UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-93124
SGI International
(Exact name of registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of May 11,
1998, was 13,430,845.
<PAGE>
TABLE OF CONTENTS
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Equity (Deficiency) 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introductory Note 9
Results of Operations 9
Liquidity and Capital Resources 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 11
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
PART III. SIGNATURES 14
2
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1998 1997
(Unaudited)
===================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash 1,931,634 429,232
Restricted time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 47,473 26,066
Trade accounts receivable, less allowance for
doubtful accounts of $84,460 and $84,460 586,540 346,763
Costs and estimated earnings in
excess of billings on contracts 337,508 146,364
Inventories 64,542 64,843
Prepaid expenses and other current assets 90,530 232,977
- ---------------------------------------------------------------------------------------------------
Total current assets 3,460,727 1,648,745
- ---------------------------------------------------------------------------------------------------
LFC Process related assets:
Notes receivable 150,000 150,000
Royalty rights, net 1,492,687 1,571,250
LFC cogeneration project, net 394,816 421,137
Investment in TEK-KOL Partnership 271,805 481,685
Australia LFC project, net 108,597 115,836
Other technological assets, net 30,487 29,598
- ---------------------------------------------------------------------------------------------------
2,448,392 2,769,506
Property and equipment, net of accumulated
depreciation of $655,816 and $589,789 837,757 788,740
Goodwill, net of accumulated amortization
of $108,772 and $96,790 371,472 383,454
- ---------------------------------------------------------------------------------------------------
7,118,348 5,590,445
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable 393,547 287,458
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and
estimated earnings on contracts 719,399 193,792
Current maturities of long-term notes payable 3,061,875 3,061,875
12% convertible debentures 976,573 976,573
Accrued salaries, benefits and related taxes 182,252 240,368
Payable to TEK-KOL Partnership - 100,000
Interest payable 483,859 483,930
Other accrued expenses 96,753 189,308
- ---------------------------------------------------------------------------------------------------
Total current liabilities 6,314,258 5,933,304
Long-term notes payable, less current maturities 111,875 114,250
- ---------------------------------------------------------------------------------------------------
Total liabilities 6,426,133 6,047,554
- ---------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' equity (deficiency)
Convertible preferred stock 667 910
Common stock 41,899,279 39,927,760
Paid-in capital 10,361,533 8,511,878
Accumulated deficit (51,569,264) (48,897,657)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity (deficiency) 692,215 (457,109)
- ---------------------------------------------------------------------------------------------------
7,118,348 5,590,445
===================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended March 31, 1998 1997
===================================================================================================
<S> <C> <C>
Revenues:
Net sales $ 1,088,912 $ 1,104,260
Other 12,647 9,655
- ---------------------------------------------------------------------------------------------------
1,101,559 1,113,915
Expenses:
Cost of sales 786,600 835,595
Engineering research and consulting 247,230 301,881
Loss on investment in TEK-KOL Partnership 231,214 124,073
Selling, general and administrative 681,466 531,454
Legal and accounting 185,766 152,794
Depreciation and amortization 192,359 176,753
Interest 136,012 134,910
- ---------------------------------------------------------------------------------------------------
2,460,647 2,257,460
- ---------------------------------------------------------------------------------------------------
Net loss $(1,359,088) $(1,143,545)
Imputed preferred stock dividends for Series 97G 8%,
and 98A 6% convertible preferred stock 1,312,519 -
- ---------------------------------------------------------------------------------------------------
Net loss applicable to common stock (2,671,607) (1,143,545)
===================================================================================================
Net loss per common share - Basic $ (0.25) $ (0.19)
===================================================================================================
Weighted average common shares outstanding 10,768,073 6,175,482
===================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
<TABLE>
Preferred Total
convertible stock Common stock Paid-in Accumulated stockholders'
Shares Amount Shares Amount capital deficiency equity (deficiency)
---------------- ---------------------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 90,997 $910 9,258,250 $39,927,760 $8,511,878 $(48,897,657) $(457,109)
Issuance of common stock for cash 194,502 156,800 156,800
Issuance of common stock for services 14,886 20,612 20,612
Issuance of preferred stock for cash 2,750 28 2,312,672 2,312,700
Conversion of preferred stock (27,061) (271) 2,761,133 1,794,107 (1,793,836) -
Issuance of warrants to purchase
common stock to non-employees 18,300 18,300
Net loss (1,359,088) (1,359,088)
Preferred Series 97G and 98A
imputed dividends 1,312,519 (1,312,519) -
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 66,686 $ 667 12,228,771 $ 41,899,279 $ 10,361,533 $ (51,569,264) $ 692,215
==================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Three months ended March 31, 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (1,359,088) $ (1,143,545)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Equity in net loss of TEK-KOL Partnership 231,214 124,073
Depreciation and amortization 192,359 185,245
Common stock issued for services 20,612 42,620
Non-employee compensation expense on issuance
of warrants 18,300 -
Changes in operating assets and liabilities:
Receivable from TEK-KOL Partnership (21,407) (16,695)
Trade accounts receivable (430,921) 417,952
Inventories 301 5,000
Prepaid expenses and other current assets 142,447 (6,269)
Accounts payable 106,088 155,528
Billings in excess of costs and estimated
earnings on contracts 525,607 (321,150)
Accrued salaries, benefits and related taxes (58,116) 8,228
Interest payable (71) 4,000
Other accrued expenses (92,555) (26,021)
- --------------------------------------------------------------------------------------------
Net cash flows used in operating activities (725,230) (571,034)
- --------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Investment in TEK-KOL Partnership (21,333) (150,000)
Payable to TEK-KOL Partnership (100,000) 50,000
Purchase of property and equipment (115,044) (107,449)
Other assets (3,116) -
- --------------------------------------------------------------------------------------------
Net cash flows used in investing activities (239,493) (207,449)
- --------------------------------------------------------------------------------------------
Financing activities:
Borrowings on line-of-credit - 100,000
Payments of notes payable (2,375) (8,375)
Proceeds from issuance of common stock 156,800 64,128
Proceeds from issuance of preferred stock 2,312,700 -
- --------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 2,467,125 155,753
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,502,402 (622,730)
Cash at beginning of period 429,232 740,018
- --------------------------------------------------------------------------------------------
Cash at end of period $ 1,931,634 $ 117,288
============================================================================================
Supplemental disclosure of cash flow information:
Interest $ 108,620 $ 119,228
Supplemental disclosure of non-cash activities:
Common stock issued for services $ 20,612 $ 42,620
Conversion of preferred stock $ 1,794,107 $ 3,197
============================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SGI INTERNATIONAL
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of SGI
International (the "Company") for the three months ended March 31, 1998, and
1997, are unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. These financial statements reflect all adjustments, consisting of
only normal recurring adjustments which, in the opinion of management, are
necessary for a fair statement of the consolidated financial position as of
March 31, 1998, and the consolidated results of operations for the three months
ended March 31, 1998, and 1997. The results of operations for the three months
ended March 31, 1998, are not necessarily indicative of the results to be
expected for the year ending December 31, 1998. For more complete financial
information, these financial statements, and the notes thereto, should be read
in conjunction with the consolidated audited financial statements for the year
ended December 31, 1997, included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
(2) Organization and Business
The principal businesses of the Company are developing, commercializing, and
licensing new energy technologies; and manufacturing automated assembly
equipment.
The recovery of amounts invested in the Company's principal assets, the LFC
Process related assets, is dependent upon the Company's ability to adequately
fund its capital contributions to the TEK-KOL Partnership and TEK-KOL's ability
to successfully attract sufficient additional equity, debt or other third party
financing to complete the commercialization of the LFC Process. The Company is
engaged in continuing negotiations to secure additional capital and financing,
and while management believes these negotiations will be successful, there is no
assurance thereof.
(3) Equity Transactions
On March 31, 1998, the Company granted certain debt holders, pursuant to the
Company's 1998 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 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.
As provided in related service or consulting agreements, the Company granted
nine warrants to purchase an aggregate 120,000 common shares, to one employee,
four directors and four consultants for services rendered during the three month
period ended March 31, 1998, pursuant to the exemptions provided by Section 4(2)
of the Securities Act and Regulation D. Investment representations were obtained
from the investors and legends were placed on the certificates. In connection
therewith, the Company recorded compensation expense to non-employees of
approximately $18,000. The exercise prices were not lower than the closing bid
price on the grant date and expire on December 31, 2003. The warrants are
exercisable one year from the grant date at $0.84 per share.
During the quarter ended March 31, 1998, the Company issued 14,886 restricted
common shares to four domestic individuals pursuant to the exemptions provided
by Section 4(2) of the Securities Act and Regulation D for services rendered,
valued at approximately $21,000. Investment representations were obtained
from the investors and legends were placed on the certificates.
7
<PAGE>
(4) Net Loss per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share." Basic EPS includes no dilution and is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. For purposes of computing the net loss available to
common stockholders, preferred stock dividends are deducted from the net loss.
Preferred stock dividends include "imputed dividends" for preferred stock issued
with a non-detachable beneficial conversion feature near the date of issuance.
Imputed dividends represent the aggregate difference between conversion price
and the fair market value of the common stock as of the date of issuance of the
preferred stock, without regard to the actual date on which the preferred stock
may be converted. Shares issuable upon conversion of preferred stock,
convertible debentures and upon exercise of outstanding stock options and
warrants are not included since the effects would be anti-dilutive. Diluted EPS
reflects the potential dilution from securities that could share in the earnings
of the Company, similar to fully diluted EPS under APB No. 15. The Statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures. All per share amounts for all periods presented must be
restated to conform to SFAS No. 128 requirements. No restatement of the
previously determined per share amounts is necessary as the effects of the
outstanding convertible securities, warrants and options would be anti-dilutive.
(5) Recent Accounting Pronouncements
Statement No. 130 of the Financial Accounting Standards Board (SFAS No. 130),
"Reporting Comprehensive Income" establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Comprehensive
Income includes items such as unrealized gains on available-for-sale securities
that are not included in net income. The Statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective in 1998 and had no material impact on the Company's results of
operations or related disclosures for the three months ended March 31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 requires the disclosure
of financial information on operating segments on the basis used by management
in evaluating performance and deciding how to allocate resources. SFAS No. 131
will first be reflected in the Company's 10-K for the year ended December 31,
1998.
(6) Composition of Certain Financial Statement Captions
Property and Equipment
<TABLE>
March 31, December 31,
1998 1997
---------------------------------------------------------------
<S> <C> <C>
Office furniture and fixtures $ 109,000 $ 109,000
Laboratory equipment 898,000 836,000
Machinery and equipment 120,000 118,000
Computer equipment 346,000 295,000
Leasehold improvements 21,000 21,000
----------------------------------------------------------------
1,494,000 1,379,000
Less accumulated depreciation (656,000) (590,000)
----------------------------------------------------------------
Net property and equipment $ 838,000 $ 789,000
----------------------------------------------------------------
</TABLE>
8
<PAGE>
(7) Reclassification
Certain prior period amounts have been reclassified to conform to the current
period presentation. These changes had no impact on previously reported results
of operations, cash flows or stockholder's equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introductory Note
This Quarterly Report on form 10-Q contains statements relative to (i)
projections, (ii) estimates, (iii) future research plans and expenditures, (iv)
potential collaborative arrangements, (v) opinions of management and (vi) the
need for and availability of additional financing which may be considered
"forward looking statements."
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports including this form 10-Q, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
Results of Operations
Three months ended March 31, 1998, compared to Three months ended March 31,
1997.
Net Loss per Common Share. Net loss per common share for the period ended March
31, 1998, decreased approximately $0.06 per share over the same prior year
period, after excluding a non-recurring imputed dividend. The imputed dividend
of approximately $0.12 per common share is primarily associated with the
issuance of the Series 98-A convertible preferred shares. Also see Note 4 "Net
Loss per Share" to the condensed consolidated financial statements. The overall
decrease is primarily attributable to an increase in the weighted average number
of common shares outstanding, as the overall net loss increased approximately
$216,000 over the same prior year period.
Sales and Cost of Sales. Sales and cost of sales are primarily attributable to
AMS and are recorded using the percentage of completion method. Sales for the
three months ended March 31, 1998, remained substantially unchanged over the
same prior year period. Cost of sales decreased approximately 6%, over the same
prior year period. The Company attributes the decrease to tighter controls on
project management and increased productivity.
Other Income. Other income for the three months ended March 31, 1998, remained
substantially unchanged over the same prior year period.
9
<PAGE>
Loss on Investment in TEK-KOL. The Company's share of the TEK-KOL loss for the
three months ended March 31, 1998, increased 86% over the same prior year
period. The increase is primarily attributable to TEK-KOL's continuing efforts
to increase the economic value of CDL and increased expenses related to project
development efforts in the Kuzbass region of Russia and the Powder River Basin
in Wyoming.
Engineering Research and Consulting Expenses. Engineering research and
development expenses for the three months ended March 31, 1998, decreased 18%
over the same prior year period. The decrease is primarily attributable to a
35% reduction in the number of employees working at the Company's OCET
laboratory.
Selling General and Administrative Expenses. Selling general and administrative
expense for the three months ended March 31, 1998, increased 28% over the same
prior year period. The increase is primarily related to the Company's expanded
usage of public relations and financial consultants which accounts for
approximately $76,000 of the increase. The remaining portion of the increase is
attributable to various miscellaneous administrative expenses, including
approximately $17,000 of financial penalties associated with delays in
registering the common shares underlying certain securities of the Company.
Selling, general and administrative expenses for AMS remained relatively
unchanged over the same prior year period.
Legal and Accounting Expenses. Legal and accounting expenses for the three
months ended March 31, 1998, increased 22% over the same prior year period. The
increase is related primarily to legal expenses incurred in preparing and filing
the Company's recent Form S-2 with the Securities and Exchange Commission.
Depreciation and Amortization Expenses. Depreciation and amortization expense
increased 9% over the same prior year period due primarily to purchases and
construction of additional equipment at the Company's OCET laboratory.
Interest Expense. Interest expense remained substantially unchanged over the
same prior year period.
Liquidity and Capital Resources
As of March 31, 1998, the Company had assets totaling $7.1 million, including
unrestricted cash of $1.9 million, and a working capital deficiency of $2.9
million. The Company anticipates continued operating losses over the next twelve
months and has both short-term and long-term liquidity deficiencies as of March
31, 1998. Current notes payable and associated accrued interest aggregating $4.5
million contribute to the Company's short-term deficiency at March 31, 1998.
Short-term liquidity requirements are expected to be satisfied from existing
cash balances, proceeds from the sale of future equity securities or other
collaborative arrangements. Negotiations are on-going for the public and private
placement of equity securities, the proceeds of which are intended to be used to
satisfy the short-term liquidity deficiency. In the event that the Company is
unable to finance operations at the current level, various administrative
activities would be curtailed and certain research and development efforts would
be reduced. The Company will not be able to sustain operations if it is
unsuccessful in securing sufficient financing and/or generating revenues from
operations.
The Company had long-term liquidity deficiencies at March 31, 1998. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and development activities and ultimately to commercialize,
with or without the assistance of corporate partners, any of its proposed
technologies. The Company believes the long-term liquidity deficiency will be
satisfied through future equity sales, increased positive cash flows from AMS's
operations, and research or other collaborative agreements, until such time, if
ever, as the commercialization of the LFC and OCET Processes result in positive
cash flows. The Company is seeking collaborative or other arrangements with
larger well capitalized companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non exclusive
licenses or other rights to certain technologies and products the Company is
developing. Although the Company is presently engaged in discussions with a
number of suitable candidate companies, there can be no assurance that an
agreement or agreements will arise
11
<PAGE>
from these discussions in a timely manner, or at all, or that revenues that may
be generated thereby will offset operating expenses sufficiently to reduce the
Company's short-term or long-term funding requirements.
Cash used in operating activities increased 27% over the same prior year period.
The use of funds from operating activities is primarily attributable to the
Company's financing and administrative expenses.
The Company's investing activities amounted to approximately $240,000 for the
three month period ended March 31, 1998. The funds were utilized primarily in
the acquisition and construction of equipment at the OCET laboratory,
acquisition of computer related equipment at AMS and the funding of the TEK-KOL
Partnership's operations. Additional capital contributions to the TEK-KOL
Partnership are expected to be required from time to time prior to profitable
operations. The Company is required to contribute one-half of any such required
capital contributions. Management presently estimates that the Company will be
required to contribute between $.75 million and $1.0 million in 1998. The
amount of funds used for investing activities in a given period are directly
related to development requirements and funds availability. The Company does not
have material commitments for capital expenditures as of March 31, 1998.
The Company's financing activities raised approximately $2.5 million for the
three month period ended March 31, 1998. These funds were raised primarily
through the private placement of equity securities. The amount of money raised
during a given period is dependent upon financial market conditions,
technological progress and the Company's projected funding requirements. The
Company anticipates that future financing activities will be influenced by the
aforementioned factors.
As noted previously, significant future financing activities will be required to
fund future operating and investing activities and to maintain debt service.
While the Company is engaged in continuing negotiations to secure additional
capital and financing, there is no assurance such funding will be available or
if received will be adequate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. The only lawsuit
currently pending against the Company is Walsh vs. AMS, filed on September 7,
1997, in the San Diego Superior Court. The Walsh case relates to events
occurring prior to the acquisition of AMS by the Company. The lawsuit asserts
claims, for among other things, breach of contract relating to a loan of
approximately $300,000. AMS has filed an answer denying liability and discovery
is proceeding. In the opinion of the Company, the pending litigation, if
adversely decided, should not have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
On March 31, 1998, the Company granted certain debt holders, pursuant to the
Company's 1998 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 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.
As provided in related service or consulting agreements, the Company granted
nine warrants to purchase an aggregate 120,000 common shares, to one employee,
four directors and four consultants for services rendered during the three month
period ended March 31, 1998, pursuant to the exemptions provided by Section 4(2)
of the Securities Act and Regulation D. Investment representations were obtained
from the
11
<PAGE>
investors and legends were placed on the certificates. In connection therewith,
the Company recorded compensation expense to non-employees of approximately
$18,000. The exercise prices were not lower than the closing bid price on the
grant date and expire on December 31, 2003. The warrants are exercisable one
year from the grant date at $0.84 per share.
During the quarter ended March 31, 1998, the Company issued 14,886 restricted
common shares to four domestic individuals pursuant to the exemptions provided
by Section 4(2) of the Securities Act and Regulation D for services rendered,
valued at approximately $21,000. Investment representations were obtained
from the investors and legends were placed on the certificates.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
[NONE]
ITEM 5. OTHER INFORMATION
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 ("97-D
Agreement") with the two purchasers thereof. In accordance with this amendment,
the Company agreed to issue an additional 100,000 shares of restricted common
stock of the Company to one purchaser and 10,000 shares of restricted common
stock to the other purchaser in exchange for a mutual release of possible claims
by the Company and the purchasers thereof. The 97-D Agreement contained a
"favored nations" clause which obligated the Company to pay the purchasers a
certain amount in the event the Company sold convertible securities for $550,000
or less with similar terms and conditions and where the conversion price
provided a greater discount than that given to the purchasers in the 97-D
Agreement. The 97-D Agreement also granted the purchasers registration rights
which provided monetary penalties in the event the registration statement
relating to the shares to be registered was not declared effective within the
required time. The Company entered into an agreement for the sale of convertible
securities in January 1998 which was alleged by the purchasers in the 97-D
Agreement to trigger the favored nations and registration rights penalty
provisions. The additional shares issued to the two purchasers settled the
possible claims resulting from the favored nations and the registration rights
provisions without relieving the Company of the obligation to continue paying a
penalty monthly. The 110,000 shares of common stock were valued by the Company
and will be recorded at $88,275 based on a 25% discount to the $1.07 bid price
of the common stock of the Company on the closing date.
On May 11, 1998, the Company gave notice to Bluegrass Coal Holding Company
("Bluegrass") a subsidiary of Zeigler Coal Holding Company, in accordance with
the TEK-KOL Partnership Agreement (the "Partnership Agreement"), that it was
unilaterally terminating the Partnership Agreement effective six months from the
date of the notice. Upon termination, the parties are required to take those
steps necessary to dissolve the partnership and wind up all partnership affairs.
All tangible assets are to be sold and all intangible assets comprising
intellectual property are transferred to both parties such that each party owns
an undivided 50% interest in all patents, trade secrets trademarks, and all
other intellectual property. However, upon termination, the Company has a
worldwide exclusive through April 12, 2000, to market and license the LFC
Technology. After April 12, 2000, both parties have the right to market and
license the present technology worldwide. Bluegrass may continue to use the LFC
Technology on any of its sole projects.
Royalties earned on licenses entered into through the term of the Company's
exclusive period ending on April 12, 2000, are paid 80% to the Company and 20%
to Bluegrass, up to a date 10 years from the date of dissolution. For licenses
entered into after the date of dissolution, royalties are divided equally
12
<PAGE>
between the partied for a subsequent period of 10 years. Both the Company and
Bluegrass are obligated to continue funding the TEK-KOL Partnership until
dissolution, which must be accomplished within 18 months from the notice of
termination.
While not anticipated, the termination of the Partnership Agreement could have
a material adverse impact on the business and operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
4.1 Amended Registration Rights Agreement re: Series 97-D Preferred
Stock, dated April 1, 1998, between the Registrant and the holders
thereof.(1)
27.1 Financial Data Schedule.(2)
----------------
(1) Incorporated by reference to the Company's S-2 Registration Statement
Amendment No. 1.
(2) Filed herewith.
2. Reports on Form 8-K: On January 23, 1998, the Company reported on its
Current Report on Form 8-K, filed with the Securities and Exchange
Commission, that it had entered into an agreement for the private
placement of certain equity securities pursuant to Regulation S of the
Securities Act.
13
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SGI INTERNATIONAL
/s/ Joseph A. Savoca May 13, 1997
- -----------------------
Joseph A. Savoca,
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Joseph A. Savoca May 13, 1997
- -----------------------
Joseph A. Savoca,
Chief Executive Officer
and Chairman of the Board
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-Q for the three month period ended March 31, 1998, and
is qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,931,634
<SECURITIES> 402,500
<RECEIVABLES> 1,055,981
<ALLOWANCES> 84,460
<INVENTORY> 64,542
<CURRENT-ASSETS> 3,460,727
<PP&E> 1,493,573
<DEPRECIATION> 655,816
<TOTAL-ASSETS> 7,118,348
<CURRENT-LIABILITIES> 6,314,258
<BONDS> 0
0
667
<COMMON> 41,899,279
<OTHER-SE> (41,207,731)
<TOTAL-LIABILITY-AND-EQUITY> 7,118,348
<SALES> 1,088,912
<TOTAL-REVENUES> 1,101,559
<CGS> 786,600
<TOTAL-COSTS> 786,600
<OTHER-EXPENSES> 1,538,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,012
<INCOME-PRETAX> (1,359,088)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,359,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,359,088)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
