As filed with the Securities and Exchange Commission on January 23, 1998.
Registration No._________
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 and telephone number
of agent for service)
---------------------------
Copies to:
FISHER THURBER, LLP
TIMOTHY J. FITZPATRICK, ESQ.
DAVID A. FISHER, ESQ.
4225 Executive Square, Suite 1600
La Jolla, CA 92037-1483
Tel. (619) 535-9400
Fax (619) 535-1616
---------------------------
Approximate date of commencement of proposed sale to
the public: As soon as practicable after the Registration
Statement has become effective.
---------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
- ------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<S>
Title of each class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price per Aggregate Offering Registration
registered registered (1)(2) Unit(3) Price (3) Fee
Common Stock, no par <C> <C> <C> <C>
value, which may be sold
by selling shareholders..... 139,714 $0.99 $ 138,317 $ 41.91
Common Stock, no par
value, underlying
outstanding Convertible
Preferred Stock............. 7,093,003 $0.99 $7,022,073 $2,127.90
Common Stock, no par
value, outstanding
underlying Warrants......... 1,411,360 $0.99 $1,397,246 $ 423.41
TOTAL....................... . . . . . . . . . . . . . . . . . . . . . . . $2,593.22
============================ ==================== ======================= =========================== ==================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement covers such additional indeterminate number of shares of common
stock as may be issued by reason of adjustments in the number of shares of
common stock issuable pursuant to anti-dilution provisions contained in the
existing warrants and convertible preferred stock. Because such additional
shares of common stock will, if issued, be issued for no additional
consideration, no additional registration fee is required.
(2) The number of shares of common stock registered herein underlying certain
convertible preferred stock is indeterminate and is estimated to include
the shares of common stock required to fulfill the conversion rights of
preferred stock which is convertible into a given number of common shares
in part based upon conversion formulae, referencing fluctuating market
prices and is also estimated to satisfy contractual obligations of the
Company requiring the registration of various amounts up to 230% of the
number of shares of Common Stock issuable upon conversion of the Company's
Series 97-D and 97-F Convertible Preferred Stock.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933,
based on the average of the bid and ask prices of the Company's common
stock on the OTC Bulletin Board on January 20, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREFORE BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
Subject to Completion dated January 23, 1998
PROSPECTUS
SGI INTERNATIONAL
1,411,360 Shares of Common Stock underlying outstanding
warrants 7,093,003 Shares of Common Stock underlying outstanding
convertible preferred stock
139,714 Shares of outstanding Common Stock
This Prospectus (the "Prospectus") relates to the public offering, which is
not being underwritten, and the resale by the holders of (i) an aggregate of
1,411,360 shares ("Warrant Shares") of common stock no par value ("Common
Stock") issuable upon exercise of certain outstanding warrants to purchase
Common Stock of the Company ("Existing Warrants"); (ii) an aggregate of
7,093,003 shares of common stock issuable upon conversion of various series of
outstanding convertible preferred stock issued in 1996 and 1997 including shares
of Common Stock issuable upon exercise of outstanding warrants which were issued
in connection therewith; and shares of Common Stock issued to the placement
agents for the Company in connection therewith (the "Preferred Shares"). This
Prospectus also relates to the resale which is not being underwritten by the
holders of an aggregate of 139,714 shares of outstanding common stock ("Selling
Shares"). The Warrant Shares, Preferred Shares and Selling Shares are referred
to herein as the "Securities." The Securities may be offered by certain
shareholders of the Company (the "Selling Security Holders") from time to time
in transactions in the over-the-counter market through the OTC Bulletin Board,
in privately negotiated transactions, through the writing of options on the
Securities, or through a combination of such methods of sale, at fixed prices
that may be changed, at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices, or at negotiated prices. The Selling
Security Holders may effect such transactions by selling the Securities to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of the Securities for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation as to
a particular broker-dealer might be in excess of customary commissions). See
"Selling Security Holders" and "Plan of Distribution."
The Company shall receive the proceeds from the exercise (if any) of the
Existing Warrants. None of the proceeds from the sale of the Securities by the
Selling Security Holders will be received by the Company. The Company has agreed
to bear all expenses (other than selling commissions and fees and expenses of
counsel and other advisers to the Selling Security Holders) in connection with
the registration and sale of the Securities being offered by the Selling
Security Holders. The Securities offered hereby were restricted securities under
the Securities Act prior to their registration hereunder. This Prospectus has
been prepared so that future sales of common stock by the Selling Security
Holders will not be restricted under the Securities Act of 1933 (the "Securities
Act"). See "Selling Security Holders."
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "SGII." On January 20, 1998, the last reported bid and ask prices for the
Common Stock were $.9687 and $1.02, respectively.
THE SECURITIES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is January __, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549, and at the
Commission's regional offices: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Suite
1300, 7 World Trade Center, New York, New York 10048. Copies of such materials
can also be obtained at prescribed rates from the Public References Section of
the Commission at 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Commission's web site is located at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete, and reference is made in each instance to the complete
copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including all exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, DC, and copies of all or any part thereof may be obtained from such
office after payment of fees prescribed by the Commission.
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
INFORMATION INCORPORATED BY REFERENCE
The Company regularly files documents with the Securities and Exchange
Commission to comply with applicable government regulations, including Form 10-Q
and Form 10-K. The Company will provide without charge to each person, including
any beneficial owner, to whom this Prospectus is delivered, a copy of the Form
10-K for the year ended December 31, 1996, and the 10-Q for the quarter ended
September 30, 1997, and upon written or oral request of such person, a copy of
any and all of the other documents that have been filed with the Securities and
Exchange Commission and incorporated by reference in this Prospectus (other than
exhibits to such documents which are not specifically incorporated by reference
herein). Such requests should be directed to SGI International, Attn: George
Donlou, Controller, at its principal offices located at 1200 Prospect Street,
Suite 325, La Jolla, CA 92037 (619) 551- 1090.
The following documents previously filed with the Commission, except as
superseded or modified herein, are hereby incorporated by reference into this
Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; (iii)
the Company's definitive Form 14a (Proxy) dated May 23, 1997; (iv) the Company's
Form 8-K dated November 24, 1997; (v) the Company's 1934 Act Registration
Statement on Form 8-A; and (vi) each additional exhibit from all of the
Company's prior 1933 Act filings.
2
<PAGE>
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus.
No person is authorized in connection with any offering made hereby to give
any information or make any representation not contained or incorporated by
reference in this Prospectus, and any information not contained or incorporated
herein must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus at any time nor any sale made hereunder shall, under any
circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
---------------------------
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. When included in this
Prospectus, the words "expects," "intends," "anticipates," "plans," "projects"
and "estimates," and analogous or similar expressions are intended to identify
forward-looking statements. Such statements, which include statements contained
in "Prospectus Summary," "Risk Factors," "Business" and elsewhere are inherently
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those reflected in such forward-looking statements.
For a discussion of certain of such risks, see "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward- looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
3
<PAGE>
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information, including "Risk
Factors," and the financial statements incorporated by reference herein
appearing elsewhere in this Prospectus or incorporated by reference herein.
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Existing Warrants.
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel ("PDF") and coal
derived liquids ("CDL"), and at the same time reduce the PDF's pollution
potential when it is subsequently burned for fuel. The Company believes the LFC
Process could upgrade a significant portion of the world's abundant low-rank
coal reserves into coal and petroleum-based products which could provide
cost-effective compliance with certain environmental legislation and regulations
including the United States Clean Air Act ("Clean Air Act") and other current
and possibly future U.S. and international environmental regulations or
concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes countries outside the United States who
currently generate much of their electricity from burning coal, and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.
In 1989 the Company contributed the LFC Process to the TEK-KOL Partnership
("TEK-KOL"). TEK-KOL currently consists of the Company and a subsidiary of
Zeigler Coal Holding Company ("Zeigler"). Zeigler is a coal producing company in
the United States. The LFC Process has been used to produce PDF and CDL for test
burning at the "Clean Coal Demonstration Plant" ("Demonstration Plant") owned by
Zeigler in Gilette, Wyoming. To date the Demonstration Plant has produced
approximately 114,900 tons of PDF and 116,100 barrels of CDL, and has shipped
over 83,500 tons of PDF to seven electric utilities in six states, and 104,000
barrels of CDL to eight industrial users in seven states. The purpose of the
Demonstration Plant, which was originally intended to operate for two years, was
to demonstrate the validity of the LFC Process. The Demonstration Plant was
constructed pursuant to an agreement between the U.S. Department of Energy and
ENCOAL Corporation, a Shell Mining Company subsidiary, as part of the U.S.
government's "Clean Coal Technology Program." The Company believes the operation
of the Demonstration Plant from 1995 through the third quarter of 1997 when its
operations were suspended, has provided invaluable design data and engineering
parameters to assist in the commercial scale development of the LFC Process.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.
4
<PAGE>
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil and resid produced in oil
refining in order to increase the efficiency of crude oil refineries. The OCET
Process is still in the development stage, and will require substantial research
and development before it is ready (if ever) for commercial use. The
Company has another wholly owned operating subsidiary, Assembly and
Manufacturing Systems, Inc. ("AMS"). AMS designs and produces custom automated
assembly equipment primarily for manufacturers in the biomedical, automotive,
electronics and computer industries.
The Offering
<TABLE>
<S> <C>
Securities Offered(1)(2)................................ 8,644,077 shares of Common Stock
Common Stock outstanding as of
January 16, 1998(3)(4)................................... 9,522,786
Common Stock outstanding after this offering(3)(4)...... 18,166,863
Use of Proceeds......................................... The Company will not
receive any of the proceeds from the conversion of the Preferred Shares or from
the sale of the Selling Shares. To the extent any of the Existing Warrants are
exercised the net proceeds received by the Company will be used for research
and development, working capital and general corporate purposes. The use of
proceeds is subject to change based on the extent to which Existing Warrants
are exercised, future occurrences, LFC and OCET development requirements and
other factors. See "Use of Proceeds."
OTC Bulletin Board Symbol............................... SGII
Risk Factors............................................ This offering involves
a high degree of risk, including without limitation substantial risk resulting
from the Company's lack of revenue, uncertain availability of required
additional capital, as well as the risks associated with developing
technologies and uncertain markets and legislative impacts. See "Risk Factors."
</TABLE>
- --------
(1) For a description of the voting and other rights of the Common Stock see
"Description of Securities--Common Stock."
(2) Includes: (i) 524,437 shares of Common Stock issuable upon exercise of the
Existing Warrants; (ii) up to 7,093,003 shares of Common Stock issuable upon
conversion of outstanding Preferred Stock; and (iii) up to 886,923 shares of
Common Stock issuable upon exercise of the arrants issued in connection with
the Preferred Share Warrants registered hereby.
(3) Does not include: (i) 2,000,000 shares of Common Stock reserved for
issuance under the Company's stock-based compensation plans of which
options to acquire 441,000 shares have been granted as of the date of this
Prospectus; (ii) 2,763,746 shares of Common Stock issuable upon exercise of
other outstanding warrants not registered herein; (iii) up to 2,901,056
shares of Common Stock issuable upon conversion of various series of
outstanding Preferred Stock not registered herein; and (iv) up to 813,811
shares of Common Stock issuable upon conversion of outstanding convertible
debentures not registered herein.
(4) Includes estimated numbers of shares which may be issued upon conversion of
outstanding Preferred Stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The Summary Consolidated Financial Data set forth below should be read
in connection with the financial statements included in the materials
incorporated by reference herein.
<TABLE>
Consolidated Statement of Operations Data:
<S> Nine months ended
Years ended December 31, September 30,
---------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
----- ------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 693,118 $ 809,910 $ 552,503 $ 900,306(1) $ 4,244,268(2) $ 3,184,649 $ 3,809,650
Net Loss............ $(4,915,472) $(6,116,388) $(5,844,121) $(6,824,940)(1) $(4,259,365)(2) $(3,209,511) $(3,946,944)
Imputed Dividends (3) -- -- -- -- -- -- $ 381,073
Net loss Per Common
Share .............. $(3.14) (3.62) (3.02) (2.46)(1) (0.80)(2) (0.63) (0.63)
Weighted Average
Common Shares
Outstanding......... 1,564,124 1,691,675 1,933,032 2,744,084 5,357,010 5,115,776 6,851,470
</TABLE>
Consolidated Balance Sheet Data:
Nine Months ended
September 30, 1997
-------------------
December 31, 1996 Actual As Adjusted(4)
----------------- ------ -------------
Current Assets........................ $ 2,295,167 $2,049,434 $6,179,020
Working capital (deficiency)(5)........ (4,015,187) (4,976,751) (847,165)
Total assets............................ 6,628,678 6,177,973 10,307,559
Long-term debt, less
current portion........................... 123,750 116,625 116,625
Total liabilities....................... 6,434,104 7,142,810 7,142,810
Shareholders' equity
(deficit)(3).............................. 194,574 (964,837) 3,164,749
- -----------------------------
(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) AMS recorded revenue of $3,939,000 and income from operations of $498,000
for the twelve months ended December 31, 1996.
(3) No cash dividends have been declared or paid on the Company's common stock
since inception.
(4) Assumes exercise of all Existing Warrants, Preferred Share Warrants and
conversion of all Convertible Preferred Stock, and inclusive of all proceeds to
be received upon exercise of the Warrants. See "Use of Proceeds."
(5) Working Capital is defined as current assets minus current liabilities.
Current liabilities represented include only obligations due within twelve
months.
6
<PAGE>
RISK FACTORS
The purchase of the securities offered hereby involves a high degree of
risk. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including but not limited to those set forth in the following risk
factors and elsewhere in the Prospectus. Further, any such forward-looking
statements speak only as of the date on which a statement was made, and the
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. Prospective purchasers of
these securities should carefully review and consider the risk factors set forth
below, as well as the other information contained herein.
Limited Operating Revenues; Accumulated Deficit; Expectation of Future Losses
The Company has experienced operating losses in each fiscal period since
its inception in 1980. As of September 30, 1997, the Company had a deficit
accumulated of approximately $46.4 million and a working capital deficiency of
approximately $5.0 million. The Company's operations may result in substantial
and continuing losses for the indefinite future. Except for the operation of
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
which it acquired in October, 1995, the Company has generated only nominal
revenues from operations. The development of the Company's LFC Process and OCET
Process will require the commitment of substantial resources for the underlying
technology to be finalized and licensed to third parties, or for a sale of such
technologies, and to establish marketing, sales and administrative capabilities.
There can be no assurance the Company will be successful in any of these
endeavors. There can be no assurance the Company will enter into agreements with
third parties for product development and commercialization, or will
successfully market or license the LFC Process or the OCET Process. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, manufacture and market its proprietary technologies. There can be no
assurance the Company will be able to accomplish these tasks. Significant delays
in any of these matters could have a material adverse impact on the Company's
business, financial condition and results of operations.
Going Concern Assumption
The Company's independent auditors' report on the Company's financial
statements as of December 31, 1996 and for the years ended December 31, 1995 and
1994 contains an explanatory paragraph indicating the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. The Company will require substantial additional funds in the
future, and there can be no assurance that any independent auditors' report on
the Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the cost of its operations. The
existence of the explanatory paragraph may have a material adverse effect on the
Company's business, financial condition and results of operations.
Future Capital Requirements Uncertain; No Assurance of Future Funding
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, and to market its proposed LFC
Process and OCET Process. The Company's future capital requirements will depend
upon numerous factors, including the amount of revenues generated from AMS
operations, the cost of the Company's sales and marketing activities and the
progress of the Company's research and development activities, none of which can
be predicted with certainty. However, the Company will seek additional funding
during the next few months and could seek additional funding after such time.
There can be no assurance any additional financing will be available on
acceptable terms, or at all, when required by the Company. Moreover, if
additional financing is not available, the Company could be required to reduce
or suspend its operations, seek an acquisition partner or sell
7
<PAGE>
securities on terms that may be highly dilutive or otherwise disadvantageous
to investors. The Company has experienced in the past, and may continue to
experience, delays in its LFC Process product development due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has a line of credit with a financial institution for
approximately $400,000 and has borrowings of $400,000 as of the date of this
Prospectus. The Company does not anticipate being able to secure any additional
bank financing in the foreseeable future. The Company intends to finance the
development and marketing of its proposed LFC Process and OCET Process through
licensing agreements, strategic alliances and other arrangements with third
parties. There can be no assurance such license, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development, competitive and
technological advances, and other factors.
Risk Involved in Commercializing Technology
There can be no assurance that either the LFC Process or OCET Process will
complete development; will ultimately prove to be commercially viable; that the
Company will locate project participants or secure agreements to construct,
finance, develop and operate LFC Process plants or OCET Process plants; that the
market for the products produced by LFC Process plants will be such that any of
such plants will be economical, and even if economical, profitable; and that
future governmental and tax regulations, if enacted, would not significantly and
adversely impact the ability of the Company to market the LFC Process, the OCET
Process or other technologies to be developed by the Company. See "Business."
Risks Associated with International Development
The Company believes there are significant growth opportunities in the next
several years for the LFC Process in markets outside of the United States. The
Company is actively pursuing projects in Russia, Indonesia and China. There can
be no assurance the Company will license, sell or otherwise generate revenue
from the LFC Process in any of these foreign countries. Additionally, other
countries may be identified as attractive development prospects in the future.
Doing business in foreign countries exposes the Company to many risks that are
not present in the United States, including political, military, privatization,
currency exchange and repatriation risks, and higher credit risks that may be
associated with potential customers. In addition, it is possible that legal
obligations may be more difficult for the Company to enforce in foreign
countries and that the Company may be at a disadvantage in any legal proceeding
within the local jurisdiction. Local laws may also limit the ability of the
Company to hold a majority interest in some of the projects that it may develop.
Uncertainty of Community Support
Development, construction and operation of LFC Process or OCET Process
production facilities require numerous environmental and other permits. The
process of obtaining these permits can be lengthy and expensive. In addition,
local opposition to a particular project can substantially increase the cost and
time associated with developing a project, and can potentially render a project
unfeasible or uneconomic. The Company may incur substantial costs or delays or
may be unsuccessful in developing LFC Process and/or OCET Process production
facilities as a result of such opposition.
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Federal Regulation of Air Emissions
The Company believes a significant factor creating demand for the LFC
Process in the United States is the Clean Air Act, as amended by the Clean Air
Act Amendments of 1990 (the "Clean Air Act"). The Clean Air Act specifies
certain air emission requirements for electrical utility companies and
industrial fuel users. The Company believes that compliance with such
regulations by these coal users can be fully or partially met through the use of
clean-burning fuel technologies such as the LFC Process being developed by the
Company. A full or partial repeal of the Clean Air Act could have a material
adverse effect on the Company. The Company is unable to predict future
regulatory changes and their impact on the demand for the Company's products.
See "Business - Government Regulation."
No Established Market for LFC Process or OCET Process Products
Although the Company believes a substantial market will develop both
domestically and internationally for the LFC Process and the OCET Process, an
established market does not currently exist. Since no established market exists,
the availability of accurate and reliable demand, pricing information and
transportation alternatives are not fully known. The future success of the
Company will be determined by its ability to establish a market for the LFC
Process among potential customers such as electrical utility companies and
industrial coal users and for the OCET Process by oil refineries and others.
Many of such potential users of the Company's fuel products will be able to
choose among alternative fuel supplies. Although the Company believes the LFC
Process has been demonstrated successfully on a test basis at the Demonstration
Plant, the market viability of the LFC Process will not be known until third
parties such as electric utilities or coal mining companies with substantial
resources or partners construct one or more commercial-scale LFC Process
production facilities, either in the United States or internationally, that
produce PDF and CDL that meet certain minimum performance specifications. Until
the LFC Process and the OCET Process are completed, the Company may be unable to
attract licenses or other parties to build and operate either an LFC Process
plant or an OCET Process plant. See "Business - LFC Process."
Continued Participation of Bluegrass and the ENCOAL Corporation
Bluegrass Coal Holding Company ("Bluegrass") is a wholly owned subsidiary
of Zeigler Coal Holdings. Bluegrass, formerly known as SMC Mining Company, is
the Company's sole partner in TEK-KOL. The ENCOAL Corporation is a wholly owned
subsidiary of Bluegrass. ENCOAL is the licensee of a LFC Process license from
TEK-KOL, and is the owner of the Demonstration Plant, which ENCOAL constructed
and operated through September 30, 1996, pursuant to a Cooperative Research and
Development Agreement with the U.S. Department of Energy. ENCOAL has expended
substantial funds in the operation and maintenance of the Demonstration Plant.
There are no assurances ENCOAL will continue to expend funds or restart the
Demonstration Plant. The determination by ENCOAL to suspend operations of the
Demonstration Plant in the fourth quarter of 1997 may have a material adverse
impact on the business and operations of the Company. In the event Bluegrass
were to withdraw from, terminate, or offer to sell its interest in TEK-KOL, it
could have a material adverse impact on the business and operations of the
Company. Zeigler has made public announcements that it is interested in a sale
of its business. See "Business - LFC Process Demonstration Plant."
Patents and Proprietary Rights
The Company's success will depend, in large part, on the Company's ability
to obtain patent protection for the proposed LFC Process and OCET Process, both
in the United States and in foreign countries. The Company currently has three
patents issued, and one additional patent application pending in the United
States for the LFC Process and one patent pending for the OCET Process. There
have been foreign counterparts to certain of these applications filed in other
countries on behalf of the Company. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, or that the claims allowed will be sufficiently broad to protect
the Company's technology. In addition, there can be no assurance any patents
issued to the Company will
9
<PAGE>
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide adequate proprietary protection to the Company. In
addition, any patents obtained by the Company will be of limited duration.
All United States patents issuing from patent applications filed June 8, 1995,
or thereafter will have a term of 20 years from the date of filing. All United
States patents in force before June 8, 1995 will have a term of the longer of:
(i) 17 years from the date of issuance; or (ii) 20 years from the date of
filing. All United States patents issuing from patent applications applied for
before June 8, 1995 will have a term equal to the longer of: (i) 17 years from
the date of issuance; or (ii) 20 years from the date of filing. All United
States design patents have a 14 year life from the date of issuance. Further,
U.S. patents do not provide any remedies for infringement that occurred
before the patent is granted.
The commercial success of the Company may also depend upon avoiding
infringing patents issued to competitors. If competitors prepare and file patent
applications in the United States that claim technology also claimed by the
Company, in accordance with the requirements of the TEK-KOL Agreement, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office ("PTO") to determine the priority of invention,
which could result in substantial cost, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, and could require the Company to license disputed rights from
third parties or cease using all or part of the licensed technology. A U.S.
patent application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its competitors
in the PTO.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of the Company's technology
which may be patented, or duplicate the Company's trade secrets. In some cases,
the Company may rely on trade secrets to protect the Company or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored, or that others will not independently develop similar or
superior technology. To the extent consultants, key employees, or other third
parties apply technological information independently developed by them or by
others to Company projects, disputes may arise as to the proprietary rights to
such information, which may not be resolved in favor of the Company. See
"Business - Patents and Proprietary Technology."
Dependence on Others
Prior to the acquisition of AMS the Company realized only nominal revenues
from operations. Without the financial participation and services of others, the
Company does not and is not expected to have sufficient capital, personnel,
experience or resources to finance, design, engineer, construct or operate
either an LFC Process or an OCET Process production plant.
Success in commercialization of the LFC Process and OCET Processes is
dependent upon the Company's ability to enter into satisfactory arrangements
with other partners, financiers or customers to construct, develop, operate and
manage LFC Process and OCET Process plants, and upon the ability of these third
parties to perform their responsibilities. The resources required to profitably
develop, construct and operate an LFC Process plant are likely to require
$100-$400 million dollars or more, several years of construction and expertise
in major plant development and operations. The Company believes that if such
agreements can be completed, the parties to any such arrangements would have an
economic motivation to succeed in performing their contractual responsibilities.
The amount and timing of resources to be devoted to these activities by such
third parties will likely not be within the control of the Company. There can be
no assurance any licenses, joint venture agreements or other arrangements will
be available on terms acceptable to the Company, if at all; that such parties
will perform their obligations as expected; that any revenue will
10
<PAGE>
be derived from such arrangements; or that, if revenue is generated, any of
said arrangements will be profitable to the Company. If the Company is
unsuccessful in its attempts to license the LFC Process or OCET Process it will
have a material adverse impact on the business and operations of the Company.
See "Business."
Electric Utility Regulatory Changes
The domestic electric utility industry is in the early stages of
deregulation, similar to that which occurred with the natural gas utility
industry. The National Energy Policy Act of 1992 exempts a new class of
facilities from certain federal utility regulation and liberalizes access for
non-utility generators to the utility power transmission grid. It also initiated
competition in the wholesale electric market. In addition, many states are
considering the elimination of many of the regulations that currently limit
the ability of parties to sell within specific geographic boundaries, which
were previously reserved for the local independent electric utility, municipal
electricity utility or rural cooperative. The Company believes these regulatory
changes will result in utilities and other power generators striving to reduce
costs. This will result in increased competition in the electric wholesale and
retail markets and increase pressures on all suppliers to electric utilities to
reduce costs. These factors may make it more difficult to obtain the pricing
needed to sell LFC Process products into the U.S. utility market.
Competition and Technology Obsolescence
The principal market for PDF and CDL is the energy industry, which is
intensely competitive. There are many utility companies, coal companies and
other companies engaged in research into ways to clean or convert coal into a
more acceptable fuel or other commercially viable product. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, test and license coal related technologies. In addition, some of these
companies have extensive experience in operating coal technology plants. These
companies may develop and introduce coal related technologies competitive with
or superior to those of the Company prior to any market acceptance for the LFC
Process or other technologies developed by the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter,
construct, own and operate a plant using the LFC Process which is successful in
supplying processed coal products, are expected to be important competitive
factors. The Company expects that competition will be based, among other things,
on how economically, if at all, the LFC Process coal products can be produced,
their quality, compliance with environmental standards, transportation costs,
government incentive programs, comparison to energy generating alternatives, and
the strength of any patents on the LFC Process or other potential technologies.
These factors indicate significant long-term competition for the Company.
There can be no assurance developments by these various competitors will not
render the Company's or its affiliates' technologies and processes obsolete or
noncompetitive. See "Business - Competition."
Customer Concentration; Dependence on Few Customers
Since AMS typically builds one significant system for each of a small
number of customers annually many of its customers in any one fiscal period may
be responsible for ten percent or more of its revenues for that fiscal year.
Since most of the systems developed and sold by AMS are for a unique application
such a concentration of revenues does not necessarily indicate AMS will receive
any revenues from a prior customer in a subsequent period.
For the nine months ended September 30, 1997, two customers, Eaton
Corporation and Pairgain Technologies, together represented approximately 40.2%
of AMS's sales. Pairgain Technologies was the single largest customer
11
<PAGE>
accounting for approximately 27.5% of sales, while Eaton Corporation represented
approximately 12.7% of sales. AMS expects that a small number of customers will
continue to account for a substantial portion of its sales for the foreseeable
future. Assembly does not have long term contracts with any of its customers,
and there can be no assurance they will continue to purchase AMS's products. Due
to the small number of annual projects entered into by AMS a significant
performance problem with AMS project could have a material adverse effect on
AMS. For the year ending December 31, 1996, AMS had four major customers, Alza
Corporation representing 16.3%; Motorola Inc. representing 11.3%; Nacom
representing 19.1%; and TRW Safety Systems representing 30.8% of AMS's sales,
who were different from the major customers in the same period in 1997, and who
accounted for approximately 75% of its sales. There can be no assurance that
revenue from customers that 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. See "Business - AMS Major Customers."
Dependence Upon Key Personnel
The Company's success in developing the LFC Process, the OCET Process and
additional marketable products and processes and achieving a competitive
position will depend, in large part, on its ability to retain qualified
scientific and management personnel and, in particular, Dr. Ernest Esztergar and
Joseph Savoca, President and CEO, respectively. There can be no assurance that
the Company will be able to retain such personnel. The loss of either or both of
these individuals could have a material adverse impact on the business and
operations of the Company. The Company's potential growth and any expansion into
areas and activities requiring additional expertise, such as expanded programs
for the LFC Process and OCET Process research, testing, engineering and
marketing, would be expected to place increased demands on the Company's human
resources. These demands are expected to require the addition of new management
and scientific personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospectus for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, and
research and development strategies. Most, if not all, of the Company's
consultants and advisors are self-employed or are employees of other companies,
and may have commitments to, or consulting or advisory contracts with, more than
one other entity that may affect their ability to contribute to the Company.
Environmental and Other Government Laws, Regulations and Project Approvals
Potential LFC Process and/or OCET Plants are now and will likely in the
future be subject to federal, state and local environmental and other laws and
regulations. These laws and regulations include, but are not limited to, the
Clean Air Act and various regulatory provisions of the United States Department
of Energy, the Environmental Protection Agency, the United States Treasury
Department and Internal Revenue Service, as well as the laws and regulations of
other countries and international treaties.
The Company's operations may be directly affected by various laws, or
indirectly affected as a result of market changes in response to laws and
regulations, or market participants' economic behavior in response to laws and
regulations. For example, electric utilities under the recent amendments to the
Clean Air Act may have various options from which to comply with more stringent
standards required under said Act. These utilities may choose to concentrate and
invest their funds in other areas such as advanced and improved scrubbers for
smokestacks to extract pollutants from their existing power plants in order to
reduce emissions rather than purchase processed fuels, such as the products
which could be produced using the LFC Process. There is no assurance the Company
will be in a position to offer competitive products and incentives for utilities
or others to purchase LFC Process products as a method of complying with
regulatory constraints, including the amended Clean Air Act and other
regulations.
Moreover, there can be no assurance future tax policy of the U.S. or other
countries will not negatively impact the Company's prospects and revenue, if
any. For example, the U.S. Government, through the Department of Energy and
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<PAGE>
other offices of the executive branch, could choose to implement tax and other
policy directives to encourage the production and use of other fuel sources, for
example, natural gas, and discourage the production and use of coal.
It is likely LFC Process Plants will continue to be subject to the
application of various environmental regulations designed to ensure, among other
things, environmentally compatible plant operations. Failure to comply with
applicable regulatory requirements can result in fines, suspensions of
regulatory approvals, operating restrictions, criminal prosecution and other
negative consequences. Furthermore, additional government regulation may be
established in the future, which could prevent or delay the commercialization of
LFC Process and/or OCET Process. See "Business Government Regulation."
Risk of Hazardous Material Contamination
Future LFC Process Plants and the Demonstration Plant in Wyoming involve
the use of certain hazardous materials. Although the Company believes the safety
procedures which have been employed by ENCOAL for handling and
disposing of such materials, as well as those which could be employed by any
licensees of the LFC Process, comply with the standards prescribed in applicable
state and federal laws and regulations, the risk of an accidental contamination
or injury from these materials cannot be completely eliminated.
Dilution
The Company has a substantial number of outstanding options, warrants and
other convertible securities. The exercise of the options or warrants or
conversion of any significant number of these convertible securities would
result in substantial additional dilution. In addition, as long as options,
warrants or convertible securities are outstanding, the terms upon which the
Company will be able to obtain equity capital may be adversely affected.
No Dividends Paid on Common or Preferred Stock
The Company has never paid any cash dividends on its Common Stock or
Preferred Stock and does not anticipate the payment in the near future of any
cash dividends. Payment of dividends on the Common Stock or Preferred Stock is
within the discretion of the Board of Directors, is subject to state law, and to
preferences of other outstanding securities of the Company, and will depend upon
the Company's earnings, if any, its capital requirements, financial condition
and other relevant factors.
Market Value of Company's Securities
The Company will be required to obtain additional funds from investors in
consideration for the sale and issuance of its debt or equity securities to
continue in business. In the event the market price of the publicly traded
Common Stock of the Company decreases below a certain amount, the Company may be
unable to sell additional equity of the Company, or if it is able to sell
securities, it may not obtain sufficient consideration from the sale of its
securities to provide adequate funding to continue its operations.
Current Registration Statement and State Blue Sky Compliance or Exemption
Required for Exercise of Existing Warrants and Conversion of Convertible
Preferred Stock.
The Company will be able to issue registered shares of Common Stock upon
exercise of all of the Existing Warrants and/or the conversion of any of the
Preferred Stock only if there is a then current prospectus relating to such
Common Stock under an effective registration statement filed with the Securities
and Exchange Commission or an applicable
13
<PAGE>
exemption is available, and only if such Common Stock is qualified for sale or
exempt from qualification under applicable state securities laws of each
jurisdiction in which the various holders of the Existing Warrants and the
Preferred Stock reside. Subject to its other contractual obligations, the
Company reserves the right in its sole discretion to determine not to register
or qualify such Common Stock in any jurisdiction where the time and expense do
not justify such registration or qualification. The Existing Warrants and the
Preferred Stock may be deprived of any value in the event the Company does not
satisfy or the Company chooses not to satisfy any such state and federal
requirements. Although it is the present intention of the Company to satisfy
such requirements, there can be no assurance the Company will be able to do so.
Anti-Takeover Provisions and Inadequate Assets for Liquidation Preference of
Preferred Stock
Certain provisions in the Articles of Incorporation and Bylaws of the
Company may be deemed to have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that may be favorable to the interests of the
shareholders. Such provisions may also adversely effect market prices of the
Common Stock. These provisions include classification of the Company's Board of
Directors into three classes, each of which serves for a different three-year
period, advance notice procedures for shareholder nominations for the election
of directors and business to be brought by shareholders for an annual meeting.
Such advance notice procedures must be given in the manner provided by the
Bylaws. Amendment or repeal of the classification of directors and advance
notice provisions requires the vote of 70% of all shares entitled to vote for
directors. In addition, the Articles of Incorporation require the affirmative
vote of 70% of the voting power of the outstanding shares of capital stock for
certain business combinations, including mergers, consolidations, sales,
leases, transfers, reclassification and recapitalizations. Amendment or repeal
of the 70% vote requirements for business combinations requires the vote of 70%
of all voting shares.
The Company's Board of Directors is authorized to issue up to 20,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms and privileges with respect to any series of preferred stock.
The issuance of any series of preferred stock having rights superior to those of
the Common Stock may result in a decrease in the value or market price of the
Common Stock, and could further be used by the Board as a device to prevent a
change in control of the Company. Holders of outstanding preferred stock
currently have, and future holders of preferred stock may have, the right to
receive dividends, and certain preferences in liquidation and conversion rights.
The issuance of preferred stock could, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of the Company
without further vote or action by the shareholders and could adversely affect
the voting and other rights of the holders of Common Stock. In the event of a
sale, dissolution or bankruptcy of the Company, such preferred shareholders
would have a preference over the common shareholders as to any assets remaining
after distribution to creditors. Without a substantial change in the Company's
current financial situation, as of September 30, 1997 there will not be enough
assets upon liquidation to pay any portion of the preferences of any of the
outstanding series of preferred stock, or to provide any distribution to common
shareholders. See "Description of Certain Provisions of the Articles of
Incorporation and Bylaws with Possible Anti-Takeover Effect."
Market for LFC Process Plant Products
The Company believes the potential market for processed coal to be produced
by LFC Process plants includes utilities, independent power producers, certain
manufacturers of steel using new technologies, and other industrial enterprises
which use coal, both in and outside of the United States. The potential market
for the coal-derived liquid fuels includes industrial fuel users, refineries and
makers of chemical products in the United States and foreign countries. The
Company's ability to market the LFC Process to any significant portion of these
markets in the future will be dependent upon various factors, including such
user's current and future commitment to such coal or oil based energy, changes
in the cost of delivered coal and oil, and the difference between the costs of
coal generated power versus other energy sources. These other sources include
but are not limited to natural gas and petroleum based products, hydroelectric,
solar, wind, geothermal, waste heat, solid waste and nuclear power generation
facilities. The Company's
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ability to market the LFC Process will also be impacted by regulatory efforts
to reduce acid rain and other emissions; regulatory incentives to utilize coal
based energy sources; and the reliability and cost effectiveness of LFC Process
Plant products relative to gas and other energy sources currently existing or
developed in the future. There can be no assurance LFC Process plant products
will achieve market acceptance at any level sufficient to provide profits to
the Company. See "Business - Markets."
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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, 1996, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below for the nine months ended September 30, 1996, 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 operation for these periods.
Operating results for the nine months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and the financial statements and the related notes thereto which are
incorporated by reference in this Prospectus.
<TABLE>
<S>
Nine months ended
September 30,
------------------
Years ended December 31, (Unaudited)
-----------------------------------------------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ -----
<C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues............. $ 693,118 $ 809,910 $ 552,503 $ 900,306(1) $ 4,244,268(2) $ 3,184,649 $ 3,809,650
Net Loss............. (4,915,472) (6,116,388) (5,844,121) (6,824,940)(1) (4,259,365)(2) (3,209,511) (3,946,944)
Imputed Dividends(3). -- -- -- -- -- -- (381,073)
Net Loss Per Share
Applicable to
Common Stock......... $ (3.14) $ (3.62) $ (3.02) $ (2.46)(1) $ (0.80)(2) $ (0.63) $ (0.63)
Weighted Average
Shares Outstanding... 1,564,124 1,691,675 1,933,032 2,744,084 5,357,010 5,115,776 6,851,470
Balance Sheet Data:
Current Assets....... $ 1,727,940 1,331,381 717,406 944,910 2,295,167 2,204,284 $ 2,049,434
Working capital
(deficit)............ 303,876 (917,979) (3,348,255) (2,369,079) (4,015,187) (4,289,386) (4,976,751)
Total assets......... 10,886,581 9,240,338 8,198,362 6,592,086 6,628,678 7,580,742 6,177,973
Long-term debt, less
current portion...... 4,292,622 4,637,997 3,575,835 4,631,250 123,750 126,125 116,625
Stockholders' equity
(deficit)(3)......... 4,889,895 2,350,981 556,866 (1,629,578) 194,754 960,947 (964,837)
</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) AMS recorded revenue of $3,939,000 and income from operations of $498,000
for the twelve months ended December 31, 1996.
(3) No dividends have been declared since inception. Imputed dividends
represents the aggregate difference between the conversion price and the
fair market value of the common stock as of the date of issuance of the
preferred stock, without regard to the actual date on which the preferred
stock may be converted.
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RECENT DEVELOPMENTS
During October, 1997, the Company was able to extend, exchange or convert
approximately $4.8 in existing debt for new securities of the Company, including
Common Stock, warrants and revised, amended or new debt securities, and also
paid approximately $400,000 in existing debt. The Company retired approximately
$250,000 in existing 10%, 11% and 12% interest accruing notes which were
required to be paid by October 31, 1997 in exchange for $250,000 of 12%
debentures due September 30, 1998 with interest payments due quarterly on the
replacement notes. The Company obtained an extension to September 30, 1998 of
approximately $3,420,000 of debt which was required to be paid by October 31,
1997, and in connection therewith issued rights to acquire warrants to purchase
an aggregate of 152,500 shares of Common Stock on or before December 31, 1999,
at an exercise price of $1.20 per share for each quarterly period the debt
remains unpaid. The Company also obtained an extension to September 30, 1998 of
approximately $727,000 of debt which was required to be paid by October 31,
1997. In connection therewith and in part as consideration for all interest due
through the maturity of the extended notes the Company issued 95,439 shares of
Common Stock.
All of the securities issued in connection with these debt restructurings
were issued to existing security holders of the Company in reliance upon
exemptions from registration pursuant to the Securities Act provided by Sections
3(a)(9) and 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. All of these debt holders were "Accredited Investors" as that term
is defined in Regulation D.
On January 8, 1998, the Company entered into two Series 97-G Convertible
Preferred Stock Subscription Agreements (the "Series 97-G Agreements") with one
investor and one placement agent ("Series 97-G Holders"). Pursuant thereto, and
for the total consideration of $500,000 the Company issued (i) 550 shares of
Series 97-G Preferred Stock; (ii) warrants to purchase a total of 25,000 shares
of Common Stock of the Company, and (iii) 194,502 shares of restricted Common
Stock. The Series 97-G Preferred Stock, the warrants and the restricted Common
Stock were issued pursuant to the provisions of Regulation S under the
Securities Act to non U.S. Persons who qualified as "Accredited Investors" as
that term is defined in Regulation D.
Dividends. The Series 97-G Preferred Stock has a right to cumulative
dividends, at a per share rate equal to 8% of the 97-G preferred shares
liquidation preference of $1,000 per share. The Series 97-G dividends are
payable solely in Common Stock.
Redemption. The Series 97-G Holders may not require its redemption. The
Company may redeem the Series 97-G Preferred Stock at 130% of the liquidation
preference of $1,000, plus the amount of any accrued and unpaid dividends.
Liquidation. The Series 97-G Holders are entitled to be preferentially 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 Series 97-G Preferred Stock are payable before any
payment or distribution is made to the holders of the Common Stock, or any other
series of Preferred Stock other than all previously issued series of Preferred
Stock.
Conversion. Each share of Series 97-G Preferred Stock is convertible, at
the option of the holder thereof, at any time 41 days after the Series 97-G
Agreement closing date of January 8, 1998. Each share is convertible into the
number of shares of Common Stock derived by dividing the conversion rate by the
conversion price. The conversion rate is the liquidation preference of $1,000
per share of Series 97-G Preferred Stock. The conversion price is determined
based on the date the conversion notice is received ("Conversion Date") and is
equal to the lesser of (a) the average closing bid price of the Common Stock
over the five day trading period prior to the closing date of January 8, 1998 or
(b) 75% of the average of the closing bid price of the Common Stock on the five
trading days ending on the date proceeding the Conversion Date. There are
monetary penalties to the Company if Common Stock is not delivered to the Series
97-G Holder within five days of the Company's receipt of a notice of conversion
and the certificates representing the Preferred Stock to be converted.
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<PAGE>
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.
On January 14, 1998, the Company granted incentive stock options exercisable
for a total of 225,000 shares of Common Stock at $0.843 per share to employees
of the Company. The options were granted in reliance upon the exepmtions from
registration pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
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BUSINESS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward- looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."
Overview
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel and coal derived
liquids, and at the same time reduce the PDF's pollution potential when it is
subsequently burned for fuel. The Company believes the LFC Process could upgrade
a significant portion of the world's abundant low-rank coal reserves into coal
and petroleum-based products which could provide cost-effective compliance with
certain environmental legislation and regulations including the Clean Air Act
and other current and possibly future U.S. and international environmental
regulations or concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes for countries outside the United States who
currently generate much of their electricity from burning coal, and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.
In 1989 the Company contributed the LFC Process to TEK-KOL. TEK-KOL
currently consists of the Company and a subsidiary of Zeigler. Zeigler is a coal
producing company in the United States. The LFC Process has been used to produce
PDF and CDL for test burning at the Demonstration Plant owned by Zeigler in
Gilette, Wyoming. To date the Demonstration Plant has produced approximately
114,900 tons of PDF and 116,100 barrels of CDL, and has shipped over 83,500 tons
of PDF to seven electric utilities in six states, and 104,000 barrels of CDL to
eight industrial users in seven states. The purpose of the Demonstration Plant,
which was originally intended to operate for two years, was to demonstrate the
validity of the LFC Process. The Demonstration Plant was constructed pursuant to
an agreement between the U.S. Department of Energy and ENCOAL Corporation, a
Shell Mining Company subsidiary, as part of the U.S. government's "Clean Coal
Technology Program." The Company believes the operation of the Demonstration
Plant from 1995 through the third quarter of 1997 when its operations were
suspended, has provided invaluable design data and engineering parameters to
assist in the commercial scale development of the LFC Process.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.
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The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil resid produced in oil
refining in order to increase the efficiency of crude oil refineries. The OCET
Process is still in the development stage, and will require substantial
research and development before it is ready (if ever) for commercial use. The
Company has another wholly owned operating subsidiary, AMS. AMS designs and
produces custom automated assembly equipment primarily for manufacturers in the
biomedical, automotive, electronics and computer industries.
TEK-KOL Partnership
TEK-KOL owns all right, title and interest in the LFC Process. The partners
in TEK-KOL are the Company and a subsidiary of Zeigler. TEK-KOL was established
in 1989 and the original partner was the Shell Mining Company ("SMC"). In 1992,
all of the assets of SMC were purchased by Zeigler. The TEK-KOL Partnership
Agreement, as amended, currently provides for the distribution of 75% of certain
TEK-KOL cash receipts to the Company and 25% to Zeigler, until the Company
receives $2 million. Thereafter, cash from operations, (if any) is to be
distributed 50% to the Company and 50% to Zeigler. TEK-KOL is marketing the LFC
Process to obtain licensees, joint venture partners, strategic and other
relationships. Except for the license issued to SMC for the Demonstration Plant
and other plants, as of the date of this Prospectus, the Company does not have
any agreements to license the LFC Process.
LFC Process
The LFC Process is specifically designed to process subbituminous
(low-rank) or a lignite coal which have a high moisture content. PDF is designed
to be a cleaner value solid with a higher BTU, or heat value, than the coal it
was refined from, and with significantly lower moisture. PDF has higher ash, a
higher fixed carbon and lower organic sulfur than the parent coal. CDL is a
low-sulfur hydrocarbon liquid. Based on operations at the Demonstration Plant,
the Company believes each ton of coal should produce approximately one-half ton
of PDF and one-half barrel of CDL, although differing raw material and operating
conditions may effect these estimates.
To process the coal, the LFC Process uses a drying/partial pyrolsis
technology, which uses low rank coal as a feedstock. Pyrolsis is a process
whereby organic compounds are subjected to very high temperatures. The LFC
Process is a mild gasification technology that employs a series of pyrolysis
zones to produce solids and gas, and a condensation system to produce liquids.
The LFC Process has been used at the Demonstration Plant which has produced and
shipped to customers product for test burning over a hundred tons of PDF and
over a hundred thousand barrels of CDL. The Company believes the operation of
the Demonstration Plant has provided key operational and engineering design data
for the LFC Process which it believes may assist in completing the final stages
of development of the LFC Process.
The Company believes four key factors in the LFC Process differentiate it
from other coal cleaning, liquefaction, or gasification technologies. First, the
process simultaneously produces solids and liquids. Second, the control system
regulates the coal heating rate and temperature level to control the governing
kinetics of gasification and stabilization reactions. Third, the PDF can be
stabilized and is less likely to self-ignite. Fourth, for the purpose of
controlling the gasification conditions (to obtain the desired co-products),
computer models of coal reaction kinetics, sensors, and servomechanisms can be
incorporated into the control system.
The Company's marketing efforts are in part based on the Company's belief
that low-grade (or low-rank) coals of the world are relatively disadvantaged in
the marketplace compared to higher-rank bituminous coals. Low-rank coals
generally have higher water content which makes them more expensive to transport
to distant markets. Additionally their lower heat value can make them a less
efficient boiler fuel. The Company estimates the transportation cost component
of the coal's delivered price can be over 3-5 times the cost of the coal at the
mine. SGI expects PDF and CDL can reduce transportation costs by removing water,
and economically producing lower sulfur, lower water content, cleaner burning
coals along with potentially valuable co-product oils and liquids, and therefore
such refineries' products will be able to compete against high-grade coals.
There can be no assurance these objectives will be achieved.
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LFC Process Demonstration Plant
In 1989, ENCOAL Corporation, which at the time was a Shell Mining Company
subsidiary, and the U.S. Department of Energy ("DOE") jointly committed to fund
one-half each of the costs to construct, own and operate, for
two years, a "Clean Coal Demonstration Plant" using the LFC Process at the
Buckskin Mine near Gilette, Wyoming. Several amendments of the original
agreement with the DOE extended the operations and funding of the Demonstration
Plant to March, 1997. TEK-KOL licensed the LFC Process to SMC Mining for use at
the Demonstration Plant. Construction of the Demonstration Plant began in 1990
and was completed in 1995 when it began shipping PDF and CDL to customers for
test burning. The Demonstration Plant was not expected to, and did not, produce
any licensing royalties to the Company.
In November 1992, Zeigler Coal Holding Company ("Zeigler") purchased Shell
Mining Company and its assets, including ENCOAL Corporation and the
Demonstration Plant. Zeigler operated the Demonstration Plant through the third
quarter of 1997 at which time the operations of the Demonstration Plant were
suspended. Suspending operations of the Demonstration Plant may have a material
adverse impact on the marketing of the LFC Process.
In late 1996 and early 1997, an affiliate of Zeigler applied for various
air quality, industrial siting, land quality and land swap permits with the
state of Wyoming and certain agencies of the U.S. government in contemplation of
construction of an LFC Process plant. Mitsubishi International Corporation and a
Zeigler subsidiary executed an engineering, procurement and construction
agreement on December 30, 1996 for the construction of a $460 million LFC
Process plant. Although this agreement was subsequently terminated, Zeigler is
continuing to develop an LFC Process plant at that location. There can be no
assurance the development of any plant will be developed by Zeigler or others.
The termination of this agreement to construct an LFC Process plant may have a
material adverse impact on the business and operations of the Company.
Test burns to date, based on the Company's analysis, indicate PDF is a
viable fuel which can be used with minimal modification of the coal burning
equipment. The Company believes PDF can be a means for helping utilities meet
the requirements of the Clean Air Act. There can be no assurance these test
results will be duplicated in a future commercial facility, if any, using the
LFC Process.
Markets
The Company believes the principal markets for PDF will be the electric
utility market where utilities may burn coal to generate electricity, and in the
non-coking coal metallurgical market which produce steel and metals. TEK-KOL
currently believes future PDF production from an LFC Process plant could be sold
into the utility market and the metallurgy market. There can be no assurance the
Company's beliefs will prove to be accurate.
CDL from the Demonstration Plant has been sold into the residual fuel oil
market. While the Company has completed development work to determine CDL's
composition, significant additional development is required. The Company
believes CDL may have more potential when further refined into separate
products. No assurance can be given that any market for PDF and CDL will
develop.
PDF Electric Utility Markets. The Company believes power plants operated by
utilities meeting the following criteria will be the "best potential" markets
for PDF. Boilers requiring low ash-fusion coal (primarily cyclone and wet bottom
boilers); boilers using high-Btu fuel; utilities desiring to switch to
low-sulfur coal to meet Clean Air Act compliance levels; and utilities with
acceptable transportation economies. There can be no assurance any of these
utilities would elect to use PDF once development is completed.
A number of factors could have a material impact on the size and value of
the utility market for PDF. The Company believes the potential impact of the
Clean Air Act on the utility industry could present marketing opportunities for
PDF. If environmental regulations become stricter, the desirability of PDF may
increase. The Company believes
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the potential for reduced emissions increases the likelihood PDF could be
marketed successfully. A full or partial repeal of the Clean Air Act would
likely have a material adverse impact on the Company and the market for PDF in
the United States.
PDF Metallurgical Markets. While the Company believes the U.S. electric utility
market is the largest potential market for PDF, based on the current economics
of coal-burning utilities, the Company also believes a relatively small
but potentially growing market for non-coking metallurgical coals could provide
an opportunity for sales of PDF. Potential PDF metallurgical markets could occur
in the steel industry, where the Company believes a demand for coke substitutes
is increasing. In steel making, the Company believes environmental constraints
on coke production and the lower limits on permissible emissions may motivate
development of new technologies to replace the traditional combination of blast
furnaces and coke ovens.
The Company believes PDF's characteristics may make it an acceptable
replacement for coke. Limited testing has been conducted utilizing CDL as a
blast furnace injectant. A world wide reduction in coke production may also
provide an additional market for CDL as a replacement for coal tars produced
during the coking process. There can be no assurance such markets will develop,
or the Company's technologies will prove to be commercially valuable in
connection therewith.
The Company also believes that certain emerging technologies, including
COREX, HIsmelt, AISI direct steel making, FAST Met and other methods using
coal-based technologies to produce clean iron units offer opportunities for PDF.
Preliminary discussions with potential steel manufacturers in Northern Indiana
along Lake Michigan have been made by the Company. To date, no steel
manufacturing plant has licensed or signed a letter of intent to use the LFC
Process.
CDL Markets. The Company believes current industrial residual fuel oil
markets in the U.S. will not pay enough for CDL as a residual fuel to make it
worthwhile to sell into that market. Enhanced CDL-derived products are being
developed by the Company with the goal of providing increased economic returns.
While these enhanced CDL products are not yet completely defined, progress has
been made in developing upgraded CDL products. Portions of the upgrading process
have been identified by the Company and include centrifugation to remove
entrained solids, distillation to collect crude cresylic acids, as an asphalt
additive and the sale of the remaining crude CDL to fuel oil markets. The
Company will require significant additional funding to further its research,
development and testing before enhanced CDL products could be available for
commercial use.
CDL upgrading efforts are currently focused on domestic and international
markets that the Company believes may be more commodity based, and less
sensitive to limited numbers of fixed end users. These CDL markets are aimed at
transportation fuels combined with specialty chemicals with potential large
volume acceptance. There can be no assurance the Company will develop any
upgraded CDL products, that any markets will accept or use CDL, or that it will
produce revenues or profits for the Company.
OCET Process and Strategy
Another energy-related technology which is being developed by the Company
through its wholly-owned subsidiary, the OCET Corporation, is the OCET Process.
The OCET Corporation ("OCET") is a development stage Delaware corporation which
is a wholly-owned subsidiary of the Company. OCET is developing a technology
which it believes can deasphalt petroleum residium, or resid, so it can be more
easily or further refined (the "OCET Process").
In laboratory tests both petroleum resid and heavy crudes have been
successfully deasphalted using lab scale continuous prototype processing
equipment. The results of these laboratory tests have demonstrated the ability
in testing conditions to produce deasphalted oil which OCET believes is
comparable in quality and yield to that produced by commercial solvent
deasphalting processes. There can be no assurance the results of such laboratory
tests will be proved in actual commercial scale developments, or that any
commercial use will be made of the OCET Process.
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The Company's principal efforts to commercialize the OCET Process are
intended to focus on licensing the technology to oil refineries, steel
manufacturers and other parties with related interests. Construction and
operation of a commercial scale facility using the OCET Process is dependent
upon funding from the oil refinery, steel manufacturer or other third parties.
OCET believes there has been a shift of crude oils over time to being higher in
resid volume and contaminant levels, and therefore the need for some successful
deasphalting technology has increased.
The proposed OCET Process uses a solvent additive to destabilize the crude
oil, followed by electrochemical processing to separate the asphaltines, metals
and unwanted contaminants contained in the resid in order to produce a higher
quality liquid which OCET believes could be used in refinery processes. The
electrochemical processing distinguishes the OCET Process from other
deasphalting processes known to the Company, and OCET believes will provide an
additional method for controlling the rate, selectivity and efficiency of the
separation. The OCET Process as currently structured does not require high
temperatures or pressures, and OCET believes that both capital and operating
costs to separate the resid could be lower than other competing processes. There
can be no assurance these cost savings will be achieved.
OCET and SGI are currently in the process of attempting to construct a
model process development unit which would be capable of measuring OCET Process
performance. Concurrently analytical methods are also being developed in an
effort to analyze feedstocks to measure and optimize process performance. OCET
will require substantial additional funding to complete such a development unit,
and to date has no commitments for such funding.
OCET believes the market potential for the OCET Process and related
technologies could be significant. OCET believes domestic and worldwide demand
for crude oil and refining products is expected to increase, and worldwide
refining capacity is also expected to increase. OCET believes new oil refineries
will be called upon to meet increased worldwide demand for lighter products, to
upgrade residual fuel, to supply transportation fuels with reduced lead and to
supply both distillate and residual fuels with decreased sulfur levels to
decrease pollution.
The target application for the OCET Process has been the upgrading of
refinery resid to produce high quality lube oil blend stock, feedstocks for
refinery catalytic upgrading processes, hydrocracking or hydrotreating and
boiler grade coker feed because the liquid product could be reduced in
asphaltines, metals, sulfur, nitrogen, carbon residue and other contaminants.
OCET believes there are other potential markets, including deasphalting heavy
crude oil at the well site, upgrading crude oil before introduction into the
crude distillation tower at the refinery, near complete removal of metals from
deasphalted oils, removal of sulfur compounds from diesel and gasoline,
viscosity reduction as oil is being produced out of the ground, used motor oil,
for removal of metals and other contaminants for recycling, removal of
hydrocarbons from wastewater and removal of metals such as selenium from
wastewater.
On April 14, 1997 OCET and the U.S. Department of Energy executed a
Cooperative Research and Development Agreement ("CRADA") to jointly analyze
certain parameters of the OCET Process. The CRADA is intended to allow petroleum
experts in the DOE to consult with SGI while protecting SGI's proprietary
information.
The proposed OCET Process is expected to compete with alternative methods
for conversion of resid including thermal processes, solvent extraction
processes and catalytic processes. The primary method for upgrading resid is
delayed coking, which exposes resid to high enough temperatures to break apart
some of the chemical bonds to produce gases, liquids and solid coke.
There can be no assurance the OCET Process will be determined to be
commercially viable, or will be developed to the point it can be determined to
be commercially viable, or if it is there will be a market for the OCET Process,
or, if a market develops, OCET will license its technology or otherwise produce
revenue from the OCET Process or any other enterprise or technology development.
The OCET Process is still in development and has not been licensed or used
in either a pilot plant or on a commercial scale. The OCET Process will require
significant additional research and development, including substantial
additional funding to finish development of the process and demonstrate its
potential (if any) for commercial use. There
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can be no assurance such efforts will be successfully completed. At the
present time, OCET has no agreements with any oil refinery or other party to
use the OCET Process in a commercial or even large scale testing facility.
Patents and Proprietary Technology
To date, TEK-KOL has five issued patents and one patent pending in the
United States, which relate to various aspects of the LFC Process. Patent
#5,601,692 was issued in February, 1997. Patent #5,401,364 was issued in March,
1995; Patent #5,372,497 was issued in December, 1994; Patent #5,582,807 was
issued in December, 1996; Patent #5,547,548 was issued in August, 1996. TEK-KOL
filed a patent in October, 1995 for a lean fuel combustion control method which
is pending. OCET filed a patent application in September, 1994 for the OCET
Process. AMS owns one patent jointly with Ethicon, a customer, however, AMS does
not believe this patent is critical for the operation of its business.
TEK-KOL has non-exclusive worldwide rights to license the use of the MK
Dust Control System pursuant to the License Agreement with Shell Mining. There
can be no assurance any additional patents will be issued to TEK-KOL as a result
of TEK-KOL's pending applications, or, if issued, such patents combined with the
existing TEK-KOL patent will be sufficiently broad to afford protection against
competitors using similar technology. The Company's success will depend in large
part on its ability and that of TEK-KOL to obtain patents for the LFC Process
and related technologies, if any, to defend patents once obtained, to maintain
trade secrets and to operate without infringing upon the proprietary rights of
others, both in the United States and in foreign countries. TEK-KOL also has
foreign patents pending for certain elements of the LFC Process.
There can be no assurance any patents issued to TEK-KOL or the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the TEK-KOL Partnership Agreement to
contribute to the costs of prosecuting and defending all infringement claims
necessary to enforce TEK-KOL's rights or to determine the scope and validity of
others' proprietary rights. U.S. patents do not provide any remedies for
infringement occurring before a patent is granted. Because patent rights are
territorial, the Company or TEK-KOL may hot have an effective remedy against use
of their patented technology in any country in which TEK-KOL or the Company does
not, at the time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors. TEK-KOL owns all of the
technology relating to the LFC Process. If competitors prepare and file patent
applications in the United States claiming technology also claimed as
proprietary by TEK-KOL or the Company, the Company may be forced to contribute
to the cost of participating in interference proceedings declared by the PTO to
determine the priority of the invention. Such proceedings could result in
substantial costs to the Company, even if the outcome is favorable to the
Company. An adverse outcome of such proceedings could subject the Company to
significant liabilities to third parties and could require TEK-KOL and/or the
Company to license disputed rights from third parties or cease using the
infringing technology. Although the Company believes its current and proposed
activities do not and will not infringe upon patents for competing technologies,
there can be no assurance the Company's belief would be affirmed in any
litigation over any patent or that the Company's future technological
developments will be outside the scope of these patents. A U.S. patent
application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its
competitors. If competitors infringe on TEK-KOL or Company patents which are
pending but not yet issued, TEK-KOL and the Company will not be able to pursue
infringement claims against them unless the infringement continues after such
patents are issued.
The Company also relies on certain proprietary information which may not be
patentable. Although the Company has taken steps to protect its proprietary
information, in part through the use of confidentiality agreements with certain
employees, consultants and contractors, there can be no assurance these
agreements will not be breached, the Company
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would have adequate remedies for any breach, or the Company's proprietary
information will not otherwise become known or be independently developed or
discovered by others including its competitors.
Governmental Regulation
The LFC Process, as it is proposed to be used in the operation of a coal
refinery plant will likely be subject to numerous federal and state regulations.
Any United States LFC Process production plants which may be constructed may be
owned and operated by others since the Company does not now have and is not
expected in the future to have the financing necessary to develop, construct or
operate such plants. LFC Process plants will likely require numerous permits,
approvals and certificates from appropriate federal, state and local
governmental agencies before construction of any such facility may begin, and
will be subject to periodic maintenance or review requirements once any such
facilities begin production. Such permits and regulations include: (i) air
quality; (ii) wastewater discharge; (iii) land quality; and (iv) hazardous
waste treatment storage and disposal. There can be no assurance that such
approval will be granted to any licensees of the LFC Process in the event a
plant is proposed to be constructed and operated using the LFC Process. In
addition, there can be no assurance future domestic or international
governmental regulations will not change and the necessary permits
and approvals for any future commercial-scale production facilities will not be
prohibitively expensive or difficult to obtain. Any failure by any licensee of
the LFC Process to obtain required regulatory approvals, or any substantial
delay in obtaining such approval, could have a material adverse effect on the
Company.
Mine Health and Safety Administration ("MHSA") regulations and approvals
may be applicable to any use of the LFC Process at a plant constructed for such
use. The Demonstration Plant in Wyoming has operated under the oversight of the
MHSA since construction began. The Company believes the ideal location for an
LFC Process plant will be on the grounds of or adjacent to a coal mine to
minimize transportation costs.
The Clean Air Act and amendments specify certain air emission requirements
for electrical utility companies and industrial coal users. The Company believes
the Clean Air Act is now, and will in the future be, a significant factor in
creating demand and a market for the LFC Process. The Company believes electric
utilities and industrial coal users who use the LFC Process will be subject to
the Clean Air Act, and compliance with such regulations could be fully or
partially met through the use of the LFC Process. Beginning on January 1, 2000,
Phase II of the Clean Air Act imposes a permanent cap on sulfur dioxide
emissions and requires nitrogen oxide reductions. A full or partial repeal of
the Clean Air Act could have a material adverse impact on the Company. The
Company is unable to predict future regulatory changes and their impact on the
demand for the LFC Process. See "Risk Factors - Environmental and Other
Governmental Laws, Regulations and Project Approvals."
Competition
The principal markets for PDF and CDL are in the energy industry, which is
intensely competitive. There are many companies engaged in research into ways to
clean or convert coal into a more acceptable fuel or other commercially viable
products. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, test and license coal refining
technologies. In addition, some of these companies have extensive experience in
operating refining plants and many of these companies have extensive experience
in operating coal burning plants. These companies may develop and introduce coal
refining technologies competitive with or superior to those of the Company prior
to any market acceptance for the LFC Process or other technologies developed by
the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter
construct, own and operate a plant using the LFC Process and their success in
supplying processed coal products, are expected to be important competitive
factors. The Company expects principal competitive factors may include, among
other things, how economically LFC Process coal products can be produced,
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at what quality levels and demand for such products develops, compliance with
environmental standards, the transportation costs, cost comparisons to energy
fuels, and the strength of any patents on the LFC Process or other related
technologies.
The demand, if any, by coal-fired electrical generation facilities for
processed coal products derived from using the LFC Process may also be
materially impacted by several competing fuels and other costs, such as natural
gas and alternative energy sources including but not limited to hydroelectric
power, synthetic fuels, solar power, wind power, wood, geothermal, waste heat,
solid waste and nuclear sources. The Company believes other competitive factors
which may influence competition for the Company include the availability and
cost of delivered coal, the difference between the costs of other energy
alternatives and coal prices and availability, regulatory efforts to reduce
pollution and other emissions, regulatory incentives, if any, to utilize clean
coal based energy sources and the reliability and cost effectiveness of the LFC
Process relative to other competing technologies.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the period between development and testing of the LFC Process and any possible
introduction of the technology into the commercial market place.
The Company is aware of several entities in the U.S. and foreign countries
which are engaged in producing clean- burning coal. These include the Rosebud
SynCoal Partnership, owned by indirect subsidiaries of Montana Power Company and
Northern States Power Company which processes approximately 1,430 tons of feed
coal a day at its plant in Colstrip, Montana. Also, KFX, Inc., a public company,
is engaged in producing a clean coal product, Carbontec, which produces upgraded
coal at a pilot plant; Custom Coals, International, which makes a clean coal
product; Puron Co.; Cyprus, a coal company, and SOSOI/FT. There can be no
assurance the Company will be able to compete successfully.
Employees
As of the date of this Prospectus the Company including OCET employs 20
full-time employees and AMS employs approximately 33 full-time employees. None
of the Company's or AMS's employees are represented by a labor union or bound by
a collective bargaining agreement. The Company and AMS believe that they
maintain positive relations with their employees.
Properties
The Company leases 5,500 square feet of office space at 1200 Prospect
Street, Suite 325, La Jolla, California 92037. The term of the lease expires in
December, 2000. In addition, the Company leases 5,080 square feet of laboratory
space at 11588-20 and 21 Sorrento Valley Road, San Diego, California 92121
pursuant to a lease which expires in May, 2000. AMS leases 20,000 square feet of
office and manufacturing space at 2222 Shasta Way, Simi Valley, California
93065, which includes 15,000 square feet of manufacturing space. The term of the
lease expires in October, 1998. The Company and AMS believe their current
facilities will be adequate for their respective expected needs for the
foreseeable future.
Legal Proceedings
The Company and its subsidiaries are from time to time involved in
litigation arising in the ordinary course of their respective businesses. In the
opinion of the Company none of the pending litigation, if adversely decided,
should have a material adverse effect on the Company.
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ASSEMBLY AND MANUFACTURING SYSTEMS, INC.
Overview
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
of the Company, is a supplier of custom made precision assembly equipment. AMS
designs and builds custom, automated assembly systems marketed principally to
manufacturers in three principal industries: automotive, medical, and computer
and communications. These assembly systems integrate multiple manufacturing
functions often into a single custom production line built to the customer's
specifications.
Assembly functions integrated into products manufactured by AMS include:
material and component handling, dispensing and placement of film or liquid
adhesives, sealants or customer-formulated materials such as pharmaceuticals,
marking and encoding, assembly of components, riveting, swagging, inspection
functions including machine vision inspection, testing, data collection and
analysis. Completed AMS assembly systems may be from bench
top size to almost a hundred feet in length, and may incorporate all types of
subsystems, including robots, machine vision, conveyors, welders, mechanical
tests, electronic tests and others as specified by the customer. AMS believes it
is well positioned to capitalize on what it forecasts is an ongoing
consolidation and growth in the fragmented automation assembly market.
Generally automation system functions integrated into products manufactured
by AMS are computer controlled through custom software written by AMS, and
incorporate control, data handling, reporting and safety functions. The
completed automation systems are generally tested and accepted by the customer
at AMS prior to shipment and installation at the customer's site.
AMS believes that a majority of its current customers and future customers
purchase automation systems for several reasons including support of new product
introductions and start-up, labor cost reductions, increase in capacity,
increase in quality, and favorable return on investment and payback. To reduce
costs and improve productivity on current products and to increase its quality
and improve facilities, AMS customers choose to automate production of their
products.
AMS believes it offers customers a number of competitive advantages over
its competitors including successful project execution, competitive pricing,
systems which meet specified performance criteria, engineering and manufacturing
expertise and experience and innovative machine concepts. The typical AMS
contract price is approximately $500,000.
Marketing and Sales
AMS employs three sales professionals and two to three applications
engineers and their support staff are involved in directly marketing its
services to potential customers. AMS relies primarily on personal contact by its
executive and sales personnel to secure new customers and market its products.
AMS regularly participates in local, regional and national trade show meetings
in its key industry groups. AMS believes personal contact by its sales and
engineering staff is critical to retain new customers.
AMS has targeted large, established manufacturing companies in the
automotive, medical, and computer and communications industries as prospective
clients. AMS targets companies that need small manufactured equipment and
devices, requiring mechanical or electric mechanical assembly and test, or
inspection with material handling, as key accounts. To assist in marketing its
products and services, AMS also works to develop new applications for target
customers for their various manufacturing needs.
As part of its current marketing focus, AMS is targeting Fortune 1000 businesses
with assembly contracts in the range of $750,000 to $1.5 million per project to
increase its market share and economies of scale.
27
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Major Customers
Since AMS typically builds one significant system each for a small number
of customers annually. Most of its customers in any one fiscal period may be
responsible for ten percent or more of its revenues for that fiscal year. Since
most of the systems developed and sold by AMS are for a unique application such
a concentration of revenues does not necessarily indicate AMS will receive any
revenues from a prior customer in a subsequent period.
For the nine months ended September 30, 1997, two customers, Eaton
Corporation and Pairgain Technologies, together represented approximately 40.2%
of AMS's sales. Pairgain Technologies was the single largest customer accounting
for approximately 27.5% of sales, while Eaton Corporation represented
approximately 12.7% of sales. AMS expects that a small number of customers will
continue to account for a substantial portion of its sales for the foreseeable
future. AMS does not have long term contracts with any of its customers, and
there can be no assurance any previous customer 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. For the year ending December 31, 1996, AMS had four major
customers who were different from the major customers in the same period in
1997, and who accounted for approximately 75% of its sales: Alza Corporation
representing 16.3% of AMS annual sales; Motorola Inc. representing 11.3%; Nacom
representing 19.1%; and TRW Safety Systems representing 30.8%. There can be no
assurance revenue from customers who accounted for significant revenue in past
periods, individually or as a group will continue, or if continued, will reach
or exceed historical levels in any period. See "Risk Factors - Major Customer
Concentration; Dependence on Few Customers."
Manufacturing
All design, engineering, fabrication, assembly and testing of AMS's
products are carried out at its facility in Simi Valley, California. Proprietary
software and in-house procedures are used to ensure the quality and timeliness
of project execution, and AMS's custom automation related software incorporate
control, data handling, reporting and safety features. AMS also uses
state-of-the-art computer-aided design practices to create the customized
assembly processes for its customers.
To manufacture certain of its automation equipment, AMS uses subcontractors
for common industrial services such as machining, fabrication of welded
structures, painting and power coating on an as-needed basis. Manufacturing
operations include purchasing, receiving, cutting, machining, grinding,
electrical fabrication and testing, machine assembly as well as testing and all
other functions required to complete the automated assembly product. When
needed, AMS also employs a number of subcontractors for special assembly
operations including welding, power coating, wire electric discharge machining
and other unique operations.
AMS has implemented certain quality control procedures for its
manufacturing facility. AMS's quality control personnel regularly monitor the
manufacturing process and have initiated numerous procedures which assist in
quality control. AMS believes new customers, particularly Fortune 1000 customers
with large assembly projects, may impose additional quality control standards.
It is possible such customer or other quality control standards may require
additional substantial expenditures over a long period of time, or that AMS may
determine that such expenses are not cost-effective.
Raw Materials
The primary raw materials used by AMS in its assembly systems include such
items as stock steel shapes, aluminum extrusions, billet and plate software.
These raw material items are converted by AMS into the needed support structures
and are custom-machined in house to be incorporated into the automated assembly
systems purchased by AMS customers. Raw materials used by AMS are generally
standard industry materials which AMS believes can be provided from multiple
sources of supply. AMS believes the most critical machine subsystems such as
computers, vision systems,
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part feeders, conveyors and robots are also common and have multiple sources
of supply. Up to approximately 75% of the AMS assembly system components are
purchased off the shelf. AMS does not have any contracts with any of its raw
material suppliers, and believes numerous suppliers would be available in the
event its current suppliers were not available.
Competition
The Company believes competition in the automotive assembly industry is
fragmented, and that no single competitor dominates the industry. While AMS
competes with at least 85 other companies which are engaged in the automation
assembly business, AMS believes the majority of these competitors provide
assembly equipment for smaller projects, and cannot handle the larger projects
(over $250,000 in price) for which AMS is currently competing. AMS's principal
competitors in the 1997 fiscal year include Remmele Corp., Vanguard Automation,
and Bosch-Weldun Automation. Many of AMS's competitors have substantially
greater financial, marketing and technological resources than AMS.
The automation industry is characterized by rapid technological change, and
competitors may develop their automation products more rapidly than AMS. AMS
believes competition among automation companies is based primarily on price, the
speed and quantity of products produced, timely delivery, product quality,
safety, product innovation and assistance in marketing and customer service. The
competitive position of AMS will depend in part on AMS's ability to remain
current in automation manufacturing and to increase the innovation, speed and
reliability of its automated assembly processes. There can be no assurance AMS
will be able to compete successfully.
Backlog
As of September 30, 1997, AMS had a backlog of orders of approximately $1.7
million, compared to a backlog as of December 31, 1996 of approximately $2.8
million.
Liability Insurance
The automotive, medical, computer, communications and other products expose
AMS to possible product liability claims, if among other things, the use of such
products results in personal injury, death or property damage. AMS maintains
product liability insurance in the principal amount of $2 million through April,
1998. There can be no assurance such insurance will be adequate in terms and
scope to protect AMS against material adverse effects in the event of a
successful claim, or that such insurance will be renewed with acceptable terms
and conditions.
29
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USE OF PROCEEDS
The Company will not receive any proceeds from conversion of the Preferred
Shares or from the sale of the Selling Shares. If all of the Existing Warrants
are exercised, the Company would receive approximately $3.9 million before
deducting expenses of this offering. The exercise prices of the Existing
Warrants range from $1.03 to $5.75 per share. To the extent the exercise price
of any of the Existing Warrants exceeds the public sale price of the Company's
Common Stock on the OTC Bulletin Board, the Company believes it is unlikely
these Existing Warrants will be exercised. There is no minimum number of
Existing Warrants which are required to be exercised or a minimum number of
Warrant Shares which are required to be sold herein. Accordingly, only a limited
number of Existing Warrants may be exercised and as a result the corresponding
proceeds to the Company may be limited. If received, the Company would utilize
those funds for administrative, general operating expenses, and expenditures
related to development of the LFC and OCET Processes.
The Company cannot precisely determine the cost, timing and amount of funds
required for specific uses at this time. The use of proceeds is subject to
change based on future occurrences, competitive market forces and other
conditions. The rate of commercialization of the LFC and OCET processes, and the
availability of alternative methods of financing will also impact the allocation
and timing of the Company's use of proceeds. The Board of Directors has broad
discretion in determining how the proceeds resulting from the exercise of the
Existing Warrants, if any, will be applied.
30
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information, as of the date hereof,
with respect to the beneficial ownership of the Company's Warrant Shares and
Preferred Shares (collectively the "Resale Securities") registered herein by
each Selling Security Holder named below. The shares of Common Stock are being
registered to permit public secondary trading of the Resale Securities, and the
Selling Security Holders may offer the Resale Securities for resale from time to
time. Except as described below, none of the selling Security Holders has had
any position, office or other material relationship with the Company within the
past three years. The following table assumes each Selling Security Holder sells
all of the Resale Securities held by such Selling Security Holder in this
offering. The Company is unable to determine the exact number of Resale
Securities that will actually be sold.
Existing Warrant Holders Warrant Shares Offered Hereby (1)(2)
- ----------------------------------------------------------------------------
Adams, Jack W..........................................................18,000
AEM Corporation........................................................37,714
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust..........................................3,000
Avalon Capital Limited..................................................8,000
Bangham, June B., Trustee
June B. Bangham Trust...................................................3,000
Boe, Charles
Minshew, Janelle........................................................3,000
Breault, Jeffrey.......................................................20,000
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Rev. Liv. Trust.......................................6,000
Continental Capital....................................................22,223
Cuttyhunk Fund, Ltd....................................................12,000
Davis, William.........................................................20,000
Day, Patrick & Geraldine, Trustees
Day Family Trust........................................................6,000
Dominion Capital Fund..................................................30,000
Endeavour Capital Fund.................................................10,000
Farquhar, Thomas H......................................................6,000
Feeney, Terry..........................................................61,539
FT Trading.............................................................10,000
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Ganesh Asset Management................................................5,000
Goldau, Ernest.........................................................3,000
Hatch, Robert.........................................................25,000
Hess, Frederic & Rita, Trustees
Frederic & Rita Hess Liv Trust
Dtd 10/13/89...........................................................3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust.......................................12,000
Hoover, Thomas........................................................87,500
Hurford, John B........................................................6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94...................................3,000
Lard, Whitney..........................................................3,000
Mahrdt, Clark..........................................................3,000
Millenco L.P.........................................................615,384
Montag, Jeffrey.......................................................30,000
Newport Capital.......................................................60,000
Pefley, Gordon V. & Betty-Jane,
JTWROS................................................................18,000
Orndorff, Owen........................................................40,000
Roberts, Lee R........................................................40,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust
U/A Dtd 01/2/70........................................................3,000
Senkus, Randy.........................................................20,000
Settondown Capital....................................................30,000
Shepherd, Mark........................................................10,000
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94.......................................3,000
Smith, Jeffrey L......................................................50,000
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Smith, Lester A.,Trustee
Lester A. Smith Family Trust...........................................3,000
Thomas, Edward........................................................37,000
Trieschmann, Ralph....................................................25,000
Total..............................................................1,411,360
(1) Expiration dates of the Existing Warrants range from 60 days following the
effective date of the Registration Statement of which this Prospectus is a
part through December 31, 2006. Exercise prices for the Existing Warrants
vary from $1.03 to $5.75 per share. The holders of the Warrants may own
additional warrants not included herein, and may own additional Common
Stock and/or Preferred Stock, and/or notes of the Company.
(2) All of the holders of the Existing Warrants listed herein own less than 1%
of the issued and outstanding Common Stock of the Company, with the
exception of Millenco L.P. which, assuming exercise of its Existing
Warrants as of the date of this Prospectus, would own approximately 5.63%.
Preferred Shareholders Preferred Shares
Offered Hereby (1)(2)(3)
- ----------------------------------------------------------------------------
Adams, Jack W..........................................................18,000
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust..........................................3,000
Avalon Capital Ltd....................................................566,496
Bangham, June B., Trustee
June B. Bangham Trust...................................................3,000
Boe, Charles
Minshew, Janelle........................................................3,000
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Revocable Living Trust................................6,000
Cuttyhunk Fund, Ltd...................................................849,744
Day, Patrick & Geraldine, Trustees
Day Family Trust........................................................6,000
Dominion Capital Fund Ltd...........................................2,124,360
Endeavour Capital Fund................................................708,120
Farquhar, Thomas H......................................................6,000
Feeney, Terry.........................................................157,614
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FT Trading............................................................708,120
Ganesh Asset Management................................................33,990
Goldau, Ernest..........................................................3,000
Hess, Frederic & Rita, Trustees
Frederic L. & Rita R. Hess Living
Trust Dtd 10/13/89......................................................3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust........................................12,000
Hurford, John B.........................................................6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94....................................3,000
Lard, Whitney...........................................................3,000
Mahrdt, Clark...........................................................3,000
Millenco, L.P.......................................................1,576,138
Pefley, Gordon V. & Betty-Jane, JTWROS.................................18,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust U/A Dtd 01/02/70.................................3,000
Settondown Capital....................................................263,421
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94........................................3,000
Smith, Lester A., Trustee
Lester A. Smith Family Trust............................................3,000
Total...............................................................7,093,003
(1) Avalon Capital Ltd.; FT Trading; Cuttyhunk Fund, Ltd.; Endeavour Capital
Fund; Dominion Capital Fund Ltd.; Settondown Capital and Ganesh Asset
Management, pursuant to registration rights agreements are registering 200%
of the number of Preferred Shares, and Millenco L.P. and Terry Feeney are
registering 230% of the number of Preferred Shares issuable upon conversion
of the Preferred Stock in accordance with the conversion formula for these
Preferred Shares.
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(2) All of the holders of the Preferred Shares listed herein, assuming
conversion of the Preferred Shares on January 16, 1998, own less than 1% of
the Company's Common Stock, with the exception of the following parties:
(1) Avalon Capital, Ltd. would own approximately 3.41%; (2) Cuttyhunk Fund
Ltd. would own approximately 5.11%; (3) Dominion Capital Fund Ltd. would
own approximately 12.79%; (4) FT Trading would own approximately 4.26%; (5)
Endeavour Capital Fund would own approximately 4.26%; (6) Settondown
Capital would own approximately 1.59%; and (7) Millenco L.P. would own
approximately 9.49% of the outstanding Common Stock of the Company.
(3) The holders of the Preferred Stock may own additional Preferred Stock, the
underlying shares of which are not included, and may also own warrants,
common stock, and/or notes of the Company.
Number
Shares of Common Stock Offered Herein
- -------------------------------------------------------------------------
AEM Corporation....................................................25,714
Continental Capital...............................................112,000
The Taxin Network...................................................2,000
Total.............................................................139,714
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<PAGE>
PLAN OF DISTRIBUTION
The Warrants may be exercised by surrendering properly endorsed
certificates therefor to the Company's Controller accompanied by payment in full
of the exercise price for each share of Common Stock as to which the Warrants
are being exercised and any applicable transfer or other taxes. Payment of the
exercise price for the Warrants may be made by tendering cash or a cashier's
check.
The Preferred Stock may be converted into Common Stock of the Company at
the election of the holder by providing proper notice thereof and the
certificate for the Preferred Stock to be converted in whole or in part to the
Company's Controller.
The Company must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the Warrants in order for a
holder to exercise them. The Warrant Shares must also be registered or exempt
for sale under the securities laws of the state in which the holder resides. The
Company intends to use its best efforts to keep the Registration Statement
incorporating this Prospectus current, but there can be no assurance such
Registration Statement (or any other registration statement filed by the Company
covering the Securities) can be kept current. In the event a registration
statement including the Warrant Shares is not kept current, or if the Warrant
Shares are not registered or exempt for sale in the state in which a holder
resides the Warrants may be deprived of some or all of their value.
The Company will not be required to pay a fee to any selling agent with
respect to any exercise of the Warrants.
The Common Stock offered by the Selling Security Holders are not being
underwritten. The Selling Security Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Common Stock offered hereby may be sold by the Selling Security Holders from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Common Stock directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Securities for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection
with the sale of the Common Stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such Common Stock as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act. The Company will not receive any proceeds from the
sales by the Selling Security Holders, although the Company will receive
proceeds from the exercise of the Warrants. Sales of the Securities by the
Selling Security Holders, or even the potential of such sales, could have an
adverse effect on the market price of the Company's outstanding Common Stock.
At the time a particular offer of Common Stock is made, except as herein
contemplated, by or on behalf of a Selling Security Holder or the Company
including following exercise of Warrants, to the extent required, a prospectus
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for Common Stock purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may
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<PAGE>
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.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the securities of the Company for a
period of at least one, and possibly five, business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, Rules 101, 102 and 107, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Security Holders.
The Warrants and Preferred Stock were originally issued to certain Selling
Security Holders pursuant to an exemption from the registration requirements of
the Securities Act provided by Sections 3(b) and 4(2) thereof. The Company
agreed to register the Warrant Shares, Preferred Stock Shares and the Selling
Shares under the Securities Act and to indemnify and hold such Selling Security
Holders harmless against certain liabilities under the Securities Act that could
arise in connection with the sale by such Selling Security Holders of such
Common Stock. In connection therewith the Company has agreed to pay all
reasonable fees and expenses except for fees and expenses for counsel to the
Selling Security Holders and any underwriting discounts and commissions.
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<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 95,000,000 shares
of capital stock, of which 75,000,000 shares are shares of common stock, no par
value ("Common Stock"), and 20,000,000 shares may be shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). Preferred Stock is issuable
in one or more series. As of September 30, 1997, 8,002,042 shares of Common
Stock were issued and outstanding, and 89,254 shares of convertible Preferred
Stock were issued and outstanding. The following summary description of the
capital stock of the Company does not purport to be complete and is subject to,
and is qualified in its entirety by, reference to the Articles of Incorporation,
amendments thereto, Certificates of Secretary specifying the rights, preferences
and privileges on each series of outstanding Preferred Stock, and the Bylaws of
the Company, copies of all of which are on file with the SEC or available for
inspection at the Company's offices.
Common Stock
The holders of Common Stock are entitled to one vote for each share on all
matters requiring shareholder action. The holders of a majority of shares of
Common Stock represented at a meeting of shareholders can elect all of the
directors to be elected at such meeting. In addition, subject to the preferences
that may be applicable to any then outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available, and upon
liquidation, will be entitled to receive pro rata all assets of the Company
available for distribution to such holders. The Common Stock has no preemptive
or other subscription rights, no cumulative voting rights, and there are no
conversion rights, redemption or sinking fund provisions with respect thereto.
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
Stock. In addition, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal of current management, even if such removal may be in the best
interests of the shareholders.
Outstanding Preferred Stock
The outstanding Preferred Stock of the Company at September 30, 1997
consisted of 89,254 shares of Preferred Stock, which were issued in 24 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 and 97-D. Subsequent to September 30, 1997,
the Series 97-F and 97-G Preferred Stock was issued. The primary distinction
between such series of Preferred Stock relates to the dividend and liquidation
preferences for each.
All outstanding series of Preferred Stock are fully paid and nonassessable.
The Preferred Stock has no preemptive rights to subscribe for any additional
securities which may be issued by the Company. No sinking fund or similar
provision has been provided in respect to any of the outstanding series of
Preferred Stock. The rights of the holders of
38
<PAGE>
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.
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.
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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.
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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.
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Series 91-R
Dividends. Dividends of 8% per annum will be payable on the Series 91-R
Preferred Stock, in quarterly installments out of unreserved earned surplus,
before any dividends shall be payable on any other class of stock or any other
shares of Preferred Stock other than previously issued series of Preferred
Stock, and before any sum shall be set aside for the purchase of, or retirement
of, the whole or any part of the Series 91-R Preferred Stock or any other class
of stock, other than any previously issued series of Preferred Stock of the
Company. Dividends payable on the Series 91-R Preferred Stock are cumulative
and are payable prior to the payment of any dividends on the Common Stock of
the Company.
Redemption. The holders do not have the right to require redemption of the
Series 91-R Preferred Stock. The Company may redeem the Series 91-R Preferred
Stock in whole or part, at any time and from time to time effective on 60 days
prior written notice, at $10,000 per Series 91-R Preferred Share, plus the
amount of any unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem the Series 91-R Preferred
Shares is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-R
Preferred Stock shall be entitled to a cash payment of $10,000 per share, plus
all accrued and unpaid dividends up to the date fixed for distribution, whether
or not such dividends have been earned or declared. Such payment shall be made
before any payment or distribution is made to the holders of the Common Stock,
or any other series of Preferred Stock other than previously issued series of
Preferred Stock of the Company.
Conversion. During the 60 day notice period provided for redemption by the
Company, each share of the Series 91-R Preferred Stock is convertible into 167
shares of Common Stock without further payment at the election of the
shareholder. At any time after October 15, 1993, the holders of the preferred
shares may demand conversion into Common Stock.
Series 91-S
Dividends. No dividends are payable on the Series 91-S Preferred Stock.
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.
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Redemption. The holders of the Series 91-V Preferred Stock do not have the
right to require the redemption of the Series 91-V convertible Preferred Stock.
The Company has a right to cause redemption of the Series 91-V Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
Series 91-V Preferred Stock is subject to compliance with Utah law, including
without limitation certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-V
Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. During the 60 day notice period provided wherein the Company
may redeem the Series 91-V Preferred Stock, or at any other prior time, each
share of the Series 91-V Preferred Stock is convertible into 8 shares of Common
Stock of the Company without further payment at the election of the shareholder.
Series 92-A and 92-B
Dividends. The Series 92-A and 92-B Preferred Stock have no dividend rights.
Redemption. The Series 92-A and 92-B Preferred Stock holders do not have
the right to require its redemption. The Company may redeem the Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
shares is subject to compliance with Utah law, including without limitation
certain retained earnings and requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 92-A and
92-B Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 92-A Preferred Stock is convertible
into 6 shares of Common Stock. Each share of the Series 92-B Preferred Stock is
convertible into 8 shares of Common Stock. Each share is convertible without
further payment at the election of the shareholder.
Series 93-A, 93-B and 93-C
Dividends. The Series 93-A, 93-B and 93-C Preferred Stock have no dividend
rights.
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
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rate on the promissory note purchased in connection with the private placement
under which the shares of these three series of Preferred Stock were issued.
Series 94-A and 94-B
Dividends. The Series 94-A and 94-B Preferred Stock have no dividend rights.
Redemption. The holders of the Series 94-A and 94-B Preferred Stock have no
option or right to require redemption of their shares. The Series 94-A and 94-B
Preferred Stock is redeemable by the Company as a series, in whole or in part,
effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of the Series 94-A and
94-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 94-A and 94-B Preferred Stock is
convertible, at the option of the holder without further payment, into from 25
to 45 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement with which
the shares of these series of Preferred Stock were issued.
Series 95-R
Dividends. No dividends are payable on the Series 95-R Preferred Stock.
Redemption. The holders of the Series 95-R Preferred Stock have no option
or right to require redemption. The Series 95-R preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 95-R
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of Series 95-R Preferred Stock. Such
liquidation payments are to be made before any payment or distribution is made
to the holders of the Common Stock, or any other series of Preferred Stock other
than previously issued series of Preferred Stock.
Conversion. Each share of the Series 95-R Preferred Stock is convertible
after November 1, 1997, at the option of the holder without further payment,
into Common Stock with a bid based market value of (i) $18,000; or (ii) $16,500.
Alternatively, each share of Series 95-R Preferred Stock can be converted into
12,500 shares of Common Stock, at the option of the holder.
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.
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Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 96-A
and 96-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $10,000 and $13,000 per share, respectively. The liquidation
preference shall be payable before any payment or distribution is made to the
holders of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock.
Conversion. Each share of the Series 96-A Preferred Stock is convertible,
at the option of the holder without further payment after April 30, 1998, into
13,500 common shares. Each share of Series 96-B Preferred Stock is convertible
at the option of the holder without further payment after the earlier of August
30, 1998 or the date a registration statement filed by the Company with the SEC
is declared effective, into 3,000 shares of Common Stock.
Series 97-D, 97-F and 97-G
Dividends. The Series 97-D Preferred Stock has a right to cumulative
dividends, out of assets legally available therefore, at a per share rate equal
to 7% per annum of its liquidation preference of $1,000 per share. The Series
97-F and 97-G Preferred Stock have a right to cumulative dividends, out of
assets legally available therefore, at a per share rate equal to 8% per annum of
the liquidation preference of $1,000 per share.
Redemption. Neither the holders of the Series 97-D Preferred Stock nor the
Company have any option or right to require or cause redemption of the Series
97-D Preferred Stock. The holders of the Series 97-F and 97-G Preferred
Stock may not require its redemption. The Company may redeem the Series 97-F and
97-G Preferred Stock at 130% of the liquidation preference ($1,000), plus
the amount of any unpaid cumulative dividends which have become payable with
respect thereto.
Liquidation. The Series 97-D, 97-F and 97-G are each entitled to be paid
out of the assets of the Company available for distribution to shareholders,
liquidating distributions in the amount of $1,000 per share. The liquidation
preference with respect to each series shall be payable before any payment or
distribution is made to the holders of the Common Stock, or any other series of
Preferred Stock other than previously issued series of Preferred Stock.
Conversion. Each share of Series 97-D Preferred Stock is convertible, at
the option of the holder thereof, at the earlier of: (i) the date a registration
statement shall be declared effective by the SEC for the Common Stock underlying
the Series 97-D Preferred Stock, or (ii) one year from the closing date of the
purchase of such series, which was August 12, 1997. Each share is convertible
into the number of shares of Common Stock derived by dividing the conversion
rate by the conversion price. The conversion rate is the liquidation preference
of $1,000 per share of Series 97-D Preferred Stock and the Dividend Amount. The
Dividend Amount is equal to the Liquidation Preference of $1,000 per share
multiplied by 7% per annum, multiplied by the number of days since the closing
date, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to the closing date of August 12, 1997
or (b) 77.5% of the average of the closing bid price of the shares of Common
Stock of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if Common Stock is
not delivered to the holder within five days of receipt of a notice of
conversion and receipt of the Preferred Stock to be converted.
Conversion of the Series 97-D Preferred Stock is subject to the following
limitations. The Series 97-D Preferred Stock is not convertible until the
earlier of (a) the date the registration statement is declared effective or (b)
one year from the closing date of the purchase of such series. The holder is
precluded from converting any portion of the Preferred Stock which would cause
holder to be deemed to be the beneficial owner of 4.99% or more of the issued
and outstanding Common 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
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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.
Each share of Series 97-F Preferred Stock is convertible, at the option of
the holder thereof, at the earlier of: (i) the date a registration statement
shall be declared effective by the SEC for the Common Stock underlying the
Series 97-F, or (ii) one year from November 6, 1997. Each share is convertible
into the number of shares of Common Stock derived by dividing the conversion
rate by the conversion price. The conversion rate is the liquidation preference
of $1,000 per share of Series 97-F Preferred Stock and the dividend amount. The
dividend amount is equal to the liquidation preference of $1,000 per share
multiplied by 8% per annum, multiplied by the number of days since November 6,
1997, divided by 365 days. The conversion price is determined based on the date
that the conversion notice is received ("Conversion Date") and shall equal the
lesser of (a) the average closing bid price of the shares of the Common Stock
over the five day trading period prior to November 6, 1997 or (b) 75% of the
average of the closing bid price of the shares of Common Stock of the Company on
the five trading days ending on the date proceeding the Conversion Date. There
are monetary penalties to the Company if the Common Stock is not delivered to
the holder with 5 days of receipt of a notice of conversion and receipt of the
Preferred Stock to be converted. The Series 97-F must be converted no later
than two years from November 6, 1997.
Conversion of the Series 97-F Preferred Stock is subject to the following
limitations. 50% of the Series 97-F Preferred Stock issued to purchasers is
convertible on the 61st day from the date that purchasers deliver a demand for
registration to the Company, if the registration statement filed by the Company
is not effective by that date. If the registration statement filed by the
Company is not declared effective by the 121st day from the demand for
registration then the remaining 50% of the Series 97-F Preferred Stock is
convertible. However, in order for purchasers to convert at these times the
purchasers must meet all of the qualifications for trading under Regulation S.
The holder is precluded from converting any portion of the Preferred Stock which
would cause holder to be deemed to be the beneficial owner of 4.99% or more of
the issued and outstanding Common Stock of the Company.
Each share of Series 97-G Preferred Stock is convertible, at the option of
the holder thereof, beginning 41 days from January 8, 1998. Each share is
convertible into the number of shares of Common Stock derived by dividing the
conversion rate by the conversion price. The conversion rate is the liquidation
preference of $1,000 per share of Series 97-G Preferred Stock. The conversion
price is determined based on the date that the conversion notice is received
("Conversion Date") and shall equal the lesser of (a) the average closing bid
price of the shares of the Common Stock over the five day trading period prior
to January 8, 1998 or (b) 75% of the average of the closing bid price of the
shares of Common Stock of the Company on the five trading days ending on the
date proceeding the Conversion Date. There are monetary penalties to the Company
if the Common Stock is not delivered to the holder with five days of receipt of
a notice of conversion and receipt of the Preferred Stock to be converted. The
Series 97-G must be converted no later than two years from January 8, 1998.
The holder of the Series 97-G Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.
Warrants
As of September 30, 1997, the Company had outstanding warrants entitling
the holders thereof to purchase approximately 2,507,576 shares of Common Stock
of the Company at exercise prices which range from $.60 to $54.00 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.
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The various warrant exercise prices were determined arbitrarily by the
Company, and there is no assurance the price of the Common Stock will ever rise
to a level where exercise of the warrants would be of economic value to any the
warrant holders.
The warrants do not confer upon the holders any voting or dividend rights
or any other rights of a shareholder of the Company. The warrants may generally
be exercised during the exercise period upon surrender of the warrant
certificate at the offices of the Company, with a form of election to purchase
generally shown on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares being purchased.
Registration Rights
The Company will be able to issue shares of Common Stock upon exercise of
all of the various warrants only if there is a then current prospectus relating
to such Common Stock under an effective registration statement filed with the
Securities and Exchange Commission or pursuant to an applicable exemption from
such requirements, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the states
in which the various holders of the warrants reside. Common Stock underlying
warrants issued in connection with the sale of Series 97-D, 97-F and 97-G, as
well as other warrants issued under varying circumstances are being registered
in this Registration Statement. See "Selling Security Holders." Many of these
warrants were issued with "piggyback" registration rights. The warrants with
"piggyback" registration rights were all issued with an exercise price equal to
the fair market value of the Common Stock or higher on the date of issue.
In connection with the issuance of the Series 96-B, 97-D and 97-F, the Company
is required to use its best efforts to file a registration statement covering
the Preferred Shares with the SEC. For the Series 97-D and 97-F the Company is
further required to use its best efforts to have the registration statement
declared effective, generally within 120 days of the closing of each of the
transactions, wherein the Series 97-D and 97-F Preferred Stock was purchased.
Failure to have the registration statementdeclared effective generally within
120 days of the respective closings relative to the Series 97-D and 97-F
Preferred Stock will result in the Company having to pay significant monetary
damages computed on a daily basis until the registration statement is effective.
For the Series 97-D and 97-F Preferred Stock, the Company is required to
register 230% and 200%, respectively, of the number of shares which would be
capable of conversion five days prior to the filing of the registration
statement, and to keep the registration statement effective, until the earlier
of: (i) all of the holders' securities have been registered; (ii) the holders'
securities which are subject to registration may be sold without registration
pursuant to Rule 144, Rule 144(k) or Regulation S; or (iii) one year from the
issuance of the securities subject to registration.
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.
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Classified Board of Directors
The Articles of Incorporation, as amended, divide the Board of Directors
into three classes, with each class having a term of three years, and with each
class expiring in successive years. Each such class is as near equal in number
as possible. At each annual meeting of shareholders, directors are elected to
succeed those directors whose terms have expired.
The Company believes a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and its
business strategies and policies. The classified Board of Directors provision
should increase the likelihood in the event of a takeover of the Company that
incumbent directors will retain their positions. In addition, the classified
board provision will help ensure the Company's Board of Directors, if confronted
with an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and seek the best available result for all
shareholders.
Special Meetings
The Company's Articles of Incorporation as amended provide that no action
shall be taken by shareholders except at an annual or special meeting of
shareholders. The Company's Articles of Incorporation, as amended, provide that
special meetings of shareholders of the Company may be called by the President
or Chief Executive Officer, or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.
Shareholders Nomination of Directors
The Company's Articles of Incorporation and Bylaws, as amended, establish
an advance notice procedure with regard to the nomination, other than by or at
the direction of the Board of Directors, of candidates for election as directors
and the introduction of business. Only persons who are nominated by the Board of
Directors, or by a shareholder who has given timely prior written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected shall be eligible for election as directors of the Company.
Although the Company's Articles of Incorporation and Bylaws, as amended, do
not give the Board of Directors any power to approve or disapprove shareholder
nominations for the election of directors or any other business properly brought
by the Company's shareholders before an annual or special meeting, the Articles
of Incorporation as amended may have the effect of precluding certain methods of
proposing a nomination for the election of a director or precluding a certain
manner of conducting business at a particular meeting if the proper procedures
are not followed, or may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors, or otherwise
attempting to obtain control of the Company.
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,
48
<PAGE>
or other property having an aggregate fair market value equal to or
in excess of the lesser of $5,000,000 or 20% percent of the gross assets of the
Company; (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an interested shareholder
or any affiliate of any interested shareholder; (e) any reclassification of
securities or recapitalization of the Company or any merger or consolidation of
the Company with any of its subsidiaries or any other transaction which has the
effect directly or indirectly of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
interested shareholder or any affiliate of any interested shareholder. The 70%
vote requirement is not applicable to any business combination, as defined in
the Bylaws, where such business combination is either approved by a majority of
the disinterested directors, or certain price and procedure requirements are
met.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fisher Thurber LLP, 4225 Executive
Square, Suite 1600, La Jolla, California 92037-1483. David A. Fisher, a Partner
of Fisher Thurber LLP, owns an option to purchase 10,000 shares of Common Stock
at $2.00 per share.
EXPERTS
The consolidated financial statements of SGI International appearing in SGI
International's Annual Report (Form 10-K) for the fiscal year ended December 31,
1996 have been audited by Ernst & Young LLP, independent auditors, as set forth
in the 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 as experts in accounting and auditing.
49
<PAGE>
- --------------------------------------------------------------------------
SGI International
----------
Shares of Common Stock
--------------------
PROSPECTUS
--------------------
January __, 1998
- ----------------------------------------------------------------------------
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.....................................................
Summary Financial Data.................................................6
Risk Factors...........................................................7
Selected Consolidated Financial Data...................................16
Recent Developments....................................................17
Business...............................................................19
Use of Proceeds........................................................30
Selling Security Holders...............................................31
Plan of Distribution...................................................36
Description of Securities..............................................38
Description of Certain Provisions of Articles of
Incorporation and Bylaws with Possible
Anti-Takeover Effects..................................................47
Legal Matters..........................................................49
Experts................................................................49
- ----------------
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.
<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....................................... $2,593.22
Blue Sky Fees and Expenses........................... $ *
-----
Printing and Engraving Expenses...................... $ *
-----
Accounting Fees and Expenses......................... $ *
-----
Legal Fees and Expenses.............................. $ *
-----
Miscellaneous........................................ $ *
-----
Total (Estimated) $ *
* To be filed by amendment -----
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
II-1
<PAGE>
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.
Pursuant to authorization provided under the Bylaws and the Utah
Corporation Act, the Company has entered into indemnification agreements with
each of its directors and officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Utah law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. The
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification. The Company's Bylaws contain a provision
of similar effect relating to advancement or expenses to a director or officer,
subject to an undertaking to repay if it is ultimately determined that
indemnification is unavailable.
Item 16. EXHIBITS
Exhibit
Number Description
3.1 Restated Articles of Incorporation.(2)
3.2 Registrants' Bylaws as amended to date.(1)
3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(2)
3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred
Stock.(2)
3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(2)
3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(2)
3.7 Form of Debenture for Series 97-E.(2)
3.8 Form of Warrant for Series 97-E.(2)
3.9 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(2)
3.10 Amended Certificate of Secretary re: Designation of Series 97-G Preferred
Stock.(2)
4.1 Form of Common Stock certificate.(2)
4.2 Form of Warrant Certificate re: Existing Warrants.(3)
II-2
<PAGE>
4.3 Form of Stock Purchase Warrant re: Series 97-D, and 97-F Preferred
Stock.(3)
4.4 Form of Stock Purchase Warrant re: Series 97-B, Preferred Stock.(2)
4.5 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(2)
4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997
between the Registrant and the holders thereof.(3)
4.7 Registration Rights Agreement re: Series 97-D Preferred Stock dated
August 12, 1997 between the Registrant and the holders thereof.(3)
4.8 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated
November 6, 1997 between the Registrant and the holders thereof.(3)
4.9 Registration Rights Agreement re: Series 97-F Preferred Stock dated
November 6, 1997 between the Registrant and the holders thereof.(3)
4.10 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
Registrant and Settendown Capital dated January 8, 1998.(2)
4.11 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
Registrant and Dominion Capital dated January 8, 1998.(2)
4.12 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated
January 8, 1998 between the Registrant and the holders thereof.(2)
4.13 Agreement between the Registrant and AEM dated December 11, 1997.(2)
4.14 Agreement between the Registant and The Taxin Network dated April 22,
1997.(2)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities
being registered.(4)
23.1 Consent of Ernst & Young LLP, independent auditors.(2)
23.2 Consent of Fisher Thurber LLP (included in Exhibit 5.1).
24.1 Power of attorney (see pg. II-5).
- ---------------------------
(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1990.
(2) Filed herewith.
(3) Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
(4) To be filed by amendment.
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
II-3
<PAGE>
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 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 January 22, 1998.
SGI International
By: /s/ Joseph A. Savoca
- ---------------------------------------------
Joseph A. Savoca, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph A. Savoca, as his or her true and
lawful attorney-in-fact and agents, with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agents, or their substitutes may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures
/s/ Joseph A. Savoca
- ------------------------------
Joseph A. Savoca
Chief Executive Officer, Chief Financial Officer and Director
January 22, 1998
/s/ Ernest P. Esztergar
- ------------------------------
Ernest P. Esztergar
Director
January 22, 1998
/s/ William A. Kerr
- -----------------------------
William A. Kerr
Director
January 22, 1998
/s/ William R. Harris
- ----------------------------
William R. Harris
Director
January 22, 1998
/s/ Bernard V. Baus
- ----------------------------
Bernard V. Baus
Director
January 22, 1998
/s/ Norman Grant
- ----------------------------
Norman Grant
Director
January 22, 1998
<PAGE>
Exhibit Index
--------------
3.1 Restated Articles of Incorporation.(2)
3.2 Registrants' Bylaws as amended to date.(1)
3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(2)
3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred
Stock.(2)
3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(2)
3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(2)
3.7 Form of Debenture for Series 97-E.(2)
3.8 Form of Warrant for Series 97-E.(2)
3.9 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(2)
3.10 Amended Certificate of Secretary re: Designation of Series 97-G Preferred
Stock.(2)
4.1 Form of Common Stock certificate.(2)
4.2 Form of Warrant Certificate re: Existing Warrants.(3)
<PAGE>
4.3 Form of Stock Purchase Warrant re: Series 97-D, and 97-F Preferred
Stock.(3)
4.4 Form of Stock Purchase Warrant re: Series 97-B, Preferred Stock.(2)
4.5 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(2)
4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997
between the Registrant and the holders thereof.(3)
4.7 Registration Rights Agreement re: Series 97-D Preferred Stock dated
August 12, 1997 between the Registrant and the holders thereof.(3)
4.8 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated
November 6, 1997 between the Registrant and the holders thereof.(3)
4.9 Registration Rights Agreement re: Series 97-F Preferred Stock dated
November 6, 1997 between the Registrant and the holders thereof.(3)
4.10 Series 97-G 8% Convertible Preferred Stock Purchaser Subscription
Agreement between Registrant and Settendown Capital dated January 8,
1998.(2)
4.11 Series 97-G 8% Convertible Preferred Stock Purchaser Subscription
Agreement between Registrant and Dominion Capital dated January 8, 1998.(2)
4.12 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated
January 8, 1998 between the Registrant and the holders thereof.(2)
4.13 Agreement with AEM.(2)
4.14 Agreement with Taxin Network.(2)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities
being registered.(4)
23.1 Consent of Ernst & Young LLP, independent auditors.(2)
23.2 Consent of Fisher Thurber LLP (included in Exhibit 5.1).
24.1 Power of attorney (see pg. II-5).
RESTATED ARTICLES OF INCORPORATION
OF
SGI INTERNATIONAL
The Articles of Incorporation of SGI International are restated in their
entirety to read as follows:
The Board of Directors of SGI International on the 25th day of February, 1988,
duly adopted a Resolution that the proposed Restated Articles of Incorporation
for this Corporation as hereinafter set forth correctly sets forth, without
change, the corresponding provisions of the Articles of Incorporation of this
Corporation as previously amended, as follows:
ARTICLE I
The name of the Corporation is SGI INTERNATIONAL.
ARTICLE II
The duration of the Corporation is perpetual.
ARTICLE III
The purposes for which this Corporation is organized are (1) to develop and
manufacture scientific products (2) to develop, research, produce, distribute,
market, and license products, equipment and services and all matters related or
ancillary thereto, (3) to purchase, own, lease, manage, sell, operate, invest in
and develop any and all real property, personal property, mineral, oil and gas
properties and all matters related or ancillary thereto, and (4) to do all
things and engage in all lawful transactions which a Corporation organized under
the laws of the State of Utah might do or engage in even though not expressly
stated herein.
ARTICLE IV
(a) Capital Stock. The aggregate number of shares of stock which the Corporation
shall have the authority to issue is 70 Million (70,000,000) shares consisting
of 50 Million (50,000,000) shares of Common Stock, no par value, and 20 Million
(20,000,000) shares of Preferred Stock, par value $0.01 per share. Any stock of
the Corporation which is fully paid shall not be subject to further call or
assessment for any purpose.
(b) Common Stock. The shares of authorized Common Stock of the Corporation shall
be identical in all respects and shall have equal rights and preferences.
<PAGE>
(c) Preferred Stock. The Board of Directors shall have authority to establish
the terms and approve the issuance of, from time to time, the shares of
Preferred Stock, to divide the Preferred Stock into one or more classes or
series and, in connection with the creation of any such class or series, to fix
by the resolution or resolutions providing for the issue of shares thereof the
designation, powers and relative, participating, optional, or other special
rights of such class or series, and the qualification, limitations, or
restrictions thereof, to the full extent now or hereafter permitted by law.
ARTICLE V
The Corporation will not commence business until at least One Thousand and
no/100 Dollars ($1,000) in cash has been received by it as consideration for the
issuance of its shares.
ARTICLE VI
The post office address of the Corporation's initial registration office is 185
South State, Suite 1040, Salt Lake City, Utah 84111. The name of its initial
registered agent at such address is David S. Jensen.
ARTICLE VII
The authorized and treasury stock of this Corporation may be issued at such
time, upon such terms and conditions and for such consideration as the Board of
Director shall determine. Any and all shareholders have no pre-emptive rights to
acquire unissued shares of the stock of this Corporation.
ARTICLE VIII
(a) Number, election and terms of Directors. Except as otherwise fixed by or
pursuant to the provisions of Article IV hereof relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional Directors under
specified circumstances, the Board of Directors of the Corporation shall be
comprised of a minimum of three and a maximum of nine members, as established by
resolution of the Board of Directors. The Directors, other than those who may be
elected by the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, shall be classified with
respect to the time for which they severally hold office, into three classes of
Directors, of as equal number as possible, one class to be originally elected
for a term expiring at the annual meeting of the shareholders to be held in
1986, another class to be originally elected for a term expiring at the annual
meeting of shareholders to be held in 1987, and another class to be originally
elected for a term expiring at the annual meeting of shareholders to be held in
1988, with each Director to hold office until his or her successor shall have
been duly elected and qualified. At each annual meeting of the shareholders of
the Corporation, the successors of the class of Directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election.
(b) Shareholder nomination of Director candidates and introduction of business.
Advance notice of shareholder nominations for the election of Directors and
advance notice of business to be brought by Shareholders before an annual
meeting shall be given in the manner provided in the By-laws of the Corporation.
(c) Newly created directorships and vacancies. Except as otherwise provided for
or fixed by or pursuant to the provisions of Article IV hereof relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
Directors under specified circumstances, newly created directorships resulting
from any increase in the number of Directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled by the affirmative vote of a majority of the remaining
Directors then in office, even though less than a quorum of the Board of
Directors, and not otherwise filled unless required by law. Any Director elected
in accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred, unless required by law to hold office for a
shorter duration, and, in any event, until such Director's successor shall have
been duly elected and qualified. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
(d) Removal. Subject to the rights of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to elect
Directors under specified circumstances, any Director may be removed from office
for cause only by a vote of the holders of a majority of the shares issued and
outstanding and entitled to vote. Cause shall include, exclusively, the
commission of a felony, malfeasance in office or the gross neglect of the duties
of a Director.
(e) Amendment, repeal, or alteration. Notwithstanding anything contained in this
Articles of Incorporation to the contrary, the affirmative vote of the holders
of at least 70% of the voting power of all shares of the Corporation entitled to
vote generally in the election of directors, voting together as a single class,
shall be required to alter, amend or repeal this Article VIII.
ARTICLE IX
Subject to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, any action
required or permitted to be taken by the shareholders of the Corporation may be
effected at a duly called annual or special meeting of such shareholders and not
otherwise effected unless required by law. Subject to the rights of the
shareholders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, special meetings of shareholders of
the Corporation may be called by the President or Chief Executive Officer of the
Corporation or by the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors and not otherwise called unless
required by law. Notwithstanding anything contained in these Articles of
Incorporation to the contrary, the affirmative vote of the holders of at least
70% of the voting power of all shares of the Corporation entitled to vote
generally in the election of Directors, voting together as a single class, shall
be required to alter, amend or repeal this Article IX.
ARTICLE X
The Board of Directors shall have power to make, alter, amend and repeal the
By-laws of the Corporation (except to the extent that the By-laws of the
Corporation adopted by the shareholders shall otherwise provide). Any By-laws
made by the Directors under the powers conferred hereby may be altered, amended
or repealed by the Directors or by the shareholders. Notwithstanding the
foregoing and anything contained in these Articles of Incorporation to the
contrary, Sections 2.2, 2.5, 2.6 and 2.9 of Article II and Sections 3.1, 3.2 and
3.3 of Article III of the By-laws shall not be altered, amended or repealed
without the affirmative vote of the holders of at least 70% of the voting power
of all the shares of the Corporation entitled to vote generally in the election
of directors, voting together as a single class, except to renumber the Section
designations thereof. Notwithstanding anything contained in these articles of
Incorporation to the contrary, the affirmative vote of the holders of at least
70% of the voting power of all the shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to alter, amend or repeal this Article X.
ARTICLE XI
SECTION 1. Vote Required for Certain Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any affirmative
vote required by law or these Articles of Incorporation, and except as otherwise
expressly provided in Section 2 of this Article XI:
(i) any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter defined) with (a) any Interested Shareholder (as hereinafter
defined) or (b) any other corporation (whether or not itself an Interested
Shareholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) 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 $5 million or 20% of the gross assets of the
Corporation; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation or
any Subsidiary to any Interested Shareholder or any Affiliate of any Interested
Shareholder in exchange for cash, securities or other property (or a combination
thereof) having an aggregate Fair Market Value equal to or in excess of the
lesser of $5 million or 20% of the gross assets of the Corporation; or
(iv) the adoption of any plan or proposal for the liquidation or dissolution of
the Corporation proposed by or on behalf of an Interested Shareholder or any
Affiliate of any Interested Shareholder; or
(v) any reclassification of securities (including any reverse stock split), or
recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries, or any other transaction (whether or
not with or into or otherwise involving an Interested Shareholder) 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
Corporation or any Subsidiary which is directly or indirectly owned by any
Interested Shareholder or any Affiliate of any Interested Shareholder,
shall require the affirmative vote of the holders of at least 70% of the voting
power of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of Directors (the "Voting Stock" for
purposes of this Article XI), voting together as a single class (it being
understood that for purposes of this Article XI, each share of the Voting Stock
shall have the number of votes granted to it pursuant to Article IV of the
Articles of Incorporation). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
B. Definition of "Business Combination." The term "Business Combination" as used
in this Article XI shall mean any transaction which is referred to in any one or
more of clauses (i) through (v) of paragraph A of this Section 1.
SECTION 2. When Higher Vote is Not Required. The provisions of Section 1 of this
Article XI shall not be applicable to any particular Business Combination, and
such Business Combination shall require only such affirmative vote as is
required by law and any other provision of these Articles of Incorporation, if
all of the conditions specified in either of the following paragraphs A or B are
met:
A. Approval of Disinterested Directors. The Business Combination shall have
been approved by a majority of Disinterested Directors (as hereinafter defined).
B. Price and Procedure Requirements. All of the following conditions shall have
been met:
(i) The aggregate amount of the cash and the Fair Market Value (as hereinafter
defined) as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of Common
Stock in such Business Combination shall be at least equal to the higher of the
following:
(a) (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Interested
Shareholder for any shares of Common Stock acquired by it (1) within the
two-year period immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement Date") or (2) in the
transaction in which it became an Interested Shareholder, whichever is higher;
and
(b) the Fair Market Value per share of Common Stock on the Announcement Date or
on the date on which the Interested Shareholder became an Interested Shareholder
(such latter date is referred to in this Article XI as the "Determination
Date"), whichever is higher,
(ii) The aggregate of the cash and the Fair Market Value as of the date of the
consummation of the Business Combination of consideration other than cash to be
received per share by holders of shares of any other class of outstanding Voting
Stock (other than Excluded Preferred Stock, as hereinafter defined) shall be at
least equal to the highest of the following (it being intended that the
requirements of this paragraph B(ii) shall be required to be met with respect to
every class of outstanding Voting Stock (other than Excluded Preferred Stock),
whether or not the Interested Shareholder has previously acquired any shares of
a particular class of Voting Stock):
(a) (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Interested
Shareholder for any shares of such class of Voting Stock acquired by it (1)
within the two-year period immediately prior to the Announcement Date or (2) in
the transaction in which it became an Interested Shareholder, whichever is
higher;
(b) (if applicable) the highest preferential amount per share to which the
holders of shares of such class of Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(c) the Fair Market Value per share of such class of Voting Stock on the
Announcement DAte or on the Determination Date, whichever is higher.
(iii) The consideration to be received by holders of a particular class of
outstanding Voting Stock, including Common Stock (other than Excluded Preferred
Stock), shall be in cash or in the same form as the Interested Shareholder has
previously paid for shares of such class of Voting Stock. If the Interested
Shareholder has paid for shares of any class of Voting Stock with varying forms
of consideration, the form of consideration for such class of Voting Stock shall
be either cash or the form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by it. The price determined in
accordance with Paragraphs B(i) and B(iii) of this Section 2 shall be subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination of shares or similar event.
(iv) After such Interested Shareholder has become an Interested Shareholder and
prior to the consummation of such Business Combination: (a) except as approved
by a majority of the Disinterested Directors, there shall have been no failure
to declare and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on any outstanding Preferred Stock; (b) there shall
have been (1) no reduction in the annual rate of dividends paid on the Common
Stock (except as necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested Directors, and (2) an
increase in such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the failure of increase
such annual rate is approved by a majority of the Disinterested Directors; and
(c) such Interested Shareholder shall not have become the beneficial owner of
any additional shares of Voting Stock except as part of the transaction which
results in such Interested Shareholder becoming an Interested Shareholder.
(v) After such Interested Shareholder has become an Interested Shareholder, such
Interested Shareholder shall not have received the benefit directly or
indirectly (except proportionately as a shareholder or in the ordinary course of
the Corporation's business) of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages provided by the
Corporation, whether in anticipation of or in connection with such Business
Combination or otherwise.
(vi) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to public shareholders
of the Corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required to
be mailed pursuant to such Act or subsequent provisions).
SECTION 3. Certain Definitions. For the purposes of this Article XI:
A. A "person" shall mean any individual, firm, corporation or other entity.
B. "Interested Shareholder" shall mean any person (other than the Corporation or
any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the outstanding Voting Stock;
(ii) is an Affiliate of the Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock
which were at any time within the two-year period immediately prior to the date
in question beneficially owned by any Interested Shareholder, if such assignment
or succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as hereinafter
defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has (a) the right
to acquire (whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote pursuant to any agreement, arrangement or
understanding; or
(iii) which are beneficially owned, directly or indirectly, by any other person
with which such person or any of its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Voting Stock.
D. For the purposes of determining whether a person is an Interested Shareholder
pursuant to paragraph B of this Section 3, the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned through application
of paragraph C of this Section 3 but shall not include any other shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
E. "Affiliate" or "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934 (the "Exchange Act"), as in effect on March 4,
1986.
F. "Subsidiary" means any corporation of which a majority of Voting Stock is
owned, directly or indirectly, by the Corporation and who is unaffiliated with
the Interested Shareholder.
G. "Disinterested Director" means any member of the Board of Directors of the
Corporation (the "Board") who is unaffiliated with the Interested Shareholder
and either was (i) a member of the Board prior to the time that the Interested
Shareholder became an Interested Shareholder, (ii) initially appointed to fill
any vacancy on, or initially elected to, the Board subsequent to the time that
the Interested Shareholder became an Interested Shareholder upon the
recommendation of a majority of Disinterested Directors or (iii) a member of the
Board at the time of shareholder approval of this Article XI.
H. "Fair Market Value" means (i) in the case of stock: (1) if the Corporation's
stock is traded in the over-the-counter market and not traded in the NASDAQ
National Market System (a) the highest closing bid and asked price of the
Corporation's stock for the immediately preceding 30-day period, as quoted by
NASDAQ or (b) if the Corporation's stock is not then quoted by NASDAQ, then the
highest bid price of the Corporation's stock for such period, as reported in the
"pink streets" published by the National Quotation Bureau, Incorporation; (2) if
the Corporation's stock is traded in the NASDAQ National Market System or on a
national securities exchange, the highest daily per share closing sale price of
the Corporation's stock for the immediately preceding 30-day period, in the
NASDAQ National Market System or on the principal stock exchange on which it is
listed, as the case may be; and (3) if the Corporation's stock has no readily
ascertainable market value, the fair market value of such stock on the date in
question as determined by the Board in good faith and (ii) in the case of
property other than cash or stock, the fair market value of such property on the
date in question as determined by the Board in good faith.
I. In the event of any Business Combination in which the Corporation survives,
the phrase "consideration other than cash to be received" as used in paragraphs
B(i) and (ii) of Section 2 of this Article XI shall include the shares of Common
Stock and/or the shares of any other class of outstanding Voting Stock retained
by the holders of such shares.
J. "Excluded Preferred Stock" shall mean any series of Preferred Stock with
respect to which the resolution of the Board of Directors creating such series
expressly provides that such series shall be Excluded Preferred Stock for
purposes of this Article XI.
SECTION 4. Powers of the Board of Directors. A majority of the Directors of the
Corporation shall have the power and duty to determine for the purposes of this
Article XI, on the basis of information known to them after reasonable inquiry,
(A) whether a person is an Interested Shareholder, (B) the number of shares of
Voting Stock beneficially owned by any person, (C) whether a person is an
Affiliate or Associate of another, (D) whether the assets which are the subject
of any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any Subsidiary (other
than Excluded Preferred Stock) in any Business Combination has, an aggregate
Fair Market Value equal to or in excess of $5 million or 20% of the gross assets
of the Corporation. A majority of the Directors shall have the further power to
interpret all of the terms and provisions of this Article XI.
SECTION 5. No Effect on Fiduciary Obligations of Interested Shareholders.
Nothing contained in this Article XI shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
SECTION 6. Amendment, Repeal, etc. Notwithstanding any other provisions of these
Articles of Incorporation or the By-laws of the Corporation, or any lesser
percentage that may be specified by law, the affirmative vote of the holders of
70% or more of the outstanding Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal this Article XI.
<PAGE>
ARTICLE XII
The number of directors constituting the initial Board of Directors of the
Corporation is three (3), and the names and addresses of the persons who are to
serve as Directors until the first annual meeting of the shareholders or until
their successors are elected and shall qualify, are:
Richard D. Casey Mark B. Jensen
2266 East 11660 South 4078 Killarney Circle
Sandy, Utah 84092 West Valley City, Utah 84119
Wallace T. Boyack
Suite 350, IBM Building
420 East South Temple
Salt Lake City, Utah 84111
The number of Directors of the Corporation is at least three (3), but not more
than nine (9), as established by resolution of the Board of Directors.
ARTICLE XIII
The names and addresses of the incorporators are:
Wallace T. Boyack Jolene S. Allphin
Suite 350, IBM Building Suite 350, IBM Building
420 East South Temple 420 East South Temple
Salt Lake City, Utah 84111 Salt Lake City, Utah 84111
Craig S. Cummings
Suite 350, IBM Building
420 East South Temple
Salt Lake City, Utah 84111
ARTICLE XIV
No contract or other transaction between this Corporation and any other
corporation or other business entity shall be affected because a Director or
Officer of this Corporation is interested in or is a Director or Officer of such
other corporation; and any Director or Officer, individually or jointly, may be
a party to or may be interested in any Corporation or transaction of this
Corporation or in which this Corporation is interested; an no contract or other
transaction of this Corporation with any person, firm or corporation shall be
affected because any Director or Officer of the Corporation is a party to or is
interested in such contract, act or transaction or any way connected with such
person, firm or corporation, and any person who may become a Director or Officer
of this Corporation is hereby relieved from liability that might otherwise exist
from contracting with the Corporation for the benefit of himself or any firm,
association or corporation in which he may be in any way interested, provided
said Director or Officer acts in good faith.
ARTICLE XV
The private property of the shareholders shall not be subject to the payment of
any Corporate debts to any extent whatsoever.
ARTICLE XVI
There shall be only one (1) class of common stock.
DATED this 25th day of February, 1988.
SGI INTERNATIONAL, A Utah Corporation
By /s/ Ernest P. Esztergar
- -------------------------------
Ernest P. Esztergar,
President
By /s/ Robert D. Krintzman
- -------------------------------
Robert D. Krintzman,
Secretary
STATE OF CALIFORNIA )
) ss.
COUNTY OF SAN DIEGO )
Before me, a Notary Public in and for said County and State, personally appeared
Ernest P. Esztergar and Robert D. Krintzman, who acknowledged before me that
they are the President and Secretary of SGI International, a Utah corporation,
and that each of them signed the foregoing RESTATED ARTICLES OF INCORPORATION as
their free and voluntary act and deed for the uses and purposes therein set
forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th day of
February, 1988. My commission expires .
/s/ Laura Levin
- -------------------------
Notary Public
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a Resolution
passed by the SGI Board of Directors on August 5, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on August 9, 1996.
/s/ John R. Taylor
- ----------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to authority expressly granted to the Board of Directors
by the provisions of the Articles of Incorporation of this Corporation, the
Board of Directors hereby creates a series of the Series 96-B Convertible
Preferred Stock of the Corporation to consist initially of 50 shares, and hereby
fixes the designations, powers, conversion privilege preferences and other
special rights, and the qualifications, limitations or restrictions thereof, of
the shares of such series as follows:
a) The designation of the series of Convertible Preferred Stock created by this
resolution shall be "Series 96-B Convertible Preferred Stock."
b) The holders of Series 96-B Convertible Preferred Stock shall have no voting
rights.
c) The shareholders of Series 96-B Convertible Preferred Stock do not have
the right to cause its redemption. On or after April 30, 1998 Each
Series 96-B Convertible Preferred Share is convertible without further
payment into Three Thousand (3,000) shares of Common Stock on the first
to occur of the following: (1) August 30, 1998; OR, (2) on the date a
Registration Statement filed by SGI with the Securities and Exchange
Commission, including the registration of the underlying Common Stock,
is declared effective by the SEC.
d) In the event of the voluntary liquidation, dissolution or other
termination of the Corporation, the holders of shares of the Series
96-B Convertible Preferred Stock shall be entitled only to a cash
payment with respect thereto of thirteen thousand dollars ($13,000.00)
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 Corporation.
e) The Series 96-B Convertible Preferred Stock and the Common Stock into
which it is convertible will, upon issuance, be fully paid and non-assessable.
f) In the event that the Corporation shall at any time after issuance of a
share of Series 96-B Convertible Preferred Stock hereunder: (i) declare or pay
to the holders of the Common Stock a dividend payable in any kind of shares of
stock of the Corporation; or (ii) split, reverse split or otherwise reclassify
its Common Stock into the same or a different number of shares with or without
par value or into shares of any class or classes; or (iii) consolidate or merge
with or transfer its property as an entirety or substantially as an entirety to
any other corporation; or (iv) make any distribution of its assets to holders
of its Common Stock as a liquidation or partial liquidation dividend or by way
of return of capital; then, upon subsequent conversion of a share of Series
96-B Convertible Preferred Stock, the shareholders shall receive in exchange
for a share of Series 96-B Convertible Preferred Stock, in addition to, in
reduction of, or in substitution for, in Common Stock to which he would
otherwise be entitled upon such exercise, such additional shares of Common
Stock, or less number shares of Common Stock, as the case may be, of stock or
script of the Corporation, or such unclassified shares of stock of the
Corporation, or such shares of securities or property of the Corporation
resulting from consolidation or merger or transfer, or such assets of the
Corporation, so that the value so received by the shareholder is equivalent to
the value which he would have teem entitled to receive (and the total
consideration exchangeable by the shareholder is equivalent to the total
consideration which would otherwise be exchangeable by him) had he converted a
share of Series 96-B Convertible Preferred Stock into shares of Common Stock
immediately prior to the happening of any of the foregoing events.
g) The Series 96-B Convertible Preferred Stock and the Common Stock into
which it is convertible ("Conversion Common Stock"), are restricted and
will not be registered under the Securities Act of 1933.
h) SGI agrees that the common stock underlying this Convertible Preferred
Share shall be granted "piggyback" registration rights as set forth
herein. The corporation shall be obligated to shareholder as follows:
During the period of two years from the date hereof, whenever the
Corporation proposes to file with the SEC a Registration Statement
(other than as to securities issued pursuant to an employee benefit
plan or as to a transaction subject to Rule 145 promulgated under the
Act), it shall at least 20 days prior to each such filing, give written
notice of such proposed filing to shareholders at its address as it
appears on the records of the Corporation, and shall offer to include
in such filing all common shares issuable upon conversion of this
Convertible Preferred Share upon receipt by the Corporation, not less
than 10 days prior to the proposed filing date, of a request therefor
setting forth the facts with respect to such shares reasonably
necessary to be included in such Registration Statement. The
Corporation shall keep such Registration Statement effective for a
period of at least 90 days. If such Registration Statement relates to
an underwritten offering, and if the managing underwriter for said
offering advises the Company in writing that the inclusion of all or
any portion of such shares would be detrimental to said offering, or if
upon due consideration, the Board of Directors reasonably determines
that the inclusion of all or any portion of such shares would be
detrimental to the best interests of the Company, the shares shall not
be included in the Registration Statement. In the event that the
underwriter or the Board of Directors conclude that the inclusion of
any portion of such securities in the offering would not be detrimental
thereto, and such portion is less than the amount requested for
inclusion, then the amount to be included shall be prorated among the
requesting Shareholders and other security holders of the Company
possessing similar registration rights.
RESOLVED FURTHER, that any SGI Officer is hereby authorized and directed to
expedite all steps necessary to timely implement the foregoing Resolutions.
RESOLVED FINALLY, that the President and the Secretary are hereby authorized and
directed to take all steps necessary to comply with applicable blue-sky laws and
the federal laws governing the issuance and sale of securities, before offering
any of the authorized capital stock for sale.
FIRST AMENDMENT TO CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a Resolution
passed by the SGI Board of Directors on May 27, 1997, which Resolution amends
the original Resolution of the Board of Directors dated May 13, 1997
establishing the Series 97-B Convertible Preferred Stock and the corresponding
Certificate of Secretary filed with the Utah Corporations Division filed on
May 14, 1997. The May 27, 1997 Resolution of the Board of Directors of SGI
authorizes the filing of this First Amendment to the Certificate of Secretary.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on May 27, 1997.
/s/ John R. Taylor
- ---------------------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of One Thousand (1,000) shares, out of Twenty Million (20,000,000)
shares of Preferred Stock which the Company has authority to issue, be, and the
same hereby is, authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restriction thereof, of the shares of such
series (in addition to the powers, designations, preferences, and relative,
participating, optional or to other special rights and the qualification,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the Preferred Stock) authorized by this
resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 97-B Convertible Preferred Stock (the "Series 97-B Preferred
Stock"). The maximum number of shares of Series 97-B Preferred Stock shall have
a liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 97-B Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 97-B Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 97-B
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
bow payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 97-B Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Dividend Provisions
(i) The holders of shares of Series 97-B Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to eight percent (8%) per annum of the amount of the
respective Liquidation Preference of the Series 97-B as set forth in Section (a)
hereof, payable annually when, as, and if declared by the Board of Directors.
Any dividends payable pursuant to the provisions of this paragraph shall only be
payable in Common Stock of the Company and not in cash.
(ii) Dividends on Series 97-B Preferred Stock shall not be
cumulative, and no rights under this Section (b) shall accrue to the holders of
Series 97-B Preferred Stock by reason of the fact that this Company may have
failed to declare or pay dividends on Series 97-B Preferred Stock in any
previous fiscal year of the Company, whether or not the earnings of this Company
were sufficient to pay such dividends.
(c) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 97-B Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 97-B Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends plus the Liquidation Preference of the Series 97-B Preferred Stock
(collectively, the "Liquidation Value"), and shall not be entitled to any
further payment. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the payment and the place where the
amounts distributable shall be payable, shall be mailed by certified or
registered mail., return receipt requested, not less than 60 days prior to the
payment date stated therein, to each record holder of any share of Series 97-B
Preferred Stock. Neither the consolidation or merger of the Company into or with
any other company or companies, nor the sale or transfer by the Company of all
or any part of its assets, nor the reduction of the capital stock of the
Company, shall be deemed to be a liquidation, dissolution, or winding up of the
Company for purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 97-B Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 97-B
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 97-B Preferred Stock and stock
ranking on a parity therewith, them the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 97-B may include accumulated dividends) to
which they are entitled.
(d) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (e) herein, each share of the Series 97-B Preferred Stock shall be
convertible, at the option of the holder thereof, forty one (41) days after the
date of original issuance of such share at the office of this Company, into that
number of shares of fully paid and nonassessable shares of Common Stock which is
to be derived from dividing the Conversion Rate by the Conversion Price. For
purposes of this Certificate, the Conversion Rate shall mean the Liquidation
Preference of $1,000 per share of Preferred Stock. For purposes hereof, the
Conversion Price shall be determined as of the date the notice of conversion is
received by the Company ("Conversion Date") and shall be equal to the lesser of:
(a) the average closing bid price of the shares of Common Stock over the five
(5) day trading period prior to the Closing Date as such Closing Date is defined
in the Convertible Preferred Stock Offshore Subscription Agreement, dated May
23, 1997, or (b) seventy five percent (75%) of the average of the closing bid
price on the five (5) trading days ending on the date preceding the date of
conversion. The closing bid price shall be deemed to be the reported last bid
price regular way on the principal national securities exchange on which the
Common Stock is listed or admitted to trading, or if the Common Stock is not
listed or admitted to trading on any national securities exchange, the closing
bid price as reported by NASDAQ or such other system then in use, or, if the
Common Stock is not quoted by any such organization, the closing bid price in
the over-the-counter market as furnished by the principal national securities
exchange on which the Common Stock is traded. In the event that the Common Stock
issuable upon conversion of the Series 97-B Preferred Stock is not delivered, as
a direct result of the negligence or action or inaction of the Company only,
within five (5) business days of receipt by the Company of a valid conversion
notice and the Series 97-B Preferred Stock to be converted ("Receipt Conversion
Date"), the Company shall pay to the purchaser, in immediately available funds,
upon demand, as liquidated damages for such failure and not as a penalty, for
each $100,000 of the Series 97-B Preferred Stock sought to be converted, $500
for each of the first ten (10) days and $1,000 per day thereafter that the
shares of Common Stock issuable upon conversion of the Series 97-B Preferred
Stock are not delivered, which liquidated damages shall run from the sixth
business day after the Receipt Conversion Date. Any and all payments required
pursuant to this paragraph shall be payable only in shares of Common Stock and
not in cash. The number of such shares shall be determined by dividing the total
sum payable by the Conversion Price.
2. Limitations. Subject to limitations described in paragraph
(e) herein and notwithstanding the foregoing, the Series 97-B Preferred Stock
shall not be convertible until the forty first (41st) day following the closing
of the purchase of the Series 97-B Preferred Stock. The holder of the Series
97-B Preferred Stock shall be prohibited from converting any portion of the
Series 97-B Preferred Stock which would result in the holder being deemed the
beneficial owner in accordance with the provisions of Rule 13d-3 of the Exchange
Act of 1934, as amended, of 4.99% or more of their issued and outstanding Common
Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 97-B
Preferred Stock shall exercise its right to convert the Series 97-B Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 97-B Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 97-B Preferred Stock (together with the certificates representing the
Series 97-B Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within three business days after the
Conversion Date if the Company has received the original notice of conversion
and Series 97-B Preferred Stock certificate being so converted by such date. The
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If certificates for
Common Stock are not delivered within three (3) business days of actual receipt
of a duly completed election to convert and the certificate to be converted,
then the purchaser of the Series 97-B Preferred Stock will be entitled to revoke
the relevant notice of conversion by delivering a notice to such effect to the
Company whereupon the Company and the purchaser shall each be restored to their
respective positions immediately prior to the delivery of such notice of
conversion.
4. Adjustment Provisions. The number of shares of Common Stock issuable upon
the conversion of the Preferred Stock and the Conversion Price shall be subject
to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common
Stock or securities convertible into, exchangeable for or otherwise entitling
a holder thereof to receive Common Stock, (ii) declare a dividend payable in
cash on its Common Stock and at substantially the same time offer its
shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other entitling a holder thereof to receive Common
Stock) from proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend), (iii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iv) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (v) issue by reclassification of its
Common Stock any shares of Common Stock of the Company, the number of shares
of Common Stock issuable upon conversion of the Series 97-B Preferred Stock
immediately prior thereto shall be adjusted so that the holders of the Series
97-B Preferred Stock shall be entitled to receive after the happening of any
of the events described above that number and kind of shares as the holders
would have received had such Series 97-B Preferred Stock been converted
immediately prior to the happening of such event or any record date with
respect thereto. Any adjustment made pursuant to this subdivision shall become
effective immediately after the close of business on the record date in the
case of a stock dividend and shall become effective immediately after the
close of business on the record date in the case of a stock split, subdivision,
combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (d)(4) will not have to be made
if such adjustment would not require an increase or decrease in one percent
(1%) or more in the number of shares of Common Stock issuable upon conversion
of the Series 97-B Preferred Stock. No adjustment in the Conversion Rate will
be made for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or trusts
related thereto or for issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Company and the investment of additional optional amounts in
shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock issuable upon the
conversion of the Series 97-B Preferred Stock is adjusted, as herein provided,
the Conversion Price shall be adjusted (to the nearest cent) by multiplying
such Conversion Price immediately prior to such adjustment by a fraction of
which the numerator shall be the number of shares of Common Stock issuable upon
the exercise of each share of Series 97-B Preferred Stock immediately prior to
such adjustment, and of which the denominator shall be the number of shares of
Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 97-B Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
97-B Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the entity, and (B) failed to exercise his or her rights of election, if any, as
to the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, sale or transfer (provided that if the kind or
amount of securities, cash or other property receivable upon such consolidation,
merger, sale or transfer is not the same for each share of Common Stock of the
Company held immediately prior to such consolidation, merger, sale or transfer
by other than a constituent entity or an affiliate thereof and in respect of
which the Company merged into the Company or to which such rights or election
shall not have been exercised ("non-electing share"), then for the purpose of
this Section (d)(5) the kind and amount of securities, cash or other property
receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). If necessary, appropriate
adjustment shall be made in the application of the provision set forth herein
with respect to the rights and interest thereafter of the holders of shares of
Series 97-B Preferred Stock, to the end that the provisions set forth herein
shall thereafter correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock or other securities or property
thereafter deliverable on the conversion of the shares. The above provisions
shall similarly apply to successive consolidations, mergers, sales, transfers,
capital reorganizations and reclassifications. The Company shall not effect any
such consolidation, merger, sale or transfer unless prior to or simultaneously
with the consummation thereof the successor Company or entity (if other than the
Company) resulting from such consolidation, merger, sale or transfer shall
assume, by written instrument, the obligation to deliver to the holder of each
share of Series 97-B Preferred Stock such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
receive under this Section (d)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (d) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 97-B Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 97-B Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 97-B Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
<PAGE>
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 97-B Preferred
Stock pursuant to Section (d)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 97-B Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 97-B Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 97-B Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 97-B Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 97-B Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 97-B Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 97-B Preferred Stock shall be converted pursuant to Section (d) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company shall have the status of authorized but unissued shares of Preferred
Stock and my be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 97-B Preferred Stock.
(e) Redemption
1. Optional Redemption by the Company. Holders of Series 97-B
Convertible Preferred Shares do not have the right to cause redemption of their
Series 97-B Convertible Preferred Shares. For any Series 97-B Preferred Stock
for which a notice of conversion has not been sent, the Series 97-B Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 97-B Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a) and (c) above ("Redemption
Price"). On the date the Company sends a notice of redemption to the holders of
the Series 97-B Convertible Preferred Stock ("Holders") and wire transfers the
appropriate amount of funds into the escrow account described in paragraph
(e)(2) herein, whichever event date is the latter ("Notice of Redemption Date"),
the Holder's right to convert the Series 97-B Convertible Preferred Stock shall
terminate and be canceled immediately, provided, however, the Company shall only
have the right to redeem the Series 97-B Preferred Stock when the closing bid
price, as defined in paragraph (d)(l) herein, of the shares of Common Stock into
which the Series 97-B Preferred Stock is convertible has declined in value since
the date the Holder or the original subscriber executed the 8% Convertible
Preferred Stock Offshore Subscription Agreement. If fewer than all of the
outstanding shares of Series 97-B Convertible Preferred Stock are to be
redeemed, the Company will select those to be redeemed pro-rata, by lot or by
other method deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
97-B Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (d) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 97-B Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 97-B Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 97-B Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the purchaser of the Series 97-B Preferred Stock within three (3) business
days of such notice. Additionally, if after the passage of three (3) business
days from the receipt by the purchaser of the notice of the Company's right to
redeem the Series 97-B Preferred Stock and the time funds are received by the
escrow agent, the Company has not deposited into escrow the appropriate amount
of funds to redeem the Series 97-B Preferred Stock, the Company shall pay to the
purchaser an amount equal to five (5%) percent per month of the Liquidation
Preference on a pro rata basis in cash. After the escrow agent is in receipt of
such funds, he shall notify the purchaser to surrender the appropriate amount of
Series 97-B Preferred Stock. If after three (3) business days from the date the
notice of redemption is received by the purchaser the funds have not been
received by the escrow agent, then the purchaser shall again have the right to
convert the Series 97-B Preferred Stock and the Company shall have the right to
redeem the Series 97-B Preferred Stock but only upon simultaneously sending a
notice of redemption to the purchaser and wire transferring the appropriate
amount of funds.
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 97-B Preferred Stock into Common Stock as more fully
provided in Section (d) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(e)(1) herein, each share of Series 97-B Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 97-B Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 97-B Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (d) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 97-B Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (e) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 97-B Preferred Stock.
(f) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 97-B Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 97-B Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its President, and attested to by its Secretary, this 27th day of
May, 1997.
SGI International
By: /s/ Joseph A. Savoca
- ---------------------------
Title: President
Attest:
/s/ John R. Taylor
- ----------------------------
John R. Taylor, Secretary
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is true and correct copy of a Resolution
passed by the SGI Board of Directors on June 2, 1997, establishing the Series
97-C Convertible Preferred Stock. The June 2, 1997, Resolution of the Board of
Directors of SGI authorizes the filing of this Certificate of Secretary.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
the corporation on June 9, 1997.
/s/ John R. Taylor
- ------------------------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to authority expressly granted to the Board of
Directors by the provisions of the Articles of Incorporation of this
Corporation, the Board of Directors hereby creates a series of the Series 97-C
Preferred Stock of the Corporation to consist of one share, and hereby fixes the
designations, powers, conversion privileges, preferences and other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series as follows:
(a) The designation of the series of Preferred Stock created by this resolution
shall be "Series 97-C Preferred Stock."
(b) The holders of Series 97-C Preferred Stock shall have no voting rights.
(c) The shareholders of Series 97-C Preferred Stock do not have the
right to cause its redemption. On or after June 1, 1998 each Series 97-C
Preferred Share is convertible without further payment into Thirteen Thousand
Five Hundred (13,500) shares of Common Stock.
(d) In the event of the voluntary liquidation, dissolution or other
termination of the Corporation, the holders of shares of the Series 97-C
Preferred Stock shall be entitled only to a cash payment with respect thereto of
ten thousand dollars ($10,000.00) 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 Corporation.
(e) The Series 97-C Preferred Stock and the Common Stock into which it
is convertible will, upon issuance, be fully paid and non-assessable.
(f) In the event that the Corporation shall at any time after issuance
of a share of Series 97-C Preferred Stock hereunder: (i) declare or pay to the
holders of the Common Stock a dividend payable in any kind of shares of stock of
the Corporation; or (ii) split, reverse split or otherwise reclassify its Common
Stock into the same or a different number of shares with or without par value or
into shares of any class or classes; or (iii) consolidate or merge with or
transfer its property as an entirety or substantially as an entirety to any
other corporation; or (iv) make any distribution of its assets to holders of its
Common Stock as a liquidation or partial liquidation dividend or by way of
return of capital; then, upon subsequent conversion of a share of Series 97-C
Preferred Stock, the shareholders shall receive in exchange for a share of
Series 97-C Preferred Stock in addition to, in reduction of, or in substitution
for, in Common Stock to which he would otherwise be entitled upon such exercise,
such additional shares of Common Stock or less number shares of Common Stock as
the case may be, of stock or script of the Corporation, or such unclassified
shares of stock of the Corporation, or such shares of securities or property of
the Corporation resulting from consolidation or merger or transfer, or such
assets of the Corporation, so that the value so received by the shareholder is
equivalent to the value which he would have been entitled to receive (and the
total consideration exchangeable by the shareholder is equivalent to the total
consideration which would otherwise be exchangeable by him) had he converted a
share of Series 97-C Preferred Stock into shares of Common Stock immediately
prior to the happening of any of the foregoing events.
(g) The Series 97-C Preferred Stock and the Common Stock into which it
is convertible ("Conversion Common Stock"), are restricted and will not be
registered under the Securities Act of 1933.
RESOLVED FURTHER, that any SGI Officer is hereby authorized and directed to
expedite all steps necessary to timely implement the foregoing Resolutions.
RESOLVED FINALLY, that the President and the Secretary are hereby
authorized and directed to take all steps necessary to comply with applicable
blue-sky laws and the federal laws governing the issuance and sale of
securities, before offering any of the authorized capital stock for sale.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its President, and attested to by its Secretary, this 9th day of
June, 1997.
SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
- --------------------------------
Title: President
Attest:
/s/ John R. Taylor
- --------------------------------
John R. Taylor, Secretary
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a Resolution
passed by the SGI Board of Directors on August 4, 1997, which Resolution
establishes the Series 97-D Convertible Preferred Stock and authorizes the
filing of this Certificate of Secretary with the Utah Corporations Division.
This Certificate of Secretary authorizes and establishes the rights, preferences
and privileges of the Series 97-D Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
the Corporation on August 4, 1997.
/s/ John R. Taylor
- ---------------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and vested in the
Board of Directors by provisions of the Articles of Incorporation of the
Company, as amended (the "Articles of Incorporation"), and the Corporation Laws
of the State of Utah, the issuance of a series of Preferred Stock, which shall
consist of Five Hundred Fifty (550) shares, out of Twenty Million (20,000,000)
shares of Preferred Stock which the Company has authority to issue, be, and the
same hereby is authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the powers, designations, preferences, and relative,
participating, optional or to other special rights and the qualification,
limitations or restrictions thereof, set forth in the Articles of Incorporation
which may be applicable to the Preferred Stock) authorized by this resolution as
follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this resolution
shall be Series 97-D Convertible Preferred Stock (the "Series 97-D Preferred
Stock"). The maximum number of shares of Series 97-D Preferred Stock shall have
a liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 97-D Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 97-D Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 97-D
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall
<PAGE>
be junior to all outstanding debt of the Company. The Series 97-D Preferred
Stock shall be subject to the creation of parity stock and junior stock to the
extent not expressly prohibited by the Company's Articles of Incorporation.
(b) Voting Rights
Each holder of the shares of Series 97-D Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
1. The holders of the outstanding shares of Series 97-D Preferred Stock shall be
entitled to receive cumulative dividends, out of any assets legally available
therefore, at a per share rate equal to seven percent (7%) per annum of the
amount of the respective Liquidation Preference of the Series 97-D Preferred
Stock as set forth in Section (a) hereof, payable on a pro rata basis on
conversion. Any dividends payable pursuant to the provisions of this paragraph
shall only be payable in Common Stock of the Company and not in cash.
2. Such dividends shall accrue on each share from the date of its original
issuance, and shall accrue from day to day, whether or not earned or declared.
Such dividends/shall be cumulative so that if such dividends in respect of any
previous or current annual dividend period, at the annual rate specified above,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, for all Series 97-D Preferred Stock at the time outstanding,
the deficiency shall first be fully paid before any dividend or other
distribution shall be paid on or declared or set apart for the Series 97-D
Preferred Stock or Common Stock. The Series 97-D Preferred Stock is not
entitled to any additional dividends beyond the cumulative dividends specified
herein. After the cumulative dividends on the Series 97-D Preferred Stock have
been paid or set apart, any additional dividends declared by the Board of
Directors shall be declared solely on the Common Stock. The Series 97-D
Preferred Stock shall not participate in such dividends.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of the Company, the
holders of the Series 97-D Preferred Stock shall be entitled to be paid out of
the assets of the Company available for distribution to stockholders, before any
distribution or payment is made upon any Common Stock or any other stock ranking
as to the distribution of assets upon liquidation, dissolution or winding up of
the Company junior to the Series 97-D Preferred Stock, an amount in cash equal
to the amount of any accumulated but unpaid dividends plus the Liquidation
Preference of the Series 97-D Preferred Stock (collectively, the "Liquidation
Value"), and shall not be entitled to any further payment. Written notice of
such liquidation, dissolution or winding up, stating a payment date, the amount
of the payment and the place where the amounts distributable shall be payable,
shall be mailed by certified or registered mail (return receipt requested), not
less than 60 days prior to the payment date stated therein, to each record
holder of any share of Series 97-D Preferred Stock. Neither the consolidation or
merger of the Company into or with any other company or companies, nor the sale
or transfer by the Company of all or any part of its assets, nor the reduction
of the capital stock of the Company, shall be deemed to be a liquidation,
dissolution, or winding up of the Company for purposes hereof.
2. Partial Distribution of Assets. If the amounts available for distribution
with respect to the Series 97-D Preferred Stock and all other outstanding stock
of the Company ranking on a parity with the Series 97-D Preferred Stock upon
liquidation are not sufficient to satisfy the full liquidation rights of all the
outstanding Series 97-D Preferred Stock and stock ranking on a parity therewith,
then the holders of each series of such stock will share ratably in any such
distribution of assets in proportion to the full respective preferential amount
(which in the case of Preferred Stock ranking on a parity with or senior to
Series 97-D Preferred Stock may include accumulated dividends) to which they are
entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof, each share of the Series
97-D Preferred Stock shall be convertible, at the option of the holder thereof,
at the earlier of: (i) the date a registration statement shall be declared
effective by the Securities and Exchange Commission for the shares of Common
Stock into which the Series 97-D Preferred Stock shall be convertible pursuant
to the provisions of this Certificate; or (ii) one year from the Closing Date as
defined in the Series 97-D Preferred Stock Purchase Agreement ("Stock Purchase
Agreement"), between the Company and the purchasers of the Series 97-D Preferred
Stock, into that number of shares of fully paid and nonassessable shares of
Common Stock which is to be derived from dividing the Conversion Rate by the
Conversion Price. For purposes of this Certificate, the Conversion Rate shall
mean the Liquidation Preference of $1,000 per share of Series 97-D Preferred
Stock and the Dividend Amount. For the purposes hereof, the Dividend Amount
shall equal the Liquidation Preference of $1000 per share of the Series 97-D
Preferred Stock, multiplied by seven percent (7%) per annum, multiplied by the
number of days since the Closing Date, divided by 365 days. For purposes hereof,
the Conversion Price shall be determined as of the date the notice of conversion
is received by the Company ("Conversion Date") and shall be equal to the lesser
of: (a) the average closing bid price of the shares of Common Stock of the
Company over the five (5) day trading period prior to the Closing Date as is
defined in the Stock Purchase Agreement; or (b) seventy seven and one half
percent (77.5%) of the average of the closing bid price of shares of Common
Stock of the Company on the five (5) trading days ending on the date preceding
the Conversion Date. The closing bid price shall be deemed to be the reported
last bid price regular way on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
closing bid price as reported by NASDAQ or such other system then in use, or, if
the Common Stock is not quoted by any such organization, the closing bid price
in the over-the-counter market as furnished by the principal national securities
exchange on which the Common Stock is traded. In the event the Common Stock
issuable upon conversion of the Series 97-D Preferred Stock is not delivered
within five (5) business days of receipt by the Company of a valid conversion
notice and the Series 97-D Preferred Stock certificate to be converted ("Receipt
Conversion Date"), the Company shall pay to the purchaser, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 of the Series 97-D Preferred Stock sought to be
converted (pro rated for larger or smaller amounts) $500 for each of the first
ten (10) days and $1,000 per day thereafter that the shares of Common Stock
issuable upon conversion of the Series 97-D Preferred Stock are not delivered,
which liquidated damages shall run from the sixth business day after the Receipt
Conversion Date. Any and all payments required pursuant to this paragraph shall
be payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price.
2. Limitations. Subject to limitations described in paragraph (e)(1) herein and
notwithstanding the foregoing, the Series 97-D Preferred Stock shall not be
convertible until the earlier of:(i) the date a registration statement shall be
declared effective by the Securities and Exchange Commission for the shares of
Common Stock into which the Series 97-D Preferred Stock shall be convertible
pursuant to the provisions of this Certificate; or (ii) one year from the
Closing Date as defined in the Stock Purchase Agreement. The holder of the
Series 97-D Preferred Stock shall also be prohibited from converting any portion
of the Series 97-D Preferred Stock which would result in the holder being deemed
the beneficial owner in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, of 4.99% or more of their issued
and outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 97-D Preferred Stock shall
exercise its right to convert the Series 97-D Preferred Stock by telecopying an
executed and completed notice of conversion to the Company and delivering the
original notice of conversion and the certificate, duly endorsed with Medallion
signature guarantees, representing the Series 97-D Preferred Stock to the
Company by express courier. Each business date on which a notice of conversion
is telecopied to and received by the Company in accordance with the provisions
hereof shall be deemed a Conversion Date. The notice of conversion shall include
notice that the holder thereof elects to convert the Series 97-D Preferred Stock
and shall state the number of shares of Series 97-D Preferred Stock to be
converted. The Company will use its best efforts to transmit the certificates
representing shares of Common Stock issuable upon conversion of any Series 97-D
Preferred Stock (together with the certificates representing the Series 97-D
Preferred Stock not so converted) to the holder via express courier, by
electronic transfer or otherwise within three business days after the Conversion
Date if and only if the Company has received the original notice of conversion
and Series 97-D Preferred Stock certificate, duly endorsed, being so converted
by such date. The person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within three (3) business days
of actual receipt by the Company of a duly completed election to convert and the
certificate to be converted, duly endorsed, then the purchaser of the Series
97-D Preferred Stock will be entitled to revoke the relevant notice of
conversion by delivering a notice to such effect to the Company whereupon the
Company and the purchaser shall each be restored to their respective positions
immediately prior to the delivery of such notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock issuable upon
the conversion of the Preferred Stock and the Conversion Price shall be subject
to adjustment as follows:
(i) In case the Company shall: (i) pay a dividend on Common Stock in Common
Stock or securities convertible into, exchangeable for or otherwise entitling a
holder thereof to receive Common Stock; (ii) declare a dividend payable in cash
on its Common Stock and at substantially the same time offer its shareholders
a right to purchase new Common Stock (or securities convertible into,
exchangeable for or otherwise entitling a holder thereof to receive Common
Stock) from proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend);
(iii) subdivide its outstanding shares of Common Stock into a greater number
of shares of Common Stock; (iv) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock; or
(v) issue by reclassification of its Common Stock any shares of Common Stock of
the Company, then the number of shares of Common Stock issuable upon conversion
of the Series 97-D Preferred Stock immediately prior thereto shall be adjusted
so that the holders of the Series 97-D Preferred Stock shall be entitled to
receive after the happening of any of the events described above that number
and kind of shares as the holders would have received had such Series 97-D
Preferred Stock been converted immediately prior to the happening of such event
or any record date with respect thereto. Any adjustment made pursuant to this
subdivision shall become effective immediately after the close of business on
the record date in the case of a stock dividend and shall become effective
immediately after the close of business on the record date in the case of a
stock split, subdivision, combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (e)(4) will not have to be made if
such adjustment would not require an increase or decrease in one percent (1%) or
more in the number of shares of Common Stock issuable upon conversion of the
Series 97-D Preferred Stock. No adjustment in the Conversion Rate will be made
for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or trusts
related thereto or for issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Company and the investment of additional optional amounts in
shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock issuable upon the conversion
of the Series 97-D Preferred Stock is adjusted, as herein provided, the
Conversion Price shall be adjusted (to the nearest cent) by multiplying such
Conversion Price immediately prior to such adjustment by a fraction of which
the numerator shall be the number of shares of Common Stock issuable upon the
exercise of each share of Series 97-D Preferred Stock immediately prior to such
adjustment, and of which the denominator shall be the number of shares of
Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any: (i) consolidation or merger of the Company
into any entity (other than a consolidation or merger that does not result in
any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Company); (ii) sale, transfer, lease or
conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety; or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 97-D Preferred Stock then outstanding shall have
the right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of
Series 97-D Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company: (A) is
not an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate
of the constituent entity; and (B) failed to exercise his or her rights
of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of
securities, cash or other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock of the Company
held immediately prior to such consolidation, merger, sale or transfer by other
than a constituent entity or an affiliate thereof and in respect of which the
Company merged into the Company or to which such rights or election shall not
have been exercised ("non-electing share"), then for the purpose of this Section
(e)(5) the kind and amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer by each non-electing share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing shares). If necessary, appropriate adjustment shall be made in the
application of the provision set forth herein with respect to the rights and
interest thereafter of the holders of shares of Series 97-D Preferred Stock, to
the end that the provisions set forth herein shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the conversion
of the shares. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, capital reorganizations and
reclassifications. The Company shall not effect any such consolidation, merger,
sale or transfer unless prior to or simultaneously with the consummation thereof
the successor Company or entity (if other than the Company) resulting from such
consolidation, merger, sale or transfer shall assume, by written instrument, the
obligation to deliver to the holder of each share of Series 97-D Preferred Stock
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its Articles of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Company, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 97-D Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon conversion of the
Series 97-D Preferred Stock shall be rounded to the nearest whole share or, at
the election of the Company, the Company shall pay the holder thereof an amount
in cash equal to the closing bid price thereof. Whether or not fractional
shares are issuable upon conversion shall be determined on the basis of the
total number of shares of Series 97-D Preferred Stock the holder is at the time
converting to Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series 97-D Preferred Stock pursuant to
Section (e)(4), the Company, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of such Series 97-D Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment are based. The Company shall, upon
written request at any time of any holder of Series 97-D Preferred Stock,
furnish or cause to be furnished to such holder a certificate setting forth (A)
the Conversion Price at the time in effect, and (B) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of a share of Series 97-D Preferred Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The Company shall at
all times
reserve and keep available out of its authorized but unissued shares of Common
Stock solely for the purpose of effecting the conversion of shares of Series
97-D Preferred Stock, such numbers of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
Series 97-D Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock shall be insufficient to satisfy the conversion
rights hereunder, in addition to such other remedies as shall be available to
the holder of Series 97-D Preferred Stock, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of Series 97-D Preferred
Stock shall be converted pursuant to Section (e) hereof, the shares so
converted shall be canceled and shall not be issuable by the Company and shall
have the status of authorized but unissued shares of Preferred Stock and may be
reissued by the Company at anytime as shares of any series of Preferred Stock
other than Series 97-D Preferred Stock.
(f) Redemption
The Company shall not have the right to call or redeem all or any part of the
Series 97-D Preferred Stock, nor shall there by any mandatory redemption rights
or powers on behalf of the Company, nor shall the holders have any right to
compel Company to call or redeem all or any part of the Series 97-D Preferred
Stock.
(g) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof to be given or
made by a holder of shares of Series 97-D Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to
the holder) as follows:
Attn: John Taylor, Esq.
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 97-D Preferred Stock Holders. Any notice pursuant to the terms
hereof to be given or made by the Company to or upon any holder of shares of
Series 97-D Preferred Stock shall be sufficiently given or made if sent by mail,
postage Prepaid, addressed (until another address is sent by the holder to the
Company) to the address of such holder on the records of the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to be signed
by its President, and attested to by its Secretary, this ____ day of August ,
1997.
SGI INTERNATIONAL
By: /s/ Joseph Savoca
------------------------
Title: President
Attest:
/s/ John R. Taylor
- -----------------------------
John R. Taylor, Secretary
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, OR UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES ARE
RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR PURSUANT
TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF
WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
No. 000 US $____________
SGI International
12% CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 1998
THIS DEBENTURE is one of a duly authorized issue of $__________ in
Debentures of SGI International, a corporation organized and existing under the
laws of Utah (the "Company") designated as its series 97-E Convertible Debenture
due September 30, 1998.
FOR VALUE RECEIVED, the Company promises to pay to________________, the
registered holder hereof (the "Holder"), the principal sum of ($_____________)
Dollars on September 30, 1998 (the "Maturity Date") and to pay interest on the
principal sum outstanding from time to time in arrears as provided herein
quarterly, beginning on October 1, 1997 at the rate of 12% per annum accruing
from the date of initial issuance. Accrual of interest shall commence on the
first such business day to occur after the date hereof until payment in full of
the principal sum has been made or other consideration paid in accordance with
Paragraph 4. Subject to the provisions of paragraph 4 below, the principal of,
and interest on, this Debenture are convertible at the option of the Holder,
into shares of Common stock of the Company. The Company will pay the principal
of and interest upon this Debenture on the Maturity Date, less any amounts
required by law to be deducted, to the registered Holder of this Debenture, and
addressed to such Holder. The forwarding of such check or other consideration in
accordance with Paragraph 4 shall constitute a full payment of principal and
interest hereunder and shall satisfy and discharge the liability for principal
and interest on this Debenture to the extent of the sum represented by such
check plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for such
registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including legal opinions that the issuance of the Debenture in
such other name does not and will not cause a violation of the Act or any
applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. a. The Holder of this Debenture is entitled, at its option, to
convert at any time commencing ten (10) days after the date hereof, the
principal amount of this Debenture, and any and all interest payable thereon,
provided that the principal amount is at least US $5,000 (unless if at the time
of such election to convert the aggregate principal amount of all Debentures
registered to the Holder is less than Five Thousand Dollars (US $5,000), then
the whole amount thereof). The Debenture will be convertible at any time after
November 10, 1997, until the earlier of (i) fifteen (15) days after the date
Company gives 30 days written notice that it will pay the full amount of
principal and interest owing under such Debenture, or (ii) September 15, 1998.
The Debenture will, at the option of the Holder, convert unto the number of
shares of SGI International restricted Common stock determined by dividing the
face amount of the Debenture and all interest payable thereon, by $1.20. In the
event that the Debenture is not converted by Holder by September 15, 1998, then
SGI International shall on September 30, 1998, pay the full amount owing under
the Debenture, which shall be the face amount plus all accrued and unpaid
interest payable thereon. Conversion shall be effectuated by surrendering the
Debentures to be converted to SGI International at 1200 Prospect, Suite 325, La
Jolla, Calif. 92037, with the form of conversion notice attached hereto as
Exhibit A, executed by the Holder of the Debenture evidencing such Holder's
intention to convert this Debenture (as above provided) hereof, and accompanied,
if required by the Company, by proper assignment hereof in blank. The Holder
must convert all of the principal and accrued, but unpaid interest, if any is
converted. No fraction of Shares or certificates representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded to the nearest whole share. The date on which notice of conversion is
given (the "Conversion Date") shall be deemed to be the date on which the Holder
faxes the conversion notice duly executed, to the Company, as long as the
Debenture is received by the Company within 5 business days thereafter.
Facsimile delivery of the conversion notice shall be accepted by the Company at
facsimile number (619) 551-0247; Attn: Controller). Certificates representing
restricted Common stock upon conversion, will be delivered as promptly as
practicable from the date the notice of conversion and the original Debenture,
is delivered to the Company. No payment or adjustment shall be made upon
conversion with respect to any interest accrued on any Debenture guaranteed for
conversion prior to an interest payment date or to any dividend on the common
stock delivered upon conversion.
b. Notwithstanding any other term or condition contained
herein, Holder may elect to convert all interest payable quarterly hereunder
into restricted common stock of Company with the number of shares determined by
dividing the interest to be paid by $1.20. Such election may be made by
selecting Alternative C in the Subscription Documents Offering Series 97-E. All
such restricted stock payable for all interest will be issued and paid in
advance to Holder in early November 1997.
5. Company may prepay this Debenture at any time without incurring any
penalty for such prepayment. No provision of this Debenture, except as is
specifically described in Paragraph 4, shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company. In the
event Company determines to prepay the Debenture, Company shall give Holder
thirty (30) days advance written notice of prepayment and Holder may convert
during the period ending fifteen (15) days from the date of such notice by
giving notice. Conversion notice may be made by facsimile. Absent receipt of
such notice of conversion Company may prepay and has no obligation to allow any
conversion after payment.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common stock are entitled to receive stock, securities or
property in respect of or in exchange for Common stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a Holder of the number of shares of Common
stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company within fifteen (15)
days of receipt of notice of such Sale from the Company.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that, notwithstanding any other
provision of this Debenture, such Holder will not offer, sell or otherwise
dispose of this Debenture or the Shares of restricted Common stock issuable upon
conversion thereof, except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky or foreign laws or similar
laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in accordance with
the laws of the State of Utah. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the City of San
Diego or the state courts of the State of California sitting in the City of San
Diego in connection with any dispute arising under this Agreement and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non coveniens, to the bringing of any such proceeding
in such jurisdictions.
10. The following shall constitute an "Event of Default":
a. The Company shall fail to make any payment due under this Debenture and the
same shall continue for a period of thirty (30) days; or
b. The Company shall make (1) an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (2) apply for or consent to the
appointment of a trustee, liquidator or receiver for its or for a substantial
part of its property or business; or
c. A trustee, liquidator or receiver shall be appointed for the Company or for
a substantial part of its property or business without its consent and shall
not be discharged within sixty (60) days after such appointment; or
d. Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within sixty (60) days
after such institution or the Company shall by any action or answer approve of,
consent to, or acquiesce in any such proceedings or admit the material
llegations of, or default in answering a petition filed in any such proceeding;
or
In the Event of Default or at any time thereafter, and in each and every such
case, unless such Event of Default shall have been waived in writing by the
Holder (which waiver shall not be deemed to be a waiver of any subsequent
default) at the option of the Holder and in the Holder's sole discretion, the
Holder may consider this Debenture immediately due and payable, without
presentment, demand, protest or notice of any kinds, all of which are hereby
expressly waived, anything herein or in any note or other instruments contained
to the contrary notwithstanding, and the Holder may immediately enforce any and
all of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law.
11. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: __________________, 1997
SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
--------------------------------
Joseph A. Savoca
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert of the principal
amount of the above Debenture No. ___ into Shares of restricted Common stock of
SGI INTERNATIONAL (the "Company") according to the conditions hereof, as of the
date written below.
Date of Conversion* __________________________________________________________
Signature: ___________________________________________________________________
Name: ________________________________________________________________________
Address: ____________________________________________________________________
- ----------------------------------------------------------------------------
This original Debenture and Notice of Conversion must be received by the
Company's transfer agent by the fifth business date following the Date of
Conversion.
The signature on this Notice of Conversion must correspond with the name as
written on the face of this Debenture in every particular without alteration,
enlargement or any change whatsoever.
WARRANT
Warrant Certificate No. 97F-000
WARRANT TO PURCHASE 500 SHARES OF COMMON STOCK
SGI INTERNATIONAL
INCORPORATED UNDER THE LAWS
OF THE STATE OF UTAH
"The securities represented by this Certificate have
not been registered under the Securities Act of 1933 or any
state securities law and may not be sold, exchanged,
hypothecated or transferred in any manner except in compliance
with Paragraph 4 hereof."
1. Grant of Warrant. This certifies that, effective ,
, the registered holder hereof (the "Warrantholder"), is
entitled to purchase from SGI International, a Utah corporation (the "Company"),
at any time during the Exercise Period (as defined in Paragraph 2 hereof), at
the purchase price per Share of $1.20 (the "Warrant Price"), the number of
shares of common stock, no par value, of the Company set forth above (the
"Shares"), subject to the terms and conditions set forth herein.
2. Exercise of Warrant. The Warrant evidenced hereby may be exercised
at any time the dates after the date hereof, from time to time, in whole or in
part, by presentation of this Warrant certificate with the Warrant Exercise Form
included as page A2-3, duly executed and simultaneous payment of the Warrant
Price at the principal office of the Company. Payment shall be made by check.
The "Exercise Period" shall be the period of time from the effective date
through December 31, 1999.
3. Legend on Shares. Each certificate for Shares issued upon exercise
of the Warrant shall bear the following legend, unless, at the time of exercise,
such Shares are subject to a currently effective Registration Statement under
the Securities Act of 1933 (the "Act"):
"The securities represented by this Certificate have not been registered under
the Securities Act of 1933 or any state securities law and may not be sold,
exchanged, hypothecated or transferred in any manner except in compliance with
Paragraph 4 of the Warrant pursuant to which they were issued."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
This Warrant and the Common stock underlying its exercise are restricted and
there is no agreement that either will be registered under the Securities Act
of 1933.
4. Restrictions on Transfer; Registration Rights.
(a) By acceptance of this Warrant, the Warrantholder agrees
that prior to making any disposition of the Warrant or the Shares, the
Warrantholder shall give written notice to the Company describing briefly the
manner in which any such proposed disposition is to be made; and no such
disposition shall be made unless Warrantholder provides Company with an opinion
of legal counsel acceptable to Company that a registration statement or other
notification or post-effective amendment thereto (hereinafter, collectively, a
"Registration Statement") under the Act is not required with respect to such
disposition, or unless such a Registration Statement has been filed by the
Company with, and declared effective, if necessary, by the Securities and
Exchange Commission (the "Commission").
(b) The Company agrees that until all Shares have been sold under a
Registration Statement or pursuant to Rule 144 under the Act, it will keep
current in filing all materials required to be filed with the Commission in
order to permit the holders of such Shares to sell the same under Rule 144.
5. Reservation of Shares Issuable on Exercise of Warrants. The Company
will at all times reserve and keep available out of its authorized Shares,
solely for the issuance upon the exercise of this Warrant and other similar
Warrants, such number of Shares as from time to time shall be issuable upon the
exercise of this Warrant and all other similar Warrants at the time outstanding.
6. Warrantholder Not a Shareholder. The Warrantholder, as such, shall not be
entitled by reason of this Warrant to any rights whatsoever of a shareholder of
the Company.
7. Notices. Any notice pursuant to this Warrant by the Company or by a
Warrantholder or a holder of Shares shall be in writing and shall be deemed to
have been duly given if delivered or mailed by certified mail, return receipt
requested:
(a) If to a Warrantholder or a holder of Shares -addressed to it at its address
as set forth in the register for the Warrants maintained by the Company or in
the records of the transfer agent for the Shares;
(b) If to the Company - addressed to it at 1200 Prospect Street, #325, La
Jolla, California 92037, attention: Investor Relations.
Warrantholder and/or Company may from time to time change the address to which
notices to it are to be delivered or mailed hereunder by giving notice to the
other in accordance herewith.
8. Successors and Assigns. The provisions of this Warrant by or for the benefit
of the Company, any Warrantholder or successor holder(s) of Warrants or the
holders of Shares shall bind and inure to the benefit of their respective
heirs, successors and/or assigns hereunder.
9. Applicable Law. This Warrant shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be construed in
accordance with the laws of said State.
10. Investment Intent of Warrantholder. Notwithstanding anything herein
to the contrary, this Warrant is issued subject to the condition that the
Warrant has been acquired for the account of the Warrantholder and not with a
view to, or for sale in connection with, any distribution thereof.
SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
---------------------------
Joseph A. Savoca, CEO
<PAGE>
SGI INTERNATIONAL
WARRANT EXERCISE FORM
SGI International
1200 Prospect, Suite 325
La Jolla, California 92037
The undersigned irrevocably elects to exercise the right of purchase
represented by the within Warrant certificate for, and to purchase thereunder,
Shares of Common stock provided for therein, and requests that certificates for
such Shares be issued in the name of:
(Please Print or Type Name, Address and Social Security Number)
- -----------------------------------------------------------------------------
and, if such number of Shares are not all the Shares purchasable hereunder, that
a new Warrant certificate for the balance of the Shares purchasable under the
within Warrant certificate be registered in the name of the undersigned
Warrantholder or his Assignee as indicated below and delivered to the address
stated below.
Dated:
Name of Warrantholder or Assignee:
(Please Print)
Address:
Signature:
Note: The above signature must correspond with the name as written upon the
face of this Warrant certificate in every particular, without
alteration or enlargement or any change whatever, unless these Warrants
have been assigned.
Signature Guaranteed:
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a Resolution
passed by the SGI Board of Directors on October 8, 1997, establishing the
Series 97-F Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
the corporation on October 8, 1997.
/s/ John R. Taylor
- ---------------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Two Thousand (2,000) shares, out of Twenty Million (20,000,000)
shares of Preferred Stock which the Company has authority to issue, be, and the
same hereby is, authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restriction thereof, of the shares of such
series (in addition to the powers, designations, preferences, and relative,
participating, optional or to other special rights and the qualification,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the Preferred Stock) authorized by this
resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 97-F Convertible Preferred Stock (the "Series 97-F Preferred
Stock"). The maximum number of shares of Series 97-F Preferred Stock shall have
a liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 97-F Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 97-F Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 97-F
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 97-F Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 97-F Preferred Stock shall have no voting rights or
powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 97-F Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to eight percent (8%) per annum of the amount of the
respective Liquidation Preference of the Series 97-F as set forth in Section (a)
hereof, payable quarterly or on a pro rata basis on conversion at the election
of the holder thereof. Any dividends payable pursuant to the provisions of this
paragraph shall only be payable in Common Stock of the Company and not in cash.
(2) Such dividends shall accrue on each share from the date of
its original issuance, and shall accrue from day to day whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series 97-F Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series 97-F
Preferred Stock or Common Stock. Dividends on the Series 97-F Preferred Stock
shall be nonparticipating and the holders of the Series 97-F Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 97-F Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 97-F Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 97-F Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
97-F Preferred Stock, the remaining assets shall be paid to, the Common Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the payment and the place where the amounts distributable
shall be payable, shall be mailed by certified or registered mail., return
receipt requested, not less than 60 days prior to the payment date stated
therein, to each record holder of any share of Series 97-F Preferred Stock.
Neither the consolidation or merger of the Company into or with any other
company or companies, nor the sale or transfer by the Company of all or any part
of its assets, nor the reduction of the capital stock of the Company, shall be
deemed to be a liquidation, dissolution, or winding up of the Company for
purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 97-F Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 97-F
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 97-F Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 97-F may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 97-F Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate, the Conversion Rate shall mean the
Liquidation Preference of $1,000 per share of Preferred Stock. For purposes
hereof, the Conversion Price shall be determined as of the date the notice of
conversion is received by the Company ("Conversion Date") and shall be equal to
the lesser of: (a) the average closing bid price of the shares of Common Stock
over the five (5) day trading period prior to the Closing Date as such Closing
Date is defined in the 8% Convertible Preferred Stock Subscription Agreement for
the Series 97-F Preferred Stock, a copy of which is attached hereto, or (b)
seventy five percent (75%) of the average of the closing bid price on the five
(5) trading days ending on the day immediately preceding the Conversion Date.
The closing bid price shall be deemed to be the reported last bid price regular
way as reported by Bloomberg LP or if unavailable, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or if the Common Stock is not listed or admitted to trading on any national
securities exchange, the closing bid price as reported by NASDAQ or such other
system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded. In the event that the Common Stock issuable upon conversion of the
Series 97-F Preferred Stock is not delivered, as a direct result of the
negligence or action or inaction of the Company only, within five (5) business
days of receipt by the Company of a valid notice of conversion and the
certificate for the Series 97-F Preferred Stock to be converted ("Receipt
Conversion Date"), the Company shall pay to the purchaser, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 of the Series 97-F Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the shares of Common Stock issuable upon conversion of the
Series 97-F Preferred Stock are not delivered, which liquidated damages shall
run from the sixth business day after the Receipt Conversion Date. Any and all
payments required pursuant to this paragraph shall be payable only in shares of
Common Stock and not in cash. The number of such shares shall be determined by
dividing the total sum payable by the Conversion Price.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 97-F shall first be convertible at
the earlier of: (i) the date the registration statement for the shares of Common
Stock underlying the Series 97-F Preferred Stock is declared effective by the
Securities and Exchange Commission ("SEC") or (ii) sixty one (61) days from the
closing date as defined in the 8% Preferred Stock Subscription Agreement
("Closing Date"). If the registration statement is not declared effective by the
SEC by the sixty first (61st) day following the date the notice demanding
registration is received by the Company, the holder of the Series 97-F Preferred
Stock has the option of either (a) converting up to fifty percent (50%) of the
Series 97-F Preferred Stock pursuant to the provisions of Regulation S or (b)
requiring the Company to pay to the holder thereof damages, in cash, at the rate
of one and one-half percent (1.5%) of the Liquidation Value for the first month,
and three percent (3%) of the Liquidation Value for each month thereafter until
the registration statement is declared effective by the SEC, with the damages
beginning to accrue on the ninety first (91st) day following demand by the
holder thereof. For the purpose of determining if any damages may be payable by
the Company to the holder of the Series 97-F Preferred Stock, if a Form S-3
registration statement is not available to the Company, and the Company shall
file a Form SB-2 registration statement or other registration statement, the
period of time during which the registration statement must be declared
effective after the date the notice demanding registration is received by the
Company shall increase from sixty one (61) days to one-hundred and twenty one
(121) days. Notwithstanding the proceeding sentence, if the registration
statement for the common stock underlying the Series 97-F Preferred Stock is not
declared effective by the one-hundred and twenty first (121st) day following the
date the notice demanding registration is received by the Company, the holder of
the Series 97-F Preferred Stock has the option of converting the remaining
shares of Common Stock underlying the Series 97-F Preferred Stock pursuant to
the provisions of Regulation S. Subject to the limitations described in this
paragraph regarding the period of time when the Series 97-F Preferred Stock
shall first be convertible, the Series 97-F Preferred Stock shall be convertible
for two (2) years from the Closing Date, and all of the Series 97-F Preferred
Stock must be converted by the second anniversary of the Closing Date. The
holder of the Series 97-F Preferred Stock shall further be prohibited from
converting any portion of the Series 97-F Preferred Stock which would result in
the holder being deemed the beneficial owner in accordance with the provisions
of Rule 13d-3 of the Securities Act of 1934, as amended, of 4.99% or more of the
issued and outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 97-F
Preferred Stock shall exercise its right to convert the Series 97-F Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 97-F Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 97-F Preferred Stock (together with the certificates representing the
Series 97-F Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within three business days after the
Conversion Date if the Company has received the original duly executed notice of
conversion and Series 97-F Preferred Stock certificate being so converted by
such date. The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within three (3) business days
of actual receipt of a duly completed election to convert and the certificate to
be converted, then the purchaser of the Series 97-F Preferred Stock will be
entitled to revoke the relevant notice of conversion by delivering a notice to
such effect to the Company whereupon the Company and the purchaser shall each be
restored to their respective positions immediately prior to the delivery of such
notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock issuable upon
the conversion of the Preferred Stock and the Conversion Price shall be subject
to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common Stock
or securities convertible into, exchangeable for or otherwise entitling a holder
thereof to receive Common Stock, (ii) declare a dividend payable in cash on its
Common Stock and at substantially the same time offer its shareholder a right to
purchase new Common Stock (or securities convertible into, exchangeable for or
other entitling a holder thereof to receive Common Stock) from proceeds of such
dividend (all Common Stock so issued shall be deemed to have been issued as a
stock dividend), (iii) subdivide its outstanding shares of Common Stock into a
greater number of shares of Common Stock, (iv) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (v) issue by
reclassification of its Common Stock any shares of Common Stock of the Company,
the number of shares of Common Stock issuable upon conversion of the Series 97-F
Preferred Stock immediately prior thereto shall be adjusted so that the holders
of the Series 97-F Preferred Stock shall be entitled to receive after the
happening of any of the events described above that number and kind of shares as
the holders would have received had such Series 97-F Preferred Stock been
converted immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this subdivision shall
become effective immediately after the close of business on the record date in
the case of a stock dividend and shall become effective immediately after the
close of business on the record date in the case of a stock split, subdivision,
combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (e)(4) will not have to be made if
such adjustment would not require an increase or decrease in one percent (1%) or
more in the number of shares of Common Stock issuable upon conversion of the
Series 97-F Preferred Stock. No adjustment in the Conversion Rate will be made
for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or trusts
related thereto or for issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Company and the investment of additional optional amounts in
shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock issuable upon the conversion
of the Series 97-F Preferred Stock is adjusted, as herein provided, the
Conversion Price shall be adjusted (to the nearest cent) by multiplying such
Conversion Price immediately prior to such adjustment by a fraction of which
the numerator shall be the number of shares of Common Stock issuable upon the
exercise of each share of Series 97-F Preferred Stock immediately prior to such
adjustment, and of which the denominator shall be the number of shares of
Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 97-F Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
97-F Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 97-F Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 97-F Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 97-F Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 97-F Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 97-F Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 97-F Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 97-F Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 97-F Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 97-F Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 97-F Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 97-F Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 97-F Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 97-F Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company, shall have the status of authorized but unissued shares of Preferred
Stock and may be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 97-F Preferred Stock.
(f) Redemption
1. Optional Redemption by the Company. Holders of Series 97-F
Convertible Preferred Shares do not have the right to cause redemption of their
Series 97-F Convertible Preferred Shares. For any Series 97-F Preferred Stock
for which a notice of conversion has not been sent, the Series 97-F Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 97-F Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a), (c), and (d) above ("Redemption
Price") which Liquidation Value shall include cumulative dividends as provided
in paragraph (c) herein accrued and unpaid through the Redemption Date. On the
date the Company sends a notice of redemption to the holders of the Series 97-F
Convertible Preferred Stock ("Holders") and wire transfers the appropriate
amount of funds into the escrow account described in the 8% Convertible
Preferred Stock Subscription Agreement, whichever event date is the latter
("Notice of Redemption Date"), the Holder's right to convert the Series 97-F
Convertible Preferred Stock shall terminate and be canceled immediately,
provided, however, the Company shall only have the right to redeem the Series
97-F Preferred Stock when, on the Redemption Date, the closing bid price, as
defined in paragraph (e)(1) herein, of the shares of Common Stock into which the
Series 97-F Preferred Stock is convertible, is less than the closing bid price
on the date the Holder or the original subscriber executed the 8% Convertible
Preferred Stock Subscription Agreement. If fewer than all of the outstanding
shares of Series 97-F Convertible Preferred Stock are to be redeemed, the
Company will select those to be redeemed pro-rata, by lot or by other method
deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
97-F Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 97-F Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 97-F Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 97-F Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the purchaser of the Series 97-F Preferred Stock within three (3) business
days of such notice. Additionally, if after the passage of three (3) business
days from the receipt by the purchaser of the notice of the Company's right to
redeem the Series 97-F Preferred Stock and the time funds are received by the
escrow agent, the Company has not deposited into escrow the appropriate amount
of funds to redeem the Series 97-F Preferred Stock, the Company shall pay to the
purchaser an amount equal to five (5%) percent per month of the Liquidation
Preference on a pro rata basis in cash. After the escrow agent is in receipt of
such funds, he shall notify the purchaser to surrender the appropriate amount of
Series 97-F Preferred Stock. If after three (3) business days from the date the
notice of redemption is received by the purchaser the funds have not been
received by the escrow agent, then the purchaser shall again have the right to
convert the Series 97-F Preferred Stock and the Company shall have the right to
redeem the Series 97-F Preferred Stock but only upon simultaneously sending a
notice of redemption to the purchaser and wire transferring the appropriate
amount of funds.
<PAGE>
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 97-F Preferred Stock into Common Stock as more fully
provided in Section (e) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(f)(1) herein, each share of Series 97-F Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 97-F Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 97-F Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (e) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 97-F Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (f) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 97-F Preferred Stock.
(g) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 97-F Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 97-F Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
8th day of October, 1997.
SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
--------------------------
Title: President
Attest:
/s/ John R. Taylor
- -----------------------------
John R. Taylor, Secretary
AMENDED
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a Utah
Corporation.
2. The Resolution set forth below is a true and correct copy of a Resolution
passed by the SGI Board of Directors on December 19, 1997, establishing the
Series 97-G Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
the corporation on December 19, 1997.
/s/ John R. Taylor
- ---------------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Five Hundred and Fifty (550) shares, out of Twenty Million
(20,000,000) shares of Preferred Stock which the Company has authority to issue,
be, and the same hereby is, authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restriction thereof, of the
shares of such series (in addition to the powers, designations, preferences, and
relative, participating, optional or to other special rights and the
qualification, limitations or restrictions thereof, set forth in the Certificate
of Incorporation which may be applicable to the Preferred Stock) authorized by
this resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 97-G Convertible Preferred Stock (the "Series 97-G Preferred
Stock"). The maximum number of shares of Series 97-G Preferred Stock shall have
a liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 97-G Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 97-G Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 97-G
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 97-G Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 97-G Preferred Stock shall have no voting rights or
powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 97-G Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to eight percent (8%) per annum of the amount of the
respective Liquidation Preference of the Series 97-G as set forth in Section (a)
hereof, payable quarterly or on a pro rata basis on conversion at the election
of the holder thereof. Any dividends payable pursuant to the provisions of this
paragraph shall only be payable in Common Stock of the Company and not in cash.
(2) Such dividends shall accrue on each share from the date of
its original issuance, and shall accrue from day to day whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series 97-G Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series 97-G
Preferred Stock or Common Stock. Dividends on the Series 97-G Preferred Stock
shall be nonparticipating and the holders of the Series 97-G Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 97-G Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 97-G Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 97-G Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
97-G Preferred Stock, the remaining assets shall be paid to, the Common Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the payment and the place where the amounts distributable
shall be payable, shall be mailed by certified or registered mail., return
receipt requested, not less than 60 days prior to the payment date stated
therein, to each record holder of any share of Series 97-G Preferred Stock.
Neither the consolidation or merger of the Company into or with any other
company or companies, nor the sale or transfer by the Company of all or any part
of its assets, nor the reduction of the capital stock of the Company, shall be
deemed to be a liquidation, dissolution, or winding up of the Company for
purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 97-G Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 97-G
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 97-G Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 97-G may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 97-G Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate, the Conversion Rate shall mean the
Liquidation Preference of $1,000 per share of Preferred Stock. For purposes
hereof, the Conversion Price shall be determined as of the date the notice of
conversion is received by the Company ("Conversion Date") and shall be equal to
the lesser of: (a) the average closing bid price of the shares of Common Stock
over the five (5) day trading period prior to the Closing Date as such Closing
Date is defined in the 8% Convertible Preferred Stock Subscription Agreement for
the Series 97-G Preferred Stock, a copy of which is attached hereto, or (b)
seventy five percent (75%) of the average of the closing bid price on the five
(5) trading days ending on the day immediately preceding the Conversion Date.
The closing bid price shall be deemed to be the reported last bid price regular
way as reported by Bloomberg LP or if unavailable, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or if the Common Stock is not listed or admitted to trading on any national
securities exchange, the closing bid price as reported by NASDAQ or such other
system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded. In the event that the Common Stock issuable upon conversion of the
Series 97-G Preferred Stock is not delivered, as a direct result of the
negligence or action or inaction of the Company only, within five (5) business
days of receipt by the Company of a valid notice of conversion and the
certificate for the Series 97-G Preferred Stock to be converted ("Receipt
Conversion Date"), the Company shall pay to the purchaser, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 of the Series 97-G Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the shares of Common Stock issuable upon conversion of the
Series 97-G Preferred Stock are not delivered, which liquidated damages shall
run from the sixth business day after the Receipt Conversion Date. Any and all
payments required pursuant to this paragraph shall be payable only in shares of
Common Stock and not in cash. The number of such shares shall be determined by
dividing the total sum payable by the Conversion Price.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 97-G shall first be convertible
forty one (41) days from the closing date as defined in the Series 97-G 8%
Preferred Stock Subscription Agreement ("Closing Date"). Subject to the
limitations described in this paragraph regarding the period of time when the
Series 97-G Preferred Stock shall first be convertible, the Series 97-G
Preferred Stock shall be convertible for two (2) years from the Closing Date,
and all of the Series 97-G Preferred Stock must be converted by the second
anniversary of the Closing Date. The holder of the Series 97-G Preferred Stock
shall further be prohibited from converting any portion of the Series 97-G
Preferred Stock which would result in the holder being deemed the beneficial
owner in accordance with the provisions of Rule 13d-3 of the Securities Act of
1934, as amended, of 4.99% or more of the issued and outstanding Common Stock of
the Company.
3. Mechanics of Conversion. The holder of the Series 97-G
Preferred Stock shall exercise its right to convert the Series 97-G Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 97-G Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 97-G Preferred Stock (together with the certificates representing the
Series 97-G Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within three business days after the
Conversion Date if the Company has received the original duly executed notice of
conversion and Series 97-G Preferred Stock certificate being so converted by
such date. The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within three (3) business days
of actual receipt of a duly completed election to convert and the certificate to
be converted, then the purchaser of the Series 97-G Preferred Stock will be
entitled to revoke the relevant notice of conversion by delivering a notice to
such effect to the Company whereupon the Company and the purchaser shall each be
restored to their respective positions immediately prior to the delivery of such
notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock issuable upon
the conversion of the Preferred Stock and the Conversion Price shall be subject
to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common Stock
or securities convertible into, exchangeable for or otherwise entitling a holder
thereof to receive Common Stock, (ii) declare a dividend payable in cash on its
Common Stock and at substantially the same time offer its shareholder a right to
purchase new Common Stock (or securities convertible into, exchangeable for or
other entitling a holder thereof to receive Common Stock) from proceeds of such
dividend (all Common Stock so issued shall be deemed to have been issued as a
stock dividend), (iii) subdivide its outstanding shares of Common Stock into a
greater number of shares of Common Stock, (iv) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or (v) issue by
reclassification of its Common Stock any shares of Common Stock of the Company,
the number of shares of Common Stock issuable upon conversion of the Series 97-G
Preferred Stock immediately prior thereto shall be adjusted so that the holders
of the Series 97-G Preferred Stock shall be entitled to receive after the
happening of any of the events described above that number and kind of shares as
the holders would have received had such Series 97-G Preferred Stock been
converted immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this subdivision shall
become effective immediately after the close of business on the record date in
the case of a stock dividend and shall become effective immediately after the
close of business on the record date in the case of a stock split, subdivision,
combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (e)(4) will not have to be made if
such adjustment would not require an increase or decrease in one percent (1%) or
more in the number of shares of Common Stock issuable upon conversion of the
Series 97-G Preferred Stock. No adjustment in the Conversion Rate will be made
for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or trusts
related thereto or for issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Company and the investment of additional optional amounts in
shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock issuable upon the
conversion of the Series 97-G Preferred Stock is adjusted, as herein provided,
the Conversion Price shall be adjusted (to the nearest cent) by multiplying
such Conversion Price immediately prior to such adjustment by a fraction of
which the numerator shall be the number of shares of Common Stock issuable upon
the exercise of each share of Series 97-G Preferred Stock immediately prior to
such adjustment, and of which the denominator shall be the number of shares of
Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 97-G Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
97-G Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 97-G Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 97-G Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 97-G Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 97-G Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 97-G Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 97-G Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 97-G Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 97-G Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 97-G Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 97-G Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 97-G Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 97-G Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 97-G Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company, shall have the status of authorized but unissued shares of Preferred
Stock and may be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 97-G Preferred Stock.
(f) Redemption
1. Optional Redemption by the Company. Holders of Series 97-G
Convertible Preferred Shares do not have the right to cause redemption of their
Series 97-G Convertible Preferred Shares. For any Series 97-G Preferred Stock
for which a notice of conversion has not been sent, the Series 97-G Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 97-G Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a), (c), and (d) above ("Redemption
Price") which Liquidation Value shall include cumulative dividends as provided
in paragraph (c) herein accrued and unpaid through the Redemption Date. On the
date the Company sends a notice of redemption to the holders of the Series 97-G
Convertible Preferred Stock ("Holders") and wire transfers the appropriate
amount of funds into the escrow account described in the 8% Convertible
Preferred Stock Subscription Agreement, whichever event date is the latter
("Notice of Redemption Date"), the Holder's right to convert the Series 97-G
Convertible Preferred Stock shall terminate and be canceled immediately,
provided, however, the Company shall only have the right to redeem the Series
97-G Preferred Stock when, on the Redemption Date, the closing bid price, as
defined in paragraph (e)(1) herein, of the shares of Common Stock into which the
Series 97-G Preferred Stock is convertible, is less than the closing bid price
on the date the Holder or the original subscriber executed the 8% Convertible
Preferred Stock Subscription Agreement. If fewer than all of the outstanding
shares of Series 97-G Convertible Preferred Stock are to be redeemed, the
Company will select those to be redeemed pro-rata, by lot or by other method
deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
97-G Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 97-G Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 97-G Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 97-G Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the purchaser of the Series 97-G Preferred Stock within three (3) business
days of such notice. Additionally, if after the passage of three (3) business
days from the receipt by the purchaser of the notice of the Company's right to
redeem the Series 97-G Preferred Stock and the time funds are received by the
escrow agent, the Company has not deposited into escrow the appropriate amount
of funds to redeem the Series 97-G Preferred Stock, the Company shall pay to the
purchaser an amount equal to five (5%) percent per month of the Liquidation
Preference on a pro rata basis in cash. After the escrow agent is in receipt of
such funds, he shall notify the purchaser to surrender the appropriate amount of
Series 97-G Preferred Stock. If after three (3) business days from the date the
notice of redemption is received by the purchaser the funds have not been
received by the escrow agent, then the purchaser shall again have the right to
convert the Series 97-G Preferred Stock and the Company shall have the right to
redeem the Series 97-G Preferred Stock but only upon simultaneously sending a
notice of redemption to the purchaser and wire transferring the appropriate
amount of funds.
<PAGE>
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 97-G Preferred Stock into Common Stock as more fully
provided in Section (e) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(f)(1) herein, each share of Series 97-G Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 97-G Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 97-G Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (e) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 97-G Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (f) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 97-G Preferred Stock.
(g) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 97-G Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 97-G Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
19th day of December, 1997.
SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
---------------------------
Title: President
Attest:
/s/ John R. Taylor
- -----------------------------
John R. Taylor, Secretary
SGI International, Incorporated under the laws of the state of Utah
Number SL-000000 Shares 000000
Cusip No. 784185 20 9
THIS CERTIFIES THAT _______________________
IS THE RECORD HOLDER OF **_____________________**
FULLY-PAID AND NON-ASSESABLE SHARES OF THE COMMON STOCK NO PAR VALUE OF
SGI INTERNATIONAL
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated: *R*
/s/ John R. Taylor /s/ Joseph A. Savoca
- ---------------------------- ----------------------------
Secretary Chairman-CEO-President
RESTRICTED STOCK
The shares represented by this certificate have not been Registered under the
Securities Act of 1933. The shares have been acquired for investment and may not
be offered sold or otherwise transfered in the absence of an effective
Registration Statement for the shares under the Securities Act of 1933, or a
prior opinion of counsel satisfactory to the issuer that registration is not
required under that Act.
- ------------------------------------------------------------------------
Notice: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular without alteration
or enlargement or any change whatever.
Countersigned & Registered ATLAS STOCK TRANSFER CORPORATION 5899 South State
Street Salt Lake City, UT 84107
/s/ Pam Gray
- ----------------------------------------------
Registrar - Authorized Signature
SGI INTERNATIONAL CORPORATE SEAL UTAH
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"ACT"), AS AMENDED, PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION
S PROMULGATED UNDER THE ACT, OR QUALIFIED UNDER APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON
UNLESS REGISTERED UNDER THE ACT, OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
WARRANT CERTIFICATE NO. 97B-000
TO PURCHASE _______ SHARES OF COMMON STOCK OF
SGI INTERNATIONAL
THIS CERTIFIES that, for value received,
_________________________(the "Investor"), is entitled, upon the terms and
subject to the conditions hereinafter set forth, at any time on or after one day
after the date hereof and on or prior to May , 2002 (the "Termination Date") but
not thereafter, to subscribe for and purchase from SGI INTERNATIONAL, a Utah
corporation (the "Company"), _____________(________) shares of Common Stock (the
"Warrant Shares"). The purchase price of one share of Common Stock (the
"Exercise Price") under this Warrant shall be One Hundred Ten (110%) percent of
the average closing bid price on the OTC Bulletin Board, over the five (5) day
trading period prior to May ___, 1997 (the "Closing Date"). The Exercise Price
and the number of shares for which the Warrant is exercisable shall be subject
to adjustment as provided herein. This Warrant is being issued in connection
with the Convertible Preferred Stock Offshore Agreement dated on or about May
___, 1997, in the amount of One Million ($1,000,000) Dollars (the "Agreement")
between the Company and Investor and is subject to its terms. In the event of
any conflict between the terms of this Warrant and the Agreement, the Agreement
shall control.
1. Title of Warrant. Prior to the expiration hereof and ubject to compliance
with applicable laws, this Warrant and all rights hereunder are transferable,
in whole or in part, at the office or agency of the Company by the holder
hereof in person or by duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form annexed hereto properly endorsed.
<PAGE>
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. Exercise of Warrant. Exercise of the purchase rights
represented by this Warrant may be made at any time or times one day after the
date hereof, in whole or in part, before the close of business on the
Termination Date, or such earlier date on which this Warrant may terminate as
provided in paragraph 11 below, by the surrender of this Warrant and the
Subscription Form annexed hereto duly executed, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company) and upon payment of the Exercise Price of the
shares thereby purchased; whereupon the holder of this Warrant shall be entitled
to receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares purchased hereunder shall be delivered to the holder
hereof within five business days after the date on which this Warrant shall have
been exercised as aforesaid. Payment of the Exercise Price of the shares may be
by certified check or cashier's check or by wire transfer to an account
designated by the Company in an amount equal to the Exercise Price multiplied by
the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer. On exercise of the Warrant, the Company shall
require the person exercising to certify that the holder of this Warrant is not
a United States Person as defined in the Offshore Subscription Agreement
executed concurrently herewith, and is not exercising the Warrant on behalf of a
United States Person, or in the alternative such person shall be required to
provide a written opinion of their United States counsel, acceptable to the
Company stating that the Warrant and the securities delivered upon exercise have
been registered under the Act or are exempt from registration under the Act. The
holder of the Warrant agrees to comply with the procedures the Company intends
to adopt to ensure that the Warrants offered pursuant to Regulation S will not
be exercised within the United States and that the securities may not be
delivered within the United States upon exercise, other than in offering deemed
to meet the definition of an offshore transaction under Regulation S, unless
they are registered under the Act or are exempt from registration.
The holder of the Warrant agrees and acknowledges that the
Warrant is being purchased for the holder's own account, for investment purposes
only, and not for the account of any other person, and not with a view to
distribution, assignment, pledge or resale to others or to fractionalization in
whole or in part. The holder further represents, warrants and agrees as follows:
no other person has or will have a direct or indirect beneficial interest in
this Warrant and the holder will not sell, hypothecate or otherwise transfer the
Warrant except in accordance with the Act and Regulation S thereunder and
applicable state securities laws or unless, in the opinion of counsel for the
holder acceptable to the Company, an exemption from the registration
requirements of the Act and such laws is available.
7. Closing of Books. The Company will at no time close its shareholder books
or records in any manner which interferes with the timely exercise of this
Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares so purchased shall be and be
deemed to be issued to such holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been exercised.
9. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Securities Act, or (ii) in a
transaction pursuant to an exemption, if available, from such registration and
whereby, if requested by the Company, an opinion of counsel reasonably
satisfactory to the Company is obtained by the holder of this Warrant to the
effect that the transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken
or such right may be exercised on the next succeeding day not a legal holiday.
12. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, the Company shall give the holder of this Warrant
thirty (30) days' notice of the proposed effective date of the transaction
specifying that the Warrant shall terminate if the Warrant has not been
exercised by the effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or
Merger Transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) "Piggy-Back" Registration. The Holder of this Warrant
shall have the right to include all of the shares of Common Stock underlying
this Warrant (the "Registrable Securities") as part of any registration of
securities filed by the Company (other than in connection with a transaction
contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8)
and must be notified in writing of such filing; provided, however, that the
holder of this Warrant agrees it shall not have any piggy-back registration
rights pursuant to this Section 12(c) if the shares of Common Stock underlying
this Warrant are freely tradable in the United States pursuant to the provisions
of Regulation S. Holder shall have five (5) business days to notify the Company
in writing as to whether the Company is to include Holder or not include Holder
as part of the registration; provided, however, that if any registration
pursuant to this Section shall be underwritten, in whole or in part, the Company
may require that the Registrable Securities requested for inclusion pursuant to
this Section be included in the underwriting on the same terms and conditions as
the securities otherwise being sold through the underwriters. If in the good
faith judgment of the underwriter evidenced in writing of such offering only a
limited number of Registrable Securities should be included in such offering, or
no such shares should be included, the Holder, and all other selling
stockholders, shall be limited to registering such proportion of their
respective shares as shall equal the proportion that the number of shares of
selling stockholders permitted to be registered by the underwriter in such
offering bears to the total number of all shares then held by all selling
stockholders desiring to participate in such offering. Those Registrable
Securities which are excluded from an underwritten offering pursuant to the
foregoing provisions of this Section (and all other Registrable Securities held
by he selling stockholders) shall be withheld from the market by the Holders
thereof for a period, not to exceed one hundred eighty (180) days, which the
underwriter may reasonably determine is necessary in order to effect such
underwritten offering. The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section 12(c) prior to the
effectiveness of such registration whether or not any Warrant holder elected to
include securities in such registration. All registration expenses incurred by
the Company in complying with this Section 12(c) shall be paid by the Company,
exclusive of underwriting discounts, commissions and legal fees and expenses for
counsel to the holders of the Warrants.
13. Adjustments of Exercise Price and Number of Warrant Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
14. Voluntary Adjustment by the Company. The Company may at its discretion, at
any time during the term of this Warrant, reduce the then current Exchange
Price to any amount and for any period of time deemed appropriate by the Board
of Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
16. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the Common Stock acquired
upon the exercise of this Warrant, if not registered, may have restrictions
upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or permitted to be
given or delivered to the holders hereof of the Company shall be delivered or
shall be sent by certified or registered mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officers thereunto duly authorized.
Dated: May ___, 1997 SGI INTERNATIONAL
By: /s/ Joseph A. Savoca
----------------------------------
Title: President
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase ________ shares of Common Stock
of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price in full, together with all applicable
transfer taxes, if any.
(2) By signing below, the undersigned hereby certifies that it
is not a U.S. person as defined in the Offshore Subscription Agreement, and that
this Warrant is not being exercised on behalf of a U.S. person. In lieu of this
certification, the undersigned has attached hereto an opinion of its United
States counsel, acceptable to the Company, stating that the shares of Common
Stock to be issued upon exercise of this Warrant have been registered under the
Securities Act of 1933 ("Act"), or that an exemption from registration under the
Act is available for such shares of Common Stock.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
- -------------------------------
(Name)
- -------------------------------
(Address)
- -------------------------------
Dated:
- ------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are
hereby assigned to___________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ______________, 1997
Holder's Signature: _____________________________
Holder's Address:_____________________________
- -----------------------------
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH,
EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY.
STOCK PURCHASE WARRANT 97FA-174
To Purchase 15,000 Shares of Common Stock of
SGI INTERNATIONAL
THIS CERTIFIES that, for value received, Dominion Capital,
Ltd. (the "Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after ten days after the date hereof
and on or prior to January 8, 2003 (the "Termination Date") but not thereafter,
to subscribe for and purchase from SGI INTERNATIONAL, a Utah corporation (the
"Company"), fifteen thousand (15,000) shares of Common Stock (the "Warrant
Shares"). The purchase price of one share of Common Stock (the "Exercise Price")
under this Warrant shall be One Hundred Ten (110%) percent of the average
closing bid price on the OTC BULLETIN BOARD, over the five (5) day trading
period prior to January 8, 1998 (the "Closing Date"). The Exercise Price and the
number of shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein. This Warrant is being issued in connection with
the 8% Convertible Preferred Stock Agreement dated on or about January 8, 1998,
in the amount of Five Hundred Thousand ($500,000.00) Dollars (the "Agreement")
between the Company and Investor and is subject to its terms. In the event of
any conflict between the terms of this Warrant and the Agreement, the Agreement
shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to compliance
with applicable laws, this Warrant and all rights hereunder are transferable,
in whole or in part, at the office or agency of the Company by the holder
hereof in person or by duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of Common
Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented by
this Warrant may be made at any time or times one day after the date hereof, in
whole or in part, before the close of business on the Termination Date, or such
earlier date on which this Warrant may terminate as provided in paragraph 12
below, by the surrender of this Warrant and the Notice of Exercise Form annexed
hereto duly executed, at the office of the Company (or such other office or
agency of the Company as it may designate by notice in writing to the registered
holder hereof at the address of such holder appearing on the books of the
Company) and upon payment of the Exercise Price of the shares thereby purchased;
whereupon the holder of this Warrant shall be entitled to receive a certificate
for the number of shares of Common Stock so purchased. Certificates for shares
purchased hereunder shall be delivered to the holder hereof within five business
days after the date on which this Warrant shall have been exercised as
aforesaid. Payment of the Exercise Price of the shares may be by certified check
or cashier's check or by wire transfer to an account designated by the Company
in an amount equal to the Exercise Price multiplied by the number of shares
being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common
Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant and any Warrant Shares may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except as follows: (i) to a person who,
in the opinion of counsel to the Company, is a person to whom this Warrant or
the Warrant Shares may legally be transferred without registration and without
the delivery of a current prospectus under the Act with respect thereto, and
then only against receipt of an agreement of such person to comply with the
provisions of this Section 6(a) with respect to any resale or other disposition
of such securities; or (ii) to any person upon delivery of a prospectus then
meeting the requirements of the Act relating to such securities and the
offering thereof for such sale or disposition, and thereafter to all successive
assignees.
(b) Unless the Warrant Shares have been registered under the Act, or exempt
from registration pursuant to Regulation S, upon exercise of any of the Warrant
and the issuance of any of the Warrant Shares, all certificates representing
Warrant Shares shall bear on the face thereof substantially the following
legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR
TO U.S. PERSONS IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT WHICH, EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144
UNDER SAID ACT, IS CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The holder of the Warrant agrees and acknowledges that the Warrant is being
purchased for the holder's own account, for investment purposes only, and not
for the account of any other person, and not with a view to distribution,
assignment, pledge or resale to others or to fractionalization in whole or in
part. The holder further represents, warrants and agrees as follows:
no other person has or will have a direct or indirect beneficial interest in
this Warrant and the holder will not sell, hypothecate or otherwise transfer the
Warrant except in accordance with the Act thereunder and applicable state
securities laws or unless, in the opinion of counsel for the holder acceptable
to the Company, an exemption from the registration requirements of the Act and
such laws is available.
7. Closing of Books. The Company will at no time close its shareholder books
or records in any manner which interferes with the timely exercise of this
Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does not entitle the
holder hereof to any voting rights or other rights as a shareholder of the
Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
9. Assignment and Transfer of Warrant. This Warrant may be assigned by the
surrender of this Warrant and the Assignment Form annexed hereto duly executed
at the office of the Company (or such other office or agency of the Company as
it may designate by notice in writing to the registered holder hereof at the
address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except
(i) in a transaction registered under the Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents
and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken
or such right may be exercised on the next succeeding day not a legal holiday.
12. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or otherwise convey all or
substantially all of its assets or (ii) to effect a transaction (by merger or
otherwise) in which more than 50% of the voting power of the Company is
disposed of (collectively, a "Sale or Merger Transaction"), in which the
consideration to be received by the Company or its shareholders consists solely
of cash, the Company shall give the holder of this Warrant thirty (30) days'
notice of the proposed effective date of the transaction specifying that the
Warrant shall terminate if the Warrant has not been exercised by the effective
date of the transaction.
(b) In case the Company shall at any time effect a Sale or Merger Transaction
in which the consideration to be received by the Company or its shareholders
consists in part of consideration other than cash, the holder of this Warrant
shall have the right thereafter to purchase, by exercise of this Warrant and
payment of the aggregate Exercise Price in effect immediately prior to such
action, the kind and amount of shares and other securities and property which
it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) "Piggy-Back" Registration. The Holder of this Warrant shall have the right
to include all of the shares of Common Stock underlying this Warrant (the
"Registrable Securities") as part of any registration of securities filed by
the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8) and must be notified
in writing of such filing; provided, however, that the holder of this Warrant
agrees it shall not have any piggy-back registration rights pursuant to this
Section 12(c) if the shares of Common Stock underlying this Warrant are freely
tradable in the United States pursuant to the provisions of Regulation S or
Rule 144. Holder shall have five (5) business days to notify the Company in
writing as to whether the Company is to include Holder or not include Holder
as part of the registration; provided, however, that if any
registration pursuant to this Section shall be underwritten, in whole or in
part, the Company may require that the Registrable Securities requested for
inclusion pursuant to this Section be included in the underwriting on the same
terms and conditions as the securities otherwise being sold through the
underwriters. If in the good faith judgment of the underwriter evidenced in
writing of such offering only a limited number of Registrable Securities should
be included in such offering, or no such shares should be included, the Holder,
and all other selling stockholders, shall be limited to registering such
proportion of their respective shares as shall equal the proportion that the
number of shares of selling stockholders permitted to be registered by the
underwriter in such offering bears to the total number of all shares then held
by all selling stockholders desiring to participate in such offering. Those
Registrable Securities which are excluded from an underwritten offering pursuant
to the foregoing provisions of this Section (and all other Registrable
Securities held by the selling stockholders) shall be withheld from the market
by the Holders thereof for a period, not to exceed one hundred eighty (180)
days, which the underwriter may reasonably determine is necessary in order to
effect such underwritten offering. The Company shall have the right to terminate
or withdraw any registration initiated by it under this Section 12(c) prior to
the effectiveness of such registration whether or not any Warrant holder elected
to include securities in such registration. All registration expenses incurred
by the Company in complying with this Section 12(c) shall be paid by the
Company, exclusive of underwriting discounts, commissions and legal fees and
expenses for counsel to the holders of the Warrants.
13. Adjustments of Exercise Price and Number of Warrant Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
14. Voluntary Adjustment by the Company. The Company may at
its discretion, at any time during the term of this Warrant, reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
16. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the
NASDAQ National Market System or any domestic securities exchange upon which the
Common Stock may be listed.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: January 8, 1998 SGI INTERNATIONAL
By:
Title:_______________________________
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase shares of Common
Stock of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) By signing below, the undersigned hereby certifies that it
is not a U.S. Person as defined in Section 3.1 of the 8% Convertible Preferred
Stock Subscription Agreement, and that this Warrant is not being exercised on
behalf of a U.S. Person. In lieu of this certification, the undersigned has
attached hereto an opinion of its United States counsel, acceptable to the
Company, stating that the shares of Common Stock to be issued upon exercise of
this Warrant have been registered under the Securities Act of 1933 (the "Act"),
or that an exemption from registration under the Act is available for such
shares of Common Stock.
(3) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name
as is specified below:
- -------------------------------
(Name)
- -------------------------------
(Address)
- -------------------------------
Dated:
- ------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are
hereby assigned to___________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ______________, 1998
Holder's Signature: _____________________________
Holder's Address:_____________________________
- -----------------------------
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE
AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
8% CONVERTIBLE PREFERRED STOCK
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation S as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 8% Convertible Preferred Stock
Series 97-G (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock of the Company (the "Common
Stock") and the other terms of the Preferred Stock are set forth in the Amended
Certificate of Secretary of the 8% Convertible Preferred Stock Series 97-G (the
"Amended Certificate of Secretary" annexed hereto as Exhibit A). In addition,
the Company will issue to the Subscriber (as defined below) a warrant (the
"Warrant") to purchase Ten Thousand shares of Common Stock of the Company for a
period of five (5) years from the Closing Date (as defined herein), as per the
terms of a separate Common Stock Purchase Warrant annexed hereto as Exhibit B.
This Subscription and, if accepted by the Company, the offer and sale of the
Preferred Stock (the "Shares"), Warrants and the underlying Common Stock (the
"Underlying Shares", and collectively the "Securities"), are being made in
reliance upon the provisions of Regulation S under the Act.
The Closing Date shall be January __, 1998 (as determined in accordance with
Section 1.1 herein).
The undersigned SETTONDOWN CAPITAL INTERNATIONAL, LTD.,
located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau Bahamas,
a corporation (limited liability company) organized under the laws of Bahamas, a
non-USA jurisdiction (hereinafter referred to as "Subscriber" or "Purchaser"),
hereby represents and warrants to, and agrees with the Company as follows:
Section 1. Agreement to Subscribe: Purchase Price.
1.1 Closing Date. The Company will issue and the Subscriber
will receive an aggregate of Fifty (50) shares of Preferred Stock and Warrant to
purchase Ten Thousand (10,000) shares of Common Stock of the Company as
consideration for subscription agent services, based on U.S.$1,000 per share of
Preferred Stock. Dividends will accrue and be paid at the rate of eight (8%)
percent on the outstanding principal amount of the Shares until the Shares have
been completely converted, provided, however, all dividends thereon shall only
be payable in common stock of the Company and not in cash. Dividends shall be
calculated at the Conversion Price on the Conversion Date (as such terms are
defined in the Amended Certificate of Secretary) when converted.
<PAGE>
Section 2. Representation and Warranties of the Subscriber. Subscriber
acknowledges, represents, warrants and agrees as follows:
2.1 Organizations and Authorization. Subscriber is duly
incorporated or organized and validly existing in the country of its
incorporation or organization and has all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by the Subscriber, the performance by the Subscriber
of its obligations hereunder and the consummation by the Subscriber of the
transactions contemplated hereby have been duly authorized and requires no other
proceedings on the part of the Subscriber. The Undersigned's signatory has all
right, power and authority to execute and deliver this Agreement on behalf of
the Subscriber. This Agreement has been duly executed and delivered by the
Subscriber and, assuming the execution and delivery hereof and acceptance
thereof by the Company, will constitute the legal, valid and binding obligations
of the Subscriber, enforceable against the Subscriber in accordance with its
terms and the Subscriber can afford the complete loss of Subscriber's
investment.
2.2 Evaluation of Risks. Subscriber has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of, and bearing the economic risks entailed by, an investment
in the Company and of protecting its interests in connection with this
transaction. It recognizes that its investment in the Company involves a high
degree of risk and the Subscriber can afford the complete loss of Subscriber's
investment.
2.3 Independent Counsel. Subscriber acknowledges that it has
been advised to consult with its own attorney regarding legal matters concerning
the Company and to consult with its tax advisor regarding the tax consequences
of acquiring the Securities.
2.4 Disclosure Documentation. Subscriber has received and
reviewed copies of the Company's reports filed under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), including its 10-Ks, and 10-Qs, filed by
the Company since December 31, 1994 (collectively, the "Reports"). Except for
the Reports, Subscriber is not relying on any other information relating to the
offer and sale of the Securities. Subscriber acknowledges that the Company has
offered to make available any additional public information that the Subscriber
may reasonably request, including technical information, and other material
information about the Company and Subscriber has been offered Company's full and
unconditional cooperation in making such information available to Subscriber and
acknowledges that the Company has recommended that the Subscriber request and
review such information prior to making an investment decision. No oral or
written representations have been made, or oral or written information furnished
to the undersigned or its advisors, if any, in connection with the offering of
the Securities which were or are in any way inconsistent with the Reports.
<PAGE>
2.5 Opportunity to Ask Questions. Subscriber has had a
reasonable opportunity to ask questions of and receive answers from the Company
concerning the Company and the offering, and all such questions, if any, have
been answered to the full satisfaction of Subscriber.
2.6 Reports Constitute Sole Representations. Except as set
forth in the Reports, no representations or warranties have been made to
Subscriber by (a) the Company or any agent, employee or affiliate of the Company
or (b) any other person, and in entering into this transaction Subscriber is not
relying upon any information, other than that contained in the Reports and the
results of independent investigation by Subscriber.
2.7 Subscriber is Accredited Investor. The undersigned is an "Accredited
Investor" as defined below who represents and warrants it is included within
one or more of the following categories of "Accredited Investors."
(i) Any bank as defined in Section 3(a)(2) of the
Act, or any savings and loan associated or other institution as defined
in Section 3(a)(5)A of the Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
(iv) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
<PAGE>
(v) Any natural person whose individual net worth, or joint net worth with
hat person's spouse, at the time of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section 230.506(b)(2)(ii)
of Regulation D under the Act;
(viii) Any entity in which all of the equity owners are accredited investors;
and
(ix) Any self-directed employee benefit plan with investment decisions made
solely by persons that are accredited investors within the meaning of Rule 501
of Regulation D promulgated under the Act.
2.8 No Registration, Review or Approval. Subscriber
acknowledges and understands that the limited private offering and sale of
Securities pursuant to this Agreement has not been reviewed or approved by the
SEC or by any state securities commission, authority or agency, and is not
registered under the Act or under the securities or "blue sky" laws, rules or
regulations of any state. Subscriber acknowledges, understands and agrees that
the Securities are being offered and sold hereunder pursuant to (i) a private
placement exemption to the registration provisions of the Act pursuant to
Section 3(b) or Section 4(2) of such Act and Regulation S promulgated under such
Act, and (ii) a similar exemption to the registration provisions of applicable
state securities laws. Subscriber understands that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Subscriber set forth herein in order to
determine the applicability of such exemptions and the suitability of Subscriber
to acquire the Securities. Subscriber will advise Company of the state of its
residence prior to executing this or any other agreement to enable the Company
to comply with applicable "blue sky" laws.
2.9 Investment Intent. Without limiting its ability to resell
the Securities pursuant to an effective registration statement, Subscriber is
acquiring the Securities solely for its own account and not with a view to the
distribution, assignment or resale to others. Subscriber understands and agrees
that it may bear the economic risk of its investment in the Securities for an
indefinite period of time. Subscriber does not now have any short position or
hedge position in the Company's Common Stock nor will the Subscriber make any
promissory notes and/or pledges to that effect on the Company's Common Stock.
2.10 No Advertisements. The Subscriber is not subscribing for
Securities as a result of or subsequent to any advertisement, article, notice or
other communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
Section 3. Further Representations and Warranties of the Subscriber. Subscriber
further acknowledges, represents, warrants and agrees as follows:
3.1 Offering Outside the United States. The Subscriber is not
a "U.S. Person" as defined in Regulation S (as the same may be amended from time
to time) promulgated under the Act.1 At the time the buy order for this
transaction was originated, Subscriber was outside the United States and no
offer to purchase the Securities was made in the United States. Subscriber
agrees not to reoffer or sell the Securities, or to cause any transferee
permitted hereunder to reoffer or sell the Securities, within the United States,
or for the account or benefit of a U.S. Person, (i) as part of the distribution
of the Securities at any time, or (ii) otherwise, until at least forty (40) days
after the Securities are issued, and, in either case, only in a transaction
meeting the requirements of Regulation S under the Act, including without
limitation, where the offer (i) is not made to a person in the United States and
either (A) at the time the buy order is originated, the Buyer is outside the
United States or the Company and any person acting on its behalf reasonably
believe that the buyer is outside the United States, or (B) the transaction is
executed in, on or through the facilities of a designated offshore securities
market and neither the seller nor any person acting on its behalf knows that the
transaction has been pre-arranged with a buyer in the United States; and (ii) no
directed selling efforts shall be made in the United States by the buyer, an
affiliate or any person acting on their behalf, or in a transaction registered
under the Act or pursuant to an exemption from such registration.
3.2 Transfer Restrictions/Conversion Holding Period.
(i) The transaction restriction in connection with this offshore offer and sale
restricts Subscriber from offering and selling to U.S. Persons, or for the
account or benefit of a U.S. Person, for a period of time. Rule 903(c)(2) of
Regulation S sets forth a forty (40) day transaction restriction and is defined
herein as the "Restricted Period." The Preferred Stock is convertible into the
Underlying Shares, at the option of the Subscriber, at any time forty
one (41) days after the Closing Date (the "Holding Period").
(ii) A legend substantially in the form of Section 14 herein has been or will
be placed on any certificates or other documents evidencing the Securities so
as to restrict the resale, pledge, hypothecation or other transfer thereof in
accordance with the provisions hereof and the provisions of Regulation S
promulgated under the Act and the Holding Period.
3.3 Transfer Restrictions Regarding Securities. Upon
conversion of any part or all of the Preferred Stock at any time after the
Holding Period, if the holder of the Preferred Stock being converted makes the
certification, pursuant to the appropriate Notice of Conversion attached hereto
as Exhibits E and F, that such holder has complied with all of the requirements
of Regulation S and such other requirements as set forth herein, then the
Company shall cause the Transfer Agent to deliver the Underlying Shares upon
such conversion without a restrictive legend or stop transfer instructions, by
delivering a Regulation S opinion substantially in the form annexed hereto as
Exhibit G hereto, otherwise the Underlying Shares shall be considered restricted
securities and certificates representing such Underlying Shares shall contain
restrictive legends and stop transfer instructions will be placed with the
Company's transfer agent regarding such Underlying Shares.
The Subscriber understands that the Company is the issuer of the securities
which are the subject of this Agreement, and that, for purposes of Regulation S,
a "distributor" is any underwriter, dealer or other person who participates,
pursuant to a contractual arrangement, in the distribution of securities offered
or sold in reliance on Regulation S and that an "affiliate" is any partner,
officer, director or any person directly or indirectly controlling, controlled
by or under common control with the person in question. In this regard, the
Subscriber shall not, during the 40-day Restricted Period set forth under Rule
903(c)(2), act as a distributor, either
<PAGE>
directly or through any affiliate, nor shall he sell, transfer, hypothecate or
otherwise convey the Securities or any interest therein, other than outside the
United States to a non-U.S. person.
Section 4. Representations and Warranties of the Company. For so long as any
Securities held by Subscriber remains outstanding, the Company acknowledges,
represents, warrants and agrees as follows:
4.1 Organization/Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
4.2 Accuracy of Reports and Information. To the best of its
knowledge, the Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has registered its Common Stock pursuant to Section 12 of the Exchange Act and
the Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed
pursuant to all reporting obligations, under either Section 13(a) or 15(d) of
the Exchange Act for a period of at least twelve (12) months immediately
preceding the offer and sale of the Securities (or for such shorter period that
the Company has been required to file such material).
4.3 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and sale, or such shorter
period that the Company has been required to file such Reports as defined
herein, to the best of the Company's knowledge (i) none of the Company's filings
with the Securities and Exchange Commission contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Company has timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been publicly
disclosed by the Company or disclosed in writing to the Subscriber which (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or on earnings, business affairs, properties or assets
of the Company, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company to perform its obligations pursuant to this
Agreement.
4.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares and the
performance of the Company's obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies, and to limitations
of public policy as they may apply to the indemnification provisions set forth
in this Agreement. Upon their issuance and delivery pursuant to this Agreement,
the Shares will be validly issued, fully paid and nonassessable and will be free
of any liens or encumbrances; provided, however, that the Shares are subject to
restrictions on transfer under state and/or federal securities laws. The
issuance and sale of the Shares will not give rise to any preemptive right or
right of first refusal or right of participation on behalf of any person.
4.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
4.6 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Reports, this
Agreement or those incurred in the ordinary course of the Company's business
since September 30, 1997, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business, condition
(financial or otherwise), results of operations or prospects of the Company. No
event or circumstance has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
4.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion provision of the Shares, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or any
statute or the Articles of the Company, or, to the best of the Company's
knowledge, any decree, judgment, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or its
properties, or the Company's listing agreement for its Common Stock.
4.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
4.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Shares, or the consummation of any other transaction contemplated hereby, except
as may be required by applicable securities laws.
4.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and the Company is not aware of any claim being made against the Company
regarding any trademark, trade name, patent, copyright, license, trade secret or
other intellectual property right which could have a material adverse effect on
the business or financial condition of the Company.
4.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect the Company is not in material breach
or material default under any of such agreements.
4.12 Litigation. Except as disclosed in the Reports there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
4.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
4.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
4.15 Required Governmental Permits. To the best of the
Company's knowledge, the Company is in possession of and operating in compliance
with all authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities which are material to the
conduct of its business, all of which are valid and in full force and effect.
4.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Shares and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
4.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, and Addenda 1, there are no other
outstanding securities, debt or equity presently convertible into Common Stock.
Except as disclosed in the Reports, and herein, the Company has no outstanding
restricted shares, or shares of Common Stock sold under Regulation S, Regulation
D or outstanding under any other exemption from registration, which are
available for sale as unrestricted ("free trading") stock.
4.18 Registration Alternative. The Company covenants and
agrees that in the event the term of Regulation S are materially altered so that
the Subscriber is unable to convert the Preferred Stock immediately after the
Holding Period, (i) the Company agrees to use its best efforts to include the
Underlying Shares in any registration statement which is being prepared but not
yet filed, or in any registration statement which has been filed, but not yet
declared effective, at the time Regulation S is materially altered, or (ii) the
Subscriber may exercise its registration rights under the terms of the
Registration Rights Agreement, annexed hereto as Exhibit C. The Company and the
Subscriber shall provide to the Transfer Agent any and all papers necessary to
complete the transfer under Regulation S, including, but not limited to,
opinions of counsel to the Transfer Agent, (i) continue to file all material
required to be filed pursuant to Sections 13(a) or 15(d) of the Exchange Act,
and (ii) not knowingly engage in directed selling efforts in connection with the
resale of securities by Subscriber under Regulation S.
4.19 Reporting Issuer Company Status. The Company is a
"Reporting Issuer" as defined in Rule 902 of Regulation S. The Company is in
full compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and shall use its best efforts to maintain such
status on a timely basis. The Company has registered its Common Stock pursuant
to Section 12 of the Exchange Act and the Common Stock trades on the OTC
Bulletin Board.
4.20 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
and 20,000,000 shares of non-voting Preferred Stock, .01 par value,. All issued
and outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and nonassessable.
4.21 Dilution. The Company is aware and acknowledges that conversion of the
Preferred Stock would cause dilution to existing shareholders and could
significantly increase the outstanding number of shares of Common Stock.
Section 5. Further Representations and Warranties of the Company. For so long
as any Securities held by the Subscriber remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
(i) It will reserve from its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to permit the conversion in full
of the outstanding Securities.
(ii) It will use its best efforts to maintain the listing of its Common Stock
on the OTC Bulletin Board.
(iii) It will permit the Subscriber to exercise its
right to convert the Preferred Stock and/or exercise the Warrants by
telecopying an executed and completed Notice of Conversion and/or
Notice of Exercise to the Company and delivering the original Notice of
Conversion and/or Notice of Exercise and the certificate representing
the Preferred Stock and/or the original Warrant to the Company by
express courier. Each business date on which a Notice of Conversion
and/or Notice of Exercise is telecopied to and received by the Company
in accordance with the provisions hereof shall be deemed a conversion
date and/or exercise date. The Company will use its best efforts to
transmit the certificates representing shares of Common Stock issuable
upon conversion of any Preferred Stock and/or exercise of any Warrants
(together with the certificates representing the Preferred Stock not so
converted, and/or Warrants not exercised) to the Subscriber via express
courier, by electronic transfer or otherwise within three business days
after the conversion and/or exercise date if the Company has received
the original Notice of Conversion and Preferred Stock certificate being
so converted and/or original Notice of Exercise and Warrant by such
date. In addition to any other remedies which may be available to the
Subscriber, in the event that the Company fails to use its best efforts
to effect delivery of such shares of Common Stock within such three
business day period, the Subscriber will be entitled to revoke the
relevant Notice of Conversion and/or Notice of Exercise by delivering a
notice to such effect to the Company whereupon the Company and the
Subscriber shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion and/or
Notice of Exercise. The Notice of Conversion and Preferred Stock and/or
Notice of Exercise and Warrant(s) representing the portion of the
Shares converted and/or exercised shall be delivered as follows:
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of
the Preferred Stock and/or upon exercise of the Warrants and/or exercise of the
Warrants is not delivered, as a direct result of the negligence or action or
inaction of the Company only, within five (5) business days of receipt by the
Company of a valid Notice of Conversion and the Preferred Stock to be converted
and/or Notice of Exercise and Warrants to be exercised (such date of receipt
referred to as the "Conversion Date" and/or "Exercise Date"), the Company shall
pay to the Purchaser, in immediately available funds, upon demand, as liquidated
damages for such failure and not as a penalty, for each $100,000 of Preferred
Stock sought to be converted $500 for each of the first ten (10) days and $1,000
per day thereafter that the Underlying Shares are not delivered, and for each
One Thousand (1000) shares of Common Stock sought to be exercised under the
Warrant, $7.50 for each of the first ten (10) days and $15 per day thereafter
that the Underlying Shares are not delivered, which liquidated damages shall run
from the sixth business day after the Conversion Date and/or Exercise Date. Any
and all payments required pursuant to this paragraph shall be payable only in
shares of Common Stock and not in cash. The number of such shares shall be
determined by dividing the total sum payable by the Conversion Price and/or
Exercise Price.
Section 6. Opinion of Counsel. The Company shall have their
counsel provide, at the Company's expense, an opinion of counsel acceptable to
the transfer agent (if required) upon conversion of the Preferred Stock and/or
exercise of Warrants, upon receipt of Notice of Conversion and/or Notice of
Exercise from each.
Subscriber shall, upon the Closing, receive an opinion letter from counsel to
the Company subject to reasonable and customary limitations and qualifications
to the effect that:
(i) The Company is duly incorporated and validly existing under the laws and
jurisdiction of its incorporation. The Company and/or its subsidiaries are
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions where the Company and/or its subsidiaries owns or leases
properties, maintains employees or conducts business, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the Company, and has all requisite corporate power and authority to own its
properties and conduct its business.
<PAGE>
(ii) Except as set forth in the Reports to the best of Counsel's knowledge
without an independent investigation, there is no action, proceeding or
investigation pending, or to such counsel's knowledge, threatened against the
Company which might result, either individually or in the aggregate, in any
material adverse change in the business or financial condition of the Company.
(iii) Except as set forth in the Reports to the best of counsel's knowledge
without an independent investigation, the Company is not a party to or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality.
(iv) Except as set forth in the Reports to the best
of counsel's knowledge without an independent investigation, there is
no action, suit, proceeding or investigation by the Company currently
pending, except for a lawsuit against Company's subsidiary, Automotive
& Assembly Manufacturing, Inc. ("AMS") for breach of contract, which
would not have a material adverse effect on Company.
(v) The Preferred Stock, which shall be issued at the closing, will be duly
authorized and validly issued under the laws of the Company's State of
Incorporation.
(vi) This Subscription Agreement, the issuance of the Shares and the issuance
of Common Stock, upon conversion of the Shares, have been duly approved by all
required corporate action and that all such securities, upon delivery, shall
be validly issued and outstanding, fully paid and nonassessable.
(vii) The issuance of the Shares will not violate the applicable listing
agreement between the Company and any securities exchange or market on which
the Company's securities are listed.
(viii) Assuming the accuracy of the representation and warranties of the
Company and the Subscriber set forth in this Subscription Agreement, the offer,
issuance and sale of the Preferred Stock, Warrants and Underlying Shares to
be issued upon conversion and exercise to the Subscriber pursuant to this
Agreement are exempt from the registration requirements of the Act.
(ix) As more specifically described in the Reports, the authorized capital
stock of the Company consists of 75,000,000 shares of Common Stock, no par
value per share ("Common Stock") and 20,000,000 shares of Preferred Stock, par
value $.01 per share.
(x) The Common Stock is registered pursuant to Section 12(b) or Section 12(g)
of the Securities Exchange Act of 1934, as amended, and to the best of
Counsel's knowledge without an independent investigation the Company has
timely filed
<PAGE>
all the material required to be filed pursuant to Sections 13(a) or
15(d) of such Act for a period of at least twelve months preceding the
date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in this Agreement; the Agreement has been duly
and validly authorized by all necessary corporate action by the
Company, to our knowledge, no approval of any governmental or other
body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; the Agreement has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge without an
independent investigation, after due inquiry, the execution, delivery
and performance of the Agreements by the Company and the performance of
its obligations thereunder do not and will not constitute a breach or
violation of any of the terms and provisions of, or constitute a
default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the
Company is a party or by which it or any of its property is bound,
(iii) any applicable statute or regulation, (iv) or any judgment,
decree or other of any court or governmental body having jurisdiction
over the Company or any of its property.
Section 7. Opinion of Counsel Upon Conversion. The Company
will obtain for the Subscriber, at the Company's expense, any and all opinions
of counsel which may be reasonably required in order to convert the Preferred
Stock, including, but not limited to, obtaining for the Subscriber an opinion of
counsel (substantially in the form of Exhibit G annexed hereto), subject only to
receipt of a Notice of Conversion in the form of Exhibit D or Exhibit E and
receipt by Counsel of such representations, warranties, and documents as are
determined to be necessary to comply with applicable securities laws, duly
executed by the Subscriber which shall be satisfactory to the Transfer Agent,
directing the Transfer Agent to remove the legend from the certificate.
Section 8. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the Exchange Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request
a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Act and the 1934
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as Purchaser may reasonably request in availing itself of any
rule or regulation of the SEC allowing Purchaser to sell any such
Securities without registration.
Section 8. Representations and Warranties of the Company and
Subscriber. Each of Subscriber and the Company represent to the other the
following with respect to itself:
8.1 Subscription Agreement. The Subscription Agreement has
been duly authorized, validly executed and delivered on behalf of the Company
and Subscriber and is a valid and binding agreement in accordance with its
terms, subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally.
8.2 No-Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation, and any amendments thereto,
Bylaws and any amendments thereto of the Company or any material mortgage,
indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree statute, law, ordinance, rule or
regulation applicable to the Company, its properties or assets.
8.3 Approvals. Neither the Company nor Subscriber is aware of
any authorization, approval or consent of any governmental body which is legally
required for the issuance and sale of the Securities.
8.4 Indemnification. Each of the Company and the Subscriber
agrees to indemnify the other and to hold the other harmless from and against
any and all losses, damages, liabilities, costs and expenses (including
reasonable attorneys' fees) which the other may sustain or incur in connection
with the breach by the indemnifying party of any representation, warranty or
covenant made by it in this Agreement.
8.5 Transfer Restrictions/Conversion Holding Period. Refer to the Amended
Certificate of Secretary (Exhibit A).
8.6 Demand Rights. The parties have entered into a Registration Rights
Agreement (Exhibit C).
Section 9. Restrictions on Conversion of Preferred Stock. The
Subscriber or any subsequent holder of the Preferred Stock (the "Holder") shall
be prohibited from converting any portion of the Preferred Stock which would
result in the Subscriber or the Holder being deemed the beneficial owner, in
accordance with the provisions of Rule 13d-3 of the 1934 Act, as amended, of
4.99% or more of the then issued and outstanding Common Stock of the Company.
Section 10. Permissive Redemption. The Company has the right
to redeem the Preferred Stock, in whole or in part, in cash at one hundred
thirty (130%) percent of the Liquidation Value, as defined in the Amended
Certificate of Secretary of the 8% Convertible Preferred Stock Series 97-G, for
any Preferred Stock for which a Notice of Conversion has not been sent. Upon
notice of its right to redeem the Preferred Stock, the Company shall wire
transfer the appropriate amount of funds into an escrow account mutually agreed
upon by both Company and Subscriber within three (3) business days of such
notice. Additionally, if after the passage of three (3) business days from the
receipt by the Subscriber of the notice of the Company's right to redeem the
Preferred Stock and the time funds are received by the escrow agent, the Company
has not deposited into escrow the appropriate amount of funds to redeem the
Preferred Stock, the Company shall pay to the Subscriber an amount equal to five
(5%) percent per month of the Liquidation Value of the Preferred Stock held by
Subscriber on a pro rata basis in cash. After the escrow agent is in receipt of
such funds, he shall notify the Subscriber to surrender the appropriate amount
of Preferred Stock. If after three (3) business days from the date the notice of
redemption is received by the Subscriber the funds have not been received by the
escrow agent, then the Subscriber shall again have the right to convert the
Preferred Stock and the Company shall have the right to redeem the Preferred
Stock but only upon simultaneously sending a notice of redemption to the
Subscriber and wire transferring the appropriate amount of funds.
Section 12. Mandatory Conversion. In the event the Shares have
not been converted two (2) years from the Closing Date, the Shares shall
automatically be converted as if the Subscriber voluntarily elected such
conversion in accordance with the procedure, terms and conditions set forth in
this Agreement.
Section 13. Registration or Exemption Requirements. Subscriber
acknowledges and understands that the Securities may not be resold or otherwise
transferred except in a transaction registered under the Act and any applicable
state securities laws or unless an exemption from such registration is
available. Subscriber understands that the Securities will be imprinted with a
legend that prohibits the transfer of the Securities unless (i) they are
registered or such registration is not required, and (ii) if the transfer is
pursuant to an exemption from registration other than Rule 144 under the Act
and, if the Company shall so request in writing, an opinion of counsel
reasonably satisfactory to the Company is obtained to the effect that the
transaction is so exempt.
Section 14. Legend. The certificates representing the Securities shall be
subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER WITH
THE REGULATIONS PROMULGATED THEREUNDER, THE "SECURITIES ACT"), AND MAY
NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED
WITHIN THE UNITED STATES (AS THAT TERM IS DEFINED IN REGULATION S
PROMULGATED UNDER THE SECURITIES ACT) OR TO A U.S. PERSON (AS THAT TERM
IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
The certificates representing the Securities, and each certificate issued in
transfer thereof, will also bear any legend required under any applicable state
securities law.
Upon receipt of the Notice of Conversion annexed hereto as Exhibit E the
Company shall forward to the Transfer Agent an opinion substantially in the
form annexed hereto as Exhibit G, to have the legend removed and the company
shall issue replacement certificates.
Section 15. Stock Delivery Instructions. The Preferred Stock Certificate and
Warrant Certificate shall be delivered to the Escrow Agent on a delivery versus
payment basis as set forth in the Escrow Agreement.
Section 16. Closing Date. The date the Escrow Agent receives
the Securities and Purchase Price, and the conditions set forth in Sections 17
and 18 and the terms and conditions of the Escrow Agreement (Exhibit F) herein
are satisfied or waived shall be the closing date (the "Closing Date"). The
Closing Date shall be mutually agreed upon as to time and place.
Section 17. Conditions to the Company's Obligation to Sell.
Subscriber understands that the Company's obligation to sell the Preferred Stock
and additional Restricted Shares are subject to the fulfillment or waiver as of
the Closing Date of the following conditions:
(i) The receipt and acceptance by the Company of this Subscription Agreement
and all duly executed Exhibits thereto by an authorized officer of the Company;
and
(ii) All representations and warranties of the Subscriber contained herein
shall be true when made and remain true and correct as of the Closing Date; and
(iii) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, Warrants, Restricted Shares and the proposed issuance
of the Common Stock underlying the Preferred Stock, Warrants and
Restricted Shares shall be legally permitted by all laws and
regulations to which the Subscriber and the Company are subject; and
(iv) The Amended Certificate of Secretary for the Preferred Stock shall have
been filed with the Utah Secretary of State; and
(v) The Subscriber shall have performed and complied with all agreements and
conditions herein agreed to be performed or complied with by him or her on or
before the Closing Date.
Section 18. Conditions to Subscriber's Obligation to Purchase.
The Company understands that Subscriber's obligation to purchase the Preferred
Stock and Warrants is subject to the fulfillment or waiver as of the Closing
Date of the following conditions:
(i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all
duly executed Exhibits hereto for the sale of the Securities;
(ii) Delivery of the original Securities as described herein;
(iii) All representations and warranties of the Company contained herein shall
remain true and correct as of the Closing Date;
(iv) Receipt of opinion of counsel and filed Amended Certificate of Secretary;
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock and Warrants shall be legally permitted by all laws and
regulations to which the Company and Subscriber are subject;
(vi) The Subscriber shall have performed and complied with all agreements and c
conditions herein agreed to be performed or complied with by him or her on or
before the Closing Date; and
(vii) Receipt of a draft Regulation S opinion of counsel, which shall be
satisfactory to Subscriber (which satisfaction shall not be unreasonably
withheld), substantially in the form of Exhibit G annexed hereto.
<PAGE>
Section 19. Miscellaneous.
19.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any country having jurisdiction over the party
against whom such judgment was obtained, and each party hereby waives any
defenses available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law.
19.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
19.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and Exhibits hereto constitute the entire agreement between the
Subscriber and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by all parties.
19.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
19.5 Entire Agreement. This Agreement and Exhibits hereto
constitute the entire agreement between the Subscriber and the Company with
respect to the subject matter hereof. This Agreement may be amended only by a
writing executed by all parties.
19.6 Reliance by Company. The Subscriber represents to the
Company that the representations and warranties of the Subscriber contained
herein are complete and accurate and may be relied upon by the Company in
determining the availability of an exemption from registration under federal and
state securities laws in connection with a private offering of securities.
19.7 Confidentiality. Each of the Company and the Subscriber
agrees to keep confidential and not to disclose to or use for the benefit of any
third party the terms of this Agreement or any other information which at any
time is communicated by the other party as being confidential without the prior
written approval of the other party; provided, however, that this provision
shall not apply to information which, at the time of disclosure, is already part
of the public domain (except by breach of this Agreement) and information which
is required to be disclosed by law.
19.8 Fees. Except as referenced in the Escrow Agreement, each
of the parties shall pay its own fees and expenses (including the fees of any
attorneys, accountants, appraisers or others engaged by such party) in
connection with this Agreement and the transactions contemplated hereby.
19.9 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
<PAGE>
IN WITNESS WHEREOF, this Agreement was duly executed on the date first written
below.
SETTONDOWN CAPITAL
INITERNATIONAL, LTD.
By /s/ Wayne Coleson
-----------------------
Name: Wayne Coleson
Title: Director
Executed this ____ day of January, 1998
Agreed to and Accepted on
this ____ day of January 1998
SGI INTERNATIONAL
By: /s/ John R. Taylor
---------------------------
Title: Senior Vice President
<PAGE>
FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES:
NAME: Settondown Capital International, Ltd.
ADDRESS: Charlotte House
Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
TEL NO:
FAX NO:
CONTACT
NAME:
DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):
NAME:
ADDRESS:
TEL NO:
FAX NO:
CONTACT
NAME:
SPECIAL
INSTRUCTIONS:
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE
AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
8% CONVERTIBLE PREFERRED STOCK
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction exemption afforded
by Regulation S as promulgated by the Securities and Exchange Commission
("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in connection with the
private placement of the 8% Convertible Preferred Stock Series 97-G (hereinafter
referred to as the "Preferred Stock") of SGI INTERNATIONAL (OTC Bulletin Board
symbol "SGII"), located at 1200 Prospect Street, Suite 325, La Jolla, CA 92037,
a corporation organized under the laws of Utah, USA (hereinafter referred to as
the "Company"). The terms on which the Preferred Stock may be converted into
Common Stock of the Company (the "Common Stock") and the other terms of the
Preferred Stock are set forth in the Amended Certificate of Secretary of the 8%
Convertible Preferred Stock Series 97-G (the "Amended Certificate of Secretary"
annexed hereto as Exhibit A). In addition, the Company will sell to Subscriber a
warrant ("Warrant") to purchase Fifteen Thousand (15,000) shares of common stock
of the Company per Five Hundred Thousand ($500,00.00) Dollars (such number of
shares of common stock underlying the Warrant shall be pro rated as per each
subscription amount) for a period of five (5) years from the Closing Date (as
defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit
B annexed hereto). This Subscription and, if accepted by the Company, the offer
and sale of the Preferred Stock (the "Shares"), Warrants and the underlying
Common Stock (the "Underlying Shares", and collectively the "Securities"), are
being made in reliance upon the provisions of Regulation S under the Act.
The Closing Date shall be January , 1998 (as determined in accordance with
Section 1.1 herein).
The undersigned, DOMINION CAPITAL, LTD., located at c/o Bahamas Financial
Center, Shirley & Charlotte Streets, 3rd Fl., P.O. Box CB 13136, Nassau,
Bahamas, a corporation (limited liability company) organized under the laws of
Bahamas, a non-USA jurisdiction (hereinafter referred to as "Subscriber" or
"Purchaser"), hereby represents and warrants to, and agrees with the Company as
follows:
Section 1. Agreement to Subscribe: Purchase Price.
1.1 Closing Date. The Company will sell and the Subscriber will buy an aggregate
of Five Hundred (500) shares of Preferred Stock for an aggregate purchase price
of Five Hundred Thousand ($500,000) U.S. Dollars (the "Purchase Price") based on
U.S. $1,000 per share. Dividends will accrue and be paid at the rate of eight
(8%) percent on the outstanding principal amount of the Shares until the Shares
have been completely converted, provided, however, all dividends thereon shall
only be payable in common stock of the Company and not in cash. Dividends shall
be calculated at the Conversion Price on the Conversion Date (as such terms are
defined in the Amended Certificate of Secretary) when converted.
1.2 Additional Consideration. As consideration for Subscriber to have entered
into this Agreement for the purchase of additional shares of Preferred Stock and
the elimination of penalties in this Agreement solely regarding in the event the
Company does not register the stock in a timely fashion, an additional shares of
restricted common stock (the "Restricted Shares") of the Company shall be
delivered on the Closing Date. This consideration is specifically limited to
Subscriber who is purchasing 97-G Preferred Stock from the Company.
1.3 Form of Payment. Subscriber shall pay the Purchase Price by delivering good
funds in United States Dollars by wire transfer to Goldstein, Goldstein & Reis,
LLP, Escrow Agent, against delivery of the original Securities. The parties have
entered into an Escrow Agreement annexed hereto as Exhibit C which is
incorporated by this reference.
1.4 Wire Instructions. Wire instructions for Goldstein, Goldstein & Reis, LLP
are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
Section 2. Representation and Warranties of the Subscriber. Each Subscriber
severally acknowledges, represents, warrants and agrees as follows:
2.1 Organizations and Authorization. Subscriber is duly incorporated or
organized and validly existing in the country of its incorporation or
organization and has all requisite power and authority to purchase and hold the
Securities. The decision to invest and the execution and delivery of this
Agreement by the Subscriber, the performance by the Subscriber of its
obligations hereunder and the consummation by the Subscriber of the transactions
contemplated hereby have been duly authorized and requires no other proceedings
on the part of the Subscriber. The Undersigned's signatory has all right, power
and authority to execute and deliver this Agreement on behalf of the Subscriber.
This Agreement has been duly executed and delivered by the Subscriber and,
assuming the execution and delivery hereof and acceptance thereof by the
Company, will constitute the legal, valid and binding obligations of the
Subscriber, enforceable against the Subscriber in accordance with its terms and
the Subscriber can afford the complete loss of Subscriber's investment.
2.2 Evaluation of Risks. Subscriber has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of, and bearing the economic risks entailed by, an investment in the
Company and of protecting its interests in connection with this transaction. It
recognizes that its investment in the Company involves a high degree of risk and
the Subscriber can afford the complete loss of Subscriber's investment.
2.3 Independent Counsel. Subscriber acknowledges that it has been advised to
consult with its own attorney regarding legal matters concerning the Company and
to consult with its tax advisor regarding the tax consequences of acquiring the
Securities.
2.4 Disclosure Documentation. Subscriber has received and reviewed copies of the
Company's reports filed under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), including its 10-Ks, and 10-Qs, filed by the Company since
December 31, 1994 (collectively, the "Reports"). Except for the Reports,
Subscriber is not relying on any other information relating to the offer and
sale of the Securities. Subscriber acknowledges that the Company has offered to
make available any additional public information that the Subscriber may
reasonably request, including technical information, and other material
information about the Company and Subscriber has been offered Company's full and
unconditional cooperation in making such information available to Subscriber and
acknowledges that the Company has recommended that the Subscriber request and
review such information prior to making an investment decision. No oral or
written representations have been made, or oral or written information furnished
to the undersigned or its advisors, if any, in connection with the offering of
the Securities which were or are in any way inconsistent with the Reports.
2.5 Opportunity to Ask Questions. Subscriber has had a reasonable opportunity to
ask questions of and receive answers from the Company concerning the Company and
the offering, and all such questions, if any, have been answered to the full
satisfaction of Subscriber.
2.6 Reports Constitute Sole Representations. Except as set forth in the Reports,
no representations or warranties have been made to Subscriber by (a) the Company
or any agent, employee or affiliate the Company or (b) any other person, and in
entering into this transaction Subscriber is not relying upon any information,
other than that contained in the Reports and the results of independent
investigation by Subscriber.
2.7 Subscriber is Accredited Investor. The undersigned is an "Accredited
Investor" as defined below who represents and warrants it is included within
one or more of the following categories of "Accredited Investors."
(i) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan
associated or other institution as defined in Section 3(a)(5)A of the Act
whether acting in its individual or fiduciary capacity; any broker or dealer
registered pursuant to Section 15 of the 1934 Act; any insurance company as
defined in Section 2(13) of the Act; any investment company registered under the
Investment Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the Small
Business Act of 1958; any plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivision, for the benefits of its employees if such plan has total
assets in excess of $5,000,000, any employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association, insurance company, or
registered investment advisor, or if the employee benefit plan has total assets
in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
(ii) Any private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership, not
formed for the specific purpose of acquiring the securities offered, with total
assets in excess of $5,000,000;
(iv) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or general
partner of a general partner of that issuer,
(v) Any natural person whose individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in excess of $200,000 in
each of the two (2) most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching that same income level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is directed
by a sophisticated person as described in Section 230.506(b)(2)(ii) of
Regulation D under the Act;
(viii) Any entity in which all of the equity owners are accredited investors;
and
(ix) Any self-directed employee benefit plan with investment decisions made
solely by persons that are accredited investors within the meaning of Rule 501
of Regulation D promulgated under the Act.
2.8 No Registration, Review or Approval. Subscriber acknowledges and understands
that the limited private offering and sale of Securities pursuant to this
Agreement has not been reviewed or approved by the SEC or by any state
securities commission, authority or agency, and is not registered under the Act
or under the securities or "blue sky" laws, rules or regulations of any state.
Subscriber acknowledges, understands and agrees that the Securities are being
offered and sold hereunder pursuant to (i) a private placement exemption to the
registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of
such Act and Regulation S promulgated under such Act, and (ii) a similar
exemption to the registration provisions of applicable state securities laws.
Subscriber understands that the Company is relying upon the truth and accuracy
of the representations, warranties, agreements, acknowledgments and
understandings of Subscriber set forth herein in order to determine the
applicability of such exemptions and the suitability of Subscriber to acquire
the Securities. Subscriber will advise Company of the state of its residence
prior to executing this or any other agreement to enable the Company to comply
with applicable "blue sky" laws.
2.9 Investment Intent. Without limiting its ability to resell the Securities
pursuant to an effective registration statement, Subscriber is acquiring the
Securities solely for its own account and not with a view to the distribution,
assignment or resale to others. Subscriber understands and agrees that it may
bear the economic risk of its investment in the Securities for an indefinite
period of time. Subscriber does not now have any short position or hedge
position in the Company's Common Stock nor will the Subscriber make any
promissory notes and/or pledges to that effect on the Company's Common Stock.
2.10 No Advertisements. The Subscriber is not subscribing for Securities as a
result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
Section 3. Further Representations and Warranties of the Subscriber. Subscriber
further acknowledges, represents, warrants and agrees as follows:
3.1 Offering Outside the United States. The Subscriber is not a "U.S. Person" as
defined in Regulation S (as the same may be amended from time to time)
promulgated under the Act.(1) At the time the buy order for this transaction was
originated, Subscriber was outside the United States and no offer to purchase
the Securities was made in the United States. Subscriber agrees not to reoffer
or sell the Securities, or to cause any transferee permitted hereunder to
reoffer or sell the Securities, within the United States, or for the account or
benefit of a U.S. Person, (i) as part of the distribution of the Securities at
any time, or (ii) otherwise, until at least forty (40) days after the Securities
are issued, and, in either case, only in a transaction meeting the requirements
of Regulation S under the Act, including without limitation, where the offer (i)
is not made to a person in the United States and either (A) at the time the buy
order is originated, the Buyer is outside the United States or the Company and
any person acting on its behalf reasonably believe that the buyer is outside the
United States, or (B) the transaction is executed in, on or through the
facilities of a designated offshore securities market and neither the seller nor
any person acting on its behalf knows that the transaction has been pre-arranged
with a buyer in the United States; and (ii) no directed selling efforts shall be
made in the United States by the buyer, an affiliate or any person acting on
their behalf, or in a transaction registered under the Act or pursuant to an
exemption from such registration.
3.2 Transfer Restrictions/Conversion Holding Period.
(i) The transaction restriction in connection with this offshore offer and sale
restricts Subscriber from offering and selling to U.S. Persons, or for the
account or benefit of a U.S. Person, for a period of time. Rule 903(c)(2) of
Regulation S sets forth a forty (40) day transaction restriction and is defined
herein as the "Restricted Period." The Preferred Stock is convertible into the
Underlying Shares, at the option of the Subscriber, at any time forty one (41)
days after the Closing Date (the "Holding Period").
- -------------------------------------
(i) Pursuant to Regulation S. a "U.S. Person" means: (i) any natural person
resident in the United States, (ii) any partnership or corporation organized or
incorporated under the laws of the United States, (iii) any estate of which any
executor or administrator is a U.S. Person, (iv) any trust of which any trustee
is a U.S. Person, (v) any agency or branch of a foreign entity located in the
United States, (vi) any non-discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary for the benefit or
account of a U.S. person, (vii) any discretionary account or similar account
(other than an estate or trust) held by a dealer or other fiduciary organized,
incorporated or (if an individual resident in the United States), or (viii) any
partnership or corporation if organized under the laws of any foreign
jurisdiction and formed by any U.S. Person principally for the purpose of
investing in securities not registered under the Act, unless it is organized or
incorporated and owned by accredited investors (as defined in Rule 501(a) under
the Act) who are not natural persons, estates or trusts.
(ii) A legend substantially in the form of Section 14 herein has been or will be
placed on any certificates or other documents evidencing the Securities so as to
restrict the resale, pledge, hypothecation or other transfer thereof in
accordance with the provisions hereof and the provisions of Regulation S
promulgated under the Act and the Holding Period.
- ---------------------------------------
3.3 Transfer Restrictions Regarding. Upon conversion of any part or all of the
Preferred Stock and/or Warrants at any time after the Holding Period, if the
holder of the Preferred Stock being converted (or Warrant being exercised) makes
the certification, pursuant to the appropriate Notice of Conversion attached
hereto as Exhibits E and F, that such holder has complied with all of the
requirements of Regulation S and such other requirements as set forth herein,
then the Company shall cause the Transfer Agent to deliver the Underlying Shares
upon such conversion (or exercise) without a restrictive legend or stop transfer
instructions by delivering a Regulation S opinion substantially in the form
annexed hereto as Exhibit G, otherwise the Underlying Shares shall be considered
restricted securities and certificates representing such Underlying Shares shall
contain restrictive legends and stop transfer instructions will be placed with
the Company's transfer agent regarding such Underlying Shares.
The Subscriber understands that the Company is the issuer of the securities
which are the subject of this Agreement, and that, for purposes of Regulation S,
a "distributor" is any underwriter, dealer or other person who participates,
pursuant to a contractual arrangement, in the distribution of securities offered
or sold in reliance on Regulation S and that an "affiliate" is any partner,
officer, director or any person directly or indirectly controlling, controlled
by or under common control with the person in question. In this regard, the
Subscriber shall not, during the 40-day Restricted Period set forth under Rule
903(c)(2), act as a distributor, either directly or through any affiliate, nor
shall he sell, transfer, hypothecate or otherwise convey the Securities or any
interest therein, other than outside the United States to a non-U.S. person.
Section 4. Representations and Warranties of the Company. For so long as any
Securities held by Subscriber remains outstanding, the Company acknowledges,
represents, warrants and agrees as follows:
4.1 Organization/Qualification. The Company is a corporation duly organized and
validly existing under the laws of the State of Utah and is in good standing
under such laws. The Company has all requisite corporate power and authority to
own, lease and operate its properties and assets, and to carry on its business
as presently conducted. The Company is qualified to do business as a foreign
corporation in each jurisdiction in which the ownership of its property or the
nature of its business requires such qualification, except where failure to so
qualify would not have a material adverse effect on the Company.
4.2 Accuracy of Reports and Information. To the best of its knowledge, the
Company is in compliance, to the extent applicable, with all reporting
obligations under either Section 12(b), 12(g) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company has
registered its Common Stock pursuant to Section 12 of the Exchange Act and the
Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed pursuant to all
reporting obligations, under either Section 13(a) or 15(d) of the Exchange Act
for a period of at least twelve (12) months immediately preceding the offer and
sale of the Securities (or for such shorter period that the Company has been
required to file such material).
4.3 SEC Filings/Full Disclosure. For a period of at least twelve (12) months
immediately preceding this offer and sale, or such shorter period that the
Company has been required to file such Reports as defined herein, to the best of
the Company's knowledge (i) none of the Company's filings with the Securities
and Exchange Commission contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein in light of the circumstances under which they were made,
not misleading, and (ii) the Company has timely filed all requisite forms,
reports and exhibits thereto with the Securities and Exchange Commission.
There is no fact known to the Company (other than general economic conditions
known to the public generally) that has not been publicly disclosed by the
Company or disclosed in writing to the Subscriber which (i) could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise) or on earnings, business affairs, properties or assets of the
Company, or (ii) could reasonably be expected to materially and adversely affect
the ability of the Company to perform its obligations pursuant to this
Agreement.
4.4 Authorization. The Company has all requisite corporate right, power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, sale, issuance and delivery of the Shares and the performance of
the Company's obligations hereunder has been taken. This Agreement has been duly
executed and delivered by the Company and constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies, and to limitations of public policy as they may apply
to the indemnification provisions set forth in this Agreement. Upon their
issuance and delivery pursuant to this Agreement, the Shares will be validly
issued, fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however, that the Shares are subject to restrictions on
transfer under state and/or federal securities laws. The issuance and sale of
the Shares will not give rise to any preemptive right or right of first refusal
or right of participation on behalf of any person.
4.5 No Conflict. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to a loss of a
material benefit, under, any provision of the Articles of Incorporation, and any
amendments thereto, Bylaws, Stockholders Agreements and any amendments thereto
of the Company or any material mortgage, indenture, lease or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree
statute, law, ordinance, rule or regulation applicable to the Company, its
properties or assets and which would have a material adverse effect on the
Company's business and financial condition.
4.6 No Undisclosed Liabilities or Events. The Company has no liabilities or
obligations other than those disclosed in the Reports, this Agreement or those
incurred in the ordinary course of the Company's business since September 30,
1997, and which individually or in the aggregate, do not or would not have a
material adverse effect on the properties, business, condition (financial or
otherwise), results of operations or prospects of the Company. No event or
circumstance has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
4.7 No Default. The Company is not in default in the performance or observance
of any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust or other material instrument or agreement to
which it is a party or by which it is or its property is bound, and neither the
execution, nor the delivery by the Company, nor the performance by the Company
of its obligations under this Agreement, including the conversion provision of
the Shares, will conflict with or result in the breach or violation of any of
the terms or provisions of, or constitute a default or result in the creation or
imposition of any lien or charge on any assets or properties of the Company
under, any material indenture, mortgage, deed of trust or other material
agreement applicable to the Company or instrument to which the Company is a
party or by which it is bound or any statute or the Articles of the Company, or,
to the best of the Company's knowledge, any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or the Company's listing agreement for its Common
Stock.
4.8 Absence of Events of Default. Except as set forth in the Reports and this
Agreement, no Event of Default, as defined in the respective agreement to which
the Company is a party, and no event which, with the giving of notice or the
passage of time or both, would become an Event of Default (as so defined), has
occurred and is continuing, which would have a material adverse effect on the
Company's business, properties, prospects, condition (financial or otherwise) or
results of operations.
4.9 Governmental Consent. Etc. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Company is required in connection with the valid execution and delivery
of this Agreement, or the offer, sale or issuance of the Shares, or the
consummation of any other transaction contemplated hereby, except as may be
required by applicable securities laws.
4.10 Intellectual Property Rights. Except as disclosed in the Reports, the
Company has sufficient trademarks, trade names, patent rights, copyrights and
licenses to conduct its business as presently conducted in the Reports. To the
Company's knowledge, neither the Company nor its products is infringing or will
infringe any trademark, trade name, patent right, copyright, license, trade
secret or other similar right of others currently in existence; and the Company
is not aware of any claim being made against the Company regarding any
trademark, trade name, patent, copyright, license, trade secret or other
intellectual property right which could have a material adverse effect on the
business or financial condition of the Company.
4.11 Material Contracts. Except as set forth in the Reports, the agreements to
which the Company is a party described in the Reports are valid agreements, in
full force and effect the Company is not in material breach or material default
under any of such agreements.
4.12 Litigation. Except as disclosed in the Reports, there is no action,
proceeding or investigation pending, or to the Company's knowledge threatened,
against the Company which might result, either individually or in the aggregate,
in any material adverse change in the business, prospects, conditions, affairs
or operations of the Company. The Company is not a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.
4.13 Title to Assets. Except as set forth in Reports, the Company has good and
marketable title to all properties and material assets described in the Reports
as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than such as are not material to
the business of the Company.
4.14 Subsidiaries. Except as disclosed in the Reports, the Company does not
presently own or control, directly or indirectly, any interest in any other
corporation, partnership, association or other business entity.
4.15 Required Governmental Permits. To the best of the Company's knowledge, the
Company is in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal and
other regulatory authorities which are material to the conduct of its business,
all of which are valid and in full force and effect.
4.16 Listing. The Company will use its best efforts to maintain the listing of
its Common Stock on the OTC Bulletin Board or other organized United States
market or quotation system. The Company has not received any notice, oral or
written, regarding continued listing and, as long as the Preferred Shares and
Warrants are outstanding, the Company will take no action which would impact
their continued listing or eligibility of the Company for such listing.
4.17 Other Outstanding Securities/Financing Restrictions. Except as disclosed in
the Reports, and Addenda 1, there are no other outstanding securities, debt or
equity presently convertible into Common Stock. Except as disclosed in the
Reports, and herein, the Company has no outstanding restricted shares, or shares
of Common Stock sold under Regulation S, Regulation D or outstanding under any
other exemption from registration, which are available for sale as unrestricted
("free trading") stock.
4.18 Registration Alternative. The Company covenants and agrees that in the
event the terms of Regulation S are materially altered so that the Subscriber is
unable to convert the Preferred Stock immediately after the Holding Period, the
Company (i) agrees to use its best efforts to include the Underlying Shares in
any registration statement which is being prepared but not yet filed, or in any
registration statement which has been filed, but not yet declared effective, at
the time Regulation S is materially altered, or (ii) the Subscriber may exercise
its registration rights under the terms and conditions of the Registration
Rights Agreement attached hereto as Exhibit D. The Company and the Subscriber
shall provide to the Transfer Agent any and all papers necessary to complete the
transfer under Regulation S. including, but not limited to, opinions of counsel
to the Transfer Agent, (i) continue to file all material required to be filed
pursuant to Sections 13(a) or 15(d) of the Exchange Act, and (ii) not knowingly
engage in directed selling efforts in connection with the resale of securities
by Subscriber under Regulation S.
4.19 Reporting Issuer Company Status. The Company is a "Reporting Issuer" as
defined in Rule 902 of Regulation S. The Company is in full compliance, to the
extent applicable, with all reporting obligations under either Section 12(b),
12(g) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and shall use its best efforts to maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the
Exchange Act and the Common Stock trades on the OTC Bulletin Board.
4.20 Capitalization. The authorized capital stock of the Company consists of
75,000,000 shares of Common Stock, no par value per share, and 20,000,000 shares
of nonvoting Preferred Stock, $.01 par value. All issued and outstanding shares
of Common Stock have been duly authorized and validly issued and are fully paid
and nonassessable.
4.21 Dilution. The Company is aware and acknowledges that conversion of the
Preferred Stock would cause dilution to existing shareholders and could
significantly increase the outstanding number of shares of Common Stock.
Section 5. Further Representations and Warranties of the Company. For so long as
any Securities held by the Subscriber remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
(i) It will reserve from its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to permit the conversion in full of
the outstanding Securities.
(ii) It will use its best efforts to maintain the listing of its Common Stock on
the OTC Bulletin Board.
(iii) It will permit the Subscriber to exercise its right to convert the
Preferred Stock and/or Warrants by telecopying an executed and completed Notice
of Conversion and/or Notice of Exercise to the Company and delivering the
original Notice of Conversion and/or original Notice of Exercise and the
certificate representing the Preferred Stock and/or the original Warrant to the
Company by express courier. Each business date on which a Notice of Conversion
and/or Notice of Exercise is telecopied to and received by the Company in
accordance with the provisions hereof shall be deemed a conversion date and/or
exercise date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Preferred Stock and/or exercise of any Warrants (together with the certificates
representing the Preferred Stock not so converted) and/or Warrants not so
exercised to the Subscriber via express courier, by electronic transfer or
otherwise within three business days after the conversion and/or exercise date
if the Company has received the original Notice of Conversion and Preferred
Stock certificate being so converted and/or original Notice of Exercise and
Warrants by such date. In addition to any other remedies which may be available
to the Subscriber, in the event that the Company fails to use its best efforts
to effect delivery of such shares of Common Stock within such three business day
period, the Subscriber will be entitled to revoke the relevant Notice of
Conversion and/or Notice of Exercise by delivering a notice to such effect to
the Company whereupon the Company and the Subscriber shall each be restored to
their respective positions immediately prior to delivery of such Notice of
Conversion and/or Notice of Exercise. The Notice of Conversion and Preferred
Stock and/or the Notice of Exercise and Warrants representing the portion of the
Shares converted and/or exercised shall be delivered as follows:
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of the Preferred
Stock and/or exercise of the Warrants is not delivered, as a direct result of
the negligence or action or inaction of the Company only, within five (5)
business days of receipt by the Company of a valid Notice of Conversion and the
Preferred Stock to be converted and/or Notice of Exercise and Warrants to be
exercised (such date of receipt referred to as the "Conversion Date" and/or
"Exercise Date"), the Company shall pay to the Purchaser, in immediately
available funds, upon demand, as liquidated damages for such failure and not as
a penalty, for each $100,000 of Preferred Stock sought to be converted for each
one thousand (1000) shares of Common Stock sought to be exercised under the
Warrant, $500 for each of the first ten (10) days and $1,000 per day thereafter
that the Underlying Shares are not delivered, and for each one thousand (1000)
shares of Common Stock sought to be exercised under the Warrant, $7.50 for each
of the first ten (10) days and $15 per day thereafter that the Underlying Shares
are not delivered, which liquidated damages shall run from the sixth business
day after the Conversion Date and/or Exercise Date. Any and all payments
required pursuant to this paragraph shall be payable only in shares of Common
Stock and not in cash. The number of such shares shall be determined by dividing
the total sum payable by the Conversion Price and/or Exercise Price.
Section 6. Opinion of Counsel. The Company shall have their counsel provide, at
the Company's expense, an opinion of counsel acceptable to the transfer agent
(if required) upon conversion of the Preferred Stock and/or exercise of
Warrants, upon receipt of Notice of Conversion and/or Notice of Exercise from
each.
Subscriber shall, upon the Closing, receive an opinion letter from counsel to
the Company subject to reasonable and customary limitations and qualifications
to the effect that:
(i) The Company is duly incorporated and validly existing under the laws and
jurisdiction of its incorporation. The Company and/or its subsidiaries are duly
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions where the Company and/or its subsidiaries owns or leases
properties, maintains employees or conducts business, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the Company, and has all requisite corporate power and authority to own its
properties and conduct its business.
(ii) Except as set forth in the Reports to the best of Counsel's knowledge
without an independent investigation, there is no action, proceeding or
investigation pending, or to such counsel's knowledge, threatened against the
Company which might result, either individually or in the aggregate, in any
material adverse change in the business or financial condition of the Company.
(iii) Except as set forth in the Reports to the best of counsel's knowledge
without an independent investigation, the Company is not a party to or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality.
(iv) Except as set forth in the Reports to the best of counsel's knowledge
without an independent investigation, there is no action, suit, proceeding or
investigation by the Company currently pending, except for a lawsuit against
Company's subsidiary, Automotive & Assembly Manufacturing, Inc. ("AMS") for
breach of contract, which would not have a material adverse effect on Company.
(v) The Preferred Stock, which shall be issued at the closing, will be duly
authorized and validly issued under the laws of the Company's State of
Incorporation.
(vi) This Subscription Agreement, the issuance of the Shares and the issuance of
Common Stock, upon conversion of the Shares, have been duly approved by all
required corporate action and that all such securities, upon delivery, shall be
validly issued and outstanding, fully paid and nonassessable.
(vii) The issuance of the Shares will not violate the applicable listing
agreement between the Company and any securities exchange or market on which the
Company's securities are listed.
(viii) Assuming the accuracy of the representation and warranties of the Company
and the Subscriber set forth in this Subscription Agreement, the offer, issuance
and sale of the Preferred Stock, Warrants and Underlying Shares to be issued
upon exercise to the Subscriber pursuant to this Agreement are exempt from the
registration requirements of the Act.
(ix) As more specifically described in the Reports, the authorized capital stock
of the Company consists of 75,000,000 shares of Common Stock, no par value per
share ("Common Stock") and 20,000,000 shares of Preferred Stock, par value $.01
per shares.
(x) The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of
the Securities Exchange Act of 1934, as amended, and to the best of Counsel's
knowledge without an independent investigation the Company has timely filed all
the material required to be filed pursuant to Sections 13(a) or 15(d) of such
Act for a period of at least twelve months preceding the date hereof.
(xi) The Company has the requisite corporate power and authority to enter into
the Agreements and to sell and deliver the Securities and the Common Stock to be
issued upon the conversion of the Securities as described in this Agreement; the
Agreement has been duly and validly authorized by all necessary corporate action
by the Company, to our knowledge, no approval of any governmental or other body
is required for the execution and delivery of each of the Agreements by the
Company or the consummation of the transactions contemplated thereby; the
Agreement has been duly and validly executed and delivered by and on behalf of
the Company, and is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights generally,
and except as to compliance with federal, state and foreign securities laws, as
to which no opinion is expressed.
(xii) To the best of our knowledge without an independent investigation, after
due inquiry, the execution, delivery and performance of the Agreements by the
Company and the performance of its obligations thereunder do not and will not
constitute a breach or violation of any of the terms and provisions of, or
constitute a default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture, mortgage,
deed of trust, agreement or other instrument to which the Company is a party or
by which it or any of its property is bound, (iii) any applicable statute or
regulation, (iv) or any judgment, decree or other of any court or governmental
body having jurisdiction over the Company or any of its property.
Section 7. Opinion of Counsel Upon Conversion. The Company will obtain for the
Subscriber, at the Company's expense, any and all opinions of counsel which may
be reasonably required in order to convert the Preferred Stock, including, but
not limited to, obtaining for the Subscriber an opinion of counsel
(substantially in the form annexed hereto as Exhibit G), subject only to receipt
of a Notice of Conversion in the form of Exhibit E or Exhibit F and receipt by
Counsel of such representations, warranties, and documents as are determined to
be necessary to comply with applicable securities laws, duly executed by the
Subscriber which shall be satisfactory to the Transfer Agent, directing the
Transfer Agent to remove the legend from the certificate.
Section 8. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the SEC which may at any time permit the sale
of the Securities to the public without registration, the Company agrees to use
its best efforts to:
(i) make and keep public information available, as those terms are understood
and defined in Rule 144 under the Act, at all times after the effective date on
which the Company becomes subject to the reporting requirements of the Act or
the Exchange Act;
(ii) use its best efforts to file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144,
and of the Act and the 1934 Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company and
other information in the possession of or reasonably obtainable by the Company
as Purchaser may reasonably request in availing itself of any rule or regulation
of the SEC allowing Purchaser to sell any such Securities without registration.
Section 8. Representations and Warranties of the Company and Subscriber. Each of
Subscriber and the Company represent to the other the following with respect to
itself:
8.1 Subscription Agreement. The Subscription Agreement has been duly authorized,
validly executed and delivered on behalf of the Company and Subscriber and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally.
8.2 No-Conflict. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or to a loss of a material benefit, under, any provision of
the Certificate of Incorporation, and any amendments thereto, Bylaws and any
amendments thereto of the Company or any material mortgage, indenture, lease or
other agreement or instrument, permit, concession, franchise, license, judgment,
order, decree statute, law, ordinance, rule or regulation applicable to the
Company, its properties or assets.
8.3 Approvals. Neither the Company nor Subscriber is aware of any authorization,
approval or consent of any governmental body which is legally required for the
issuance and sale of the Securities.
8.4 Indemnification. Each of the Company and the Subscriber agrees to indemnify
the other and to hold the other harmless from and against any and all losses,
damages, liabilities, costs and expenses (including reasonable attorneys' fees)
which the other may sustain or incur in connection with the breach by the
indemnifying party of any representation, warranty or covenant made by it in
this Agreement.
8.5 Transfer Restrictions/Conversion Holding Period. Refer to Certificate of
Designation (Exhibit A).
8.6 Demand Rights. The parties have entered into a Registration Rights
Agreement (Exhibit D).
Section 9. Restrictions on Conversion of Preferred Stock. The Subscriber or any
subsequent holder of the Preferred Stock (the "Holder") shall be prohibited from
converting any portion of the Preferred Stock which would result in the
Subscriber or the Holder being deemed the beneficial owner, in accordance with
the provisions of Rule 13d-3 of the 1934 Act, as amended, of 4.99% or more of
the then issued and outstanding Common Stock of the Company.
Section 10. Permissive Redemption. The Company has the right to redeem the
Preferred Stock, in whole or in part, in cash at one hundred thirty (130%)
percent of the Liquidation Value, as defined in the Amended Certificate of
Secretary of the 8% Convertible Preferred Stock Series 97-G, for any Preferred
Stock for which a Notice of Conversion has not been sent. Upon notice of its
right to redeem the Preferred Stock, the Company shall wire transfer the
appropriate amount of funds into an escrow account mutually agreed upon by both
Company and Subscriber within three (3) business days of such notice.
Additionally, if after the passage of three (3) business days from the receipt
by the Subscriber of the notice of the Company's right to redeem the Preferred
Stock and the time funds are received by the escrow agent, the Company has not
deposited into escrow the appropriate amount of funds to redeem the Preferred
Stock, the Company shall pay to the Subscriber an amount equal to five (5%)
percent per month of the Liquidation Value of the Preferred Stock held by
Subscriber on a pro rata basis in cash. After the escrow agent is in receipt of
such funds, he shall notify the Subscriber to surrender the appropriate amount
of Preferred Stock. If after three (3) business days from the date the notice of
redemption is received by the Subscriber the funds have not been received by the
escrow agent, then the Subscriber shall again have the right to convert the
Preferred Stock and the Company shall have the right to redeem the Preferred
Stock but only upon simultaneously sending a notice of redemption to the
Subscriber and wire transferring the appropriate amount of funds.
Section 12. Mandatory Conversion. In the event the Shares have not been
converted two (2) years from the Closing Date, the Shares shall automatically be
converted as if the Subscriber voluntarily elected such conversion in accordance
with the procedure, terms and conditions set forth in this Agreement.
Section 13. Registration or Exemption Requirements. Subscriber acknowledges and
understands that the Securities may not be resold or otherwise transferred
except in a transaction registered under the Act and any applicable state
securities laws or unless an exemption from such registration is available.
Subscriber understands that the Securities will be imprinted with a legend that
prohibits the transfer of the Securities unless (i) they are registered or such
registration is not required, and (ii) if the transfer is pursuant to an
exemption from registration other than Rule 144 under the Act and, if the
Company shall so request in writing, an opinion of counsel reasonably
satisfactory to the Company is obtained to the effect that the transaction is so
exempt.
Section 14. Legend. The certificates representing the Securities shall be
subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (TOGETHER WITH THE REGULATIONS
PROMULGATED THEREUNDER, THE "SECURITIES ACT"), AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHIN THE UNITED STATES (AS THAT
TERM IS DEFINED IN REGULATION S PROMULGATED UNDER THE SECURITIES ACT) OR TO A
U.S. PERSON (AS THAT TERM IS DEFINED IN REGULATION S) IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
The certificates representing the Securities, and each certificate issued in
transfer thereof, will also bear any legend required under any applicable state
securities law.
Upon receipt of the Notice of Conversion annexed hereto as Exhibit F the Company
shall forward to the Transfer Agent an opinion substantially in the form annexed
hereto as Exhibit G to have the legend removed and the company shall issue
replacement certificates.
Section 15. Stock Delivery Instructions. The Preferred Stock Certificate shall
be delivered to the Escrow Agent on a delivery versus payment basis as set
forth in the Escrow Agreement.
Section 16. Closing Date. The date Escrow Agent receives the Securities and
Purchase Price, and the conditions set forth in Sections 17 and 18 and the terms
and conditions of the Escrow Agreement (Exhibit C) herein are satisfied or
waived shall be the closing date (the "Closing Date"). The Closing Date shall be
mutually agreed upon as to time and place.
Section 17. Conditions to the Company's Obligation to Sell. Subscriber
understands that the Company's obligation to sell the Preferred Stock, Warrants
and additional Restricted Shares are subject to the fulfillment or waiver as of
the Closing Date of the following conditions:
(i) The receipt and acceptance by the Company of this Subscription Agreement and
all duly executed Exhibits thereto by an authorized officer of the Company; and
(ii) Delivery into escrow by Subscriber of good cleared funds in the minimum
amount of Five Hundred Thousand ($500,000.00) Dollars as payment in full for the
purchase of the Securities; and
(iii) All representations and warranties of the Subscriber contained herein
shall be true when made and remain true and correct as of the Closing Date; and
(iv) The Company shall have obtained all permits and qualifications required by
any state for the offer and sale of the Preferred Stock and Warrants, or shall
have the availability of exemptions therefrom. At the Closing Date, the sale and
issuance of the Preferred Stock, Warrants, Restricted Shares, and the proposed
issuance of the Common Stock underlying the Preferred Stock, Warrants and
Restricted Shares shall be legally permitted by all laws and regulations to
which the Subscriber and the Company are subject; and
(v) The Amended Certificate of Secretary for the Preferred Stock shall have been
filed with the Utah Secretary of State; and
(vi) The Subscriber shall have performed and complied with all agreements and
conditions herein agreed to be performed or complied with by him or her on or
before the Closing Date.
Section 18. Conditions to Subscriber's Obligation to Purchase. The Company
understands that Subscriber's obligation to purchase the Preferred Stock,
Warrants and additional Restricted Shares is, subject to the fulfillment or
waiver as of the Closing Date of the following conditions:
(i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all
duly executed Exhibits hereto for the sale of the Securities;
(ii) Delivery of the original Securities as described herein;
(iii) All representations and warranties of the Company contained herein shall
remain true and correct as of the Closing Date; and
(iv) Receipt of opinion of counsel and filed Amended Certificate of Secretary.
(v) The Company shall have obtained all permits and qualifications required by
any state for the offer and sale of the Preferred Stock, Warrants, and
Restricted Shares, or shall have the availability of exemptions therefrom. At
the Closing Date, the sale and issuance of the Preferred Stock, Warrants, and
Restricted Shares shall be legally permitted by all laws and regulations to
which the Company and Subscriber are subject.
(vi) The Subscriber shall have performed and complied with all agreements and
conditions herein agreed to be performed or complied with by him or her on or
before the Closing Date.
(vii) Receipt of a draft Regulation S opinion of counsel.
Section 19. Miscellaneous.
19.1 Governing Law/Jurisdiction. This Agreement will be construed and enforced
in accordance with and governed by the laws of the State of New York, except for
matters arising under the Act, without reference to principles of conflicts of
law. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the State of New York or the state courts
of the State of New York in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party hereby agrees
that if another party to this Agreement obtains a judgment against it in such a
proceeding, the party which obtained such judgment may enforce same by summary
judgment in the courts of any country having jurisdiction over the party against
whom such judgment was obtained, and each party hereby waives any defenses
available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law.
19.2 Confidentiality. If for any reason the transactions contemplated by this
Agreement are not consummated, each of the parties hereto shall keep
confidential any information obtained from any other party (except information
publicly available or in such party's domain prior to the date hereof, and
except as required by court order) and shall promptly return to the other
parties all schedules, documents, instruments, work papers or other written
information, without retaining copies thereof, previously furnished by it as a
result of this Agreement or in connection herewith.
19.3 Facsimile/Counterparts/Entire Agreement. Except as otherwise stated herein,
in lieu of the original, a facsimile transmission or copy of the original shall
be as effective and enforceable as the original. This Agreement may be executed
in counterparts which shall be considered an original document and which
together shall be considered a complete document. This Agreement and Exhibits
hereto constitute the entire agreement between the Subscriber and the Company
with respect to the subject matter hereof. This Agreement may be amended only by
a writing executed by all parties.
19.4 Severability. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
19.5 Entire Agreement. This Agreement and Exhibits hereto constitute the entire
agreement between the Subscriber and the Company with respect to the subject
matter hereof. This Agreement may be amended only by a writing executed by all
parties.
19.6 Reliance by Company. The Subscriber represents to the Company that the
representations and warranties of the Subscriber contained herein are complete
and accurate and may be relied upon by the Company in determining the
availability of an exemption from registration under federal and state
securities laws in connection with a private offering of securities.
19.7 Confidentiality. Each of the Company and the Subscriber agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by the other party as being confidential without the prior written
approval of the other party; provided, however, that this provision shall not
apply to information which, at the time of disclosure, is already part of the
public domain (except by breach of this Agreement) and information which is
required to be disclosed by law.
19.8 Fees. Except as referenced in the Escrow Agreement, each of the parties
shall pay its own fees and expenses (including the fees of any attorneys,
accountants, appraisers or others engaged by such party) in connection with this
Agreement and the transactions contemplated hereby.
19.9 Authorization. Each of the parties hereto represents that the individual
executing this Agreement on its behalf has been duly and appropriately
authorized to execute the Agreement.
19.10 Finders Fee. A finders fee in the amount of fifty (50) shares of Preferred
Stock, and Warrants to purchase ten thousand (10,000) shares of Common Stock of
the Company shall be paid by the Company to Settondown Capital. The Company and
Subscriber represent and warrant that there is no other finders fee, commission,
or other remuneration, will be paid to any party in connection with the
transactions set forth herein.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first written
below.
DOMINION CAPITAL, LTD.
By /s/ Barry W. Herman
-------------------------
Name: Barry W. Herman
Title: Director
Executed this day of January, 1998
Agreed to and Accepted on this day of January 1998
SGI INTERNATIONAL
By /s/ John R. Taylor
--------------------------
Title: Senior Vice President
<PAGE>
FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES:
NAME: Dominion Capital, Ltd.
ADDRESS: Bahamas Financial Center
Shirley & Charlotte Streets, 3rd Fl.
P.O. Box CB 13136
Nassau, Bahamas
TEL NO:
FAX NO:
CONTACT NAME:
DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):
NAME:
ADDRESS:
TEL NO:
FAX NO:
CONTACT NAME:
SPECIAL INSTRUCTIONS:
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated
the ____ day of January, 1998, between Dominion Capital, Ltd. (the "Purchaser")
Settendown Capital International Ltd. (the "Finder") (the Purchaser and the
Finder are collectively referred to as "Holder" or "Holders") issued pursuant to
the 8% Convertible Preferred Stock Subscription Agreement of even date herewith
(the "Subscription Agreement"), and SGI INTERNATIONAL, a Utah corporation having
its principal place of business at 1200 Prospect Street, Suite 325, La Jolla, CA
92037 (the "Issuer" or "Company").
WHEREAS, simultaneously with the execution and delivery of this Agreement, the
Finder is receiving from the Company, pursuant to a 8% Convertible Preferred
Stock Subscription Agreement dated the date hereof, Fifty (50) shares of the
Company's Series 97-G Preferred Stock (the "Preferred Stock"), and a Warrant
to purchase ten thousand (10,000) shares of common stock of the Company..
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchaser is purchasing from the Company, pursuant to a 8%
Convertible Preferred Stock Subscription Agreement dated the date hereof , an
aggregate of Five Hundred (500) shares of Preferred Stock, a Warrant to purchase
Fifteen Thousand (15,000) shares of the Company's common stock (the "Warrant"),
and __________ shares of restricted common stock of the Company (the "Restricted
Shares"). The common stock underlying the Preferred Stock is referred to as the
Conversion Shares, and the common stock of the Company underlying the Warrants
is referred to as Warrant Shares. The Conversion Shares, Warrant Shares and
Restricted Shares are collectively referred to as the "Stock" or the
"Securities" of the Company.
WHEREAS, the Company desires to grant to the Holders the registration rights
set forth herein with respect to the Securities.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
"Registrable Security" means each of the Securities; provided, however, that
with respect to any particular Registrable Security, such security shall cease
to be a Registrable Security when, as of the date of determination, (i) it has
been effectively registered under the Securities Act of 1933, as amended (the
"Act") and disposed of pursuant thereto, (ii) registration under the Act is no
longer required for the immediate public distribution of such security as a
result of the provisions of Rule 144 or Regulation S, or (iii) it has ceased to
be outstanding. The term "Registrable Securities" means any and/or all of the
securities falling within the foregoing definition of a "Registrable Security."
In the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Common Stock, such adjustment
shall be made in the definition of "Registrable Security" as is appropriate in
order to prevent any dilution or enlargement of the rights granted pursuant to
this Section 1.
Section 2. Restrictions on Transfer. The Holder and the
Company acknowledge and understand that in the event Regulation S is materially
altered such that the Holder is unable to convert the Preferred Stock
immediately following the Holding Period (as that term is defined in the
Subscription Agreement) then (i) the Company agrees to use its best efforts to
include the Underlying Shares in any registration statement which is being
prepared but not yet filed, and in any registration statement which is filed but
not yet effective pending at the time Regulation S is materially altered, or
(ii) the Subscriber may exercise its registration rights granted hereunder The
Holder understands that no disposition or transfer of the Securities may be made
by Holder in the absence of (i) an opinion of counsel reasonably satisfactory to
the Company that such transfer may be made or (ii) a registration statement
under the Act is then in effect with respect thereto.
Section 3. Registration Rights.
(a) In the event Regulation S is materially altered as
described in Section 2 above then, the Holder or Holders of the Securities may
exercise their registration rights by written notice to the Company (the "Demand
Registration Request"), to have the Company prepare and file with the Securities
and Exchange Commission ("SEC") , on one occasion, a registration statement (the
"Registration Statement"), at the sole expense of the Company (except as
provided in Section 3(c) hereof), in respect of all holders of Registrable
Securities, so as to permit a non-underwritten public offering and sale of the
Registrable Securities under the Act, provided, the Company shall not be
obligated to take any action to effect any such registration, qualification or
compliance pursuant to this Section 3(a) in any jurisdiction in which the
Company would be required to qualify as a dealer in Securities, under the
Securities or blue sky laws of such jurisdiction. The number of shares of Common
Stock to be registered shall be two hundred (200%) percent of the number of such
shares that would be required, if all of the Securities were converted in
accordance with the Amended Certificate of Secretary and assuming a conversion
date five (5) days prior to the filing of the Registration Statement
(b) The Company will use its best efforts to maintain any
Registration Statement or post-effective amendment filed under this Section 3
hereof current under the Act until the earlier of (i) the date that all of the
Registrable Securities have been sold pursuant to the Registration Statement,
(ii) the date the holders thereof receive an opinion of counsel that the
Registrable Securities may be sold under the provisions of Rule 144, or (iii)
the first anniversary of the effective date of the Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
any Registration Statement under subparagraph 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and the fees and expenses of its counsel. The
Company shall use its best efforts to qualify any of the securities for sale in
such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 9 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to
include a Holder's Registrable Securities in any Registration Statement which is
to be filed if, in the opinion of counsel for both the Holder and the Company
(or, should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Act.
(e) From the date of the Demand Registration Request, the Company will use its
best efforts to cause the registration statement to become effective within
sixty (60) days from such demand. This paragraph shall not effect the ability
of the Holders to convert the Preferred Stock pursuant to Regulation S.
(f) No provision contained herein shall preclude the Company from selling
securities pursuant to any Registration Statement in which it is required to
include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. If and whenever the Company is required by
any of the provisions of this Agreement to effect the registration of any of
the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement when the
Holder or Holders of such securities shall desire to sell or otherwise dispose
of the same (including prospectus supplements with respect to the sales of
securities from time to time in connection with a registration statement
pursuant to Rule 415 of the Commission);
(b) furnish to each Holder such numbers of copies of a summary prospectus or
other prospectus, including a preliminary prospectus or any amendment or
supplement to any prospectus, in conformity with the requirements of the Act,
and such other documents, as such Holder may reasonably request in order to
facilitate the public sale or other disposition of the securities owned by such
Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holder, shall reasonably request, and
do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to maintain its listing on the OTC Bulletin Board or
any securities exchange on which any securities of the Company is then listed,
if the listing of such securities is then permitted under the rules of such
exchange;
(e) enter into and perform its obligations under an underwriting agreement, if
the offering is an underwritten offering, in usual and customary form, with the
managing underwriter or underwriters of such underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
Section 6. Information by Holder. Each Holder of Registrable
Securities included in any registration shall furnish to the Company such
information or documents regarding such Holder and the distribution proposed by
such Holder as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 6.
Section 7. Assignment. The rights granted the Holders under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unreasonably withheld. In the event of a transfer of
the rights granted under this Agreement, the Holders agree that the Company may
require that the transferee comply with reasonable conditions as determined in
the discretion of the Company. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
Section 8. Termination of Registration Rights. The rights granted pursuant to
this Agreement shall terminate as to each Investor (and permitted transferee
under Section 7 above) upon the occurrence of any of the following:
(a) all such Holder's securities subject to this Agreement have been registered;
(b) such Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 or Regulation S promulgated
by the SEC pursuant to the Act;
(c) such Holder's securities subject to this Agreement can be sold pursuant to
Rule 144(k); or
(d) one year from the issuance of the Registrable Security.
Section 9. Indemnification.
(a) In the event of the filing of any Registration Statement
with respect to Registrable Securities pursuant to Section 3 hereof, the Company
agrees to indemnify and hold harmless the Holder and each person, if any, who
controls the Holder within the meaning of the Act ("Distributing Holders")
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Distributing Holders may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such Registration Statement, or any
related preliminary prospectus, final prospectus, offering circular,
notification or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto
in reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holders, specifically for use in the preparation
thereof. This indemnity agreement will be in addition to any liability which the
Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such officer,
director or controlling person may become subject under the Act or otherwise,
insofar as such losses claims, damages or liabilities (or actions in respect
thereof); arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in a Registration Statement requested
by such Distributing Holder, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such Distributing Holder, specifically for use in the preparation thereof and,
provided further, that the indemnity agreement contained in this Section 9(b)
shall not inure to the benefit of the Company with respect to any person
asserting such loss, claim, damage or liability who purchased the Registrable
Securities which are the subject thereof if the Company failed to send or give
(in violation of the Act or the rules and regulations promulgated thereunder) a
copy of the prospectus contained in such Registration Statement to such person
at or prior to the written confirmation to such person of the sale of such
Registrable Securities, where the Company was obligated to do so under the Act
or the rules and regulations promulgated thereunder. This indemnity agreement
will be in addition to any liability which the Distributing Holders may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 10. Contribution. In order to provide for just and
equitable contribution under the Act in any case in which (i) the Distributing
Holder or the Company makes a claim for indemnification pursuant to Section 9
hereof but is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 9 hereof provide for indemnification in such case, or (ii) contribution
under the Act may be required on the part of any Distributing Holder or the
Company, then the Company and the applicable Distributing Holder shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), in either such case (after contribution from others) on the basis of
relative fault as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the applicable Distributing Holder, on the other
hand, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Distributing Holder agree that it would not be just and equitable if
contribution pursuant to this Section were determined by pro rata allocation or
by any other method of allocation which does not take account of the equitable
considerations referred to in this Section. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this Section shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Section 11. Notices. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on the signature
page of this Agreement, with a copy to the person designated in the Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 12. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 13. Headings. The headings in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
Section 14. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any country having jurisdiction over the party
against whom such judgment was obtained, and each party hereby waives any
defenses available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Agreement irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law.
Section 15. Severability/Defined Terms. If any provision of this Agreement
shall for any reason be held invalid or unenforceable, such invalidity or
unenforceablity shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein. Terms not otherwise defined herein shall be defined in
accordance with the Subscription Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, on the day and year first above written.
Attest: SGI INTERNATIONAL
By:______________________ By:_________________________
Name: Name:
Title:_____________________ Title:________________________
DOMINION CAPITAL, LTD.
By:__________________________
Name:
Title:
SETTONDOWN CAPITAL INTERNATIONAL, LTD.
By:__________________________
Name
Title:
<PAGE>
EXHIBIT E
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the 8% Convertible
Preferred Stock)
The undersigned hereby irrevocably elects to convert the Preferred Stock
Certificate No. _________ into Shares of Common Stock of SGI INTERNATIONAL (the
"Company") according to the conditions hereof, as of the date written below.
The undersigned represents and warrants that:
(i) that all offers and sales by the undersigned of the shares of Common Stock
issuable to the undersigned upon conversion of the Preferred Stock shall be
made pursuant to an exemption from registration under the Act, or pursuant to
registration of the Common Stock under the Securities Act of 1933, as amended
(the "Act"), subject to any restrictions on sale or transfer set forth in the
Subscription Agreement between the Company and the original holder of the
Preferred Stock submitted herewith for conversion; (ii) the undersigned has not
engaged in any transaction or series of transaction that is a part of or a plan
or scheme to evade the registration requirements of the Act; and (iii) upon
conversion pursuant to this Notice of Conversion, the undersigned will not own
or deemed to beneficially own (within the meaning of the 1934 Act) 4.99% or
more of the then issued and outstanding shares of the Company.
- ---------------------------------- ---------------------------------
Date of Conversion Applicable Conversion Price
- ---------------------------------- ---------------------------------
Number of Common Shares upon Conversion $ Amount of Conversion
- ---------------------------------- ---------------------------------
Signature Name
Address: Delivery of Shares to:
* This original Preferred Stock and Notice of Conversion must be received by the
Company by the third business day following the Date of Conversion.
<PAGE>
EXHIBIT F
REGULATION S
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
Convertible Preferred Stock)
The undersigned hereby irrevocably elects to convert the above Preferred Stock
No. ____ into Shares of common stock of SGI INTERNATIONAL (the "Company")
according to the conditions hereof, as of the date written below.
The undersigned represents and warrants that
(i) The undersigned represents and warrants that it is the original Subscriber
and purchaser of the Series 97-G Preferred Stock and all offers and sales
by the undersigned of the shares of Common Stock issuable to the undersigned
upon conversion of the Preferred Stock shall be made in compliance with
Regulation S, pursuant to an exemption from registration under the Act, or
pursuant to registration of the Common Stock under the Securities Act of 1933,
as amended (the "Securities Act"), subject to any restrictions on sale or
transfer set forth in the Securities Subscription Agreement between the Company
and the original holder of the Preferred Stock submitted herewith for
conversion. (ii)the undersigned has not engaged in any transaction or series of
transactions that is a part of or a plan or scheme to evade the registration
requirements of the Securities Act. (iii) Upon conversion pursuant to this
Notice of Conversion, the undersigned will not own or deemed to beneficially
own (within the meaning of the Securities Exchange Act of 1934) 4.99% or more
of the then issued and outstanding shares of the Company. (iv)All of
Subscriber's representations, warranties and covenants set forth in the
Agreement are true and correct as of the date hereof.
Date of Conversion Applicable Conversion Price
Number of Common Shares upon $ Amount of Conversion Conversion
Signature Name
Address: Delivery of Shares to:
* The original Preferred Stock Certificate and Notice of Conversion must be
received by the Company by the third business day following the Date of
Conversion.
EXHIBIT G
VIA FACSIMILE AND REGULAR MAIL
Dominion Capital, LTD
c/o Bahamas Financial Center
Shirley & Charlotte Streets, 3rd Floor
P.O. Box 13136
Nassau, Bahamas
Re: SGI International
To Whom It May Concern:
We are special counsel for SGI International, a Utah corporation (the
"Company"). Dominion Capital, LTD, ("Dominion") has requested our opinion
regarding the removal of the Regulation S legend and/or stop transfer orders on
a total of __________ Shares of common stock of the Company ("Shares") held by
Dominion and represented by Certificate No. ____. Terms not otherwise defined
herein shall have the meanings ascribed to them in the 8% Convertible Preferred
Stock Subscription Agreement ("Subscription Agreement") dated January , 1998
between the Company and Dominion.
As the basis for this opinion, we have relied upon representations of
the current directors and executive officers of the Company, and the originals
or copies, certified to our satisfaction, of all such corporate documents and
records as we have deemed relevant as a basis for the opinions set forth herein,
including but not limited to the following documents: (i) Subscription Agreement
dated January , 1998 between the Company and Dominion; (ii) Certificate of
Secretary for Series 97-G Preferred Stock; (iii) Stock Purchase Warrant dated
January __, 1998 for Dominion; (iv) Escrow Agreement dated January __, 1998
between the Company and Dominion; and (v) Registration Rights Agreement dated
January __, 1998 between the Company and Dominion, and the Exhibits relating to
the above referenced documents.
<PAGE>
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to originals of all documents submitted to us as certified, photostatic or
conformed copies, and the authenticity of the originals of all such latter
documents. We have relied exclusively upon such certificates of public
officials, other statements of public officials, and representations of the
current officers of the Company for the accuracy of factual matters contained
therein. We have not independently investigated the accuracy of the factual
matters contained herein.
We have also assumed the due execution and delivery by all parties other than
the Company of all documents where due execution and delivery are prerequisites
to the effectiveness thereof.
Our opinion is also subject to the following assumptions:
a. From the date the Shares were issued until the date of this opinion, the
Shares have not been transferred, pledged, hypothecated or sold to or for the
account of a "United States Person" as defined in the Subscription Agreement.
b. The securities underlying the referenced Certificate have been held
by Dominion for a minimum of 40 days since the date the Subscription Agreement
was signed by Dominion and the funds were received by the Company to pay for the
Preferred Stock.
c. During the Restricted Period, Dominion and any Distributor (as those
terms are defined in Regulation S) did not enter into any transaction involving
any of the Shares of the Company which could directly or indirectly constitute a
distribution of the Company's securities in the United States or to "United
States Persons".
d. The representations and warranties of Dominion set forth in the Subscription
Agreement were true and correct at the time of the execution thereof.
e. The representations and warranties of Dominion set forth in the
Regulation S Notice of Conversion dated ____, are true and correct, including
without limitation that Dominion was not a "United States Person" when the
Subscription Agreement was executed and is not now a "United States Person" as
defined in the Subscription Agreement; that Dominion was outside the United
States both at the time of the purchase and the conversion of the Company's
Preferred Stock, and that neither Dominion, any of its affiliates or any person
acting on their behalf has undertaken any "Directed Selling Efforts" as defined
in the Regulation S, including any action undertaken for the purpose of, or that
could reasonably be expected to have the effect of, conditioning the market in
the United States for any securities of the Company.
f. Since the date of the Subscription Agreement, Dominion has not, and does not
now have any short position or hedge position in the Company's Common Stock.
Based upon the foregoing and subject to the qualifications and assumptions
stated herein, we are of the opinion:
The Regulation S legend and/or stop transfer order may be removed from the
referenced Certificates for a total of __________ Shares, and a new certificate
may be issued free and clear of any restrictive legend and/or stop transfer
order.
We are lawyers licensed to practice law in California, and our opinion
is limited to United States and California law only and does not include the
laws of any other jurisdiction. This letter is rendered solely for your benefit
and may not be quoted in whole or in part, or otherwise referred to or filed
with any governmental agency or relied upon by any other person without our
prior written consent. This opinion is as of the date hereof and we expressly
decline any undertaking to advise you of any matters arising subsequent to the
date hereof, whether or not they would cause us to amend any portion of the
foregoing in whole or in part.
Sincerely,
FISHER THURBER LLP
By: ____________________________
Timothy J. Fitzpatrick
TJF/ams
<PAGE>
ADDENDA 1
As disclosed in the Company's Form 10-Q for the quarter ended September 30,
1997, Series 97-C is a preferred share issued to a noteholder who in late 1995
thought that she had signed documentation to be able to convert certain debt
into common stock. Since the Company never received anything from her, the
Company issued 97-C allowing her to convert her $10,000 note into 13,000 shares
of restricted common on and after August 15, 1998. Series 97-D is bridge
financing the Company obtained and consists of two preferred certificates with a
face value of $550,000, which will be registered with the registration statement
the Company is now drafting. These certificates are not convertible until the
date that that registration statement becomes effective, and then are
convertible at the lesser of $2.44 per share or 77.5% of the five day bid
average prior to the date of conversion.
Series 97-E is the offering SGI made to its noteholders to obtain an extension
to September 30, 1998 of approximately $4.8 million in debt. This offering
allowed the noteholders three options. Option A allowed them to exchange their
promissory note for a convertible debenture due on September 30, 1998, with
interest payable in cash quarterly. Option B allowed them to simply extend the
due date of the note to September 30, 1998, with interest payable quarterly in
return for a warrant for 2,000 shares of restricted common stock per $10,000 of
principal. Option C allowed them to exchange the promissory note for a
convertible debenture due on September 30, 1998, with interest payable in 144
restricted stock rather than cash. Any conversion of a debenture, which can not
be made until November 10, 1997, results in a conversion into 144 restricted
stock, which could not trade until a year from the date of the debenture, which
at the earliest would be in October 1998 or later. Approximately $223,000 of
notes were exchanged for debentures under Option A and approximately $710,000 of
notes were exchanged for debentures under Option C. There is no agreement to
register any of the stock underlying the 97-E Debentures of the 97-C preferred
share, nor does SGI intend to do so.
AGREEMENT
This Agreement is made effective as of December 11, 1997, by and between AEM
Corporation, an Alaska Corporation ("AEM"), and SGI International, a Utah
Corporation ("SGI").
WHEREAS, by letter dated 19 November 1996, attached as Exhibit "A" hereto, AEM
offered to sell all of it's right, title and interest in certain cash flows
generated by the Colstrip project (a 35 mw cogeneration project located at
Colstrip, Montana), and actually received by SGI from certain Rosebud
Shareholders who are Jeffrey L. Smith, R. Lee Roberts, Owen Orndorff, and James
P. Sletteland, upon the same terms and conditions as were contained in SGI's
Private Offering Memorandum ("POM") to certain MOP participants, subject to a
vote of AEM's shareholders; and
WHEREAS, said transaction is calculated to include one share of SGI Convertible
Preferred Stock convertible into twenty five thousand seven hundred and fourteen
(25,714) shares of SGI restricted common Stock, and a warrant to purchase twenty
five thousand seven hundred and fourteen (25,714) shares of SGI common stock, at
an exercise price of five dollars and seventy five cents ($5.75) per share,
expiring December 31, 2001; and
WHEREAS, AEM, in said letter, also offered to sell its fifteen percent (15%)
profit interest in The Healy Alaska Project in consideration of the issuance of
a warrant to purchase fifteen thousand (15,000) shares of SGI common stock on
the same terms and conditions as the above-described warrant, subject to a vote
of AEM's shareholders;
NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Colstrip. AEM hereby sells, and SGI hereby purchases, all of AEM's right,
title and interest in and to those certain cash flows generated by the Colstrip
Project, and actually received by AEM from the Rosebud shareholders , in
consideration of the issuance of twenty five thousand seven hundred fourteen
(25,714) shares of SGI restricted common stock, and a warrant to purchase twenty
five thousand seven hundred and fourteen (25,714) shares of SGI common stock
upon the terms and conditions depicted in the attached Exhibit "A" hereto, which
Exhibit is incorporated herein by reference.
2. Healy. AEM hereby sells, and SGI hereby purchases, all of AEM's right, title
and interest in and to its twelve percent (12%) of distributed net profits
interest in The Healy Alaska Project, as is more particularly described in the
attached Exhibit "B" hereto, which Exhibit is incorporated herein by reference,
in consideration of the issuance of a warrant to purchase twelve thousand
(12,000) shares of SGI common stock upon the terms and conditions depicted in
the attached Exhibit "A" hereto.
3. Representations and Warranties. AEM acknowledges, represents, warrants and
agrees as follows:
a. It has received and carefully reviewed the 96-B Private Placement
Memorandum (the "Memorandum") and attached Form 10-K and Forms 10-Q, and has
relied only on the information contained therein, information otherwise provided
in writing by SGI, and information from books and records of SGI. AEM
understands that all documents, records and books pertaining to this transaction
have been made available for inspection by it, it's attorney and/or accountant,
and that the books and records of SGI will be available, upon reasonable notice,
for inspection during reasonable business hours at SGI's principal place of
business. AEM and/or it's advisor(s) have had a reasonable opportunity to ask
questions of and receive answers from SGI, or a person or persons acting on its
behalf, concerning the Offering, and to obtain additional information, to the
extent possessed by SGI or obtainable without unreasonable effort or expense,
necessary to verify the accuracy of the information in the Memorandum. All such
questions have been answered to the full satisfaction of AEM. No oral
representations have been made or oral information furnished to AEM or it's
advisor(s) in connection with the Offering which are not contained in the
Memorandum.
b. AEM (i) has adequate means of providing for it's current needs and
possible contingencies, (ii) has no need for liquidity in this transaction,
(iii) is able to bear the substantial economic risks of an investment in the
Securities for an indefinite period, and (iv) at the present time, can afford a
complete loss of such investment. AEM has no reason to anticipate any change in
circumstances, financial or otherwise, which should cause it to sell or
distribute or necessitate or require any sale or distribution of the herein
Securities.
c. AEM is familiar with the nature of and risks attending investments
in securities not registered under the Act, and recognizes that the transaction
herein involves significant risks, including those set forth under the caption
"Risk Factors" in the Memorandum.
d. AEM understands that the Memorandum has not been filed with or reviewed by
certain state securities administrators because of the representation made by
SGI as to the private or limited nature of the Offering.
e. AEM understands that neither the Offering nor the sale of the
Securities has been registered under the Act in reliance upon an exemption
therefrom for non-public offerings. AEM understands that the Securities may have
to be held indefinitely unless the sale or other transfer thereof is
subsequently registered under the Act, or an exemption from such registration is
available (e.g., pursuant to Rule 144 if the 1-year holding period and other
applicable conditions are met). AEM further understands that SGI is under no
obligation to register the Securities on it's behalf, other than as
above-described, or to assist in complying with any exemption from registration.
f. The Securities are being acquired solely for AEM's own account for
investment purposes only and not for the account of any other person and not
with a view toward the distribution, assignment or resale to others of all or
any portion thereof; no other person has a direct or indirect beneficial
interest in such Securities; and under no circumstances will AEM sell, transfer
or assign all or any portion of it's Securities except in compliance with the
provisions of this Agreement.
g. AEM realizes that it may not be able to sell of dispose of its
Securities in an emergency or for any other reason. In addition, AEM understands
that it's right to transfer the Securities will be subject to the condition that
the transfer not be in violation of the Act and applicable state securities laws
(including investor suitability standards), and the requirement that SGI must
consent to such transfer.
h. AEM understands that legends will be placed on the Securities with
respect to the herein described restrictions on the assignment, resale or other
disposition of the Securities and that stop transfer instructions have or will
be placed with respect to the Securities so as to restrict the assignment,
resale or other disposition thereof, except in the case of Registration
Statement being declared effective.
i. AEM further represents that it: (i) is duly authorized and otherwise
duly qualified to acquire and hold the herein Securities; (ii) has its principal
place of business as set forth on the signature page hereof, and (iii) has not
been formed for the specific purpose of acquiring the herein Securities.
j. AEM understands that all projections and assumptions set forth in the
Memorandum are based on various estimates, assumptions, forecasts and
projections determined by SGI and are subject to the caveats set forth in the
Memorandum.
k. AEM will not, in any event, sell its Securities or any portion
thereof unless, in the opinion of it's counsel, which opinion and which counsel
shall be satisfactory to counsel for SGI, such Shares may be legally sold
without registration under the Act, and/or registration and/or qualification
under then applicable state and/or federal statutes, or such Securities shall
have been so registered and/or qualified and an appropriate prospectus shall
then be in effect.
l. AEM UNDERSTANDS THAT THE SECURITIES HAVE BEEN ISSUED BY SGI IN
RELIANCE UPON THE EXEMPTIONS PROVIDED BY SECTION 3(a)(9) AND 4(2) OF THE FEDERAL
SECURITIES ACT OF 1933, AS AMENDED, AND SECURITIES AND EXCHANGE COMMISSION RULE
506 OF REGULATION D PROMULGATED THEREUNDER, ON THE GROUNDS THAT NO PUBLIC
OFFERING IS INVOLVED, AND UPON THE REPRESENTATIONS, WARRANTIES AND AGREEMENTS
SET FORTH HEREIN.
4. Indemnification. AEM agrees to indemnify and hold harmless SGI, counsel to
SGI, and the respective officers, directors, and Affiliates from and against any
and all damages, losses, liabilities, obligations, actions, judgments, suits,
proceedings, penalties, costs and expenses (including, without limitation,
attorneys' fees and costs and expenses of defense, appeal and settlement) which
may be imposed on, incurred by or asserted against any of such persons by reason
of the failure of AEM to fulfill any of the terms or conditions of this
Agreement, or by reason of any breach of the representations and warranties made
by AEM herein, or in any document provided by the undersigned to SGI.
5. Miscellaneous.
a. AEM agrees not to transfer or assign this Agreement, or any of it's
interest herein, and further agrees that any transfer or assignment of the
Securities acquired pursuant hereto shall be made only in accordance with the
provisions of this Agreement and all applicable laws.
b. This Agreement constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof and may be amended only by a writing
executed by all parties.
c. This Agreement shall be governed, construed and enforced in all respects in
accordance with the laws of the State of California.
d. The representations and warranties of AEM set forth herein shall survive the
termination of this Agreement acquisition and sale of the Securities pursuant
to this Agreement.
AEM Corporation
/s/ Jeffrey L. Smith
By:------------------------------------------
Jeffrey L. Smith, President
Taxpayer Identification No.:
Address of Principal
Corporate Offices:
Executed at ,
this day of , 1996.
SGI International
A Utah Corporation,
/s/ Joseph A. Savoca
By:--------------------------------------
Joseph A. Savoca, Chief Executive Officer
Date:
Mr. Joseph Savoca, Chairman
SGI International
1200 Prospect Street
Suite 325
La Jolla, CA 92037
Fax: 619-551-0247
THE TAXIN NETWORK ("TTN") is pleased to issue this proposal letter
("Engagement") to SGI International ("The Client") regarding a number of
financial advisory services to be performed by TTN on behalf of The Client. We
welcome the opportunity to establish an on-going business relationship and
proceed expeditiously to assist The Client as follows:
1. Arrange for appearances on WEVD, New York City - KEZX, Seattle, - WMET,
Washington, D. C. - KBPN, Portland, Oregon - KFNN, Phoenix, Arizona - Cleveland
- - WERE, Chicago - WGIB and any other stations as available. Appearance will be
on "The Financial Hour with Ed Taxin" and shall consist of ten (10) minute
segments.
2. Optional mailings to exclusive list of listeners of "The Financial Hour with
Ed Taxin". Postage, printing and handling additional. Invoice to be submitted
prior to mailing.
3. Article to be published on the InterNet under the by line of Ed Taxin.
4. Client shall receive articles written in Personal Investing News and in
Investors Chronicle, publications reaching 65,000 + investors and other
financial publications as part of this contract, should contract exceed 30 days.
5. Inclusion of company at various speaking engagements and financial seminars.
6. Research reports by request, prepared by Investors Research Institute - one
time additional fee of Four Thousand Five Hundred ($4,500) US Dollars.
7. Additional 30-45 minute interview on NBC - Professional Financial Network,
Show airs to 6500 analysts/traders nationwide per appearance charge Five
Thousand ($5,000.00) US Dollars.
The Client agrees to compensate TTN for its various advertising/promotional
services, in the amount of 2,000 shares of restricted securities. The length of
this agreement shall be for a period of 30 days, extendible at the company's
sole option. The client agrees that the shares shall be registered in any
registration concluded by the company. The client will reimburse The Taxin
Network for any pre-approved expenses relating to the performance of the above
contract, such as travel, printing, postage and entertainment.
If the foregoing is in accordance with your agreement and understanding, please
sign this Engagement Letter and return it together with the appropriate
certificate made out to The Taxin Network.
Sincerely,
THE TAXIN NETWORK
by: /s/ Edward B. Taxin
- --------------------------
Accepted and Approved this
22 Day of April 1997
by: /s/ Joseph A. Savoca
- --------------------------
Joseph A. Savoca
SGI International
for: THE CLIENT
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-2) and related Prospectus of SGI International
for the registration of 8,644,077 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
- -----------------------------------
San Diego, California
January 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SGI
Intenational's Form 10-Q for the 3-month and 9-month periods ended September
30, 1997, and is qualified in its entirety by refence to such financial
statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1,000,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 147,813
<SECURITIES> 0
<RECEIVABLES> 1,094,343
<ALLOWANCES> 0
<INVENTORY> 66,459
<CURRENT-ASSETS> 2,049,434
<PP&E> 1,278,168
<DEPRECIATION> 559,026
<TOTAL-ASSETS> 6,177,973
<CURRENT-LIABILITIES> 7,026,185
<BONDS> 0
0
893
<COMMON> 38,770,056
<OTHER-SE> (39,735,786)
<TOTAL-LIABILITY-AND-EQUITY> 6,177,973
<SALES> 3,779,897
<TOTAL-REVENUES> 3,809,650
<CGS> 2,893,349
<TOTAL-COSTS> 2,893,349
<OTHER-EXPENSES> 3,775,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429,801
<INCOME-PRETAX> (3,946,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,946,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,946,944)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
