 20, 1998.
Registration No.
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
AMENDMENT NO. 1 TO THE
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------------------
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, CA 92037
TEL (619)551-1090 / FAX (619)551-0247
(Address, including zip code, telephone number and
facsimile number, including area code, of registrant's
principal executive offices)
Joseph A. Savoca, Chief Executive Officer
President and Chairman of the Board
SGI International
1200 Prospect Street, Suite 325, La Jolla, CA 92037(619) 551-1090
(Name, address and telephone number of agent for service)
Copies to:
FISHER THURBER LLP
TIMOTHY J. FITZPATRICK, ESQ.
DAVID A. FISHER, ESQ.
4225 Executive Square, Suite 1600
La Jolla, CA 92037-1483
Tel. (619) 535-9400
Fax (619) 535-1616
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Satement has become effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
============================= ------------------- ---------------------- ----------------------- -------------------
Proposed Maximum Proposed Maximum
Title of each class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be registered registered (1)(2) per Unit (3) Price (3) Registration Fee
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, no par value,
which may be sold by
selling shareholders 249,714 $ .81 $ 202,268 $ 59.67
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
Common Stock, no par value,
underlying outstanding
Convertible Preferred Stock 8,617,583 $ .81 $ 6,980,242 $ 2,059.17
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
Common Stock, no par value,
outstanding underlying
Warrants 1,501,360 $ .81 $ 1,216,102 $ 358.75
============================= =================== ====================== ======================= ===================
TOTAL $ 2,477.59
====================================================================================================================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement covers such additional indeterminate number of shares of common
stock as may be issued by reason of adjustments in the number of shares of
common stock issuable pursuant to anti-dilution provisions contained in the
existing warrants and convertible preferred stock. Because such additional
shares of common stock will, if issued, be issued for no additional
consideration, no additional registration fee is required.
(2) The number of shares of common stock registered herein underlying certain
convertible preferred stock is indeterminate and is estimated to include
the shares of common stock required to fulfill the conversion rights of
preferred stock which is convertible into a given number of common shares
in part based upon conversion formulae, referencing fluctuating market
prices and is also estimated to satisfy contractual obligations of the
Company requiring the registration of various amounts up to 230% of the
number of shares of Common Stock issuable upon conversion of the Company's
Series 97-D and 97-F Convertible Preferred Stock.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, based
on the average of the bid and ask prices of the Company's common stock on the
OTC Bulletin Board on April 16, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREFORE BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
Subject to Completion dated April 20, 1998
PROSPECTUS
SGI INTERNATIONAL
1,501,360 Shares of Common Stock underlying outstanding warrants
8,617,583 Shares of Common Stock underlying outstanding
convertible preferred stock
249,714 Shares of outstanding Common Stock
This Prospectus (the "Prospectus") relates to the resale, which is not
being underwritten, by the holders of (i) an aggregate of 1,501,360 shares
("Warrant Shares") of common stock no par value ("Common Stock") issuable upon
exercise of certain outstanding warrants to purchase Common Stock of the
Company ("Existing Warrants"); and (ii) an aggregate of 8,617,583 shares of
common stock issuable upon conversion of the Series 96-B; 97-D; 97-F and Series
98-A convertible preferred stock issued in 1996, 1997 and 1998 including shares
of Common Stock issuable upon exercise of outstanding warrants which were
issued in connection therewith; and shares of Common Stock issued to the
placement agents for the Company in connection therewith (the "Preferred
Shares"). This Prospectus also relates to the resale which is not being
underwritten by the holders of an aggregate of 249,714 shares of outstanding
common stock ("Selling Shares"). The Warrant Shares, Preferred Shares and
Selling Shares are referred to herein as the "Securities." The Securities may
be offered by certain shareholders of the Company (the "Selling Security
Holders") from time to time in transactions in the over-the-counter market
through the OTC Bulletin Board, in privately negotiated transactions, through
the writing of options on the Securities, or through a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices. The Selling Security Holders may effect such
transactions by selling the Securities to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions
or commissions from the Selling Security Holders and/or the purchasers of the
Securities for whom such broker-dealers may act as agents or to whom they may
sell as principals, or both (which compensation as to a particular broker-
dealer might be in excess of customary commissions). See "Selling Security
Holders" and "Plan of Distribution."
The Company shall receive the proceeds from the exercise (if any) of the
Existing Warrants. None of the proceeds from the sale of the Securities by the
Selling Security Holders will be received by the Company. The Company has agreed
to bear all expenses (other than selling commissions and fees and expenses of
counsel and other advisers to the Selling Security Holders) in connection with
the registration and sale of the Securities being offered by the Selling
Security Holders. The Securities offered hereby were restricted securities under
the Securities Act prior to their registration hereunder. This Prospectus has
been prepared so that future sales of common stock by the Selling Security
Holders will not be restricted under the Securities Act of 1933 (the "Securities
Act"). See "Selling Security Holders."
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "SGII." On April 16, 1998, the last reported bid and ask prices for the
Common Stock were $.78 and $.84, respectively.
THE SECURITIES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 20, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549, and at the
Commission's regional offices: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Suite
1300, 7 World Trade Center, New York, New York 10048. Copies of such materials
can also be obtained at prescribed rates from the Public References Section of
the Commission at 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Commission's web site is located at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. The Registration Statement, including all
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission.
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
INFORMATION INCORPORATED BY REFERENCE
The Company regularly files documents with the Securities and Exchange
Commission to comply with applicable government regulations, including Form 10-Q
and Form 10-K. The Company will provide without charge to each person, including
any beneficial owner, to whom this Prospectus is delivered, a copy of the Form
10-K for the year ended December 31, 1997, and upon written or oral request of
such person, a copy of any and all of the other documents that have been filed
with the Securities and Exchange Commission and incorporated by reference in
this Prospectus (other than exhibits to such documents which are not
specifically incorporated by reference herein). Such requests should be directed
to SGI International, Attn: George Donlou, Controller, at its principal offices
located at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 (619) 551-1090.
The following documents previously filed with the Commission, except as
superseded or modified herein, are hereby incorporated by reference into this
Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997, June 30, 1997, and September 30, 1997; (iii)
the Company's definitive Form 14a (Proxy) dated May 23, 1997; (iv) the Company's
Form 8-K's dated January 23, 1998, and November 24, 1997; (v) the Company's 1934
Act Registration Statement on Form 8-A; and (vi) each additional exhibit from
all of the Company's prior 1933 Act filings.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus.
No person is authorized in connection with any offering made hereby to give
any information or make any representation not contained or incorporated by
reference in this Prospectus, and any information not contained or incorporated
herein must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus at any time nor any sale made hereunder shall, under any
circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. When included in this
Prospectus, the words "expects," "intends," "anticipates," "plans," "projects"
and "estimates," and analogous or similar expressions are intended to identify
forward-looking statements. Such statements, which include statements contained
in "Prospectus Summary," "Risk Factors," "Business" and elsewhere are inherently
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those reflected in such forward-looking statements.
For a discussion of certain of such risks, see "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information, including "Risk
Factors," and the financial statements incorporated by reference herein
appearing elsewhere in this Prospectus or incorporated by reference herein.
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Existing Warrants.
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel ("PDF") and coal
derived liquids ("CDL"), and at the same time reduce the PDF's pollution
potential when it is subsequently burned for fuel. The Company believes the LFC
Process could upgrade a significant portion of the world's abundant low-rank
coal reserves into coal and petroleum-based products which could provide
cost-effective compliance with certain environmental legislation and regulations
including the United States Clean Air Act ("Clean Air Act") and other current
and possibly future U.S. and international environmental regulations or
concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. Except for the license issued by TEK-KOL to
Shell Mining Company ("SMC") for the Demonstration Plant and other plants which
may be built by the successors to SMC and a license issued to the Company, and
a non-exclusive license granted by the Company to Rosebud Energy Corp. which was
granted prior to the formation of TEK-KOL, TEK-KOL does not have any other
agreements to license or to sell the LFC Process. Except for the proceeds of the
sale of the LFC Technology to SMC on September 28, 1989, in the amount of
$2,550,000 plus the assumption by Shell of the obligation to build the
Demonstration Plant, the Company has received only nominal revenues from the LFC
Process. The only marketing related agreement relating to the LFC Process is a
supply agreement between TEK-KOL and Mitsubishi Heavy Industries ("MHI") dated
February 8, 1996. This agreement provides that Mitsubishi will pay TEK-KOL 3% of
the cost of equipment and services provided by MHI to any future LFC Process
plant. The Company believes many existing users of coal in the U.S., such as
electric utilities, face costly capital expenditures to modify their
coal-powered electricity producing facilities to comply with the Clean Air Act.
In the opinion of the Company, the Clean Air Act impacts over 100 coal fired
electrical generating plants in the U.S. and, by the year 2000, requires many
major U.S. power plants to achieve specified reductions in pollution. The
Company believes countries outside the United States who currently generate much
of their electricity from burning coal, and who have substantial low rank coal
reserves, could use the LFC Process to provide a more cost-effective and less
environmentally damaging fuel source for the production of power.
In 1989, the Company contributed the LFC Process to the TEK-KOL Partnership
("TEK-KOL"). TEK-KOL currently consists of the Company and Bluegrass Coal
Holding Company ("Bluegrass"), a subsidiary of Zeigler Coal Holding Company
("Zeigler"). Zeigler is a coal producing company in the United States. The LFC
Process has been used to produce PDF and CDL for test burning at the "Clean Coal
Demonstration Plant" ("Demonstration Plant") owned by Zeigler in Gillette,
Wyoming. To date the Demonstration Plant has produced approximately 114,900 tons
of PDF and 116,100 barrels of CDL, and has shipped over 83,500 tons of PDF to
seven electric utilities in six states, and 104,000 barrels of CDL to eight
industrial users in seven states. The purpose of the Demonstration Plant, which
was originally intended to operate for two years, was to demonstrate the
validity of the LFC Process. The Demonstration Plant was constructed pursuant to
an agreement between the U.S. Department of Energy and ENCOAL Corporation, a
Shell Mining Company subsidiary, as part of the U.S. government's "Clean Coal
Technology Program." The Company believes the operation of the Demonstration
Plant from 1995 through the third quarter of 1997 when its operations were
suspended, has provided invaluable design data and engineering parameters to
assist in the commercial scale development of the LFC Process. The Company
believes that because of the continuing losses generated by the operation of the
Demonstration Plant, Bluegrass, which owns ENCOAL, decided to suspend operation
of the Demonstration Plant. The Company currently cannot determine when, or if,
operations will resume.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has been sold and shipped to customers for testing as a fuel, and CDL has
been sold commercially as a fuel. Although the Company believes it has completed
development of the LFC Process, additional development to test and demonstrate
aspects and uses of the LFC Process is necessary before the value (if any) of
its use on a large scale commercial basis can be verified. There can be no
assurance these development issues will be successfully concluded or that the
LFC Process will be licensed or sold commercially, or if sold, will generate
revenue or profits for the Company.
The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.
4
<PAGE>
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil and resid produced in oil
refining in order to increase the efficiency of crude oil refineries. Resid is
the residue remaining after processing crude oil in a refinery to produce liquid
fuels and lubricants. The OCET Process is still in the development stage, and
will require substantial research and development before it is ready (if ever)
for commercial use.
The Company has another wholly owned operating subsidiary, Assembly and
Manufacturing Systems, Inc. ("AMS"). AMS designs and produces custom automated
assembly equipment primarily for manufacturers in the biomedical, automotive,
electronics and computer industries. AMS provided 93% of the gross revenues of
the Company for the fiscal year ended December 31, 1996, and provided 99% of the
gross revenues of the Company for the fiscal year ended December 31, 1997. While
AMS provides a substantial portion of the current gross revenues of the Company,
the Company currently intends to focus its business and operations on
commercializing and developing the LFC Process and the OCET Process.
The Offering
<TABLE>
<S> <C>
Securities Offered(1)(2)(4).......................... 10,368,657 shares of Common Stock
Common Stock outstanding as of
April 16, 1998(3)(4)............................... 12,412,022
Common Stock outstanding after this offering(3)(4)... 22,780,679
Use of Proceeds...................................... The Company will not receive any of the proceeds from the
conversion of the Preferred Shares or from the sale of
the Selling Shares. To the extent any of the Existing
Warrants are exercised the net proceeds received by the
Company will be used for research and development, working
capital and general corporate purposes. The use of
proceeds is subject to change based on the extent to which
Existing Warrants are exercised, future occurrences, LFC
and OCET development requirements and other factors. See
"Use of Proceeds."
OTC Bulletin Board Symbol............................ SGII
Risk Factors......................................... This offering involves a high degree of risk, including
without limitation substantial risk resulting from the
Company's lack of revenue, uncertain availability of
required additional capital, as well as the risks
associated with developing technologies and uncertain
markets and legislative impacts. See "Risk Factors."
</TABLE>
- ----------------
(1) For a description of the voting and other rights of the Common Stock see
"Description of Securities--Common Stock."
(2) Includes: (i) 524,437 shares of Common Stock issuable upon exercise of the
Existing Warrants; (ii) up to 8,617,583 shares of Common Stock issuable upon
conversion of outstanding Preferred Stock; (iii) up to 976,923 shares of Common
Stock issuable upon exercise of the warrants issued in connection with the
Preferred Share Warrants registered hereby; and (iv) 249,714 shares of
outstanding restricted Common Stock.
(3) Does not include: (i) 2,000,000 shares of Common Stock reserved for
issuance under the Company's stock-based compensation plans of which options to
acquire 488,000 shares have been granted as of the date of this Prospectus;
(ii) 3,051,915 shares of Common Stock issuable upon exercise of other
outstanding warrants not registered herein; (iii) up to 1,904,712 shares of
Common Stock issuable upon conversion of various series of outstanding
Preferred Stock not registered herein; and (iv) up to 813,811 shares of Common
Stock issuable upon conversion of outstanding convertible debentures not
registered herein.
(4) Includes estimated numbers of shares which may be issued upon conversion of
outstanding Preferred Stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" for, and as of, the end of the years in the
five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation," and the financial statements and
the related notes thereto which are incorporated by reference in this
Prospectus.
<TABLE>
Years ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 5,322,724 $ 4,244,268 $ 900,306(1) $ 552,503 $ 809,910
Net loss (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) (770,226) -- -- -- --
Net Loss Applicable
to Common Stock (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common Share - Basic (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average Common
Shares Outstanding 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets $ 1,648,745 $ 2,295,167 $ 944,910 $ 717,406 $1,331,381
Working Capital
Deficiency (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding Current Portion) 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity (Deficiency) (457,109) 194,574 (1,629,578) 556,866 2,350,981
- ------------------
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue of
$867,000 and income from operations of $238,000 for the period October 31, 1995,
through December 31, 1995.
(2) No dividends have been declared since inception.
6
<PAGE>
RISK FACTORS
The purchase of the securities offered hereby involves a high degree of
risk. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including but not limited to those set forth in the following risk
factors and elsewhere in the Prospectus. Prospective purchasers of these
securities should carefully review and consider the risk factors set forth
below, as well as the other information contained herein.
Limited Operating Revenues; Accumulated Deficit; Expectation of Future
Losses; Three Licensing Agreements for LFC Process
The Company has experienced operating losses in each fiscal period since
its inception in 1980. As of December 31, 1997, the Company had a deficit
accumulated of approximately $49.0 million and a working capital deficiency of
approximately $4.3 million. The Company's operations may result in substantial
and continuing losses for the indefinite future. Except for the operation of
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
which it acquired in October 1995, the Company has generated only nominal
revenues from operations. AMS provided 93% of the gross revenues of the Company
for the fiscal year ended December 31, 1996, and provided 99% of the gross
revenues of the Company for the fiscal year ended December 31, 1997. The
development of the Company's LFC Process and OCET Process will require the
commitment of substantial resources for the underlying technology to be
finalized and licensed to third parties, or for a sale of such technologies, and
to establish marketing, sales and administrative capabilities. There can be no
assurance the Company will be successful in any of these endeavors. Except for
the license issued by TEK-KOL to SMC for the Demonstration Plant and other
plants which may be built by the successors to SMC and a license issued to the
Company, and a non-exclusive license granted by the Company to Rosebud Energy
Corp. which was granted prior to the formation of TEK-KOL, TEK-KOL does not
have any other agreements to license or to sell the LFC Process. There can be
no assurance the Company will enter into other agreements with third parties
for product development and commercialization, or will successfully market or
license the LFC Process or the OCET Process. To achieve profitable operations,
the Company, alone or with others, must successfully develop, manufacture and
market its proprietary technologies. There can be no assurance the Company will
be able to accomplish these tasks. Significant delays in any of these matters
could have a material adverse impact on the Company's business, financial
condition and results of operations.
Going Concern Assumption
The reports of the Company's independent auditors on the Company's
financial statements as of December 31, 1997, and 1996, and for the years ended
December 31, 1997, 1996, and 1995, contain explanatory paragraphs stating that
the Company's recurring operating losses, working capital deficiencies and
certain other matters raise substantial doubt about its ability to continue as a
going concern. The Company will require substantial additional funds in the
future to complete and commercialize the LFC Process. There can be no assurance
the Company will be able to raise sufficient funds or generate sufficient cash
from operations to cover the cost of its operations and therefore, there can be
no assurance the independent auditors' reports in the future will not have a
similar explanatory paragraph. The existence of the explanatory paragraph may
have a material adverse effect on the Company's business, financial condition
and results of operations.
Substantial Debt Service Obligations
The Company has substantial debt service obligations which become due
before the end of the 1998 fiscal year. The Company has approximately $4.4
million of debt which is due on September 30, 1998, and does not currently have
any sinking fund or other mechanism to retire any of such debt prior to that
time. Based on current levels of operations, the Company will not be able to
meet the principal and interest payments due without substantial additional
funding and/or extension or conversion of existing debt. If the Company is
unable to pay its debt when due, the Company may be required to refinance all or
a portion of its existing debt, or sell assets or obtain additional financing.
There can be no assurance that any such refinancing or that any such sale of
assets or additional financing would be possible on terms reasonably favorable
to the Company, if at all. The failure to repay or restructure the debt would
have a material adverse impact on the business and operations of the Company.
7
<PAGE>
During October 1997, the Company was able to extend, exchange or convert
approximately $4.8 in existing debt for new securities of the Company, including
common stock, warrants and revised, amended or new debt securities, and also
paid approximately $400,000 in existing debt. The Company retired approximately
$250,000 in existing 10%, 11% and 12% interest accruing notes which were
required to be paid by October 31, 1997, in exchange for $250,000 of 12%
debentures due September 30, 1998, with interest payments due quarterly on the
replacement notes. The Company obtained an extension to September 30, 1998, of
approximately $3,428,000 of debt which was formerly due October 31, 1997, and in
connection therewith issued rights to acquire warrants to purchase an aggregate
of 152,500 shares of Common Stock on or before December 31, 1999, at an exercise
price of $1.20 per share. The Company also obtained an extension to September
30, 1998, of approximately $727,000 of debt which was required to be paid by
October 31, 1997. In connection therewith and in part as consideration for all
interest due through the maturity of the extended notes the Company issued
95,439 shares of Common Stock.
Future Capital Requirements Uncertain; No Assurance of Future Funding
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, to market its proposed LFC
Process and OCET Process and to repay or restructure its debt obligations. In
the next twelve months, these expenditures will include the Company's
obligations to TEK-KOL, which may require $750,000 or more for its 50% share of
the partnership's budget obligations, and the principal owed on outstanding debt
obligations of the Company in the approximate amount of $4.4 million due
September 30, 1998. The Company does not currently have the funds available to
pay all of these obligations. The Company intends to raise the approximately
$5.15 million necessary for these expenses, as well as ongoing operations and
working capital, through sales of its equity or debt securities, or from
revenues generated from strategic partnerships, licenses or similar
transactions. The Company's future capital requirements will depend upon
numerous factors, including the amount of revenues generated from AMS
operations, the cost of the Company's sales and marketing activities and the
progress of the Company's research and development activities, none of which can
be predicted with certainty. The Company will seek additional funding during the
next few months and will likely seek additional funding after such time. There
can be no assurance any additional financing will be available on acceptable
terms, or at all, when required by the Company. Moreover, if additional
financing is not available, the Company could be required to reduce or suspend
its operations, seek an acquisition partner or sell securities on terms that may
be highly dilutive or otherwise disadvantageous to investors. The Company has
experienced in the past, and may continue to experience, delays in its LFC
Process product development due to working capital constraints. Any such
difficulties or delays could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has a line of credit with a financial institution for
approximately $400,000 and has borrowings of $400,000 as of the date of this
Prospectus. The Company does not anticipate being able to secure any additional
bank financing in the foreseeable future. The Company intends to finance the
development and marketing of its proposed LFC Process and OCET Process through
licensing agreements, strategic alliances and other arrangements with third
parties. There can be no assurance such license, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development, competitive and
technological advances, and other factors.
Risk Involved in Commercializing Technology
There can be no assurance that either the LFC Process or OCET Process will
complete development; will ultimately prove to be commercially viable; that the
Company will locate project participants or secure agreements to construct,
finance, develop and operate LFC Process plants or OCET Process plants; that the
market for the products produced by LFC Process plants will be such that any of
such plants will be economical, and even if economical, profitable; and that
future governmental and tax regulations, if enacted, would not significantly and
adversely impact the ability of the Company to market the LFC Process, the OCET
Process or other technologies to be developed by the Company. See "Business."
8
<PAGE>
Risks Associated with International Development
The Company believes there are significant growth opportunities in the next
several years for the LFC Process in markets outside of the United States. The
Company is actively pursuing projects in Russia, Indonesia and China. There can
be no assurance the Company will license, sell or otherwise generate revenue
from the LFC Process in any of these foreign countries. The Company believes
TEK-KOL's proposed projects in Indonesia may not progress any further until such
time as that country's financial problems are resolved. The Company's proposed
LFC Process plants in Russia are in an early stage of development. The Company
is unable to determine the possible outcome of its current marketing and project
study efforts in Russia. Additionally, other countries may be identified as
attractive development prospects in the future. Doing business in foreign
countries exposes the Company to many risks that are not present in the United
States, including political, military, privatization, currency exchange and
repatriation risks, and higher credit risks that may be associated with
potential customers. In addition, it is possible that legal obligations may be
more difficult for the Company to enforce in foreign countries and that the
Company may be at a disadvantage in any legal proceeding within the local
jurisdiction. Local laws may also limit the ability of the Company to hold a
majority interest in some of the projects that it may develop.
Uncertainty of Community Support
Development, construction and operation of LFC Process or OCET Process
production facilities require numerous environmental and other permits. The
process of obtaining these permits can be lengthy and expensive. In addition,
local opposition to a particular project can substantially increase the cost and
time associated with developing a project, and can potentially render a project
unfeasible or uneconomic. The Company may incur substantial costs or delays or
may be unsuccessful in developing LFC Process and/or OCET Process production
facilities as a result of such opposition.
Federal Regulation of Air Emissions
The Company believes a significant factor creating demand for the LFC
Process in the United States is the Clean Air Act, as amended by the Clean Air
Act Amendments of 1990 (the "Clean Air Act"). The Clean Air Act specifies
certain air emission requirements for electrical utility companies and
industrial fuel users. The Company believes that compliance with such
regulations by these coal users can be fully or partially met through the use of
clean-burning fuel technologies such as the LFC Process being developed by the
Company. A full or partial repeal of the Clean Air Act could have a material
adverse effect on the Company. The Company is unable to predict future
regulatory changes and their impact on the demand for the Company's products.
See "Business - Government Regulation."
No Established Market for LFC Process or OCET Process Products
Although the Company believes a substantial market will develop both
domestically and internationally for the LFC Process and the OCET Process, an
established market does not currently exist. Since no established market exists,
the availability of accurate and reliable demand, pricing information and
transportation alternatives are not fully known. The future success of the
Company will be determined by its ability to establish a market for the LFC
Process among potential customers such as electrical utility companies and
industrial coal users and for the OCET Process by oil refineries and others.
Many of such potential users of the Company's fuel products will be able to
choose among alternative fuel supplies. Although the Company believes the LFC
Process has been demonstrated successfully on a test basis at the Demonstration
Plant, the market viability of the LFC Process will not be known until third
parties such as electric utilities or coal mining companies with substantial
resources or partners construct one or more commercial-scale LFC Process
production facilities, either in the United States or internationally, that
produce PDF and CDL that meet certain minimum performance specifications. Until
the LFC Process and the OCET Process are completed, the Company may be unable to
attract licenses or other parties to build and operate either an LFC Process
plant or an OCET Process plant. See "Business - LFC Process."
9
<PAGE>
Suspension of Operations at Demonstration Plant
Bluegrass is a wholly owned subsidiary of Zeigler Coal Holdings. Bluegrass,
formerly known as SMC Mining Company, is the Company's sole partner in TEK-KOL.
The ENCOAL Corporation is a wholly owned subsidiary of Bluegrass. ENCOAL,
through its parent Bluegrass, is the licensee of a LFC Process license from
TEK-KOL, and is the owner of the Demonstration Plant, which ENCOAL constructed
and operated through September 30, 1996, pursuant to a Cooperative Research and
Development Agreement with the U.S. Department of Energy. Because of continuing
losses generated by operation of the Demonstration Plant, ENCOAL suspended its
operations in the fourth quarter of 1997. There can be no assurance ENCOAL will
expend funds in the future or resume operations of the Demonstration Plant. The
suspension of operations of the Demonstration Plant may have a material adverse
impact on the business and operations of the Company. In the event Bluegrass
were to withdraw from, terminate, or offer to sell its interest in TEK-KOL, it
could have a material adverse impact on the business and operations of the
Company. Zeigler has made public announcements that it is interested in a sale
of its business. See "Business - LFC Process Demonstration Plant."
Patents and Proprietary Rights
The Company's success will depend, in large part, on the Company's ability
to obtain patent protection for the proposed LFC Process and OCET Process, both
in the United States and in foreign countries. The Company currently has three
patents issued, and one additional patent application pending in the United
States for the LFC Process and one patent pending for the OCET Process. There
have been foreign counterparts to certain of these applications filed in other
countries on behalf of the Company. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, or that the claims allowed will be sufficiently broad to protect
the Company's technology. In addition, there can be no assurance any patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide adequate proprietary protection
to the Company. In addition, any patents obtained by the Company will be of
limited duration. All United States patents issuing from patent applications
filed June 8, 1995, or thereafter will have a term of 20 years from the date of
filing. All United States patents in force before June 8, 1995, will have a term
of the longer of: (i) 17 years from the date of issuance; or (ii) 20 years from
the date of filing. All United States patents issuing from patent applications
applied for before June 8, 1995, will have a term equal to the longer of: (i) 17
years from the date of issuance; or (ii) 20 years from the date of filing. All
United States design patents have a 14 year life from the date of issuance.
Further, U.S. patents do not provide any remedies for infringement that occurred
before the patent is granted.
The commercial success of the Company may also depend upon avoiding
infringing patents issued to competitors. If competitors prepare and file patent
applications in the United States that claim technology also claimed by the
Company, in accordance with the requirements of the TEK-KOL Agreement, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office ("PTO") to determine the priority of invention,
which could result in substantial cost, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, and could require the Company to license disputed rights from
third parties or cease using all or part of the licensed technology. A U.S.
patent application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its competitors
in the PTO.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of the Company's technology
which may be patented, or duplicate the Company's trade secrets. In some cases,
the Company may rely on trade secrets to protect the Company or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored, or that others will not independently develop similar or
superior technology. To the extent consultants, key employees, or other third
parties apply technological information independently developed by them or by
others to Company projects, disputes may arise as to the proprietary rights to
such information, which may not be resolved in favor of the Company. See
"Business - Patents and Proprietary Technology."
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Dependence on Others
Prior to the acquisition of AMS the Company realized only nominal revenues
from operations. Without the financial participation and services of others, the
Company does not and is not expected to have sufficient capital, personnel,
experience or resources to finance, design, engineer, construct or operate
either an LFC Process or an OCET Process production plant.
Success in commercialization of the LFC Process and OCET Processes is
dependent upon the Company's ability to enter into satisfactory arrangements
with other partners, financiers or customers to construct, develop, operate and
manage LFC Process and OCET Process plants, and upon the ability of these third
parties to perform their responsibilities. The resources required to profitably
develop, construct and operate an LFC Process plant are likely to require
$100-$400 million dollars or more, several years of construction and expertise
in major plant development and operations. The Company believes that if such
agreements can be completed, the parties to any such arrangements would have an
economic motivation to succeed in performing their contractual responsibilities.
The amount and timing of resources to be devoted to these activities by such
third parties will likely not be within the control of the Company. There can be
no assurance any licenses, joint venture agreements or other arrangements will
be available on terms acceptable to the Company, if at all; that such parties
will perform their obligations as expected; that any revenue will be derived
from such arrangements; or that, if revenue is generated, any of said
arrangements will be profitable to the Company. If the Company is unsuccessful
in its attempts to license the LFC Process or OCET Process it will have a
material adverse impact on the business and operations of the Company. See
"Business."
Electric Utility Regulatory Changes
The domestic electric utility industry is in the early stages of
deregulation, similar to that which occurred with the natural gas utility
industry. The National Energy Policy Act of 1992 exempts a new class of
facilities from certain federal utility regulation and liberalizes access for
non-utility generators to the utility power transmission grid. It also initiated
competition in the wholesale electric market. In addition, many states are
considering the elimination of many of the regulations that currently limit the
ability of parties to sell within specific geographic boundaries, which were
previously reserved for the local independent electric utility, municipal
electricity utility or rural cooperative. The Company believes these regulatory
changes will result in utilities and other power generators striving to reduce
costs. This will result in increased competition in the electric wholesale and
retail markets and increase pressures on all suppliers to electric utilities to
reduce costs. These factors may make it more difficult to obtain the pricing
needed to sell LFC Process products into the U.S. utility market.
Competition and Technology Obsolescence
The principal market for PDF and CDL is the energy industry, which is
intensely competitive. There are many utility companies, coal companies and
other companies engaged in research into ways to clean or convert coal into a
more acceptable fuel or other commercially viable product. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, test and license coal related technologies. In addition, some of these
companies have extensive experience in operating coal technology plants. These
companies may develop and introduce coal related technologies competitive with
or superior to those of the Company prior to any market acceptance for the LFC
Process or other technologies developed by the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter,
construct, own and operate a plant using the LFC Process which is successful in
supplying processed coal products, are expected to be important competitive
factors. The Company expects that competition will be based, among other things,
on how economically, if at all, the LFC Process coal products can be produced,
their quality, compliance with environmental standards, transportation costs,
government incentive programs, comparison to energy generating alternatives, and
the strength of any patents on the LFC Process or other potential technologies.
The automation assembly industry within which AMS competes is highly
competitive. Competition is based primarily on price, the speed and quantity of
products produced, timely delivery, product quality, safety, product innovation
and assistance in marketing and customer service. AMS competes with at least 85
other companies in the automation assembly
11
<PAGE>
business. Many of AMS's competitors are substantially larger and more
diversified, and have substantially greater financial and marketing resources
than AMS. There can be no assurance AMS will be able to compete successfully.
These factors indicate significant long-term competition for the Company
and AMS. There can be no assurance developments by these various competitors
will not render the Company's or its affiliates' technologies and processes
obsolete or non-competitive. See "Business - Competition."
Customer Concentration; Dependence on Few Customers
Since AMS typically builds one significant system for each of a small
number of customers annually many of its customers in any one fiscal period
may be responsible for ten percent or more of its revenues for that fiscal year.
AMS expects that a small number of customers will continue to account for a
substantial portion of sales for the foreseeable future. Assembly does not have
long term contracts with any of its customers, and there can be no assurance
they will continue to purchase AMS's products. Due to the small number of annual
projects attempted by AMS, a significant performance problem with any one AMS
project could have a material adverse effect on AMS. There can be no assurance
revenue from customers who accounted for significant revenue in past periods,
individually, or as a group, will continue, or if continued, will reach or
exceed historical levels in any period.
Dependence Upon Key Personnel
The Company's success in developing the LFC Process, the OCET Process and
additional marketable products and processes and achieving a competitive
position will depend, in large part, on its ability to retain qualified
scientific and management personnel and, in particular, Dr. Ernest Esztergar and
Joseph Savoca, President and CEO, respectively. There can be no assurance that
the Company will be able to retain such personnel. The loss of either or both of
these individuals could have a material adverse impact on the business and
operations of the Company. The Company's potential growth and any expansion into
areas and activities requiring additional expertise, such as expanded programs
for the LFC Process and OCET Process research, testing, engineering and
marketing, would be expected to place increased demands on the Company's human
resources. These demands are expected to require the addition of new management
and scientific personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospectus for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, and
research and development strategies. Most, if not all, of the Company's
consultants and advisors are self-employed or are employees of other companies,
and may have commitments to, or consulting or advisory contracts with, more than
one other entity that may affect their ability to contribute to the Company.
AMS's success will depend, in large part, on its ability to retain
qualified project management, qualified engineers and management personnel and,
in particular, Amir Khiabani, AMS's President, Gary Vasey, engineering, and
Clarence Dyksterhuis, engineering. There can be no assurance AMS will be able to
retain such personnel or to retain additional qualified personnel. The loss of
any of these individuals could have a material adverse impact on the business
and operations of AMS. AMS's potential growth would be expected to place
increased demands on its human resources. These demands are expected to require
the addition of new management, marketing and sales, and engineering and related
personnel and the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on AMS's prospects for success.
Environmental and Other Government Laws, Regulations and Project Approvals
Potential LFC Process and OCET Plants as well as the operations of AMS are
now and will likely in the future be subject to federal, state and local
environmental and other laws and regulations. These laws and regulations
include, but are not limited to, the Clean Air Act and various regulatory
provisions of the United States Department of Energy, the Environmental
Protection Agency, the United States Treasury Department and Internal Revenue
Service, as well as the laws and regulations of other countries and
international treaties.
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The Company's operations may be directly affected by various laws, or
indirectly affected as a result of market changes in response to laws and
regulations, or market participants' economic behavior in response to laws and
regulations. For example, electric utilities under the recent amendments to the
Clean Air Act may have various options from which to comply with more stringent
standards required under said Act. These utilities may choose to concentrate and
invest their funds in other areas such as advanced and improved scrubbers for
smokestacks to extract pollutants from their existing power plants in order to
reduce emissions rather than purchase processed fuels, such as the products
which could be produced using the LFC Process. There is no assurance the Company
will be in a position to offer competitive products and incentives for utilities
or others to purchase LFC Process products as a method of complying with
regulatory constraints, including the amended Clean Air Act and other
regulations.
Moreover, there can be no assurance future tax policy of the U.S. or other
countries will not negatively impact the Company's prospects and revenue, if
any. For example, the U.S. Government, through the Department of Energy and
other offices of the executive branch, could choose to implement tax and other
policy directives to encourage the production and use of other fuel sources, for
example, natural gas, and discourage the production and use of coal.
It is likely LFC Process Plants will continue to be subject to the
application of various environmental regulations designed to ensure, among other
things, environmentally compatible plant operations. Failure to comply with
applicable regulatory requirements can result in fines, suspensions of
regulatory approvals, operating restrictions, criminal prosecution and other
negative consequences. Furthermore, additional government regulation may be
established in the future, which could prevent or delay the commercialization of
LFC Process and/or OCET Process. See "Business -Government Regulation."
Risk of Hazardous Material Contamination
Future LFC Process Plants and the Demonstration Plant in Wyoming, as well
as the operations of AMS, involve the use of certain hazardous materials.
Although the Company believes the safety procedures which have been employed by
ENCOAL for handling and disposing of such materials, as well as those which
could be employed by any licensees of the LFC Process and by AMS, comply with
the standards prescribed in applicable state and federal laws and regulations,
the risk of an accidental contamination or injury from these materials cannot be
completely eliminated.
Dilution
The Company has a substantial number of outstanding options, warrants and
other convertible securities. The exercise of the options or warrants or
conversion of any significant number of these convertible securities would
result in substantial additional dilution. In addition, as long as options,
warrants or convertible securities are outstanding, the terms upon which the
Company will be able to obtain equity capital may be adversely affected.
No Dividends Paid on Common or Preferred Stock
The Company has never paid any cash dividends on its Common Stock or
Preferred Stock and does not anticipate the payment in the near future of any
cash dividends. Payment of dividends on the Common Stock or Preferred Stock is
within the discretion of the Board of Directors, is subject to state law, and to
preferences of other outstanding securities of the Company, and will depend upon
the Company's earnings, if any, its capital requirements, financial condition
and other relevant factors.
Market Value of Company's Securities
The Company will be required to obtain additional funds from investors in
consideration for the sale and issuance of its debt or equity securities to
continue in business. In the event the market price of the publicly traded
Common Stock of the Company decreases below a certain amount, the Company may be
unable to sell additional equity of the Company, or if it is able to sell
securities, it may not obtain sufficient consideration from the sale of its
securities to provide adequate funding to continue its operations.
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Current Registration Statement and State Blue Sky Compliance or Exemption
Required for Exercise of Existing Warrants and Conversion of Convertible
Preferred Stock
The Company will be able to issue shares of Common Stock registered for
resale herein upon exercise of all of the Existing Warrants and/or the
conversion of any of the Preferred Stock only if there is a then current
prospectus relating to such Common Stock under an effective registration
statement filed with the Securities and Exchange Commission or an applicable
exemption is available, and only if such Common Stock is qualified for sale or
exempt from qualification under applicable state securities laws of each
jurisdiction in which the various holders of the Existing Warrants and the
Preferred Stock reside. Subject to its other contractual obligations, the
Company reserves the right in its sole discretion to determine not to register
or qualify such Common Stock in any jurisdiction where the time and expense do
not justify such registration or qualification. The Existing Warrants and the
Preferred Stock may be deprived of any value in the event the Company does not
satisfy or the Company chooses not to satisfy any such state and federal
requirements. Although it is the present intention of the Company to satisfy
such requirements, there can be no assurance the Company will be able to do so.
Anti-Takeover Provisions and Inadequate Assets for Liquidation Preference
of Preferred Stock
Certain provisions in the Articles of Incorporation and Bylaws of the
Company may be deemed to have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that may be favorable to the interests of the
shareholders. Such provisions may also adversely effect market prices of the
Common Stock. These provisions include classification of the Company's Board of
Directors into three classes, each of which serves for a different three-year
period, advance notice procedures for shareholder nominations for the election
of directors and business to be brought by shareholders for an annual meeting.
Such advance notice procedures must be given in the manner provided by the
Bylaws. Amendment or repeal of the classification of directors and advance
notice provisions requires the vote of 70% of all shares entitled to vote for
directors. In addition, the Articles of Incorporation require the affirmative
vote of 70% of the voting power of the outstanding shares of capital stock for
certain business combinations, including mergers, consolidations, sales, leases,
transfers, reclassification and recapitalizations. Amendment or repeal of the
70% vote requirements for business combinations requires the vote of 70% of all
voting shares.
The Company's Board of Directors is authorized to issue up to 20,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms and privileges with respect to any series of preferred stock.
The issuance of any series of preferred stock having rights superior to those of
the Common Stock may result in a decrease in the value or market price of the
Common Stock, and could further be used by the Board as a device to prevent a
change in control of the Company. Holders of outstanding preferred stock
currently have, and future holders of preferred stock may have, the right to
receive dividends, and certain preferences in liquidation and conversion rights.
The issuance of preferred stock could, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of the Company
without further vote or action by the shareholders and could adversely affect
the voting and other rights of the holders of Common Stock. In the event of a
sale, dissolution or bankruptcy of the Company, such preferred shareholders
would have a preference over the common shareholders as to any assets remaining
after distribution to creditors. Without a substantial change in the Company's
current financial situation, as of December 31, 1997, there will not be enough
assets upon liquidation to pay any portion of the preferences of any of the
outstanding series of preferred stock, or to provide any distribution to common
shareholders. See "Description of Certain Provisions of the Articles of
Incorporation and Bylaws with Possible Anti-Takeover Effect."
Market for LFC Process Plant Products
The Company believes the potential market for processed coal to be produced
by LFC Process plants includes utilities, independent power producers, certain
manufacturers of steel using new technologies, and other industrial enterprises
which use coal, both in and outside of the United States. The potential market
for the coal-derived liquid fuels includes industrial fuel users, refineries and
makers of chemical products in the United States and foreign countries. The
Company's ability to market the LFC Process to any significant portion of these
markets in the future will be dependent upon various factors, including such
user's current and future commitment to such coal or oil based energy, changes
in the cost of delivered coal and oil, and the difference between the costs of
coal generated power versus other energy sources. These other sources include
but are not limited to natural gas and petroleum based products, hydroelectric,
solar, wind, geothermal, waste heat, solid waste and nuclear power generation
facilities. The Company's ability to market the LFC Process will also be
impacted
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by regulatory efforts to reduce acid rain and other emissions; regulatory
incentives to utilize coal based energy sources; and the reliability and cost
effectiveness of LFC Process Plant products relative to gas and other energy
sources currently existing or developed in the future. There can be no
assurance LFC Process plant products will achieve market acceptance at any level
sufficient to provide profits to the Company. See "Business Markets."
Disclosures Relating to Low Priced Stocks; Possible Restrictions on Resale of
Low Priced Stocks and on Broker-Dealer Sales; Possible Adverse Effect of
"Penny Stock" Rules on Liquidity for the Company's Securities
Transactions in the securities of the Company are subject to Rule 15g-9
under the Securities Exchange Act of 1934 (the "Exchange Act"). Rule 15g-9
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 individually, or $300,000 together with their
spouses). For transactions covered by this Rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
this Rule could affect the ability of broker-dealers to sell securities of the
Company and may affect the ability of selling security holders to resell any of
the Securities registered herein in the secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any security of a company that has a market price (as therein
defined) less than $5.00 per share, or with an exercise price of less than
$5.00 per share subject to certain exceptions, and which is not traded on any
exchange or quoted on NASDAQ. For any transaction by broker-dealers involving a
penny stock, unless exempt, the rules require delivery of a risk disclosure
document relating to the penny stock market prior to a transaction in a penny
stock. Disclosure is also required to be made about compensation payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in an account and
information on the limited market in penny stocks.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" for, and as of, the end of the years in the
five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operation," and the financial statements and
the related notes thereto which are incorporated by reference in this
Prospectus.
<TABLE>
Years ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 5,322,724 $ 4,244,268 $ 900,306(1) $ 552,503 $ 809,910
Net loss (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) (770,226) -- -- -- --
Net Loss Applicable
to Common Stock (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common Share - Basic (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average Common
Shares Outstanding 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets $ 1,648,745 $ 2,295,167 $ 944,910 $ 717,406 $1,331,381
Working Capital
Deficiency (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding Current Portion) 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity (Deficiency) (457,109) 194,574 (1,629,578) 556,866 2,350,981
- ------------------
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue of
$867,000 and income from operations of $238,000 for the period October 31, 1995,
through December 31, 1995.
(2) No dividends have been declared since inception.
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RECENT DEVELOPMENTS
On March 31, 1998, the Company granted certain debt holders, pursuant to
the Company's October 1997 debt restructuring, warrants to purchase an aggregate
of 152,500 restricted common shares 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 the Securities Act provided by Sections 3(a)(9) and 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. All of these debt
holders were "Accredited Investors" as that term is defined in Regulation D.
On April 1, 1998, the Company agreed to amend the terms and conditions of
the Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997,
("Agreement") with Millenco L.P. and Terry Feeney. In accordance with the First
Amendment to the Agreement, the Company agreed to issue an additional 100,000
shares of restricted common stock of the Company to Millenco L.P., and 10,000
shares of restricted common stock to Terry Feeney as a result of a "favored
nations" clause in the Stock Purchase Agreement and in exchange for a release of
possible claims by such parties.
17
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BUSINESS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward-looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."
Overview
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel and coal derived
liquids, and at the same time reduce the PDF's pollution potential when it is
subsequently burned for fuel. The Company believes the LFC Process could upgrade
a significant portion of the world's abundant low-rank coal reserves into coal
and petroleum-based products which could provide cost-effective compliance with
certain environmental legislation and regulations including the Clean Air Act
and other current and possibly future U.S. and international environmental
regulations or concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes countries outside the United States who
currently generate much of their electricity from burning coal, and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.
In 1989, the Company contributed the LFC Process to TEK-KOL. TEK-KOL
currently consists of the Company and Bluegrass, a subsidiary of Zeigler.
Zeigler is a coal producing company in the United States. The LFC Process has
been used to produce PDF and CDL for test burning at the Demonstration Plant
owned by ENCOAL Corporation (a subsidiary of Bluegrass) in Gillette, Wyoming.
To date the Demonstration Plant has produced approximately 114,900 tons of PDF
and 116,100 barrels of CDL, and has shipped over 83,500 tons of PDF to seven
electric utilities in six states, and 104,000 barrels of CDL to eight industrial
users in seven states. The purpose of the Demonstration Plant, which was
originally intended to operate for two years, was to demonstrate the validity
of the LFC Process. The Demonstration Plant was constructed pursuant to an
agreement between the U.S. Department of Energy and ENCOAL Corporation ("SMC,"
now called Bluegrass), a Shell Mining Company subsidiary, as part of the U.S.
government's "Clean Coal Technology Program." The Company believes the
operation of the Demonstration Plant from 1995 through the third quarter of
1997 when its operations were suspended, has provided invaluable design data
and engineering parameters to assist in the commercial scale development of the
LFC Process. Because of the continuing losses generated by the operation of
the Demonstration Plant, ENCOAL suspended operation of the Demonstration Plant
in the fourth quarter of 1997. In the event ENCOAL does not elect to resume
operations of the Demonstration Plant the Company will be forced to try to buy
the Demonstration Plant, find a partner to build another one or market the LFC
Process without the assistance of a demonstration plant. There could be a
material adverse impact on the Company if the Demonstration Plant does not
resume operations, even if a substitute demonstration plant is completed in
place of the Demonstration Plant.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
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The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil and resid produced in oil
refining in order to increase the efficiency of crude oil refineries. Resid is
the residue remaining after processing crude oil in a refinery to produce liquid
fuels and lubricants. The OCET Process is still in the development stage, and
will require substantial research and development before it is ready (if ever)
for commercial use. The Company has another wholly owned operating subsidiary,
AMS. AMS designs and produces custom automated assembly equipment primarily for
manufacturers in the biomedical, automotive, electronics and computer
industries. AMS provided 93% of the gross revenues of the Company for the fiscal
year ended December 31, 1996, and provided 99% of the gross revenues of the
Company for the fiscal year ended December 31, 1997. While AMS provides a
substantial portion of the current gross revenues of the Company, the Company
intends to focus its business and operations on commercializing and developing
the LFC Process and the OCET Process.
TEK-KOL Partnership
TEK-KOL owns all right, title and interest in the LFC Process, except for a
non-exclusive license granted by the Company prior to the formation of TEK-KOL,
to Rosebud Energy Corp. for LFC Process cogeneration plants with an aggregate
capacity of 350 Mw. The partners in TEK-KOL are the Company and Bluegrass.
TEK-KOL was established in 1989 and the original partner was SMC (now called
Bluegrass). In 1992, all of the assets of SMC were purchased by Zeigler. The
TEK-KOL Partnership Agreement, as amended, currently provides for the
distribution of 75% of certain TEK-KOL cash receipts to the Company and 25% to
Zeigler, until the Company receives $2 million. Thereafter, cash from
operations, (if any) is to be distributed 50% to the Company and 50% to Zeigler.
TEK-KOL is marketing the LFC Process to obtain licensees, joint venture
partners, strategic and other relationships.
Except for the license issued to SMC for the Demonstration Plant and the
license issued to the Company, as of the date of this Prospectus, TEK-KOL does
not have any agreements to license the LFC Process. All of the costs of TEK-KOL
are split equally between Bluegrass and the Company. The Company expects
TEK-KOL's budget for 1998 to be approximately $1,500,000 to $2,000,000. There
can be no assurance the Company's obligations to TEK-KOL will not be greater.
The Company intends to finance its TEK-KOL and other obligations from the sale
of equity, debt securities, sales of assets and from licensing. There can be no
assurance the Company will be able to fund its obligations to TEK-KOL. In the
event the Company is unable to fund its obligations to TEK-KOL it could have a
material adverse impact on the business and operations of the Company.
LFC Process
The LFC Process is specifically designed to process subbituminous
(low-rank) or a lignite coal which have a high moisture content. PDF is
designed to be a less polluting solid fuel with a higher Btu, or heat value,
than the coal it was refined from, and with significantly lower moisture. PDF
has higher ash, a higher fixed carbon and lower organic sulfur than the parent
coal. CDL is a low-sulfur hydrocarbon liquid. Based on operations at the
Demonstration Plant, the Company believes each ton of coal should produce
approximately one-half ton of PDF and one-half barrel of CDL, although
differing raw material and operating conditions may effect these estimates.
To process the coal, the LFC Process uses a drying/partial pyrolsis
technology, which uses low rank coal as a feedstock. Pyrolsis is a process
whereby organic compounds are subjected to very high temperatures. The LFC
Process is a mild gasification technology that employs a series of pyrolysis
zones to produce solids and gas, and a condensation system to produce liquids.
The LFC Process has been used at the Demonstration Plant which has produced and
shipped to customers product for test burning over a hundred tons of PDF and
over a hundred thousand barrels of CDL. The Company believes the operation of
the Demonstration Plant has provided key operational and engineering design
data for the LFC Process which it believes may assist in completing the final
stages of development of the LFC Process.
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<PAGE>
The Company believes four key factors in the LFC Process differentiate it
from other coal cleaning, liquefaction, or gasification technologies. First, the
process simultaneously produces solids and liquids. Second, the control system
regulates the coal heating rate and temperature level to control the governing
kinetics of gasification and stabilization reactions. Third, the PDF can be
stabilized and is less likely to self-ignite. Fourth, for the purpose of
controlling the gasification conditions (to obtain the desired co-products),
computer models of coal reaction kinetics, sensors, and servo-mechanisms can be
incorporated into the control system.
The Company's marketing efforts are in part based on the Company's belief
that low-grade (or low-rank) coals of the world are relatively disadvantaged in
the marketplace compared to higher-rank bituminous coals. Low-rank coals
generally have higher water content which makes them more expensive to transport
to distant markets. Additionally, their lower heat value can make them a less
efficient boiler fuel. The Company estimates the transportation cost component
of the coal's delivered price can be over 3-5 times the cost of the coal at the
mine. SGI expects PDF and CDL can reduce transportation costs by removing water,
and economically producing lower sulfur, lower water content, cleaner burning
coals along with potentially valuable co-product oils and liquids, and therefore
such refineries' products will be able to compete against high-grade coals.
There can be no assurance these objectives will be achieved.
LFC Process Demonstration Plant
In 1989, ENCOAL Corporation, which at the time was a Shell Mining Company
subsidiary, and the U.S. Department of Energy ("DOE") jointly committed to fund
one-half each of the costs to construct, own and operate, for two years, a
"Clean Coal Demonstration Plant" using the LFC Process at the Buckskin Mine near
Gilette, Wyoming. Several amendments of the original agreement with the DOE
extended the operations and funding of the Demonstration Plant to March 1997.
TEK-KOL licensed the LFC Process to SMC Mining for use at the Demonstration
Plant. Construction of the Demonstration Plant began in 1990 and was completed
in 1995 when it began shipping PDF and CDL to customers for test burning. The
Demonstration Plant was not expected to, and did not, produce any licensing
royalties to the Company.
In November 1992, Zeigler purchased Shell Mining Company and its assets,
including ENCOAL Corporation and the Demonstration Plant. Zeigler operated the
Demonstration Plant through the third quarter of 1997 at which time the
operations of the Demonstration Plant were suspended. Suspending operations of
the Demonstration Plant may have a material adverse impact on the marketing of
the LFC Process.
In late 1996 and early 1997, ENCOAL applied for various air quality,
industrial siting, land quality and land swap permits with the state of Wyoming
and certain agencies of the U.S. government in contemplation of construction of
an LFC Process plant. Mitsubishi International Corporation and NuCoal
(another subsidiary of Zeigler) executed an engineering, procurement and
construction agreement on December 30, 1996, for the construction of a $460
million LFC Process plant at North Rochelle, Wyoming. The Company was not a
party to this agreement. Although this agreement was subsequently terminated,
Zeigler is continuing to develop an LFC Process plant at that location. The
Company currently has no obligation to assist in funding the continued
development of the LFC Process plant at North Rochelle. There can be no
assurance the development of any LFC Process plant will be developed by Zeigler
or others. The termination of this agreement to construct an LFC Process
plant may have a material adverse impact on the business and operations of the
Company.
Test burns to date, based on the Company's analysis, indicate PDF is a
viable fuel which can be used with minimal modification of the coal burning
equipment. The Company believes PDF can be a means for helping utilities meet
the requirements of the Clean Air Act. There can be no assurance these test
results will be duplicated in a future commercial facility, if any, using the
LFC Process.
Markets
The Company believes the principal markets for PDF will be the electric
utility market where utilities may burn coal to generate electricity, and in the
non-coking coal metallurgical market which produce steel and metals. TEK-KOL
currently believes future PDF production from an LFC Process plant could be sold
into the utility market and the metallurgy market. There can be no assurance
the Company's beliefs will prove to be accurate.
20
<PAGE>
CDL from the Demonstration Plant has been sold into the residual fuel oil
market. Of the approximately 5,010,600 gallons of CDL that have been produced by
the Demonstration Plant and sold to date, the vast majority has been sold to
fuel oil distributors who have blended the CDL or sold it straight as fuel for
use in industrial boilers. Other purchasers of CDL have included one coal tar
chemical company and a steel manufacturer. While the Company has completed
development work to determine CDL's composition, significant additional
development is required. The Company believes CDL may have more potential when
further refined into separate products. No assurance can be given that any
market for PDF and CDL will develop.
PDF Electric Utility Markets. The Company believes power plants operated by
utilities meeting the following criteria will be the "best potential" markets
for PDF. Boilers requiring low ash-fusion coal (primarily cyclone and wet bottom
boilers); boilers using high-Btu fuel; utilities desiring to switch to
low-sulfur coal to meet Clean Air Act compliance levels; and utilities with
acceptable transportation economies. There can be no assurance any of these
utilities would elect to use PDF assuming its development is completed.
A number of factors could have a material impact on the size and value of
the utility market for PDF. The Company believes the potential impact of the
Clean Air Act on the utility industry could present marketing opportunities for
PDF. If environmental regulations become stricter, the desirability of PDF may
increase. The Company believes the potential for reduced emissions increases the
likelihood PDF could be marketed successfully. A full or partial repeal of the
Clean Air Act would likely have a material adverse impact on the Company and the
market for PDF in the United States.
PDF Metallurgical Markets. While the Company believes the U.S. electric
utility market is the largest potential market for PDF, based on the current
economics of coal-burning utilities, the Company also believes a relatively
small but potentially growing market for non-coking metallurgical coals could
provide an opportunity for sales of PDF. Potential PDF metallurgical markets
could occur in the steel industry, where the Company believes a demand for coke
substitutes is increasing. In steel making, the Company believes environmental
constraints on coke production and the lower limits on permissible emissions may
motivate development of new technologies to replace the traditional combination
of blast furnaces and coke ovens.
CDL Markets. The Company believes current industrial residual fuel oil
markets in the U.S. will not pay enough for CDL as a residual fuel to make it
worthwhile to sell into that market. Enhanced CDL-derived products are being
developed by the Company with the goal of providing increased economic returns.
While these enhanced CDL products are not yet completely defined, progress has
been made in developing upgraded CDL products. Portions of the upgrading process
have been identified by the Company and include centrifugation to remove
entrained solids, distillation to collect crude cresylic acids, as an asphalt
additive and the sale of the remaining crude CDL to fuel oil markets. The
Company will require significant additional funding to further its research,
development and testing before enhanced CDL products could be available for
commercial use.
CDL upgrading efforts are currently focused on domestic and international
markets that the Company believes may be more commodity based, and less
sensitive to limited numbers of fixed end users. These CDL markets are aimed at
transportation fuels combined with specialty chemicals with potential large
volume acceptance. There can be no assurance the Company will develop any
upgraded CDL products, that any markets will accept or use CDL, or that it will
produce revenues or profits for the Company.
OCET Process and Strategy
Another energy-related technology which is being developed by the Company
through its wholly-owned subsidiary, the OCET Corporation, is the OCET Process.
OCET is developing a technology which it believes can deasphalt petroleum
residium, or resid, so it can be more easily or further refined (the "OCET
Process").
In laboratory tests both petroleum resid and heavy crudes have been
successfully deasphalted using lab scale continuous prototype processing
equipment. The results of these laboratory tests have demonstrated the ability
in testing conditions to produce deasphalted oil which OCET believes is
comparable in quality and yield to that produced by commercial solvent
deasphalting processes. There can be no assurance the results of such laboratory
tests will be proved in actual commercial scale developments, or that any
commercial use will be made of the OCET Process.
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<PAGE>
The Company's principal efforts to commercialize the OCET Process are
intended to focus on licensing the technology to oil refineries, oil companies
and other parties with related interests. Construction and operation of a
commercial scale facility using the OCET Process is dependent upon funding from
an oil refinery, oil company or other third parties.
The proposed OCET Process uses a solvent additive to destabilize the crude
oil, followed by electrochemical processing to separate the asphaltines, metals
and unwanted contaminants contained in the resid in order to produce a higher
quality liquid which OCET believes could be used in refinery processes. The
electrochemical processing distinguishes the OCET Process from other
deasphalting processes known to the Company, and OCET believes will provide an
additional method for controlling the rate, selectivity and efficiency of the
separation. The OCET Process as currently structured does not require high
temperatures or pressures.
OCET and SGI are currently in the process of attempting to construct a
model process development unit which would be capable of measuring OCET Process
performance. Concurrently analytical methods are also being developed in an
effort to analyze feedstocks to measure and optimize process performance.
The target application for the OCET Process has been the upgrading of
refinery resid to produce high quality lube oil blend stock, feedstocks for
refinery catalytic upgrading processes, hydrocracking or hydrotreating and
boiler grade coker feed because the liquid product could be reduced in
asphaltines, metals, sulfur, nitrogen, carbon residue and other contaminants.
OCET believes there are other potential markets, including deasphalting heavy
crude oil at the well site, upgrading crude oil before introduction into the
crude distillation tower at the refinery, near complete removal of metals from
deasphalted oils, removal of sulfur compounds from diesel and gasoline,
viscosity reduction as oil is being produced out of the ground, cleaning of used
motor oil, to remove metals and other contaminants and removal of hydrocarbons
and metals such as selenium from wastewater.
On April 14, 1997, OCET and the U.S. Department of Energy executed a
Cooperative Research and Development Agreement ("CRADA") to jointly analyze
certain parameters of the OCET Process. The CRADA is intended to allow petroleum
experts in the DOE to consult with SGI while protecting SGI's proprietary
information.
The proposed OCET Process is expected to compete with alternative methods
for conversion of resid including thermal processes, solvent extraction
processes and catalytic processes. The primary method for upgrading resid is
delayed coking, which exposes resid to high enough temperatures to break apart
some of the chemical bonds to produce gases, liquids and solid coke.
There can be no assurance the OCET Process will be determined to be
commercially viable, or will be developed to the point it can be determined to
be commercially viable, or if it is there will be a market for the OCET Process,
or, if a market develops, OCET will license its technology or otherwise produce
revenue from the OCET Process or any other enterprise or technology development.
The OCET Process is still in development and has not been licensed or used
in either a pilot plant or on a commercial scale. The OCET Process will require
significant additional research and development, including substantial
additional funding to finish development of the process and demonstrate its
potential (if any) for commercial use. There can be no assurance such efforts
will be successfully completed. At the present time, OCET has no agreements with
any oil refinery or other party to use the OCET Process in a commercial or even
large scale testing facility.
Patents and Proprietary Technology
To date, TEK-KOL has five issued patents and one patent pending in the
United States, which relate to various aspects of the LFC Process. Patent
#5,601,692 was issued in February 1997. Patent #5,401,364 was issued in March
1995; Patent #5,372,497 was issued in December 1994; Patent #5,582,807 was
issued in December 1996; Patent #5,547,548 was issued in August 1996. TEK-KOL
filed a patent in October 1995 for a lean fuel combustion control method which
is pending. OCET filed a patent application in September 1994 for the OCET
Process. AMS owns one patent jointly with Ethicon, a customer, however, AMS does
not believe this patent is critical for the operation of its business.
TEK-KOL has non-exclusive worldwide rights to license the use of the MK
Dust Control System pursuant to the License Agreement with Shell Mining. There
can be no assurance any additional patents will be issued to TEK-KOL as a result
of TEK-KOL's pending applications, or, if issued, such patents combined with the
existing TEK-KOL patents will
22
<PAGE>
be sufficiently broad to afford protection against competitors using similar
technology. The Company's success will depend in large part on its ability and
that of TEK-KOL to obtain patents for the LFC Process and related technologies,
if any, to defend patents once obtained, to maintain trade secrets and to
operate without infringing upon the proprietary rights of others, both in the
United States and in foreign countries. TEK-KOL also has foreign patents
pending for certain elements of the LFC Process.
There can be no assurance any patents issued to TEK-KOL or the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the TEK-KOL Partnership Agreement to
contribute to the costs of prosecuting and defending all infringement claims
necessary to enforce TEK-KOL's rights or to determine the scope and validity of
others' proprietary rights. U.S. patents do not provide any remedies for
infringement occurring before a patent is granted. Because patent rights are
territorial, the Company or TEK-KOL may hot have an effective remedy against use
of their patented technology in any country in which TEK-KOL or the Company does
not, at the time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors. TEK-KOL owns all of the
technology relating to the LFC Process. If competitors prepare and file patent
applications in the United States claiming technology also claimed as
proprietary by TEK-KOL or the Company, the Company may be forced to contribute
to the cost of participating in interference proceedings declared by the PTO to
determine the priority of the invention. Such proceedings could result in
substantial costs to the Company, even if the outcome is favorable to the
Company. An adverse outcome of such proceedings could subject the Company to
significant liabilities to third parties and could require TEK-KOL and/or the
Company to license disputed rights from third parties or cease using the
infringing technology. Although the Company believes its current and proposed
activities do not and will not infringe upon patents for competing technologies,
there can be no assurance the Company's belief would be affirmed in any
litigation over any patent or that the Company's future technological
developments will be outside the scope of these patents. A U.S. patent
application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its
competitors. If competitors infringe on TEK-KOL or Company patents which are
pending but not yet issued, TEK-KOL and the Company will not be able to pursue
infringement claims against them unless the infringement continues after such
patents are issued.
The Company also relies on certain proprietary information which may not be
patentable. Although the Company has taken steps to protect its proprietary
information, in part through the use of confidentiality agreements with certain
employees, consultants and contractors, there can be no assurance these
agreements will not be breached, the Company would have adequate remedies for
any breach, or the Company's proprietary information will not otherwise become
known or be independently developed or discovered by others including its
competitors.
Governmental Regulation
The LFC Process, as it is proposed to be used in the operation of a coal
refinery plant will likely be subject to numerous federal and state regulations.
Any United States LFC Process production plants which may be constructed may be
owned and operated by others since the Company does not now have and is not
expected in the future to have the financing necessary to develop, construct or
operate such plants. LFC Process plants will likely require numerous permits,
approvals and certificates from appropriate federal, state and local
governmental agencies before construction of any such facility may begin, and
will be subject to periodic maintenance or review requirements once any such
facilities begin production. Such permits and regulations include: (i) air
quality; (ii) wastewater discharge; (iii) land quality; and (iv) hazardous waste
treatment storage and disposal. There can be no assurance that such approval
will be granted to any licensees of the LFC Process in the event a plant is
proposed to be constructed and operated using the LFC Process. In addition,
there can be no assurance future domestic or international governmental
regulations will not change and the necessary permits and approvals for any
future commercial-scale production facilities will not be prohibitively
expensive or difficult to obtain. Any failure by any licensee of the LFC Process
to obtain required regulatory approvals, or any substantial delay in obtaining
such approval, could have a material adverse effect on the Company.
23
<PAGE>
Mine Health and Safety Administration ("MHSA") regulations and approvals
may be applicable to any use of the LFC Process at a plant constructed for such
use. The Demonstration Plant in Wyoming has operated under the oversight of the
MHSA since construction began. The Company believes the ideal location for an
LFC Process plant will be on the grounds of or adjacent to a coal mine to
minimize transportation costs.
The Clean Air Act and amendments specify certain air emission requirements
for electrical utility companies and industrial coal users. The Company believes
the Clean Air Act is now, and will in the future be, a significant factor in
creating demand and a market for the LFC Process. The Company believes electric
utilities and industrial coal users who use the LFC Process will be subject to
the Clean Air Act, and compliance with such regulations could be fully or
partially met through the use of the LFC Process. Beginning on January 1, 2000,
Phase II of the Clean Air Act imposes a permanent cap on sulfur dioxide
emissions and requires nitrogen oxide reductions. A full or partial repeal of
the Clean Air Act could have a material adverse impact on the Company. The
Company is unable to predict future regulatory changes and their impact on the
demand for the LFC Process. See "Risk Factors - Environmental and Other
Governmental Laws, Regulations and Project Approvals."
Competition
The principal markets for PDF and CDL are in the energy industry, which is
intensely competitive. There are many companies engaged in research into ways to
clean or convert coal into a more acceptable fuel or other commercially viable
products. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, test and license coal refining
technologies. In addition, some of these companies have extensive experience in
operating refining plants and many of these companies have extensive experience
in operating coal burning plants. These companies may develop and introduce coal
refining technologies competitive with or superior to those of the Company prior
to any market acceptance for the LFC Process or other technologies developed by
the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter
construct, own and operate a plant using the LFC Process and their success in
supplying processed coal products, are expected to be important competitive
factors. The Company expects principal competitive factors may include, among
other things, how economically LFC Process coal products can be produced, at
what quality levels and demand for such products develops, compliance with
environmental standards, the transportation costs, cost comparisons to energy
fuels, and the strength of any patents on the LFC Process or other related
technologies.
The demand, if any, by coal-fired electrical generation facilities for
processed coal products derived from using the LFC Process may also be
materially impacted by several competing fuels and other costs, such as natural
gas and alternative energy sources including but not limited to hydroelectric
power, synthetic fuels, solar power, wind power, wood, geothermal, waste heat,
solid waste and nuclear sources. The Company believes other competitive factors
which may influence competition for the Company include the availability and
cost of delivered coal, the difference between the costs of other energy
alternatives and coal prices and availability, regulatory efforts to reduce
pollution and other emissions, regulatory incentives, if any, to utilize clean
coal based energy sources and the reliability and cost effectiveness of the LFC
Process relative to other competing technologies.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the period between development and testing of the LFC Process and any possible
introduction of the technology into the commercial market place.
The Company is aware of several entities in the U.S. and foreign countries
which are engaged in producing clean-burning coal. These include the Rosebud
SynCoal Partnership, owned by indirect subsidiaries of Montana Power Company and
Northern States Power Company which processes approximately 1,430 tons of feed
coal a day at its plant in Colstrip, Montana. Also, KFX, Inc., a public company,
is engaged in producing a clean coal product, Carbontec, which produces upgraded
coal at a pilot plant; Custom Coals, International, which makes a clean coal
product; Puron Co.; Cyprus, a coal company, and SOSOI/FT. There can be no
assurance the Company will be able to compete successfully.
24
<PAGE>
Employees
As of the date of this Prospectus the Company including OCET employs 20
full-time employees and AMS employs approximately 33 full-time employees. None
of the Company's or AMS's employees are represented by a labor union or bound by
a collective bargaining agreement. The Company and AMS believe that they
maintain positive relations with their employees.
Properties
The Company leases 5,500 square feet of office space at 1200 Prospect
Street, Suite 325, La Jolla, California 92037. The term of the lease expires in
December 2000. In addition, the Company leases 5,080 square feet of laboratory
space at 11588-20 and 21 Sorrento Valley Road, San Diego, California 92121,
pursuant to a lease which expires in May 2000. AMS leases 20,000 square feet of
office and manufacturing space at 2222 Shasta Way, Simi Valley, California
93065, which includes 15,000 square feet of manufacturing space. The term of the
lease expires in October 1998. The Company and AMS believe their current
facilities will be adequate for their respective expected needs for the
foreseeable future.
Legal Proceedings
The Company and its subsidiaries are from time to time involved in
litigation arising in the ordinary course of their respective businesses. In the
opinion of the Company none of the pending litigation, if adversely decided,
should have a material adverse effect on the Company.
ASSEMBLY AND MANUFACTURING SYSTEMS, INC.
Overview
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
of the Company, is a supplier of custom made precision assembly equipment. AMS
designs and builds custom, automated assembly systems marketed principally to
manufacturers in three principal industries: medical, automotive and high-tech.
These assembly systems integrate multiple manufacturing functions often into a
single custom production line built to the customer's specifications.
Assembly functions integrated into products manufactured by AMS include:
material and component handling, dispensing and placement of film or liquid
adhesives, sealants or customer-formulated materials such as pharmaceuticals,
marking and encoding, assembly of components, riveting, swagging, inspection
functions including machine vision inspection, testing, data collection and
analysis. Completed AMS assembly systems may be from bench top size to almost a
hundred feet in length, and may incorporate all types of subsystems, including
robots, machine vision, conveyors, welders, mechanical tests, electronic tests
and others as specified by the customer. AMS believes it is well positioned to
capitalize on what it forecasts is an ongoing consolidation and growth in the
fragmented automation assembly market.
Generally automation system functions integrated into products manufactured
by AMS are computer controlled through custom software written by AMS, and
incorporate control, data handling, reporting and safety functions. The
completed automation systems are generally tested and accepted by the customer
at AMS prior to shipment and installation at the customer's site.
AMS believes that a majority of its current customers and future customers
purchase automation systems for several reasons including support of new product
introductions and start-up, labor cost reductions, increase in capacity,
increase in quality, and favorable return on investment and payback. AMS
customers may also choose to automate production of their products to reduce
costs, improve productivity on current products and to increase their quality
and improve facilities.
AMS believes it offers customers a number of competitive advantages over
its competitors including successful project execution, competitive pricing,
systems which meet specified performance criteria, engineering and manufacturing
expertise and experience and innovative machine concepts. The typical AMS
contract price is in excess of $500,000.
25
<PAGE>
Marketing and Sales
AMS employs three sales professionals and two to three applications
engineers and their support staff who are involved directly in marketing its
services to potential customers. AMS relies primarily on personal contact by
its executive and sales personnel to secure new customers and market its
products. AMS regularly participates in local, regional and national trade show
meetings in its key industry groups. AMS believes personal contact by its sales
and engineering staff is critical to retain new customers.
AMS has targeted large, established manufacturing companies in the medical,
automotive and high-tech industries as prospective clients. AMS targets
companies that need small manufactured equipment and devices, requiring
mechanical or electric mechanical assembly and test, or inspection with material
handling, as key accounts. To assist in marketing its products and services, AMS
also works to develop new applications for target customers for their various
manufacturing needs.
As part of its current marketing focus, AMS is targeting Fortune 1000
businesses with assembly contracts in the range of $750,000 to $1.5 million per
project to increase market share and benefit from economies of scale.
Major Customers
Sales revenue was derived primarily from contracts to manufacture equipment
with three, four and two customers in 1997, 1996 and 1995, respectively. Revenue
from sales of automated assembly equiment accounted for 99%, 93% and 96% of the
Company's consolidated revenues in 1997, 1996 and 1995, respectively. In each of
the past three years no single customer has accounted for more than 10% of sales
for more than any one fiscal year. AMS does not have long term contracts with
any of its customers and expects that a small number of customers will continue
to account for a substantial portion of sales for the foreseeable future. Due to
the small number of annual projects attempted by AMS, a significant performance
problem with any one AMS project could have a material adverse effect on AMS.
There can be no assurance revenue from customers who accounted for significant
revenue in past periods, individually, or as a group, will continue, or if
continued, will reach or exceed historical levels in any period.
Manufacturing
All design, engineering, fabrication, assembly and testing of AMS's
products are carried out at its facility in Simi Valley, California.
Proprietary software and in-house procedures are used to ensure the quality and
timeliness of project execution, and AMS's custom automation related software
incorporate control, data handling, reporting and safety features. AMS also
uses state-of-the-art computer-aided design practices to create the customized
assembly processes for its customers.
To manufacture certain of its automation equipment, AMS uses subcontractors
for common industrial services such as machining, fabrication of welded
structures, painting and power coating on an as-needed basis. Manufacturing
operations include purchasing, receiving, cutting, machining, grinding,
electrical fabrication and testing, machine assembly as well as testing and all
other functions required to complete the automated assembly product. When
needed, AMS also employs a number of subcontractors for special assembly
operations including welding, power coating, wire electric discharge machining
and other unique operations.
AMS has implemented certain quality control procedures for its
manufacturing facility. AMS's quality control personnel regularly monitor the
manufacturing process and have initiated numerous procedures which assist in
quality control. AMS believes new customers, particularly Fortune 1000 customers
with large assembly projects, may impose additional quality control standards.
It is possible such customer or other quality control standards may require
additional substantial expenditures over a long period of time, or that AMS may
determine that such expenses are not cost-effective.
Raw Materials
The primary raw materials used by AMS in its assembly systems include such
items as stock steel shapes, aluminum extrusions, billet and plate software.
These raw material items are converted by AMS into the needed support structures
26
<PAGE>
and are custom-machined in house to be incorporated into the automated assembly
systems purchased by AMS customers. Raw materials used by AMS are generally
standard industry materials which AMS believes can be provided from multiple
sources of supply. AMS believes the most critical machine subsystems such as
computers, vision systems, part feeders, conveyors and robots are also common
and have multiple sources of supply. Up to approximately 75% of the AMS assembly
system components are purchased off the shelf. AMS does not have any contracts
with any of its raw material suppliers, and believes numerous suppliers would be
available in the event its current suppliers were not available.
Competition
The Company believes competition in the automation assembly industry is
fragmented, and that no single competitor dominates the industry. While AMS
competes with at least 85 other companies which are engaged in the automation
assembly business, AMS believes the majority of these competitors provide
assembly equipment for smaller projects, and cannot handle the larger projects
(over $250,000 in price) for which AMS is currently competing. AMS's principal
competitors in the 1997 fiscal year include Remmele Corp., Vanguard Automation,
and Bosch-Weldun Automation. Many of AMS's competitors have substantially
greater financial, marketing and technological resources than AMS.
The automation industry is characterized by rapid technological change, and
competitors may develop their automation products more rapidly than AMS. AMS
believes competition among automation companies is based primarily on price, the
speed and quantity of products produced, timely delivery, product quality,
safety, product innovation and assistance in marketing and customer service. The
competitive position of AMS will depend in part on AMS's ability to remain
current in automation manufacturing and to increase the innovation, speed and
reliability of its automated assembly processes. There can be no assurance AMS
will be able to compete successfully.
Backlog
As of December 31, 1997, AMS had a backlog of orders of approximately $1.3
million, compared to a backlog as of December 31, 1996, of approximately $2.8
million.
Liability Insurance
The medical, automotive, high-tech and other products sold by AMS expose it
to possible product liability claims, if among other things, the use of such
products results in personal injury, death or property damage. AMS maintains
product liability insurance in the principal amount of $2 million through April
20, 1998, and will be renewed upon expiration. There can be no assurance such
insurance will be adequate in terms and scope to protect AMS against material
adverse effects in the event of a successful claim, or that such insurance will
be renewed with acceptable terms and conditions.
27
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from conversion of the Preferred
Shares or from the sale of the Selling Shares. If all of the Existing Warrants
are exercised, the Company would receive approximately $4.2 million before
deducting expenses of this offering. The exercise prices of the Existing
Warrants range from $1.03 to $5.75 per share. To the extent the exercise price
of any of the Existing Warrants exceeds the public sale price of the Company's
Common Stock on the OTC Bulletin Board, the Company believes it is unlikely
these Existing Warrants will be exercised. There is no minimum number of
Existing Warrants which are required to be exercised or a minimum number of
Warrant Shares which are required to be sold herein. Accordingly, only a limited
number of Existing Warrants may be exercised and as a result the corresponding
proceeds to the Company may be limited. If received, the Company would utilize
those funds for administrative, general operating expenses, and expenditures
related to development of the LFC and OCET Processes.
The Company cannot precisely determine the cost, timing and amount of funds
required for specific uses at this time. The use of proceeds is subject to
change based on future occurrences, competitive market forces and other
conditions. The rate of commercialization of the LFC and OCET processes, and the
availability of alternative methods of financing will also impact the allocation
and timing of the Company's use of proceeds. The Board of Directors has broad
discretion in determining how the proceeds resulting from the exercise of the
Existing Warrants, if any, will be applied.
28
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information, as of the date hereof,
with respect to the beneficial ownership of the Company's Warrant Shares and
Preferred Shares (collectively the "Resale Securities") registered herein by
each Selling Security Holder named below. The shares of Common Stock are being
registered to permit public secondary trading of the Resale Securities, and the
Selling Security Holders may offer the Resale Securities for resale from time to
time. Except as described below, none of the Selling Security Holders has had
any position, office or other material relationship with the Company within the
past three years. The following table assumes each Selling Security Holder sells
all of the Resale Securities held by such Selling Security Holder in this
offering. The Company is unable to determine the exact number of Resale
Securities that will actually be sold.
<TABLE>
Existing Warrant Holders Warrant Shares Offered Hereby (1)(2)
- --------------------------------------------------------------------------------
<S> <C>
Adams, Jack W............................................. 18,000
AEM Corporation........................................... 37,714
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust .............................3,000
Avalon Capital Limited..................................... 8,000
Bangham, June B., Trustee
June B. Bangham Trust ......................................3,000
Boe, Charles
Minshew, Janelle ...........................................3,000
Breault, Jeffrey ..........................................20,000
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Rev. Liv. Trust ..........................6,000
Continental Capital....................................... 22,223
Cuttyhunk Fund, Ltd....................................... 12,000
Davis, William............................................ 20,000
Day, Patrick & Geraldine, Trustees
Day Family Trust ...........................................6,000
Dominion Capital Fund .....................................30,000
Endeavour Capital Fund ....................................10,000
Farquhar, Thomas H. ........................................6,000
Feeney, Terry .............................................61,539
FT Trading ................................................10,000
Ganesh Asset Management ....................................5,000
Goldau, Ernest .............................................3,000
Hatch, Robert .............................................25,000
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<PAGE>
Hess, Frederic & Rita, Trustees
Frederic & Rita Hess Liv Trust Dtd 10/13/89................ 3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust ...........................12,000
Hoover, Thomas ............................................87,500
Hurford, John B. ...........................................6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94 .......................3,000
Lard, Whitney ..............................................3,000
Mahrdt, Clark ..............................................3,000
Millenco, L.P. ...........................................615,384
Montag, Jeffrey ...........................................30,000
Newport Capital ...........................................60,000
Pefley, Gordon V. & Betty-Jane,
JTWROS ....................................................18,000
Orndorff, Owen ............................................40,000
Roberts, Lee R............................................ 40,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust
U/A Dtd 01/2/70 ........................................... 3,000
Senkus, Randy .............................................20,000
Settondown Capital ........................................70,000
Shepherd, Mark ............................................10,000
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94.... .......................3,000
Smith, Jeffrey L. .........................................50,000
Smith, Lester A.,Trustee
Lester A. Smith Family Trust............................... 3,000
Sovereign Partners, L.P. ..................................50,000
Thomas, Edward ............................................37,000
Trieschmann, Ralph ........................................25,000
Total ..................................................1,501,360
</TABLE>
30
<PAGE>
(1) Expiration dates of the Existing Warrants range from 60 days following the
effective date of the Registration Statement of which this Prospectus is a
part through December 31, 2006. Exercise prices for the Existing Warrants
vary from $1.03 to $5.75 per share. The holders of the Warrants may own
additional warrants not included herein, and may own additional Common
Stock and/or Preferred Stock, and/or notes of the Company.
(2) All of the holders of the Existing Warrants listed herein own less than 1%
of the issued and outstanding Common Stock of the Company, with the
exception of Millenco L.P. which, assuming exercise of all Existing
Warrants as of the date of this Prospectus, would own approximately 4.42%.
<TABLE>
Preferred Shareholders Preferred Shares
Offered Hereby (1)(2)(3)
- --------------------------------------------------------------------------------
<S> <C>
Adams, Jack W. ....................................................18,000
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust..................................... 3,000
Bangham, June B., Trustee
June B. Bangham Trust.............................................. 3,000
Boe, Charles/Minshew, Janelle ......................................3,000
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Revocable Living Trust ...........................6,000
Cuttyhunk Fund, Ltd. .............................................400,000
Day, Patrick & Geraldine, Trustees
Day Family Trust ...................................................6,000
Endeavour Capital Fund ...........................................333,333
Farquhar, Thomas H. ................................................6,000
Feeney, Terry ....................................................160,538
FT Trading .......................................................130,667
Ganesh Asset Management ...........................................16,000
Goldau, Ernest .....................................................3,000
Hess, Frederic & Rita, Trustees
Frederic L. & Rita R. Hess Living Trust Dtd 10/13/89 ...............3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust ...................................12,000
Hurford, John B. ...................................................6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94............................... 3,000
Lard, Whitney ......................................................3,000
Mahrdt, Clark ......................................................3,000
31
<PAGE>
Millenco, L.P. .................................................1,605,379
Pefley, Gordon V. & Betty-Jane, JTWROS ............................18,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust U/A Dtd 01/02/70 ............................3,000
Settondown Capital ...............................................533,333
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94 ...................................3,000
Smith, Lester A., Trustee
Lester A. Smith Family Trust .......................................3,000
Sovereign Partners, L.P. .......................................5,333,333
Total ..........................................................8,617,583
</TABLE>
(1) FT Trading; Cuttyhunk Fund, Ltd.; Endeavour Capital Fund; Sovereign
Partners, L.P.; Settondown Capital and Ganesh Asset Management, pursuant to
registration rights agreements are registering 200% of the number of
Preferred Shares, and Millenco L.P. and Terry Feeney are registering 230%
of the number of Preferred Shares issuable upon conversion of the Preferred
Stock in accordance with the conversion formula for these Preferred Shares.
(2) All of the holders of the Preferred Shares listed herein, assuming
conversion of the Preferred Shares on the date of this Prospectus, would
own less than 1% of the Company's Common Stock, with the exception of the
following parties: (1) Sovereign Partners, L.P. would own approximately
25.36%; (2) Cuttyhunk Fund Ltd. would own approximately 1.90%; (3)
Endeavour Capital Fund would own approximately 1.59%; (4) Settondown
Capital would own approximately 2.54%; and (5) Millenco L.P. would own
approximately 7.63% of the outstanding Common Stock of the Company.
(3) The holders of the Preferred Stock may own additional Preferred Stock, the
underlying shares of which are not included, and may also own warrants,
common stock, and/or notes of the Company.
<TABLE>
Number
Shares of Common Stock Offered Herein
- ------------------------------------------------------------------------------
<S> <C>
AEM Corporation.................................................... 25,714
Continental Capital ...............................................112,000
Feeney, Terry ......................................................10,000
Millenco, L.P......................................................100,000
The Taxin Network ...................................................2,000
Total .............................................................249,714
</TABLE>
32
<PAGE>
PLAN OF DISTRIBUTION
The Warrants may be exercised by surrendering properly endorsed
certificates therefor to the Company's Controller accompanied by payment in
full of the exercise price for each share of Common Stock as to which the
Warrants are being exercised and any applicable transfer or other taxes.
Payment of the exercise price for the Warrants may be made by tendering cash or
a cashier's check.
The Preferred Stock may be converted into Common Stock of the Company at
the election of the holder by providing proper notice thereof and the
certificate for the Preferred Stock to be converted in whole or in part to the
Company's Controller.
The Company must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the Warrants in order for a
holder to exercise them. The Warrant Shares must also be registered or exempt
for sale under the securities laws of the state in which the holder resides. The
Company intends to use its best efforts to keep the Registration Statement
incorporating this Prospectus current, but there can be no assurance such
Registration Statement (or any other registration statement filed by the Company
covering the Securities) can be kept current. In the event a registration
statement including the Warrant Shares is not kept current, or if the Warrant
Shares are not registered or exempt for sale in the state in which a holder
resides the Warrants may be deprived of some or all of their value.
The Company will not be required to pay a fee to any selling agent with
respect to any exercise of the Warrants.
The Common Stock offered by the Selling Security Holders are not being
underwritten. The Selling Security Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Common Stock offered hereby may be sold by the Selling Security Holders from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Common Stock directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Securities for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection
with the sale of the Common Stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such Common Stock as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act. The Company will not receive any proceeds from the
sales by the Selling Security Holders, although the Company will receive
proceeds from the exercise of the Warrants. Sales of the Securities by the
Selling Security Holders, or even the potential of such sales, could have an
adverse effect on the market price of the Company's outstanding Common Stock.
At the time a particular offer of Common Stock is made, except as herein
contemplated, by or on behalf of a Selling Security Holder or the Company
including following exercise of Warrants, to the extent required, a prospectus
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for Common Stock purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
33
<PAGE>
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the securities of the Company for a
period of at least one, and possibly five, business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, Rules 101, 102 and 107, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Security Holders.
The Warrants and Preferred Stock were originally issued to certain Selling
Security Holders pursuant to an exemption from the registration requirements of
the Securities Act provided by Sections 3(b) and 4(2) thereof. The Company
agreed to register the Warrant Shares, Preferred Stock Shares and the Selling
Shares under the Securities Act and to indemnify and hold such Selling Security
Holders harmless against certain liabilities under the Securities Act that could
arise in connection with the sale by such Selling Security Holders of such
Common Stock. In connection therewith the Company has agreed to pay all
reasonable fees and expenses except for fees and expenses for counsel to the
Selling Security Holders and any underwriting discounts and commissions.
34
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 95,000,000 shares
of capital stock, of which 75,000,000 shares are shares of common stock, no par
value ("Common Stock"), and 20,000,000 shares may be shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). Preferred Stock is issuable
in one or more series. As of December 31, 1997, 9,258,250 shares of Common Stock
were issued and outstanding, and 90,997 shares of convertible Preferred Stock
were issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share on all
matters requiring shareholder action. The holders of a majority of shares of
Common Stock represented at a meeting of shareholders can elect all of the
directors to be elected at such meeting. In addition, subject to the preferences
that may be applicable to any then outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available, and upon
liquidation, will be entitled to receive pro rata all assets of the Company
available for distribution to such holders. The Common Stock has no preemptive
or other subscription rights, no cumulative voting rights, and there are no
conversion rights, redemption or sinking fund provisions with respect thereto.
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal of current management, even if such removal may be in the best
interests of the shareholders.
Outstanding Preferred Stock
The outstanding Preferred Stock of the Company at December 31, 1997,
consisted of 90,997 shares of Preferred Stock, which were issued in 25 series.
The outstanding Preferred Stock series are: 90-B; 90-C; P-90; PS-90; 91-A; 91-C;
91-D; 91-E; 91-M; 91-P; 91-R; 91-S; 91-V; 92-A; 92-B; 93-A; 93-B; 93-C; 94-A;
94-B; 95-R; 96-A; 96-B; 97-C; 97-D; and 97-F. Subsequent to December 31, 1997,
the Series 97-G and 98-A Preferred Stock were issued. The primary distinction
between such series of Preferred Stock relates to the dividend and liquidation
preferences for each.
All outstanding series of Preferred Stock are fully paid and nonassessable.
The Preferred Stock has no preemptive rights to subscribe for any additional
securities which may be issued by the Company. No sinking fund or similar
provision has been provided in respect to any of the outstanding series of
Preferred Stock. The rights of the holders of each series of Preferred Stock are
subordinate to those of the Company's general creditors, and every previously
issued series of Preferred Stock. All of the outstanding series of Preferred
Stock are subject to adjustment in certain events, including for stock
dividends, stock splits, reclassifications, consolidations, mergers, etc. The
Company has never declared or paid a cash dividend on any of its outstanding
Preferred Stock, and it is not likely any dividends will be declared for some
time.
Except as required by mandatory provisions of Utah law, the holders of the
various series of outstanding Preferred Stock have no voting rights.
35
<PAGE>
Series 90-B and 90-C
Dividends. The Series 90-B and 90-C Preferred Stock are entitled to
dividends of $8 per share annually, payable in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock of the Company, other
than a previously issued series of Preferred Stock and before any funds are set
aside for the purchase of, or retirement of, the whole or any part of any
series of Preferred Stock, or any other class of stock of the Company. Dividends
are cumulative and are payable before dividends on any Common Stock are paid.
Redemption. The Series 90-B and 90-C Preferred Stock do not have the right
to require its redemption. The Series 90 Preferred Stock is redeemable by the
Company as a series, in whole or in part, after August 31, 1992, at any time and
from time to time effective on 60 days prior notice, at $100 for each share,
plus the amount of any unpaid cumulative dividends which have then become
payable with respect thereto. The right of the Company to redeem the Series 90-B
and 90-C Preferred Stock is subject to compliance with Utah law, including
without limitation, certain retained earnings requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series 90-B
and 90-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, prior to any distribution
with respect to any other class of stock, liquidating distributions in the
amount of $100 per share, plus all accrued and unpaid dividends up to the date
fixed for distribution, whether or not such dividends have been earned or
declared.
Conversion. Each share of the Series 90-B and 90-C Preferred Stock is
convertible, at the option of the holder thereof without further payment at any
time, into 88 shares of Common Stock unless previously redeemed.
Series P-90
Dividends. The Series P-90 Preferred Stock are entitled to dividends of $8
per share annually, payable in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock of the Company, other than previously issued
series of Preferred Stock and before any funds are set aside for the purchase
of, or retirement of, the whole or any part of any series of Preferred Stock, or
any other class of stock of the Company. Dividends are cumulative and are
payable before dividends on any Common Stock are paid.
Redemption. The Series P-90 Preferred Stock is redeemable by the Company as
a series, in whole or in part, after January 1, 1996, at $100 per share, plus
the amount of any unpaid cumulative dividends which have then become payable
thereto. The right of the Company to redeem this series is subject to compliance
with Utah law, including without limitation certain retained earnings
requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series P-90
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, prior to any distribution with
respect to any other class of stock, liquidating distributions in the amount of
$100 per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared.
Conversion. Each share of Series P-90 Preferred Stock is convertible into
250 shares of Common Stock of the Company, at the option of the holder and upon
payment to the Company at the time of conversion of $1.375 per common share.
Series PS-90
Dividends. Dividends of $20 per share annually are payable on the Series
PS-90 Preferred Stock, in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock other than previously issued series of
Preferred Stock, and before any sum shall be set aside for the purchase of, or
retirement of, the whole or any part of the Series PS-90 Preferred Stock, or any
other class of stock. The
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dividends on the PS-90 Preferred Stock are cumulative, and are payable prior
to the payment of any dividends on the Common Stock.
Redemption. The holders of the PS-90 Preferred Stock have no right to
require redemption of their Preferred Stock. The Series PS-90 Preferred Stock is
redeemable by the Company as a series, in whole or in part, after December 31,
1993, and any time and from time to time effective on 60 days prior notice, at
$250 per share of Series PS-90 Preferred Stock, plus the amount of any unpaid
cumulative dividends which have become payable with respect thereto. The right
of the Company to redeem this series of Preferred Stock is subject to compliance
with Utah law, including without limitation, certain retained earnings
requirements.
Liquidation. In the event of liquidation, dissolution or other termination
of the Company, the holders of the shares of the Series PS-90 Preferred Stock
are entitled to $250 per share, plus all accrued and unpaid dividends up to the
date fixed for distribution whether or not earned or declared. Such payments
shall be made before any payment or distribution is made to the holders of the
Common Stock or any other series of Preferred Stock and concurrently with the
90-B, 90-C or P-90 series.
Conversion. Each share of the PS-90 Preferred Stock is convertible into 125
shares of Common Stock at the election of the shareholder upon payment to the
Company of $1.375 per common share at the time of conversion.
Series 91-A, 91-C, 91-D and 91-E
Dividends. Dividends of $8 per share annually will be payable on the Series
91-A, 91-C, 91-D and 91-E Preferred Stock in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock other than previously
issued series of Preferred Stock and before any sum shall be set aside for the
purchase of, or retirement of, the whole or any part of the Series 91 Preferred
Stock or any other class of stock, other than any previously issued series of
Preferred Stock of the Company. Dividends are cumulative and are payable prior
to the payment of any dividends on the Common Stock of the Company.
Redemption. The holders of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock have no right to require redemption of the shares. The Company may redeem
the shares in a series, in whole or in part after December 31, 1993, at any time
and from time to time effective on 60 days prior notice, at $100 per share, plus
the amount of unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem this series of Preferred
Stock is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of the shares of the Series 91-A,
91-C, 91-D and 91-E Preferred Stock shall be entitled to a cash payment of $100
per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than the
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock is convertible into 25 shares of Common Stock at the election of the
shareholder without further payment.
Series 91-M
Dividends. No dividends are payable on the Series 91-M convertible
Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause or
require redemption of the Series 91-M Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of Series 91-M convertible
Preferred Stock are entitled to a cash payment of $2 per share. Such payment
shall be made before any payment or distribution is made to the holders of the
Common Stock, or any other series of Preferred Stock other than the previously
issued series of Preferred Stock of the Company.
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Conversion. On or after September 30, 1993, each 5,000 shares of series
91-M Preferred Stock is convertible into 300 shares of Common Stock of the
Company, at the election of the shareholder without further payment. The
Company shall have the absolute right to cause conversion of the 91-M Preferred
Shares at any time, or from time to time without additional payment upon 60
days prior written notice. In the event the Company elects to convert the 91-M
shares to Common Stock, each share of Series 91-M Preferred Stock shall be
converted into 300 shares of the Company's Common Stock.
Series 91-P
Dividends. No dividends are payable on the Series 91-P Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-P Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-P
Preferred Stock shall be entitled to a cash payment of $2.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after July 15, 1993, each 4,000 shares of Series 91-P
Preferred Stock is convertible into 250 shares of Common Stock of the Company at
the election of the shareholder and without further payment. The Company shall
also have the absolute right to cause conversion of the Series 91-P Preferred
Shares at any time or from time to time upon 60 days prior written notice. In
such event, each share of Series 91-P Preferred Stock shall be convertible into
250 shares of Common Stock.
Series 91-R
Dividends. Dividends of 8% per annum will be payable on the Series 91-R
Preferred Stock, in quarterly installments out of unreserved earned surplus,
before any dividends shall be payable on any other class of stock or any other
shares of Preferred Stock other than previously issued series of Preferred
Stock, and before any sum shall be set aside for the purchase of, or retirement
of, the whole or any part of the Series 91-R Preferred Stock or any other class
of stock, other than any previously issued series of Preferred Stock of the
Company. Dividends payable on the Series 91-R Preferred Stock are cumulative and
are payable prior to the payment of any dividends on the Common Stock of the
Company.
Redemption. The holders do not have the right to require redemption of the
Series 91-R Preferred Stock. The Company may redeem the Series 91-R Preferred
Stock in whole or part, at any time and from time to time effective on 60 days
prior written notice, at $10,000 per Series 91-R Preferred Share, plus the
amount of any unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem the Series 91-R Preferred
Shares is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-R
Preferred Stock shall be entitled to a cash payment of $10,000 per share, plus
all accrued and unpaid dividends up to the date fixed for distribution, whether
or not such dividends have been earned or declared. Such payment shall be made
before any payment or distribution is made to the holders of the Common Stock,
or any other series of Preferred Stock other than previously issued series of
Preferred Stock of the Company.
Conversion. During the 60 day notice period provided for redemption by the
Company, each share of the Series 91-R Preferred Stock is convertible into 167
shares of Common Stock without further payment at the election of the
shareholder. At any time after October 15, 1993, the holders of the preferred
shares may demand conversion into Common Stock.
Series 91-S
Dividends. No dividends are payable on the Series 91-S Preferred Stock.
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Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-S Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-S
Preferred Stock shall be entitled to a cash payment of $3.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after September 30, 1993, each share of Series 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock of the
Company, at the election of the shareholder. The Company also has the right to
cause conversion of the Series 91-S Preferred Stock at any time, or from time to
time upon 60 days prior written notice. In such event, each share of 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock.
Series 91-V
Dividends. The holders of the 91-V Preferred Stock have no right to
dividends.
Redemption. The holders of the Series 91-V Preferred Stock do not have the
right to require the redemption of the Series 91-V convertible Preferred Stock.
The Company has a right to cause redemption of the Series 91-V Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
Series 91-V Preferred Stock is subject to compliance with Utah law, including
without limitation certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-V
Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. During the 60 day notice period provided wherein the Company
may redeem the Series 91-V Preferred Stock, or at any other prior time, each
share of the Series 91-V Preferred Stock is convertible into 8 shares of Common
Stock of the Company without further payment at the election of the shareholder.
Series 92-A and 92-B
Dividends. The Series 92-A and 92-B Preferred Stock have no dividend
rights.
Redemption. The Series 92-A and 92-B Preferred Stock holders do not have
the right to require its redemption. The Company may redeem the Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
shares is subject to compliance with Utah law, including without limitation
certain retained earnings and requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 92-A and
92-B Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 92-A Preferred Stock is convertible
into 6 shares of Common Stock. Each share of the Series 92-B Preferred Stock is
convertible into 8 shares of Common Stock. Each share is convertible without
further payment at the election of the shareholder.
Series 93-A, 93-B and 93-C
Dividends. The Series 93-A, 93-B and 93-C Preferred Stock have no dividend
rights.
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Redemption. The holders of the Series 93-A, 93-B and 93-C Preferred Stock
have no option or right to require redemption of their shares. The Series 93-A,
93-B and 93-C Preferred Stock is redeemable by the Company as a series, in whole
or in part, effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 93-A,
93-B and 93-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 93-A, 93-B and 93-C Preferred Stock is
convertible, at the option of the holder without further payment, into either 15
or 38 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement under which
the shares of these three series of Preferred Stock were issued.
Series 94-A and 94-B
Dividends. The Series 94-A and 94-B Preferred Stock have no dividend
rights.
Redemption. The holders of the Series 94-A and 94-B Preferred Stock have no
option or right to require redemption of their shares. The Series 94-A and 94-B
Preferred Stock is redeemable by the Company as a series, in whole or in part,
effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 94-A
and 94-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 94-A and 94-B Preferred Stock is
convertible, at the option of the holder without further payment, into from 25
to 45 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement with which
the shares of these series of Preferred Stock were issued.
Series 95-R
Dividends. No dividends are payable on the Series 95-R Preferred Stock.
Redemption. The holders of the Series 95-R Preferred Stock have no option
or right to require redemption. The Series 95-R preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 95-R
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of Series 95-R Preferred Stock. Such
liquidation payments are to be made before any payment or distribution is made
to the holders of the Common Stock, or any other series of Preferred Stock other
than previously issued series of Preferred Stock.
Conversion. Each share of the Series 95-R Preferred Stock is convertible
after November 1, 1997, at the option of the holder without further payment,
into Common Stock with a bid based market value of (i) $18,000; or (ii) $16,500.
Alternatively, each share of Series 95-R Preferred Stock can be converted into
12,500 shares of Common Stock, at the option of the holder.
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Series 96-A and 96-B
Dividends. The Series 96-A and 96-B Preferred Stock have no dividend
rights.
Redemption. Neither the holders of the Series 96-A or 96-B Preferred Stock
nor the Company have any option or right to require or cause redemption.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 96-A
and 96-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $10,000 and $13,000 per share, respectively. The liquidation
preference shall be payable before any payment or distribution is made to the
holders of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock.
Conversion. Each share of the Series 96-A Preferred Stock is convertible,
at the option of the holder without further payment after April 30, 1998, into
13,500 common shares. Each share of Series 96-B Preferred Stock is convertible
at the option of the holder without further payment after the earlier of August
30, 1998, or the date a registration statement filed by the Company with the SEC
is declared effective, into 3,000 shares of Common Stock.
Series 97-D, 97-F, 97-G and 98-A
Dividends. The Series 97-D Preferred Stock has a right to cumulative
dividends, out of assets legally available therefore, at a per share rate
equal to 7% per annum of its liquidation preference of $1,000 per share.
The Series 97-F and 97-G Preferred Stock have a right to cumulative dividends,
out of assets legally available therefore, at a per share rate equal to 8% per
annum of the liquidation preference of $1,000 per share. The Series 98-A
Preferred Stock has a right to cumulative dividends out of assets legally
available therefore,at a per share rate equal to 7% per annum of the liquidation
preference of $1,000 per share.
Redemption. Neither the holders of the Series 97-D Preferred Stock nor the
Company have any option or right to require or cause redemption of the Series
97-D Preferred Stock. The holders of the Series 97-F, 97-G and 98-A Preferred
Stock may not require its redemption. The Company may redeem the Series 97-F,
97-G and 98-A Preferred Stock at 130% of the liquidation preference ($1,000),
plus the amount of any unpaid cumulative dividends which have become payable
with respect thereto.
Liquidation. The Series 97-D, 97-F, 97-G and 98-A are each entitled to be
paid out of the assets of the Company available for distribution to
shareholders, liquidating distributions in the amount of $1,000 per share. The
liquidation preference with respect to each series shall be payable before any
payment or distribution is made to the holders of the Common Stock, or any other
series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. The Series 97-D Preferred Stock is convertible, at the option
of the holder thereof, at the earlier of: (i) the date a registration statement
shall be declared effective by the SEC for the Common Stock underlying the
Series 97-D Preferred Stock; or (ii) one year from the closing date of the
purchase of such series, which was August 12, 1997. Each 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 Series 97-D Preferred Stock and the Dividend Amount. The
Dividend Amount is equal to the Liquidation Preference of $1,000 per share
multiplied by 7% per annum, multiplied by the number of days since the closing
date, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to the closing date of August 12, 1997,
or (b) 77.5% of the average of the closing bid price of the shares of Common
Stock of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if Common Stock is
not delivered to the holder within five days of receipt of a notice of
conversion and receipt of the Preferred Stock to be converted.
The Series 97-D Preferred Stock is convertible, subject to the following
limitations. The Series 97-D Preferred Stock is not convertible until the
earlier of (a) the date the registration statement is declared effective or (b)
one year from the closing date of the purchase of such series. The holder is
precluded from converting any portion of the Preferred Stock which would cause
holder to be deemed to be the beneficial owner of 4.99% or more of the issued
and outstanding Common
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Stock of the Company. The Common Stock underlying the Series 97-D Preferred
Stock and the warrants issued in connection with the sale thereof have demand
registration rights. The Company is obligated to use its best efforts to
maintain any registration statement or post-effective amendment current until
the earlier of the date that all of such securities have been sold pursuant to
the registration statement, or the date the holders receive a legal opinion of
counsel that the securities may be sold under Rule 144, or the second
anniversary of the effective date of the registration statement.
The Series 97-F Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 97-F;
or (ii) one year from November 6, 1997. Each 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 Series 97-F Preferred Stock and the dividend amount. The dividend
amount is equal to the liquidation preference of $1,000 per share multiplied by
7% per annum, multiplied by the number of days since November 6, 1997, divided
by 365 days. The conversion price is determined based on the date that the
conversion notice is received ("Conversion Date") and shall equal the lesser of
(a) the average closing bid price of the shares of the Common Stock over the
five day trading period prior to November 6, 1997, or (b) 75% of the average of
the closing bid price of the shares of Common Stock of the Company on the five
trading days ending on the date proceeding the Conversion Date. There are
monetary penalties to the Company if the Common Stock is not delivered to the
holder with 5 days of receipt of a notice of conversion and receipt of the
Preferred Stock to be converted. The Series 97-F must be converted no later than
two years from November 6, 1997.
The Series 97-F Preferred Stock is convertible, subject to the following
limitations. 50% of the Series 97-F Preferred Stock issued to purchasers is
convertible on the 61st day from the date that purchasers deliver a demand for
registration to the Company, if the registration statement filed by the Company
is not effective by that date. If the registration statement filed by the
Company is not declared effective by the 121st day from the demand for
registration then the remaining 50% of the Series 97-F Preferred Stock is
convertible. However, in order for purchasers to convert at these times the
purchasers must meet all of the qualifications for trading under Regulation S.
The holder is precluded from converting any portion of the Preferred Stock which
would cause holder to be deemed to be the beneficial owner of 4.99% or more of
the issued and outstanding Common Stock of the Company.
The Series 97-G Preferred Stock is convertible, at the option of the holder
thereof, beginning 41 days from January 8, 1998. Each 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 Series 97-G Preferred Stock. The conversion price is
determined based on the date that the conversion notice is received ("Conversion
Date") and shall equal the lesser of (a) the average closing bid price of the
shares of the Common Stock over the five day trading period prior to January 8,
1998, or (b) 75% of the average of the closing bid price of the shares of Common
Stock of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if the Common Stock
is not delivered to the holder with five days of receipt of a notice of
conversion and receipt of the Preferred Stock to be converted. The Series 97-G
must be converted no later than two years from January 8, 1998.
The holder of the Series 97-G Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.
The Series 98-A Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 97-F;
or (ii) 61 days from March 6, 1998. Each 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
Series 98-A Preferred Stock and the dividend amount. The dividend amount is
equal to the liquidation preference of $1,000 per share multiplied by 7% per
annum, multiplied by the number of days since March 6, 1998, divided by 365
days. The conversion price is determined based on the date that the conversion
notice is received ("Conversion Date") and shall equal the lesser of (a) the
average closing bid price of the shares 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 shares of Common Stock of the Company on the five trading days
ending on the date proceeding the Conversion Date. There are monetary penalties
to the Company if the Common Stock is not delivered to the holder with 5 days of
receipt of a notice of conversion and receipt of the Preferred Stock to be
converted. The Series 98-A must be converted no later than two years from March
6, 1998.
The holder of the Series 98-A Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.
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Warrants
As of December 31, 1997, the Company had outstanding warrants entitling the
holders thereof to purchase approximately 4,401,775 shares of Common Stock of
the Company at exercise prices which range from $.60 to $47.50 and with varying
warrant expiration dates. The exercise price of the warrants is generally
subject to adjustment in the event of stock splits, stock dividends and similar
events. Some outstanding warrants expire only on the occurrence of certain
conditions precedent, which are not dates certain. The warrants are not divided
into any series or class, and there is currently no public market for any of the
warrants which are outstanding as of the date hereof.
The various warrant exercise prices were determined arbitrarily by the
Company, and there is no assurance the price of the Common Stock will ever rise
to a level where exercise of the warrants would be of economic value to any the
warrant holders.
The warrants do not confer upon the holders any voting or dividend rights
or any other rights of a shareholder of the Company. The warrants may generally
be exercised during the exercise period upon surrender of the warrant
certificate at the offices of the Company, with a form of election to purchase
generally shown on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares being purchased.
Registration Rights
The Company will be able to issue shares of Common Stock upon exercise of
all of the various warrants only if there is a then current prospectus relating
to such Common Stock under an effective registration statement filed with the
Securities and Exchange Commission or pursuant to an applicable exemption from
such requirements, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the states in which
the various holders of the warrants reside. Common Stock underlying warrants
issued in connection with the sale of Series 97-D, 97-F, 97-G and 98-A, as well
as other warrants issued under varying circumstances are being registered in
this Registration Statement. See "Selling Security Holders." Many of these
warrants were issued with "piggyback" registration rights. The warrants with
"piggyback" registration rights were all issued with an exercise price equal to
the fair market value of the Common Stock or higher on the date of issue.
In connection with the issuance of the Series 96-B, 97-D and 97-F the
Company is required to use its best efforts to file a registration statement
covering the Preferred Shares with the SEC. For the Series 97-D and 97-F the
Company is further required to use its best efforts to have the registration
statement declared effective, generally within 120 days of the closing of each
of the transactions, wherein the Series 97-D and 97-F Preferred Stock was
purchased. Failure to have the registration statement declared effective
generally within 120 days of the respective closings relative to the Series 97-D
and 97-F Preferred Stock will result in the Company having to pay significant
monetary damages computed on a daily basis until the registration statement is
effective. Damages may be as much as $100,000 per month depending on which
option the holder of the Series 97-F Preferred Stock elects. Liquidated damages
paid through March 1998 for the Series 97-D, 97-F and 97-G equal $16,500. In
the event this registration statement is not declared effective, damages could
equal approximately $800,000.
For the Series 97-D and 97-F Preferred Stock, the Company is required to
register 230% and 200%, respectively, of the number of shares which would be
capable of conversion five days prior to the filing of the registration
statement, and to keep the registration statement effective, until the earlier
of: (i) all of the holders' securities have been registered; (ii) the holders'
securities which are subject to registration may be sold without registration
pursuant to Rule 144, Rule 144(k) or Regulation S; or (iii) one year from the
issuance of the securities subject to registration.
For the Series 98-A Preferred Stock, the Company is required to file an
amended registration statement as soon as possible after March 6, 1998. In the
event the amended registration statement is not filed by the 45th day after
March 6, 1998, or declared effective by the SEC by the 90th day after March 6,
1998, the Company must pay liquidated damages equal to 1.5% of the principal
amount of the $2 million in securities sold for the first month, and 2% of the
principal amount of the $2 million in securities sold each month thereafter
until the amended registration statement is declared effective. The Company is
required to register 200% of the number of shares of common stock underlying the
Series 98-A Preferred Stock which would be capable of conversion five days prior
to the filing of the amended registration statement, until the earlier
43
<PAGE>
of (i) all of the holder's securities have been registered; or (ii) the
holder's common stock underlying the Series 98-A Preferred Stock may be sold
with registration pursuant to Rule 144 or Rule 144(k).
Transfer Agent
The Transfer Agent for the Company's Common Stock is Atlas Stock Transfer
Corporation located at 5899 South State Street, Salt Lake City, UT 84107.
DESCRIPTION OF CERTAIN PROVISIONS OF THE ARTICLES
OF INCORPORATION AND BYLAWS WITH POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Articles of Incorporation and Bylaws contain several
provisions that may make acquiring control of the Company by means of tender
offer, over-the-market purchases, a proxy fight or otherwise more difficult. Set
forth below is a description of certain provisions of the Company's Articles of
Incorporation, as amended and the Bylaws.
Classified Board of Directors
The Articles of Incorporation, as amended, divide the Board of Directors
into three classes, with each class having a term of three years, and with each
class expiring in successive years. Each such class is as near equal in number
as possible. At each annual meeting of shareholders, directors are elected to
succeed those directors whose terms have expired.
The Company believes a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and its
business strategies and policies. The classified Board of Directors provision
should increase the likelihood in the event of a takeover of the Company that
incumbent directors will retain their positions. In addition, the classified
board provision will help ensure the Company's Board of Directors, if confronted
with an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and seek the best available result for all
shareholders.
Special Meetings
The Company's Articles of Incorporation as amended provide that no action
shall be taken by shareholders except at an annual or special meeting of
shareholders. The Company's Articles of Incorporation, as amended, provide that
special meetings of shareholders of the Company may be called by the President
or Chief Executive Officer, or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.
Shareholders Nomination of Directors
The Company's Articles of Incorporation and Bylaws, as amended, establish
an advance notice procedure with regard to the nomination, other than by or at
the direction of the Board of Directors, of candidates for election as directors
and the introduction of business. Only persons who are nominated by the Board of
Directors, or by a shareholder who has given timely prior written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected shall be eligible for election as directors of the Company.
Although the Company's Articles of Incorporation and Bylaws, as amended, do
not give the Board of Directors any power to approve or disapprove shareholder
nominations for the election of directors or any other business properly brought
by the Company's shareholders before an annual or special meeting, the Articles
of Incorporation as amended may have the effect of precluding certain methods of
proposing a nomination for the election of a director or precluding a certain
manner of conducting business at a particular meeting if the proper procedures
are not followed, or may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors, or otherwise
attempting to obtain control of the Company.
44
<PAGE>
Certain Voting Requirements and Business Combinations
Under certain circumstances, the Company's Articles of Incorporation as
amended require the affirmative vote of 70% of the voting power of then
outstanding shares of capital stock of the Company entitled to vote generally
in the election of directors, voting together as a single class to approve or
authorize (a) any merger or consolidation of the Company or any subsidiary with
any interested shareholder as defined in the Bylaws, or any other corporation
which is or after such merger or consolidation would be an affiliate (as
defined) of an interested shareholder; (b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with any interested shareholder or
any affiliate of any interested shareholder of any assets of the corporation or
any subsidiary having an aggregate fair market value equal to or in excess of
the lesser of Five Million Dollars ($5,000,000) or twenty (20%) percent of the
gross assets of the Company; (c) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to any interested
shareholder or any affiliate of any interested shareholder in exchange for cash,
securities, or other property having an aggregate fair market value equal to or
in excess of the lesser of $5,000,000 or 20% percent of the gross assets of the
Company; (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an interested shareholder
or any affiliate of any interested shareholder; (e) any reclassification of
securities or recapitalization of the Company or any merger or consolidation of
the Company with any of its subsidiaries or any other transaction which has the
effect directly or indirectly of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
interested shareholder or any affiliate of any interested shareholder. The 70%
vote requirement is not applicable to any business combination, as defined in
the Bylaws, where such business combination is either approved by a majority of
the disinterested directors, or certain price and procedure requirements are
met.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fisher Thurber LLP, 4225 Executive
Square, Suite 1600, La Jolla, California 92037-1483. David A. Fisher, a Partner
of Fisher Thurber LLP, owns an option to purchase 10,000 shares of Common Stock
at $2.00 per share.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, have been audited by J.H. Cohn LLP, independent public accountants, as
set forth in their report thereon (which is unqualified and contains an
explanatory paragraph with respect to the Company's ability to continue as a
going concern) included therein and incorporated herein by reference. Such
consolidated financial statements referred to above are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the fiscal year ended December 31, 1996,
have been audited by Ernst & Young LLP, independent public accountants, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to the Company's ability to continue as a going concern, as described in
Note 2 to the consolidated financial statements) included therein and
incorporated herein by reference. Such consolidated financial statements
referred to above are incorporated herein by reference in reliance upon such
report given upon the authority of such firm experts in accounting and auditing.
45
<PAGE>
SGI INTERNATIONAL
------------
Shares of Common Stock
--------------------------
PROSPECTUS
--------------------------
April ________, 1998
<TABLE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any of the
securities other than the securities other than the securities to which it
relates, or an offer or solicitation of an offer to buy any of the securities to
which it relates, or an offer or solicitation to any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
an implication that information contained herein is correct as of any time
subsequent to the date hereof.
- ------------------
TABLE OF CONTENTS Page
<S> <C>
Prospectus Summary ....................................4
Summary Financial Data ................................6
Risk Factors ..........................................7
Selected Consolidated Financial Data
Recent Developments ..................................16
Business .............................................16
Use of Proceeds ......................................26
Selling Security Holders .............................27
Plan of Distribution .................................32
Description of Securities ............................34
Description of Certain Provisions of Articles of
Incorporation and Bylaws with Possible
Anti-Takeover Effects ................................43
Legal Matters........................................ 44
Experts ..............................................44
</TABLE>
- ----------------
Until _____ ___, 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
46
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission ("SEC")
registration fee.
<TABLE>
<S> <C>
SEC Filing Fee....................................$ 2,478
Blue Sky Fees and Expenses ....................... 12,000
Printing and Engraving Expenses .................. 5,000
Accounting Fees and Expenses...................... 18,000
Legal Fees and Expenses .......................... 70,000
Miscellaneous .................................... 5,000
--------
Total (Estimated) ................................$112,478
--------
--------
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Company's Bylaws, and in accordance with Section 16-10a-901 et
seq. of the Utah Revised Business Corporation Act ("Utah Corporation Act"), the
Company shall indemnify any person who was or is a party or is threatened to
made a party to any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as an officer or director or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses reasonably incurred by him or imposed on him in the connection
with or resulting from the defense of such action, suit or other proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
or in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, or with respect to any criminal action or proceeding,
that the person had reasonable cause to believe that his conduct was unlawful.
The Company's Bylaws provide the Company shall pay for expenses incurred
defending a civil or criminal action, suit or proceeding against a director or
officer of the Company, and shall be paid in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on behalf
of the officer or director, that he shall repay the amount advanced, if it is
ultimately determined he is not entitled to be indemnified by the Company. The
Board of Directors shall approve such undertaking, but shall be liberal with
respect to the requirements for the undertaking, to promote the beneficial and
remedial purposes of protecting those persons who serve as directors and
officers. The Company's Bylaws also provide the Company may purchase and
maintain insurance on behalf of any person who is or was a director or officer,
or employee of the Company, or is or was serving at the request of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or incurred by him in any capacity, or arising
out of his status as such, whether or not the Company would have the power to
indemnify him against liability under the provisions of the Bylaws.
Section 16-10a-901 et seq. of the Utah Corporation Act provides for the
indemnification of officers, directors and agents of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations. The Company currently maintains
officer and director liability insurance with policy limits of $2,000,000.
II-1
<PAGE>
Pursuant to authorization provided under the Bylaws and the Utah
Corporation Act, the Company has entered into indemnification agreements with
each of its directors and officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Utah law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. The
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification. The Company's Bylaws contain a provision
of similar effect relating to advancement or expenses to a director or officer,
subject to an undertaking to repay if it is ultimately determined that
indemnification is unavailable.
Item 16. EXHIBITS
Exhibit
Number Description
- --------------------------------
<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation.(4)
3.2 Registrants' Bylaws as amended to date.(1)
3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(4)
3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred Stock.(4)
3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(4)
3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(4)
3.7 Amended Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(2)
3.8 Form of Debenture for Series 97-E.(4)
3.9 Form of Warrant for Series 97-E.(4)
3.10 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(4)
3.11 Amended Certificate of Secretary re: Designation of Series 97-G Preferred Stock.(4)
3.12 Certificate of Secretary re: Designation of Series 98-A Preferred Stock.(5)
4.1 Form of Common Stock certificate.(4)
4.2 Form of Warrant Certificate re: Existing Warrants.(3)
4.3 Form of Stock Purchase Warrant re: Series 97-B, 97-D and 97-F Preferred Stock.(3)
4.4 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(4)
4.5 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997, between the
Registrant and the holders thereof.(3)
4.6 Amended Series 97-D Preferred Stock Purchase Agreement dated April 1, 1998, between
the Registrant and the holders thereof.(2)
II-2
<PAGE>
4.7 Registration Rights Agreement re: Series 97-D Preferred Stock dated August 12,
1997, between the Registrant and the holders thereof.(3)
4.8 Amended Registration Rights Agreement re: Series 97-D Preferred Stock, dated April
1, 1998, between the Registrant and the holders thereof.(2)
4.9 Agreement and General Release re: Series 97-D Preferred Stock, dated April 1, 1998,
between the Registrant and the holders thereof.(2)
4.10 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated November 6, 1997,
between the Registrant and the holders thereof.(3)
4.11 Registration Rights Agreement re: Series 97-F Preferred Stock dated November 6, 1997,
between the Registrant and the holders thereof.(3)
4.12 Series 97-G 8% Convertible Preferred Stock Subscription Agreement dated January 8, 1998,
between the Registrant and the holders thereof.(4)
4.13 Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998, between
the Registrant and the holders thereof.(4)
4.14 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between Registrant and
Dominion Capital dated January 8, 1998.(4)
4.15 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998,
between the Registrant and the holders thereof.(4)
4.16 Agreement between the Registrant and AEM dated December 11, 1997.(4)
4.17 Agreement between the Registrant and The Taxin Network dated April 22, 1997.(4)
4.18 Series 98-A Convertible Preferred Stock Subscription Agreement
dated March 6, 1998, between the Registrant and the holders thereof.(5)
4.19 Registration Rights Agreement re: Series 98-A Preferred Stock dated March 6, 1998, between
Registrant and the holders thereof.(5)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered.(2)
23.1 Consent of Ernst & Young LLP, independent public accountants.(2)
23.2 Consent of J.H. Cohn LLP, independent public accountants.(2)
23.3 Consent of Fisher Thurber LLP (included in Exhibit 5.1).
24.1 Power of attorney (see pg. II-5).
</TABLE>
S
- ---------------------------
(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1990.
(2) Filed herewith.
(3) Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
(4) Previously filed.
(5) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997.
II-3
<PAGE>
Item 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) To include any additional or changed material information on the plan of
distribution.
(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant hereby undertakes:
(1) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and authorized this Amendment No. 1 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on April 17, 1998.
SGI International
By: /s/ Joseph A. Savoca
- ------------------------------------------
Joseph A. Savoca, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph A. Savoca, as his or her true and
lawful attorney-in-fact and agents, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or their substitutes may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures
/s/ Joseph A. Savoca /s/ Ernest P. Esztergar
- --------------------------------- ---------------------------------
Joseph A. Savoca Ernest P. Esztergar
Chief Executive Officer, Chief Director
Financial Officer and Director April 17, 1998
April 17, 1998
/s/ William A. Kerr /s/ William R. Harris
- --------------------------------- ---------------------------------
William A. Kerr William R. Harris
Director Director
April 17, 1998 April 17, 1998
/s/ Bernard V. Baus /s/ Norman Grant
- --------------------------------- ---------------------------------
Bernard V. Baus Norman Grant
Director Director
April 17, 1998 April 17, 1998
II-5
EXHIBIT 3.7
First 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 April 1, 1998
amending a resolution passed on August 4, 1997, which Resolution amends
the Series 97-D Convertible Preferred Stock and authorizes the filing
of this Certificate of Secretary with the Utah Corporations Division.
This Certificate of Secretary authorizes and establishes the rights,
preferences and privileges of the Series 97-D Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation on April 1, 1998.
_______________/s/________________
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors by provisions of the Articles of Incorporation
of the Company, as amended (the "Articles of Incorporation"), and the
Corporation Laws of the State of Utah, the issuance of a series of Preferred
Stock, which shall consist of Five Hundred Fifty (550) 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 restrictions 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 Articles 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 Series 97-D Convertible Preferred Stock (the "Series 97-D
Preferred Stock"). The maximum number of shares of Series 97-D Preferred Stock
shall have a liquidation preference (the "Liquidation Preference") of One
Thousand ($1,000) per share. The Series 97-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 97-D Preferred Stock as to dividend rights
or rights upon liquidation, winding up or dissolution of the Company. The Series
97-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,
1
<PAGE>
dissolution, or winding up of the Company, and shall be junior to
all outstanding debt of the Company. The Series 97-D Preferred Stock shall be
subject to the creation of parity stock and junior stock to the extent not
expressly prohibited by the Company's Articles of Incorporation.
(b) Voting Rights
Each holder of the shares of Series 97-D Preferred Stock shall
have no voting rights or powers whatsoever on any matters concerning the
Company.
(c) Dividend Provisions
1. The holders of the outstanding shares of Series 97-D
Preferred Stock shall be entitled to receive cumulative dividends, out of any
assets legally available therefore, at a per share rate equal to seven percent
(7%) per annum of the amount of the respective Liquidation Preference of the
Series 97-D Preferred Stock as set forth in Section (a) hereof, payable on a pro
rata basis on conversion. Any dividends payable pursuant to the provisions of
this paragraph shall only be payable in Common Stock of the Company and not in
cash.
2. Such dividends shall accrue on each share from the date of
its original issuance, 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 97-D 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 97-D
Preferred Stock or Common Stock. The Series 97-D Preferred Stock is not entitled
to any additional dividends beyond the cumulative dividends specified herein.
After the cumulative dividends on the Series 97-D Preferred Stock have been paid
or set apart, any additional dividends declared by the Board of Directors shall
be declared solely on the Common Stock. The Series 97-D Preferred Stock shall
not participate in such dividends.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 97-D 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 97-D Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends plus the Liquidation Preference of the Series 97-D Preferred Stock
(collectively, the "Liquidation Value"), and shall not be entitled to any
further payment. 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 days prior to the
payment date stated therein, to each record holder of any share of Series 97-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.
2. Partial Distribution of Assets. If the amounts available for
distribution with respect to the Series 97-D Preferred Stock and all other
outstanding stock of the Company ranking on a
2
<PAGE>
parity with the Series 97-D Preferred Stock upon liquidation are not sufficient
to satisfy the full liquidation rights of all the outstanding Series 97-D
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 97-D Preferred
Stock may include accumulated dividends) to which they are entitled.
(e) Conversion
1. General. Subject to the other provisions hereof, each share
of the Series 97-D Preferred Stock shall be convertible, at the option of the
holder thereof, at the earlier of: (i) the date a registration statement shall
be declared effective by the Securities and Exchange Commission for the shares
of Common Stock into which the Series 97-D Preferred Stock shall be convertible
pursuant to the provisions of this Certificate; or (ii) one year from the
Closing Date as defined in the Series 97-D Preferred Stock Purchase Agreement
("Stock Purchase Agreement"), between the Company and the purchasers of the
Series 97-D Preferred Stock, 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, the
Conversion Rate shall mean the Liquidation Preference of $1,000 per share of
Series 97-D Preferred Stock and the Dividend Amount. For the purposes hereof,
the Dividend Amount shall equal the Liquidation Preference of $1000 per share of
the Series 97-D Preferred Stock, multiplied by seven percent (7%) per annum,
multiplied by the number of days since the Closing Date, divided by 365 days.
For purposes hereof, the Conversion Price shall be determined as of the date the
notice of conversion is received by the Company ("Conversion Date") and shall be
equal to the lesser of: (a) the average closing bid price of the shares of
Common Stock of the Company over the five (5) day trading period prior to the
Closing Date as is defined in the Stock Purchase Agreement; or (b) seventy five
percent (75%) of the average of the closing bid price of shares of Common Stock
of the Company on the five (5) trading days ending on the date preceding the
Conversion Date. The closing bid price shall be deemed to be the reported last
bid price regular way 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. In the event the Common Stock
issuable upon conversion of the Series 97-D Preferred Stock is not delivered
within five (5) business days of receipt by the Company of a valid conversion
notice and the Series 97-D Preferred Stock certificate to be converted ("Receipt
Conversion Date"), the Company shall pay to the purchaser, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 of the Series 97-D Preferred Stock sought to be
converted (pro rated for larger or smaller amounts) $500 for each of the first
ten (10) days and $1,000 per day thereafter that the shares of Common Stock
issuable upon conversion of the Series 97-D Preferred Stock are not delivered,
which liquidated damages shall run from the sixth business day after the Receipt
Conversion Date. Any and all payments required pursuant to this paragraph shall
be payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price.
2. Limitations. Subject to limitations described in paragraph
(e)(1) herein and notwithstanding the foregoing, the Series 97-D Preferred Stock
shall not be convertible until the earlier of: (i) the date a registration
statement shall be declared effective by the Securities and
3
<PAGE>
Exchange Commission for the shares of Common Stock into which the Series 97-D
Preferred Stock shall be convertible pursuant to the provisions of this
Certificate; or (ii) one year from the Closing Date as defined in the Stock
Purchase Agreement. The holder of the Series 97-D Preferred Stock shall also be
prohibited from converting any portion of the Series 97-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 Exchange Act of 1934, as amended,
of 4.99% or more of their issued and outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 97-D
Preferred Stock shall exercise its right to convert the Series 97-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,
duly endorsed with Medallion signature guarantees, representing the Series 97-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 notice of
conversion shall include notice that the holder thereof elects to convert the
Series 97-D Preferred Stock and shall state the number of shares of Series 97-D
Preferred Stock to be converted. The Company will use its best efforts to
transmit the certificates representing shares of Common Stock issuable upon
conversion of any Series 97-D Preferred Stock (together with the certificates
representing the Series 97-D Preferred Stock not so converted) to the holder via
express courier, by electronic transfer or otherwise within three business days
after the Conversion Date if and only if the Company has received the original
notice of conversion and Series 97-D Preferred Stock certificate, duly endorsed,
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 three (3)
business days of actual receipt by the Company of a duly completed election to
convert and the certificate to be converted, duly endorsed, then the purchaser
of the Series 97-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 shareholders a right to purchase new Common Stock (or securities
convertible into, exchangeable for or otherwise 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,
then the number of shares of Common Stock issuable upon conversion of the Series
97-D Preferred Stock immediately
4
<PAGE>
prior thereto shall be adjusted so that the holders of the Series 97-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 97-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 percent (1%) or more in the number of shares of Common Stock
issuable upon conversion of the Series 97-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.
(iii) Whenever the number of shares of Common Stock
issuable upon the conversion of the Series 97-D 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 97-D 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 97-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
97-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
5
<PAGE>
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 97-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 97-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
Articles 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 97-D Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 97-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 97-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 of the Conversion Price of Series 97-D 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 97-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 97-D 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 97-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 97-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 97-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
6
<PAGE>
the holder of Series 97-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 97-D Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company 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 97-D Preferred Stock.
(f) Redemption
The Company shall not have the right to call or redeem all or
any part of the Series 97-D Preferred Stock, nor shall there by any mandatory
redemption rights or powers on behalf of the Company, nor shall the holders have
any right to compel Company to call or redeem all or any part of the Series 97-D
Preferred Stock.
(g) Notices
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Series 97-D 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:
Attn: John Taylor, Esq.
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 97-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 97-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.
7
<PAGE>
IN WITNESS WHEREOF, SGI International, has caused this First Amended
Certificate to be signed by its President, and attested to by its Secretary,
this 1st day of April , 1998.
SGI INTERNATIONAL
/s/
By:-------------------------
Title: President
Attest:
/s/
- -------------------------------
John R. Taylor, Secretary
8
EXHIBIT 4.6
First Amendment
to
Series 97-D Preferred
Stock Purchase Agreement
This First Amendment to the Stock Purchase Agreement ("First
Amendment") is made as of April 1, 1998, by and between SGI International, a
Utah corporation (the "Company") and the persons and entities listed on the
Schedule of Investors attached hereto as Exhibit A (the "Investors").
Recitals
A. On August 12, 1997, the parties hereto entered into a Series 97-D
Preferred Stock Purchase Agreement (the "Agreement") and a Registration Rights
Agreement, the latter of which required registration of the stock underlying
warrants and preferred shares that were being purchased; and,
B. The Agreement also contained at Section 5(e) a "Favored Nations"
clause that imposed certain obligations on the Company in the event that it
issued any other convertible stock purchase agreement with similar terms and in
an aggregate amount of $550,000 or less; and,
C. The Company did issue on January 8, 1998, another convertible stock
purchase agreement with similar terms in an amount of $500,000.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration and in consideration
of the covenants and agreements contained herein the parties agree as follows:
1. Authorization. The Company will authorize the issuance of 100,000
shares of restricted stock to Millenco, and 10,000 shares of restricted stock to
Terry Feeney, such stock to be issued to Investors in consideration for
Investors discharging and releasing the obligation of the Company under Section
5(e) of the Agreement and in discharge of any and all claims for damages or
otherwise related directly or indirectly to the delay by the Company in filing
the S-2 registration statement, except for liquidated damages as specifically
provided for in accordance with Section 3(e) of the Registration Rights
Agreement between the parties dated August 12, 1998.
1
<PAGE>
2. Amended Exhibit B. In order to provide Investors, in accordance with
Section 5(e) of the Agreement, with the same discount as provided to the
investors of the January 8, 1998 transaction with the Company, the parties
hereto agree to delete the Exhibit B ("First Amended Certificate of Secretary")
attached to the Agreement and attach in place and instead thereof, the Exhibit B
attached to this First Amendment.
3. Entire Agreement. Except as is specifically amended hereby by this
First Amendment the Agreement shall continue to be in full force and effect
without any modifications, except as specifically agreed to by the parties
hereto in writing.
IN WITNESS WHEREOF, this First Amendment to the Stock Purchase Agreement
was duly executed on the date first written below.
INVESTOR: Millenco, L.P.
/s/
By:-------------------------------
Name:
Title:_______________________________
Executed this 1st day of April, 1998
INVESTOR: Terry Feeney
/s/
By:--------------------------------
Terry Feeney, Individual
Agreed to and Accepted on
this 1st day of April, 1998
SGI INTERNATIONAL
a Utah Corporation
/s/
By:-----------------------------
/s/
Title:--------------------------
2
<PAGE>
EXHIBIT A
Schedule of Investors
Name and Address Number of Shares
Millenco, L.P. 500
111 Broadway 20th Floor
New York, NY 10006
Terry Feeney 50
111 Broadway 20th Floor
New York, NY 10006
3
EXHIBIT 4.8
First Amendment
to
Registration Rights Agreement
This First Amendment to the Registration Rights Agreement
("First Amendment") is made as of April 1, 1998, by and between SGI
International, a Utah corporation (the "Company") and the persons and entities
listed on the Schedule of Investors attached hereto as Exhibit A (the
"Investors").
Recitals
A. On August 12, 1997, the parties hereto entered into a Series 97-D
Registration Rights Agreement (the "Agreement"), which required registration of
the stock underlying warrants and preferred shares that were being purchased and
also entered into a 97-D Preferred Stock Purchase Agreement; and,
B. The 97-D Preferred Stock Purchase Agreement also contained at
Section 5(e) a "Favored Nations" clause that imposed certain obligations on the
Company in the event that it issued any other convertible stock purchase
agreement with similar terms and in an aggregate amount of $550,000 or less;
and,
C. The Company did issue on January 8, 1998, another convertible stock
purchase agreement with similar terms in an amount of $500,000.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration and in
consideration of the covenants and agreements contained herein the parties agree
as follows:
1. Registrable Securities. The definition of Registrable Security shall
also include the 110,000 shares of restricted common stock being issued to
Investors in accordance with the First Amendment to the 97-D Preferred Stock
Purchase Agreement.
1
<PAGE>
2. Entire Agreement. Except as is specifically amended hereby this
First Amendment of the Agreement shall continue to be in full force and effect
without any modifications, except as specifically agreed to by the parties
hereto in writing.
IN WITNESS WHEREOF, this First Amendment to the Registration Rights
Agreement was duly executed on the date first above written.
Attest: SGI INTERNATIONAL
/s/ /s/
By:-------------------------- By:--------------------------
Name: Name:
Title:_______________________ Title:______________________
PURCHASER: Millenco, L.P.
/s/
By:-------------------------------
Name:
Title:___________________________
PURCHASER: Terry Feeney
/s/
By:-------------------------------
Terry Feeney, Individual
2
<PAGE>
EXHIBIT A
Schedule of Investors
Name and Address Number of Shares
Millenco, L.P. 500
111 Broadway 20th Floor
New York, NY 10006
Terry Feeney 50
111 Broadway 20th Floor
New York, NY 10006
3
EXHIBIT 4.9
AGREEMENT AND
GENERAL RELEASE
This Agreement and General Release (the "Agreement") is made and
entered into effective as of April 1, 1998, by and between, SGI International, a
corporation, and Millenco, L.P and Terry Feeney (Millenco and Feeney shall be
collectively referred to as the "Investors"), with reference to the following
facts:
RECITALS
A. On August 12, 1997, the parties hereto entered into a 97-D Preferred
Stock Purchase Agreement and also entered into a Series 97-D Registration Rights
Agreement, which required registration of the stock underlying warrants and
preferred shares that were being purchased; and,
B. The 97-D Preferred Stock Purchase Agreement contained at Section
5(e) a "Favored Nations" clause that imposed certain obligations on the Company
in the event that it issued any other convertible stock purchase agreement with
similar terms and in an aggregate amount of $550,000 or less; and,
C. The Company did issue on January 8, 1998, another convertible stock
purchase agreement with similar terms in an amount of $500,000.
AGREEMENT
NOW, THEREFORE, in consideration of the matters set forth in the
Recitals and for other good and valuable consideration the parties hereto agree
as follows:
1. Representations. Each of the parties hereto represents and warrants
to the other parties that to the extent of his, her or its knowledge the
recitals set forth above are true, correct, and accurate.
2. Claims. As used herein, "Claims" shall mean any and all claims,
demands, agreements, contracts, covenants, representations, warranties,
promises, undertakings, actions, suits, causes of action, obligations, debts,
fees, costs, expenses, accounts, damages, judgments, losses, injuries and
liabilities of whatsoever kind or nature in law, equity or otherwise, present or
future, known or unknown, suspected or unsuspected, asserted or unasserted,
whether against any party hereto or not, and whether or not concealed or hidden,
based upon any facts, acts, or omissions occurring prior to the date hereof
which relate to the delay by SGI in filing the S-2 Registration Statement which
was finally filed with the SEC on January 23, 1998 and which relate to the
`Favored Nations" clause contained at Section 5(e) of the 97-D Stock Purchase
Agreement. Notwithstanding any other provisions of this agreement the Parties
hereto do not hereby release SGI from the obligation to pay penalties in
accordance with Section 3(e) contained in the Registration Agreement.
1
<PAGE>
3. Release by Investors. In consideration for the Company and Investors
entering into amendments to the Registration Agreement and to the Series 97-D
Preferred Stock Agreement (copy of which are attached hereto in Exhibits A and
incorporated herein by reference) Investors do hereby and forever release,
remise, and discharge SGI and any of their agents, employees, directors,
officers or representatives, and any successors (collectively the "SGI Parties")
of and from any and all Claims, which any of said Investors have, have had, may
have had, or now have against the SGI Parties or their representatives or
successors.
4. Waivers. IT IS EXPRESSLY UNDERSTOOD THAT Section 1542 of the Civil
Code of California provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release
which if known by him must have materially affected his settlement with the
debtor."
The provisions of Section 1542 of the Civil Code of California, if in
any way applicable to this Agreement, as well as any similar provisions of the
law of California or similar laws of any other state, ARE HEREBY KNOWINGLY AND
VOLUNTARILY WAIVED AND RELINQUISHED by all parties hereto, and each of them.
Each of the parties acknowledges that he, she, or its representatives, may
hereafter discover facts in addition to or different from those which he, she,
or it now believes concerning the subject matter of this Agreement, and that
notwithstanding any such new or different facts, this Agreement shall remain in
full force and effect and shall not be challenged in any way or sought to be
voided or avoided. Such parties acknowledge and agree that this waiver is an
essential and material term of this Agreement, without which consideration, the
parties would not have executed this Agreement. All of the parties have been
advised of their respective rights by legal counsel regarding this Agreement and
this waiver and understand and acknowledge its significance and the consequence
of this Agreement and waiver of Section 1542.
5. No Admissions. The parties hereby acknowledge and agree that this is a
compromise settlement, which is not in any respect nor for any purpose to be
deemed or construed to be, or in any way to be used as evidence of any admission
or concession of any liability whatsoever on the part of any of them or any
other person, firm or corporation whatsoever.
6. Representations and Warranties. Each of the parties hereto warrants and
represents that such party has not assigned or in any way conveyed, transferred
or encumbered all or any portion of the Claims or other rights covered by this
Agreement and the Agreement has been duly authorized, executed and delivered on
behalf of each party and is valid and enforceable against such party in
accordance with its terms and each party further acknowledges and agrees that
these warranties and representations are an essential and material term of this
Agreement without which consideration would not have been given and delivered.
7. Governing Law. This Agreement is made and entered into in the State of
California and is to be governed by and interpreted in accordance with the laws
of the State of California.
2
<PAGE>
8. Interpretation. If there is any dispute with respect to this Agreement
the interpretation of the words herein shall be made with respect to the fair
meaning of the words and not for or against any party because one party drafted
the Agreement.
9. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have this day and year executed and
delivered this instrument.
SGI INTERNATIONAL MILLENCO, L.P.
/s/ /s/
By:------------------------------- By:----------------------------
Joseph A. Savoca, Chairman/CEO Name:
Title:_________________________
/s/
By:--------------------------
Terry Feeney, Individual
3
April 16, 1998
Board of Directors
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Re: Form S-2 Registration Statement
Ladies and Gentlemen:
We have acted as special counsel for SGI International (the "Company") in
connection with the preparation and filing of a Registration Statement on Form
S-2, Registration No. 333-44789 (the "Registration Statement"), and the
Prospectus to be included therein (the "Prospectus") pursuant to which it is
proposed to offer up to 9,857,340 shares of Common Stock, no par value, as
stated on the facing page of the Registration Statement. Capitalized terms
used herein have the meanings ascribed to them in the Registration Statement
unless otherwise noted.
We are familiar with the proceedings by which the Common Stock has been
authorized, and we have reviewed and are familiar with the Articles of
Incorporation, as amended, and the By-Laws of the Company and such other
corporate records and documents as we have deemed necessary to express the
opinion herein stated. We have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, the conformity
to original documents and all documents submitted to us as certified or
photostatic copies, and the authenticity of the originals of such latter
documents.
Based upon the foregoing, we are of the opinion that the Common Stock to be
sold and delivered as contemplated by the Registration Statement will be
legally issued, fully paid and nonassessable.
We hereby consent to the references to this firm in the Legal Matters section
of the Registration Statement. We further consent to the use of this opinion as
an exhibit to the Registration Statement.
Sincerely,
Fisher Thurber LLP
By: /s/ David A. Fisher
David A. Fisher
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-2) and related Prospectus
of SGI International for the registration of 10,368,657 shares of its common
stock and to the incorporation by reference therein of our report dated March
20, 1997, except for Note 11, as to which the date is April 14, 1997, with
respect to the consolidated financial statements of SGI International included
in its Annual Report (Form 10-K) for the year ended December 31, 1996, filed
with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
April 16, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-2 of our report, dated March 28, 1998, on
the consolidated financial statements of SGI International and subsidiaries
(the "Company") as of and for the year ended December 31, 1997, which appears
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, and contains an explanatory paragraph with respect to the Company's
ability to continue as a going concern. We also consent to the reference to
our firm under the caption "Experts" in the Prospectus of the Registration
Statement.
J.H. Cohn LLP
San Diego, California
April 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-K for the year ended Decmeber 31, 1997, and is qualified
in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
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