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PART I
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ITEM 1: 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 herein. 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 many countries outside the United States, who
currently generate much of their electricity from burning coal and who have
substantial low rank coal reserves, could use the LFC Process to provide a more
cost-effective and less environmentally damaging fuel source for the production
of power.
In 1989, the Company contributed the LFC Process to TEK-KOL. TEK-KOL currently
consists of the Company and Bluegrass Coal Holding Company ("Bluegrass") a
subsidiary of Zeigler Coal Holding ("Zeigler"). Zeigler is one of the largest
coal companies in the United States. The LFC Process has been used to produce
PDF and CDL for test burning at the Demonstration Plant owned by the ENCOAL
Corporation (a subsidiary of Bluegrass) in Gillette, Wyoming. To date the
Demonstration Plant has produced approximately 114,900 tons of PDF and 116,100
barrels of CDL, and has shipped over 83,500 tons of PDF to seven electric
utilities in six states, and 104,000 barrels of CDL to eight industrial users in
seven states. The purpose of the Demonstration Plant, which was originally
intended to operate for two years, was to demonstrate the validity of the LFC
Process. The Demonstration Plant was constructed pursuant to an agreement
between the U.S. Department of Energy and ENCOAL Corporation, a Shell Mining
Company ("SMC," now called Bluegrass) 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. If
the Demonstration Plant does not resume operations, then the possibility of
having other third parties construct a suitable substitute would be explored.
There could be a material adverse impact on the Company if the Demonstration
Plant does not resume operation or if a substitute testing plant is not
completed.
The LFC Process is still in development. PDF produced at the Demonstration Plant
has been sold and shipped to customers for testing and CDL has been sold to a
number of users. 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 will be necessary before the value (if any) of its use on a
large scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
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The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process.
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil resid produced in oil
refining in order to increase the efficiency of crude oil refineries. Resid is
the residue remaining after processing crude oil in a refinery to produce liquid
fuels and lubricants. The OCET Process is still in the development stage, and
will require substantial research and development before it is ready (if ever)
for commercial use. The Company has another wholly owned operating subsidiary,
AMS. AMS designs and produces custom automated assembly equipment primarily for
manufacturers in the medical, automotive and High-Tech (consisting of computer,
electronics and communications) industries.
TEK-KOL Partnership
TEK-KOL owns all rights, title and interest in the LFC Process, except for a
non-exclusive license granted by the Company prior to the formation of TEK-KOL
to Rosebud Energy Corp. for LFC process cogeneration plants with an aggregate
capacity of 350 MW. The partners in TEK-KOL are the Company and Bluegrass.
TEK-KOL was established in 1989 with the original partner being 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 to be built by SMC and a similar license issued to the Company
for its sole projects, TEK-KOL does not have any agreements to license the LFC
Process. TEK-KOL operates in accordance with a budget. All of the costs of
TEK-KOL are split equally between Bluegrass (formerly SMC) and the Company. The
Company expects TEK-KOL's budget for 1998 to be approximately $1,500,000 to
$2,000,000. However, there can be no assurance that the Company's obligations
will not be greater than one half of that amount. The Company intends to finance
its obligations from the sale of equity, assets and debt securities. There can
be no assurance that the Company will be able to fund its obligations pursuant
to the TEK-KOL Partnership agreement. In the event that the Company was unable
to fund its obligations under the TEK-KOL Partnership Agreement this could have
a material adverse impact on the business and operations of the Company.
LFC Process
The LFC Process is specifically designed to process subbituminous (low-rank) or
lignite coal which has a high moisture content. PDF is designed to be a less
polluting solid fuel with a higher Btu, or heat value, than the coal it was
refined from, and with significantly lower moisture. PDF has higher ash, a
higher fixed carbon and lower organic sulfur than the parent coal. CDL is a
low-sulfur hydrocarbon liquid. Based on operations at the Demonstration Plant,
the Company believes each ton of coal should produce approximately one-half ton
of PDF and one-half barrel of CDL, although differing raw material and operating
conditions may effect these estimates.
To process the coal, the LFC Process uses a drying/partial pyrolysis technology,
which uses low-rank coal as a feedstock. Pyrolysis 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 over a hundred tons of PDF for test burning 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.
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Second, the control system regulates the coal heating rate and temperature
level to control the governing kinetics of gasification and stabilization
reactions. Third, the PDF can be stabilized and is less likely to self-ignite.
Fourth, for the purpose of controlling the gasification conditions (to obtain
the desired co-products), computer models of coal reaction kinetics, sensors,
and servo-mechanisms can be incorporated into the control system.
The Company's marketing efforts are in part based on the Company's belief that
low-grade (or low-rank) coals of the world are relatively disadvantaged in the
marketplace compared to higher-rank bituminous coals. Low-rank coals generally
have higher water content which makes them more expensive to transport to
distant markets. Additionally, their lower heat value can make them a less
efficient boiler fuel. The Company estimates the transportation cost component
of the coal's delivered price can be over 3-5 times the cost of the coal at the
mine. SGI expects PDF and CDL can reduce transportation costs by removing water,
and economically producing lower sulfur, lower water content, cleaner burning
coals along with potentially valuable co-product oils and liquids, and therefore
such refineries' products will be able to compete against high-grade coals.
There can be no assurance these objectives will be achieved.
LFC Process Demonstration Plant
In 1989, ENCOAL Corporation, which at the time was a Shell Mining Company
subsidiary, and the U.S. Department of Energy ("DOE") jointly committed to fund
one-half each of the costs to construct, own and operate, for two years, a
"Clean Coal Demonstration Plant" using the LFC Process at the Buckskin Mine near
Gillette, 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, the ENCOAL Corporation, a subsidiary 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 the ENCOAL Corporation, 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. The Company was not a party to the agreement that was
terminated. The Company currently has no obligation to assist in funding the
continued development of an LFC Plant at North Rochelle. There can be no
assurance that 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
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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 in general been sold into the residual fuel
oil market. Of the approximately 5,010,600 gallons of CDL that have been
produced by the ENCOAL Demonstration Plant and sold, the vast majority has been
sold into the residual fuel oil market to oil distributors who have blended the
CDL or sold it as straight fuel oil for use in industrial boilers. Other
purchasers of CDL have included a coal tar chemical company and a steel
manufacturer. While the Company has completed development work to determine
CDL's composition, significant additional development is required. The Company
believes CDL may have more potential when further refined into separate
products. No assurance can be given that any market for PDF and CDL will
develop.
PDF Electric Utility Markets. The Company believes power plants operated by
utilities meeting the following criteria will be the "best potential" markets
for PDF. Boilers requiring low ash-fusion coal (primarily cyclone and wet bottom
boilers); boilers using high-Btu fuel; utilities desiring to switch to
low-sulfur coal to meet Clean Air Act compliance levels; and utilities with
acceptable transportation economies. There can be no assurance any of these
utilities would elect to use PDF 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 for PDF may
increase. The Company believes the potential for reduced emissions increases the
likelihood PDF could be marketed successfully. A full or partial repeal of the
Clean Air Act would likely have a material adverse impact on the Company and the
market for PDF in the United States.
PDF Metallurgical markets. While the Company believes the U.S. electric utility
market is the largest potential market for PDF, based on the current economics
of coal burning utilities, the Company also believes a relatively small, but
potentially growing market for non-coking metallurgical coals could provide an
opportunity for sales of PDF. Potential PDF metallurgical markets could occur in
the steel industry, where the Company believes 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 combustion of blast
furnaces and coke ovens.
CDL Markets. The Company believes current industrial residual fuel oil markets
in the U.S. will not pay enough for CDL as a residual fuel to make it worthwhile
to sell into that market. Enhanced CDL-derived products are being developed by
the Company with the goal of providing increased economic returns. While these
enhanced CDL products are not yet completely defined, progress has been made in
developing upgraded CDL products. Portions of the upgrading process have been
identified by the Company and include centrifugation to remove entrained solids,
distillation to collect crude cresylic acids, as an asphalt additive and the
sale of the remaining crude CDL to fuel oil markets. The Company will require
significant additional funding to further its research, development and testing
before enhanced CDL products could be available for commercial use.
CDL upgrading efforts are currently focused on domestic and international
markets that the Company believes may be more commodity based, and less
sensitive to limited numbers of fixed end users. These CDL markets are aimed at
transportation fuels combined with specialty chemicals with potential large
volume acceptance. There can be no assurance the Company will develop any
upgraded CDL products, that any markets will accept or use CDL, or that it will
produce revenues or profits for the Company.
OCET Process and Strategy
Another energy-related technology which is being developed by the Company
through its wholly-owned subsidiary, the OCET Corporation, is the OCET Process.
The OCET Corporation ("OCET") is a development stage Delaware corporation. OCET
is developing a technology which it believes can deasphalt petroleum residuum,
or resid, so it can be more easily or further refined (the "OCET Process").
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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
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.
The Company's principal efforts in commercializing the OCET Process are intended
to focus on licensing the technology to oil refineries, oil companies, and other
parties with related interests. Construction and operation of a commercial scale
facility using the OCET Process is dependent upon funding from the oil refinery,
oil company, 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 successful deasphalting technology has increased. Experts
in the industry, employed by the Company, believe that the quality of crude oils
has declined and has a greater amount of asphaltenes, nickel, vanadium, and
other contaminants, which results in a greater amount of resid being produced
from refining operations.
The OCET Process uses a solvent additive to destabilize the crude oil,
followed by electrochemical processing to separate the asphaltenes, metals and
unwanted contaminants contained in the resid in order to produce a higher
quality liquid which OCET believes could be used in refinery processes. The
electrochemical processing distinguishes the OCET Process from other
deasphalting processes known to the Company, and OCET believes will provide an
additional method for controlling the rate, selectivity and efficiency of the
separation. The OCET Process as currently structured does not require high
temperatures or pressures.
OCET and SGI are currently in the process of attempting to construct a model
process development unit which would be capable of measuring OCET Process
performance. Concurrently, analytical methods are also being developed in an
effort to analyze feedstocks to measure and optimize process performance.
Management initially believed that substantial additional funding to complete
the process development unit would be required. However, the additional
equipment necessary to complete the development unit has been acquired for much
less than anticipated and future funding necessary for completion of the
development unit is currently considered insignificant.
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 are likely to be called upon to meet
increased worldwide demand for transportation fuels 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 asphaltenes, metals,
sulfur, nitrogen, carbon residue and other contaminants. OCET believes there are
other potential markets, including deasphalting heavy crude oil at the well
site, upgrading crude oil before introduction into the crude distillation tower
at the refinery, near complete removal of metals from deasphalted oils, removal
of sulfur compounds from diesel and gasoline, viscosity reduction as oil is
being produced out of the ground, cleaning of used motor oil to remove metals
and other contaminants, and removal of hydrocarbons and metals such as selenium
from wastewater.
On April 14, 1997, OCET and the U.S. Department of Energy executed a Cooperative
Research and Development Agreement ("CRADA") to jointly analyze certain
parameters of the OCET Process. The CRADA is intended to allow petroleum experts
in the DOE to consult with SGI while protecting SGI's proprietary information.
The 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 where it can be determined to be
commercially viable, or that there will be a market for the
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OCET Process, or, if a market develops, OCET will license its technology or
otherwise produce revenue from the OCET Process or any other enterprise or
technology development.
The OCET Process is still in development and has not been licensed or used in
either a pilot plant or on a commercial scale. The OCET Process will require
significant additional research and development, including substantial
additional funding to finish development of the process and demonstrate its
potential (if any) for commercial use. There can be no assurance such efforts
will be successfully completed. At the present time, OCET has no agreements with
any oil refinery or other party to use the OCET Process in a commercial or large
scale testing facility.
Patents and Proprietary Technology
To date, TEK-KOL has been issued five 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 application 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, which was allowed in January of 1998. 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 Bluegrass. There can be no
assurance any additional patents will be issued to TEK-KOL as a result of
TEK-KOL's pending applications, or, if issued, such patents combined with the
existing TEK-KOL patents will 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, the Company, or OCET
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 not 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 U.S.
Patent office ("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.
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The Company also relies on certain proprietary information which may not be
patentable. Although the Company has taken steps to protect its proprietary
information, in part through the use of confidentiality agreements with certain
employees, consultants and contractors, there can be no assurance these
agreements will not be breached, the Company would have adequate remedies for
any breach, or the Company's proprietary information will not otherwise become
known or be independently developed or discovered by others including its
competitors.
Governmental Regulation
The LFC Process, as it is proposed to be used in the operation of a coal
refinery plant will likely be subject to numerous federal and state regulations.
Any United States LFC plants that may be constructed will likely be owned 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 in the U.S. 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.
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 TEK-KOL's existing or potential competitors have substantially
greater financial, technical and human resources than TEK-KOL 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 TEK-KOL prior to any market acceptance
for the LFC Process or other technologies developed by the Company or its
subsidiaries.
The relative speed with which TEK-KOL markets the LFC Process and enters into
licenses 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.
TEK-KOL expects principal competitive factors may include, among other things,
how economically LFC Process coal products
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can be produced, at what quality levels and how fast demand for such products
develops, compliance with environmental standards, transportation costs, cost
comparisons to other 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 TEK-KOL 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.
TEK-KOL'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 in 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 owns a 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 TEK-KOL will be able to compete
successfully with any of these companies.
ASSEMBLY AND MANUFACTURING SYSTEMS, INC.
AMS, a wholly-owned subsidiary of the Company, is a supplier of custom made
precision assembly equipment. AMS designs and builds custom, automated assembly
systems marketed principally to manufacturers in three principal industries:
medical, automotive and High-Tech. These assembly systems integrate multiple
manufacturing functions often into a single custom production line built to the
customer's specifications.
Assembly functions integrated into products manufactured by AMS include:
material and component handling, dispensing and placement of film or liquid
adhesives, sealants or customer-formulated materials such as pharmaceuticals,
marking and encoding, assembly of components, riveting, swagging, inspection
functions including machine vision inspection, testing, data collection and
analysis. Completed AMS assembly systems may be from bench top size to almost a
hundred feet in length, and may incorporate all types of subsystems, including
robots, machine vision, conveyors, welders, mechanical tests, electronic tests
and others as specified by the customer. AMS believes it is well positioned to
capitalize on what it forecasts is an ongoing consolidation and growth in the
fragmented automation assembly market.
Automation system functions integrated into products manufactured by AMS are
generally computer controlled through custom software written by AMS, and
incorporate control, data handling, reporting and safety functions. The
completed automation systems are generally tested and accepted by the customer
at AMS prior to shipment and installation at the customer's site.
AMS believes that a majority of its current customers and future customers
purchase automation systems for several reasons including support of new product
introductions and start-up, labor cost reductions, increase in capacity,
increase in quality, and favorable return on investment and payback. AMS
customers may also choose to automate production of their products to reduce
costs and improve productivity on current products and to increase their quality
and improve facilities.
AMS believes it offers customers a number of competitive advantages over its
competitors including successful project execution, competitive pricing, systems
which meet specified performance criteria, engineering and manufacturing
expertise and experience and innovative machine concepts. The typical AMS
contract price is in excess of $500,000.
<PAGE>
Marketing and Sales
AMS employs three sales professionals and two to three applications engineers
and their support staff who are involved directly in marketing its services to
potential customers. AMS relies primarily on personal contact by its executive
and sales personnel to secure new customers and to market its products. AMS
regularly participates in local, regional and national trade show meetings in
its key industry groups. AMS believes personal contact by its sales and
engineering staff is critical to retain new customers.
AMS has targeted large, established manufacturing companies in the medical,
automotive and High-Tech industries as prospective clients. AMS targets
companies that need small manufactured equipment and devices, requiring
mechanical or electric mechanical assembly and test, or inspection with material
handling, as key accounts. To assist in marketing products and services, AMS
also works to develop new applications for target customers for their various
manufacturing needs.
As part of its current marketing focus, AMS is targeting Fortune 1000 businesses
with assembly contracts in the range of $750,000 to $1.5 million per project to
increase market share and benefit from economies of scale.
Major Customers
Sales revenue was derived primarily from contracts to manufacture assembly
equipment with three, four and two customers in 1997, 1996, and 1995,
respectively. Revenue from sales of automated assembly equipment accounted for
99%, 93% and 96% of the Company's consolidated revenues in 1997, 1996, and 1995,
respectively. In each of the past three years no single customer has accounted
for more than 10% of sales on a consistent basis. AMS does not have long term
contracts with any of its customers and expects that a small number of customers
will continue to account for a substantial portion of sales for the foreseeable
future. Due to the small number of annual projects attempted by AMS, a
significant performance problem with any one AMS project could have a material
adverse effect on AMS. There can be no assurance revenue from customers who
accounted for significant revenue in past periods, individually, or as a group,
will continue, or if continued, will reach or exceed historical levels in any
period.
Manufacturing
All design, engineering, fabrication, assembly and testing of AMS's products are
carried out at its facility in Simi Valley, California. Proprietary software and
in-house procedures are used to ensure the quality and timeliness of project
execution, and AMS's custom automation related software incorporates 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 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 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 assembly systems include such items as
stock steel shapes, aluminum extrusions, billet and plate software. These raw
material items are converted by AMS into
<PAGE>
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, 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 long term
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 December 31, 1997, AMS had a backlog of orders of approximately $1.3
million, compared to a backlog as of December 31, 1996, of approximately $2.8
million.
Liability Insurance
The medical, automotive, High-Tech and other products expose AMS to possible
product liability claims, if 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.
Employees
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.
ITEM 2. 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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. The only lawsuit
currently pending against the Company is Walsh vs. AMS, filed on September 7,
1997, in the San Diego Superior Court. The Walsh case relates to events
occurring prior to the by the Company. The lawsuit asserts
claims, for among other things, breach of contract relating to a loan of
approximately $300,000. AMS has filed an answer denying liability and discovery
is proceeding. In the opinion of the Company, the pending litigation, if
adversely decided, should not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the three months ended December 31, 1997, to a
vote of the shareholders.
<PAGE>
_______________________________________________________________________________
PART II
_______________________________________________________________________________
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company is currently traded and prices are quoted on the
NASD OTC Bulletin Board under the symbol SGII. The following table sets forth
the high and low bid prices for SGI Common Stock during the periods indicated.
The prices represent bid quotations and do not include retail mark-ups,
mark-downs or fees, nor do they necessarily represent actual trades.
<TABLE>
High Low
______ _______
1997
<S> <C> <C>
First Quarter $ 6.25 $ 4.19
Second Quarter 4.31 1.88
Third Quarter 3.22 1.03
Fourth Quarter 2.38 1.09
1996
First Quarter $ 3.44 $ 0.63
Second Quarter 13.00 2.25
Third Quarter 6.00 3.50
Fourth Quarter 7.88 3.88
</TABLE>
As of March 2, 1998, the Company had approximately 2,200 stockholders of record,
and believes it has beneficial owners in excess of that number.
The Company has not declared any cash dividends on the Common Stock and does not
currently intend to pay any cash dividends on the Common Stock in the
foreseeable future.
The Company had the following sales of unregistered securities during the fiscal
year period ended December 31, 1997.
<PAGE>
In April 1997, the Company executed a funding agreement with certain foreign
accredited investors which provided for the sale of the Company's common stock
in three tranches of $1,000,000 each, pursuant to Regulation S. On May 30, 1997,
this agreement was modified and the Company issued 1,000 shares of $.01 par
value, 8% Convertible Preferred Series 97B stock and ten warrants to purchase
30,000 shares at $2.30 per share to four foreign accredited investors for an
aggregate $1,000,000. The 97B Preferred Shares accrued dividends at a rate of 8%
per annum and were cumulative. The dividend is only payable in common stock of
the Company. The warrants were immediately exercisable and expire on May 30,
2002. As of December 31, 1997, all the preferred shares had been converted into
756,006 common shares of the Company.
In October 1997, the Company was able to extend, exchange or convert
approximately $4.8 million in existing debt for new securities of the Company,
including common stock, warrants and revised, amended or new convertible debt
securities and also paid approximately $400,000 in existing debt. The Company
retired approximately $250,000 in existing 10%, 11% and 12% interest bearing
notes which were required to be paid by October 31, 1997, in exchange for
$250,000 of 12% convertible debentures due September 30, 1998, with a conversion
price of $1.20. The Company obtained an extension to September 30, 1998 of
approximately $3,428,000 of debt which was required to be paid by October 31,
1997, and, in connection therewith, agreed to grant warrants to purchase an
aggregate of 152,500 shares of common stock at an exercise price of $1.20 per
share for each quarterly period the debt remains unpaid. The warrants are
exercisable one year from the date of issuance. The Company retired an
additional $727,000 of existing 10%, 11% and 12% interest bearing notes which
were required to be paid by October 31, 1997, in exchange for $727,000 of 12%
convertible debentures due September 30, 1998, with a conversion price of $1.20.
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
restricted common stock. All of the securities issued in the debt restructuring
were issued to existing security holders of the Company, in reliance upon
exemptions from registration, pursuant to Section 3(a)(9) and 4(2) of the
Securities Act and Rule 5.06 promulgated thereunder. All debt holders were
"Accredited Investors" as defined in Regulation D.
On December 11, 1997, the Company issued 25,714 restricted common shares and two
warrants to purchase an aggregate of 37,714 common shares at $5.75 per share to
one purchaser pursuant to Section 4(2) of the Securities Act. The warrants were
exercisable one year from the date of issuance and expire on December 31, 1999.
The common shares and warrants were issued in exchange for current obligations
of approximately $116,000, and for claims against future collections on notes
held by the Company, as well as to acquire a 12% distributed net profits
interest in a potential cogeneration facility.
Between October 1, and December 31, 1997, the Company granted warrants to four
consultants to purchase 105,000 common shares, at exercise prices between $1.31
and $1.38 per share. Investment representations were obtained and the warrants
were issued pursuant to Section 4(2) of the Securities Act and Regulation D. The
warrants are exercisable one year from the date of grant and expire in November,
2002.
On December 31, 1997, the Company issued warrants to purchase 152,500 common
shares to accredited investors, pursuant to Regulation D. These warrants were
issued to certain debt holders in accordance with their agreements and contain
an exercise price of $1.20. The warrants are exercisable one year from the date
of grant and expire on December 31, 2002. The warrants were to existing security
holders of the Company in reliance upon exemptions from registration pursuant to
Section 3(a)(9) and 4(2) of the Securities Act and Rule 5.06 promulgated
thereunder.
On January 14, 1998, the Company granted incentive stock options, pursuant to
its 1996 Omnibus Stock Plan, 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 exemptions from registration pursuant to Section 4(2) of
the Securities Act and reliance on Regulation D, investment representations were
obtained. The options are exercisable upon an effective registration statement
under the Securities Act of 1933 or one year from the date of issuance. The
options expire on January 14, 2003.
On March 6, 1998, the Company, for net proceeds of $1,980,000, issued 2,200
shares of Series 98A 6% Convertible Preferred Stock pursuant to the provisions
of Regulation D to two accredited investors. The 98A Preferred Shares accrue
dividends at a rate of 6% per annum and are cumulative. The dividend is only
payable in common stock of the Company. The Company also issued warrants to
purchase a total of 90,000 common shares at $1.27 per share to these investors.
The Series 98A Preferred Stock is convertible, at the
<PAGE>
earlier of the date the underlying common shares are included
in a registration statement which has been
declared effective by the SEC, or sixty days from the closing date, March 6,
1998. Each Series 98A share is convertible into the number of shares of common
stock derived by dividing the conversion rate by the conversion price. The
conversion rate is the liquidation preference of $1,000 per share of the Series
98A Preferred Stock. The conversion price is determined based on the date the
conversion notice is received and is equal to the lesser of (a) the average
closing bid price of the Common Stock over the five day trading period prior to
the closing date or (b) 75% of the average of the closing bid price of the
common stock on the five trading days ending on the date preceding the
conversion notice. No sale can occur absent an effective registration statement
for the underlying stock. The warrants were exercisable 10 days after issuance
and expire on March 6, 2003. The 98A Preferred Shares are redeemable at the
option of the Company, in whole or in part, in cash, at 130% of the Liquidation
value plus accrued and unpaid dividends. The 98A Preferred Shares will
automatically convert into common stock two years from the closing date. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
from the investors and legends were placed on the certificates.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company, certain of which appear
elsewhere in this Reports together with the reports of the Company's
Independent Auditors, whose reports include an explanatory paragraph relating
to an uncertainty concerning the Company's ability to continue as a going
concern. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto.
<TABLE>
Years ended December 31,
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Revenue $ 809,910 $ 552,503 $ 900,306(1) $4,244,268 $ 5,322,724
Net loss (6,116,388) (5,844,121) (6,824,940)(1) (4,259,365) (5,708,302)
Imputed Dividends -- -- -- -- (770,226)
Net Loss Applicable
to Common Stock (6,116,388) (5,844,121) (6,824,940) (4,259,365) (6,478,528)
Net Loss Per Common Share -
Basic (3.02) (3.02) (2.46)(1) (0.80) (0.88)
Weighted Average
Shares Outstanding 1,691,675 1,933,032 2,744,084 5,357,010 7,324,953
Balance Sheet Data:
Current Assets $ 1,331,381 $ 717,406 $ 944,910 $ 2,295,167 $ 1,648,745
Working Capital
Deficiency (917,979) (3,348,255) (2,369,079) (4,015,187) (4,284,559)
Total Assets 9,240,338 8,198,362 6,592,086 6,628,678 5,590,445
Long-Term Debt
(Excluding Current
Portion) 4,637,997 3,575,835 4,631,250 123,750 114,250
Stockholders'
Equity (Deficiency) 2,350,981 556,866 (1,629,578) 194,574 (457,109)
- ---------------------------------------------------------------------------------------------------------
Note: No dividends have been declared since inception.
(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.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements: This Annual Report on Form 10-K contains statements
relative to: (i) projections, (ii) estimates, (iii) future research plans and
expenditures, (iv) potential collaborative arrangements, (v) opinions of
management, and (vi) the need for and availability of additional financing;
which may be considered forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's SEC reports
including this Form 10-K, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated will be realized and
actual results may differ materially. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the SEC that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Therefore, historical results and percentage relationships will not necessarily
be indicative of the operating results of any future period. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, to reflect new information, events or circumstances, or reflect the
occurrence or non-occurrence of unanticipated events after the date hereof.
Results of Operations
Year ended December 31, 1997, compared to Year ended December 31, 1996.
Sales and Cost of Sales. Sales and cost of sales are primarily attributable to
AMS and are recorded using the percentage of completion method. Net sales for
1997 increased 34% over 1996. The Company attributes the increase in sales to a
change in marketing strategy. AMS is currently focusing its marketing efforts on
the western region of the U.S. with a heightened emphasis on the High-Tech
industry. In 1997, sales to the High-Tech industry increased 225% over the prior
year and sales to the automotive and medical industries declined 19% and 31%
respectively, primarily as a result of the change in marketing strategy.
Consequently, AMS is continuing its current marketing strategy and is
anticipating another strong year in 1998. Cost of sales as a percentage of sales
declined 13%, compared to the prior year, as the 1996 cost of sales amount
contained the results of a job overrun. Management believes that the current
year results are more indicative of future operations at AMS.
Other Income. Other income for 1997 decreased 86% from 1996. The decrease is
related to the forgiveness of certain royalty obligations by a related party
totaling $142,000 and the reversal of estimated tax expenses related to the
acquisition of AMS, totaling approximately $110,000 in the prior year.
Loss on Investment in TEK-KOL. The Company's TEK-KOL loss for the year increased
102% over 1996. This increase is primarily the result of TEK-KOL's efforts to
increase the economic value of CDL and thereby improve the entire economics of
an LFC plant. In addition to the CDL enhancement program costs, TEK-KOL received
certain non-recurring payments of approximately $350,000 under an agreement with
MHI during the prior year.
Engineering Research and Consulting Expenses. The Company's engineering research
and consulting expenses for 1997 increased 91% over 1996. The increase relates
to the Company's heightened efforts to develop the OCET process.
Selling, General and Administrative Expenses. Selling, general and
administrative expense increased 71% over 1996 after adjusting for a 1996
non-recurring non-cash charge of $158,000, related to employee
<PAGE>
warrant exercises with non-recourse notes. AMS's addition of sales personnel
and its increased marketing efforts account for approximately 50% of the
overall increase. The remaining portion of the 1997 increase is related to the
Company's expanded usage of public relations and financial consultants, as well
as a one-time charge of approximately $155,000 related to the write-off of
certain contingent notes receivable.
Legal and Accounting Expenses. The Company's legal and accounting expenses for
the year ended December 31, 1997, decreased 14% from 1996, after adjusting for
non-recurring non-cash charges of $316,000, related to employee warrant
exercises with non-recourse notes. The remaining decrease is due to cost
reduction activities in these areas.
Depreciation and Amortization Expenses. Depreciation and amortization expense
increased 17% over 1996. The increase is due primarily to purchases and
construction of additional equipment at the Company's OCET laboratory.
Interest Expense. Interest expense increased 8% ($43,000) over 1996, after
adjusting for a one-time non-recurring imputed interest charge of $176,000. The
imputed interest charge is related to the issuance of 12% convertible
debentures, with a non-detachable beneficial conversion feature on the date of
issuance. The increase is due primarily to increased borrowing on the line of
credit as compared to the prior year.
Year ended December 31, 1996, compared to Year ended December 31, 1995.
The Company acquired AMS effective October 30, 1995. The acquisition of AMS has
been accounted for as a purchase and, accordingly, the operating results of AMS
have been included in the Company's consolidated financial statements. AMS
recorded revenue and income from operations of $3,939,000 and $498,000,
respectively, during the twelve months ended December 31, 1996. AMS recorded
revenue and income from operations of $867,000 and $238,000, respectively, for
the period subsequent to October 30, 1995. As the Company's 1995 financial
statements only include two months of operations, management does not believe a
comparison to 1996 operations would be meaningful. As such the following
discussions do not include the effect of AMS's operations unless otherwise
stated. (Refer to Note 6 of the consolidated financial statements).
Sales and Cost of Sales. Cost of Sales as a percentage of sales for AMS
increased in from 73% in 1995 to 87% in 1996 as a result of a one time job
overrun in 1996.
Other Income. Other income in 1996 increased 808% over 1995. The increase is
primarily related to the forgiveness of certain royalty obligations by a related
party totaling $142,000 and the reversal of estimated tax expenses related to
the acquisition of AMS, totaling approximately $110,000 in 1996.
Loss on Investment in TEK-KOL. TEK-KOL's activities increased significantly in
1996; therefore, the Company's share of the partnership's 1996 loss increased
61% over 1995.
Research and Development Expenses. Engineering, research and development
expenses in 1996 decreased 58% from 1995. Management curtailed certain
engineering activities and TEK-KOL assumed those responsibilities as well as all
LFC Process marketing activities which contributed to the decrease. Current year
expenses relate primarily to design of the OCET Process.
Selling, General and Administrative Expenses. General and administrative
expenses in 1996 decreased 3% from 1995. The 1996 expenses include non-recurring
charges of $158,000 related to employee warrant exercises with non-recourse
notes. In 1995, the Company allocated general and administrative expense of
$651,000 to engineering, research and development expense based on "LFC"
employee hours worked. No such allocation was made in 1996. After adjusting for
non-recurring charges and expense allocation differences, general and
administrative expense decreased 14% from 1995.
Legal and Accounting Expenses. Legal and accounting expenses in 1996 increased
56% over 1995. The 1996 expenses include non-recurring charges of $316,000
related to employee warrant exercises with non-recourse notes. After adjusting
for the non-recurring charges, legal and accounting expense increased 2%.
<PAGE>
Depreciation and Amortization Expenses. Depreciation and amortization expenses
in 1996 decreased 71% from 1995. Certain LFC process-related assets were written
off in 1995 following management's evaluation of their estimated net carrying
value. Accordingly, depreciation expenses decreased due to the overall decline
in LFC related assets.
Interest Expense. Interest expense of $522,470 is directly related to the amount
of debt outstanding during the period, the stated interest rate and note
discounts amortized. Interest expense decreased 53% in 1996 as all note
discounts had been fully amortized as of December 31, 1995, all as discussed in
Note 5 of the notes to the consolidated financial statements.
Liquidity and Capital Resources
As of December 31, 1997, the Company had assets totaling $5.2 million, including
unrestricted cash of $429,232, and a working capital deficiency of $4.3 million.
The Company anticipates continued operating losses over the next twelve months
and has both short-term and long-term liquidity deficiencies as of December 31,
1997. The Company had short-term liquidity deficiencies at December 31, 1997,
and 1996, of $4.3 million and $4.0 million, respectively. Current notes payable
and associated accrued interest of $4.5 million contribute to the Company's
short-term deficiency at December 31, 1997. Short-term liquidity requirements
are expected to be satisfied from existing cash balances; proceeds from the sale
of equity securities or other collaborative arrangements. Negotiations are
on-going for the public and private placement of equity securities, the proceeds
of which will be used to satisfy the short-term liquidity deficiency. In the
event that the Company is unable to finance operations at the current level,
various administrative activities would be curtailed and certain research and
development efforts would be reduced. The Company will not be able to sustain
operations if it is unsuccessful in securing sufficient financing and/or
generating revenues from operations.
The Company had long-term liquidity deficiencies at December 31, 1997, and 1996.
Over the long-term, the Company will require substantial additional funds to
maintain and expand its research and development activities and ultimately to
commercialize, with or without the assistance of corporate partners, any of its
proposed technologies. The Company believes the long-term liquidity deficiency
will be satisfied through equity sales, increased positive cash flows from AMS's
operations, and research or other collaborative agreements, until such time, if
ever, as the commercialization of the LFC and OCET Processes results in positive
cash flows. The Company is seeking collaborative or other arrangements with
larger well capitalized companies, under which such companies would provide
additional capital to the Company in exchange for exclusive or non exclusive
licenses or other rights to certain technologies and products the Company is
developing. Although the Company is presently engaged in discussions with a
number of suitable candidate companies, there can be no assurance that an
agreement or agreements will arise from these discussions in a timely manner, or
at all, or that revenues that may be generated thereby will offset operating
expenses sufficiently to reduce the Company's short-term or long-term funding
requirements.
The Company's 1997 cash used in operating activities remained approximately the
same as the previous year at $3.2 million. The use of funds from operating
activities is primarily attributable to the Company's financing and
administrative expenses and to OCET's research and development operations.
The Company's investing activities amounted to approximately $1.4 million for
the year ended December 31, 1997. The funds were utilized in the acquisition and
construction of equipment for the OCET laboratory and the funding of the TEK-KOL
Partnership's operations. Additional capital contributions to the TEK-KOL
Partnership are expected to be required from time to time prior to profitable
operations. The Company is required to contribute one-half of any such required
capital contributions. Management estimates that the Company will be required to
contribute between $.75 million and $1.0 million in 1998, if agreements with
existing or other corporate partners are not consummated. The amount of funds
used for investing activities in a given period are directly related to
development requirements and funds availability. The Company does not have
material for capital expenditures as of December 31, 1997.
The Company's financing activities raised approximately $4.3 million for the
year ended December 31, 1997. These funds were raised primarily through the
private placement of equity securities and borrowings on the line-of-credit. The
amount of money raised during a given period is dependent upon financial market
<PAGE>
conditions, technological progress and the Company's projected funding
requirements. The Company anticipates that future financing activities will be
influenced by the aforementioned factors.
The Company had notes payable and associated accrued interest of approximately
$4.8 million due September 30, 1997. In October 1997, the Company was able to
extend, exchange or convert approximately $4.8 million of existing debt for new
securities of the Company including common stock, warrants and revised, amended
or new convertible debt securities. The Company also paid approximately $400,000
on existing notes and interest.
As noted previously, significant future financing activities will be required to
fund future operating and investing activities and to maintain debt service. The
Company is engaged in continuing negotiations to secure additional capital and
financing, and while management believes these negotiations will be successful,
there is no assurance such funding will be available or if received will be
adequate.
Impact of Inflation
The results of the Company's operations for periods discussed have not been
significantly affected by inflation. Further, although AMS often sells products
on a fixed quote basis, the average time between the receipt of an order and
delivery is generally under nine months. Therefore, AMS generally is not
adversely affected by increases in the cost of raw materials and components.
This could change in situations in which AMS is working against a substantial
backlog and may not be able to pass on higher costs to customers. In addition,
interest on the Company's line-of-credit is tied to the prime rate and therefore
may increase with inflation.
Year 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company has assessed the impact on its computer systems of the
Year 2000 issue. The financial impact of making the required systems changes is
not expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
Recent Accounting Pronouncements
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which is
required to be adopted on December 31, 1997. SFAS No. 128 replaces Accounting
Principles Board Opinion ("APB") No. 15 and simplifies the computation of
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from securities that could share in the earnings of the Company,
similar to fully diluted EPS under APB No. 15. The Statement requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. All per share amounts for all periods presented must be restated to
conform to SFAS No. 128 requirements. The Company has adopted SFAS No. 128 as of
December 31, 1997, however, no restatement of the previously determined per
share amounts is required as the effects of the outstanding convertible
securities, warrants and options would be anti-dilutive.
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's provisions
to conclude how it will
<PAGE>
present comprehensive income in its financial statements, and has not yet
determined the amounts to be disclosed. The Company will adopt SFAS No. 130
effective January 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the Statement's provisions to determine the additional disclosures
required in its financial statements, if any. The Company will adopt SFAS No.
131 for the fiscal year ended December 31, 1998.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Reports of Independent Auditors...........................................22-23
Consolidated Balance Sheets - December 31, 1997, and 1996.................24-25
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995..........................................26
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995..............................27
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995..........................................28
Notes to Consolidated Financial Statements................................29-47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
SGI International
We have audited the accompanying consolidated balance sheet of SGI International
and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency), and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SGI
International and subsidiaries at December 31, 1997, and their results of
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company's
principal assets are related to the LFC (Liquid From Coal) Process. The recovery
of these assets is dependent upon future events, including the Company's ability
to attract sufficient additional equity and/or financing needed to fund its
portion of the TEK-KOL Partnership that is responsible for completion and
commercialization of the LFC Process. These factors and the Company's working
capital deficiency and recurring losses from operations, among others, raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 2 to the
consolidated financial statements. The accompanying 1997 consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
J. H. COHN LLP
San Diego, California
March 27, 1998
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
SGI International
We have audited the accompanying consolidated balance sheet of SGI International
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SGI International
at December 31, 1996, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 2 of the notes to consolidated financial statements, the
Company's principal assets are related to the LFC (Liquids From Coal) Process.
The recovery of these assets is dependent upon future events, including the
Company's ability to attract sufficient additional equity and/or financing
needed to fund its portion of the TEK-KOL Partnership, that is responsible for
completion and commercialization of the LFC Process. These factors and the
Company's working capital deficiency and recurring losses from operations at
December 31, 1996, raise substantial doubt about its ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
March 20, 1997
<PAGE>
<TABLE>
SGI International and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------------
Assets 1997 1996
--------------------------
<S> <C> <C>
Current assets:
Cash $ 429,232 $ 740,018
Restricted time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 26,066 24,431
Trade accounts receivable, less allowance for doubtful accounts
of $84,460 and $7,796 346,763 888,254
Costs and estimated earnings in excess of billings on contracts 146,364 113,130
Inventories 64,843 68,289
Prepaid expenses and other current assets 232,977 58,545
--------------------------
Total current assets 1,648,745 2,295,167
--------------------------
LFC Process related assets:
Notes receivable, net 150,000 304,903
Royalty rights, net 1,571,250 1,885,500
LFC cogeneration project, net 421,137 526,421
Investment in TEK-KOL Partnership 481,685 464,163
Australia LFC project, net 115,836 144,795
Other technological assets, net 29,598 27,742
--------------------------
2,769,506 3,353,524
Property and equipment, net of accumulated depreciation and
amortization of $589,789 and $345,995 788,740 548,601
Goodwill, net of accumulated amortization of $96,790 and $48,858 383,454 431,386
--------------------------
$5,590,445 $6,628,678
==========================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SGI International and Subsidiaries
Consolidated Balance Sheets
<TABLE>
December 31,
----------------------------
1997 1996
----------------------------
Liabilities and Stockholders' Equity (Deficiency)
<S> <C> <C>
Current liabilities:
Accounts payable $ 287,458 $ 444,436
Borrowings on line-of-credit 400,000 300,000
Billings in excess of costs and estimated earnings on contracts 193,792 387,892
Current maturities of long-term notes payable 3,061,875 4,216,500
12% convertible debentures 976,573 -
Accrued salaries, benefits and related taxes 240,368 124,942
Payable to TEK-KOL Partnership 100,000 83,252
Interest payable 483,930 529,183
Other accrued expenses 189,308 224,149
----------------------------
Total current liabilities 5,933,304 6,310,354
Long-term notes payable, less current maturities 114,250 123,750
----------------------------
Total liabilities 6,047,554 6,434,104
----------------------------
Commitments and Contingencies
Stockholders' equity (deficiency):
Convertible preferred stock, $.01 par value; 20,000,000 shares authorized,
90,997 and 88,732 shares issued and outstanding 910 887
Common stock, no par value; 75,000,000 shares authorized,
9,258,250 and 6,094,605 shares issued and outstanding 39,927,760 36,118,231
Paid-in capital 8,511,878 6,494,585
Accumulated deficit (48,897,657) (42,419,129)
----------------------------
Total stockholders' equity (deficiency) (457,109) 194,574
----------------------------
$ 5,590,445 $ 6,628,678
============================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SGI International and Subsidiaries
Consolidated Statements of Operations
<TABLE>
Years ended December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 5,279,589 $ 3,938,854 $ 866,676
Other 43,135 305,414 33,630
--------------------------------------------
5,322,724 4,244,268 900,306
Expenses: --------------------------------------------
Cost of sales 3,898,737 3,440,381 628,506
Engineering, research and consulting 1,267,195 664,887 1,599,826
Loss on investment in TEK-KOL Partnership 932,477 462,613 288,000
Selling, general and administrative 2,952,489 1,880,655 1,377,172
Legal and accounting 504,325 905,466 579,630
Depreciation and amortization 734,027 627,161 2,142,957
Interest 741,776 522,470 1,109,155
--------------------------------------------
11,031,026 8,503,633 7,725,246
--------------------------------------------
Net loss (5,708,302) (4,259,365) (6,824,940)
Imputed preferred stock dividends for Series 97B 8%,
97D 7%, and 97F 8% convertible preferred stock 770,226 - -
--------------------------------------------
Net loss applicable to common stock $(6,478,528) $(4,259,365) $(6,824,940)
============================================
Net loss per common share - Basic $ (.88) $ (.80) $ (2.46)
============================================
Weighted average common shares outstanding 7,324,953 5,357,010 2,774,084
============================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SGI International and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficiency)
<TABLE>
Convertible
preferred stock Common stock
------------------ --------------
Shares Amount Shares Amount
---------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 107,101 $ 1,071 2,104,447 $ 29,377,998
Issuance of common stock for services and interest - - 389,103 482,166
Issuance of common stock at $.48 to $10 per share for cash net - - 963,035 1,023,956
Exercise of warrants to purchase common stock for cash and notes - - 274,829 318,548
Issuance of convertible preferred stock for cash, net 125,002 1,250 - -
Conversion of preferred stock (128,533) (1,286) 128,257 1,052,689
Issuance of convertible preferred stock for notes payable and interest 156 2 - -
Issuance of convertible preferred stock to acquire AMS, Inc. 3 - - -
Net loss - - - -
-------------------------------------------
Balances at December 31, 1995 103,729 1,037 3,859,671 32,255,357
Issuance of common stock for notes payable, services and interest - - 587,278 750,799
Issuance of common stock at $0.48 to $3.30 per share for cash, net - - 1,377,306 2,593,844
Exercise of warrants to purchase common stock for
cash and notes payable - - 243,528 270,509
Issuance of convertible preferred stock for notes payable and interest 105 1 - -
Conversion of preferred stock (15,101) (151) 26,822 247,722
Repurchase of preferred stock (1) - - -
Warrants granted for notes payable, accounts payable and interest - - - -
Compensation expense for warrants exercised with notes receivable - - - -
Collection of notes receivable - - - -
Net loss - - - -
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 88,732 887 6,094,605 36,118,231
Issuance of common stock for services and interest - - 281,027 384,401
Issuance of common stock at $1.88 to $4.52 per share for cash, net - - 578,042 1,146,081
Exercise of warrants to purchase common stock for cash - - 150,000 141,385
Imputed interest on issuance of 12% convertible debenture - - - -
Issuance of convertible preferred stock for cash and notes payable 3,406 34 - -
Conversion of preferred stock (1,141) (11) 2,154,576 2,137,662
Issuance of warrants to purchase common stock to non-employees - - - -
Net loss - - - -
Preferred Series 97B 8%, 97D 7%, and 97F 8% imputed dividends - - - -
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 90,997 $ 910 9,258,250 $ 39,927,760
======================================================================================================================
</TABLE>
<TABLE>
Total
Paid-in Accumulated Notes stockholders'
capital deficit receivable equity (deficiency)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ 2,512,621 $(31,334,824) $ - $ 556,866
Issuance of common stock for services and interest - - - 482,166
Issuance of common stock at $.48 to $10 per share for cash net - - - 1,023,956
Exercise of warrants to purchase common stock for cash and notes - - (308,423) 10,125
Issuance of convertible preferred stock for cash, net 1,112,726 - - 1,113,976
Conversion of preferred stock (1,051,403) - - -
Issuance of convertible preferred stock for notes payable and interest 1,678,492 - - 1,678,494
Issuance of convertible preferred stock to acquire AMS, Inc. 329,779 - - 329,779
Net loss - (6,824,940) - (6,824,940)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 4,582,215 (38,159,764) (308,423) (1,629,578)
Issuance of common stock for notes payable, services and interest - - - 750,799
Issuance of common stock at $0.48 to $3.30 per share for cash, net - - - 2,593,844
Exercise of warrants to purchase common stock for cash and notes payable - - - 270,509
Issuance of convertible preferred stock for notes payable and interest 1,583,396 - - 1,583,397
Conversion of preferred stock (245,511) - - 2,060
Repurchase of preferred stock (41,223) - - (41,223)
Warrants granted for notes payable, accounts payable and interest 141,603 - - 141,603
Compensation expense for warrants exercised with notes receivable 474,105 - - 474,105
Collection of notes receivable - - 308,423 308,423
Net loss - (4,259,365) - (4,259,365)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 6,494,585 (42,419,129) - 194,574
Issuance of common stock for services and interest - - - 384,401
Issuance of common stock at $1.88 to $4.52 per share for cash, net - - - 1,146,081
Exercise of warrants to purchase common stock for cash - - - 141,385
Imputed interest on issuance of 12% convertible debenture 175,922 - - 175,922
Issuance of convertible preferred stock for cash and notes payable 3,000,733 - - 3,000,767
Conversion of preferred stock (2,137,651) - - -
Issuance of warrants to purchase common stock to non-employees 208,063 - - 208,063
Net loss - (5,708,302) - (5,708,302)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Series 97B 8%, 97D 7%, and 97F 8% imputed dividends 770,226 (770,226) - -
Balances at December 31, 1997 $ 8,511,878 $ (48,897,657) $ - $ (457,109)
====================================================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SGI International and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
Years ended December 31,
------------- ------------- ---------------
1997 1996 1995
------------- ------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net loss (5,708,302) (4,259,365) (6,824,940)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 734,027 659,660 1,164,157
Write-down and write-off of LFC related assets 154,903 - 978,800
Write-off of receivables from officers and directors - - 396,961
Amortization of note discounts - - 269,064
Common stock and warrants issued for services
and interest 279,251 211,650 603,160
Imputed interest on 12% convertible debenture 175,922 - -
Non-employee compensation expense on issuance
of warrants 208,063 - -
Compensation for warrants exercised with notes
receivable - 474,105 -
Equity in net loss of TEK-KOL Partnership 932,477 462,613 288,000
Forgiveness of royalty payable to officer/stockholder - (141,790) (88,064)
Changes in operating assets and liabilities:
Receivable from TEK-KOL Partnership (1,635) 51,093 (29,701)
Trade accounts receivable 508,257 (388,584) (59,162)
Inventories 3,446 - 500
Prepaid expenses and other current assets (87,193) 102,248 5,266
Accounts payable (156,978) (239,147) (65,664)
Billings in excess of costs and estimated earnings
on contracts (194,100) 212,147 77,188
Accrued salaries, benefits and related taxes 115,426 (154,161) 54,473
Interest payable 5,231 113,095 247,044
Other accrued expenses (34,840) (154,420) 20,849
------------- ------------- ---------------
Net cash used in operating activities (3,066,045) (3,050,856) (2,962,069)
------------- ------------- ---------------
Investing activities:
Cash acquired from AMS - - 21,184
Purchase time deposit - (402,500) -
LFC process related assets:
Collection of notes receivable and related interest, net - 1,717,258 117,235
Additions to other technological assets (10,129) (1,302) (33,183)
Additions to process demonstration equipment - - (31,511)
Investment in TEK-KOL Partnership (950,000) (330,500) (472,000)
Payable to TEK-KOL Partnership 16,749 (228,748) 412,000
Purchase of property and equipment (469,469) (408,727) (45,469)
Other assets - 12,876 63,274
------------- ------------- ---------------
Net cash provided by (used in) investing
activities (1,412,849) 358,357 31,530
------------- ------------- ---------------
Financing activities:
Borrowings on line-of-credit 100,000 300,000 -
Proceeds from issuance of notes payable - 50,000 830,362
Payment of notes payable (210,125) (125,250) (525,025)
Proceeds from issuance of convertible preferred
stock and warrants, net 2,990,767 - 1,113,976
Redemption of preferred stock - (41,223) -
Proceeds from issuance of common stock 1,287,466 3,174,836 1,034,081
------------- ------------- ---------------
Net cash provided by financing activities 4,168,108 3,358,363 2,453,394
------------- ------------- ---------------
Net increase (decrease) in cash (310,786) 665,864 (477,145)
Cash at beginning of the year 740,018 74,154 551,299
============= ============= ===============
Cash at the end of the year $ 429,232 $ 740,018 $ 74,154
============= ============= ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 411,000 $ 195,000 $ 294,000
============= ============= ===============
Supplemental disclosure of non-cash activities:
Series 97 convertible preferred stock issued
for notes payable and interest $ 13,000 - -
============= ============= ===============
Convertible debentures and common stock issued
for notes payable and interest $ 977,000 - -
============= ============= ===============
Common stock and warrants issued for current
liabilities $ 116,000 - -
============= ============= ===============
Series 96 convertible preferred stock issued
for notes payable and interest - $1,583,000 -
============= ============= ===============
Series 95 convertible preferred stock issued
to acquire AMS - - 330,000
============= ============= ===============
Series 95 convertible preferred stock issued
for notes payable - - 1,557,500
============= ============= ===============
Warrants exercised in exchange for notes
payable - 230,000 308,000
============= ============= ===============
Common stock or warrants issued for notes
payable, services and interest 384,000 751,000 482,000
============= ============= ===============
Conversion of preferred stock $ 2,138,000 $ 246,000 $ 1,053,000
============= ============= ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements
1. Business, Organization and Principles of Consolidation
SGI International (the "Company") was organized in 1985 as the successor to
certain other businesses. Through 1994, the principal business of the Company
was to license the Liquids From Coal ("LFC") Process technology as exclusive
licensing agent for the TEK-KOL Partnership (TEK-KOL's formation is discussed in
Note 4), to provide expert technical services to all LFC Process related
activities and projects and to develop Clean Coal Refineries worldwide. During
1995, the Company commenced development of the OCET (Opti-Crude Enhancement
Technology) Process which is designed to increase the amount of high quality
fuels refined from residual oil, and the Company acquired a manufacturing
business that fabricates and sells automated assembly equipment. Since
inception, the Company has financed its research and development of the LFC and
OCET processes by private placement of debt and equity securities and to a
lesser extent through research and development contracts.
The Company has the following wholly-owned subsidiaries at December 31, 1997:
Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and
U.S. Clean Coal Refineries, Inc. ("USCCR"). AMS designs, manufactures and
installs automated assembly equipment, and was acquired in October 1995 (Note
6). OCET was organized in February 1995 to research and develop the Opti-Crude
Enhancement Technology, a process for further refining residual oil bottoms.
USCCR was organized in October 1994 to market clean coal refinery project
development programs.
SGI Australia Pty. Ltd. ("SGIA") was organized in 1985 and became a wholly-
owned subsidiary in 1993. SGIA was established to commercialize the LFC Process
technology in Australia and New Zealand. During 1997, the Company dissolved
SGIA as it was determined that a special purpose subsidiary was no
longer required to effectively market the LFC Process in Australia.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.
2. Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements are
prepared on a going concern basis. The recovery of amounts invested in the
Company's principal assets, the LFC Process related assets, is dependent upon
the Company's ability to adequately fund its capital contributions to TEK-KOL
and TEK-KOL's ability to successfully attract sufficient additional equity, debt
or other third-party financing to complete the commercialization of the LFC
Process technology.
Success in commercialization of the LFC Process is dependent in large part upon
the ability to enter into satisfactory arrangements with other partners,
financiers or customers and upon the ability of these third parties to perform
their responsibilities. The resources required to profitably develop, construct
and operate an LFC plant are likely to include hundreds of millions of dollars,
and expertise in major plant development and operations. There can be no
assurance any licenses, joint venture agreements or other arrangements will be
available on acceptable terms, if at all; that any revenue will be derived from
such arrangements; or that, if revenue is generated, any of said arrangements
will be profitable to TEK-KOL or the Company. If the Company and TEK-KOL are
unsuccessful in their attempts to license the LFC Process, or if such third
parties are unsuccessful in profitably developing and operating LFC plants, the
planned business and operations of the Company will likely not succeed and the
Company would not be able to recover the carrying value of the long-lived assets
related to LFC Process.
The Company had negative working capital of $4.3 million and an accumulated
deficit of $48.9 million at December 31, 1997. These factors and the Company's
recurring losses from continuing operations, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company is
currently seeking additional financing through public or private sales of its
securities to fund working capital requirements.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
The Company will also seek funding through additional strategic partnerships,
joint ventures or similar arrangements to commercialize the technologies. There
can be no assurance that any collaborative financing arrangements through a
joint venture, and/or with strategic partners, will be available when needed, or
on terms acceptable to the Company. If adequate funds are not available, the
Company may be required to curtail or terminate one or more of its operating
activities. The Company is engaged in continuing negotiation to secure
additional capital and financing, and while management believes funds can be
raised, there is no assurance that their efforts will be successful. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Estimates and Assumptions. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
Concentration of Credit Risk. The Company invests its excess cash in interest
bearing deposits with major banks, commercial paper and money market funds.
Although certain of the cash accounts may exceed the federally insured deposit
amount, management does not anticipate non-performance by the other parties.
Management reviews the stability of these institutions on a periodic basis.
Inventories. Inventories are stated at the lower of cost or market. The Company
uses the first-in, first-out method of determining cost.
Accounting for Long-Lived Assets. Effective January 1, 1996, the Company adopted
FASB Statement No. 121, "Accounting for Long-Lived Assets and Long-Lived Assets
to Be Disposed Of." The Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that assets might be
impaired and the undiscounted cash flow estimated to be generated by those
assets are less than the carrying amounts of those assets. The LFC Process
related assets and other long-lived assets are evaluated continually by
management for evidence of impairment. In performing its evaluation, management
considers such factors as competing technologies, current and future market
potential for products generated from the LFC Process technology, viability of
projects or assets and progress of related projects such as the Colstrip Project
and the TEK-KOL Partnership. The Company's estimate of undiscounted cash flows
indicated that such carrying amounts were expected to be recovered. This
analysis is based upon the successful development, construction and operation of
a commercial LFC plant as discussed in the second paragraph of this Note. It is
reasonably possible that the estimate of undiscounted cash flows may change in
the near term resulting in the need to write-down the LFC Process related assets
to fair value.
Depreciation and Amortization. Royalty rights, the LFC cogeneration project and
the Australian LFC project are stated at cost and are being amortized over ten
years. Process demonstration equipment is stated at cost and is being
depreciated over five years. Property and equipment is stated at cost and is
being amortized over three to five years. Goodwill related to the AMS
acquisition is being amortized over ten years. Depreciation and amortization on
the LFC Process related assets and other long-lived assets is calculated using
the straight-line method and the depreciation and amortization periods are based
on management's estimates of the useful lives of the respective assets.
Revenue Recognition. Revenues from engineering and consulting services are
recorded as the services are performed and earned in accordance with the
contracts to perform such services. Revenues from manufacturing contracts are
recorded using the percentage-of-completion method of accounting, based upon the
ratio of costs incurred to total estimated costs. Estimated losses are recorded
in their entirety when loss contracts are identified. Contracts may extend over
one or more accounting periods, and revisions in estimated costs and revenue
recognition during the course of the work are reflected during the accounting
period in which the facts that require such revisions become known. Other income
consists primarily of interest income and is recorded as earned.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Stock Based Compensation Awards. Management recommends and the Board of
Directors authorizes warrant grants to employees and other individuals on a
periodic basis. Warrant grants are not made pursuant to a qualified plan;
therefore, all warrants issued have a non-qualified tax status.
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to follow Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for stock based compensation awards to employees. Under APB 25, if the exercise
price of the Company's warrants equals or exceeds the fair value of the
underlying stock on the grant date, no compensation expense is recorded. Stock
based compensation awards issued to non-employees are accounted for in
accordance with SFAS 123. See Note 7 for pro forma disclosures required by SFAS
123.
Common Shares Issued for Services. The values assigned to the restricted common
shares issued for services are recorded at the estimated fair value of the
services rendered or the value of the restricted common shares issued, which
ever is more readily determinable.
Income Taxes. Income taxes are provided for in accordance with the provisions of
SFAS No. 109. Under this method, the Company recognizes deferred tax assets and
liabilities for the expected future tax effects of temporary differences between
the carrying amounts of assets and liabilities used for financial reporting and
income tax purposes, as well as operating loss carryforwards.
Net Loss per Share. Net loss per share is computed based on the weighted average
number of common shares outstanding and includes preferred stock dividends.
Shares issuable upon conversion of preferred stock, convertible debentures and
upon exercise of outstanding stock options and warrants are not included since
the effects would be anti-dilutive. For purposes of computing net loss per
share, preferred stock dividends include "imputed dividends" for preferred stock
issued with a non-detachable beneficial conversion feature near the date of
issuance. Imputed dividends represent the aggregate difference between
conversion price and the fair market value of the common stock as of the date of
issuance of the preferred stock, without regard to the actual date on which the
preferred stock may be converted.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which is
required to be adopted on December 31, 1997. SFAS No. 128 replaces Accounting
Principles Board Opinion ("APB") No. 15 and simplifies the computation of
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from securities that could share in the earnings of the Company,
similar to fully diluted EPS under APB No. 15. The Statement requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. All per share amounts for all periods presented must be restated to
conform to SFAS No. 128 requirements. The Company has adopted SFAS No. 128 as of
December 31, 1997, however, no restatement of the previously determined per
share amounts is necessary as the effects of the outstanding convertible
securities, warrants and options would be anti-dilutive.
Reclassification. Certain prior year amounts have been reclassified to conform
to the fiscal 1997 presentation. These changes had no impact on previously
reported results of operations, cash flows or stockholder's equity.
3. Composition of Certain Financial Statement Captions
Billings
As of December 31, 1997, billings on contracts in progress of $2,404,000
exceeded costs incurred and estimated earnings on contracts of $2,357,000 by
$47,000. As of December 31, 1996, billings on contracts in progress of
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Composition of Certain Financial Statement Captions (continued)
$5,366,000 exceeded costs incurred and estimated earnings on contracts of
$5,091,000 by $275,000. The amounts are included in the accompanying
consolidated balance sheets under the following captions:
<TABLE>
December 31,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on contracts $ 146,364 $ 113,130
Billings in excess of costs and estimated
earnings on contracts (193,792) (387,892)
===================================
$ (47,428) $ (274,762)
===================================
</TABLE>
<TABLE>
Property and Equipment
December 31,
------------------------------------
1997 1996
------------------------------------
<S> <C> <C>
Office furniture and fixtures $ 109,000 $ 117,000
Laboratory equipment 836,000 447,000
Machinery and equipment 118,000 63,000
Computer equipment 295,000 262,000
Leasehold improvements 21,000 6,000
------------------------------------
1,379,000 895,000
Less accumulated depreciation (590,000) (346,000)
====================================
Net property and equipment $ 789,000 $ 549,000
====================================
</TABLE>
4. LFC Process Related Assets
Notes receivable In June 1985, Montana One Partners ("MOP"), a California
limited partnership, was formed to develop an LFC-CoGen Plant in Colstrip,
Montana (the "Colstrip Project"). The Company was the sole general partner.
Originally, the limited partners purchased a 5.93% preferred interest in MOP for
$1,462,000; 84.07% was acquired by the Company and 10% by an affiliate, AEM
Corp.
Pursuant to agreements executed in 1988 (the Colstrip Sale Agreements), MOP sold
its interest in the Colstrip Project and the Company sold its interest in
certain other projects to four individuals who formed Rosebud Energy Corp.
("Rosebud"). The sales price of $6,769,000 included $3,500,000 of 8% notes
payable, liabilities aggregating $2,519,000 which were assumed by Rosebud and
liabilities of $750,000 which were forgiven. The basis of the assets sold was
$5,317,000. The Company recognized the immediate reduction of accounts payable
and deferred the remaining gain of $702,000. The notes were non-recourse, and
collectibility was contingent on profitable operations or future financing of
the Colstrip Project.
The transaction was recorded as a non monetary exchange, and because of the
contingencies on the note payments, no gain or interest income will be
recognized until the proceeds received are in excess of the basis of assets
sold.
By December 31, 1991, the Company had acquired the limited partners' 5.93%
preferred interest and AEM's 10% interest in MOP in exchange for cash
($727,000), contingent notes payable ($1,124,500) and warrants to purchase
28,688 common shares at $10 per share. The notes payable to MOP former limited
partners ("FLP") and AEM are payable only out of the Company's collections on
the contingent notes received from Rosebud.
As of December 31, 1995, the Company had received principal payments of
$375,000, interest payments of $739,000 and had written off notes receivable
with a face value of $425,000.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LFC Process Related Assets (continued)
During August through October 1996, the Company entered into the following
agreements with the certain FLPs and the Rosebud individuals. The Company
offered to exchange a preferred share convertible into 3,000 restricted common
shares and a warrant to purchase 3,000 restricted common shares at $5.75 per
share for each FLP's contingent note payable. Approximately 76% of the FLPs
accepted this offer, and the Company issued 35 Series 96B preferred shares
convertible into 105,000 restricted common shares and warrants to purchase
105,000 restricted common shares at $5.75 per share. The Rosebud individuals
paid the Company $1,525,000 in exchange for the notes held by the Company from
the 1988 Colstrip Project sale and the related accrued interest. The Company
combined these transactions for reporting purposes and recorded $788,000 as the
valuation of the securities issued to the FLPs.
On December 11, 1997, the Company finalized an agreement with AEM, whereby the
Company issued 25,714 shares of restricted common stock and two warrants to
acquire an aggregate of 37,714 of common shares at $5.75 per share, in exchange
for current obligations to AEM of approximately $116,000. In addition, the
Company acquired all of AEM's interest in future collections on the contingent
notes receivable, as well as a 12% distributed net profits interest in a
potential LFC cogeneration facility.
The remaining balances of notes receivable and related accounts represent
amounts due from the 1988 sale of certain other projects and contingent amounts
payable to the remaining FLPs. During 1997 the Company wrote-off as
uncollectible, notes receivable of $150,000 and $170,000 of related interest.
The components of the net carrying value of the notes receivable on the
accompanying consolidated balance sheets are as follows:
<TABLE>
December 31,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
8% notes receivable $ 150,000 $ 300,000
Interest receivable 166,265 288,203
-----------------------------------
316,265 588,203
-----------------------------------
Deferred gain and interest income (141,631) 202,193)
8% notes contingently payable to
FLP's and AEM (24,634) (81,107)
-----------------------------------
Net carrying value $ 150,000 $ 304,903
===================================
</TABLE>
Royalty Rights. LFC Technology Partners ("LFCTP") originally financed research
and development of the LFC Process technology under certain research agreements
entered into with the Company from 1982 to 1986. As provided under the research
agreements, LFCTP provided cash and issued notes to the Company in exchange for
all rights in the LFC Process technology. On October 1, 1987, the Company and
LFCTP entered into an Amended Technology Transfer Agreement (the transfer
agreement), which provided for the transfer of all rights in the LFC Process
technology to the Company in exchange for three levels of royalty payments. The
first level of royalty payments was satisfied during 1992.
In 1992, the Company and LFCTP entered into a Settlement Agreement which
provided for modifications of the second and third level royalty payments. In
exchange for 12,500 shares of Series 92-C convertible preferred stock, LFCTP's
third level royalty under the transfer agreement was reduced from 12.5% of the
Company's future net cash receipts (as defined) to zero and LFCTP's second level
royalty under the transfer agreement was reduced from approximately $9 million
at December 1992 to $10,000 per month plus 25% of net cash receipts generated by
the Colstrip Project.
Royalty rights aggregating $3,142,500 were recorded in 1992 based upon the value
of the underlying common shares. Royalty expense will be recognized as would
have been required under the transfer agreement or evenly over 10 years,
whichever is greater. Amortization expense of $314,250 was recorded during 1997,
1996, and 1995, and accumulated amortization totals $1,571,250 and $1,257,000 at
December 31, 1997, and 1996, respectively.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LFC Process Related Assets (continued)
LFC Cogeneration Project. The Company has substantially completed the design
and engineering of an LFC facility for use in conjunction with an electric
cogeneration plant. Amounts capitalized at December 31, 1997, relate primarily
to plans and drawings for the design of such a facility. Amortization expense of
$105,000 was recorded during 1997, 1996, and 1995, and accumulated amortization
totaled $631,000 and $526,000 at December 31, 1997, and 1996, respectively.
Pursuant to the Colstrip Sale Agreements, the Company granted Rosebud a
non-exclusive license for LFC Process cogeneration plants with an aggregate
capacity of 350 megawatts which provides for the Company to receive royalties of
up to $1,000,000 from future plant financings and operations.
Investment in TEK-KOL Partnership. The Company entered into a Technology
Purchase Agreement (the "Agreement") with Shell Mining Company ("SMC") on
September 28, 1989. Under the Agreement, SMC acquired a one-half interest in
the LFC Process technology, related stand-alone assets and patents in exchange
for $650,000 in cash, a $550,000 note, and forgiveness of $350,000 of current
debt. SMC also agreed to pay additional consideration totaling $1,000,000 when
the first LFC plant became operational or $40,000 per month, up to an aggregate
of $1,000,000 beginning July 1992. Because of the time period involved over
which the proceeds were collected, the Company recognized the revenue as the
consideration was received.
The Company and SMC formed TEK-KOL on September 30, 1989, and each partner
contributed its respective one-half interest in the LFC Process, related LFC
stand-alone assets and patents to the partnership. TEK-KOL was formed to own and
license the LFC Process technology. As a result of the Agreement and subsequent
partnership formation, the Company recorded the book value of its one-half
interest in the assets contributed, $412,000, as its investment in TEK-KOL. The
Company accounts for its investment in TEK-KOL using the equity method. TEK-KOL
became operational in 1995 and the Company has recorded $932,000, $463,000 and
$288,000 as its share of TEK-KOL's 1997, 1996 and 1995 net losses, respectively.
Capital contributions to TEK-KOL are expected to be required from time to time.
The partnership agreement requires the Company to contribute one-half of any
required capital contributions which is mutually determined by the partners. The
Company recorded a liability to TEK-KOL of $412,000 at December 31, 1995, for
the unpaid portion of the required contributions. The partners verbally agreed
that the Company was not in default of the partnership agreement provision
regarding payment of required capital contributions. The Company paid all
required capital contributions to TEK-KOL through December 31, 1997.
The partnership agreement originally designated the Company as licensing
contractor. To date, the Company has not been reimbursed for past licensing
related expenditures. The partnership agreement was amended effective May 1,
1995, so that the Company now receives 75% of all royalties, fees, and other
monies paid to TEK-KOL by third parties, until such time that the Company has
received $2.0 million. After the Company receives $2.0 million, all royalties,
fees, and other monies paid to TEK-KOL will be shared evenly. Ongoing licensing
activities by the Company will be compensated as determined by TEK-KOL. The
Company will record licensing revenues as these monies are received.
TEK-KOL granted the Company a royalty-free LFC Process license for cogeneration
plants with an aggregate capacity of 350 megawatts and a royalty-bearing LFC
Process license which requires the Company to pay royalties of approximately
12.5% of the net proceeds from the sale of liquids produced by its first two
sole LFC Projects. Royalties to TEK-KOL for all products produced by additional
SGI sole projects are subject to negotiation based on prevailing industry
practices.
TEK-KOL granted an LFC Process license to SMC through which TEK-KOL will receive
royalties of approximately 12.5% of the net proceeds from the sale of liquids
produced by the first Level I and Level II plants. Royalties to TEK-KOL for all
products produced by any subsequent SMC plants are subject to royalties
negotiated based on prevailing industry practices.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LFC Process Related Assets (continued)
Australia LFC Project The Company has capitalized certain costs associated with
preliminary site reviews and engineering studies relative to Australian coals as
part of an effort to market the LFC Process technology. The Company owns the
right to license the LFC Process technology in Australia and New Zealand. The
capitalized costs are being amortized over a ten year estimated life and
amortization expense of $29,000 was recorded during 1997, 1996, and 1995.
Accumulated amortization at December 31, 1997 and 1996 is $174,000 and $145,000,
respectively.
5. Line-of-Credit and Notes Payable
The Company established a $400,000 line-of-credit with a financial institution
during 1996. The line-of-credit is secured by a $402,500 certificate of deposit
maturing May 1998, and borrowings on the line-of-credit bear interest at 2% over
the certificate of deposit interest rate. Borrowings on the line-of-credit were
$400,000 at December 31, 1997.
Notes payable consist of the following:
<TABLE>
December 31,
-----------------------------------
1997 1996
-----------------------------------
<S> <C> <C>
12% notes, due through September 2000, unsecured $ 26,125 $ 33,250
10-12% notes, due on September 30, 1998, unsecured 3,050,000 4,207,000
12% convertible debentures due on September 30, 1998, unsecured 976,573 --
Non-interest bearing convertible debenture, due no earlier
than 1999, unsecured 100,000 100,000
-----------------------------------
4,152,698 4,340,250
Less current portion 4,038,448 4,216,500
===================================
Long-term portion $ 114,250 $ 123,750
===================================
</TABLE>
During 1986 and 1987, the Company sold securities to qualified investors through
private placement offerings which included 12% notes payable. Principal payments
of $2,375 and 12% interest payments are due quarterly through maturity in
September 2000. The 12% notes payable also include contingent interest ranging
from 6% to 24%. The contingent interest begins accruing quarterly upon
completion of construction, start-up and testing of a commercial LFC Plant. No
commercial LFC Plants have been built and no interest expense related to this
contingency has been recorded to date. The notes are convertible into restricted
common stock at the rate of .075 shares per $1 of outstanding principal.
Prepayment of the principal results in the payment of an amount which would
cause the annual return from the original note date to become 18% to 24%,
compounded annually. An additional payment equal to 25% of the outstanding
principal is also required upon prepayment. The balance outstanding under these
notes totaled $26,125 at December 31, 1997.
Early in 1995, the Company sold Investment Units ("Units") through private
placement offerings to qualified investors for $10,100 per unit. Such Units
include a $10,000 note payable, bearing interest at rates of 10% to 12% per
annum and one convertible preferred share. The notes payable generally have
twelve to thirty-six month terms and interest is payable quarterly. The
preferred shares are convertible into common stock as described in Note 7. The
proceeds from the Units were allocated to the notes payable and preferred shares
based on their relative fair values which resulted in recording discounts to the
notes payable. Note discounts of $269,000 were amortized to interest expense
during 1995.
The Company made limited principal and interest payments in 1995 on the notes
payable issued through the Unit sales. In November 1995, the Company proposed a
note restructuring program to the noteholders pursuant to which the original
maturity date could be extended to September 1997, or the note principal could
convert into preferred stock. The notes payable were restructured during late
1995 and early 1996 as discussed below.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Line-of-Credit and Notes Payable (continued)
As of December 31, 1995, the original maturity dates for notes payable with a
carrying value of $4,034,000 were extended and notes payable with a carrying
value of $1,557,500 were converted into 155.75 Series 95R preferred shares with
a $10,000 per share liquidation preference. On November 1, 1997, 135.25 of the
preferred shares were convertible into 1,806,875 common shares and 20.5
preferred shares were convertible into common shares based on the fair market
value of the common stock on the date of conversion. At December 31, 1997, 81.75
preferred shares were converted into approximately 1,093,000 common shares and
an additional 1,006,000 common shares have been reserved for issuance. Certain
of the converting noteholders were granted warrants to purchase 39,250 shares of
common stock at $1.25 per share pursuant to terms of the restructuring.
In 1995, accrued interest of $121,000 was satisfied through the issuance of the
Series 95R preferred shares, accrued interest of $99,000 was satisfied through
the issuance of 88,838 restricted common shares, and accrued interest through
December 31, 1995, of $276,000 became due September 30, 1997. The Company also
prepaid interest through September 30,1996, of $94,000 on certain notes through
the issuance of 84,177 restricted commons shares.
During 1996, the original maturity dates for notes payable with a carrying value
of $165,000 were extended and notes payable with a carrying value of $725,000
were converted into 2.5 Series 95R preferred shares and 70 Series 96A preferred
shares, all with a $10,000 per share liquidation preference. The Series 95R
preferred shares are convertible into 33,750 common shares on November 1, 1997,
and the Series 96A preferred shares are convertible into 945,000 common shares
on May 1, 1998.
In 1996, accrued interest of $89,000 was satisfied through the issuance of the
Series 95R and 96A preferred shares, the Company prepaid interest through
September 30, 1997, of $62,200 on certain notes through the issuance of 14,288
restricted common shares, and accrued interest through December 31, 1996, of
$529,000 became due September 30, 1997.
In 1996, the Company granted the owner of a domestic research company a warrant
to purchase 100,000 restricted common shares at $1.72 per share in exchange for
a note payable previously issued by the Company, accrued interest and accounts
payable totaling $141,600.
The Company received $304,000 and $50,000 from an entity controlled by a
Director in 1995 and 1996, respectively, in exchange for 10% notes payable due
on December 31, 1996. In March 1996, the Company issued 283,200 restricted
common shares in satisfaction of the aggregate principal and accrued interest of
$375,000.
The Company received $230,000 from LFCTP in 1995 in exchange for 10% notes
payable due through 2000 and warrants to purchase 230,000 common shares at $1.00
per share. The notes payable were collateralized by the notes receivable
discussed in Note 4. In 1996, LFCTP exercised the warrant in exchange for the
previously issued note payable and the Company issued 230,000 restricted common
shares. Accrued interest of $18,000 on the notes was satisfied through the
issuance of 2,096 restricted common shares.
The Company received $100,000 from a foreign corporation in 1995 in exchange for
a non-interest bearing debenture with a $100,000 face value. The debenture is
due one year from the occurrence of certain future events, none of which
occurred to date. Accordingly, the debenture is classified as long-term debt in
the accompanying consolidated balance sheet. The debenture is convertible based
on future events, and would have converted into 24,807 common shares at December
31, 1996, had those events occurred.
On July 15, 1997, the Company converted one $10,000 note payable and associated
accrued interest of $2,748 into one share of Series 97C convertible preferred
stock. The convertible preferred share is fully paid and non-assessable, has no
voting rights, has a preference in liquidation of $10,000 and is convertible
into 13,500 shares of common stock on or after August 30, 1998, without further
payment.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Line-of-Credit and Notes Payable (continued)
In October 1997, the Company was able to extend, exchange or convert
approximately $4.8 million in existing debt for new securities of the Company
including common stock, warrants and revised, amended or new convertible debt
securities and also paid approximately $400,000 in existing debt. The Company
retired approximately $250,000 in existing 10%, 11% and 12% interest bearing
notes which were required to be paid by October 31, 1997, in exchange for
$250,000 of 12% convertible debentures due September 30, 1998, with a conversion
price of $1.20. The Company obtained an extension to September 30, 1998, of
approximately $3,428,000 of debt, and in connection therewith, agreed to grant
warrants to purchase an aggregate of 152,500 shares of common stock at an
exercise price of $1.20 per share for each quarterly period the debt remains
unpaid. The warrants expire one year from the date of issuance. The Company
retired an additional $727,000 of existing 10%, 11% and 12% interest bearing
notes which were required to be paid by October 31, 1997, in exchange for
$727,000 of convertible debentures due September 30, 1998, with a conversion
price of $1.20. 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 restricted common stock. The 12% convertible debentures are
convertible into approximately 814,000 shares of restricted common stock. No
note payments were made prior to December 31, 1997, and the Company issued
warrants to purchase 152,500 common shares, as previously discussed, to
noteholders. Imputed interest expense of $175,922 was recorded in connection
with the issuance of the 12% convertible debentures.
<TABLE>
Scheduled principal payments of notes payable are as follows:
Years ended December 31,
-------------------------------------------
<S> <C>
1998 $ 4,038,448
1999 109,500
2000 4,750
=================
Total payments $ 4,152,698
=================
</TABLE>
6. Acquisition of AMS and Information on Industry Segments
Acquisition
On October 30, 1995, the Company acquired AMS, a designer and manufacturer of
automated assembly equipment. For financial statement purposes the acquisition
was accounted for as a purchase and, accordingly AMS's results are included in
the consolidated financial statements since the date of acquisition. The
aggregate consideration of approximately $1,395,000 included approximately
$1,047,000 of certain liabilities assumed, $18,000 of acquisition costs and
three Series 95 convertible preferred shares valued at $330,000 in exchange for
100% of the outstanding common stock of AMS. The excess of the purchase price
over the fair value of the assets acquired ("Goodwill") approximated $479,000.
Pro forma results of the Company's operations, assuming the acquisition had
occurred as of January 1, 1994, are presented below:
<TABLE>
1995 1994
--------------- ----------------
<S> <C> <C>
Net revenue $ 4,865,000 $ 6,184,000
Net loss 7,258,000 6,093,000
Net loss per share 2.64 3.15
</TABLE>
In management's opinion, the pro forma consolidated results of operations do not
purport to be indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1995 or at the beginning
of fiscal 1994 or of future operations of the consolidated companies under the
ownership and management of the Company.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Acquisition of AMS and Information on Industry Segments (continued)
Segment Information
The following table presents relevant information for AMS as a whole for the
years ended December 31, 1997, 1996, and the period from October 31, 1995, to
December 31, 1995:
<TABLE>
1997 1996 1995
--------------- ---------------- -----------------
<S> <C> <C> <C>
Sales $ 5,280,000 $ 3,939,000 $ 867,000
Income from operations 1,353,000 498,000 238,000
Total assets 1,403,000 1,527,000 1,297,000
Accum. Depreciation 82,000 34,000 1,000
</TABLE>
AMS operates in three segments of the automated assembly systems industry:
High-Tech, medical and automotive. The sales for 1997 and 1996 are presented
below, 1995 information is not provided as management believes that two months
of operations would not be meaningful.
<TABLE>
1997 1996
--------------- ----------------
<S> <C> <C>
High-Tech $ 2,967,000 $ 943,000
Medical 717,000 1,028,000
Automotive 1,596,000 1,968,000
--------------- ----------------
Total Sales $ 5,280,000 $ 3,939,000
=============== ================
</TABLE>
Sales revenue was derived primarily from contracts to manufacture assembly
equipment with three, four and two customers in 1997, 1996 and 1995,
respectively. Revenue from sales of automated assembly equipment accounted for
99%, 93% and 96% of the Company's revenues in 1997, 1996 and 1995, respectively.
In each of the past three years, no single customer has accounted for more than
10% of sales on a consistent basis. AMS does not have long-term contracts with
any of its customers and expects that a small number of customers will continue
to account for a substantial portion of its sales for the foreseeable future.
7. Stockholders' Equity (Deficiency)
Convertible Preferred Stock A summary of the issued and outstanding convertible
preferred stock at December 31, 1997, is as follows:
<TABLE>
Common shares
Shares issued Preference in issuable
and outstanding liquidation on conversion
------------------- ------------------- ----------------------
<S> <C> <C> <C>
Series P-90 Preferred Stock 400 $ 40,000 100,000
Series PS90 Preferred Stock 8 2,000 1,000
Series 90 Preferred Stock 6 640 560
Series 91 Preferred Stock 87,655 346,440 7,520
Series 92 Preferred Stock 18 1,810 130
Series 93 Preferred Stock 74 7,350 2,700
Series 94 Preferred Stock 250 24,995 10,624
Series 95 Preferred Stock 75 856,111 1,094,963
Series 96 Preferred Stock 105 1,155,000 1,050,000
Series 97 Preferred Stock 2,406 2,415,000 2,666,078
================== =================== ======================
90,997 $4,849,346 4,933,575
================== =================== ======================
</TABLE>
During 1997, shareholders elected to convert 1,141 Preferred Shares into
approximately 2,155,000 shares of common stock.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (Deficiency) (continued)
In April 1997, the Company executed a funding agreement with certain foreign
accredited investors which provided for the sale of the Company's common stock
in three tranches of $1,000,000 each, pursuant to Regulation S. On May 30, 1997,
this agreement was modified and the Company issued 1,000 shares of $.01 par
value 8% Convertible Preferred Series 97B stock and ten warrants to purchase
30,000 shares at $2.30 per share to four foreign accredited investors for an
aggregate $1,000,000. The 97B Preferred Shares accrued dividends at a rate of 8%
per annum and were cumulative. The dividend was only payable in common stock of
the Company. The warrants were immediately exercisable and expire on May 30,
2002. As of December 31, 1997, all the preferred shares had been converted into
756,006 common shares of the Company. Imputed dividends aggregating $236,419
were recorded in connection with the issuance of the 97B Preferred shares. The
imputed dividends have been included in the computation of net loss per share as
disclosed in Note 1 to the consolidated financial statements.
On July 15, 1997, the Company converted one $10,000 note payable with accrued
interest of $2,748 by issuing one share of Series 97C convertible preferred
stock. The convertible preferred share has no voting rights, has a preference in
liquidation of $10,000 and is convertible into 13,500 shares of common stock on
or after August 30, 1998, without further payment.
On August 12, 1997, the Company issued 550 shares of $.01 par value, 7%
Convertible Preferred Series 97D and six warrants with an exercise price of
$2.44 per share, for net proceeds of approximately $505,000. These shares have a
liquidation preference of $1,000 per share. The number of common shares to be
issued upon conversion of the preferred shares will be determined by dividing
the amount invested by the lesser of (a) the average closing bid price for the
five trading days preceding the closing date or (b) the product of 77.5%
multiplied by the average of the closing bid price for the five trading days
preceding the conversion date. The six warrants are exercisable at the average
closing bid price for the five trading days preceding the closing date. Three
warrants representing 205,128 each of common stock each expire 60 days, 120 days
and 180 days respectively, subsequent to the underlying common shares being
included in an effective registration statement with the Securities and Exchange
Commission ("SEC"), but no later than 545 days from closing date. Another three
warrants representing 20,513 shares of common stock each expiring 60 days, 120
days and 180 days respectively, subsequent to the effective date of the
registration with the SEC, but no later than 545 days from closing date. The
warrants were exercisable August 22, 1997. The 97D Preferred Shares accrue
dividends at a rate of 7% per annum and are cumulative. The dividend is only
payable in common stock of the Company. Imputed dividends aggregating $144,654
were recorded in connection with the issuance of the 97D Preferred Shares. The
imputed dividends have been included in the computation of net loss per share as
disclosed in Note 1 to the consolidated financial statements.
On November 6, 1997, the Company issued 1,750 shares of $.01 par value, 8%
Convertible Preferred Stock Series 97F to certain foreign investors, and five
warrants, to five purchasers for $1,000 per share for an aggregate purchase
price of $1,750,000. The number of shares of common stock underlying the 97F
Preferred shares and warrants are subject to a Registration Rights Agreement
which entitles the purchasers to demand registration upon written notice to the
Company. The Company is required to register 200% of the number of shares that
would be required if all of the 97F Preferred Shares were converted, assuming a
conversion date 5 days prior to the filing of the registration statement with
the SEC. The number of common shares to be issued upon conversion of the 97F
Preferred Shares will be determined by dividing the amount invested by the
lesser of: (a) the average closing bid price for the five trading days preceding
the closing date or (b) the product of 75% multiplied by the average of the
closing bid price for the five trading days preceding the conversion date. The
five warrants which are convertible into 70,000 shares of common stock, contain
a conversion price equal to 110% of the average closing bid price for the five
trading days preceding the closing date. The warrants all expire on November 6,
2002.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (Deficiency) (continued)
The 97F Preferred Shares accrue dividends at the rate of 8% per annum and are
cumulative. The dividend is only payable in common stock of the Company. The 97F
Preferred Shares have a liquidation preference of $1,000 per share and are
convertible at the earlier of: (i) the date a registration statement including
the underlying common shares is declared effective or (ii) sixty one days from
the closing date (November 6, 1997). If the registration statement is not
declared effective by the SEC by the 61st day following the date of the demand
registration, the purchasers, at their option may either: (a) convert up to 50%
of their investment in the 97F Preferred Shares, pursuant to Regulation S or (b)
if the Company qualifies to register the Securities under Form S-3, require the
Company to pay certain specified damages in cash. Furthermore, if the Company
qualifies to file under Form S-2b and the registration statement is not declared
effective by the SEC by the 121st day following the date of the demand
registration the Purchasers, at their option may either: (a) convert all or part
of their remaining investment in the 97F Preferred Shares, pursuant to
Regulation S and/or (b) require the Company to pay certain specified damages in
cash. The 97F Preferred Shares are redeemable at the option of the Company, in
whole or in part, in cash, at 130% of the Liquidation value plus accrued and
unpaid dividends. The 97F Preferred Shares will automatically convert into
common stock two years from the closing date.
In connection with the sale of the 97F Preferred Shares, the Company paid two
unaffiliated placement agents, fees consisting of $70,000 in cash, 105 shares of
97F Preferred Shares having a value of $105,000, and warrants to purchase 35,000
shares of common stock as compensation for placement. The warrants contain a
conversion price equal to 110% of the average closing bid price for the five
trading days preceding November 6, 1997. The warrants all expire on November 6,
2002. In addition, the Company paid $8,750 in cash for legal and escrow fees
incurred in connection with this transaction. The net proceeds to the Company of
$1,671,250 will be used for working capital and the continuous research and
development of the OCET and LFC processes. Imputed dividends aggregating
$389,153 were recorded in connection with the issuance of the 97F Preferred
Shares. The imputed dividends have been included in the computation of net loss
per share as disclosed in Note 1 to the consolidated financial statements.
The Series 96 convertible preferred shares are non-voting, and were issued in
connection with the note restructuring discussed in Note 5 and the FLP
transaction discussed in Note 4. The Series 96B preferred shares have certain
registration rights, and are convertible without further payment on the earlier
to occur of the filing of a registration statement including the underlying
common shares or August 30, 1998.
The Series 95 convertible preferred shares are non-voting, and were issued in
connection with private placements, the note restructuring discussed in Note 5
and the AMS acquisition discussed in Note 6. In 1995, the Company raised
$1,114,000, net of offering costs of $137,500, through the issuance of 125,000
Series 95 convertible preferred shares and the issuance of two Series 94
convertible preferred shares. The Series 95 preferred shares were convertible
after forty-one days into common shares based on the common stock closing bid
price on various dates in 1995. During 1996, 17,500 Series 95 preferred shares
were converted into 21,875 common shares, and during 1995, 107,500 Series 95
preferred shares were converted into 126,421 common shares.
The Series 94, 93, 92, 91 and 90 preferred shares were issued in connection
with the Unit sales discussed in Note 5. All Series 94 through 90 preferred
shares are non-voting, and callable at $100 per share except the Series 91 and
Series 90 preferred shares.
Certain of the Series 91 convertible preferred shares provide cumulative
dividends ranging from $8 to $800 per share, and are callable at $100 per
preferred share plus any unpaid cumulative dividends.
The Series 90 preferred shares provide an $8 cumulative dividend per share, and
are callable at $100 per share plus any unpaid cumulative dividends.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (Deficiency) (continued)
The Series PS90 convertible preferred shares were issued in 1990 to employees of
the Company and are convertible into restricted common shares upon payment of
$1.375 per common share. The Series PS90 preferred shares are non-voting, have a
preference in liquidation of $250 per share and provide a $20 cumulative
dividend per share.
The Series P-90 convertible preferred shares were issued in 1990 to two Board
members who were also Company officers, and are convertible into restricted
common shares upon an additional payment of $1.375 per common share. The Series
P-90 preferred shares are non-voting, provide an $8 cumulative dividend per
share, and are callable after January 1, 1995, at $100 per share plus any unpaid
cumulative dividends.
Dividends on all preferred shares are only payable when the Company has
sufficient accumulated earnings. Cumulative dividends of $93,000 were in arrears
under the Series 97, 91, PS90, 90 and P-90 preferred share agreements at
December 31, 1997.
Common Stock
In January 1997, the Company issued one individual and one domestic corporation
11,250 and 26,500 common shares, respectively, as compensation for placement
agent services.
The Company executed a stock purchase agreement with a foreign accredited
investor on April 15, 1997, which provided for the sale of the Company's common
stock in five weekly tranches aggregating $1,000,000. Pursuant to this agreement
the Company issued 537,320 shares of common stock. The number of shares in each
tranch was determined by dividing the amount invested by the product of 75%
multiplied by the average of the closing bid price for the five trading days
preceding the investment.
During April 1997, the Company raised $29,735, net of discounts aggregating
$24,329, through the issuance of 15,008 restricted common shares to one
employee.
In May 1997, the Company issued 112,000 restricted common shares to a domestic
entity for financial consulting services rendered, valued at $161,700.
On December 11, 1997, the Company issued 25,714 shares of restricted common
shares and two warrants to acquire an aggregate of 37,714 of common shares at
$5.75 per share to AEM as more fully disclosed in Note 4.
Throughout the year ended December 31, 1997, the Company issued 36,088
restricted common shares to seven domestic individuals pursuant to Regulation D
for services rendered and recorded compensation expense of approximately
$108,000.
During 1996, the Company raised $2,596,000 through the issuance of 1,377,306
restricted common shares. The Company issued 49,626 restricted common shares for
services and recorded compensation expense of $65,000 in 1996. As discussed in
Note 5, the Company issued restricted common shares in exchange for notes
payable, accrued interest, and future interest obligations.
During 1995, the Company raised $1,024,000, net of offering costs of $48,000,
through the issuance of 963,035 restricted common shares. The Company issued
216,088 restricted common shares for services and recorded compensation expense
of $289,000 in 1995. As discussed in Note 5, the Company also issued restricted
common shares for accrued interest and future interest obligations.
Warrants and Options The following table summarizes disclosures required by
SFAS 123 for warrant and option activity subsequent to December 31, 1994:
- --------------------
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (Deficiency) (continued)
Common shares underlying outstanding warrants and options
<TABLE>
Underlying Common Weighted-average
Shares exercise price
----------------------------------------------
<S> <C> <C>
Balance, January 1, 1995 222,208 $15.72
Granted 1,768,816 1.83
Exercised (274,829) 1.16
Expired (16,925) 21.85
----------------
Balance, December 31, 1995 1,699,270 1.91
Granted 1,310,100 3.75
Forfeited (24,816) 1.50
Exercised (473,528) 1.06
Expired (3,450) 50.00
----------------
Balance, December 31, 1996 2,507,576 2.97
Granted 2,050,610 1.85
Exercised (150,000) 0.94
Expired (6,411) 46.74
================
Balance, December 31, 1997 4,401,775 2.18
================
</TABLE>
As provided in related service agreements, the Company granted warrants to
purchase 545,250 common shares to 39 employees during 1997 pursuant to
Regulation D. The warrant exercise prices were not lower than the closing bid
price on the grant dates. The warrants all expire on December 31, 2001, and are
exercisable one year from the grant date. The exercise price for the warrants is
$1.03 per share.
As provided in related agreements, the Company granted warrants to 9 consultants
to purchase 187,223 common shares during 1997 pursuant to Regulation D in return
for services valued at $208,063. In addition, the Company issued warrants to
purchase 1,082,137 common shares in conjunction with the various financings
throughout the year, as more fully disclosed in Note 5 and here in Note 7 of the
consolidated financial statements.
The Company changed the exercise prices for 2,667,153 shares to exercise prices
of $20.00 to $.875 per share from exercise prices of $1.375 to $.60 per share in
1995. The Company changed the exercise prices for 844,500 shares to an exercise
price of $1.03 per share from exercise prices of $1.72 to $4.375 per share in
1997. The repricings changed the exercise price to the then current common stock
closing bid price.
The weighted average grant date fair market value of warrants and options
granted in 1997 and 1996 are $1.48 and $2.64 per share, respectively. All
warrants and options granted , are not subject to repurchase by the Company.
Approximately 1.9 million common shares underlying warrants and options have
been registered with the SEC as of December 31, 1997.
The following table provides the weighted-average exercise price and the
weighted-average remaining contractual life for outstanding warrants and options
at December 31, 1997, grouped into three exercise price ranges.
<TABLE>
Warrants and Options Outstanding Warrants and Options Exercisable
- ----------------------------------------------- ---------------------------------------------
Number Wt. Avg. Wt. Avg. Number Wt. Avg. Wt. Avg.
Outstanding Remaining Exercise Exercisable Remaining Exercise
Range at 12/31/97 Life (Years) Price at 12/31/97 Life (Years) Price
- --------------- ------------- ------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$.60 - $2.438 3,635,858 3.6 $ 1.32 1,845,185 3.2 $ .95
$3.55 - $10.00 736,977 5.5 5.54 637,040 5.6 5.67
$18.00 - $47.50 28,941 1.5 25.54 28,941 1.5 25.54
</TABLE>
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (Deficit) (continued)
Pro Forma Information As of December 31, 1997, the Company has outstanding
warrants and options as described above. The Company has elected to follow APB
25 and related interpretations in accounting for the warrants and options. Under
APB 25, because the exercise price of the Company's warrants equals the market
price of the underlying stock on the grant date, no compensation expense is
recorded.
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for the
warrants and options granted subsequent to December 31, 1994 under the fair
value method of SFAS 123. The fair value for these options was estimated at the
grant date using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995, 1996, and 1997, respectively: risk-free
interest rate of approximately 6% for all years; volatility factor of the
expected market price of the Company's common stock ranging from .737 to 1.631,
1.604 to 1.721, and 1.5; weighted-average expected life of the option of 2.0
years for all years, and a dividend yield of zero for all years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's warrants and options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's warrants and options. For purposes of
pro forma disclosures, the estimated fair value of the warrants and options
expensed during the grant year. The Company's historical and pro forma
information follows (in thousands, except for net loss per share information):
<TABLE>
Years ended December 31,
------------ ------------- --------------
1997 1996 1995
------------ ------------- --------------
<S> <C> <C> <C>
Netloss
Historical ($6,479) ($4,259) ($6,825)
Pro Forma (7,858) (6,859) (8,918)
Net loss per share-basic
Historical $(0.88) $(0.80) $(2.46)
Pro Forma (1.07) (1.28) (3.21)
</TABLE>
The Company granted warrants to employees for the purchase of 3,530,000 OCET
common shares at $1.00 per share in 1995, and canceled a warrant for 850,000 of
those shares in January 1996. There is no current market for OCET common stock.
At December 31, 1997, warrants for the purchase of 2,680,000 OCET common shares
are exercisable. All warrants to purchase OCET common shares expire December 31,
1999. No compensation expense was recorded in 1995 related to the OCET warrants,
as the Company and its subsidiaries account for warrants and options in
accordance with APB 25. The fair market value of the OCET warrants was estimated
at the grant date using a Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 6%; volatility factor of zero as OCET is
a non public entity; expected life of 4 years and a dividend yield of zero. The
resulting compensation expense of approximately $35,000 was included in the SFAS
123 pro forma disclosure.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stock Option and Performance Incentive Program
On May 23, 1997, the stockholders approved the 1996 Omnibus Stock Option Plan
(the "Stock Plan") pursuant to which a maximum aggregate of 2,000,000 shares was
reserved for grant. Under the Stock Plan, employees may be given an opportunity
to purchase, by way of option, or stock purchase rights, common stock of the
Company. The Stock Plan also provides for the use of stock appreciation rights
and on term performance awards as employee incentives. The terms and conditions
of each award are at the discretion of the Board of Directors or any duly
authorized committee.
On September 11, 1997, the Company granted incentive stock options, pursuant to
the Stock Plan, exercisable for a total of 236,000 shares of common stock at
$1.03 per share to employees. The options are exercisable upon effective
registration under the Securities Act of 1933 or one year from the date of
issuance. The options shall expire on September 11, 2007 and are fully vested to
employees with one year of service. The Company applies APB 25 and related
interpretations in accounting for its plan. In accordance with SFAS 123, as more
fully described in Note 7, the options have been aggregated with the warrants
for the fair value pro forma disclosure required.
9. Related Party Transactions
SGI has entered into the following transactions with related parties:
(a) The Company sold 200 Series P-90 preferred shares for $22,000 to two
officers in 1990. Each preferred share is convertible into 250 restricted
common shares upon payment of a price that was reduced from $15.00 per
share to $1.375 per share in 1995.
(b) The Company granted warrants to purchase a total of 820,000 common shares
to officers and directors in 1996, 1995, and 1994 at exercise prices
ranging from $0.875 to $40.00 per share. The exercise prices equaled or
exceeded the closing bid price on the grant dates. During 1995, the
exercise prices of warrants to purchase 498,500 and 70,000 common shares
were changed to $0.60 and $1.375, respectively (Note 7).
(c) During 1995 and 1996, the Company issued 10% notes payable totaling
$354,000 to an entity controlled by a Board member. The notes and accrued
interest were converted into 283,200 restricted common shares in 1996.
Also during 1995, an officer advanced the Company a total of $52,000 and
was repaid.
(d) The Company had receivables from two officers of $398,000 at December 31,
1994. A portion of this receivable was offset by obligations of the
Company to both of the officers and the remaining $224,000 was reserved
at December 31, 1995. In January 1996, the Company agreed to forgive the
loans made to a former officer.
(e) The Company has an agreement with an officer/stockholder for the
assignment of his patent to the Company. The agreement provides for a
royalty equal to the greater of (i) $50,000 per calendar year or (ii)
one-tenth of one percent (.1%) of royalty revenues received by the
Company (or any joint venture of which the Company is a partner) through
December 31, 2000, conditioned only upon the continued practice of the
LFC Process technology during such period by the Company and/or any such
joint venture. The Company recognized royalty expense of $50,000 in each
of the years ended December 31, 1995, and 1994. During 1996, the
officer/stockholder agreed to forego all past and future royalty payments
pursuant to the agreement. The accrued liability of $142,000 at December 31,
1995, was recorded as other income in 1996.
(f) Three employees exercised warrants in August 1995 for 274,154 common
shares in exchange for notes payable of $308,000. The 8% notes were
non-recourse and were payable on August 23, 1999, only if the bid price
for the Company's common stock was in excess of $3.00 per share on that
date. As of January 1995 the employees had pledged 321,341 restricted
common shares as collateral for the notes payable. During the first
quarter of 1996, the Company recorded compensation expense of $474,000
related to these
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Related Party Transactions (continued)
transactions as provided by Emerging Issues Task Force Abstracts Issue
No. 95-16, "Accounting for Stock Compensation Arrangements with Employer
Loan Features under APB Opinion No. 25." The compensation expense was
determined as the product of the aggregated common shares issued upon
exercise and the difference between the market price of the common stock
and the exercise price of the warrants. During the second quarter of
1996, the three employees exchanged 8% recourse notes payable August 23,
1999, for the non-recourse notes. The Company collected all principal and
interest payments prior to December 31, 1996, and the note activity is
reflected in the accompanying consolidated balance sheets as a component
of stockholders' equity (deficiency).
(g) As of December 31, 1997, the Company owed an officer/director approximately
$121,000 in deferred compensation.
10. Commitments and Contingencies
(a) The Company leases its corporate offices under an operating lease
agreement which provides for annual escalation of rental payments and
expires in December 2000. The Company's OCET subsidiary leases its
laboratory facilities under an operating lease agreement which expires in
May 2000. AMS leases its manufacturing facility under an operating lease
agreement which expires in October 1998. Under the terms of the lease
agreements, the lessee pays taxes, maintenance and insurance. As of
December 31, 1997, the Company had no other significant commitments under
capital or operating leases. Total rent expense relating to leased
facilities was approximately $387,000, $316,000 and $226,000 in 1997,
1996, and 1995, respectively.
Future minimum annual operating lease commitments are as follows:
<TABLE>
Year ending December 31,
-----------------------------------------
<S> <C>
1998 $355,000
1999 231,000
2000 160,000
-------
$746,000
========
</TABLE>
(b) As discussed in Note 4, the Company is required to make contributions to the
TEK-KOL Partnership.
(c) The Company has employment agreements with its executives, the terms of
which expire on December 31, 1998. Such agreements, which have been
revised from time to time, provide for minimum salary levels. The
agreements contain change-in-control provisions that would automatically
extend the date of the employment agreements by one year from the date of
change. The maximum contingent liability under agreements, in such event,
is approximately $1.1 million.
(d) The Company and its subsidiaries are from time to time involved in
litigation arising in the ordinary course of their respective
businesses. The only lawsuit currently pending against the Company is
Walsh vs. AMS, which relates to events occurring prior to the
acquisition of AMS by the Company. The lawsuit asserts claims, for among
other things, breach of contract relating to a loan of approximately
$300,000. AMS has filed an answer denying liability and discovery is
proceeding. In the opinion of the Company the pending litigation, if
adversely decided, should not have a material adverse effect on the
Company.
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
The significant components of the Company's deferred tax assets and liabilities
are:
<TABLE>
1997 1996
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 18,623,000 $ 17,295,000
Depreciation and amortization 658,000 583,000
Research and development credits 419,000 380,000
Accrued interest 192,000 217,000
Stock for services 134,000 27,000
Other 109,000 24,000
-------------------------------------
20,135,000 18,526,000
Deferred tax liabilities:
Other (728,000) (731,000)
-------------------------------------
Net deferred tax assets 19,407,000 17,795,000
Deferred tax assets valuation allowance (19,407,000) (17,795,000)
-------------------------------------
$ - $ -
=====================================
</TABLE>
At December 31, 1997, the Company had net operating losses available for
carryforward for federal and state tax purposes of approximately $50,689,000
million and $15,714,000 million respectively. Federal and state loss
carryforwards of $87,000 and $7,331,000, respectively expired in 1997 and will
not be available for carryforward into 1998. The difference between federal and
state loss carryforwards is primarily attributable to the 50% limitation of
California loss carryforwards. The Company also has federal research credit
carryforwards of approximately $350,000 which will begin to expire in 2004
unless previously utilized.
At December 31, 1997, the Company had net operating loss carryforwards
for federal and state tax purposes expiring as follows:
<TABLE>
Year Expires Federal State
- -------------------------------- -------------- -------------
<S> <C> <C>
1998 $ 1,008,000 $ 2,925,000
1999 343,000 4,645,000
2000 368,000 3,879,000
2001 849,000 1,979,000
2002 1,151,000 2,286,000
2003 1,217,000 -
2004 6,984,000 -
2005 2,288,000 -
2006 3,750,000 -
2007 8,111,000 -
2008 5,723,000 -
2009 5,057,000 -
2010 4,614,000 -
2011 4,654,000 -
2012 4,572,000 -
- ---------------------------------- -------------- -------------
Total loss carryforwards $ 50,689,000 $15,714,000
- ---------------------------------- -------------- -------------
</TABLE>
12. Subsequent Events
On January 8, 1998, the Company, for the net proceeds of $490,000 issued 550
shares of Series 97G 8% Convertible Preferred Stock to two foreign accredited
investors pursuant to the provisions of Regulation S. The series 97G Preferred
Shares accrue dividends at a rate of 8% per annum and are cumulative. The
dividend is only payable in common stock of the Company. As per the subscription
agreements, the Company also issued warrants to purchase a total of 25,000
common shares at $1.35 per share and 194,502 shares of restricted common stock.
The Series 97G Preferred Stock is convertible, at any time 41 days after the
closing date of January 8, 1998. Each Series 97G share is convertible into the
number of shares of common stock derived by
<PAGE>
SGI International and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Subsequent Events (continued)
dividing the conversion rate by the conversion price. The conversion rate is the
liquidation preference of $1,000 per share of Series 97G Preferred Stock. The
conversion price is determined based on the date the conversion notice is
received and is equal to the lesser of (a) the average closing bid price of the
common stock over the five day trading period prior to the closing date or (b)
75% of the average of the closing bid price of the common stock on the five
trading days ending on the date preceding the conversion notice. The warrants
are exercisable 10 days subsequent to the closing date and expire on January 8,
2003. The 97G Preferred Shares are redeemable at the option of the Company, in
whole or in part, in cash, at 130% of the Liquidation value plus accrued and
unpaid dividends. The 97G Preferred Shares will automatically convert into
common stock two years from the closing date.
On January 14, 1998, the Company granted incentive stock options, pursuant to
its 1996 Omnibus Stock Plan, exercisable for a total of 225,000 shares of common
stock at $0.843 per share to employees of the Company. The options are
exercisable upon effective registration under the Securities Act of 1933 or one
year from the date of issuance. The options expire on January 14, 2003. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
from the investors and legends were placed on the certificates.
On March 6, 1998, the Company for net proceeds of $1,980,000, issued 2,200
shares of Series 98A Convertible Preferred Stock to two accredited investors. As
per the subscription agreements the Company also issued warrants to purchase a
total of 90,000 common shares at $1.27 per share. The Series 98A Preferred Stock
is convertible, at the earlier of the date the underlying common shares are
included in a registration statement which has been declared effective by the
SEC, or sixty days from the closing date, March 6, 1998. Each Series 98A 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 98A Preferred Stock. The conversion
price is determined based on the date the conversion notice is received and is
equal to the lesser of (a) the average closing bid price of the Common Stock
over the five day trading period prior to the closing date or (b) 75% of the
average of the closing bid price of the common stock on the five trading days
ending on the date preceding the conversion notice. The warrants were
exercisable immediately and expire on March 6, 2003. The 98A Preferred Shares
are redeemable at the option of the Company, in whole or in part, in cash, at
130% of the Liquidation value plus accrued and unpaid dividends. The 98A
Preferred Shares will automatically convert into common stock two years from the
closing date. These securities were issued pursuant to the exemptions provided
by Section 4(2) of the Securities Act and Regulation D. Investment
representations were obtained from the investors and legends were placed on the
certificates.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In November 1997, the Company changed its certifying accountants from Ernst &
Young LLP to J.H. Cohn LLP as reported in its Current Report on 8-K filed with
the Securities and Exchange Commission on November 26, 1997.
<PAGE>
PART III
The information required by this Part III will be provided in the Company's
definitive proxy statement for the Company's 1998 Annual Meeting of Shareholders
(involving the election of Directors), which definitive proxy statement will be
filed pursuant to Regulation 14A no later than April 30, 1998, and is
incorporated herein by this reference to the following extent:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Reference is made to the information appearing under the captions "Election of
Directors - Information about Nominees and Executive Officers" and "Compliance
with Section 16 of the Securities Exchange Act of 1934" in the Company's Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the captions "Information
Concerning Board of Directors - Compensation of Directors," and "Executive
Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information appearing under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement.
ITEM 13. CERTAIN TRANSACTIONS
Reference is made to the information appearing under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1&2 Financial Statements
See Index to Consolidated Financial Statements on page 26 hereof.
Financial Statement schedules for which provision is made under the
applicable accounting regulations of the SEC are not required under the
related instructions or are inapplicable and therefore have been
omitted.
(a) 3 Listing of exhibits
2.1 Merger Agreement between VDI and Genesis(2)
3.1.1 Articles of Incorporation, as amended(1)
3.1.2 Restated Articles of Incorporation(5)
3.1.3 Articles of Amendment to the Articles of Incorporation of SGI
International(26)
3.2.1 By-laws, as amended(2)(3)
3.2.2 Amended and Restated By-laws(5)
3.2.3 By-Laws, as Amended (9/20/90)(14)
4.1.1 Form of Warrants - Authorized Before 1987(1)
4.1.2 Form of Warrants - Series A through H(5)
4.1.21 Form of Amended Warrants(15)
4.1.22 Form of Amended Warrants(16)
4.1.3 Form of Warrants - Series I, M, S and P(5)
4.1.4 Form of Warrants - Series XX(12)
4.2 Loan Agreement with Arthur & Sophie Brody(4)
4.3 Form of Series 86-B Promissory Notes(4)
4.4 Form of Series 86-C Promissory Notes(4)
4.5 Form of Series 90-A Units (Promissory Note and Preferred stock)(14)
4.6 Form of Series 90-B Units (Promissory Note and Preferred Stock)(14)
4.7 Form of Series 90-C Units (Promissory Note and Preferred Stock)(14)
4.8 Form of Series 90-D Units (Promissory Note and Preferred Stock)(14)
4.9 Form of Series P90 Preferred Stock(14)
4.10 Form of Series PS90 Preferred Stock(14)
4.11 Form of Series 91-A Units (Promissory Note and Preferred Stock)(17)
4.12 Form of Series 91-AA Units (Promissory Note and Preferred Stock)(17)
4.13 Form of Series 91-B Units (Promissory Note and Preferred Stock)(17)
4.14 Form of Series 91-C Units (Promissory Note and Preferred Stock)(17)
4.15 Form of Series 91-D Units (Promissory Note and Preferred Stock)(17)
4.16 Form of Series 91-E Units (Promissory Note and Preferred Stock)(17)
4.17 Form of Series 91-V Units (Promissory Note and Preferred Stock)(17)
4.18 Form of Series 91-P Preferred Stock(17)
4.19 Form of Series 91-R Preferred Stock(17)
4.20 Form of Series 91-S Preferred Stock(17)
4.21 Form of Series 91-T Preferred Stock(17)
4.22 Form of Series 91-M Preferred Stock(17)
4.23 Form of Series 92-A Preferred Stock(19)
4.24 Form of Series 92-B Preferred Stock(19)
4.25 Form of Series 93-A Units (Promissory Note and Preferred Stock)(22)
4.26 Form of Series 93-B Units (Promissory Note and Preferred Stock)(22)
4.27 Form of Series 93-C Units (Promissory Note and Preferred Stock)(22)
4.28 Form of Series 94-A Units (Promissory Note and Preferred Stock)(23)
4.29 Form of Series 94-B Units (Promissory Note and Preferred Stock)(23)
4.30 Form of Series 94-C Units (Promissory Note)(23)
4.31 Form of Series 95-C Convertible Preferred Stock (25)
4.32 Form of Series 95-D1 Redeemable Convertible Preferred Stock (25)
4.33.1 Form of Series 95-D1.03 Convertible Preferred Stock (26)
4.33.2 Form of Series 95-D1.04 Convertible Preferred Stock (26)
4.34 Form of Series 95-E Redeemable Convertible Preferred Stock (25)
4.35 Form of Series 95-R Convertible Preferred Stock (26)
4.36 Form of Series 96-A Convertible Preferred Stock (28)
4.37 Form of Series 96-B Convertible Preferred Stock (28)
4.38 Certificate of Secretary re: Designation of Series 97-C Preferred
Stock.(29)
4.39 Certificate of Secretary re: Designation of Series 97-D Preferred
Stock.(29)
4.40 Form of Debenture for Series 97-E.(29)
4.41 Form of Warrant for Series 97-E.(29)
4.42 Certificate of Secretary re: Designation of Series 97-F Preferred
Stock.(29)
4.43 Amended Certificate of Secretary re: Designation of Series 97-G Preferred
Stock.(29)
4.44 Form of Common Stock Certificate.(29)
4.45 Form of Warrant Certificate re: Existing Warrants.(30)
4.46 Form of Stock Purchase Warrant re: 97-D and 97-F Preferred Stock.(30)
4.47 Form of Stock Purchase Warrant re: Series 97-B Preferred Stock.(29)
4.48 Form of Stock Purchase Warrant re Series 97-G Preferred Stock.(29)
4.49 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997
between the Registrant and the holders thereof.(30)
4.50 Registration Rights Agreement re: Series 97-D Preferred Stock dated
August 12, 1997 between the Registrant and the holders thereof.(30)
4.51 Series 97-F 8% Convertible Preferred Stock Subscription Agreement
dated November 6, 1997 between the Registrant and the holders hereof.(30)
4.52 Registration Rights Agreement re: Series 97-F Preferred Stock dated
November 6, 1997 between the Registrant and the holders thereof.(30)
4.53 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
the Registrant and Settondown Capital dated January 8, 1998.(29)
4.54 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between
Registrant and Dominion Capital dated January 8, 1998.(29)
4.55 Form of Registration Rights Agreement re: Series 97-G Preferred Stock
dated January 8, 1998 between the Registrant and the holders thereof.(29)
4.56 Agreement between the Registrant and AEM dated December 11, 1997.(29)
4.57 Agreement between the Registrant and The Taxin Network
dated April 22, 1997.(29)
4.58 Certificate of Secretary re: Designation of Series 98-A Preferred
Stock.(31)
4.59 Form of Series 98-A Stock Purchase Warrant(31)
4.60 Series 98-A 6% Convertible Preferred Stock Placement Agent Subscription
Agreement dated March 6, 1998, between Registrant and the holders thereof. (31)
4.61 Registration Rights Agreement for Placement Agent re: Series 98-A
Preferred Stock date March 6, 1998, between the Registrant and the
holders thereof. (31)
4.62 Series 98-A 6% Convertible Preferred Stock Subscription Agreement dated
March 6, 1998, between Registrant and the holders thereof. (31)
4.63 Registration Rights Agreement re: Series 98-A Preferred Stock date
March 6, 1998, between the Registrant and the holders thereof. (31)
10.1.1 Amended and Restated Agreements with LFC Technology
Partners - Pre 10/1/87(4)
10.1.2 Amended Technology Transfer Agreement dated 10/1/87(5)
10.1.3 Research Agreement Waiver (and Amended Research Notes) dated 10/1/87(5)
10.2 AEM Agreement(2)(3)
10.3.1 Assignment Agreement dated 11/13/84 with Ernest Esztergar(6)
10.3.2 First Amendment to Assignment Agreement dated 12/31/87 with Ernest
Esztergar(5)
10.4 Employment Agreement with Ernest Esztergar(2)(3)
10.4.1 Employment Agreement with Ernest Esztergar (1995)(26)
10.5 Lease for executive offices at 3366 N. Torrey Pines Ct. #220, La Jolla,
CA 92037(4)
10.5.1 Lease of executive offices (LJF)(14)
10.5.2 First amendment to Lease of Executive offices dated as of 10/17/95 (26)
10.6 Modification Agreement dated as of 10/1/87(7)
10.6.1 Settlement Agreement dated as of December 10, 1992(18)
10.7 Agreement to Proceed (including Agreement to Proceed, LFC Release and
Addendum)(5)
10.8 Participation Agreement (including Participation Agreement,
Confidentiality Agreement and Addendum)(5)
10.9 Agreement dated as of July 1, 1988 between AEM and Company(9)
10.10 Agreement dated July 19, 1989 between SMC and Company(10)
10.11 Technology Purchase Agreement, dated as of 9/28/89(11)
10.12 Partnership Agreement, dated as of 9/30/89(11)
10.12.1 First Amendment to Partnership Agreement dated as of 12/1/91(17)
10.12.2 Second Amendment to Partnership Agreement dated as of 5/1/95(26)
10.13 SGI Assignment Agreement, dated as of 9/30/89(11)
10.14 SMC Assignment Agreement, dated as of 9/30/89(11)
10.15 Coal Handling License, dated as of 9/30/89(11)
10.16 License to SGI International, dated as of 9/30/89(11)
10.17 License to Shell Mining Company, dated as of 9/30/89(11)
10.18.1 First Amendment to License to Shell Mining Company, dated as
of 5/01/95(26)
10.19 ENCOAL/SGI Services Agreement, dated as of 7/18/90(14)
10.20 SMC Services Agreement, dated as of 9/30/89(11)
10.21 Accounting Procedures(11)
10.22 Confidentiality Addendum(11)
10.23 Addendum to Documents 10.19 through 10.29(11)
10.24 Letter of Intent dated June 5, 1993 between Company & Shanxi Coal Bureau,
China(20)
10.25 Letter of Intent dated July 16, 1993 between Company & Fushun Coal Mine
Administration, China (20)
10.26 Letter of Intent dated January 28, 1994 between Company and Shandong
Provincial Coal Bureau, and Comprehensive Utilization Corporation of
Shandong Coal Industry, China(21)
10.27 Acquisition Agreement dated as of September 8, 1995(25)
10.28.1 Lending and Commitment Agreement dated as of September 8, 1995(25)
10.28.2 First Amendment to Acquisition and Funding Agreement dated as of
September 22, 1995(25)
10.28.3 Second Amendment to Acquisition & Funding Agreement dated as of
October 20, 1995 (24)
10.29 Technology Transfer Agreement (SGI/OCET) dated 3/17/95(26)
10.29.1 First Amendment to Technology Transfer Agreement dated as of 5/15/95(26)
10.29.2 Second Amendment to Technology Transfer Agreement dated as of
August 25, 1996 (28)
10.30 Employment Agreement with Joseph A. Savoca dated as of June 12, 1995 (26)
18.1 Letter re: Change in Accounting Principles(4)
22.1 Subsidiaries(5)
23.1 Consent of J.H. Cohn LLP, Independent Auditors (30)
23.2 Consent of Ernst & Young LLP, Independent Auditors (30)
99.1 Agreement dated June 20, 1988(8)
99.2 Modification Agreement dated August 1, 1988(8)
99.3 Colstrip Notes(8)
99.4.1 Other Notes (Healy Alaska)(8)
99.5 LTI Agreement(8)
99.6 SGI/MOP General Release(8)
99.7 Creditor Releases(8)
99.8 SGIF/DOE/METC Agreement dated 9/20/91(17)
(1) Incorporated by reference to the Registrant's
Registration Statement on Form S-14 (File No.
2-93124) (the "Registration Statement") filed on
September 6, 1984.
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed on April 24, 1985.
(3) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for the
year ended December 31, 1985.
(4) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for the
year ended December 31, 1986.
(5) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for the
year ended December 31, 1987.
(6) Incorporated by reference to Amendment No. 1 to the Registration Statement
filed on December 31, 1984.
(7) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for the
quarter ended September 30, 1987.
(8) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for the
quarter ended June 30, 1988.
(9) Incorporated by reference to Exhibit 10.18 (sic) in Report on Form 10-Q
(File No. 2-93124) for the fiscal quarter ended March 31,1990.
(10) Incorporated by reference to Exhibit 10.18 (sic) in Report on Form 10-Q
(File No. 2-93124) for the fiscal quarter ended September 30, 1990.
(11) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for
the quarter ended March 31, 1990.
(12) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1988.
(13) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1989.
(14) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1990.
(15) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed on December 1990.
(16) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed on March 1, 1991.
(17) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1991.
(18) Incorporated by reference to Report on Form 8-K (File No. 2-93124) filed
on January 15, 1993.
(19) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the l year ended December 31, 1992.
(20) Incorporated by reference to 1st Amendment to Form S-1 filed December
20, 1993.
(21) Incorporated by reference to 3rd Amendment to Form S-1 filed March 9, 1994.
(22) Incorporated by reference to Report on Form 10K (File No. 2-93124) for the
year ended December 31,1993.
(23) Incorporated by reference to Report on Form 10K (File No. 2-93124) for the
year ended December 31,1994.
(24) Incorporated by reference to Report on Form 10-Q (File No. 2-93124)for the
quarter ending September 30, 1995.
(25) Incorporated by reference to Report on Form 8-K/A (File No. 2-93124)
filed October 6, 1995.
(26) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1995.
(27) Incorporated by reference to Report on Form 10-K (File No. 2-93124) for
the year ended December 31, 1996.
(28) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-8 (File No. 2-93124) filed on December 26, 1996.
(29) Incorporated by reference to Exhibit 4 in Registration Statement on Form
S-2 (File No. 2-93124) filed on January 23, 1998.
(30) Incorporated by reference to Report on Form 10-Q (File No. 2-93124) for
the quarter ending September 30, 1997.
(31) Filed herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1996: November 26, 1997,
Change in registrants Certifying Accountant; January 23, 1998, Sale of Equity
Securities pursuant to Reg S..
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report
(d) Not applicable
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 31th day of March 1998.
SGI INTERNATIONAL
By: /s/
- ----------------------------------
Joseph A. Savoca, Chairman/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Chief Executive Officer March 31, 1998
- ------------------------------------
Joseph A. Savoca Director, Chief Financial Officer
/s/ Director March 31, 1998
- ------------------------------------
Bernard V. Baus
/s/ Director March 31, 1998
- ------------------------------------
Ernest P. Esztergar
/s/ Director March 31, 1998
- ------------------------------------
Norman Grant
/s/ Director March 31, 1998
- ------------------------------------
William Harris
/s/ Director March 31, 1998
- ------------------------------------
William A. Kerr
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Title
4.58 Certificate of Secretary re: Designation of Series 98-A Preferred Stock.
4.59 Form of Series 98-A Stock Purchase Warrant.
4.60 Series 98-A 6% Convertible Preferred Stock Placement Agent Subscription
Agreement dated March 6, 1998, between Registrant and the holders thereof.
4.61 Registration Rights Agreement for Placement Agent re: Series 98-A
Preferred Stock date March 6, 1998, between the Registrant and the holders
thereof.
4.62 Series 98-A 6% Convertible Preferred Stock Subscription Agreement dated
March 6, 1998, between Registrant and the holders thereof.
4.63 Registration Rights Agreement re: Series 98-A Preferred Stock date
March 6, 1998, between the Registrant and the holders thereof.
23.1 Consent of J.H. Cohn LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
Exhibit 4.59
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 February 27, 1998,
establishing the Series 98-A Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on February 27, 1998.
/s/
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 Two Hundred (2,200) shares, out of Twenty Million
(20,000,000) shares of Preferred Stock which the Company has authority to issue,
be, and the same hereby is, authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restriction thereof, of the
shares of such series (in addition to the powers, designations, preferences, and
relative, participating, optional or to other special rights and the
qualification, limitations or restrictions thereof, set forth in the Certificate
of Incorporation which may be applicable to the Preferred Stock) authorized by
this resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 98-A six percent (6%) Convertible Preferred Stock (the
"Series 98-A Preferred Stock"). The Series 98-A Preferred Stock shall have a
liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 98-A Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 98-A Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 98-A
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 98-A Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 98-A Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 98-A Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to six percent (6%) per annum of the amount of the
respective Liquidation Preference of the Series 98-A Preferred Stock as set
forth in Section (a) hereof, payable on a pro rata basis on conversion. Any
dividends payable pursuant to the provisions of this paragraph shall, at the
Company's option, be payable in cash or Common Stock of the Company.
(2) Such dividends shall accrue on each share from the date of
its original issuance, and shall accrue from day to day whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series 98-A Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series 98-A
Preferred Stock or Common Stock. Dividends on the Series 98-A Preferred Stock
shall be nonparticipating and the holders of the Series 98-A Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 98-A Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 98-A Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 98-A Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
98-A Preferred Stock, the remaining assets shall be paid to, the Common Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the payment and the place where the amounts distributable
shall be payable, shall be mailed by certified or registered mail, return
receipt requested, not less than 60 days prior to the payment date stated
therein, to each record holder of any share of Series 98-A Preferred Stock.
Neither the consolidation or merger of the Company into or with any other
company or companies, nor the sale or transfer by the Company of all or any part
of its assets, nor the reduction of the capital stock of the Company, shall be
deemed to be a liquidation, dissolution, or winding up of the Company for
purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 98-A Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 98-A
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 98-A Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 98-A may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 98-A Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate, the Conversion Rate shall mean the
Liquidation Preference of $1,000 per share of Preferred Stock. For purposes
hereof, the Conversion Price shall be determined as of the date the notice of
conversion is received by the Company ("Conversion Date") and shall be equal to
the lesser of: (a) the average closing bid price of the shares of Common Stock
over the five (5) day trading period ending on the day immediately prior to the
Closing Date as such Closing Date is defined in the 6% Convertible Preferred
Stock Subscription Agreement (the "Subscription Agreement") for the Series 98-A
Preferred Stock, 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 prior to the Conversion Date. The closing bid
price shall be deemed to be the reported last bid price regular way as reported
by Bloomberg LP or if unavailable, on the principal national securities exchange
on which the Common Stock is listed or admitted to trading, or if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the closing bid price as reported by NASDAQ or such other system then in use,
or, if the Common Stock is not quoted by any such organization, the closing bid
price in the over-the-counter market as furnished by the principal national
securities exchange on which the Common Stock is traded. In the event that the
Common Stock issuable upon conversion of the Series 98-A Preferred Stock is not
delivered, as a direct result of the negligence or action or inaction of the
Company only, within five (5) business days of receipt by the Company of a valid
notice of conversion and the Preferred Certificate for the Series 98-A Preferred
Stock to be converted ("Receipt Conversion Date"), the Company shall pay to the
holder, in immediately available funds, upon demand, as liquidated damages for
such failure and not as a penalty, for each $100,000 of the Series 98-A
Preferred Stock sought to be converted, $500 for each of the first ten (10) days
and $1,000 per day thereafter that the shares of Common Stock issuable upon
conversion of the Series 98-A Preferred Stock are not delivered, which
liquidated damages shall run from the sixth business day after the Receipt
Conversion Date. Any and all payments required pursuant to this paragraph shall
be payable only in cash.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 98-A Preferred Stock shall first
be convertible at the earlier of: (i) the date the amendment (the "Amended
Registration Statement") to the Form S-2 registration statement filed January
23, 1998 for the shares of Common Stock underlying the Series 98-A Preferred
Stock is declared effective by the Securities and Exchange Commission ("SEC") or
(ii) sixty (60) days from the Closing Date as defined in the Subscription
Agreement ("Closing Date"). If the Amended Registration Statement is not filed
by the forty fifth (45) day from the Closing Date or declared effective by the
SEC by the ninetieth (90th) day following the Closing Date, then the Company
shall pay to the holder thereof liquidated damages in cash, at the rate of one
percent and one half (1.5%) of the Liquidation Value pro rata for the first
month, and two percent (2%) of the Liquidation Value for each month thereafter.
The liquidated damages will be payable until the Amended Registration Statement
has been filed and/or has been declared effective. Absent the filing of the
Amended Registration Statement or the Amended Registration Statement having been
declared effective such liquidated damages will be payable up to one year from
the Closing Date, at such time as the Holder shall be allowed to effect
conversions into freely tradable Common Stock pursuant to rule 144. The
liquidated damages will be payable in cash upon demand within five (5) business
days. Subject to the limitations described in this paragraph regarding the
period of time when the Series 98-A Preferred Stock shall first be convertible,
the Series 98-A Preferred Stock shall be convertible for two (2) years from the
Closing Date, and all of the Series 98-A Preferred Stock must be converted by
the second anniversary of the Closing Date. The holder of the Series 98-A
Preferred Stock shall further be prohibited from converting any portion of the
Series 98-A Preferred Stock which would result in the holder being deemed the
beneficial owner in accordance with the provisions of Rule 13d-3 of the
Securities Act of 1934, as amended, of 4.99% or more of the issued and
outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 98-A
Preferred Stock shall exercise its right to convert the Series 98-A Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 98-A Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 98-A Preferred Stock (together with the certificates representing the
Series 98-A Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within five business days after the
Conversion Date if the Company has received the original duly executed notice of
conversion and Series 98-A Preferred Stock certificate being so converted by
such date. The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within five (5) business days of
actual receipt of a duly completed election to convert and the Preferred
Certificate to be converted, then the holder of the Series 98-A Preferred Stock
will be entitled to revoke the relevant notice of conversion by delivering a
notice to such effect to the Company whereupon the Company and the holder shall
each be restored to their respective positions immediately prior to the delivery
of such notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock
issuable upon the conversion of the Preferred Stock and the Conversion Price
shall be subject to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common
Stock or ecurities convertible into, exchangeable for or otherwise entitling a
holder hereof to receive Common Stock, (ii) declare a dividend payable in cash
on its ommon Stock and at substantially the same time offer its shareholder a
right to urchase new Common Stock (or securities convertible into, exchangeable
for or ther security entitling a holder thereof to receive Common Stock) from
proceeds of such dividend (all Common Stock so issued shall be deemed to have
been issued as a stock dividend), (iii) subdivide its outstanding shares of
Common Stock into a greater number of shares of Common Stock, (iv) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, or (v) issue by reclassification of its Common Stock any shares of
Common Stock of the Company, the number of shares of Common Stock issuable upon
conversion of the Series 98-A Preferred Stock immediately prior thereto shall
be adjusted so that the holders of the Series 98-A Preferred Stock shall be
entitled to receive after the happening of any of the events described above
that number and kind of shares as the holders would have received had such
Series 98-A Preferred Stock been converted immediately prior to the happening
of such event or any record date with respect thereto. Any adjustment made
pursuant to this subdivision shall become effective immediately after the close
of business on the record date in the case of a stock dividend and shall become
effective immediately after the close of business on the record date in the
case of a stock split, subdivision, combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (e)(4) will not have to be made
if such adjustment would not require an increase or decrease in one percent
(1%) or more in the number of shares of Common Stock issuable upon conversion
of the Series 98-A Preferred Stock. No adjustment in the Conversion Rate will
be made for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or trusts
related thereto or for issuance of any shares of Common Stock pursuant to any
plan providing for the reinvestment of dividends or interest payable on
securities of the Company and the investment of additional optional amounts in
shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock ssuable upon the conversion
of the Series 8-A Preferred Stock is adjusted, as herein provided, the
Conversion Price shall e adjusted (to the nearest cent) by multiplying such
Conversion Price immediately prior to such adjustment by a fraction of which
the numerator shall be the number of shares of Common Stock issuable upon the
exercise of each share of Series 98-A Preferred Stock immediately prior to such
adjustment, and of which the denominator shall be the number of shares of
Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 98-A Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
98-A Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 98-A Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 98-A Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 98-A Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 98-A Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 98-A Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 98-A Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 98-A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 98-A Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 98-A Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 98-A Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 98-A Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 98-A Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 98-A Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company, shall have the status of authorized but unissued shares of Preferred
Stock and may be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 98-A Preferred Stock.
(f) Redemption
1. Optional Redemption by the Company. Holders of Series 98-A
Convertible Preferred Shares do not have the right to cause redemption of their
Series 98-A Convertible Preferred Shares. For any Series 98-A Preferred Stock
for which a notice of conversion has not been sent, the Series 98-A Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 98-A Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a), (c), and (d) above ("Redemption
Price") which Liquidation Value shall include cumulative dividends as provided
in paragraph (c) herein accrued and unpaid through the Redemption Date. On the
date the Company sends a notice of redemption to the holders of the Series 98-A
Convertible Preferred Stock ("Holders") and wire transfers the appropriate
amount of funds into the escrow account described in the 6% Convertible
Preferred Stock Subscription Agreement, whichever event date is the latter
("Notice of Redemption Date"), the Holder's right to convert the Series 98-A
Convertible Preferred Stock shall terminate and be canceled immediately,
provided, however, the Company shall only have the right to redeem the Series
98-A Preferred Stock when, on the Redemption Date, the closing bid price, as
defined in paragraph (e)(1) herein, of the shares of Common Stock into which the
Series 98-A Preferred Stock is convertible, is less than the closing bid price
on the date the Holder or the original subscriber executed the 6% Convertible
Preferred Stock Subscription Agreement. If fewer than all of the outstanding
shares of Series 98-A Convertible Preferred Stock are to be redeemed, the
Company will select those to be redeemed pro-rata, by lot or by other method
deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
98-A Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 98-A Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 98-A Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 98-A Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the holder of the Series 98-A Preferred Stock within three (3) business days
of such notice. Additionally, if after the passage of three (3) business days
from the receipt by the holder of the notice of the Company's right to redeem
the Series 98-A Preferred Stock and the time funds are received by the escrow
agent, the Company has not deposited into escrow the appropriate amount of funds
to redeem the Series 98-A Preferred Stock, the Company shall pay to the holder
an amount equal to five (5%) percent per month of the Liquidation Preference on
a pro rata basis in cash. After the escrow agent is in receipt of such funds, he
shall notify the holder to surrender the appropriate amount of Series 98-A
Preferred Stock. If after three (3) business days from the date the notice of
redemption is received by the holder the funds have not been received by the
escrow agent, then the holder shall again have the right to convert the Series
98-A Preferred Stock and the Company shall have the right to redeem the Series
98-A Preferred Stock but only upon simultaneously sending a notice of redemption
to the holder and wire transferring the appropriate amount of funds.
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 98-A Preferred Stock into Common Stock as more fully
provided in Section (e) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(f)(1) herein, each share of Series 98-A Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 98-A Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 98-A Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (e) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 98-A Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (f) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 98-A Preferred Stock.
(g) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 98-A Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 98-A Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
27th day of February, 1998.
SGI INTERNATIONAL
By: /s/
Title: Senior Vice President
Attest:
/s/
John R. Taylor, Secretary
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH,
EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY.
STOCK PURCHASE WARRANT 98FA-010
To Purchase 50,000 Shares of Common Stock of
SGI INTERNATIONAL
THIS CERTIFIES that, for value received, Sovereign Partners,
L.P. (the "Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after ten days after the date hereof
and on or prior to March 6, 2003 (the "Termination Date") but not thereafter, to
subscribe for and purchase from SGI INTERNATIONAL, a Utah corporation (the
"Company"), fifty thousand (50,000) 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 March 6, 1998 (the "Closing Date"). The Exercise Price and the
number of shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein. This Warrant is being issued in connection with
the 6% Convertible Preferred Stock Series 98-A Subscription Agreement dated on
or about March 6, 1998 (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 annexed hereto duly executed, at the office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the registered holder hereof at the address of such holder appearing on the
books of the Company) and upon payment of the Exercise Price of the shares
thereby purchased; whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares purchased hereunder shall be delivered to the holder
hereof within five business days after the date on which this Warrant shall have
been exercised as aforesaid. Payment of the Exercise Price of the shares may be
by certified check or cashier's check or by wire transfer to an account
designated by the Company in an amount equal to the Exercise Price multiplied by
the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant and any Warrant Shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of except as follows:
(i) to a person who, in the opinion of counsel to the Company, is a person to
whom this Warrant or the Warrant Shares may legally be transferred without
registration and without the delivery of a current prospectus under the Act with
respect thereto, and then only against receipt of an agreement of such person to
comply with the provisions of this Section 6(a) with respect to any resale or
other disposition of such securities; or (ii) to any person upon delivery of a
prospectus then meeting the requirements of the Act relating to such securities
and the offering thereof for such sale or disposition, and thereafter to all
successive assignees.
(b) Unless the Warrant Shares have been registered under the
Act, or exempt from registration, upon exercise of any of the Warrant and the
issuance of any of the Warrant Shares, all certificates representing Warrant
Shares shall bear on the face thereof substantially the following legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The holder of the Warrant agrees and acknowledges that the
Warrant is being purchased for the holder's own account, for investment purposes
only, and not for the account of any other person, and not with a view to
distribution, assignment, pledge or resale to others or to fractionalization in
whole or in part. The holder further represents, warrants and agrees as follows:
no other person has or will have a direct or indirect beneficial interest in
this Warrant and the holder will not sell, hypothecate or otherwise transfer the
Warrant except in accordance with the Act thereunder and applicable state
securities laws or unless, in the opinion of counsel for the holder acceptable
to the Company, an exemption from the registration requirements of the Act and
such laws is available.
7. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares so purchased shall be and be
deemed to be issued to such holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been exercised.
9. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
12. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, the Company shall give the holder of this Warrant
thirty (30) days' notice of the proposed effective date of the transaction
specifying that the Warrant shall terminate if the Warrant has not been
exercised by the effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or
Merger Transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) "Piggy-Back" Registration. The Holder of this Warrant
shall have the right to include all of the shares of Common Stock underlying
this Warrant (the "Registrable Securities") as part of any registration of
securities filed by the Company (other than in connection with a transaction
contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8)
and must be notified in writing of such filing; provided, however, that the
holder of this Warrant agrees it shall not have any piggy-back registration
rights pursuant to this Section 12(c) if the shares of Common Stock underlying
this Warrant may be sold in the United States pursuant to the provisions of Rule
144. Holder shall have five (5) business days to notify the Company in writing
as to whether the Company is to include Holder or not include Holder as part of
the registration; provided, however, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering. The Company shall have the right to
terminate or withdraw any registration initiated by it under this Section 12(c)
prior to the effectiveness of such registration whether or not any Warrant
holder elected to include securities in such registration. All registration
expenses incurred by the Company in complying with this Section 12(c) shall be
paid by the Company, exclusive of underwriting discounts, commissions and legal
fees and expenses for counsel to the holders of the Warrants.
13. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
14. Voluntary Adjustment by the Company. The Company may at
its discretion, at any time during the term of this Warrant, reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
16. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: March 6, 1998 SGI INTERNATIONAL
By:
Title:_______________________________
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase shares of Common
Stock of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
- -------------------------------
(Name)
- -------------------------------
(Address)
- -------------------------------
Dated:
- ------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are
hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ______________, 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 "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
6% CONVERTIBLE PREFERRED STOCK SERIES 98-A
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 6% Convertible Preferred Stock
Series 98-A (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock and the other terms of the
Preferred Stock are set forth in the Certificate of Secretary of the 6%
Convertible Preferred Stock Series 98-A (Exhibit A annexed hereto).
In addition, the Company will issue to the Subscriber a
warrant (the "Warrant") to purchase Forty Thousand (40,000) shares of Common
Stock of the Company for a period of five (5) years from the Closing Date (as
defined herein), as per the terms of a separate Stock Purchase Warrant (Exhibit
B annexed hereto). This Subscription and, if accepted by the Company, the offer
and issuance of the Preferred Stock, Warrants and the Common Stock underlying
the Warrant and Preferred Stock (collectively the "Securities"), are being made
in reliance upon the provisions of Regulation D under the Act.
The Closing Date shall be determined in accordance with
Sections 1.1 and 15 herein.
The undersigned, SETTONDOWN CAPITAL INTERNATIONAL, LTD.,
located at Charlotte House, Charlotte Street, Nassau Bahamas, a 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 Issue Securities.
1.1 Closing. The Company will issue, and the Subscriber will
receive, on the Closing Date, an aggregate of Two Hundred (200) shares of
Preferred Stock based on U.S.$1,000 per share, and a Warrant to purchase Forty
Thousand (40,000) shares of Common Stock of the Company as consideration for
subscription agent services rendered. Dividends will accrue and be paid at the
rate of six (6%) percent on the outstanding principal amount of the Preferred
Stock until the Preferred Stock has been completely converted, provided,
however, all interest thereon shall only be payable in common stock of the
Company and not in cash at the time of conversion. Dividends shall be calculated
at the Conversion Price on the Conversion Date when converted.
Section 2. Representation and Warranties of the Subscriber. Subscriber
acknowledges, represents, warrants and agrees as follows:
2.1 Organization and Authorization. Subscriber is duly
incorporated or organized and validly existing in the state or country of its
incorporation or organization and has all requisite power and authority to 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"), and the Act, including its 10-Ks, 10-Qs,
8-K's, and registration statements, filed by the Company since December 31,
1996, (collectively, the "Reports"). Except for the Reports, Subscriber is not
relying on any other information relating to the offer and issuance 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 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 it individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; and employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners are accredited investors;
and
(ix) Any self-directed employee benefit plan with investment decisions made
solely by persons that are accredited investors within the meaning of Rule 501
Of Regulation D promulgated under the Act.
2.8 No Registration, Review or Approval. Subscriber
acknowledges and understands that the limited private offering and issuance 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 D 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.
2.11 Registration Rights. The parties have entered into a Registration Rights
Agreement (Exhibit E).
Section 3. Representations and Warranties of the Company. For
so long as any Securities held by Subscriber remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Accuracy of Reports and Information. To the best of its
knowledge, the Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934 Act
, and shall use its best efforts to maintain such status on a timely basis. The
Company has registered its Common Stock pursuant to Section 12 of the 1934 Act
and the Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed
pursuant to all reporting obligations, under either Section 13(a) or 15(d) of
the 1934 Act for a period of at least twelve (12) months immediately preceding
the offer and issuance of the Securities (or for such shorter period that the
Company has been required to file such material).
3.3 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and issuance, 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.
3.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, issuance and delivery of the Securities and the
performance of the Company's obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies, and to limitations
of public policy as they may apply to the indemnification provisions set forth
in this Agreement. Upon their issuance and delivery pursuant to this Agreement,
the Securities will be validly issued, fully paid and nonassessable and will be
free of any liens or encumbrances; provided, however, that the Securities are
subject to restrictions on transfer under state and/or federal securities laws.
The issuance of the Securities will not give rise to any preemptive right or
right of first refusal or right of participation on behalf of any person.
3.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
3.6 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Reports, this
Agreement or those incurred in the ordinary course of the Company's business
since 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 circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
3.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion or exercise provision of the Securities, will conflict with or
result in the breach or violation of any of the terms or provisions of, or
constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under, any material indenture,
mortgage, deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or any
statute or the Articles of the Company, or any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or the Company's listing agreement for its Common
Stock.
3.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
3.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except as may be required by applicable securities laws.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the business or
financial condition of the Company.
3.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect, and the Company is not in material
breach or material default under any of such agreements.
3.12 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
3.15 Required Governmental Permits. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
3.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Stock and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
3.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, the Company has no outstanding restricted
shares, or shares of Common Stock sold under Regulation S, Regulation D or
outstanding under any other exemption from registration, which are available for
sale as unrestricted ("free trading") stock.
3.18 Registration Alternative. The Company covenants and
agrees that for so long as any of the shares remain outstanding and continue to
be "restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Subscriber shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable.
3.20 Dilution. The Company is aware and acknowledges that
conversion of the Preferred Stock, and/or exercise of the Warrant, would cause
dilution to existing Shareholders and could significantly increase the
outstanding number of shares of Common Stock.
Section 4. Further Representations and Warranties of the
Company. For so long as any Securities held by the 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 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
Warrant representing the portion of the Preferred Stock converted
and/or Warrant exercised shall be delivered as follows:
<PAGE>
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of
the Preferred Stock and/or exercise of the Warrants is not delivered, as a
direct result of the negligence or action or inaction of the Company only,
within five (5) business days of receipt by the Company of a valid Notice of
Conversion and the Preferred Stock to be converted and/or Notice of Exercise and
Warrants to be exercised (such date of receipt referred to as the "Conversion
Date" and/or "Exercise Date"), the Company shall pay to the Purchaser, in
immediately available funds, upon demand, as liquidated damages for such failure
and not as a penalty, for each $100,000 of Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the Conversion Shares are not delivered, and for each thousand
(1,000) shares of Common Stock sought to be exercised under the Warrant, $7.50
for each of the first ten (10) days and $15 per day thereafter that the shares
of Common Stock underlying the Warrant are not delivered, which liquidated
damages shall run from the sixth business day after the Conversion Date and/or
Exercise Date. Any and all payments required pursuant to this paragraph shall be
payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price and/or Exercise Price.
Section 5. Opinion of Counsel. The Company shall have their
counsel provide, at the Company's expense, an opinion of counsel acceptable to
the transfer agent (if required) in order to perfect conversion of the Preferred
Stock and/or exercise of Warrants, upon receipt of Notice of Conversion and/or
Notice of Exercise.
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, Automative
& Assembly Manufacturing, Inc.
(v) The Preferred Stock, which shall be issued at the
Closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) This Subscription Agreement, the issuance of the
Securities and the issuance of Common Stock, upon conversion of the
Securities, have been duly approved by all required corporate action
and that all such securities, upon delivery, shall be validly issued
and outstanding, fully paid and nonassessable.
(vii) The issuance of the Securities will not violate
the applicable listing agreement between the Company and any securities
exchange or market on which the Company's securities are listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Subscriber set forth in this
Subscription Agreement, the offer, and issuance of the Preferred Stock
and Conversion Shares to be issued upon exercise to the Purchaser
pursuant to this Agreement are exempt from the registration
requirements of the Act.
(ix) As more specifically described in the Reports,
the authorized capital stock of the Company consists of 75,000,000
shares of Common Stock, no par value per share ("Common Stock") and
20,000,000 shares of Preferred Stock, par value $.01 per shares.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the 1934 Act and to the best of
Counsel's knowledge without an independent investigation the Company
has timely filed all the material required to be filed pursuant to
Sections 13(a) or 15(d) of such Act for a period of at least twelve
months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in this Agreement; the Agreement has been duly
and validly authorized by all necessary corporate action by the
Company, to the best of our knowledge, no approval of any governmental
or other body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; the Agreement has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge without an
independent investigation, after due inquiry, the execution, delivery
and performance of the Agreements by the Company and the performance of
its obligations thereunder do not and will not constitute a breach or
violation of any of the terms and provisions of, or constitute a
default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the
Company is a party or by which it or any of its property is bound,
(iii) any applicable statute or regulation, (iv) or any judgment,
decree or other of any court or governmental body having jurisdiction
over the Company or any of its property.
Section 6. Opinion of Counsel Upon Conversion. The Company
will obtain for the 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, subject only to receipt of a Notice of Conversion in the form of
Exhibit D and receipt by Counsel of such representations, warranties, and
documents as are determined to be necessary to comply with applicable securities
laws, duly executed by the Subscriber which shall be satisfactory to the
Transfer Agent, directing the Transfer Agent to remove the legend from the
certificate.
Section 7. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the 1934 Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request
a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Act and the 1934
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as Purchaser may reasonably request in availing itself of any
rule or regulation of the SEC allowing Purchaser to sell any such
Securities without registration.
Section 8. Representations and Warranties of the Company and
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 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
Secretary (Exhibit A).
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 Certificate of
Secretary of the 6% Convertible Preferred Stock Series 98-A, plus accrued and
unpaid dividends (the "Redemption Price"), for any Preferred Stock for which a
Notice of Conversion has not been sent. Upon receipt by Subscriber of notice by
the Company (the "Redemption Notice") of its right to redeem the Preferred Stock
(the "Redemption Date"), the Company shall wire transfer the appropriate amount
of funds into an escrow account mutually agreed upon by both the Company and
Subscriber within three (3) business days of the Redemption Date. Additionally,
if the Company has not deposited into escrow the Redemption Price for the
benefit of the Subscriber, within three (3) business days after the Redemption
Date, the Company shall pay to the Subscriber an amount equal to five (5%)
percent per month thereafter of the Liquidation Value of the Preferred Stock
being redeemed on a pro rata basis in cash. After the escrow agent is in receipt
of the Redemption Price, he shall notify the Subscriber to surrender the
appropriate number of shares of Preferred Stock. If the escrow agent has not
received the Redemption Funds within three (3) business days from the Redemption
Date, the Subscriber shall again have the right to convert the Preferred Stock,
and thereafter the Company shall only have the right to redeem the Preferred
Stock by sending a Redemption Notice to the Subscriber and simultaneously wire
transferring the Redemption Price.
Section 11. Mandatory Conversion. In the event the Preferred
Stock has not been converted two (2) years from the Closing Date, the Preferred
Stock shall automatically be converted as if the Subscriber voluntarily elected
such conversion in accordance with the procedure, terms and conditions set forth
in this Agreement.
Section 12. 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 13. Legend. The certificates representing the Securities shall be
subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
Section 14. Stock Delivery Instructions. The Preferred Stock Certificate shall
be delivered to Subscriber on a delivery versus payment basis as set forth in
the Escrow Agreement.
Section 15. Closing Date. The date Escrow Agent receives the
Securities and Purchase Price, and both the conditions set forth in Sections 16
and 17 and the terms and conditions of the Escrow Agreement (Exhibit C) herein
are satisfied or waived shall be the Closing (the "Closing Date"), and all acts,
deliveries and confirmations comprising the Closing Date regardless of
chronological sequence, shall be deemed to occur contemporaneously and
simultaneously upon the occurrence of the last act, delivery, or confirmation of
the Closing Date, and such acts, deliveries, or confirmations shall not be
effective unless and until the last of same shall have occurred, and as shall be
mutually agreed upon as to time and place.
Section 16. Conditions to the Company's Obligation to Issue. Subscriber
understands that the Company's obligation to issue the Preferred Stock and
Warrants are conditioned upon:
(i) The receipt and acceptance by the Company of this
Subscription Agreement and all duly executed Exhibits thereto by an
authorized officer of the Company.
(ii) All representations and warranties of the
Subscriber contain herein shall remain true and correct as of the
Closing Date.
(iii) The Company shall have obtained all permits and
qualifications required by any state for the offer and issuance of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the issuance of the
Preferred Stock, Warrants, and the proposed issuance of the Common
Stock underlying the Preferred Stock, and Warrants shall be legally
permitted by all laws and regulations to which the Subscriber and the
Company are subject.
(iv) The Certificate of Secretary for the Preferred
Stock shall have been filed with the Utah Secretary of State.
Section 17. Conditions to Subscriber's Obligation to Receive. The Company
understands that Subscriber's obligation to receive the Preferred Stock, and
Warrants is conditioned upon:
(i) Acceptance by Subscriber of a satisfactory Subscription Agreement and all
duly executed Exhibits hereto for the issuance of the Securities;
(ii) Delivery of the original Securities as described herein;
(iii) All representations and warranties of the
Company contained herein shall remain true and correct as of the
Closing Dates;
(iv) Receipt of opinion of counsel and proof of a filed Certificate of
Secretary; and
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and issuance of the
Preferred Stock, and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the issuance of the
Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Company and Subscriber are subject.
Section 18. Miscellaneous.
18.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Agreement irrevocably consents to the
service of process in any such proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
18.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
18.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and Exhibits hereto constitute the entire agreement between the
Subscriber and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by all parties.
18.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
18.5 Entire Agreement. This Agreement and Exhibits hereto
constitute the entire agreement between the Subscriber and the Company with
respect to the subject matter hereof. This Agreement may be amended only by a
writing executed by all parties.
18.6 Reliance by Company. The 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.
18.7 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.
18.8 Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby, except that the Company shall pay one
(1%) percent of the aggregate funds raised as a result of Subscriber's
subscription agent services, to Goldstein, Goldstein & Reis, LLP for legal,
administrative and escrow fees.
18.9 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
IN WITNESS WHEREOF, this Agreement was duly executed on the
date first written below.
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
By___________________________
Name:
Title:
Executed this ____ day of March , 1998
Agreed to and Accepted on
this ____ day of March 1998
SGI INTERNATIONAL
By____________________________
Title:
<PAGE>
FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES:
NAME: Settondown Capital International, Ltd.
ADDRESS: Charlotte House
Charlotte Street
Nassau, Bahamas
TEL NO: (242) 325-1033
FAX NO: (242) 323-3416
CONTACT
NAME: Anthony L. M. Inder Rieden
DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):
NAME:
ADDRESS:
TEL NO:
FAX NO:
CONTACT
NAME:
SPECIAL
INSTRUCTIONS: ____________________________________________________
- --------------------------------------------------------
- --------------------------------------------------------
- --------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 6th day of
March, 199, between SOVEREIGN PARTNERS, L.P., located c/o South Ridge Capital
Management, LLC, Executive Pavilion, 90 Grove Street, No. 1, Ridgefield, CT
06877, a limited partnership organized under the laws of the State of Delaware
(the "Purchaser"), SETTONDOWN CAPITAL INTERNATIONAL, LTD., located at c/o
Charlotte House, Charlotte Street, Nassau, Bahamas, a limited liability company
organized under the laws of Bahamas, a non-USA jurisdiction (the "Finder") (the
Purchaser and the Finder are collectively referred to as "Holder" or "Holders"),
issued pursuant to the 6% Convertible Preferred Stock Series 98-A Subscription
Agreement of even date herewith (the "Subscription Agreement"), and SGI
INTERNATIONAL, INC., a Utah corporation having its principal place of business
at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchaser is purchasing from the Company, pursuant to the
Subscription Agreement two thousand (2,000) shares of Preferred Stock, and a
Warrant to purchase fifty thousand (50,000) shares of Common Stock. The Common
Stock of the Company underlying the Preferred Stock is referred to as the
"Conversion Shares", and the Common Stock of the Company underlying the Warrants
is referred to as the "Warrant Shares" (capitalized terms defined in the
Subscription Agreement and not otherwise defined herein have the meanings
specified in the Subscription Agreement); and
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Finder is receiving from the Company, pursuant to the
Subscription Agreement, Two Hundred (200) shares of the Preferred Stock, and a
Warrant to purchase forty thousand (40,000) shares of common stock of the
Company; and
WHEREAS, the Company desires to grant to the Holders the registration rights
set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto, (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security as a result of the provisions of Rule 144,
or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holder acknowledges
and understands that prior to the registration of the Securities as provided
herein, the Securities are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. The Holder understands that no disposition
or transfer of the Securities may be made by Holder in the absence of (i) an
opinion of counsel reasonably satisfactory to the Company that such transfer may
be made or (ii) a registration statement under the Securities Act is then in
effect with respect thereto.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date, on one occasion an amendment to the Form S-2 registration
statement filed with the SEC on January 23, 1998 (the "Amended Registration
Statement"), at the sole expense of the Company (except as provided in Section
3(c) hereof), in respect of all holders of Registrable Securities, so as to
permit a non-underwritten public offering and sale of the Registrable Securities
under the Securities Act, provided, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 3(a) in any jurisdiction in which the Company would be required
to qualify as a dealer in securities, under the securities or blue sky laws of
such jurisdiction. The Company agrees that it will use its best efforts to cause
the Amended Registration Statement to become effective within ninety (90) days
after the Closing Date. The number of Registrable Securities to be registered
shall be two hundred (200%) percent of the number of shares that would be
required if all of the Registrable Securities were converted in accordance with
the Certificate of Secretary, on a date which is five (5) business days prior to
the filing of the Amended Registration Statement.
(b) The Company will use its best efforts to maintain the
Amended Registration Statement or post-effective amendment filed under this
Section 3 hereof current under the Securities Act until the earlier of (i) the
date that all of the Registrable Securities have been sold pursuant to the
Registration Statement, (ii) the date that the Registrable Securities may be
sold under the provisions of Rule 144 or (iii) two (2) years after the effective
date of the Amended Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Amended Registration Statement under Section 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and all of other the fees and expenses of such
registration, including of its counsel and such other expenses as are necessary
to qualify the sale of Securities in compliance with any state Blue Sky laws.
The Company shall use its best efforts to qualify any of the securities for sale
in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 9 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to
include Holder's Registrable Securities in the Amended Registration Statement
which is to be filed if, in the opinion of counsel for both the Holder and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not restricted securities, as defined in Rule 144 under the Securities
Act.
(e) In the event the Amended Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed by the Company
by the forty fifth (45th) day after the Closing Date, or if the Amended
Registration Statement is not declared effective by the SEC by the ninetieth
(90th) day after the Closing Date (the Effective Date), then the Company will
pay, in cash, to the Holder on a pro-rata basis by wire transfer, as liquidated
damages for such failure and not as a penalty, one and one-half (1.5%) percent
of the principal amount of the Securities for the first month, and two (2%)
percent of the principal amount of the Securities each month thereafter until
the Amended Registration Statement has been filed and/or declared effective. The
liquidated damages shall be payable within five (5) calendar days of written
demand by the Holder, up to one (1) year after the Closing Date.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. Such payment
shall be made to the Holder in cash immediately if the registration of the
Securities are not effected; provided, however, that the payment of such
liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The registration of the
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is
required by the provisions of this Agreement to effect the registration of any
of the Registrable Securities under the Securities Act, the Company shall
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holder, shall reasonably request, and
do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holder under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer of
the rights granted under this Agreement, the Holder agrees that the Company may
require that the transferee comply with reasonable conditions as determined in
the discretion of the Company. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
Section 7. Termination of Registration Rights. The rights granted pursuant to
this Agreement shall terminate as to each Holder (and permitted transferees or
assignees ) upon the occurrence of any of the following:
(a) all Holder's securities subject to this Agreement have been registered;
(b) such Holder's securities subject to this Agreement may be sold without such
registration pursuant to Rule 144 promulgated by the SEC pursuant to the
Securities Act; or
(c) such Holder's securities subject to this Agreement can be sold pursuant to
Rule 144(k).
Section 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Holder and each person, if any, who controls the Holder within the meaning of
the Securities Act (Distributing Holders) against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Distributing Holders may become subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Amended Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Amended Registration
Statement, preliminary prospectus, final prospectus, offering circular,
notification or amendment, or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Holders, specifically for use in the preparation thereof. This
Section shall not inure to the benefit of any Distributing Holder with respect
to any person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Distributing Holder
failed to send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus contained in the
Amended Registration Statement to such person at or prior to the written
confirmation to such person of the sale of such Registrable Securities, where
the Distributing Holder was obligated to do so under the Securities Act or the
rules and regulations promulgated hereunder. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Amended
Registration Statement prepared by the Company, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 9. Contribution. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder, or the Company, makes a claim for indemnification, but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Agreement provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, or the Company, then the
Company and the applicable Distributing Holder shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Distributing Holder agree that
it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on
the first page of this Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 11. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
Section 13. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York or the state courts of the State of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any state or country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 14. Severability/Defined Terms. If any provision of
this Agreement shall for any reason be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereof and
this Agreement shall be construed as if such invalid or unenforceable provision
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the 6% Convertible Preferred Stock Series 98-A
Subscription Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, on the day and year first above written.
Attest: SGI INTERNATIONAL, INC
By:______________________ By:_________________________
Name: Name:
Title: Title:
SOVEREIGN PARTNERS, L.P.
By:_________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
By:__________________________
Name:
Title:
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
6% CONVERTIBLE PREFERRED STOCK SERIES 98-A
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 6% Convertible Preferred Stock
Series 98-A (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock and the other terms of the
Preferred Stock are set forth in the Certificate of Secretary of the 6%
Convertible Preferred Stock Series 98-A (Exhibit A annexed hereto). In addition,
the Company will sell to Subscriber a warrant (the "Warrant") to purchase Fifty
Thousand (50,000) shares of Common Stock of the Company for a period of five (5)
years from the Closing Date (as defined herein), as per the terms of a separate
Stock Purchase Warrant (Exhibit B annexed hereto). This Subscription and, if
accepted by the Company, the offer and sale of the Preferred Stock, Warrants and
the Common Stock underlying the Warrant and Preferred Stock (collectively the
"Securities"), are being made in reliance upon the provisions of Regulation D
under the Act.
The Closing Date shall be determined in accordance with
Sections 1.1 and 15 herein.
The undersigned, Sovereign Partners, L.P., located c/o South
Ridge Capital Management, LLC, Executive Pavilion, 90 Grove Street, No. 1,
Ridgefield, CT 06877, a limited partnership organized under the laws of the
State of Delaware (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. The Company will sell, and the Subscriber will
buy, on the Closing Date, an aggregate of Two Thousand (2,000) shares of
Preferred Stock for an aggregate purchase price of Two Million ($2,000,000) U.S.
Dollars (the "Purchase Price") based on U.S.$1,000 per share, and a Warrant to
purchase Fifty Thousand (50,000) shares of Common Stock of the Company.
Dividends will accrue and be paid at the rate of six (6%) percent on the
outstanding principal amount of the Preferred Stock until the Preferred Stock
has been completely converted, provided, however, all interest thereon shall
only be payable in common stock of the Company and not in cash at the time of
conversion. Dividends shall be calculated at the Conversion Price on the
Conversion Date when converted.
1.2 Form of Payment. 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.
1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein & Reis, LLP
are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
Section 2. Representations and Warranties of the Subscriber. Subscriber
acknowledges, represents, warrants and agrees as follows:
2.1 Organization and Authorization. Subscriber is duly
incorporated or organized and validly existing in the state or country of its
incorporation or organization and has all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by the 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"), and the Act, including its 10-Ks, 10-Qs,
8-K's, and registration statements, filed by the Company since December 31,
1996, (collectively, the "Reports"). Except for the Reports, 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 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 it individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; and employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
2.8 No Registration, Review or Approval. 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 D 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.
2.11 Registration Rights. The parties have entered into a Registration Rights
Agreement (Exhibit E).
Section 3. Representations and Warranties of the Company. For
so long as any Securities held by Subscriber remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of ts
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Accuracy of Reports and Information. To the best of its
knowledge, the Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934
Act, and shall use its best efforts to maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the 1934
Act and the Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed
pursuant to all reporting obligations, under either Section 13(a) or 15(d) of
the 1934 Act for a period of at least twelve (12) months immediately preceding
the offer and sale of the Securities (or for such shorter period that the
Company has been required to file such material).
3.3 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and sale, or such shorter
period that the Company has been required to file such Reports as defined
herein, to the best of the Company's knowledge (i) none of the Company's filings
with the Securities and Exchange Commission contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Company has timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been publicly
disclosed by the Company or disclosed in writing to the 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.
3.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Securities and
the performance of the Company's obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies, and to limitations
of public policy as they may apply to the indemnification provisions set forth
in this Agreement. Upon their issuance and delivery pursuant to this Agreement,
the Securities will be validly issued, fully paid and nonassessable and will be
free of any liens or encumbrances; provided, however, that the Securities are
subject to restrictions on transfer under state and/or federal securities laws.
The issuance and sale of the Securities will not give rise to any preemptive
right or right of first refusal or right of participation on behalf of any
person.
3.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
3.6 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Reports, this
Agreement or those incurred in the ordinary course of the Company's business
since 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 circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
3.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion or exercise provision of the Securities, will conflict with or
result in the breach or violation of any of the terms or provisions of, or
constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under, any material indenture,
mortgage, deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or any
statute or the Articles of the Company, or any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or the Company's listing agreement for its Common
Stock.
3.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
3.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except as may be required by applicable securities laws.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the business or
financial condition of the Company.
3.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect, and the Company is not in material
breach or material default under any of such agreements.
3.12 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
3.15 Required Governmental Permits. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
3.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Stock and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
3.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, the Company has no outstanding restricted
shares, or shares of Common Stock sold under Regulation S, Regulation D or
outstanding under any other exemption from registration, which are available for
sale as unrestricted ("free trading") stock.
3.18 Registration Alternative. The Company covenants and
agrees that for so long as any of the shares remain outstanding and continue to
be "restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Subscriber shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable.
3.20 Dilution. The Company is aware and acknowledges that
conversion of the Preferred Stock, and/or exercise of the Warrant, would cause
dilution to existing Shareholders and could significantly increase the
outstanding number of shares of Common Stock.
Section 4. Further Representations and Warranties of the
Company. For so long as any Securities held by the 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 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
Warrant representing the portion of the Preferred Stock converted
and/or Warrant exercised shall be delivered as follows:
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of
the Preferred Stock and/or exercise of the Warrants is not delivered, as a
direct result of the negligence or action or inaction of the Company only,
within five (5) business days of receipt by the Company of a valid Notice of
Conversion and the Preferred Stock to be converted and/or Notice of Exercise and
Warrants to be exercised (such date of receipt referred to as the "Conversion
Date" and/or "Exercise Date"), the Company shall pay to the Purchaser, in
immediately available funds, upon demand, as liquidated damages for such failure
and not as a penalty, for each $100,000 of Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the Conversion Shares are not delivered, and for each thousand
(1,000) shares of Common Stock sought to be exercised under the Warrant, $7.50
for each of the first ten (10) days and $15 per day thereafter that the shares
of Common Stock underlying the Warrant are not delivered, which liquidated
damages shall run from the sixth business day after the Conversion Date and/or
Exercise Date. Any and all payments required pursuant to this paragraph shall be
payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price and/or Exercise Price.
Section 5. Opinion of Counsel. The Company shall have their
counsel provide, at the Company's expense, an opinion of counsel acceptable to
the transfer agent (if required) in order to perfect conversion of the Preferred
Stock and/or exercise of Warrants, upon receipt of Notice of Conversion and/or
Notice of Exercise.
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, Automative
& Assembly Manufacturing, Inc.
(v) The Preferred Stock, which shall be issued at the
Closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) This Subscription Agreement, the issuance of the
Securities and the issuance of Common Stock, upon conversion of the
Securities, have been duly approved by all required corporate action
and that all such securities, upon delivery, shall be validly issued
and outstanding, fully paid and nonassessable.
(vii) The issuance of the Securities will not violate
the applicable listing agreement between the Company and any securities
exchange or market on which the Company's securities are listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Subscriber set forth in this
Subscription Agreement, the offer, issuance and sale of the Preferred
Stock and Conversion Shares to be issued upon exercise to the Purchaser
pursuant to this Agreement are exempt from the registration
requirements of the Act.
(ix) As more specifically described in the Reports,
the authorized capital stock of the Company consists of 75,000,000
shares of Common Stock, no par value per share ("Common Stock") and
20,000,000 shares of Preferred Stock, par value $.01 per shares.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the 1934 Act and to the best of
Counsel's knowledge without an independent investigation the Company
has timely filed all the material required to be filed pursuant to
Sections 13(a) or 15(d) of such Act for a period of at least twelve
months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in this Agreement; the Agreement has been duly
and validly authorized by all necessary corporate action by the
Company, to the best of our knowledge, no approval of any governmental
or other body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; the Agreement has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge without an
independent investigation, after due inquiry, the execution, delivery
and performance of the Agreements by the Company and the performance of
its obligations thereunder do not and will not constitute a breach or
violation of any of the terms and provisions of, or constitute a
default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the
Company is a party or by which it or any of its property is bound,
(iii) any applicable statute or regulation, (iv) or any judgment,
decree or other of any court or governmental body having jurisdiction
over the Company or any of its property.
Section 6. Opinion of Counsel Upon Conversion. The Company
will obtain for the 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, subject only to receipt of a Notice of Conversion in the form of
Exhibit D and receipt by Counsel of such representations, warranties, and
documents as are determined to be necessary to comply with applicable securities
laws, duly executed by the Subscriber which shall be satisfactory to the
Transfer Agent, directing the Transfer Agent to remove the legend from the
certificate.
Section 7. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the 1934 Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request
a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Act and the 1934
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as Purchaser may reasonably request in availing itself of any
rule or regulation of the SEC allowing Purchaser to sell any such
Securities without registration.
Section 8. Representations and Warranties of the Company and
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
Secretary (Exhibit A).
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 Certificate of
Secretary of the 6% Convertible Preferred Stock Series 98-A, plus accrued and
unpaid dividends (the "Redemption Price"), for any Preferred Stock for which a
Notice of Conversion has not been sent. Upon receipt by Subscriber of notice by
the Company (the "Redemption Notice") of its right to redeem the Preferred Stock
(the "Redemption Date"), the Company shall wire transfer the appropriate amount
of funds into an escrow account mutually agreed upon by both the Company and
Subscriber within three (3) business days of the Redemption Date. Additionally,
if the Company has not deposited into escrow the Redemption Price for the
benefit of the Subscriber, within three (3) business days after the Redemption
Date, the Company shall pay to the Subscriber an amount equal to five (5%)
percent per month thereafter of the Liquidation Value of the Preferred Stock
being redeemed on a pro rata basis in cash. After the escrow agent is in receipt
of the Redemption Price, he shall notify the Subscriber to surrender the
appropriate number of shares of Preferred Stock. If the escrow agent has not
received the Redemption Funds within three (3) business days from the Redemption
Date, the Subscriber shall again have the right to convert the Preferred Stock,
and thereafter the Company shall only have the right to redeem the Preferred
Stock by sending a Redemption Notice to the Subscriber and simultaneously wire
transferring the Redemption Price.
Section 11. Mandatory Conversion. In the event the Preferred
Stock has not been converted two (2) years from the Closing Date, the Preferred
Stock shall automatically be converted as if the Subscriber voluntarily elected
such conversion in accordance with the procedure, terms and conditions set forth
in this Agreement.
Section 12. 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 13. Legend. The certificates representing the Securities shall be
subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
Section 14. Stock Delivery Instructions. The Preferred Stock Certificate shall
be delivered to Subscriber on a delivery versus payment basis as set forth in
the Escrow Agreement.
Section 15. Closing Date. The date Escrow Agent receives the
Securities and Purchase Price, and both the conditions set forth in Sections 16
and 17 and the terms and conditions of the Escrow Agreement (Exhibit C) herein
are satisfied or waived shall be the Closing (the "Closing Date"), and all acts,
deliveries and confirmations comprising the Closing Date regardless of
chronological sequence, shall be deemed to occur contemporaneously and
simultaneously upon the occurrence of the last act, delivery, or confirmation of
the Closing Date, and such acts, deliveries, or confirmations shall not be
effective unless and until the last of same shall have occurred, and as shall be
mutually agreed upon as to time and place.
Section 16. Conditions to the Company's Obligation to Sell. Subscriber
understands that the Company's obligation to sell the Preferred Stock, Warrants
are conditioned upon:
(i) The receipt and acceptance by the Company of this
Subscription Agreement and all duly executed Exhibits thereto by an
authorized officer of the Company;
(ii) Delivery into escrow by Subscriber of good
cleared funds as payment in full for the purchase of the Securities;
(iii) All representations and warranties of the
Subscriber contain herein shall remain true and correct as of the
Closing Date;
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, Warrants, and the proposed issuance of the Common
Stock underlying the Preferred Stock, and Warrants shall be legally
permitted by all laws and regulations to which the Subscriber and the
Company are subject; and
(v) The Certificate of Secretary for the Preferred
Stock shall have been filed with the Utah Secretary of State.
Section 17. Conditions to Subscriber's Obligation to Purchase.
The Company understands that Subscriber's obligation to purchase the Convertible
Preferred Stock, and Warrants is conditioned upon:
(i) Acceptance by 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 Dates;
(iv) Receipt of opinion of counsel and proof of a filed Certificate of
Secretary; and
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock, and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Company and Subscriber are subject.
Section 18. Miscellaneous.
18.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Agreement irrevocably consents to the
service of process in any such proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
18.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
18.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and Exhibits hereto constitute the entire agreement between the
Subscriber and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by all parties.
18.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
18.5 Entire Agreement. This Agreement and Exhibits hereto
constitute the entire agreement between the Subscriber and the Company with
respect to the subject matter hereof. This Agreement may be amended only by a
writing executed by all parties.
18.6 Reliance by Company. The 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.
18.7 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.
18.8 Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby except that the Company shall (i) pay
one (1%) percent of the Purchase Price to Goldstein, Goldstein & Reis, LLP for
legal, administrative and escrow fees; and (ii) issue to Settondown Capital
International, Ltd., as placement agent, for services rendered in connection
with this transaction, two hundred (200) shares of Preferred Stock, and a
Warrant to purchase forty thousand (40,000) shares of Common Stock.
18.9 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first written
below.
PURCHASER:
By___________________________
Name:
Title:
Executed this ____ day of March , 1998
Agreed to and Accepted on
this ____ day of March 1998
SGI INTERNATIONAL
By____________________________
Title:
<PAGE>
FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES:
NAME:
ADDRESS:
TEL NO:
FAX NO:
CONTACT
NAME:
DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):
NAME:
ADDRESS:
TEL NO:
FAX NO:
CONTACT
NAME:
SPECIAL
INSTRUCTIONS: ____________________________________________________
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 6th day of
March, 199, between SOVEREIGN PARTNERS, L.P., located c/o South Ridge Capital
Management, LLC, Executive Pavilion, 90 Grove Street, No. 1, Ridgefield, CT
06877, a limited partnership organized under the laws of the State of Delaware
(the "Purchaser"), SETTONDOWN CAPITAL INTERNATIONAL, LTD., located at c/o
Charlotte House, Charlotte Street, Nassau, Bahamas, a limited liability company
organized under the laws of Bahamas, a non-USA jurisdiction (the "Finder") (the
Purchaser and the Finder are collectively referred to as "Holder" or "Holders"),
issued pursuant to the 6% Convertible Preferred Stock Series 98-A Subscription
Agreement of even date herewith (the "Subscription Agreement"), and SGI
INTERNATIONAL, INC., a Utah corporation having its principal place of business
at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Holder is purchasing from the Company, pursuant to the
Subscription Agreement two thousand (2,000) shares of Preferred Stock, and a
Warrant to purchase fifty thousand (50,000) shares of Common Stock. The Common
Stock of the Company underlying the Preferred Stock is referred to as the
"Conversion Shares", and the Common Stock of the Company underlying the Warrants
is referred to as the "Warrant Shares" (capitalized terms defined in the
Subscription Agreement and not otherwise defined herein have the meanings
specified in the Subscription Agreement); and
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Finder is receiving from the Company, pursuant to the
Subscription Agreement, Two Hundred (200) shares of the Preferred Stock, and a
Warrant to purchase forty thousand (40,000) shares of common stock of the
Company; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto, (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security as a result of the provisions of Rule 144,
or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holder acknowledges
and understands that prior to the registration of the Securities as provided
herein, the Securities are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. The Holder understands that no disposition
or transfer of the Securities may be made by Holder in the absence of (i) an
opinion of counsel reasonably satisfactory to the Company that such transfer may
be made or (ii) a registration statement under the Securities Act is then in
effect with respect thereto.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date, on one occasion an amendment to the Form S-2 registration
statement filed with the SEC on January 23, 1998 (the "Amended Registration
Statement"), at the sole expense of the Company (except as provided in Section
3(c) hereof), in respect of all holders of Registrable Securities, so as to
permit a non-underwritten public offering and sale of the Registrable Securities
under the Securities Act, provided, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 3(a) in any jurisdiction in which the Company would be required
to qualify as a dealer in securities, under the securities or blue sky laws of
such jurisdiction. The Company agrees that it will use its best efforts to cause
the Amended Registration Statement to become effective within ninety (90) days
after the Closing Date. The number of Registrable Securities to be registered
shall be two hundred (200%) percent of the number of shares that would be
required if all of the Registrable Securities were converted in accordance with
the Certificate of Secretary, on a date which is five (5) business days prior to
the filing of the Amended Registration Statement.
(b) The Company will use its best efforts to maintain the
Amended Registration Statement or post-effective amendment filed under this
Section 3 hereof current under the Securities Act until the earlier of (i) the
date that all of the Registrable Securities have been sold pursuant to the
Registration Statement, (ii) the date that the Registrable Securities may be
sold under the provisions of Rule 144 or (iii) two (2) years after the effective
date of the Amended Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Amended Registration Statement under Section 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and all of other the fees and expenses of such
registration, including of its counsel and such other expenses as are necessary
to qualify the sale of Securities in compliance with any state Blue Sky laws.
The Company shall use its best efforts to qualify any of the securities for sale
in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 9 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to
include Holder's Registrable Securities in the Amended Registration Statement
which is to be filed if, in the opinion of counsel for both the Holder and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not restricted securities, as defined in Rule 144 under the Securities
Act.
(e) In the event the Amended Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed by the Company
by the forty fifth (45th) day after the Closing Date, or if the Amended
Registration Statement is not declared effective by the SEC by the ninetieth
(90th) day after the Closing Date (the Effective Date), then the Company will
pay, in cash, to the Holder on a pro-rata basis by wire transfer, as liquidated
damages for such failure and not as a penalty, one and one-half (1.5%) percent
of the principal amount of the Securities for the first month, and two (2%)
percent of the principal amount of the Securities each month thereafter until
the Amended Registration Statement has been filed and/or declared effective. The
liquidated damages shall be payable within five (5) calendar days of written
demand by the Holder, up to one (1) year after the Closing Date.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. Such payment
shall be made to the Holder in cash immediately if the registration of the
Securities are not effected; provided, however, that the payment of such
liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The registration of the
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is
required by the provisions of this Agreement to effect the registration of any
of the Registrable Securities under the Securities Act, the Company shall
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holder, shall reasonably request, and
do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holder under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer of
the rights granted under this Agreement, the Holder agrees that the Company may
require that the transferee comply with reasonable conditions as determined in
the discretion of the Company. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
Section 7. Termination of Registration Rights. The rights granted pursuant to
this Agreement shall terminate as to each Holder (and permitted transferees or
assignees ) upon the occurrence of any of the following:
(a) all Holder's securities subject to this Agreement have been registered;
(b) such Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 promulgated by the SEC
pursuant to the Securities Act;
(c) such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k).
Section 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Holder and each person, if any, who controls the Holder within the meaning of
the Securities Act (Distributing Holders) against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Distributing Holders may become subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Amended Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Amended Registration
Statement, preliminary prospectus, final prospectus, offering circular,
notification or amendment, or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Holders, specifically for use in the preparation thereof. This
Section shall not inure to the benefit of any Distributing Holder with respect
to any person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Distributing Holder
failed to send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus contained in the
Amended Registration Statement to such person at or prior to the written
confirmation to such person of the sale of such Registrable Securities, where
the Distributing Holder was obligated to do so under the Securities Act or the
rules and regulations promulgated hereunder. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Amended
Registration Statement prepared by the Company, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 9. Contribution. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder, or the Company, makes a claim for indemnification, but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Agreement provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, or the Company, then the
Company and the applicable Distributing Holder shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Distributing Holder agree that
it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on
the first page of this Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 11. Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
Section 13. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York or the state courts of the State of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any state or country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 14. Severability/Defined Terms. If any provision of
this Agreement shall for any reason be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereof and
this Agreement shall be construed as if such invalid or unenforceable provision
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the 6% Convertible Preferred Stock Series 98-A
Subscription Agreement.
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, INC
By:______________________ By:_________________________
Name: Name:
Title: Title:
SOVEREIGN PARTNERS, L.P.
By:_________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
By:__________________________
Name:
Title:
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statements
on Forms S-8 of our report dated March 27, 1998, on the 1997 consolidated
financial statements of SGI International and subsidiaries which appears else
where in this Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
J. H. COHN LLP
San Diego, California
March 37, 1998
We consent to the incorporation by reference in the Registration Statements
(Form S-8) and in related Prospectuses of our report dated March 20, 1997, with
respect to the consolidated financial statements of SGI International,
included in this Annual Report (Form 10-K) for the year ended Decmeber 31,
1996, filed with the Securities and Exchange Commission.
/s/
ERNST & YOUNG
San Diego, Calfornia
March 30, 1998
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<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-K for the year ended Decmeber 31, 1997, and is qualified
in its entirely by reference to such financial statements.
</LEGEND>
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<NAME> SGI International
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