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 June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 2-93124
SGI International
(Exact name of registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of August 12,
1998, was 15,310,217.
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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 10
Liquidity and Capital Resources 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
PART III. SIGNATURES 16
2
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(Unaudited)
================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 299,407 $ 429,232
Restricted time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 68,580 26,066
Trade accounts receivable, less allowance for
doubtful accounts of $84,460 and $84,460 314,825 346,763
Costs and estimated earnings in
excess of billings on contracts 367,810 146,364
Inventories 64,323 64,843
Prepaid expenses and other current assets 71,207 232,977
- ----------------------------------------------------------------------------------------------------------------
Total current assets 1,588,652 1,648,745
- ----------------------------------------------------------------------------------------------------------------
LFC Process related assets:
Notes receivable, net 150,000 150,000
Royalty rights, net 1,414,125 1,571,250
LFC cogeneration project, net 368,495 421,137
Investment in TEK-KOL Partnership 495,396 481,685
Australia LFC project, net 101,357 115,836
Other technological assets, net 28,911 29,598
- ----------------------------------------------------------------------------------------------------------------
2,558,284 2,769,506
Property and equipment, net of accumulated
depreciation of $724,949 and $589,789 918,472 788,740
Goodwill, net of accumulated amortization
of $120,755 and $96,790 359,489 383,454
- ----------------------------------------------------------------------------------------------------------------
$ 5,424,897 $ 5,590,445
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 607,878 $ 287,458
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and
estimated earnings on contracts 105,990 193,792
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 190,806 240,368
Payable to TEK-KOL Partnership - 100,000
Interest payable 483,788 483,930
Other accrued expenses 87,301 189,308
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 5,914,211 5,933,304
Long-term notes payable, less current maturities 109,500 114,250
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 6,023,711 6,047,554
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Commitments and Contingencies
Stockholders' equity (deficiency)
Convertible preferred stock 661 910
Common stock 43,047,488 39,927,760
Paid-in capital 9,538,771 8,511,878
Accumulated deficit (53,185,734) (48,897,657)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficiency) (598,814) (457,109)
- ----------------------------------------------------------------------------------------------------------------
$ 5,424,897 $ 5,590,445
================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Six months
ended June 30, ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
==============================================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,500,276 $ 1,479,892 $ 2,589,188 $ 2,584,152
Other 14,691 9,859 27,338 19,514
- ------------------------------------------------------------------------------------------------------------------------------
1,514,967 1,489,751 2,616,526 2,603,666
Expenses:
Cost of sales 1,191,510 1,169,528 1,978,110 2,005,123
Engineering, research and consulting 258,946 249,420 506,176 551,301
Loss from investment in TEK-KOL 196,075 207,675 427,289 331,748
Selling, general and administrative 796,728 623,092 1,478,194 1,154,546
Legal and accounting 167,792 152,279 353,558 305,073
Depreciation and amortization 195,516 174,928 387,875 351,681
Interest 324,870 134,033 460,882 268,943
- ------------------------------------------------------------------------------------------------------------------------------
3,131,437 2,710,955 5,592,084 4,968,415
- ------------------------------------------------------------------------------------------------------------------------------
Net loss $(1,616,470) $(1,221,204) $(2,975,558) $(2,364,749)
Imputed preferred stock dividends for Series 97G
8% and 98A 6% convertible preferred stock - - 1,312,519 -
- ------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(1,616,470) $(1,221,204) $(4,288,077) $(2,364,749)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.12) $ (0.18) $ (0.36) $ (0.36)
==============================================================================================================================
Weighted average common shares outstanding 13,292,754 6,891,713 12,037,388 6,535,576
==============================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Preferred Total
convertible stock Common stock stockholders'
------------------- ------------------------ Accumulated equity
Shares Amount Shares Amount Paid-in capital deficit (deficiency)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 90,997 $ 910 9,258,250 $39,927,760 $ 8,511,878 $(48,897,657) $ (457,109)
Issuance of common stock for cash 194,502 156,800 156,800
Exercise of warrants for cash 5,000 3,000 3,000
Issuance of common stock for
services and operating activities 126,571 128,180 128,180
Issuance of preferred stock for cash 2,750 28 2,313,172 2,313,200
Conversion of preferred stock (27,698) (277) 4,258,391 2,831,748 (2,831,471) -
Issuance of warrants to purchase
common stock to non-employees 44,640 44,640
Interest expense related to warrant
issue 188,033 188,033
Net loss (2,975,558) (2,975,558)
Preferred Series 97G and 98A
imputed dividends 1,312,519 (1,312,519) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 66,049 $ 661 13,842,714 $43,047,488 $ 9,538,771 $(53,185,734) (598,814)
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six months ended June 30, 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (2,975,558) $ (2,364,749)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss of TEK-KOL Partnership 427,289 331,748
Depreciation and amortization 387,875 365,068
Common stock issued for interest, services,
and other operating activities 128,180 172,820
Non-employee compensation expense on issuance of warrants 44,640 -
Imputed interest on warrants issued to note holders 188,033 -
Changes in operating assets and liabilities:
Receivable from TEK-KOL Partnership (42,514) 6,365
Trade accounts receivable (189,508) (347,820)
Other current assets 162,290 (236,252)
Accounts payable 320,420 583,836
Billings in excess of costs and estimated
earnings on contracts (87,802) (327,664)
Accrued salaries, benefits and related taxes (49,562) 13,569
Interest payable (142) 4,000
Other accrued expenses (102,007) 121,169
- -----------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,788,366) (1,677,910)
- -----------------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Investment in TEK-KOL Partnership (441,000) (449,999)
Payable to TEK-KOL Partnership (100,000) (83,252)
Purchase of property and equipment (264,892) (256,497)
Other assets (3,817) (2,453)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (809,709) (792,201)
- -----------------------------------------------------------------------------------------------------
Financing activities:
Borrowings on line-of-credit - 100,000
Payments of notes payable (4,750) (16,750)
Proceeds from issuance of common stock 159,800 1,122,423
Proceeds from issuance of preferred stock 2,313,200 900,000
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,468,250 2,105,673
- -----------------------------------------------------------------------------------------------------
Net decrease in cash (129,825) (364,438)
Cash at beginning of period 429,232 740,018
- -----------------------------------------------------------------------------------------------------
Cash at end of period $ 299,407 $ 375,580
=====================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 229,372 $ 217,367
Supplemental disclosure of non-cash activities:
Common stock issued for services and other operating activities $ 128,180 $ 172,820
=====================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
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SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three and six month
periods ended June 30, 1998, and 1997, are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements reflect
all adjustments, consisting of only normal recurring adjustments which, in the
opinion of management, are necessary for a fair statement of the consolidated
financial position as of June 30, 1998, and the consolidated results of
operations for the three and six month periods ended June 30, 1998, and 1997.
The results of operations for the three and six month periods ended June 30,
1998, are not necessarily indicative of the results to be expected for the year
ending December 31, 1998. For more complete financial information, these
financial statements, and the notes thereto, should be read in conjunction with
the consolidated audited financial statements for the year ended December 31,
1997, included in the Company's Form 10-K 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.
On May 11, 1998, the Company gave notice to Bluegrass Coal Holding Company
("Bluegrass") a subsidiary of Zeigler Coal Holding Company, in accordance with
the TEK-KOL Partnership Agreement (the "Partnership Agreement"), that it was
unilaterally terminating the Partnership Agreement effective six months from the
date of the notice. Upon termination, the parties are required to take those
steps necessary to dissolve the partnership and wind up all partnership affairs.
All tangible assets are to be sold or otherwise disposed of and all intangible
assets comprising intellectual property are transferred to both parties such
that each party owns an undivided 50% interest in all patents, trade secrets,
trademarks, and all other intellectual property. However, upon termination, the
Company has a worldwide exclusive through April 12, 2000, to market and license
the LFC Technology. After April 12, 2000, both parties have the right to market
and license the present technology worldwide. Bluegrass may continue to use the
LFC Technology on any of its sole projects.
Royalties earned on licenses entered into through the term of the Company's
exclusive period ending on April 12, 2000, are paid 80% to the Company and 20%
to Bluegrass, up to a date 10 years from the date of dissolution. For licenses
entered into after April 12, 2000, royalties are divided equally between the
parties for a period of 10 years after the date of dissolution. Both the Company
and Bluegrass are obligated to continue funding the TEK-KOL Partnership until
dissolution.
While not anticipated, the termination of the Partnership Agreement could have a
material adverse impact on the business and operations of the Company.
7
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(3) EQUITY TRANSACTIONS
The common stock of the Company is currently traded and prices quoted on the
NASD OTC Bulletin Board under the symbol SGII. In the course of accounting for
the issuance of its various equity securities the Company frequently refers to
the closing bid price of its common stock, as quoted on the OTC Bulletin Board.
The Company believes that the OTC Bulletin Board quoted bid price is the best
indication of the stock's fair market value. This belief is premised on the
stock's daily trading volumes which averaged approximately 76,000, 53,000, and
38,000 shares for the years 1995, 1996 and 1997, respectively.
(4) NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share" ("EPS"). Basic EPS includes no dilution and is computed by dividing net
loss available to common stockholders by the weighted-average number of common
shares outstanding for the period. For purposes of computing the net loss
available to common stockholders, preferred stock dividends are deducted from
the net loss. Preferred stock dividends include "imputed dividends" for
preferred stock issued with a non-detachable beneficial conversion feature near
the date of issuance. Imputed dividends represent the aggregate difference
between conversion price and the fair market value of the common stock as of the
date of issuance of the preferred stock, without regard to the actual date on
which the preferred stock may be converted. Shares issuable upon conversion of
preferred stock, convertible debentures and upon exercise of outstanding stock
options and warrants are not included since the effects would be anti-dilutive.
Diluted EPS reflects the potential dilution from securities that could share in
the earnings of the Company, similar to fully diluted EPS under APB No. 15. The
Statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures. All per share amounts for all periods presented must
be restated to conform to SFAS No. 128 requirements. No restatement of the
previously determined per share amounts is necessary as the effects of the
outstanding convertible securities, warrants and options would be anti-dilutive.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
Statement No. 130 of the Financial Accounting Standards Board, "Reporting
Comprehensive Income," (SFAS No. 130) establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
Comprehensive income includes items such as unrealized gains on
available-for-sale securities that are not included in net income. SFAS No. 130
requires that all items required to be recognized under accounting standards as
components of comprehensive income, be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective in 1998 and had no material impact on the Company's results of
operations or related disclosures for the six months ended June 30, 1998.
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS No. 131) is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public business enterprises report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to stockholders. SFAS No. 131 requires the
disclosure of financial information on operating segments on the basis used by
management in evaluating performance and deciding how to allocate resources.
SFAS No. 131 will first be reflected in the Company's 10-K for the year ending
December 31, 1998.
8
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(6) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Property and Equipment
<TABLE>
June 30, December 31,
1998 1997
===============================================================================
<S> <C> <C>
Office furniture and fixtures $ 114,000 $ 109,000
Laboratory equipment 996,000 836,000
Machinery and equipment 121,000 118,000
Computer equipment 360,000 295,000
Leasehold improvements 52,000 21,000
- -------------------------------------------------------------------------------
1,643,000 1,379,000
Less accumulated depreciation (725,000) (590,000)
- -------------------------------------------------------------------------------
Net property and equipment $ 918,000 $ 789,000
===============================================================================
</TABLE>
(7) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation. These changes had no impact on previously reported results
of operations, cash flows or stockholder's equity.
(8) Subsequent Events
On July 28, 1998, the Company, for net proceeds of $490,000, issued 550 shares
of Series 98A 6% Convertible Preferred Stock pursuant to the provisions of
Regulation D to two accredited investors. The 98A Preferred Shares accrue
dividends at a rate of 6% per annum and are cumulative. The dividend is only
payable in common stock of the Company. The Company also issued warrants to
purchase a total of 70,000 common shares at $1.18 per share to these investors.
The Series 98A Preferred Stock is convertible, at the earlier of the date the
underlying common shares are included in a registration statement which has been
declared effective by the SEC, or sixty days from the closing date, July 28,
1998. Each Series 98A Preferred Share is convertible into the number of shares
of common stock derived by dividing the conversion rate by the conversion price.
The conversion rate is the liquidation preference of $1,000 per share of the
Series 98A Preferred Stock. The conversion price is determined based on the date
the conversion notice is received and is equal to the lesser of (a) the average
closing bid price of the common stock over the five day trading period prior to
March 6, 1998, or (b) 75% of the average of the closing bid price of the common
stock on the five trading days ending on the date preceding the conversion
notice. No sale can occur absent an effective registration statement for the
underlying stock. The warrants were exercisable 10 days after issuance and
expire on March 6, 2003. The 98A Preferred Shares are redeemable at the option
of the Company, in whole or in part, in cash, at 130% of the Liquidation Value
plus accrued and unpaid dividends. The 98A Preferred Shares will automatically
convert into common stock two years from the closing date. The Company has
agreed to include the common shares underlying the warrants and preferred stock
in an amendment to its current registration statement effective July 22, 1998.
These securities were issued pursuant to the exemptions provided by Section 4(2)
of the Securities Act and Regulation D. Investment representations were obtained
from the investors and legends were placed on the certificates.
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."
9
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The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports including this form 10-Q, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
RESULTS OF OPERATIONS
Net Loss per Common Share. Net loss per common share for the three and six month
periods ended June 30, 1998, decreased approximately $0.06 per share and $0.11
per share, respectively, over the same prior year period after excluding
non-recurring imputed dividends. The imputed dividends are related to the
beneficial conversion feature associated with the issuance of the Series 97G and
98A convertible preferred shares. Also see Note 4 "Net Loss per Share" to the
condensed consolidated financial statements. The decrease in net loss per share
for both the three and six month periods is primarily attributable to an
increase in the weighted average number of common shares outstanding, as the
overall net loss increased approximately $395,000 and $611,000 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 and cost
of sales for the three and six months ended June 30, 1998, remained
substantially unchanged over the same prior year periods.
Other Income. Other income for the three and six months ended June 30, 1998,
increased 49% and 40% over the same prior year periods. The increases for both
periods are primarily due to additional interest income on the Company's
restricted time deposit.
Loss on Investment in TEK-KOL. The Company's share of the TEK-KOL loss for the
three months ended June 30, 1998, remained substantially unchanged over the same
prior year period. The Company's share of the TEK-KOL loss for the six month
period ended June 30, 1998, increased approximately 29% 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 are essentially related to the Company's activities
pertaining to the OCET and LFC technologies. Engineering research and
development expenses for the three months ended June 30, 1998, remained
substantially unchanged over the same prior year period. Engineering research
and development expenses for the six months ended June 30, 1998, decreased 8%
over the same prior year period. The total decrease is attributable to a 38%
reduction in the number of employees working at the Company's OCET laboratory
and partially offset by the Company's continuing efforts to develop the OCET
process and bring the process development unit on line.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1998, increased 28%
over the same prior year period. The increase is essentially related to the
Company agreeing to issue an additional 110,000 shares of restricted common
stock, valued at $105,000, to the 97D convertible preferred stock investors. The
shares were issued in settlement of a "favored nations" clause in the 97D Stock
Purchase Agreement. The remaining portion of the increase is attributable to
various miscellaneous administrative expenses, including approximately $25,000
of financial penalties associated with delays in registering the common shares
underlying certain securities of the Company. In addition, selling, general and
administrative expenses for AMS increased approximately $41,000 or 22% over the
prior year period due to an increase in marketing personnel and related
expenses.
10
<PAGE>
Selling, general and administrative expenses for the six months ended June 30,
1998, increased 28% over the same prior year period. The increase is related to
the Company agreeing to issue an additional 110,000 shares of restricted common
stock, valued at $105,000, to the 97D convertible preferred stock investors; an
approximate $82,000 increase in administrative salary expenses; and
approximately $41,000 of financial penalties associated with delays in
registering the common shares underlying certain securities of the Company. In
addition, selling, general and administrative expenses for AMS increased
approximately $42,000 or 11% over the prior year period due to an increase in
marketing personnel and related expenses.
Legal and Accounting Expenses. Legal and accounting expenses for the three and
six months ended June 30, 1998, increased 10% and 16%, respectively, over the
same prior year periods. The increase is related primarily to legal expenses
incurred in preparing and filing the Company's recent registration statement on
Form S-2 with the Securities and Exchange Commission.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
for the three and six months ended June 30, 1998, increased 12% and 10%,
respectively, over the same prior year periods. The increase for both periods
are due primarily to purchases and construction of additional equipment at the
OCET laboratory and AMS.
Interest Expense. Interest expense for the three and six month periods ended
June 30, 1998, increased 142% and 71% respectively, over the same prior year
periods. The increase of approximately $188,000 for both the three and six month
periods was due to the issuance of warrants to certain debt holders
participating in the Company's 1997 debt restructuring. The warrants are granted
and issued quarterly in arrears, with the last issuance due September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had assets totaling $5.4 million, including
unrestricted cash of $0.3 million, and a working capital deficiency of $4.3
million. The Company anticipates continued operating losses over the next twelve
months and has both short-term and long-term liquidity deficiencies as of June
30, 1998. Current notes payable and associated accrued interest aggregating $4.5
million due September 30, 1998, contribute to the Company's short-term
deficiency at June 30, 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 June 30, 1998. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and development activities and ultimately to commercialize,
with or without the assistance of corporate partners, any of its proposed
technologies. The Company believes the long-term liquidity deficiency will be
satisfied through future equity sales, increased positive cash flows from 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 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 7% over the same prior year period.
The use of funds from operating activities is essentially attributable to the
Company's net loss of approximately $3.0 million, incurred primarily in pursuing
its administrative and development activities.
The Company's investing activities amounted to approximately $810,000 for the
six month period ended June 30, 1998. The funds were utilized primarily in the
funding of the TEK-KOL Partnership's operations, acquisition and construction of
equipment at the OCET laboratory and the acquisition of computer related
equipment at AMS. Additional capital contributions to the TEK-KOL Partnership
are expected to be required from time to time prior to
11
<PAGE>
its final pending dissolution. The Company is required to contribute one-half of
any such required capital contributions. Management presently estimates that the
Company will be required to contribute between $.75 million and $1.0 million in
1998. This estimate is based in part on the Company's pending joint venture with
Mitsubishi Corporation, who in accordance with the August 6, 1998, letter of
intent will assist in the funding of the Company's LFC development and marketing
activities. In the event the joint venture is not consummated, the Company does
not anticipate any significant change in its estimate as certain activities and
expenses will be curtailed until funds are available. 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 June 30, 1998.
The Company's financing activities raised approximately $2.5 million for the six
month period ended June 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[Not Applicable]
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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 April 1, 1998, the Company agreed to amend the terms and conditions of the
Series 97D Preferred Stock Purchase Agreement dated August 12, 1997, ("97D
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 97D 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 97D
Agreement. The 97D 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 97D
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
at $105,000.
On June 30, 1998, the Company granted certain debt holders, pursuant to the
Company's 1997 debt restructuring, warrants to purchase an aggregate of 152,500
restricted common shares on or before December 31, 1999, at an exercise price of
$1.20 per share. In conjunction therewith, the Company recorded approximately
$93,000 of interest expense. 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 of June 30, 1998, all of the series 97G and 97F convertible Preferred Stock
had been fully converted, at the election of the holders thereof, into 654,773
and 2,722,370 common shares of the Company.
During the three month period ended June 30, 1998, the Company issued additional
incentive stock options, at fair market value pursuant to its 1996 Omnibus Stock
Plan. The incentive options are exercisable for a total of 429,000 shares of
common stock at $0.625 per share, the closing bid price on the grant date, to
employees of the Company. The options were granted in reliance upon exemptions
from registration pursuant to Section 4(2) of the Securities Act and Regulation
D promulgated thereunder.
As provided in related service or consulting agreements, the Company granted
eight warrants to purchase an aggregate 60,000 common shares, to one employee,
four directors and three consultants for services rendered during the three
month period ended June 30, 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 $26,340. 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 $0.625 per share.
Additionally, the Company issued eleven warrants to purchase an aggregate
201,000 common shares, to the employees of its TEK-KOL partnership, pursuant to
the exemptions provided by Section 4(2) of the Securities Act and Regulation D.
Investment representations were obtained from the individuals and legends were
placed on the
13
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certificates. The common shares underlying the warrants vest 25% on the first
day the warrant holder becomes an employee of SGI International or other entity
owned by the Company. The remaining shares shall vest 25% each three month
period thereafter, as long as warrant holder continues to be an employee.
During the quarter ended June 30, 1998, the Company issued 1,685 restricted
common shares to one domestic individual pursuant to the exemptions provided by
Section 4(2) of the Securities Act and Regulation D for services rendered,
valued at approximately $1,638. Investment representations were obtained from
the individual and legends were placed on the certificate.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual Meeting of Stockholders was scheduled on June 20, 1998. The Company
did not receive sufficient proxies to constitute a quorum and the meeting was
adjourned to August 28, 1998, at which time it will be held to elect the
Directors (Esztergar and Harris) and ratify the selection of J.H. Cohn LLP as
its Independent Public Accountants. The meeting will be held at the Company
headquarters in La Jolla at 9:00 a.m.. The directors have indicated that no
other business is expected to be transacted at that meeting.
ITEM 5. OTHER INFORMATION
On July 28, 1998, the Company, for net proceeds of $490,000, issued 550 shares
of Series 98A 6% Convertible Preferred Stock pursuant to the provisions of
Regulation D to two accredited investors. The 98A Preferred Shares accrue
dividends at a rate of 6% per annum and are cumulative. The dividend is only
payable in common stock of the Company. The Company also issued warrants to
purchase a total of 70,000 common shares at $1.18 per share to these investors.
The Series 98A Preferred Stock is convertible, at the earlier of the date the
underlying common shares are included in a registration statement which has been
declared effective by the SEC, or sixty days from the closing date, July 28,
1998. Each Series 98A Preferred Share is convertible into the number of shares
of common stock derived by dividing the conversion rate by the conversion price.
The conversion rate is the liquidation preference of $1,000 per share of the
Series 98A Preferred Stock. The conversion price is determined based on the date
the conversion notice is received and is equal to the lesser of (a) the average
closing bid price of the Common Stock over the five day trading period prior to
March 6, 1998, or (b) 75% of the average of the closing bid price of the common
stock on the five trading days ending on the date preceding the conversion
notice. No sale can occur absent an effective registration statement for the
underlying stock. The warrants were exercisable 10 days after issuance and
expire on March 6, 2003. The 98A Preferred Shares are redeemable at the option
of the Company, in whole or in part, in cash, at 130% of the Liquidation Value
plus accrued and unpaid dividends. The 98A Preferred Shares will automatically
convert into common stock two years from the closing date. The Company has
agreed to include the common shares underlying the warrants and preferred stock
in an amendment to its current registration statement effective July 22, 1998.
These securities were issued pursuant to the exemptions provided by Section 4(2)
of the Securities Act and Regulation D. Investment representations were obtained
from the investors and legends were placed on the certificates.
On August 6, 1998, the Company entered into a Letter of Intent with Mitsubishi
Corporation ("Mitsubishi") to form a joint venture. The Letter of Intent
provides for the formation of a new company (the "Joint Venture") to be owned
equally by Mitsubishi and SGI. The Joint Venture's primary objective is to
develop LFC projects in the Powder River Basin of Wyoming and further develop
and market the LFC Technology and its products. This is a non-binding Letter of
Intent and contemplates the parties will negotiate the additional terms of and
enter into definitive Joint Venture and other agreements.
In accordance with the Letter of Intent, SGI is to provide the Joint Venture
with personnel for engineering, LFC project development, and technology and
product marketing in the United States. In addition, SGI is to develop strategic
relationships and refine the CDL upgrading process. In consideration for these
services, Mitsubishi is to pay SGI a set annual fee per year for at least two
years or until the parties transition the Joint Venture into an operating
entity.
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Pursuant to the Letter of Intent, Mitsubishi is to provide to the Joint Venture,
engineering to optimize the LFC technology, to reduce the cost of LFC plant
equipment, to optimize the CDL upgrading process, and to market the technology
and products outside of the United States. Upon the occurrence of certain
events, the parties have agreed to convert the Joint Venture to an operating
entity, and SGI is to then transfer the LFC patents to this entity for an agreed
upon payment from Mitsubishi.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
3.1 Amended Certificate of Secretary re: Designation of Series 98A
Preferred Stock.(1)
4.1 Form of Stock Purchase Warrant re: Series 98A Preferred Stock dated
July 28, 1998. (1)
4.2 Form of Series 98A Convertible Preferred Stock Subscription Agreement
dated July 28, 1998, between the Registrant and the holders thereof.(1)
4.3 Form of Registration Rights Areement re: Series 98A Preferred Stock
dated July 28, 1998, between the Registrant and the holders thereof.(1)
27 Financial Data Schedule.(1)
----------------
(1) Filed herewith.
2. Reports on Form 8K: [NONE].
15
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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 August 14, 1998
- ----------------------------
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 August 14, 1998
- ----------------------------
Joseph A. Savoca,
Chief Executive Officer
and Chairman of the Board
16
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 July 17, 1998,
establishing the Series 98-A Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on July 17, 1998.
/s/ JOHN R. TAYLOR
-------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Two Thousand Seven Hundred Fifty (2,750) shares, out of Twenty
Million (20,000,000) shares of Preferred Stock which the Company has authority
to issue, be, and the same hereby is, authorized, and the Board hereby fixes the
powers, designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restriction thereof, of
the shares of such series (in addition to the powers, designations, preferences,
and relative, participating, optional or to other special rights and the
qualification, limitations or restrictions thereof, set forth in the Certificate
of Incorporation which may be applicable to the Preferred Stock) authorized by
this resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 98-A six percent (6%) Convertible Preferred Stock (the
"Series 98-A Preferred Stock"). The Series 98-A Preferred Stock shall have a
liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 98-A Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 98-A Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 98-A
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 98-A Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 98-A Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 98-A Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to six percent (6%) per annum of the amount of the
respective Liquidation Preference of the Series 98-A 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, at the
Company's option, be payable in cash or Common Stock of the Company.
(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 98-A Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series 98-A
Preferred Stock or Common Stock. Dividends on the Series 98-A Preferred Stock
shall be nonparticipating and the holders of the Series 98-A Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 98-A Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 98-A Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 98-A Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
98-A Preferred Stock, the remaining assets shall be paid to, the Common Stock.
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 98-A Preferred Stock.
Neither the consolidation or merger of the Company into or with any other
company or companies, nor the sale or transfer by the Company of all or any part
of its assets, nor the reduction of the capital stock of the Company, shall be
deemed to be a liquidation, dissolution, or winding up of the Company for
purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 98-A Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 98-A
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 98-A Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 98-A may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 98-A Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate, the Conversion Rate shall mean the
Liquidation Preference of $1,000 per share of Preferred Stock. 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
over the five (5) day trading period ending on the day immediately prior to the
Closing Date as such Closing Date is defined in the 6% Convertible Preferred
Stock Subscription Agreement (the "Subscription Agreement") for the Series 98-A
Preferred Stock, executed by the Purchaser of Series 98-A Preferred Stock, or
(b) seventy five percent (75%) of the average of the closing bid price on the
five (5) trading days ending on the day immediately prior to the Conversion
Date. The closing bid price shall be deemed to be the reported last bid price
regular way as reported by Bloomberg LP or if unavailable, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading, or if the Common Stock is not listed or admitted to trading on any
national securities exchange, the closing bid price as reported by NASDAQ or
such other system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded. In the event that the Common Stock issuable upon conversion of the
Series 98-A Preferred Stock is not delivered, as a direct result of the
negligence or action or inaction of the Company only, within five (5) business
days of receipt by the Company of a valid notice of conversion and the Preferred
Certificate for the Series 98-A Preferred Stock to be converted ("Receipt
Conversion Date"), the Company shall pay to the holder, in immediately available
funds, upon demand, as liquidated damages for such failure and not as a penalty,
for each $100,000 of the Series 98-A Preferred Stock sought to be converted,
$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 98-A 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 cash.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 98-A Preferred Stock shall first
be convertible at the earlier of: (i) the date the amendment (the "Amended
Registration Statement") to the Form S-2 registration statement filed January
23, 1998 for the shares of Common Stock underlying the Series 98-A Preferred
Stock is declared effective by the Securities and Exchange Commission ("SEC") or
(ii) sixty (60) days from the Closing Date as defined in the Subscription
Agreement ("Closing Date"). If the Amended Registration Statement is not filed
by the forty fifth (45) day from the Closing Date or declared effective by the
SEC by the ninetieth (90th) day following the Closing Date, then the Company
shall pay to the holder thereof liquidated damages in cash, at the rate of one
percent and one half (1.5%) of the Liquidation Value pro rata for the first
month, and two percent (2%) of the Liquidation Value for each month thereafter.
The liquidated damages will be payable until the Amended Registration Statement
has been filed and/or has been declared effective. Absent the filing of the
Amended Registration Statement or the Amended Registration Statement having been
declared effective such liquidated damages will be payable up to one year from
the Closing Date, at such time as the Holder shall be allowed to effect
conversions into freely tradable Common Stock pursuant to rule 144. The
liquidated damages will be payable in cash upon demand within five (5) business
days. Subject to the limitations described in this paragraph regarding the
period of time when the Series 98-A Preferred Stock shall first be convertible,
the Series 98-A Preferred Stock shall be convertible for two (2) years from the
Closing Date, and all of the Series 98-A Preferred Stock must be converted by
the second anniversary of the Closing Date. The holder of the Series 98-A
Preferred Stock shall further be prohibited from converting any portion of the
Series 98-A Preferred Stock which would result in the holder being deemed the
beneficial owner in accordance with the provisions of Rule 13d-3 of the
Securities Act of 1934, as amended, of 4.99% or more of the issued and
outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 98-A
Preferred Stock shall exercise its right to convert the Series 98-A Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 98-A Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 98-A Preferred Stock (together with the certificates representing the
Series 98-A Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within five business days after the
Conversion Date if the Company has received the original duly executed notice of
conversion and Series 98-A Preferred Stock certificate being so converted by
such date. The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within five (5) business days of
actual receipt of a duly completed election to convert and the Preferred
Certificate to be converted, then the holder of the Series 98-A Preferred Stock
will be entitled to revoke the relevant notice of conversion by delivering a
notice to such effect to the Company whereupon the Company and the holder shall
each be restored to their respective positions immediately prior to the delivery
of such notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock
issuable upon the conversion of the Preferred Stock and the Conversion Price
shall be subject to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock
in Common Stock or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock, (ii) declare a dividend
payable in cash on its Common Stock and at substantially the same time offer
its shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other security entitling a holder thereof to receive
Common Stock) from proceeds of such dividend (all Common Stock so issued shall
be deemed to have been issued as a stock dividend), (iii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iv) combine its outstanding shares of Common Stock into a smaller number
of shares of Common Stock, or (v) issue by reclassification of its Common Stock
any shares of Common Stock of the Company, the number of shares of Common Stock
issuable upon conversion of the Series 98-A Preferred Stock immediately prior
thereto shall be adjusted so that the holders of the Series 98-A Preferred Stock
shall be entitled to receive after the happening of any of the events described
above that number and kind of shares as the holders would have received had such
Series 98-A Preferred Stock been converted immediately prior to the happening of
such event or any record date with respect thereto. Any adjustment made pursuant
to this subdivision shall become effective immediately after the close of
business on the record date in the case of a stock dividend and shall become
effective immediately after the close of business on the record date in the case
of a stock split, subdivision, combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock
issuable hereunder otherwise required to be made by this Section (e)(4) will not
have to be made if such adjustment would not require an increase or decrease in
one percent (1%) or more in the number of shares of Common Stock issuable upon
conversion of the Series 98-A 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 98-A Preferred Stock is adjusted, as herein
provided, the Conversion Price shall be adjusted (to the nearest cent) by
multiplying such Conversion Price immediately prior to such adjustment by a
fraction of which the numerator shall be the number of shares of Common Stock
issuable upon the exercise of each share of Series 98-A Preferred Stock
immediately prior to such adjustment, and of which the denominator shall be the
number of shares of Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 98-A Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
98-A Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 98-A Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 98-A Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 98-A Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 98-A Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 98-A 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 98-A Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 98-A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 98-A Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 98-A Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 98-A Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 98-A Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 98-A Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 98-A 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, shall have the status of authorized but unissued shares of Preferred
Stock and may be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 98-A Preferred Stock.
(f) Redemption
1. Optional Redemption by the Company. Holders of Series 98-A
Convertible Preferred Shares do not have the right to cause redemption of their
Series 98-A Convertible Preferred Shares. For any Series 98-A Preferred Stock
for which a notice of conversion has not been sent, the Series 98-A Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 98-A Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a), (c), and (d) above ("Redemption
Price") which Liquidation Value shall include cumulative dividends as provided
in paragraph (c) herein accrued and unpaid through the Redemption Date. On the
date the Company sends a notice of redemption to the holders of the Series 98-A
Convertible Preferred Stock ("Holders") and wire transfers the appropriate
amount of funds into the escrow account described in the 6% Convertible
Preferred Stock Subscription Agreement, whichever event date is the latter
("Notice of Redemption Date"), the Holder's right to convert the Series 98-A
Convertible Preferred Stock shall terminate and be canceled immediately,
provided, however, the Company shall only have the right to redeem the Series
98-A Preferred Stock when, on the Redemption Date, the closing bid price, as
defined in paragraph (e)(1) herein, of the shares of Common Stock into which the
Series 98-A Preferred Stock is convertible, is less than the closing bid price
on the date the Holder or the original subscriber executed the 6% Convertible
Preferred Stock Subscription Agreement. If fewer than all of the outstanding
shares of Series 98-A Convertible Preferred Stock are to be redeemed, the
Company will select those to be redeemed pro-rata, by lot or by other method
deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
98-A Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 98-A Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 98-A Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 98-A Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the holder of the Series 98-A Preferred Stock within three (3) business days
of such notice. Additionally, if after the passage of three (3) business days
from the receipt by the holder of the notice of the Company's right to redeem
the Series 98-A Preferred Stock and the time funds are received by the escrow
agent, the Company has not deposited into escrow the appropriate amount of funds
to redeem the Series 98-A Preferred Stock, the Company shall pay to the holder
an amount equal to five (5%) percent per month of the Liquidation Preference on
a pro rata basis in cash. After the escrow agent is in receipt of such funds, he
shall notify the holder to surrender the appropriate amount of Series 98-A
Preferred Stock. If after three (3) business days from the date the notice of
redemption is received by the holder the funds have not been received by the
escrow agent, then the holder shall again have the right to convert the Series
98-A Preferred Stock and the Company shall have the right to redeem the Series
98-A Preferred Stock but only upon simultaneously sending a notice of redemption
to the holder and wire transferring the appropriate amount of funds.
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 98-A Preferred Stock into Common Stock as more fully
provided in Section (e) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(f)(1) herein, each share of Series 98-A Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 98-A Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 98-A Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (e) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 98-A Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (f) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 98-A 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 Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 98-A Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 98-A Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
17th day of July, 1998.
SGI INTERNATIONAL
/s/ RICHARD J. GIBBENS
By:__________________________
Title: VP - Operations
Attest:
/s/ JOHN R. TAYLOR
_____________________________
John R. Taylor, Secretary
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH,
EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY.
STOCK PURCHASE WARRANT 98FA-
To Purchase _________ Shares of Common Stock of
SGI INTERNATIONAL
THIS CERTIFIES that, for value received, ____________ (the "Investor"), is
entitled, upon the terms and subject to the conditions hereinafter set forth, at
any time on or after ten days after the date hereof and on or prior to March 6,
2003 (the "Termination Date") but not thereafter, to subscribe for and purchase
from SGI INTERNATIONAL, a Utah corporation (the "Company"), (____) shares of
Common Stock (the "Warrant Shares"). The purchase price of one share of Common
Stock (the "Exercise Price") under this Warrant shall be One Hundred Ten (110%)
percent of the average closing bid price on the OTC BULLETIN BOARD, over the
five (5) day trading period prior to March 6, 1998 (the "Closing Date"). The
Exercise Price and the number of shares for which the Warrant is exercisable
shall be subject to adjustment as provided herein. This Warrant is being issued
in connection with the 6% Convertible Preferred Stock Series 98-A Subscription
Agreement dated on or about July 28, 1998, in the amount of Five Hundred
Thousand ($500,000) Dollars (the "Agreement") between the Company, the Investor,
and another entity, and is subject to its terms. In the event of any conflict
between the terms of this Warrant and the Agreement, the Agreement shall
control.
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. Exercise of Warrant. Exercise of the purchase rights
represented by this Warrant may be made at any time or times one day after the
date hereof, in whole or in part, before the close of business on the
Termination Date, or such earlier date on which this Warrant may terminate as
provided in paragraph 12 below, by the surrender of this Warrant and the Notice
of Exercise annexed hereto duly executed, at the office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the registered holder hereof at the address of such holder appearing on the
books of the Company) and upon payment of the Exercise Price of the shares
thereby purchased; whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares purchased hereunder shall be delivered to the holder
hereof within five business days after the date on which this Warrant shall have
been exercised as aforesaid. Payment of the Exercise Price of the shares may be
by certified check or cashier's check or by wire transfer to an account
designated by the Company in an amount equal to the Exercise Price multiplied by
the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant and any Warrant Shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of except as follows:
(i) to a person who, in the opinion of counsel to the Company, is a person to
whom this Warrant or the Warrant Shares may legally be transferred without
registration and without the delivery of a current prospectus under the Act with
respect thereto, and then only against receipt of an agreement of such person to
comply with the provisions of this Section 6(a) with respect to any resale or
other disposition of such securities; or (ii) to any person upon delivery of a
prospectus then meeting the requirements of the Act relating to such securities
and the offering thereof for such sale or disposition, and thereafter to all
successive assignees.
(b) Unless the Warrant Shares have been registered under the
Act, or exempt from registration, upon exercise of any of the Warrant and the
issuance of any of the Warrant Shares, all certificates representing Warrant
Shares shall bear on the face thereof substantially the following legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The holder of the Warrant agrees and acknowledges that the
Warrant is being purchased for the holder's own account, for investment purposes
only, and not for the account of any other person, and not with a view to
distribution, assignment, pledge or resale to others or to fractionalization in
whole or in part. The holder further represents, warrants and agrees as follows:
no other person has or will have a direct or indirect beneficial interest in
this Warrant and the holder will not sell, hypothecate or otherwise transfer the
Warrant except in accordance with the Act thereunder and applicable state
securities laws or unless, in the opinion of counsel for the holder acceptable
to the Company, an exemption from the registration requirements of the Act and
such laws is available.
7. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares so purchased shall be and be
deemed to be issued to such holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been exercised.
9. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
12. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, the Company shall give the holder of this Warrant
thirty (30) days' notice of the proposed effective date of the transaction
specifying that the Warrant shall terminate if the Warrant has not been
exercised by the effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or
Merger Transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) "Piggy-Back" Registration. The Holder of this Warrant
shall have the right to include all of the shares of Common Stock underlying
this Warrant (the "Registrable Securities") as part of any registration of
securities filed by the Company (other than in connection with a transaction
contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8)
and must be notified in writing of such filing; provided, however, that the
holder of this Warrant agrees it shall not have any piggy-back registration
rights pursuant to this Section 12(c) if the shares of Common Stock underlying
this Warrant may be sold in the United States pursuant to the provisions of Rule
144. Holder shall have five (5) business days to notify the Company in writing
as to whether the Company is to include Holder or not include Holder as part of
the registration; provided, however, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering. The Company shall have the right to
terminate or withdraw any registration initiated by it under this Section 12(c)
prior to the effectiveness of such registration whether or not any Warrant
holder elected to include securities in such registration. All registration
expenses incurred by the Company in complying with this Section 12(c) shall be
paid by the Company, exclusive of underwriting discounts, commissions and legal
fees and expenses for counsel to the holders of the Warrants.
13. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
14. Voluntary Adjustment by the Company. The Company may at
its discretion, at any time during the term of this Warrant, reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
16. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: July _________, 1998 SGI INTERNATIONAL
By:_________________________
Title:______________________
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase shares of Common
Stock of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
Dated:
------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________,
Holder's Signature: _____________________________
Holder's Address:________________________________
________________________________
Signature Guaranteed: _________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
6% CONVERTIBLE PREFERRED STOCK SERIES 98-A
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 6% Convertible Preferred Stock
Series 98-A (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock and the other terms of the
Preferred Stock are set forth in the Certificate of Secretary of the 6%
Convertible Preferred Stock Series 98-A (Exhibit A annexed hereto). In addition,
the Company will sell to Subscribers a warrant (the "Warrant") to purchase an
aggregate of Fifty Thousand (50,000) shares of Common Stock of the Company for a
period of five (5) years from the Closing Date (as defined herein), as per the
terms of a separate Stock Purchase Warrant (Exhibit B annexed hereto). This
Subscription and, if accepted by the Company, the offer and sale of the
Preferred Stock, Warrants and the Common Stock underlying the Warrant and
Preferred Stock (collectively the "Securities"), are being made in reliance upon
the provisions of Regulation D under the Act.
The Closing Date shall be determined in accordance with
Sections 1.1 and 15 herein.
The entities listed on Schedule A annexed hereto (hereinafter
referred to as the "Subscribers" or "Purchasers"), hereby represent and warrant
to, and agree with the Company as follows:
Section 1. Agreement to Subscribe; Purchase Price.
1.1 Closing. The Company will sell, and the Subscribers will
buy, on the Closing Date, an aggregate of Five Hundred (500) shares of Preferred
Stock for an aggregate purchase price of Five Hundred Thousand($500,000) U.S.
Dollars (the "Purchase Price") based on U.S.$1,000 per share, and a Warrant to
purchase an aggregate of Fifty Thousand (50,000) shares of Common Stock of the
Company. Dividends will accrue and be paid at the rate of six (6%) percent on
the outstanding principal amount of the Preferred Stock until the Preferred
Stock has been completely converted, provided, however, all interest thereon
shall only be payable in common stock of the Company and not in cash at the time
of conversion. Dividends shall be calculated at the Conversion Price on the
Conversion Date when converted.
1.2 Form of Payment. Subscribers shall pay the Purchase Price
by delivering good funds in United States Dollars by wire transfer to Goldstein,
Goldstein & Reis, LLP, Escrow Agent, against delivery of the original
Securities. The parties have entered into an Escrow Agreement annexed hereto as
Exhibit C.
1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein &
Reis, LLP are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
Section 2. Representations and Warranties of the Subscribers.
Subscribers acknowledge, represent, warrant and agree as follows:
2.1 Organization and Authorization. Each of the Subscribers is
duly incorporated or organized and validly existing in the state or country of
its incorporation or organization and has all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by the Subscribers, the performance by the
Subscribers of its obligations hereunder and the consummation by the Subscribers
of the transactions contemplated hereby have been duly authorized and requires
no other proceedings on the part of the Subscribers. Each of the undersigned's
signatory has all right, power and authority to execute and deliver this
Agreement on behalf of each of the Subscribers. This Agreement has been duly
executed and delivered by the Subscribers and, assuming the execution and
delivery hereof and acceptance thereof by the Company, will constitute the
legal, valid and binding obligations of the Subscribers, enforceable against the
Subscribers in accordance with its terms and the Subscribers can afford the
complete loss of Subscriber's investment.
2.2 Evaluation of Risks. Subscribers have such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of, and bearing the economic risks entailed by, an investment
in the Company and of protecting its interests in connection with this
transaction. It recognizes that its investment in the Company involves a high
degree of risk and the Subscribers can afford the complete loss of Subscriber's
investment.
2.3 Independent Counsel. Subscribers acknowledge that they
have been advised to consult with its own attorney regarding legal matters
concerning the Company and to consult with its tax advisor regarding the tax
consequences of acquiring the Securities.
2.4 Disclosure Documentation. Subscribers have received and
reviewed copies of the Company's reports filed under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs,
8-K's, and registration statements, filed by the Company since December 31,
1996, (collectively, the "Reports"). Except for the Reports, Subscribers are not
relying on any other information relating to the offer and sale of the
Securities. Subscribers acknowledge that the Company has offered to make
available any additional public information that the Subscribers may reasonably
request, including technical information, and other material information about
the Company and Subscribers have been offered Company's full and unconditional
cooperation in making such information available to Subscribers and acknowledge
that the Company has recommended that the Subscribers request and review such
information prior to making an investment decision. No oral or written
representations have been made, or oral or written information furnished to the
undersigned or its advisors, if any, in connection with the offering of the
Securities which were or are in any way inconsistent with the Reports.
2.5 Opportunity to Ask Questions. Subscribers have had a
reasonable opportunity to ask questions of and receive answers from the Company
concerning the Company and the offering, and all such questions, if any, have
been answered to the full satisfaction of Subscribers.
2.6 Reports Constitute Sole Representations. Except as set
forth in the Reports, no representations or warranties have been made to
Subscribers by (a) the Company or any agent, employee or affiliate of the
Company or (b) any other person, and in entering into this transaction
Subscribers are not relying upon any information, other than that contained in
the Reports and the results of independent investigation by Subscribers.
2.7 Subscribers Are Accredited Investors. Each of the undersigned is
an "Accredited Investor" as defined below who represents and warrants it is
included within one or more of the following categories of "Accredited
Investors."
(i) Any bank as defined in Section 3(a)(2) of the
Act, or any savings and loan associated or other institution as defined
in Section 3(a)(5)A of the Act whether acting in it individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; and employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
2.8 No Registration, Review or Approval. Subscribers
acknowledge and understand that the limited private offering and sale of
Securities pursuant to this Agreement has not been reviewed or approved by the
SEC or by any state securities commission, authority or agency, and is not
registered under the Act or under the securities or "blue sky" laws, rules or
regulations of any state. Subscribers acknowledge, understand and agree that the
Securities are being offered and sold hereunder pursuant to (i) a private
placement exemption to the registration provisions of the Act pursuant to
Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such
Act, and (ii) a similar exemption to the registration provisions of applicable
state securities laws. Subscribers understand that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Subscribers set forth herein in order to
determine the applicability of such exemptions and the suitability of
Subscribers to acquire the Securities. Subscribers will advise Company of the
state of its residence prior to executing this or any other agreement to enable
the Company to comply with applicable "blue sky" laws.
2.9 Investment Intent. Without limiting its ability to resell
the Securities pursuant to an effective registration statement, Subscribers are
acquiring the Securities solely for its own account and not with a view to the
distribution, assignment or resale to others. Subscribers understand and agree
that they may bear the economic risk of its investment in the Securities for an
indefinite period of time. Subscribers do not now have any short position or
hedge position in the Company's Common Stock nor will the Subscribers make any
promissory notes and/or pledges to that effect on the Company's Common Stock.
2.10 No Advertisements. The Subscribers are not subscribing
for Securities as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or presented at any seminar or
meeting.
2.11 Registration Rights. The parties have entered into a Registration
Rights Agreement (Exhibit E).
Section 3. Representations and Warranties of the Company. For
so long as any Securities held by Subscribers remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Accuracy of Reports and Information. To the best of its
knowledge, the Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934
Act, and shall use its best efforts to maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the 1934
Act and the Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed
pursuant to all reporting obligations, under either Section 13(a) or 15(d) of
the 1934 Act for a period of at least twelve (12) months immediately preceding
the offer and sale of the Securities (or for such shorter period that the
Company has been required to file such material).
3.3 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and sale, or such shorter
period that the Company has been required to file such Reports as defined
herein, to the best of the Company's knowledge (i) none of the Company's filings
with the Securities and Exchange Commission contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Company has timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been publicly
disclosed by the Company or disclosed in writing to the Subscribers which (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or on earnings, business affairs, properties or assets
of the Company, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company to perform its obligations pursuant to this
Agreement.
3.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Securities and
the performance of the Company's obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies, and to limitations
of public policy as they may apply to the indemnification provisions set forth
in this Agreement. Upon their issuance and delivery pursuant to this Agreement,
the Securities will be validly issued, fully paid and nonassessable and will be
free of any liens or encumbrances; provided, however, that the Securities are
subject to restrictions on transfer under state and/or federal securities laws.
The issuance and sale of the Securities will not give rise to any preemptive
right or right of first refusal or right of participation on behalf of any
person.
3.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
3.6 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Reports, this
Agreement or those incurred in the ordinary course of the Company's business
since March 31, 1998, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business, condition
(financial or otherwise), results of operations or prospects of the Company. No
event or circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
3.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion or exercise provision of the Securities, will conflict with or
result in the breach or violation of any of the terms or provisions of, or
constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under, any material indenture,
mortgage, deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or any
statute or the Articles of the Company, or any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or the Company's listing agreement for its Common
Stock.
3.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
3.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except as may be required by applicable securities laws.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the business or
financial condition of the Company.
3.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect, and the Company is not in material
breach or material default under any of such agreements.
3.12 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
3.15 Required Governmental Permits. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
3.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Stock and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
3.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, the Company has no outstanding restricted
shares, or shares of Common Stock sold under Regulation S, Regulation D or
outstanding under any other exemption from registration, which are available for
sale as unrestricted ("free trading") stock.
3.18 Registration Alternative. The Company covenants and
agrees that for so long as any of the shares remain outstanding and continue to
be "restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Subscribers shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable.
3.20 Dilution. The Company is aware and acknowledges that
conversion of the Preferred Stock, and/or exercise of the Warrant, would cause
dilution to existing Shareholders and could significantly increase the
outstanding number of shares of Common Stock.
Section 4. Further Representations and Warranties of the
Company. For so long as any Securities held by the Subscribers remain
outstanding, the Company acknowledges, represents, warrants and agrees as
follows:
(i) It will reserve from its authorized but unissued
shares of Common Stock a sufficient number of shares of Common Stock to
permit the conversion in full of the outstanding Securities.
(ii) It will use its best efforts to maintain the
listing of its Common Stock on the OTC Bulletin Board.
(iii) It will permit the Subscribers to exercise its
right to convert the Preferred Stock and/or exercise the Warrants by
telecopying an executed and completed Notice of Conversion and/or
Notice of Exercise to the Company and delivering the original Notice of
Conversion and/or original Notice of Exercise and the certificate
representing the Preferred Stock and/or the original Warrant to the
Company by express courier. Each business date on which a Notice of
Conversion and/or Notice of Exercise is telecopied to and received by
the Company in accordance with the provisions hereof shall be deemed a
conversion date and/or exercise date. The Company will use its best
efforts to transmit the certificates representing shares of Common
Stock issuable upon conversion of any Preferred Stock and/or exercise
of any Warrants (together with the certificates representing the
Preferred Stock not so converted) and/or Warrants not so exercised to
the Subscribers via express courier, by electronic transfer or
otherwise within three business days after the conversion and/or
exercise date if the Company has received the original Notice of
Conversion and Preferred Stock certificate being so converted and/or
original Notice of Exercise and Warrants by such date. In addition to
any other remedies which may be available to the Subscribers, in the
event that the Company fails to use its best efforts to effect delivery
of such shares of Common Stock within such three business day period,
the Subscribers will be entitled to revoke the relevant Notice of
Conversion and/or Notice of Exercise by delivering a notice to such
effect to the Company whereupon the Company and the Subscribers shall
each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion and/or Notice of Exercise. The
Notice of Conversion and Preferred Stock and/or the Notice of Exercise
and Warrant representing the portion of the Preferred Stock converted
and/or Warrant exercised shall be delivered as follows:
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of
the Preferred Stock and/or exercise of the Warrants is not delivered, as a
direct result of the negligence or action or inaction of the Company only,
within five (5) business days of receipt by the Company of a valid Notice of
Conversion and the Preferred Stock to be converted and/or Notice of Exercise and
Warrants to be exercised (such date of receipt referred to as the "Conversion
Date" and/or "Exercise 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 Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the Conversion Shares are not delivered, and for each thousand
(1,000) shares of Common Stock sought to be exercised under the Warrant, $7.50
for each of the first ten (10) days and $15 per day thereafter that the shares
of Common Stock underlying the Warrant are not delivered, which liquidated
damages shall run from the sixth business day after the Conversion Date and/or
Exercise 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 and/or Exercise Price.
Section 5. Opinion of Counsel. The Company shall have their
counsel provide, at the Company's expense, an opinion of counsel acceptable to
the transfer agent (if required) in order to perfect conversion of the Preferred
Stock and/or exercise of Warrants, upon receipt of Notice of Conversion and/or
Notice of Exercise.
Subscribers shall, upon the Closing, receive an opinion letter
from counsel to the Company subject to reasonable and customary limitations and
qualifications to the effect that:
(i) The Company is duly incorporated and validly
existing under the laws and jurisdiction of its incorporation. The
Company and/or its subsidiaries are duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions where
the Company and/or its subsidiaries owns or leases properties,
maintains employees or conducts business, except for jurisdictions in
which the failure to so qualify would not have a material adverse
effect on the Company, and has all requisite corporate power and
authority to own its properties and conduct its business.
(ii) Except as set forth in the Reports to the best
of Counsel's knowledge without an independent investigation, there is
no action, proceeding or investigation pending, or to such counsel's
knowledge, threatened against the Company which might result, either
individually or in the aggregate, in any material adverse change in the
business or financial condition of the Company.
(iii) Except as set forth in the Reports to the best
of counsel's knowledge without an independent investigation, the
Company is not a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency
or in strumentality.
(iv) Except as set forth in the Reports to the best
of counsel's knowledge without an independent investigation, there is
no action, suit, proceeding or investigation by the Company currently
pending, except for a lawsuit against Company's subsidiary, Automative
& Assembly Manufacturing, Inc.
(v) The Preferred Stock, which shall be issued at the
Closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) This Subscription Agreement, the issuance of the
Securities and the issuance of Common Stock, upon conversion of the
Securities, have been duly approved by all required corporate action
and that all such securities, upon delivery, shall be validly issued
and outstanding, fully paid and nonassessable.
(vii) The issuance of the Securities will not violate
the applicable listing agreement between the Company and any securities
exchange or market on which the Company's securities are listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Subscribers set forth in this
Subscription Agreement, the offer, issuance and sale of the Preferred
Stock and Conversion Shares to be issued upon exercise to the Purchaser
pursuant to this Agreement are exempt from the registration
requirements of the Act.
(ix) As more specifically described in the Reports,
the authorized capital stock of the Company consists of 75,000,000
shares of Common Stock, no par value per share ("Common Stock") and
20,000,000 shares of Preferred Stock, par value $.01 per shares.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the 1934 Act and to the best of
Counsel's knowledge without an independent investigation the Company
has timely filed all the material required to be filed pursuant to
Sections 13(a) or 15(d) of such Act for a period of at least twelve
months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in this Agreement; the Agreement has been duly
and validly authorized by all necessary corporate action by the
Company, to the best of our knowledge, no approval of any governmental
or other body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; the Agreement has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge without an
independent investigation, after due inquiry, the execution, delivery
and performance of the Agreements by the Company and the performance of
its obligations thereunder do not and will not constitute a breach or
violation of any of the terms and provisions of, or constitute a
default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the
Company is a party or by which it or any of its property is bound,
(iii) any applicable statute or regulation, (iv) or any judgment,
decree or other of any court or governmental body having jurisdiction
over the Company or any of its property.
Section 6. Opinion of Counsel Upon Conversion. The Company
will obtain for the Subscribers, at the Company's expense, any and all opinions
of counsel which may be reasonably required in order to convert the Preferred
Stock, including, but not limited to, obtaining for the Subscribers an opinion
of counsel, subject only to receipt of a Notice of Conversion in the form of
Exhibit D and receipt by Counsel of such representations, warranties, and
documents as are determined to be necessary to comply with applicable securities
laws, duly executed by the Subscribers which shall be satisfactory to the
Transfer Agent, directing the Transfer Agent to remove the legend from the
certificate.
Section 7. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the 1934 Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request
a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Act and the 1934
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as Purchaser may reasonably request in availing itself of any
rule or regulation of the SEC allowing Purchaser to sell any such
Securities without registration.
Section 8. Representations and Warranties of the Company and
Subscribers. Each of the Subscribers and the Company represent to the other the
following with respect to itself:
8.1 Subscription Agreement. The Subscription Agreement has
been duly authorized, validly executed and delivered on behalf of the Company
and Subscribers and is a valid and binding agreement in accordance with its
terms, subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally.
8.2 No-Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation, and any amendments thereto,
Bylaws and any amendments thereto of the Company or any material mortgage,
indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree statute, law, ordinance, rule or
regulation applicable to the Company, its properties or assets.
8.3 Approvals. Neither the Company nor Subscribers are aware
of any authorization, approval or consent of any governmental body which is
legally required for the issuance and sale of the Securities.
8.4 Indemnification. Each of the Company and the Subscribers
agrees to indemnify the other and to hold the other harmless from and against
any and all losses, damages, liabilities, costs and expenses (including
reasonable attorneys' fees) which the other may sustain or incur in connection
with the breach by the indemnifying party of any representation, warranty or
covenant made by it in this Agreement.
8.5 Transfer Restrictions/Conversion Holding Period. Refer to
Certificate of Secretary (Exhibit A). It is agreed that the Closing Date as
referred to in Section (e)(1) of the Certificate of Secretary shall be the
Closing Date as defined in the Subscription Agreement, which is March 6, 1998.
Section 9. Restrictions on Conversion of Preferred Stock. The
Subscribers or any subsequent holder of the Preferred Stock (the "Holder") shall
be prohibited from converting any portion of the Preferred Stock which would
result in any Subscriber being deemed the beneficial owner, in accordance with
the provisions of Rule 13d-3 of the 1934 Act, as amended, of 4.99% or more of
the then issued and outstanding Common Stock of the Company.
Section 10. Permissive Redemption. The Company has the right
to redeem the Preferred Stock, in whole or in part, in cash at one hundred
thirty (130%) percent of the Liquidation Value, as defined in the Certificate of
Secretary of the 6% Convertible Preferred Stock Series 98-A, plus accrued and
unpaid dividends (the "Redemption Price"), for any Preferred Stock for which a
Notice of Conversion has not been sent. Upon receipt by Subscribers of notice by
the Company (the "Redemption Notice") of its right to redeem the Preferred Stock
(the "Redemption Date"), the Company shall wire transfer the appropriate amount
of funds into an escrow account mutually agreed upon by both the Company and
Subscribers within three (3) business days of the Redemption Date. Additionally,
if the Company has not deposited into escrow the Redemption Price for the
benefit of the Subscribers, within three (3) business days after the Redemption
Date, the Company shall pay to the Subscribers an amount equal to five (5%)
percent per month thereafter of the Liquidation Value of the Preferred Stock
being redeemed on a pro rata basis in cash. After the escrow agent is in receipt
of the Redemption Price, he shall notify the Subscribers to surrender the
appropriate number of shares of Preferred Stock. If the escrow agent has not
received the Redemption Funds within three (3) business days from the Redemption
Date, the Subscribers shall again have the right to convert the Preferred Stock,
and thereafter the Company shall only have the right to redeem the Preferred
Stock by sending a Redemption Notice to the Subscribers and simultaneously wire
transferring the Redemption Price.
Section 11. Mandatory Conversion. In the event the Preferred
Stock has not been converted two (2) years from the Closing Date, the Preferred
Stock shall automatically be converted as if the Subscribers voluntarily elected
such conversion in accordance with the procedure, terms and conditions set forth
in this Agreement.
Section 12. Registration or Exemption Requirements.
Subscribers acknowledge and understand that the Securities may not be resold or
otherwise transferred except in a transaction registered under the Act and any
applicable state securities laws or unless an exemption from such registration
is available. Subscribers understand that the Securities will be imprinted with
a legend that prohibits the transfer of the Securities unless (i) they are
registered or such registration is not required, and (ii) if the transfer is
pursuant to an exemption from registration other than Rule 144 under the Act
and, if the Company shall so request in writing, an opinion of counsel
reasonably satisfactory to the Company is obtained to the effect that the
transaction is so exempt.
Section 13. Legend. The certificates representing the Securities shall
be subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
Section 14. Stock Delivery Instructions. The Preferred Stock
Certificates shall be delivered to Subscribers on a delivery versus payment
basis as set forth in the Escrow Agreement.
Section 15. Closing Date. The date Escrow Agent receives the
Securities and Purchase Price, and both the conditions set forth in Sections 16
and 17 and the terms and conditions of the Escrow Agreement (Exhibit C) herein
are satisfied or waived shall be the Closing (the "Closing Date"), and all acts,
deliveries and confirmations comprising the Closing Date regardless of
chronological sequence, shall be deemed to occur contemporaneously and
simultaneously upon the occurrence of the last act, delivery, or confirmation of
the Closing Date, and such acts, deliveries, or confirmations shall not be
effective unless and until the last of same shall have occurred, and as shall be
mutually agreed upon as to time and place. However, a Closing may occur
separately for each Subscriber upon the payment of each Subscribers portion of
the Purchase Price and completion of the conditions set forth in Section 16 and
17 below as they pertain to that particular Subscriber.
Section 16. Conditions to the Company's Obligation to Sell.
Subscribers understand that the Company's obligation to sell the Preferred
Stock, Warrants are conditioned upon:
(i) The receipt and acceptance by the Company of this
Subscription Agreement and all duly executed Exhibits thereto by an
authorized officer of the Company;
(ii) Delivery into escrow by Subscribers of good
cleared funds as payment in full for the purchase of the Securities;
(iii) All representations and warranties of the
Subscribers contain herein shall remain true and correct as of the
Closing Date;
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, Warrants, and the proposed issuance of the Common
Stock underlying the Preferred Stock, and Warrants shall be legally
permitted by all laws and regulations to which the Subscribers and the
Company are subject; and
(v) The Certificate of Secretary for the Preferred
Stock shall have been filed with the Utah Secretary of State.
Section 17. Conditions to Subscriber's Obligation to Purchase.
The Company understands that Subscriber's obligation to purchase the Convertible
Preferred Stock, and Warrants is conditioned upon:
(i) Acceptance by Subscribers of a satisfactory Subscription
Agreement and all duly executed Exhibits hereto for the sale of the
Securities;
(ii) Delivery of the original Securities as described herein;
(iii) All representations and warranties of the
Company contained herein shall remain true and correct as of the
Closing Dates;
(iv) Receipt of opinion of counsel and proof of a filed
Certificate of Secretary; and
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock, and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Company and Subscribers are subject.
Section 18. Miscellaneous.
18.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Agreement irrevocably consents to the
service of process in any such proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
18.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
18.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and Exhibits hereto constitute the entire agreement between the
Subscribers and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by all parties.
18.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
18.5 Entire Agreement. This Agreement and Exhibits hereto
constitute the entire agreement between the Subscribers and the Company with
respect to the subject matter hereof. This Agreement may be amended only by a
writing executed by all parties.
18.6 Reliance by Company. The Subscribers represent to the
Company that the representations and warranties of the Subscribers contained
herein are complete and accurate and may be relied upon by the Company in
determining the availability of an exemption from registration under federal and
state securities laws in connection with a private offering of securities.
18.7 Confidentiality. Each of the Company and the Subscribers
agree to keep confidential and not to disclose to or use for the benefit of any
third party the terms of this Agreement or any other information which at any
time is communicated by the other party as being confidential without the prior
written approval of the other party; provided, however, that this provision
shall not apply to information which, at the time of disclosure, is already part
of the public domain (except by breach of this Agreement) and information which
is required to be disclosed by law.
18.8 Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby except that the Company shall (i) pay
Ten Thousand ($10,000) Dollars to Goldstein, Goldstein & Reis, LLP for legal,
administrative and escrow fees; and (ii) issue to Settondown Capital
International, Ltd., as placement agent, for services rendered in connection
with this transaction, fifty (50) shares of Preferred Stock, and a Warrant to
purchase twenty thousand (20,000) shares of Common Stock.
18.9 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
<PAGE>
IN WITNESS WHEREOF, this Subscription Agreement was duly executed on
the date first written below.
Agreed to and Accepted on
this ____ day of July 1998
SGI INTERNATIONAL
/S/ JOHN R. TAYLOR
By________________________
Title: Sr. Vice President
SETTONDOWN CAPITAL INTER-
-NATIONAL, LTD., Subscriber
By______________________________
Name:
Title:
Executed this ____ day of July 1998
SOVEREIGN PARTNERS, L.P., Subscriber
By___________________________
Name:
Title:
Executed this ____ day of July 1998
SETTONDOWN CAPITAL INTER-
-NATIONAL, LTD., Placement Agent
By______________________________
Name:
Title:
Executed this ____ day of July 1998
<PAGE>
SCHEDULE A
1. Settondown Capital International, Ltd.
Charlotte House, Charlotte Street
Nassau, Bahamas
Investment Amount: $250,000
2. Sovereign Partners, L.P.
c/o South Ridge Capital Management, LLC
Executive Pavilion
90 Grove Street, No. 1
Ridgefield, CT 06877
Investment Amount: $250,000
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the day of July,
1998, between SOVEREIGN PARTNERS, L.P., located c/o South Ridge Capital
Management, LLC, Executive Pavilion, 90 Grove Street, No. 1, Ridgefield, CT
06877, a limited partnership organized under the laws of the State of Delaware
(the "Purchaser"), SETTONDOWN CAPITAL INTERNATIONAL, LTD., located at c/o
Charlotte House, Charlotte Street, Nassau, Bahamas, a limited liability company
organized under the laws of Bahamas, a non-USA jurisdiction (the "Finder", and
also a "Purchaser") (the Purchaser and the Finder are collectively referred to
as "Holder" or "Holders"), issued pursuant to the 6% Convertible Preferred Stock
Series 98-A Subscription Agreement of even date herewith (the "Subscription
Agreement"), and SGI INTERNATIONAL, INC., a Utah corporation having its
principal place of business at 1200 Prospect Street, Suite 325, La Jolla, CA
92037 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchasers are purchasing from the Company, pursuant to the
Subscription Agreement an aggregate of five hundred (500) shares of Preferred
Stock, and a Warrant to purchase an aggregate of fifty thousand (50,000) shares
of Common Stock. The Common Stock of the Company underlying the Preferred Stock
is referred to as the "Conversion Shares", and the Common Stock of the Company
underlying the Warrants is referred to as the "Warrant Shares" (capitalized
terms defined in the Subscription Agreement and not otherwise defined herein
have the meanings specified in the Subscription Agreement); and
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Finder is receiving from the Company, pursuant to the
Subscription Agreement, fifty (50) shares of the Preferred Stock, and a Warrant
to purchase twenty thousand (20,000) shares of common stock of the Company; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto, (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security as a result of the provisions of Rule 144,
or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holder acknowledges
and understands that prior to the registration of the Securities as provided
herein, the Securities are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. The Holder understands that no disposition
or transfer of the Securities may be made by Holder in the absence of (i) an
opinion of counsel reasonably satisfactory to the Company that such transfer may
be made or (ii) a registration statement under the Securities Act is then in
effect with respect thereto.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date, on one occasion an amendment to the Form S-2 registration
statement filed with the SEC on January 23, 1998 (the "Amended Registration
Statement"), at the sole expense of the Company (except as provided in Section
3(c) hereof), in respect of all holders of Registrable Securities, so as to
permit a non-underwritten public offering and sale of the Registrable Securities
under the Securities Act, provided, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 3(a) in any jurisdiction in which the Company would be required
to qualify as a dealer in securities, under the securities or blue sky laws of
such jurisdiction. The Company agrees that it will use its best efforts to cause
the Amended Registration Statement to become effective within sixty (60) days
after the Closing Date. The number of Registrable Securities to be registered
shall be two hundred (200%) percent of the number of shares that would be
required if all of the Registrable Securities were converted in accordance with
the Certificate of Secretary, on a date which is five (5) business days prior to
the filing of the Amended Registration Statement.
(b) The Company will use its best efforts to maintain the
Amended Registration Statement or post-effective amendment filed under this
Section 3 hereof current under the Securities Act until the earlier of (i) the
date that all of the Registrable Securities have been sold pursuant to the
Registration Statement, (ii) the date that the Registrable Securities may be
sold under the provisions of Rule 144 or (iii) two (2) years after the effective
date of the Amended Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Amended Registration Statement under Section 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and all of other the fees and expenses of such
registration, including of its counsel and such other expenses as are necessary
to qualify the sale of Securities in compliance with any state Blue Sky laws.
The Company shall use its best efforts to qualify any of the securities for sale
in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 9 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to
include Holder's Registrable Securities in the Amended Registration Statement
which is to be filed if, in the opinion of counsel for both the Holder and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not restricted securities, as defined in Rule 144 under the Securities
Act.
(e) In the event the Amended Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed by the Company
by the thirtieth (30th) day after the Closing Date, or if the Amended
Registration Statement is not declared effective by the SEC by the sixtieth
(60th) day after the Closing Date (the Effective Date), then the Company will
pay, in cash, to the Holder on a pro-rata basis by wire transfer, as liquidated
damages for such failure and not as a penalty, one and one-half (1.5%) percent
of the principal amount of the Securities for the first month, and two (2%)
percent of the principal amount of the Securities each month thereafter until
the Amended Registration Statement has been filed and/or declared effective. The
liquidated damages shall be payable within five (5) calendar days of written
demand by the Holder, up to one (1) year after the Closing Date.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. Such payment
shall be made to the Holder in cash immediately if the registration of the
Securities are not effected; provided, however, that the payment of such
liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The registration of the
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is
required by the provisions of this Agreement to effect the registration of any
of the Registrable Securities under the Securities Act, the Company shall
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holder, shall reasonably request, and
do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holder under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer of
the rights granted under this Agreement, the Holder agrees that the Company may
require that the transferee comply with reasonable conditions as determined in
the discretion of the Company. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
Section 7. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferees or assignees ) upon the occurrence of any of the following:
(a) all Holder's securities subject to this Agreement have been
registered;
(b) such Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 promulgated by the SEC
pursuant to the Securities Act;
(c) such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k).
Section 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Holder and each person, if any, who controls the Holder within the meaning of
the Securities Act (Distributing Holders) against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Distributing Holders may become subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Amended Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Amended Registration
Statement, preliminary prospectus, final prospectus, offering circular,
notification or amendment, or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Holders, specifically for use in the preparation thereof. This
Section shall not inure to the benefit of any Distributing Holder with respect
to any person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Distributing Holder
failed to send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus contained in the
Amended Registration Statement to such person at or prior to the written
confirmation to such person of the sale of such Registrable Securities, where
the Distributing Holder was obligated to do so under the Securities Act or the
rules and regulations promulgated hereunder. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Amended
Registration Statement prepared by the Company, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 9. Contribution. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder, or the Company, makes a claim for indemnification, but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Agreement provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, or the Company, then the
Company and the applicable Distributing Holder shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Distributing Holder agree that
it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on
the first page of this Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 13. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York or the state courts of the State of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any state or country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 14. Severability/Defined Terms. If any provision of
this Agreement shall for any reason be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereof and
this Agreement shall be construed as if such invalid or unenforceable provision
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the 6% Convertible Preferred Stock Series 98-A
Subscription Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
Attest: SGI INTERNATIONAL, INC
/s/ JOHN R. TAYLOR
By:______________________ By:_________________________
Name: John R. Taylor Name:
Title: Sr. Vice President Title:
SOVEREIGN PARTNERS, L.P.
Purchaser
By:_________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
Purchaser
By:_____________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
Finder
By:____________________________
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-Q for the six month period ended June 30, 1998, and
is qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 299,407
<SECURITIES> 402,500
<RECEIVABLES> 767,095
<ALLOWANCES> 84,460
<INVENTORY> 64,323
<CURRENT-ASSETS> 1,588,652
<PP&E> 1,643,421
<DEPRECIATION> 724,949
<TOTAL-ASSETS> 5,424,897
<CURRENT-LIABILITIES> 5,914,211
<BONDS> 0
0
661
<COMMON> 43,047,488
<OTHER-SE> (43,646,963)
<TOTAL-LIABILITY-AND-EQUITY> 5,424,897
<SALES> 2,589,188
<TOTAL-REVENUES> 2,616,526
<CGS> 1,978,110
<TOTAL-COSTS> 1,978,110
<OTHER-EXPENSES> 2,725,803
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<INTEREST-EXPENSE> 460,882
<INCOME-PRETAX> (2,975,558)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,975,558)
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<NET-INCOME> (2,975,558)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
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