As filed with the Securities and Exchange Commission on December 11, 1998
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SGI INTERNATIONAL
(Exact name of Registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, CA 92037
TEL (619) 551-1090 / FAX (619) 551-0247
(Address, including zip code, telephone number and facsimile number,
including area code, of registrant's principal executive offices)
Joseph A. Savoca, Chief Executive Officer
President and Chairman of the Board
SGI International
1200 Prospect Street, Suite 325, La Jolla, CA 92037
(619)551-1090
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
Copies to:
FISHER THURBER LLP
TIMOTHY J. FITZPATRICK, ESQ.
DAVID A. FISHER, ESQ.
4225 Executive Square, Suite 1600
La Jolla, CA 92037-1483
Tel. (619) 535-9400
Fax (619) 535-1616
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement has become effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 the Securities Act, check the
following box. X
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box:
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. X
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed Maximum Proposed Maximum
Title of each class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be registered registered (1)(2)(3) per Unit (2) Price (2) Registration Fee
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, no par value,
which may be sold by
selling shareholders 132,079 $0.35 $46,228 $12.85
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
Common Stock, no par value,
underlying outstanding
Convertible Preferred Stock
12,518,491 $0.35 $4,381,472 $1,218.05
- ----------------------------- ------------------- ---------------------- ----------------------- -------------------
Common Stock, no par value,
outstanding underlying
Warrants 755,000 $0.35 $264,250 $73,46
============================= =================== ====================== ======================= ===================
TOTAL $1,304.36
============================= =================== ====================== ======================= ===================
</TABLE>
(1) Includes 12,518,491 shares issuable upon conversion of the Series 98-C
Preferred Stock, 610,000 shares issuable upon exercise of the warrants
issued in connection with the 97-E exchange offering to existing accredited
investors, 145,000 shares issuable upon exercise of the warrants issued in
connection with the Series 98-C Preferred Stock and 132,079 shares of
outstanding restricted Common Stock. For purposes of estimating the number
of shares of Common Stock to be included in this Registration Statement,
the Company calculated 200% of the number of shares of Common Stock that
would be issuable upon conversion if all of the registrable securities
underlying the Series 98-C Preferred Stock were converted five days prior
to filing of this Registration Statement. In addition to the shares set
forth in the table, pursuant to Rule 416 under the Securities Act of 1933,
as amended, this Registration Statement also covers an indeterminate number
of additional shares of Common Stock as may become issuable upon conversion
of or in respect of the Company's Series 98-C Preferred Stock, as such
number may be adjusted as a result of stock splits, stock dividends and
antidilution provisions (including floating rate conversion prices).
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c), based on the average of the high and low sales prices of
the Registrant's Common Stock on December 7, 1998, as reported by the OTC
Bulletin Board.
(3) No sales of securities will be conducted by Registrant. Registrant will,
however, pay expenses of the offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREFORE BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
Subject to Completion dated December 11, 1998
PROSPECTUS
SGI INTERNATIONAL
13,405,570 Shares of Common Stock
This Prospectus relates to 13,405,570 shares of common stock (plus an
indeterminate number of additional shares of common stock relating to certain
antidilution rights of preferred stock) of SGI International. These shares are
all being offered by stockholders of SGI, not by SGI directly. These
stockholders of SGI may offer these shares from time to time in transactions on
the OTC Bulletin Board (or any other exchange or automated quotation system in
which our common stock may then be listed) or in privately negotiated
transactions. These sales may take place at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at other
negotiated prices. 12,518,491 of the shares may be issuable upon conversion of
1,570 shares of Series 98-C convertible preferred stock, 755,000 of the shares
are issuable upon exercise of warrants, and 132,079 shares of outstanding common
stock are registered for resale by the stockholders of SGI. The shares were
issued in private placement transactions exempt from the registration
requirements of the Securities Act of 1933, as amended, under Section 4(2) of
that act. See "Selling Security Holders" beginning on page 15 and "Plan of
Distribution" beginning on page 21.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. We will, however, pay all expenses incurred in registering
the shares, but each selling stockholder will be responsible for all selling and
other expenses incurred by him or her.
Our common stock is quoted on the OTC Bulletin Board under the symbol "SGII".
On December 7, 1998, the closing price of the common stock on the OTC Bulletin
Board was $0.3449.
INVESTING IN SGI COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
The selling stockholders and any broker executing selling orders on behalf of
the selling stockholders may be deemed to be underwriters within the meaning
of the Securities Act. Commissions received by any such broker may be deemed to
be underwriting commissions under the Securities Act.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
OTHER REGULATORY AUTHORITY HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this Prospectus is December___, 1998
<PAGE>
In this Prospectus, the "Company", "SGI", "we", "us", and "our" refers to
SGI International.
WHERE YOU CAN FIND MORE INFORMATION
SGI files annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). You
can inspect and copy the Registration Statement on Form S-2 of which this
Prospectus is a part, as well as reports, proxy statements and other information
filed by SGI at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, DC 20549 and at the following regional
offices of the Commission: Seven World Trade Center, Suite 1300, New York, New
York, 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of these materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, DC 20549 upon payment of
the prescribed fees. Please call the Commission at 1-800-SEC-0330 for further
information regarding the operations of its public references rooms. The
Commission also maintains a World Wide Web site at http:\\www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants (like SGI) that file electronically with the Commission.
SGI has filed with the Commission a Registration Statement (which term shall
include all amendments, exhibits and schedules thereto) on Form S-2 under the
Securities Act of 1933, as amended (the "Securities Act"), of which this
Prospectus is a part. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any document referred to are not necessarily complete. With respect to each
such document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows this Prospectus to "incorporate by reference" certain
other information that SGI files with them, which means that we can disclose
important information to you by referring to those documents. The information
incorporated by reference is an important part of this Prospectus, and
information that we file later with the Commission will automatically update and
replace this information. We incorporate by reference the documents listed below
and any future filings made by us with the Commission under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until we have sold all of the securities
that we have registered.
(1) Our Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(2) Our Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, June 30, and September 30, 1998.
(3) Our Current Reports on Form 8-K filed January 23, 1998.
(4) The description of our common stock offered hereby contained in the
Company's Registration Statement on Form 8-A.
(5) Our Proxy Statement dated May 12, 1998.
We will provide, without charge, to each person, including any beneficial owner,
who receives a copy of this Prospectus, a copy of our Form 10-K/A Annual Report
for the year ended December 31, 1997, and a copy of the Form 10-Q for the
quarter ended September 30, 1998. Also, if you request the above information in
writing or by telephone, we will provide you, without charge, a copy of any or
all of the information incorporated by reference in the registration statement
of which this Prospectus is a part. Requests for such information should be in
writing to 1200 Prospect Street, Suite 325, La Jolla, California 92037, Attn:
Chief Financial Officer or by telephone at (619) 551-1090.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Prospectus (and in the
documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include information concerning
possible or assumed future results of our operations. Also, when we use such
words as "believes," "expects," "anticipates" or similar expressions, we are
making forward-looking statements. You should note that an investment in our
securities involves substantial risks and uncertainties that could affect our
future financial results. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in "Risk Factors" and elsewhere in
this Prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
It is not complete and may not contain all of the information you should
consider before investing in the Common Stock. You should read the entire
Prospectus carefully, including the "Risk Factors" section and the financial
statements which are incorporated by reference and the notes to these financial
statements.
The Company
We are in the business of developing and marketing energy-related technologies.
We are developing two principal technologies, the LFC Process and the OCET
Process. The LFC Process is intended to convert and upgrade low-rank coal to
provide a more cost-effective and less environmentally damaging fuel source for
producing power than existing low-rank coal. The LFC Process produces two
products called process derived fuel ("PDF") and coal derived liquids ("CDL")
which are alternative fuels. The OCET Process is designed to deasphalt crude
oil and resid produced in oil refining to increase the efficiency of crude oil
refineries. Resid is the residue remaining after processing crude oil in a
refinery to produce liquid fuels and lubricants.
The LFC Process is owned by the TEK-KOL Partnership. The TEK-KOL Partnership is
a partnership that consists of the Company and Bluegrass, a subsidiary of
Zeigler Coal Holding, Inc. We terminated the TEK-KOL Partnership effective
November 11, 1998, and we are in the process of dissolving and winding up the
partnership affairs. The TEK-KOL Partnership assets will be divided upon
termination, and we then will own a 50% undivided interest in all intangible
assets, including the patents and intellectual property. On termination we have
the exclusive worldwide right to market and license the LFC Process through
April 12, 2000. After April 12, 2000, the Company and Bluegrass each have the
right to market and license the LFC Process.
TEK-KOL has issued three licenses for the LFC Process which include a license
issued by TEK-KOL to Shell Mining Company for the LFC Process demonstration
plant in Wyoming (the "Demonstration Plant"), a license issued to us, and a
non-exclusive license we granted to Rosebud Energy Corporation. The
Demonstration Plant became fully operable in 1995 and was built to demonstrate
the validity of the LFC Process. The LFC Process was used to produce PDF and
CDL, for test burning, at the Demonstration Plant and produced test material
until the third quarter of 1997 when the Demonstration Plant suspended
operations. The Demonstration Plant produced approximately 114,900 tons of PDF
and 116,100 barrels of CDL, and shipped over 83,500 tons of PDF to seven
electric utilities in six states, and 104,000 barrels of CDL to eight
industrial users in seven states.
We believe the operations of the Demonstration Plant have provided critical
design data and engineering parameters to assist in commercial scale development
of the LFC Process. The LFC Process has not yet been used on a commercial scale
basis and additional development and testing will be necessary to verify its
value on a large scale commercial basis. Since the Demonstration Plant
suspended operations, we have been pursuing a number of strategies, including
buying the Demonstration Plant, finding a partner to build another LFC Process
plant, or marketing the LFC Process without a demonstration plant.
The principal markets for the LFC Process are electric utilities, coal
producers, steel companies and foreign governments or agencies. We intend to
license the LFC Process instead of building and operating our own LFC Process
plants because of the estimated $100 million - $500 million in costs and the
several years required to construct and operate an LFC Process plant. The
Company signed a Letter of Intent with Mitsubishi Heavy Industries, Ltd.
("Mitsubishi") on August 6, 1998, which proposes forming a joint venture or
other arrangement to market and license the LFC Process. While we and Mitsubishi
have produced draft documents relating to a proposed joint venture, no
agreements have been signed to date. We cannot assure you that we will enter
into any joint venture or license agreements for the LFC Process with Mitsubishi
or any other party or, if we do, that it will generate any revenue or profits
for us.
3
<PAGE>
We also have a wholly-owned subsidiary, Assembly and Manufacturing Systems,
Inc. ("AMS"), which designs and produces custom automated assembly equipment.
The principal market for AMS products include the biomedical, automotive,
electronics and computer industries. AMS provided 93% and 99% of our gross
revenues for the fiscal years ended December 31, 1996, and 1997, respectively.
While AMS has provided almost all of our gross revenues, our principal business
is the development and commercializing of the LFC Process and the OCET Process.
<TABLE>
The Offering
<S> <C>
Shares offered by the selling stockholders 13,405,570
Shares to be outstanding after the offering(1)(2) 34,110,958
OTC Bulletin Board Symbol SGII
Use of Proceeds We will not receive any proceeds from the conversion of
the preferred stock and the sale of the underlying
common shares or from the sale of the 132,079 shares of
common stock. If any of the warrants are exercised, we
intend to use the proceeds for working capital and
general corporate purposes.
Risk Factors For a discussion of certain risks you should consider
before buying the common stock, see "Risk Factors."
</TABLE>
(1) Includes: (i) up to 12,518,491 shares of Common Stock issuable upon
conversion of the Series 98-C Preferred Stock; (ii) 610,000 shares of Common
Stock issuable upon exercise of the warrants issued in connection with the 97-E
exchange offering; (iii) up to 145,000 shares of Common Stock issuable upon
exercise of the warrants issued to the Series 98-C Preferred Stock investors;
and (iv) 132,079 shares of outstanding restricted Common Stock.
(2) Does not include: (i) 2,000,000 shares of Common Stock reserved for issuance
under the Company's stock-based compensation plans of which options to acquire
1,117,000 shares have been granted as of the date of this Prospectus; (ii)
4,291,275 shares of Common Stock issuable upon exercise of other outstanding
warrants not registered herein; (iii) up to 4,859,792 shares of Common Stock
issuable upon conversion of various series of outstanding Preferred Stock not
registered herein; and (iv) up to 10,150,460 shares of Common Stock reserved
for issuance upon conversion of outstanding convertible debentures not
registered herein.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" for, and as of, the end of the years in the
five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below as of and for the nine months ended September 30, 1998, and 1997, are
derived from the unaudited consolidated financial statements of the Company. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
statement of the financial position and results of operations for these periods.
Operating results for the nine months ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The data set forth below should be read in conjunction with
the Reports of Independent Public Accountants on the consolidated financial
statements, which contain a paragraph discussing factors that raise
substantial doubt as to the Company's ability to continue as a going-concern,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and the consolidated financial statements and the related notes
thereto which are incorporated by reference in this Prospectus.
<TABLE>
Nine Months ended
September 30, Years ended December 31,
_____________________ ____________________________________________________________
1998 1997 1997 1996 1995 1994 1993
==== ==== ==== ==== ==== ==== ====
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,731,470 $3,809,650 $5,322,724 $4,244,268 900,306(1) $ 552,503 $ 809,910
Net loss (4,134,357) (3,946,944) (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) 1,434,891 381,073 770,226 -- -- -- --
Net Loss Applicable
to Common Stock (5,569,248) (4,328,017) (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common
Share - Basic (0.42) (0.63) (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average
Common Shares
Outstanding 13,123,331 6,851,470 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets $1,469,242 $2,049,434 $1,648,745 $2,295,167 $ 944,910 $ 717,406 $1,331,381
Working Capital
Deficiency (4,662,305) (4,976,751) (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 5,017,544 6,177,973 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding
Current Portion) 107,125 116,625 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity
(Deficiency) (1,221,128) (964,837) (457,109) 194,574 (1,629,578) 556,866 2,350,981
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue
of $867,000 and income from operations of $238,000 for the period October 31,
1995 through December 31, 1995.
(2) No dividends have been declared since inception.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business
operations.
If any of the following risks actually occur, our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our common stock could decline, and you could lose all or
part of your investment.
This Prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
Prospectus.
Historical Losses; Probable Future Losses
We have had a net loss in every year since we were incorporated in 1980. As
of September 30, 1998, we had an accumulated deficit of approximately $54.5
million and a working capital deficiency of approximately $4.7 million. Our
operations may result in substantial and continuing losses in the
future. We have only generated limited revenue from our principal business which
is the LFC Process. Almost all of our recent revenues have been provided by AMS,
our principal subsidiary. AMS provided 99% of our gross revenues for the year
ended December 31, 1997, and 93% of the gross revenues for the year ended
December 31, 1996.
To achieve profitability, we must, among other things, successfully complete
development of the LFC Process and license the LFC Process to third parties who
will operate an LFC Process plant on a commercial scale. Accordingly, we cannot
assure you that we will be able to achieve profitability at all or on a
sustained basis.
Substantial Debt
We have substantial debt and debt service obligations. On September 30, 1998,
we had approximately $4.4 million in debt which is due on September 30, 1999.
The debtholders have a right to convert this debt into equity which may occur
prior to September 30, 1999. Other than this, we have no procedures in place to
retire any of the debt prior to the due date. Absent conversions into equity,
unless we receive substantial additional financing or can extend or
convert the debt, based on current operations, we may not be able to pay the
principal or interest payments on our debt. If we can't pay or refinance our
debts, we may be unable to continue in business. We cannot assure you that we
will receive enough funding to pay our debts, or that we will be able to
refinance or convert our debts before or when they become due.
Substantial Capital Requirements
We must raise substantial additional financing to market our proposed LFC
Process and OCET Process, to conduct research and development and to pay our
debt obligations. During the next year, we must pay our LFC related
obligations of up to $500,000 and approximately $4.4 million on our debt. We do
not currently have the funds available to pay these obligations. Based on past
operations and funding activities, we typically have on average three months
worth of operating capital available.
We intend to raise the funds necessary for these expenses through selling
equity or debt securities, or by executing one or more strategic partnerships,
licenses or other similar transactions. We have no commitments for any
additional financing and we cannot assure you any additional financing will be
available on acceptable items. If additional financing is not available, we may
be required to reduce or suspend operations, seek to sell our assets or sell
securities on favorable terms. Our $400,000 line of credit is secured by
collateral and we are uncertain we can obtain additional bank financing in the
near term. Our future financing requirements will be affected by numerous
factors including results of LFC Process and OCET Process tests, research and
development results and competitive and technological factors.
6
<PAGE>
TEK-KOL Partnership Termination
In May 1998 we unilaterally terminated the TEK-KOL Partnership Agreement (the
"TEK-KOL Agreement") effective November 11, 1998. We and Bluegrass are in the
process of dissolving this partnership and winding up all partnership affairs.
The TEK-KOL Agreement provides that all tangible assets will be sold when the
partnership is dissolved. Also, each party will receive on dissolution an
undivided fifty percent interest in all intangible assets and intellectual
property including the patents and trade secrets. We have an exclusive worldwide
license to market and license the LFC Process through April 12, 2000. After
April 12, 2000, both the Company and Bluegrass each have the right to market and
license the LFC Process.
Royalties, if any, earned on licenses we may enter into through April 12, 2000,
will be divided 80% to us and 20% to Bluegrass for 10 years from the date the
TEK-KOL Partnership is dissolved. After our exclusive license period ends on
April 12, 2000, royalties are divided equally between us and Bluegrass for 10
years after the date of dissolution. Royalties, if any, received after 10 years
from the date of dissolution are wholly retained by the licensor. The Company
and Bluegrass must fund the TEK-KOL Partnership until it is dissolved, which
must be done by November 11, 1999. The termination of the TEK-KOL Agreement may
make marketing and licensing the LFC Process more difficult and may have a
material adverse impact on our business and operations.
No Established Markets for Either LFC Process or OCET Process Products
While we believe a market will develop in the United States and abroad for LFC
Process and OCET Process products, no market for these products currently
exists. We must establish and develop a market for the LFC Process products
among potential customers such as electric utility companies and industrial coal
users and for the OCET Process by oil refineries and others. The market
viablility of the LFC Process won't be known until third parties such as large
electric utilities or coal mining companies construct and operate commercial
scale facilities which produce PDF and CDL. Until all components of the LFC
Process and OCET Process are completed, which is expected to take additional
time, money and testing, we may not be able to license parties to build and/or
operate either an LFC Process or an OCET Process plant.
Demonstration Plant Operations Suspended
Bluegrass, formerly the SMC Mining Company, was our sole partner in the TEK-KOL
Partnership which owned the LFC Process. Bluegrass is a wholly-owned subsidiary
of Zeigler Coal Holdings. The Encoal Corporation is a wholly-owned subsidiary
of Bluegrass. AEI Resources Inc. acquired all the assets of Zeigler Coal
Holding Company on September 2, 1998, which includes Bluegrass. Encoal is the
licensee of an LFC Process license from TEK-KOL, and is the owner of the
Demonstration Plant. Encoal constructed and operated the Demonstration Plant
pursuant to an agreement with the U.S. Department of Energy. The Demonstration
Plant was built to demonstrate the LFC Process, and has produced and shipped PDF
and CDL. Encoal suspended the operations of the Demonstration Plant in the
fourth quarter of 1997 and has not restarted operations since that date.
The termination of the TEK-KOL Partnership Agreement in May 1998 could result
in the permanent suspension of Demonstration Plant operations. The suspension of
operations of the Demonstration Plant may have a material adverse impact on our
ability to market and license the LFC Process and therefore on our business and
operations.
Limited Licenses for LFC Process; No Licenses for OCET Process
TEK-KOL, which owns the LFC Process, has issued three license agreements for
the LFC Process. The three current licenses for the LFC Process are expected
to generate nominal revenues in the near future. There can be no assurance we
will successfully market, license or sell either the LFC Process or the OCET
Process. We will be dependent upon third parties to finance the construction,
development and operation of plants using the LFC Process and the OCET Process.
We do not have any license agreements for the use of the OCET Process as the
OCET Process is in the development stage.
7
<PAGE>
Dependence on Others
We do not presently have adequate capital, experience, resources or personnel
to finance, design, engineer, construct and operate an LFC Process or
OCET Process production plant. Therefore, we will be dependent on entering into
agreements with third parties to provide such financial participation and
services for both the LFC Process and OCET Process. We believe it would require
$100-$500 million or more, several years of construction and expertise in major
plant development and operations to develop, construct and operate the first
commercial LFC Process plant. We cannot assure you we will enter into any
agreement with any third parties, or even if such agreements are entered into
that they will be successful or profitable. If we are not successful in our
attempts to license the LFC Process and/or the OCET Process it will have a
material adverse impact on our business and operations.
Dilutive Effects of Outstanding Securities
We have a substantial number of options, warrants and other convertible
securities which are outstanding. The exercise of the options and warrants or
the conversion of a significant number of the convertible securities could
result in substantial additional dilution to our existing shareholders. As long
as such options, warrants or convertible securities are outstanding, our ability
to obtain equity capital on favorable terms may be adversely affected. Several
of our outstanding series of convertible preferred stock are convertible into a
variable number of shares of common stock pursuant to a formula which results in
the holders receiving more shares of common stock the lower the trading price of
our common stock.
Conversion of some of our preferred stock and the resale of the common stock
could result in a lower market price for our securities. Such conversions could
also result in other holders of our convertible securities receiving more
shares of common stock resulting in even greater potential dilution. As of
December 7, 1998, if all of the convertible preferred stock outstanding was
converted, we would issue approximately 11.6 million additional shares of common
stock, representing approximately 36% of our total outstanding shares of common
stock.
Going Concern Assumption
The reports of our independent auditors on our financial statements for
December 31, 1997, 1996 and 1995 contain an explanatory paragraph indicating
that our recurring operations losses, working capital deficiencies and certain
other matters raise substantial doubt about our ability to continue
as a going concern. We will require substantial additional funding in the
future, and our independent auditors' report on our future financial statements
may include a similar explanatory paragraph if we are unable to raise sufficient
funds or generate sufficient cash from operations to cover our cost of
operations. The statements by our independent accountants may have a material
adverse affect on our ability to raise money or enter into agreements to
commercialize the LFC Process or the OCET Process and therefore may materially
adversely affect our business, financial condition and results of operations.
Liquidity of Trading Market; Penny Stock
Shares of our common stock are quoted on the OTC Bulletin Board system. This
over-the-counter market on an electronic bulletin board generally supports
quotations for securities of companies that do not meet the Nasdaq Small Cap
Market listing requirements. As a result, investors may find it more difficult
to dispose of, or to obtain accurate price quotations of, our common stock than
they would if our common stock were quoted on the Nasdaq Small Cap Market. In
addition, quotation on the OTC Bulletin Board depends on the willingness of
broker-dealers to make a market in our common stock. We cannot assure you that
our common stock will continue to be so quoted or that there will continue to be
a market for buying and selling our common stock. Our common stock is also
subject to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. Such rules may discourage the ability or willingness of
broker-dealers to sell and/or make a market in our common stock.
8
<PAGE>
Target Market for LFC Process Plant Products
We believe the potential market for the processed coal to be produced by
future LFC Process plants includes utilities, independent power producers,
certain manufacturers of steel using new technologies, and other industrial
enterprises which use coal, both in and outside of the United States. The
potential market for the coal-derived liquid fuels includes industrial fuel
users, refineries and makers of chemical products in the United States and
foreign countries. Our ability to market the LFC Process to these markets will
be dependent upon various factors, including the user's current and future
commitment to coal or oil based energy, changes in the cost of delivered coal
and oil, and the difference between the costs of coal generated power versus
other energy sources.
Sources which may compete with the LFC Process include natural gas and
petroleum based products, hydroelectric, solar, wind, geothermal, waste heat,
solid waste and nuclear power generation facilities. Our ability to market the
LFC Process will also be affected by regulatory efforts to reduce acid rain and
other emissions; regulatory incentives to utilize coal based energy sources; and
the reliability and cost effectiveness of LFC Process plant products relative to
gas and other energy sources currently existing or developed in the future. We
cannot assure you that future LFC Process plant products will achieve market
acceptance at any level sufficient to provide profits to us.
Dependence on U.S. Regulations of Air Emissions
We believe a significant factor which assists in creating demand for the LFC
Process in the United States is the Clean Air Act, as amended. The Clean Air
Act specifies certain air emission requirements for electric utility companies
and industrial fuel users which are potential markets for the LFC Process, and
we believe these requirements could be fully or partially met through the use of
our LFC Process. A full or partial repeal of the Clean Air Act could weaken or
eliminate demand for the LFC Process and could have a material adverse impact on
our business and operations.
Competition and Technology Obsolescence
The principal market for LFC Process products is the energy industry, which is
intensely competitive. Many utility companies, coal companies and other
companies are engaged in research to clean or convert coal into a less polluting
and more efficient fuel or other commercial products. Many of our competitors
have substantially greater financial, technical and human resources than us and
may be better equipped to develop, test and license coal related technologies.
In addition, some of these companies have extensive experience in operating coal
technology plants. These companies may develop and introduce coal related
technologies competitive with or superior to our LFC Process prior to any market
acceptance for the LFC Process or other technologies developed by us or our
affiliates.
We expect that LFC Process product competition will be based, among other
things, on how economically, if at all, the LFC Process coal products can be
produced, their quality, compliance with environmental standards, transportation
costs, government incentive programs, comparison to energy generating
alternatives, and the strength of any patents on the LFC Process or other
potential technologies.
The automation assembly industry within which AMS competes is highly
competitive. Competition is based primarily on price, the speed and quantity of
products produced, timely delivery, product quality, safety, product innovation
and assistance in marketing and customer service. AMS competes with at least 85
other companies in the automation assembly business. Many of AMS's competitors
are substantially larger and more diversified, and have substantially greater
financial and marketing resources than AMS. We cannot assure you AMS will be
able to compete successfully.
Patents and Intellectual Property
Patents and other proprietary rights are very important to our success and
competitive position. We have three patents issued and one additional patent
pending in the U.S. for the LFC Process and two patents issued for the OCET
Process. We also have foreign counterparts for certain of these patent
applications. We cannot assure you that any of the pending patent applications
will be issued or, if issued, will provide meaningful protection or not be
challenged or invalidated. Any patents obtained will be for a limited time,
generally not exceeding 17 years from the date of issuance or 20 years from the
date of filing.
9
<PAGE>
We seek to protect our patents and other proprietary rights, but these actions
may be inadequate to protect our patents and other proprietary rights or to
prevent others from claiming violations of their patents and other proprietary
rights. Any claims, with or without merit, against our patents and proprietary
technology would subject us to costly litigation and the diversion of our
technical and management personnel and could have a material adverse impact on
our business, financial condition and results of operations.
Certain Anti-Takeover Provisions
Certain provisions of our Amended and Restated Articles of Incorporation,
Bylaws, other agreements and Utah law could make it more difficult for a third
party to acquire us, even if, as a result of the change in control, the
stockholders would receive a premium for their shares over the then current
market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions they may deem to be in their best interest.
Risks Associated with International Development Efforts
We have been actively pursuing LFC Process projects in Russia, Indonesia and
China for a number of years. While we believe international operations in
these countries represent potentially significant opportunities, we do not have
any agreements to construct or operate an LFC Process plant in any of these
countries. Because of the Asian and Russian economic crisis, these proposed
projects may not progress any further until economic conditions in Asia and in
Russia improve. We also believe the market for the LFC Process in China may be
adversely affected by the Asian economic crisis. If we do business in foreign
companies it also exposes us to many risks not present in the United States,
including political, military, privatization, supply, currency exchange and
higher credit risks. We cannot assure you that we will reach any agreement to
commercialize the LFC Process in these or any other foreign countries. The
termination of the TEK-KOL Agreement and the suspension of Demonstration Plant
operations may also materially adversely impact our marketing and licensing
efforts for the LFC Process in these and other countries overseas.
Electric Utility Regulatory Changes
The domestic electric utility industry is in the early stages of deregulation.
The National Energy Policy Act of 1992 exempts a new class of facilities from
certain federal utility regulation and liberalizes access for non-utility
generators. This legislation also initiated competition in the wholesale
electric market. In addition, many states are considering the elimination of
many of the regulations that currently limit the ability of parties to sell
within specific geographic boundaries. We believe these regulatory changes will
result in utilities and other power generators striving to reduce costs. We
also believe these changes will result in increased competition in the electric
wholesale and retail markets and increase pressures on all suppliers to electric
utilities to reduce costs. These factors may make it more difficult to obtain
the pricing needed to sell LFC Process products into the United States utility
market.
Customer Concentration; Dependence on Few Customers
In the past, a limited number of AMS customers were responsible for
ten percent or more of its revenues in any one year. AMS expects that a small
number of customers will continue to account for a substantial portion of
sales for the foreseeable future. AMS does not have long term contracts with
any of its customers, and we cannot assure you that AMS's past customers will
continue to purchase AMS's products. Due to the small number of annual projects
attempted by AMS, a significant performance problem with any one AMS project
could have a material adverse effect on AMS. We cannot assure you that revenue
from customers who accounted for significant revenue in past periods,
individually, or as a group, will continue, or if continued, will reach or
exceed historical levels in any period.
Dependence Upon Key Personnel
Our success in developing the LFC Process, the OCET Process and additional
marketable products and processes and achieving a competitive position is
dependent in large part on our ability to retain qualified scientific and
management personnel, including Joseph Savoca, President and CEO, and James W.
Mahler, Jr., the most senior management of the Company. We cannot assure you we
can retain such personnel. If we lost either of these individuals, it could have
a material adverse impact on the business and operations of the Company. Our
potential growth and expansion into areas requiring additional expertise, such
as expanded programs for the LFC Process and
10
<PAGE>
OCET Process requires additional research, testing, engineering and marketing
personnel which could place increased demands on our human resources. If we
expand and can not attract and retain personnel with appropriate expertise it
could have a material adverse effect on our prospects for success. We also rely
on consultants and advisors to assist us with marketing, management, and
research and development strategies. Our consultants and advisors are self-
employed or are employees of other companies, and may have commitments to, or
consulting or advisory contracts with, more than one other entity that may
affect their ability to contribute to our projects.
AMS's success will depend, in large part, on its ability to retain qualified
project management, qualified engineers and management personnel, including,
Amir Khiabani, President, Gary Vasey, engineering, and Clarence Dyksterhuis,
engineering. We cannot assure you we will be able to retain such personnel. The
loss of any of these individuals could have a material adverse impact on AMS's
business.
Environmental and Other Government Laws and Regulations
Potential LFC Process and OCET Process plants and the operations of AMS are
now and will likely in the future be subject to federal, state and local
environmental and other laws and regulations. These laws and regulations include
the Clean Air Act and various regulatory provisions of the United States
Department of Energy, the Environmental Protection Agency and the Internal
Revenue Service, as well as the laws and regulations of other countries and
international treaties. Future tax policy could also negatively impact our
prospects if the government encouraged production of other than coal for fuel
sources.
It is likely LFC Process Plants will be subject to the application
of various environmental regulations designed to ensure, among other things,
environmentally compatible plant operations. Failure to comply with applicable
regulatory requirements can result in fines, suspensions of regulatory
approvals, operating restrictions, criminal prosecution and other negative
consequences. Furthermore, additional government regulation may be established
in the future, which could prevent or delay the commercialization of either the
LFC Process and/or the OCET Process.
Market Value of Company's Securities
We must obtain substantial additional funds from investors for the sale of
our debt or equity securities to continue in business. In the event the market
price of our publicly traded Common Stock decreases below a certain price, we
may be unable to sell additional equity, or if we are able to sell securities,
we may not obtain sufficient consideration from the sale of our securities to
provide adequate funding to continue our operations.
Exercise of Existing Warrants and Conversion of Convertible Preferred Stock
We will be able to issue shares of Common Stock registered for resale upon
exercise of the warrants and/or the conversion of any of the Preferred Stock
only if there is an effective registration statement filed with the Commission
or an applicable exemption is available. Also, the Common Stock must be
qualified or exempt from qualification under applicable state securities laws
for each state in which the various holders of the warrants and the Preferred
Stock live. Subject to our other contractual obligations, we reserve the right
in our discretion to not register or qualify the Common Stock in any state where
the time and expense do not justify registration or qualification. The warrants
and the Preferred Stock may be deprived of any value in the event we do not
satisfy or we choose not to satisfy such state and federal requirements.
Although it is our present intention to satisfy such requirements, we cannot
assure you we will be able to do so.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" for, and as of, the end of the years in the
five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below as of and for the nine months ended September 30, 1998, and 1997, are
derived from the unaudited consolidated financial statements of the Company. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
statement of the financial position and results of operations for these periods.
Operating results for the nine months ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The data set forth below should be read in conjunction with
the Reports of Independent Public Accountants on the consolidated financial
statements, which contain a paragraph discussing factors that raise
substantial doubt as to the Company's ability to continue as a going-concern,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and the consolidated financial statements and the related notes
thereto which are incorporated by reference in this Prospectus.
<TABLE>
Nine Months ended
September 30, Years ended December 31,
_____________________ ____________________________________________________________
1998 1997 1997 1996 1995 1994 1993
==== ==== ==== ==== ==== ==== ====
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,731,470 $3,809,650 $5,322,724 $4,244,268 900,306(1) $ 552,503 $ 809,910
Net loss (4,134,357) (3,946,944) (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) 1,434,891 381,073 770,226 -- -- -- --
Net Loss Applicable
to Common Stock (5,569,248) (4,328,017) (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common
Share - Basic (0.42) (0.63) (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average
Common Shares
Outstanding 13,123,331 6,851,470 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets $1,469,242 $2,049,434 $1,648,745 $2,295,167 $ 944,910 $ 717,406 $1,331,381
Working Capital
Deficiency (4,662,305) (4,976,751) (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 5,017,544 6,177,973 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding
Current Portion) 107,125 116,625 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity
(Deficiency) (1,221,128) (964,837) (457,109) 194,574 (1,629,578) 556,866 2,350,981
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue
of $867,000 and income from operations of $238,000 for the period October 31,
1995 through December 31, 1995.
(2) No dividends have been declared since inception.
12
<PAGE>
RECENT DEVELOPMENTS
On December 1, 1998 (a Closing Date), the Company issued 250 shares of $0.01
par value, 6% Convertible Preferred Series 98-C ("Series 98-C Preferred") and
one warrant to one foreign investor for cash. The Company received net proceeds
of $247,500 which represents the second tranche of the Series 98-C Preferred.
Additionally, on December 11, 1998 (a Closing Date), the Company issued 250
shares of $0.01 par value, Series 98-C Preferred and one warrant to one Foreign
Investor for cash. The Company received net proceeds of $247,500 which
represents the third tranche of the Series 98-C Preferred. The securities
were issued by the Company in reliance upon exemptions from registration
provided by Section 4(2) of the Securities Act and the provisions of Regulation
D. These shares have a liquidation preference of $1,000 per share and a dividend
preference of 6% per annum, cumulative. The number of shares of common stock to
be issued upon conversion for each tranche of the Series 98-C Preferred
will be determined by dividing the amount to be converted by the lesser of
(i) $0.36 for the second tranche and $0.40 for the third tranche (ii) 75% of the
five lowest closing bid prices of the common stock during the Lookback Period.
The Lookback Period is defined as the five trading days immediately preceding
the date the notice of conversion is received by the Company. After the last
trading day of each month that the Series 98-C Preferred remains outstanding,
starting on the first day of the fourth month after the respective Closing Date,
the Lookback Period will be increased by two trading days per month until the
Lookback Period equals a maximum of 30 trading days. The Series 98-C Preferred
is redeemable at the option of the Company, in whole or in part, in cash, at
125% of the liquidation value plus accrued and unpaid dividends. In the event
the Series 98-C Preferred is not converted two years from the Closing Date of
the tranche then the outstanding Series 98-C Preferred Stock shall be redeemed
by the Company as if the Company voluntarily elected such redemption, subject to
Utah law. The warrants are convertible into 12,500 shares of common stock each,
at an exercise price equal to 110% of the average closing bid price for the five
trading days preceding the closing date ($0.38 for the second tranche and $0.40
for the third tranche). The warrants are exercisable beginning two days
following the closing date and expire five years from the resepctive Closing
Dates.
The shares of common stock underlying the 98-C Preferred and warrants are
subject to a Registration Rights Agreement, which requires the Company to file a
registration statement for these securities with the Securities and Exchange
Commission ("SEC"), within thirty calendar days after the closing date. In the
event the registration statement is not filed by the Company by the 30th
calendar day after the closing date, or if the registration statement is not
declared effective by the SEC by the 90th day after the closing date, the
Company must pay, in cash, to the holders thereof on a pro-rata basis, as
liquidated damages 1.5% of the Series 98-C Preferred purchased for the first
month late and 2% thereafter. In the event the registration statement is not
declared effective prior to the 180th calendar day after the closing date the
Company must redeem the 98-C Preferred Stock, subject to Utah law.
In connection with the sale of the second and third tranches of the Series 98-C
Preferred, the Company paid an unaffiliated placement agent a fee consisting of
50 shares of 98-C Preferred Stock having a face value of $50,000 and warrants to
purchase 25,000 shares of common stock as compensation for placement services.
The securities were issued by the Company in reliance upon exemptions from
registration provided by Section 4(2) of the Securities Act and the provisions
of Regulation D. The warrants are exercisable at 110% of the average closing bid
price for the five trading days preceding the closing date. The warrants
are exercisable beginning two days following the Closing Date and expire
five years from the Closing Date. The net proceeds of this transaction will be
used for working capital purposes.
USE OF PROCEEDS
The Company will not receive any proceeds from conversion of the Series 98-C
Preferred or the sale of the 132,079 shares of Common Stock. If all of the
97-E exchange offering warrants are exercised, the Company would receive
approximately $732,000 before deducting expenses of this offering. If all of the
Series 98-C warrants are exercised, the Company would receive approximately
$67,000 before deducting expenses of this offering. The exercise price of the
97-E exchange warrants is $1.20 per share and the exercise price of the 98-C
Preferred Stock warrants range between $0.36 and $0.51 per share, all of which
are above the $0.3449 closing price of the Common Stock of the Company as of the
date of this Prospectus. To the extent the exercise price of any of the warrants
exceeds the public sale price of the Company's Common Stock on the OTC Bulletin
Board, the Company believes it is unlikely these warrants will be exercised.
There is no minimum number of 97-E or 98-C Preferred Stock warrants which are
required to be exercised or a minimum number of warrant shares which are
required to be sold herein. Accordingly, only a limited number of 97-E and/or
98-C Preferred warrants may be exercised and as a result the corresponding
13
<PAGE>
proceeds to the Company may be limited. If received, the Company would utilize
those funds for administrative, general operating expenses, and expenditures
related to development of the LFC and OCET Processes.
The Company cannot precisely determine the cost, timing and amount of funds
required for specific uses at this time. The use of proceeds is subject to
change based on future occurrences, competitive market forces and other
conditions. The rate of commercialization of the LFC and OCET processes, and the
availability of alternative methods of financing will also impact the allocation
and timing of the Company's use of proceeds. The Board of Directors has broad
discretion in determining how the proceeds resulting from the exercise of the
warrants, if any, will be applied.
14
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information, as of the date hereof, with
respect to the beneficial ownership of the Company's shares of Common Stock
underlying the warrants ("Warrant Shares") and Series 98-C Preferred
(collectively the "Resale Securities") registered herein by each Selling
Security Holder named below. The shares of Common Stock are being registered to
permit public secondary trading of the Resale Securities, and the Selling
Security Holders may offer the Resale Securities for resale from time to time.
Except as described below, none of the Selling Security Holders has had any
position, office or other material relationship with the Company within the
past three years. The following table assumes each Selling Security Holder sells
all of the Resale Securities held by such Selling Security Holder in this
offering. The Company is unable to determine the exact number of Resale
Securities that will actually be sold.
Series 97-E Warrant Shares
Warrant Holders Offered Hereby (1)(2)
=========================================================
Adams, Gilbert (IRA SW) 4,000
Adams, Gilbert & JoAnna 14,000
Adams, JoAnna 4,000
Ahl, Maureen & John 2,000
Anstaett, Carol (SW) 1,000
Anstaett, Dale & Eva 3,000
Anstaett, Frederick & Carol 9,200
Anstaett, Frederick (SW) 1,500
Asaro Family Trust 6,000
Atkinson, Loren & Mabel 4,000
Atkinson, Loren H. Tst 14,000
Baker, Lawrence & Shirley 4,000
Bangham, June B. Spousal Trust 3,500
Black, Thomas & Marjorie 5,000
Bradley, Shirley 4,000
Brecheisen, Paul & Dollie 3,000
Brockmueller 1981 Liv. Tst 48,000
Brumbaugh, Leslie & Virginia 4,000
Brumbaugh, Virginia (SW) 2,000
Buyer, Michele 2,000
15
<PAGE>
Series 97-E Warrant Shares
Warrant Holders Offered Hereby (1)(2)
=========================================================
Caballero, Guadalupe 2,200
Callaway, Marjorie 1,000
Cemuto Family Trust 2,000
Cemuto, Philip 2,000
Cemuto, Sandra 2,000
Cozad, Gary & Marilyn 2,000
Crane, Suzanne 1,000
Crockett, Gregory & Linda J. 2,000
De La Lama, Mauricio & Gloria 50,000
Dubois, Kenneth & Corrine 3,000
Dubois, Sue L. Trust 6,000
Fitzgerald, Mary Ann 2,000
Flint, Sylvia F. 2,000
Fosberg, Regina & Gary 2,000
Gigot, Ester A. 2,000
Griffin, Maryann & Winston 6,000
Hackney, James & Rosalyn 4,000
Hanneman, Gloria (SW) 1,000
Harr, Patty (SW) 3,000
Heins, John & Roberta 2,000
Hoover, Helen F. Rev Tst 19,000
Hotchkiss, Darryl & Virginia 7,000
Hulnick, Ronald or Mary 4,000
Johnson, Melville (SW) 8,000
Johnson, Russell Living Tst 1,000
Johnson, W. Patricia 2,000
16
<PAGE>
Series 97-E Warrant Shares
Warrant Holders Offered Hereby (1)(2)
========================================================
Johnson, W. Patricia (SW) 3,000
Joyce, Lawrence M. Trust 3,000
Kasch, John & Louise 2,000
Keith, Elvin W. 4,000
Keith, Elvin W. (SW) 2,000
Kimple, Janet & Ron 2,000
Klassen, Gerhard & Linda 2,000
Krehblel, Helen 8,000
Krier, Walter Custodian 2,000
Lamb, Maxine Rev. Trust 8,000
Lowen, Henry H. Trust 2,000
Lutz, Laura E. Living Trust 8,000
Macchia 1990 Family Trust 2,000
Maple, Lewis or Jeanie or 4,000
Masters, Franklin & Judy 1,000
McClure, Keith 2,000
McHugh, Helen Price 54,000
McKeever, Leroy & Vesper 4,000
McLeod, Robert & Dorothy 2,000
Minshew, Janelle 10,000
Mitchell, Howard & Dorothy 1,000
Moran, Robert & Norma 4,000
Nash, Thomas & Natalie 2,000
Neuburger, William & Leta 8,000
Nevin, Betty 2,000
Pabst, Robert & Margaret 8,000
17
<PAGE>
Series 97-E Warrant Shares
Warrant Holders Offered Hereby (1)(2)
============================================================
Pascoe Family Trust 4,000
Patrick, Virgil & Betty 5,000
Pavel Hendrix Pavel Plan 2,000
Pray, Goldie (SW) 2,000
Pray, Ira (SW) 5,000
PSAS 40,000
Ringler, Janice 2,000
Salazar, Carmen Q. 16,000
Schnieder, Wanda 20,000
Schnieder, Wanda (SW) 6,000
Segal, Perry (Charles Schwab) 6,000
Shaw, Edgar & Leah JTWROS 10,400
Shugart, Bernice 2,000
Smart, Irene & Larry 5,200
Smart, Larry & Karen 1,000
Smith, Donald & Marion Rev 8,000
Smith, Donald (SW) 1,000
Taylor, Dan & Katherine JT 10,000
Ternes, Wendell & Rita 3,000
Thurlow, William & Mary 2,000
Truitt, Salle (SW) 2,000
Valley, Harry R. 4,000
Valusek, John & Carol 6,000
Vaughan, Barbara 2,000
Vaughn, Jean (SW) 2,000
Vaughn, William (SW) 2,000
18
<PAGE>
Series 97-E Warrant Shares
Warrant Holders Offered Hereby (1)(2)
========================================================
Wait, Ted & Glenna 6,000
Weber, Lavon 4,000
WLK Co. 3,000
Zerboni, Peggy 2,000
Total 610,000
(1) The expiration date of all of the 97-E warrants is December 31, 1999 and
the exercise price is $1.20. The holders of the 97-E warrants may own additional
warrants not included herein, and may own additional Common Stock, Preferred
Stock and/or notes of the Company.
(2) All of the holders of the 97-E warrants assuming they were to exercise all
of the warrants listed herein and excluding the conversion of any other
convertible security or exercise of any other warrant in their possession,
would own less than 1% of the Company's Common Stock.
Series 98-C Warrant Shares
Preferred Warrants Offered Hereby (1)(2)
==========================================================
GCA Strategic Investment Fund Limited 25,000
Gilston Corporation, LTD. 5,000
Manchester Asset Management, LTD. 7,500
Avalon Capital, LTD. 10,000
Settondown Capital 72,500
Augustine Fund, L.P. 12,500
HSBC James Capel Canada Inc. 12,500
Total 145,000
(1)The expiration date of the Series 98-C Preferred earrants range between
November 4, 2003, and December 11, 2003, and the exercise prices range between
$0.38 and $0.51. The holders of the Series 98-C Preferred warrants may
own additional warrants not included herein, and may own additional Common
Stock, Preferred Stock and/or notes of the Company.
(2) All of the holders of the 98-C Preferred warrants, assuming they were to
exercise all of the warrants listed herein and excluding the conversion of any
other convertible security or exercise of any other warrant in their possession,
would own less than 1% of the Company's Common Stock.
Series 98-C Common Shares
Preferred Shareholders Offered Hereby (1)(2)(3)
===========================================================
GCA Strategic Investment Fund Limited 3,992,390
Gilston Corporation, LTD. 798,478
Manchester Asset Management, LTD. 1,197,717
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Avalon Capital, LTD. 1,596,956
Settondown Capital 958,174
Series 98-C Common Shares
Preferred Shareholders Offered Hereby (1)(2)(3)
===========================================================
Augustine Fund, L.P. 1,987,389
HSBC James Capel Canada Inc. 1,987,389
Total 12,518,491
(1) Pursuant to registration rights agreements for the holders of the Series
98-C Preferred, the Company is registering 200% of the number of the shares of
Common Stock underlying their Series 98-C Preferred which may be issuable upon
its conversion in accordance with the conversion formula.
(2) All of the holders of the Series 98-C Preferred listed herein, assuming
they converted all of the Series 98-C Preferred on the date of this Prospectus,
would own less than 1% of the Company's Common Stock, with the exception of the
following parties: (1) GCA Strategic Capital Management would own approximately
12.02%; (2) Manchester Asset Management, LTD. would own approximately 3.60%;
(3) Gilston Corporation, LTD. would own approximately 2.40%; (4) Avalon
Capital, LTD. would own approximately 4.81%; (5) Augustine Fund, L.P. would own
approximately 5.98%;(6) Settondown Capital would own approximately 2.88%; and
(7) HSBC James Capel Canada Inc. would own approximately 5.98%. The Certificate
of Secretary stating the rights, preferences and privlegdes of the Series 98-C
states that the securities held by these parties do not allow the holder to
convert any Preferred Share if the conversion would result in the holder having
beneficial ownership (determined in accordance with Rule 13d-3(d)(1) of the
Exchange Act) of more than 4.99% of the total number of shares of Common Stock
of the Company, except in the event of a default, as defined in the Certificate
of Secretary.
(3) The holders of the Series 98-C Preferred may own additional Preferred Stock,
the underlying shares of which are not included, and may also own warrants,
common stock, and/or notes of the Company.
Number
Shares of Common Stock Offered Herein
==================================================
Avalon Capital Ltd. 4,431
Breault, Jeffrey. 10,000
Davis, Karen. 25,000
Dolbear, Geoffrey. 26,304
Gilston Corporation Ltd. 4,431
Lukasiewicz, Ronald. 3,858
Manchester Asset Management Ltd. 6,646
Redoutey, Ronald. 1,685
Russo, John. 25,000
Skov, Ebbe. 23,898
Ware, Judith. 826
Total 132,079
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PLAN OF DISTRIBUTION
The warrants may be exercised by surrendering properly endorsed
certificates therefor to the Company's Controller accompanied by payment in full
of the exercise price for each share of Common Stock as to which the warrants
are being exercised and any applicable transfer or other taxes. Payment of the
exercise price for the warrants may be made by tendering cash or a cashier's
check.
The Series 98-C Preferred may be converted into Common Stock of the Company
at the election of the holder by providing proper notice thereof and the
certificate for the Preferred Stock to be converted in whole or in part to the
Company's Controller.
The Company must have on file a current registration statement with the
Commission pertaining to the warrants in order for a holder to exercise them.
The shares of Common Stock underlying the warrants (the "Warrant Shares") must
also be registered or exempt for sale under the securities laws of the state in
which the holder resides. The Company intends to use its best efforts to keep
the Registration Statement incorporating this Prospectus current, but there can
be no assurance such Registration Statement (or any other registration statement
filed by the Company covering the Securities) can be kept current. In the event
a registration statement including the Warrant Shares is not kept current, or if
the Warrant Shares are not registered or exempt for sale in the state in which a
holder resides the warrants may be deprived of some or all of their value.
The Company will not be required to pay a fee to any selling agent with
respect to any exercise of the warrants.
The Common Stock offered by the Selling Security Holders is not being
underwritten. The Selling Security Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Common Stock offered hereby may be sold by the Selling Security Holders from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Common Stock directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Common Stock for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection
with the sale of the Common Stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such Common Stock as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act. The Company will not receive any proceeds from the
sales by the Selling Security Holders, although the Company will receive
proceeds from the exercise of the warrants. Sales of the Common Stock by the
Selling Security Holders, or even the potential of such sales, could have an
adverse effect on the market price of the Company's outstanding Common Stock.
At the time a particular offer of Common Stock is made, except as herein
contemplated, by or on behalf of a Selling Security Holder or the Company
including following exercise of warrants, to the extent required, a prospectus
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for Common Stock purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
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<PAGE>
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the securities of the Company for a
period of at least one, and possibly five, business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, Rules 101, 102 and 107, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Security Holders.
The Common Stock, warrants and Series 98-C Preferred were originally issued
to certain Selling Security Holders pursuant to an exemption from the
registration requirements of the Securities Act provided by Sections 3(b) and
4(2) thereof. The Company agreed to register the Warrant Shares, shares of
Common Stock underlying the Series 98-C Preferred and the Common Stock under the
Securities Act and to indemnify and hold certain of such Selling Security
Holders harmless against certain liabilities under the Securities Act that could
arise in connection with the sale by such Selling Security Holders of such
Common Stock. In connection therewith the Company has agreed to pay all
reasonable fees and expenses except for fees and expenses for counsel to the
Selling Security Holders and any underwriting discounts and commissions.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 95,000,000 shares
of capital stock, of which 75,000,000 shares are shares of common stock, no par
value ("Common Stock"), and 20,000,000 shares may be shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). Preferred Stock is issuable
in one or more series. As of September 30, 1998, 16,464,486 shares of Common
Stock were issued and outstanding, and 65,012 shares of convertible Preferred
Stock were issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share on all
matters requiring shareholder action. The holders of a majority of shares of
Common Stock represented at a meeting of shareholders can elect all of the
directors to be elected at such meeting. In addition, subject to the preferences
that may be applicable to any then outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available, and upon
liquidation, will be entitled to receive pro rata all assets of the Company
available for distribution to such holders. The Common Stock has no preemptive
or other subscription rights, no cumulative voting rights, and there are no
conversion rights, redemption or sinking fund provisions with respect thereto.
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal of current management, even if such removal may be in the best
interests of the shareholders.
22
<PAGE>
Outstanding Preferred Stock
The outstanding Preferred Stock of the Company at September 30, 1998,
consisted of 65,012 shares of Preferred Stock, which were issued in 26 series.
The outstanding Preferred Stock series are: 90-B; 90-C; P-90; PS-90; 91-A; 91-C;
91-D; 91-E; 91-M; 91-P; 91-R; 91-S; 91-V; 92-A; 92-B; 93-A; 93-B; 93-C; 94-A;
94-B; 95-R; 96-A; 96-B; 97-C; 97-D; and 98-A. Subsequent to September 30, 1998,
the Company issued Preferred Stock Series 98-C and 98-D. The primary distinction
between the various series of Preferred Stock relates to the conversion feature,
dividend and liquidation preferences for each.
All outstanding series of Preferred Stock are fully paid and nonassessable.
The Preferred Stock has no preemptive rights to subscribe for any additional
securities which may be issued by the Company. No sinking fund or similar
provision has been provided in respect to any of the outstanding series of
Preferred Stock. The rights of the holders of each series of Preferred Stock are
subordinate to those of the Company's general creditors, and every previously
issued series of Preferred Stock. All of the outstanding series of Preferred
Stock are subject to adjustment in certain events, including for stock
dividends, stock splits, reclassifications, consolidations, mergers, etc. The
Company has never declared or paid a cash dividend on any of its outstanding
Preferred Stock, and it is not likely any dividends will be declared for some
time.
Except as required by mandatory provisions of Utah law, the holders of the
various series of outstanding Preferred Stock have no voting rights.
Series 90-B and 90-C
Dividends. The Series 90-B and 90-C Preferred Stock are entitled to
dividends of $8 per share annually, payable in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock of the Company, other than
a previously issued series of Preferred Stock and before any funds are set aside
for the purchase of, or retirement of, the whole or any part of any series of
Preferred Stock, or any other class of stock of the Company. Dividends are
cumulative and are payable before dividends on any Common Stock are paid.
Redemption. The Series 90-B and 90-C Preferred Stock do not have the right
to require its redemption. The Series 90 Preferred Stock is redeemable by the
Company as a series, in whole or in part, after August 31, 1992, at any time and
from time to time effective on 60 days prior notice, at $100 for each share,
plus the amount of any unpaid cumulative dividends which have then become
payable with respect thereto. The right of the Company to redeem the Series 90-B
and 90-C Preferred Stock is subject to compliance with Utah law, including
without limitation, certain retained earnings requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series 90-B
and 90-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, prior to any distribution
with respect to any other class of stock, liquidating distributions in the
amount of $100 per share, plus all accrued and unpaid dividends up to the date
fixed for distribution, whether or not such dividends have been earned or
declared.
Conversion. Each share of the Series 90-B and 90-C Preferred Stock is
convertible, at the option of the holder thereof without further payment at any
time, into 88 shares of Common Stock unless previously redeemed.
Series P-90
Dividends. The Series P-90 Preferred Stock are entitled to dividends of $8
per share annually, payable in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock of the Company, other than previously issued
series of Preferred Stock and before any funds are set aside for the purchase
of, or retirement of, the whole or any part of any series of Preferred Stock, or
any other class of stock of the Company. Dividends are cumulative and are
payable before dividends on any Common Stock are paid.
23
<PAGE>
Redemption. The Series P-90 Preferred Stock is redeemable by the Company as
a series, in whole or in part, after January 1, 1996, at $100 per share, plus
the amount of any unpaid cumulative dividends which have then become payable
thereto. The right of the Company to redeem this series is subject to compliance
with Utah law, including without limitation certain retained earnings
requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series P-90
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, prior to any distribution with
respect to any other class of stock, liquidating distributions in the amount of
$100 per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared.
Conversion. Each share of Series P-90 Preferred Stock is convertible into
250 shares of Common Stock of the Company, at the option of the holder and upon
payment to the Company at the time of conversion of $1.375 per common share.
Series PS-90
Dividends. Dividends of $20 per share annually are payable on the Series
PS-90 Preferred Stock, in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock other than previously issued series of
Preferred Stock, and before any sum shall be set aside for the purchase of, or
retirement of, the whole or any part of the Series PS-90 Preferred Stock, or any
other class of stock. The dividends on the PS-90 Preferred Stock are cumulative,
and are payable prior to the payment of any dividends on the Common Stock.
Redemption. The holders of the PS-90 Preferred Stock have no right to
require redemption of their Preferred Stock. The Series PS-90 Preferred Stock is
redeemable by the Company as a series, in whole or in part, after December 31,
1993, and any time and from time to time effective on 60 days prior notice, at
$250 per share of Series PS-90 Preferred Stock, plus the amount of any unpaid
cumulative dividends which have become payable with respect thereto. The right
of the Company to redeem this series of Preferred Stock is subject to compliance
with Utah law, including without limitation, certain retained earnings
requirements.
Liquidation. In the event of liquidation, dissolution or other termination
of the Company, the holders of the shares of the Series PS-90 Preferred Stock
are entitled to $250 per share, plus all accrued and unpaid dividends up to the
date fixed for distribution whether or not earned or declared. Such payments
shall be made before any payment or distribution is made to the holders of the
Common Stock or any other series of Preferred Stock and concurrently with the
90-B, 90-C or P-90 series.
Conversion. Each share of the PS-90 Preferred Stock is convertible into 125
shares of Common Stock at the election of the shareholder upon payment to the
Company of $1.375 per common share at the time of conversion.
Series 91-A, 91-C, 91-D and 91-E
Dividends. Dividends of $8 per share annually will be payable on the Series
91-A, 91-C, 91-D and 91-E Preferred Stock in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock other than previously
issued series of Preferred Stock and before any sum shall be set aside for the
purchase of, or retirement of, the whole or any part of the Series 91 Preferred
Stock or any other class of stock, other than any previously issued series of
Preferred Stock of the Company. Dividends are cumulative and are payable prior
to the payment of any dividends on the Common Stock of the Company.
Redemption. The holders of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock have no right to require redemption of the shares. The Company may redeem
the shares in a series, in whole or in part after December 31, 1993, at any time
and from time to time effective on 60 days prior notice, at $100 per share, plus
the amount of unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem this series of Preferred
Stock is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
24
<PAGE>
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of the shares of the Series 91-A,
91-C, 91-D and 91-E Preferred Stock shall be entitled to a cash payment of $100
per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than the
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock is convertible into 25 shares of Common Stock at the election of the
shareholder without further payment.
Series 91-M
Dividends. No dividends are payable on the Series 91-M convertible
Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause or
require redemption of the Series 91-M Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of Series 91-M convertible
Preferred Stock are entitled to a cash payment of $2 per share. Such payment
shall be made before any payment or distribution is made to the holders of the
Common Stock, or any other series of Preferred Stock other than the previously
issued series of Preferred Stock of the Company.
Conversion. On or after September 30, 1993, each 5,000 shares of series
91-M Preferred Stock is convertible into 300 shares of Common Stock of the
Company, at the election of the shareholder without further payment. The Company
shall have the absolute right to cause conversion of the 91-M Preferred Shares
at any time, or from time to time without additional payment upon 60 days prior
written notice. In the event the Company elects to convert the 91-M shares to
Common Stock, each share of Series 91-M Preferred Stock shall be converted into
300 shares of the Company's Common Stock.
Series 91-P
Dividends. No dividends are payable on the Series 91-P Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-P Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-P
Preferred Stock shall be entitled to a cash payment of $2.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after July 15, 1993, each 4,000 shares of Series 91-P
Preferred Stock is convertible into 250 shares of Common Stock of the Company at
the election of the shareholder and without further payment. The Company shall
also have the absolute right to cause conversion of the Series 91-P Preferred
Shares at any time or from time to time upon 60 days prior written notice. In
such event, each share of Series 91-P Preferred Stock shall be convertible into
250 shares of Common Stock.
Series 91-R
Dividends. Dividends of 8% per annum will be payable on the Series 91-R
Preferred Stock, in quarterly installments out of unreserved earned surplus,
before any dividends shall be payable on any other class of stock or any other
shares of Preferred Stock other than previously issued series of Preferred
Stock, and before any sum shall be set aside for the purchase of, or retirement
of, the whole or any part of the Series 91-R Preferred Stock or any other class
of stock, other than any previously issued series of Preferred Stock of the
Company. Dividends payable on the Series 91-R
25
<PAGE>
Preferred Stock are cumulative and are payable prior to the payment of any
dividends on the Common Stock of the Company.
Redemption. The holders do not have the right to require redemption of the
Series 91-R Preferred Stock. The Company may redeem the Series 91-R Preferred
Stock in whole or part, at any time and from time to time effective on 60 days
prior written notice, at $10,000 per Series 91-R Preferred Share, plus the
amount of any unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem the Series 91-R Preferred
Shares is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-R
Preferred Stock shall be entitled to a cash payment of $10,000 per share, plus
all accrued and unpaid dividends up to the date fixed for distribution, whether
or not such dividends have been earned or declared. Such payment shall be made
before any payment or distribution is made to the holders of the Common Stock,
or any other series of Preferred Stock other than previously issued series of
Preferred Stock of the Company.
Conversion. During the 60 day notice period provided for redemption by the
Company, each share of the Series 91-R Preferred Stock is convertible into 167
shares of Common Stock without further payment at the election of the
shareholder. At any time after October 15, 1993, the holders of the preferred
shares may demand conversion into Common Stock.
Series 91-S
Dividends. No dividends are payable on the Series 91-S Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-S Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-S
Preferred Stock shall be entitled to a cash payment of $3.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after September 30, 1993, each share of Series 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock of the
Company, at the election of the shareholder. The Company also has the right to
cause conversion of the Series 91-S Preferred Stock at any time, or from time to
time upon 60 days prior written notice. In such event, each share of 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock.
Series 91-V
Dividends. The holders of the 91-V Preferred Stock have no right to
dividends.
Redemption. The holders of the Series 91-V Preferred Stock do not have the
right to require the redemption of the Series 91-V convertible Preferred Stock.
The Company has a right to cause redemption of the Series 91-V Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
Series 91-V Preferred Stock is subject to compliance with Utah law, including
without limitation certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-V
Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
26
<PAGE>
Conversion. During the 60 day notice period provided wherein the Company
may redeem the Series 91-V Preferred Stock, or at any other prior time, each
share of the Series 91-V Preferred Stock is convertible into 8 shares of Common
Stock of the Company without further payment at the election of the shareholder.
Series 92-A and 92-B
Dividends. The Series 92-A and 92-B Preferred Stock have no dividend
rights.
Redemption. The Series 92-A and 92-B Preferred Stock holders do not have
the right to require its redemption. The Company may redeem the Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
shares is subject to compliance with Utah law, including without limitation
certain retained earnings and requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 92-A and
92-B Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 92-A Preferred Stock is convertible
into 6 shares of Common Stock. Each share of the Series 92-B Preferred Stock is
convertible into 8 shares of Common Stock. Each share is convertible without
further payment at the election of the shareholder.
Series 93-A, 93-B and 93-C
Dividends. The Series 93-A, 93-B and 93-C Preferred Stock have no dividend
rights.
Redemption. The holders of the Series 93-A, 93-B and 93-C Preferred Stock
have no option or right to require redemption of their shares. The Series 93-A,
93-B and 93-C Preferred Stock is redeemable by the Company as a series, in whole
or in part, effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 93-A,
93-B and 93-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 93-A, 93-B and 93-C Preferred Stock is
convertible, at the option of the holder without further payment, into either 15
or 38 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement under which
the shares of these three series of Preferred Stock were issued.
Series 94-A and 94-B
Dividends. The Series 94-A and 94-B Preferred Stock have no dividend
rights.
Redemption. The holders of the Series 94-A and 94-B Preferred Stock have no
option or right to require redemption of their shares. The Series 94-A and 94-B
Preferred Stock is redeemable by the Company as a series, in whole or in part,
effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 94-A
and 94-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
27
<PAGE>
Conversion. Each share of the Series 94-A and 94-B Preferred Stock is
convertible, at the option of the holder without further payment, into from 25
to 45 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement with which
the shares of these series of Preferred Stock were issued.
Series 95-R
Dividends. No dividends are payable on the Series 95-R Preferred Stock.
Redemption. The holders of the Series 95-R Preferred Stock have no option
or right to require redemption. The Series 95-R preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 95-R
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of Series 95-R Preferred Stock. Such
liquidation payments are to be made before any payment or distribution is made
to the holders of the Common Stock, or any other series of Preferred Stock other
than previously issued series of Preferred Stock.
Conversion. Each share of the Series 95-R Preferred Stock is convertible
after November 1, 1997, at the option of the holder without further payment,
into Common Stock with a bid based market value of (i) $18,000; or (ii) $16,500.
Alternatively, each share of Series 95-R Preferred Stock can be converted into
12,500 shares of Common Stock, at the option of the holder.
Series 96-A and 96-B
Dividends. The Series 96-A and 96-B Preferred Stock have no dividend
rights.
Redemption. Neither the holders of the Series 96-A or 96-B Preferred Stock
nor the Company have any option or right to require or cause redemption.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 96-A
and 96-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $10,000 and $13,000 per share, respectively. The liquidation
preference shall be payable before any payment or distribution is made to the
holders of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock.
Conversion. Each share of the Series 96-A Preferred Stock is convertible,
at the option of the holder without further payment after April 30, 1998, into
13,500 common shares. Each share of Series 96-B Preferred Stock is convertible
at the option of the holder without further payment after the earlier of August
30, 1998, or the date a registration statement filed by the Company with the SEC
is declared effective, into 3,000 shares of Common Stock.
Series 97-C
Dividends. No dividends are payable on the Series 97-C Preferred Stock.
Redemption. The holders of the Series 97-C Preferred Stock have no option
or right to require redemption. The Series 97-C preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 97-C
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of
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<PAGE>
Series 97-C Preferred Stock. Such liquidation payments are to be made before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 97-C Preferred Stock is convertible
after August 30, 1998, at the option of the holder without further payment, into
13,500 shares of Common Stock.
Series 97-D, 98-A, 98-C and 98-D
Dividends. The Amended (the "Series 97-D Preferred Stock") Series 97-D
Preferred Stock has a right to cumulative dividends, out of assets legally
available therefore, at a per share rate equal to 7% per annum of its
liquidation preference of $1,000 per share. The Series 98-A and 98-C Preferred
Stock have the right to cumulative dividends out of assets legally available
therefore, at a per share rate equal to 7% per annum and 6% per annum,
respectively, of the liquidation preference of $1,000 per share. The Series 98-D
Preferred Stock has no dividend rights.
Redemption. Neither the holders of the Series 97-D Preferred Stock nor the
Company have any option or right to require or cause redemption of the Series
97-D Preferred Stock. The holders of the Series 98-A Preferred Stock may not
require its redemption. The Company may redeem the Series 98-A Preferred Stock
at 130% of the liquidation preference ($1,000), plus the amount of any unpaid
cumulative dividends which have become payable with respect thereto and with
respect to the Series 98-C Preferred Stock, the Company may redeem at 125% of
the $1,000 liquidation preference plus the amount of any unpaid cumulative
dividends which have become payable. For the Series 98-C Preferred Stock, upon
the occurrence of certain events including a change in control, sale of
substantially all the assets, the consummation of one or more equity financings
resulting in net proceeds of $4 million, or an event of default, the Company
must pay to the holders liquidated damages in the amount of 125% of the $1,000
per share liquidation preference. The Series 98-D Preferred Stock is not
redeemable by any party.
Liquidation. The Series 97-D, 98-A and 98-C are each entitled to be paid
out of the assets of the Company available for distribution to shareholders,
liquidating distributions in the amount of $1,000 per share. The liquidation
preference with respect to each series shall be payable before any payment or
distribution is made to the holders of the Common Stock, or any other series of
Preferred Stock other than previously issued series of Preferred Stock. The
Series 98-D Preferred Stock has no liquidation preference.
Conversion. The Series 97-D Preferred Stock is convertible, at the option
of the holder thereof, at the earlier of: (i) the date a registration statement
shall be declared effective by the SEC for the Common Stock underlying the
Series 97-D Preferred Stock; or (ii) one year from the closing date of the
purchase of such series, which was August 12, 1997. Each share is convertible
into the number of shares of Common Stock derived by dividing the conversion
rate by the conversion price. The conversion rate is the liquidation preference
of $1,000 per share of Series 97-D Preferred Stock and the Dividend Amount. The
Dividend Amount is equal to the Liquidation Preference of $1,000 per share
multiplied by 7% per annum, multiplied by the number of days since the closing
date, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to the closing date of August 12, 1997,
or (b) 75% of the average of the closing bid price of the shares of Common Stock
of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if Common Stock is
not delivered to the holder within five days of receipt of a notice of
conversion and receipt of the Preferred Stock to be converted.
The Series 97-D Preferred Stock is convertible, subject to the following
limitations. The Series 97-D Preferred Stock is not convertible until the
earlier of (a) the date the registration statement is declared effective or (b)
one year from the closing date of the purchase of such series. The holder is
precluded from converting any portion of the Preferred Stock which would cause
the holder to be deemed to be the beneficial owner of 4.99% or more of the
issued and outstanding Common Stock of the Company. The Common Stock underlying
the Series 97-D Preferred Stock and the warrants issued in connection with the
sale thereof have demand registration rights. The Company is obligated to use
its best efforts to maintain any registration statement or post-effective
amendment current until the earlier of the date that all of such securities
have been sold pursuant to the registration statement, or the date the holders
receive a legal opinion of counsel that the securities may be sold under Rule
144, or the second anniversary of the effective date of the registration
statement.
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The Series 98-A Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 97-F;
or (ii) 61 days from March 6, 1998. Each share is convertible into the number of
shares of Common Stock derived by dividing the conversion rate by the conversion
price. The conversion rate is the liquidation preference of $1,000 per share of
Series 98-A Preferred Stock and the dividend amount. The dividend amount is
equal to the liquidation preference of $1,000 per share multiplied by 7% per
annum, multiplied by the number of days since March 6, 1998, divided by 365
days. The conversion price is determined based on the date that the conversion
notice is received ("Conversion Date") and shall equal the lesser of (a) the
average closing bid price of the shares of the Common Stock over the five day
trading period prior to March 6, 1998, or (b) 75% of the average of the closing
bid price of the shares of Common Stock of the Company on the five trading days
ending on the date proceeding the Conversion Date. There are monetary penalties
to the Company if the Common Stock is not delivered to the holder with 5 days of
receipt of a notice of conversion and receipt of the Preferred Stock to be
converted. The Series 98-A must be converted no later than two years from March
6, 1998.
The holder of the Series 98-A Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.
The Series 98-C Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 98-C;
or (ii) 61 days from the Closing Date for each tranche purchased. Each share is
convertible into the number of shares of Common Stock derived by dividing the
conversion rate by the conversion price. The conversion rate is the liquidation
preference of $1,000 per share of Series 98-C Preferred Stock and the dividend
amount. The dividend amount is equal to the liquidation preference of $1,000
per share multiplied by 7% per annum, multiplied by the number of days since
the Closing Date for each tranche purchased divided by 365 days. The conversion
price is determined based on the date that the conversion notice is received
("Conversion Date") and shall equal the lesser of (a) the average closing bid
price of the shares of the Common Stock over the five day trading period prior
to the Closing Date, or (b) 75% of the average of the closing bid price of the
shares of Common Stock of the Company on the five trading days ending on the
date proceeding the Conversion Date. There are monetary penalties to the
Company if the Common Stock is not delivered to the holder with 5 days of
receipt of a notice of conversion and receipt of the Preferred Stock to be
converted. The Series 98-C must be converted no later than two years from the
respective Closing Dates.
The holder of the Series 98-C Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company,
except where an event of default has occurred and remains uncured for ten
business days.
Each share of the Series 98-D Preferred Stock is convertible into 700
shares of Common Stock of the Company at the option of the holder, at any time
after 15 days from October 30, 1998, for a period of two years from October 30,
1998. On the second anniversary from October 30, 1998, the Series 98-D Preferred
Stock automatically converts into Common Stock.
Warrants
As of September 30, 1998, the Company had outstanding warrants entitling
the holders thereof to purchase approximately 5.0 million shares of Common Stock
of the Company at exercise prices which range from $0.265 to $47.50 and with
varying warrant expiration dates. The exercise price of the warrants is
generally subject to adjustment in the event of stock splits, stock dividends
and similar events. Some outstanding warrants expire only on the occurrence of
certain conditions precedent, which are not dates certain. The warrants are not
divided into any series or class, and there is currently no public market for
any of the warrants which are outstanding as of the date hereof.
The various warrant exercise prices were determined arbitrarily by the
Company, and there is no assurance the price of the Common Stock will ever rise
to a level where exercise of the warrants would be of economic value to any the
warrant holders.
The warrants do not confer upon the holders any voting or dividend rights
or any other rights of a shareholder of the Company. The warrants may generally
be exercised during the exercise period upon surrender of the warrant
certificate
30
<PAGE>
at the offices of the Company, with a form of election to purchase generally
shown on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by payment of the full exercise price for the number of
shares being purchased.
Registration Rights
The Company will be able to issue shares of Common Stock upon exercise of
all of the various warrants only if there is a then current prospectus relating
to such Common Stock under an effective registration statement filed with the
Commission or pursuant to an applicable exemption from such requirements, and
only if such Common Stock is qualified for sale or exempt from qualification
under applicable state securities laws of the states in which the various
holders of the warrants reside. Common Stock underlying warrants issued in
connection with the sale of the Series 97-E exchange offering and the Series
98-C Preferred Stock are being registered in this Registration Statement. See
"Selling Security Holders." The warrants issued in connection with the Series
97-E exchange offering were issued with "piggyback" registration rights. The
warrants with "piggyback" registration rights were all issued with an exercise
price equal to the fair market value of the Common Stock or higher on the date
of issue.
In connection with the Series 98-C Preferred Stock, the Company is required
to file a registration statement covering the common stock issuable upon
conversion of the Series 98-C Preferred Stock within 30 days of the Closing Date
of each tranche and to have the registration statement declared effective by
the Commission within 90 days from the Closing Date of each tranche. Failure to
either file the registration statement within 30 days of the Closing Date of
each tranche or have it declared effective within 90 days from the Closing Date
of each tranche will result in the Company paying liquidated damages in the
amount of 1.5% of the principal amount of the securities sold for the first
month, and 2% of the principal amount of the securities sold each month
thereafter until the registration statement is either filed or declared
effective. The liquidated damages cease to accrue upon the earlier of the
effective date or the redemption date.
In the event the registration statement is not declared effective prior to
the 180th calendar day after the closing date of each tranche, the Company must
redeem the Series 98-C Preferred Stock pursuant to the terms of the Certificate
of Secretary and subject to compliance with Utah law. The Company is required to
register 200% of the number of shares of common stock underlying the Series 98-C
Preferred Stock calculated as if all of the registrable securities were
converted five days prior to the filing of the registration statement.
Transfer Agent
The Transfer Agent for the Company's Common Stock is Atlas Stock Transfer
Corporation located at 5899 South State Street, Salt Lake City, UT 84107.
DESCRIPTION OF CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAWS WITH POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Articles of Incorporation and Bylaws contain several
provisions that may make acquiring control of the Company by means of tender
offer, over-the-market purchases, a proxy fight or otherwise more difficult. Set
forth below is a description of certain provisions of the Company's Articles of
Incorporation, as amended and the Bylaws.
Classified Board of Directors
The Articles of Incorporation, as amended, divide the Board of Directors
into three classes, with each class having a term of three years, and with each
class expiring in successive years. Each such class is as near equal in number
as possible. At each annual meeting of shareholders, directors are elected to
succeed those directors whose terms have expired.
The Company believes a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and its
business strategies and policies. The classified Board of Directors provision
should increase the likelihood in the event of a takeover of the Company that
incumbent directors will retain their positions. In addition, the classified
board provision will help ensure the Company's Board of Directors, if confronted
31
<PAGE>
with an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and seek the best available result for all
shareholders.
Special Meetings
The Company's Articles of Incorporation as amended provide that no action
shall be taken by shareholders except at an annual or special meeting of
shareholders. The Company's Articles of Incorporation, as amended, provide that
special meetings of shareholders of the Company may be called by the President
or Chief Executive Officer, or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.
Shareholders Nomination of Directors
The Company's Articles of Incorporation and Bylaws, as amended, establish
an advance notice procedure with regard to the nomination, other than by or at
the direction of the Board of Directors, of candidates for election as directors
and the introduction of business. Only persons who are nominated by the Board of
Directors, or by a shareholder who has given timely prior written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected shall be eligible for election as directors of the Company.
Although the Company's Articles of Incorporation and Bylaws, as amended, do
not give the Board of Directors any power to approve or disapprove shareholder
nominations for the election of directors or any other business properly brought
by the Company's shareholders before an annual or special meeting, the Articles
of Incorporation as amended may have the effect of precluding certain methods of
proposing a nomination for the election of a director or precluding a certain
manner of conducting business at a particular meeting if the proper procedures
are not followed, or may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors, or otherwise
attempting to obtain control of the Company.
Certain Voting Requirements and Business Combinations
Under certain circumstances, the Company's Articles of Incorporation as
amended require the affirmative vote of 70% of the voting power of then
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors, voting together as a single class to approve or
authorize (a) any merger or consolidation of the Company or any subsidiary with
any interested shareholder as defined in the Bylaws, or any other corporation
which is or after such merger or consolidation would be an affiliate (as
defined) of an interested shareholder; (b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with any interested shareholder or
any affiliate of any interested shareholder of any assets of the corporation or
any subsidiary having an aggregate fair market value equal to or in excess of
the lesser of Five Million Dollars ($5,000,000) or twenty (20%) percent of the
gross assets of the Company; (c) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to any interested
shareholder or any affiliate of any interested shareholder in exchange for cash,
securities, or other property having an aggregate fair market value equal to or
in excess of the lesser of $5,000,000 or 20% percent of the gross assets of the
Company; (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an interested shareholder
or any affiliate of any interested shareholder; (e) any reclassification of
securities or recapitalization of the Company or any merger or consolidation of
the Company with any of its subsidiaries or any other transaction which has the
effect directly or indirectly of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
interested shareholder or any affiliate of any interested shareholder. The 70%
vote requirement is not applicable to any business combination, as defined in
the Bylaws, where such business combination is either approved by a majority of
the disinterested directors, or certain price and procedure requirements are
met.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fisher Thurber LLP, 4225 Executive
Square, Suite 1600, La Jolla, California 92037-1483. David A. Fisher, a Partner
of Fisher Thurber LLP, owns an option to purchase 10,000 shares of Common Stock
at $2.00 per share, which was granted on May 14, 1997 in consideration of
services rendered to the Company.
32
<PAGE>
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, have been audited by J.H. Cohn LLP, independent public accountants, as set
forth in their report thereon (which is unqualified and contains an explanatory
paragraph with respect to the Company's ability to continue as a going concern)
included therein and incorporated herein by reference. Such consolidated
financial statements referred to above are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the fiscal year ended December 31, 1996,
have been audited by Ernst & Young LLP, independent public accountants, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to the Company's ability to continue as a going concern, as described in
Note 2 to the consolidated financial statements) included therein and
incorporated herein by reference. Such consolidated financial statements
referred to above are incorporated herein by reference in reliance upon such
report given upon the authority of such firm experts in accounting and auditing.
33
<PAGE>
================================================================================
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any of the
securities other than the securities other than the securities to which it
relates, or an offer or solicitation of an offer to buy any of the securities to
which it relates, or an offer or solicitation to any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
an implication that information contained herein is correct as of any time
subsequent to the date hereof.
------------------
TABLE OF CONTENTS
Page
Prospectus Summary 3
Summary Consolidated Financial Data 5
Risk Factors 6
Selected Consolidated Financial Data 12
Recent Developments 13
Use of Proceeds 13
Selling Security Holders 15
Plan of Distribution 21
Description of Securities 22
Description of Certain Provisions of Articles of
Incorporation and Bylaws with Possible
Anti-Takeover Effects 31
Legal Matters 32
Experts 33
----------------
Until _____ ___, 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
SGI International
--------------
Shares of Common Stock
--------------
PROSPECTUS
--------------
_____________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission ("SEC")
registration fee.
SEC Filing Fee $ 1,304
Blue Sky Fees and Expenses 12,000
Printing and Engraving Expenses 5,000
Accounting Fees and Expenses 7,000
Legal Fees and Expenses 10,000
Miscellaneous 5,000
---------
Total (Estimated) $40,304
=========
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Company's Bylaws, and in accordance with Section 16-10a-901 et
seq. of the Utah Revised Business Corporation Act ("Utah Corporation Act"), the
Company shall indemnify any person who was or is a party or is threatened to
made a party to any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as an officer or director or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses reasonably incurred by him or imposed on him in the connection
with or resulting from the defense of such action, suit or other proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
or in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, or with respect to any criminal action or proceeding,
that the person had reasonable cause to believe that his conduct was unlawful.
The Company's Bylaws provide the Company shall pay for expenses incurred
defending a civil or criminal action, suit or proceeding against a director or
officer of the Company, and shall be paid in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on behalf
of the officer or director, that he shall repay the amount advanced, if it is
ultimately determined he is not entitled to be indemnified by the Company. The
Board of Directors shall approve such undertaking, but shall be liberal with
respect to the requirements for the undertaking, to promote the beneficial and
remedial purposes of protecting those persons who serve as directors and
officers. The Company's Bylaws also provide the Company may purchase and
maintain insurance on behalf of any person who is or was a director or officer,
or employee of the Company, or is or was serving at the request of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or incurred by him in any capacity, or arising
out of his status as such, whether or not the Company would have the power to
indemnify him against liability under the provisions of the Bylaws.
Section 16-10a-901 et seq. of the Utah Corporation Act provides for the
indemnification of officers, directors and agents of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations. The Company currently maintains
officer and director liability insurance with policy limits of $2,000,000.
II-1
<PAGE>
Pursuant to authorization provided under the Bylaws and the Utah
Corporation Act, the Company has entered into indemnification agreements with
each of its directors and officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Utah law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. The
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification. The Company's Bylaws contain a provision
of similar effect relating to advancement or expenses to a director or officer,
subject to an undertaking to repay if it is ultimately determined that
indemnification is unavailable.
Item 16. EXHIBITS
<TABLE>
Exhibit
Number Description
<S> <C>
3.1 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(1)
3.2 Amended Certificate of Secretary re: Designation of Series 97-B Preferred Stock.(1)
3.3 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(1)
3.4 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(1)
3.5 Amended Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(1)
3.6 Form of Debenture for Series 97-E.(1)
3.7 Form of Warrant for Series 97-E.(1)
3.8 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(1)
3.9 Amended Certificate of Secretary re: Designation of Series 97-G Preferred Stock.(1)
3.10 Certificate of Secretary re: Designation of Series 98-A Preferred Stock.(1)
3.11 Certificate of Secretary re: Designation of Series 98-C Preferred Stock.(3)
4.1 Form of Common Stock certificate.(1)
4.2 Form of Warrant Certificate re: Existing Warrants.(1)
4.3 Form of Stock Purchase Warrant re: Series 97-B, 97-D and 97-F Preferred Stock.(1)
4.4 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(1)
4.5 Form of Stock Purchase Warrant re: Series 98-C Preferred Stock.(3)
4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997, between the Registrant and the holders
thereof.(1)
4.7 Amended Series 97-D Preferred Stock Purchase Agreement dated April 1, 1998, between the Registrant and the holders
thereof.(1)
II-2
<PAGE>
4.8 Registration Rights Agreement re: Series 97-D Preferred Stock dated August 12, 1997, between the Registrant and the
holders thereof.(1)
4.9 Amended Registration Rights Agreement re: Series 97-D Preferred Stock, dated April 1, 1998, between the Registrant
and the holders thereof.(1)
4.10 Agreement and General Release re: Series 97-D Preferred Stock, dated April 1, 1998, between the Registrant and the holders
thereof.(1)
4.11 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated November 6, 1997, between the Registrant and
the holders thereof.(1)
4.12 Registration Rights Agreement re: Series 97-F Preferred Stock dated November 6, 1997, between
the Registrant and the holders thereof.(1)
4.13 Series 97-G 8% Convertible Preferred Stock Subscription Agreement dated January 8, 1998, between the Registrant and
the holders thereof.(1)
4.14 Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998, between
the Registrant and the holders thereof.(1)
4.15 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between Registrant
and Dominion Capital dated January 8, 1998.(1)
4.16 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998, between the Registrant and the
holders thereof.(1)
4.17 Agreement between the Registrant and AEM dated December 11, 1997.(1)
4.18 Agreement between the Registrant and The Taxin Network dated April 22, 1997.(1)
4.19 Series 98-A Convertible Preferred Stock Subscription Agreement dated March 6, 1998, between
the Registrant and the holders thereof.(1)
4.20 Registration Rights Agreement re: Series 98-A Preferred Stock dated March 6, 1998, between Registrant and the holders
thereof.(1)
4.21 Form of Series 98-C Convertible Preferred Stock Subscription Agreement dated November 4, 1998 between Registrant and the
holders thereof.(3)
4.22 Form of Registration Rights Agreement re: Series 98-C Preferred Stock dated November 2, 1998 between Registrant and the
holders thereof.(3)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities being registered.(2)
13.1 Annual or Quarterly Report to Shareholders.(3)(4)
23.1 Consent of Ernst & Young LLP, independent public accountants.(2)
23.2 Consent of J.H. Cohn LLP, independent public accountants.(2)
23.3 Consent of Fisher Thurber LLP (included in Exhibit 5.1).
24.1 Power of attorney (see pg. II- 5).
</TABLE>
II-3
<PAGE>
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-2 as declared effective July 22, 1998.
(2) Filed herewith.
(3) Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
(4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997.
Item 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant hereby undertakes:
(1) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly authorized and caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on December 11,
1998.
SGI International
By: /s/ JOSEPH A. SAVOCA
------------------------------------------
Joseph A. Savoca, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph A. Savoca as his or her true and
lawful attorney-in-fact and agent, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or their substitutes may
lawfully do or cause to be done by virtue hereof.
Signatures
/s/ JOSEPH A. SAVOCA ERNEST P. ESZTERGAR
Joseph A. Savoca Ernest P. Esztergar
Chief Executive Officer, Chief Financial Director
Officer and Director December 11, 1998
December 11, 1998
WILLIAM A. KERR WILLIAM R. HARRIS
William A. Kerr William R. Harris
Director Director
December 11, 1998 December 11, 1998
BERNARD V. BAUS NORMAN GRANT
Bernard V. Baus Norman Grant
Director Director
December 11, 1998 December 11, 1998
JAMES W. MAHLER
James W. Mahler
Executive Vice President and Director
December 11, 1998
II-5
12/11/98
Board of Directors
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Re: Form S-2 Registration Statement
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-2 (the
"Registration Statement") to be filed by you with the Securities and Exchange
Commission on or about December 11, 1998, in connection with the registration
for resale under the Securities Act of 1933, as amended, of 13,405,570 shares of
your Common Stock (plus an indeterminate number of additional shares of common
stock relating to certain anti-dilution rights of preferred stock).
We are familiar with the proceedings by which the Common Stock has been
authorized, and we have reviewed and are familiar with the Articles of
Incorporation, as amended, and the By-Laws of the Company and such other
corporate records and documents as we have deemed necessary to express the
opinion herein stated. We have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, the conformity to
original documents and all documents submitted to us certified or photostatic
copies, and the authenticity of the originals of such latter documents.
Based upon the foregoing, we are of the opinion that the Common Stock
to be sold and delivered in accordance with the Registration Statement will be
legally issued, fully paid and nonassessable.
We hereby consent to the references to this firm in the Legal Matters
section of the Registration Statement. We further consent to the use of this
opinion as an exhibit to the Registration Statement and any amendments thereto.
FISHER THURBER LLP
By: /s/ David A. Fisher
David A. Fisher
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-2) and related Prospectus of SGI International
for the registration of 13,405,570 shares of its common stock and to the
incorporation by reference therein of our report dated March 20, 1997, except
for Note 11, as to which the date is April 14, 1997, with respect to the
consolidated financial statements of SGI International included in its Annual
Report (Form 10-K) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
December 7, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-2 of our report, dated March 27, 1998, on the consolidated
financial statements of SGI International and subsidiaries (the "Company") as of
and for the year ended December 31, 1997, which appears in the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997, and contains
an explanatory paragraph with respect to the Company's ability to continue as a
going concern. We also consent to the reference to our firm under the caption
"Experts" in the Prospectus of the Registration Statement.
J.H. COHN LLP
San Diego, California
December 7, 1998
