As filed with the Securities and Exchange Commission on August 4, 1998
Registration No. 333-44789
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
SGI INTERNATIONAL
(Exact name of Registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, CA 92037
TEL (619) 551-1090 / FAX (619) 551-0247
(Address, including zip code, telephone number and facsimile number,
including area code, of registrant's principal executive offices)
Joseph A. Savoca, Chief Executive Officer
President and Chairman of the Board
SGI International
1200 Prospect Street, Suite 325, La Jolla, CA 92037 (619) 551-1090
(Name, address and telephone number of agent for service)
--------------------
Copies to:
FISHER THURBER LLP
TIMOTHY J. FITZPATRICK, ESQ.
DAVID A. FISHER, ESQ.
4225 Executive Square, Suite 1600
La Jolla, CA 92037-1483
Tel. (619) 535-9400
Fax (619) 535-1616
--------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement has become effective.
--------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [x]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [x]
<PAGE>
<TABLE>
====================================================================================================================
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Maximum Proposed Maximum
Title of each class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be registered registered (1)(2) per Unit (3) Price (3) Registration Fee
- ----------------------------- ------------------- ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value, which may be sold
by selling shareholders... 1,139,127 $ 1.01 $ 1,150,518 $ 339.40
- ----------------------------- ------------------- ------------------ -------------------- ------------------
Common Stock, no par value,
underlying outstanding
Convertible Preferred Stock.. 7,282,093 $ 1.01 $ 7,354,914 $ 2,169.70
- ----------------------------- ------------------- ------------------ -------------------- ------------------
Common Stock, no par value,
outstanding underlying
Warrants..................... 1,571,360 $ 1.01 $ 1,587,074 $ 468.19
- ----------------------------- ------------------- ------------------ -------------------- ------------------
TOTAL........................ ................. ................ .................. $ 2,977.29*
============================= =================== ================== ==================== ==================
</TABLE>
* $3,674.51 was previously paid by the Company in connection with this
Registration Statement filed January 23, 1998, and amended on April 20,
1998, May 14, 1998, June 15, 1998, July 1, 1998, and July 20, 1998.
(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement covers such additional indeterminate number of shares of common
stock as may be issued by reason of adjustments in the number of shares of
common stock issuable pursuant to anti-dilution provisions contained in the
existing warrants and convertible preferred stock. Because such additional
shares of common stock will, if issued, be issued for no additional
consideration, no additional registration fee is required.
(2) The number of shares of common stock registered herein underlying certain
convertible preferred stock is indeterminate and is estimated to include
the shares of common stock required to fulfill the conversion rights of
preferred stock which is convertible into a given number of common shares
in part based upon conversion formulae, referencing fluctuating market
prices and is also estimated to satisfy contractual obligations of the
Company requiring the registration of various amounts up to 230% of the
number of shares of Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933,
based on the average of the bid and ask prices of the Company's common
stock on the OTC Bulletin Board on July 29, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREFORE BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
PROSPECTUS
SGI INTERNATIONAL
1,571,360 Shares of Common Stock underlying outstanding warrants
7,282,093 Shares of Common Stock underlying
outstanding convertible preferred stock
1,139,127 Shares of outstanding Common Stock
This Prospectus (the "Prospectus") relates to the resale, which is not
being underwritten, by the holders of (i) an aggregate of 1,571,360 shares
("Warrant Shares") of common stock no par value ("Common Stock") issuable upon
exercise of certain outstanding warrants to purchase Common Stock of the Company
("Existing Warrants"); and (ii) an aggregate of 7,282,093 shares of common stock
issuable upon conversion of the Series 96-B; 97-D; and Series 98-A convertible
preferred stock issued in 1996, 1997 and 1998 including shares of Common Stock
issuable upon exercise of outstanding warrants which were issued in connection
therewith; and shares of Common Stock issued to the placement agents for the
Company in connection therewith (the "Preferred Shares"). This Prospectus also
relates to the resale which is not being underwritten by the holders of an
aggregate of 1,139,127 shares of outstanding common stock ("Selling Shares").
The Warrant Shares, Preferred Shares and Selling Shares are referred to herein
as the "Securities." The Securities may be offered by certain shareholders of
the Company (the "Selling Security Holders") from time to time in transactions
in the over-the-counter market through the OTC Bulletin Board, in privately
negotiated transactions, or through a combination of such methods of sale, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices relating to such prevailing market prices, or at negotiated
prices. The Selling Security Holders may effect such transactions by selling the
Securities to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holders and/or the purchasers of the Securities for whom such
broker-dealers may act as agents or to whom they may sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). See "Selling Security Holders" and "Plan of
Distribution."
The Company shall receive the proceeds from the exercise (if any) of the
Existing Warrants. None of the proceeds from the sale of the Securities by the
Selling Security Holders will be received by the Company. The Company has agreed
to bear all expenses (other than selling commissions and fees and expenses of
counsel and other advisers to the Selling Security Holders) in connection with
the registration and sale of the Securities being offered by the Selling
Security Holders. The Securities offered hereby were restricted securities under
the Securities Act prior to their registration hereunder. This Prospectus has
been prepared so that future sales of common stock by the Selling Security
Holders will not be restricted under the Securities Act of 1933 (the "Securities
Act"). See "Selling Security Holders."
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "SGII." On July 29, 1998, the last reported bid and ask prices for the
Common Stock were $1.00 and $1.02, respectively.
THE SECURITIES OFFERED ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS."
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 4, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549, and at the
Commission's regional offices: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Suite
1300, 7 World Trade Center, New York, New York 10048. Copies of such materials
can also be obtained at prescribed rates from the Public References Section of
the Commission at 450 Fifth Street NW, Judiciary Plaza, Washington, DC 20549.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Commission's web site is located at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-2
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. The Registration Statement, including all
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission.
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
INFORMATION INCORPORATED BY REFERENCE
The Company regularly files documents with the Securities and Exchange
Commission to comply with applicable government regulations, including Form 10-Q
and Form 10-K. The Company will provide without charge to each person, including
any beneficial owner, to whom this Prospectus is delivered, a copy of the Form
10-K for the year ended December 31, 1997, and a copy of the Form 10-Q for the
quarter ended March 31, 1998, and upon written or oral request of such person, a
copy of any and all of the other documents that have been filed with the
Securities and Exchange Commission and incorporated by reference in this
Prospectus (other than exhibits to such documents which are not specifically
incorporated by reference herein). Such requests should be directed to SGI
International, Attn: George Donlou, Controller, at its principal offices located
at 1200 Prospect Street, Suite 325, La Jolla, CA 92037 (619) 551-1090.
The following documents previously filed with the Commission, except as
superseded or modified herein, are hereby incorporated by reference into this
Prospectus: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997, June 30, 1997, September 30, 1997, and March
31, 1998, (iii) the Company's definitive Form 14a (Proxy) dated May 23, 1997;
(iv) the Company's Form 8-K's dated January 23, 1998, and November 24, 1997; (v)
the Company's 1934 Act Registration Statement on Form 8-A; and (vi) each
additional exhibit from all of the Company's prior 1933 Act filings.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein, modifies
2
<PAGE>
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as modified or superseded, to constitute a part of this
Prospectus.
No person is authorized in connection with any offering made hereby to give
any information or make any representation not contained or incorporated by
reference in this Prospectus, and any information not contained or
incorporated herein must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, by any person in any jurisdiction in which it is unlawful
for such person to make such offer or solicitation. Neither the delivery of this
Prospectus at any time nor any sale made hereunder shall, under any
circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. When included in this
Prospectus, the words "expects," "intends," "anticipates," "plans," "projects"
and "estimates," and analogous or similar expressions are intended to identify
forward-looking statements. Such statements, which include statements contained
in "Prospectus Summary," "Risk Factors," "Business" and elsewhere are inherently
subject to a variety of risks and uncertainties that could cause actual results
to differ materially from those reflected in such forward-looking statements.
For a discussion of certain of such risks, see "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information, including "Risk
Factors," and the financial statements incorporated by reference herein
appearing elsewhere in this Prospectus or incorporated by reference herein.
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Existing Warrants.
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel ("PDF") and coal
derived liquids ("CDL"), and at the same time reduce the PDF's pollution
potential when it is subsequently burned for fuel. The Company believes the LFC
Process could upgrade a significant portion of the world's abundant low-rank
coal reserves into coal and petroleum-based products which could provide
cost-effective compliance with certain environmental legislation and regulations
including the United States Clean Air Act ("Clean Air Act") and other current
and possibly future U.S. and international environmental regulations or
concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. Except for the license issued by TEK-KOL to
Shell Mining Company ("SMC") for the Demonstration Plant and other plants which
may be built by the successors to SMC and a license issued to the Company, and a
non-exclusive license granted by the Company to Rosebud Energy Corp. which was
granted prior to the formation of TEK-KOL, TEK-KOL does not have any other
agreements to license or to sell the LFC Process. Except for the proceeds of the
sale of the LFC Technology to SMC on September 28, 1989, in the amount of
$2,550,000 plus the assumption by Shell of the obligation to build the
Demonstration Plant, the Company has received only nominal revenues from the LFC
Process. The only marketing related agreement relating to the LFC Process is a
supply agreement between TEK-KOL and Mitsubishi Heavy Industries ("MHI") dated
February 8, 1996. This agreement provides that Mitsubishi will pay TEK-KOL 3% of
the cost of equipment and services provided by MHI to any future LFC Process
plant. The Company believes many existing users of coal in the U.S., such as
electric utilities, face costly capital expenditures to modify their
coal-powered electricity producing facilities to comply with the Clean Air Act.
In the opinion of the Company, the Clean Air Act impacts over 100 coal fired
electrical generating plants in the U.S. and, by the year 2000, requires many
major U.S. power plants to achieve specified reductions in pollution. The
Company believes countries outside the United States who currently generate much
of their electricity from burning coal, and who have substantial low rank coal
reserves, could use the LFC Process to provide a more cost-effective and less
environmentally damaging fuel source for the production of power.
In 1989, the Company contributed the LFC Process to TEK-KOL. TEK-KOL
consists of the Company and Bluegrass, a subsidiary of Zeigler. Zeigler is a
coal producing company in the United States. Over the period of many months the
Partners themselves, and between the Partners and other interested parties,
including MHI, failed to conclude negotiations to sell or license a portion of
the LFC Technology or otherwise significantly advance its development.
Consequently, the Company gave notice on May 11, 1998, to Bluegrass that it was
unilaterally terminating TEK-KOL. Material factors which influenced the
Company's decision included Bluegrass' closure of the Demonstration Plant and
Zeigler's decision to put all of its assets up for sale. Ultimately, the Company
determined it was in its best interest to terminate the TEK-KOL Partnership in
order to more expeditiously advance the development of the LFC Technology.
Upon termination of TEK-KOL, which pursuant to the TEK-KOL agreement is to
take no longer than 18 months, the Company will own an undivided 50% interest in
all intangible assets owned by TEK-KOL including all patents and intellectual
property. Upon termination, the Company has the exclusive worldwide right to
market and license the LFC Process through April 12, 2000. After April 12, 2000,
the Company and Bluegrass each have the right to market and license the LFC
Process. The termination of TEK-KOL could have a material adverse impact on the
business and operations of the Company, including its ability to license or sell
the LFC Process.
4
<PAGE>
The LFC Process has been used to produce PDF and CDL for test burning at
the Demonstration Plant owned by 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") subsidiary, now called
Bluegrass, 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. Because of the continuing
losses generated by the operation of the Demonstration Plant, ENCOAL suspended
operation of the Demonstration Plant in the fourth quarter of 1997. Since
TEK-KOL has been terminated by the Company, ENCOAL is very unlikely to resume
operations of the Demonstration Plant and the Company is seeking to buy the
Demonstration Plant, find a partner to build another one or market the LFC
Process without the assistance of a demonstration plant. There could be a
material adverse impact on the Company if the Demonstration Plant does not
resume operations, even if a substitute demonstration plant is completed in
place of the Demonstration Plant.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process. The
Company is in discussions with a number of candidates, including Mitsubishi
Corporation and Mitsubishi Heavy Industries, Ltd., in an effort to form a joint
venture or other collaboration to market and license the LFC Process worldwide.
The Company is currently negotiating the terms of a letter of intent with
Mitsubishi Corporation. The current proposed terms of the potential letter of
intent include establishment of a joint venture to commercialize the LFC
Process, and Mitsubishi's assumption of certain development and operating costs
and sharing the responsibility for other costs. No letter of intent has been
executed or approved by either party to date, and there can be no assurance
a letter of intent will be entered into, or that if one is entered into, the
proposed terms will include those currently being negotiated, or that any joint
venture or other material transaction will result therefrom.
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil and resid produced in oil
refining in order to increase the efficiency of crude oil refineries. 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, Assembly and
Manufacturing Systems, Inc. ("AMS"). AMS designs and produces custom automated
assembly equipment primarily for manufacturers in the biomedical, automotive,
electronics and computer industries. AMS provided 93% of the gross revenues of
the Company for the fiscal year ended December 31, 1996, and provided 99% of the
gross revenues of the Company for the fiscal year ended December 31, 1997. While
AMS provides a substantial portion of the current gross revenues of the Company,
the Company currently intends to focus its business and operations on
commercializing and developing the LFC Process and the OCET Process.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities Offered(1)(2)(4)............................. 9,992,580 shares of Common Stock
Common Stock outstanding as of July 29, 1998(3)(4)...... 14,532,043
Common Stock outstanding after this offering(3)(4)...... 24,524,623
Use of Proceeds......................................... The Company will not receive any of the proceeds from the
conversion of the Preferred Shares or from the sale of the
Selling Shares. To the extent any of the Existing Warrants
are exercised the net proceeds received by the Company
will be used for research and development, working capital
and general corporate purposes. The use of proceeds is
subject to change based on the extent to which Existing
Warrants are exercised, future occurrences, LFC and
OCET development requirements and other factors. See
"Use of Proceeds."
OTC Bulletin Board Symbol............................... SGII
Risk Factors............................................ This offering involves a high degree of risk, including
without limitation substantial risk resulting from the
Company's lack of revenue, uncertain availability of
required additional capital, as well as the risks associated
with developing technologies and uncertain markets and
legislative impacts. See "Risk Factors."
</TABLE>
- -------------------------
(1) For a description of the voting and other rights of the Common Stock see
"Description of Securities - Common Stock."
(2) Includes: (i) 524,437 shares of Common Stock issuable upon exercise of the
Existing Warrants; (ii) up to 7,282,093 shares of Common Stock issuable
upon conversion of outstanding Preferred Stock; (iii) up to 1,046,923 shares
of Common Stock issuable upon exercise of the warrants issued in connection
with the Preferred Share Warrants registered hereby; and (iv) 1,139,127
shares of outstanding restricted Common Stock.
(3) Does not include: (i) 2,000,000 shares of Common Stock reserved for
issuance under the Company's stock-based compensation plans of which
options to acquire 917,000 shares have been granted as of the date of this
Prospectus; (ii) 3,212,915 shares of Common Stock issuable upon exercise of
other outstanding warrants not registered herein; (iii) up to 1,571,002
shares of Common Stock issuable upon conversion of various series of
outstanding Preferred Stock not registered herein; and (iv) up to 813,811
shares of Common Stock issuable upon conversion of outstanding convertible
debentures not registered herein.
(4) Includes estimated numbers of shares which may be issued upon conversion of
outstanding Preferred Stock.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of, the end of the years
in the five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below for the three months ended March 31, 1997, and 1998, are derived from the
unaudited consolidated financial statements of the Company. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
statement of the financial position and results of operations for these periods.
Operating results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation," and
the financial statements and the related notes thereto which are incorporated by
reference in this Prospectus.
<TABLE>
Three months ended
March 31, Years ended December 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 1,101,559 $ 1,113,915 $ 5,322,724 $ 4,244,268 $ 900,306(1) $ 552,503 $ 809,910
Net loss (1,359,088) (1,143,545) (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) 1,312,519 - 770,226 - - - -
Net Loss Applicable
to Common Stock (2,671,607) (1,143,545) (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common Share - Basic (0.25) (0.19) (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average Common
Shares Outstanding 10,768,073 6,175,482 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets 3,460,727 1,272,449 $ 1,648,745 $ 2,295,167 $ 944,910 $ 717,406 $ 1,331,381
Working Capital
Deficiency (2,853,531) (5,004,865) (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 7,118,348 5,554,091 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding Current Portion) 111,875 119,000 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity (Deficiency) 692,215 (842,223) (457,109) 194,574 (1,629,578) 556,866 2,350,981
- ------------------
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue of
$867,000 and income from operations of $238,000 for the period October 31,
1995, through December 31, 1995.
(2) No dividends have been declared since inception.
7
<PAGE>
RISK FACTORS
The purchase of the securities offered hereby involves a high degree of
risk. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including but not limited to those set forth in the following risk
factors and elsewhere in the Prospectus. Prospective purchasers of these
securities should carefully review and consider the risk factors set forth
below, as well as the other information contained herein.
Limited Operating Revenues; Accumulated Deficit; Expectation of Future Losses;
Three Licensing Agreements for LFC Process
The Company has experienced operating losses in each fiscal period since
its inception in 1980. As of March 31, 1998, the Company had a deficit
accumulated of approximately $51.6 million and a working capital deficiency of
approximately $2.9 million. The Company's operations may result in substantial
and continuing losses for the indefinite future. Except for the operation of
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
which it acquired in October 1995, the Company has generated only nominal
revenues from operations. AMS provided 93% of the gross revenues of the Company
for the fiscal year ended December 31, 1996, and provided 99% of the gross
revenues of the Company for both the three months ended March 31, 1998, and
fiscal year ended December 31, 1997. The development of the Company's LFC
Process and OCET Process will require the commitment of substantial resources
for the underlying technology to be finalized and licensed to third parties, or
for a sale of such technologies, and to establish marketing, sales and
administrative capabilities. There can be no assurance the Company will be
successful in any of these endeavors. Except for the license issued by TEK-KOL
to SMC for the Demonstration Plant and other plants which may be built by the
successors to SMC and a license issued to the Company, and a non-exclusive
license granted by the Company to Rosebud Energy Corp. which was granted prior
to the formation of TEK-KOL, TEK-KOL does not have any other agreements to
license or to sell the LFC Process. The Company unilaterally terminated the
TEK-KOL partnership agreement by giving notice of termination on May 11, 1998.
There can be no assurance the Company will enter into other agreements with
third parties for product development and commercialization, or will
successfully market or license the LFC Process or the OCET Process. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, manufacture and market its proprietary technologies. There can be no
assurance the Company will be able to accomplish these tasks. Significant delays
in any of these matters could have a material adverse impact on the Company's
business, financial condition and results of operations.
Going Concern Assumption
The reports of the Company's independent auditors on the Company's
financial statements as of December 31, 1997, and 1996, and for the years ended
December 31, 1997, 1996, and 1995, contain explanatory paragraphs stating that
the Company's recurring operating losses, working capital deficiencies and
certain other matters raise substantial doubt about its ability to continue as a
going concern. The Company will require substantial additional funds in the
future to complete and commercialize the LFC Process. There can be no assurance
the Company will be able to raise sufficient funds or generate sufficient cash
from operations to cover the cost of its operations and therefore, there can be
no assurance the independent auditors' reports in the future will not have a
similar explanatory paragraph. The existence of the explanatory paragraph may
have a material adverse effect on the Company's business, financial condition
and results of operations.
Substantial Debt Service Obligations
The Company has substantial debt service obligations which become due
before the end of the 1998 fiscal year. The Company has approximately $4.4
million of debt which is due on September 30, 1998, and does not currently have
any sinking fund or other mechanism to retire any of such debt prior to that
time. Based on current levels of operations,
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the Company will not be able to meet the principal and interest payments due
without substantial additional funding and/or extension or conversion of
existing debt. If the Company is unable to pay its debt when due, the Company
may be required to refinance all or a portion of its existing debt, or sell
assets or obtain additional financing. There can be no assurance that any such
refinancing or that any such sale of assets or additional financing would be
possible on terms reasonably favorable to the Company, if at all. The failure to
repay or restructure the debt would have a material adverse impact on the
business and operations of the Company.
During October 1997, the Company was able to extend, exchange or convert
approximately $4.8 in existing debt for new securities of the Company, including
common stock, warrants and revised, amended or new debt securities, and also
paid approximately $400,000 in existing debt. The Company retired approximately
$250,000 in existing 10%, 11% and 12% interest accruing notes which were
required to be paid by October 31, 1997, in exchange for $250,000 of 12%
debentures due September 30, 1998, with interest payments due quarterly on the
replacement notes. The Company obtained an extension to September 30, 1998, of
approximately $3,428,000 of debt which was formerly due October 31, 1997, and in
connection therewith issued rights to acquire warrants to purchase an aggregate
of 152,500 shares of Common Stock on or before December 31, 1999, at an exercise
price of $1.20 per share. The Company also obtained an extension to September
30, 1998, of approximately $727,000 of debt which was required to be paid by
October 31, 1997. In connection therewith and in part as consideration for all
interest due through the maturity of the extended notes the Company issued
95,439 shares of Common Stock.
Future Capital Requirements Uncertain; No Assurance of Future Funding
The Company will be required to make substantial expenditures to conduct
existing and planned research and development, to market its proposed LFC
Process and OCET Process and to repay or restructure its debt obligations. In
the next twelve months, these expenditures will include the Company's
obligations to TEK-KOL, which may require $750,000 or more for its 50% share of
the partnership's budget obligations, and the principal owed on outstanding debt
obligations of the Company in the approximate amount of $4.4 million due
September 30, 1998. The Company does not currently have the funds available to
pay all of these obligations. The Company intends to raise the approximately
$5.15 million necessary for these expenses, as well as ongoing operations and
working capital, through sales of its equity or debt securities, or from
revenues generated from strategic partnerships, licenses or similar
transactions. The Company's future capital requirements will depend upon
numerous factors, including the amount of revenues generated from AMS
operations, the cost of the Company's sales and marketing activities and the
progress of the Company's research and development activities, none of which can
be predicted with certainty. The Company will seek additional funding during the
next few months and will likely seek additional funding after such time. There
can be no assurance any additional financing will be available on acceptable
terms, or at all, when required by the Company. Moreover, if additional
financing is not available, the Company could be required to reduce or suspend
its operations, seek an acquisition partner or sell securities on terms that may
be highly dilutive or otherwise disadvantageous to investors. The Company has
experienced in the past, and may continue to experience, delays in its LFC
Process product development due to working capital constraints. Any such
difficulties or delays could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has a line of credit with a financial institution for
approximately $400,000 and has borrowings of $400,000 as of the date of this
Prospectus. The Company does not anticipate being able to secure any additional
bank financing in the foreseeable future. The Company intends to finance the
development and marketing of its proposed LFC Process and OCET Process through
licensing agreements, strategic alliances and other arrangements with third
parties. There can be no assurance such license, marketing, strategic, or other
collaborative arrangements will be obtained, or that additional funds will be
available when needed, or on terms acceptable to the Company. If adequate funds
are not available, the Company may be required to relinquish rights to certain
of its technologies or potential products the Company would not otherwise
relinquish. The Company's future cash requirements will be affected by results
of research and development, collaborative relationships, if any, changes in the
focus and direction of the Company's research and development, competitive and
technological advances, and other factors.
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TEK-KOL-KOL Partnership Termination
On May 11, 1998, the Company gave notice to Bluegrass, in accordance with
the TEK-KOL partnership agreement (the "Partnership Agreement"), that it was
unilaterally terminating the Partnership Agreement effective six months from the
date of the notice. Upon termination the parties are required to take those
steps necessary to dissolve the partnership and wind up all partnership affairs.
Pursuant to the Partnership Agreement, all tangible assets are to be sold upon
dissolution and all intangible assets comprising intellectual property are
transferred to both parties such that each party owns an undivided 50% interest
in all patents, trade secrets, trademarks, and all other intellectual property.
However, upon termination the Company has a worldwide exclusive through April
12, 2000, to market and license the LFC Technology. After April 12, 2000, both
parties have the right to market and license the present technology worldwide.
Bluegrass may continue to use the LFC Technology on any of its sole projects.
Royalties earned on licenses entered into during the term of the Company's
exclusive licensing period (ending on April 12, 2000) are divided 80% to the
Company and 20% to Bluegrass, for a period ending 10 years from the date of
dissolution. For licenses entered into after April 12, 2000 royalties are
divided equally between the parties for a period of 10 years from the date of
dissolution. Royalties received after 10 years from the date of dissolution are
retained entirely by the Licensor. Both the Company and Bluegrass are obligated
to continue funding the TEK-KOL partnership until dissolution which pursuant to
the Partnership Agreement must be accomplished within 18 months of the date of
notice of termination. Thus, all risks associated with funding continue during
the period of winding up and liquidating the partnership.
Since the Company has terminated the TEK-KOL Partnership Agreement there
can be no assurance that it can continue to fund and carry on the marketing and
licensing of the LFC Technology during its exclusive period through April 12,
2000. To continue to market the LFC Process the Company intends to explore
various options including the possibility of a purchase of Bluegrass' interest
in TEK-KOL the purchase of the Demonstration Plant, and entering into a new
partnership to license the LFC Process. There can be no assurance that any such
business entity can be formed or that actual agreements can be reached with any
company to market and license the LFC Technology worldwide. Further, there can
be no assurance that present personnel of TEK-KOL will continue to work with or
for the Company to pursue such marketing.
Dilutive Effects of Convertible and Other Outstanding Securities
The Company has a substantial number of outstanding options, warrants and
other convertible securities. The exercise of the options or warrants or
conversion of any significant number of these convertible securities could
result in substantial additional dilution. In addition, as long as options,
warrants or convertible securities are outstanding, the terms upon which the
Company will be able to obtain equity capital may be adversely affected. Several
of the various outstanding series of convertible preferred stock are convertible
into a variable number of shares of Common Stock, which is determined on the
conversion date by dividing a given conversion amount by a given conversion
price. The conversion amount for each share of these series of preferred stock
is the sum of the liquidation preference of the series (typically $1,000 per
share) increasing at a fixed rate (typically 7% per annum) which is equal to the
dividend rate due on the series of preferred stock. The conversion price is the
lesser of: the trading price of the Company's Common Stock at the time the
particular series of preferred stock was purchased; or a stated percentage
(typically 75%) of the trading price of the Company's Common Stock at the time
of conversion. As a result, the lower the trading price of the Company's Common
Stock at the time the holder of these series of preferred stock decides to
convert, the more shares of Common Stock the holder wil receive upon conversion.
As to the securities being registered herein, see "Selling Security Holders" and
"Description of Securities--Preferred Stock--Series 97-D, 97-F and 98-A."
If one or more of the holders of these series of preferred stock converted
some or all of their preferred shares and immediately (or soon thereafter) sold
the Common Stock received upon conversion, the trading price of the Company's
Common Stock could decrease due at least in part to the increased number of
shares for sale in the market. In this event, because these series of preferred
shares have conversion features which allow a greater number of shares of
Common
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Stock to be received upon conversion if the price of the Common Stock is
lower, the holders of similar series of preferred stock (including potentially
the same selling holder) would be able to convert their remaining preferred
stock into an even greater number of shares of Common Stock, resulting in even
greater potential dilution to existing shareholders. Limitations on the total
number of shares of Common Stock that a preferred shareholder may own prior to
conversion will not necessarily limit the extent of these potentially
dilutive effects, since a preferred shareholder could convert preferred shares
and sell the Common Stock received sequentially without exceeding such
limitations.
As of June 29, 1998, if all of the outstanding convertible preferred stock
of the Company were converted the Company would issue 5,129,043 shares of Common
Stock to the holders of the convertible preferred shares representing 27.03% of
the total Common Stock which would be outstanding following conversion of all
outstanding convertible preferred stock.
Risk Involved in Commercializing Technology
There can be no assurance that either the LFC Process or OCET Process will
complete development; will ultimately prove to be commercially viable; that the
Company will locate project participants or secure agreements to construct,
finance, develop and operate LFC Process plants or OCET Process plants; that the
market for the products produced by LFC Process plants will be such that any of
such plants will be economical, and even if economical, profitable; and that
future governmental and tax regulations, if enacted, would not significantly and
adversely impact the ability of the Company to market the LFC Process, the OCET
Process or other technologies to be developed by the Company. See "Business."
Risks Associated with International Development
The Company believes there are significant growth opportunities in the next
several years for the LFC Process in markets outside of the United States. The
Company is actively pursuing projects in Russia, Indonesia and China. The
termination of TEK-KOL by the Company by giving notice of termination on May 11,
998, may materially and adversely impact marketing the LFC Process
internationally and domestically. There can be no assurance the Company will
license, sell or otherwise generate revenue from the LFC Process in any of these
foreign countries. The Company believes TEK-KOL's proposed projects in Indonesia
may not progress any further until such time as that country's financial
problems are resolved. The Company's proposed LFC Process plants in Russia are
in an early stage of development. The Company is unable to determine the
possible outcome of its current marketing and project study efforts in Russia.
Additionally, other countries may be identified as attractive development
prospects in the future. Doing business in foreign countries exposes the Company
to many risks that are not present in the United States, including political,
military, privatization, currency exchange and repatriation risks, and higher
credit risks that may be associated with potential customers. In addition, it is
possible that legal obligations may be more difficult for the Company to enforce
in foreign countries and that the Company may be at a disadvantage in any legal
proceeding within the local jurisdiction. Local laws may also limit the ability
of the Company to hold a majority interest in some of the projects that it may
develop.
Uncertainty of Community Support
Development, construction and operation of LFC Process or OCET Process
production facilities require numerous environmental and other permits. The
process of obtaining these permits can be lengthy and expensive. In addition,
local opposition to a particular project can substantially increase the cost and
time associated with developing a project, and can potentially render a project
unfeasible or uneconomic. The Company may incur substantial costs or delays or
may be unsuccessful in developing LFC Process and/or OCET Process production
facilities as a result of such opposition.
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Federal Regulation of Air Emissions
The Company believes a significant factor creating demand for the LFC
Process in the United States is the Clean Air Act, as amended by the Clean Air
Act Amendments of 1990 (the "Clean Air Act"). The Clean Air Act specifies
certain air emission requirements for electrical utility companies and
industrial fuel users. The Company believes that compliance with such
regulations by these coal users can be fully or partially met through the use of
clean-burning fuel technologies such as the LFC Process being developed by the
Company. A full or partial repeal of the Clean Air Act could have a material
adverse effect on the Company. The Company is unable to predict future
regulatory changes and their impact on the demand for the Company's products.
See "Business - Government Regulation."
No Established Market for LFC Process or OCET Process Products
Although the Company believes a substantial market will develop both
domestically and internationally for the LFC Process and the OCET Process, an
established market does not currently exist. Since no established market exists,
the availability of accurate and reliable demand, pricing information and
transportation alternatives are not fully known. The future success of the
Company will be determined by its ability to establish a market for the LFC
Process among potential customers such as electrical utility companies and
industrial coal users and for the OCET Process by oil refineries and others.
Many of such potential users of the Company's fuel products will be able to
choose among alternative fuel supplies. Although the Company believes the LFC
Process has been demonstrated successfully on a test basis at the Demonstration
Plant, the market viability of the LFC Process will not be known until third
parties such as electric utilities or coal mining companies with substantial
resources or partners construct one or more commercial-scale LFC Process
production facilities, either in the United States or internationally, that
produce PDF and CDL that meet certain minimum performance specifications. Until
the LFC Process and the OCET Process are completed, the Company may be unable to
attract licenses or other parties to build and operate either an LFC Process
plant or an OCET Process plant. See "Business - LFC Process."
Suspension of Operations at Demonstration Plant
Bluegrass is a wholly owned subsidiary of Zeigler Coal Holdings. Bluegrass,
formerly known as SMC Mining Company, is the Company's sole partner in TEK-KOL.
The ENCOAL Corporation is a wholly owned subsidiary of Bluegrass. ENCOAL,
through its parent Bluegrass, is the licensee of a LFC Process license from
TEK-KOL, and is the owner of the Demonstration Plant, which ENCOAL constructed
and operated through September 30, 1996, pursuant to a Cooperative Research and
Development Agreement with the U.S. Department of Energy. Because of continuing
losses generated by operation of the Demonstration Plant, ENCOAL suspended its
operations in the fourth quarter of 1997. The Company believes the termination
of TEK-KOL on May 11, 1998, by the Company could result in a permanent
suspension of the operations of the Demonstration Plant by ENCOAL and that
ENCOAL may not expend any funds in connection with it. The suspension of
operations of the Demonstration Plant may have a material adverse impact on the
business and operations of the Company. The termination of the TEK-KOL
partnership by the Company could have a material adverse impact on the business
and operations of the Company. Zeigler has made public announcements that it is
interested in a sale of its business. See "Business - LFC Process Demonstration
Plant."
Patents and Proprietary Rights
The Company's success will depend, in large part, on the Company's ability
to obtain patent protection for the proposed LFC Process and OCET Process, both
in the United States and in foreign countries. The Company currently has three
patents issued, and one additional patent application pending in the United
States for the LFC Process and one patent pending for the OCET Process. There
have been foreign counterparts to certain of these applications filed in other
countries on behalf of the Company. There can be no assurance patents will issue
from any of the pending applications, or for patents that have been issued or
may be issued, or that the claims allowed will be sufficiently broad
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to protect the Company's technology. In addition, there can be no assurance any
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide adequate
proprietary protection to the Company. In addition, any patents obtained by the
Company will be of limited duration. All United States patents issuing from
patent applications filed June 8, 1995, or thereafter will have a term of 20
years from the date of filing. All United States patents in force before June 8,
1995, will have a term of the longer of: (i) 17 years from the date of issuance;
or (ii) 20 years from the date of filing. All United States patents issuing from
patent applications applied for before June 8, 1995, will have a term equal to
the longer of: (i) 17 years from the date of issuance; or (ii) 20 years from the
date of filing. All United States design patents have a 14 year life from the
date of issuance. Further, U.S. patents do not provide any remedies for
infringement that occurred before the patent is granted.
The commercial success of the Company may also depend upon avoiding
infringing patents issued to competitors. If competitors prepare and file patent
applications in the United States that claim technology also claimed by the
Company, in accordance with the requirements of the TEK-KOL Agreement, the
Company may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office ("PTO") to determine the priority of invention,
which could result in substantial cost, even if the outcome is favorable to the
Company. An adverse outcome could subject the Company to significant liabilities
to third parties, and could require the Company to license disputed rights from
third parties or cease using all or part of the licensed technology. A U.S.
patent application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent applications filed by its competitors
in the PTO.
The Company also attempts to protect its proprietary and its licensed
technology and processes by seeking to obtain confidentiality agreements with
its contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements will
adequately protect the Company, will not be breached, the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
There can be no assurance others will not independently develop similar or
more advanced technologies or designs around aspects of the Company's technology
which may be patented, or duplicate the Company's trade secrets. In some cases,
the Company may rely on trade secrets to protect the Company or its inventions.
There can be no assurance trade secrets will be established, secrecy obligations
will be honored, or that others will not independently develop similar or
superior technology. To the extent consultants, key employees, or other third
parties apply technological information independently developed by them or by
others to Company projects, disputes may arise as to the proprietary rights to
such information, which may not be resolved in favor of the Company. See
"Business - Patents and Proprietary Technology."
Dependence on Others
Prior to the acquisition of AMS the Company realized only nominal revenues
from operations. Without the financial participation and services of others, the
Company does not and is not expected to have sufficient capital, personnel,
experience or resources to finance, design, engineer, construct or operate
either an LFC Process or an OCET Process production plant.
Success in commercialization of the LFC Process and OCET Processes is
dependent upon the Company's ability to enter into satisfactory arrangements
with other partners, financiers or customers to construct, develop, operate and
manage LFC Process and OCET Process plants, and upon the ability of these third
parties to perform their responsibilities. The resources required to profitably
develop, construct and operate an LFC Process plant are likely to require
$100-$400 million dollars or more, several years of construction and expertise
in major plant development and operations. The Company believes that if such
agreements can be completed, the parties to any such arrangements would have an
economic motivation to succeed in performing their contractual responsibilities.
The amount and timing of resources to be devoted to these activities by such
third parties will likely not be within the control of the Company. There can be
no assurance any licenses, joint venture agreements or other arrangements will
be available on terms
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acceptable to the Company, if at all; that such parties will perform their
obligations as expected; that any revenue will be derived from such
arrangements; or that, if revenue is generated, any of said arrangements will
be profitable to the Company. If the Company is unsuccessful in its attempts to
license the LFC Process or OCET Process it will have a material adverse impact
on the business and operations of the Company. See "Business."
Electric Utility Regulatory Changes
The domestic electric utility industry is in the early stages of
deregulation, similar to that which occurred with the natural gas utility
industry. The National Energy Policy Act of 1992 exempts a new class of
facilities from certain federal utility regulation and liberalizes access for
non-utility generators to the utility power transmission grid. It also initiated
competition in the wholesale electric market. In addition, many states are
considering the elimination of many of the regulations that
currently limit the ability of parties to sell within specific geographic
boundaries, which were previously reserved for the local independent electric
utility, municipal electricity utility or rural cooperative. The Company
believes these regulatory changes will result in utilities and other power
generators striving to reduce costs. This will result in increased competition
in the electric wholesale and retail markets and increase pressures on all
suppliers to electric utilities to reduce costs. These factors may make it more
difficult to obtain the pricing needed to sell LFC Process products into the
U.S. utility market.
Competition and Technology Obsolescence
The principal market for PDF and CDL is the energy industry, which is
intensely competitive. There are many utility companies, coal companies and
other companies engaged in research into ways to clean or convert coal into a
more acceptable fuel or other commercially viable product. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, test and license coal related technologies. In addition, some of these
companies have extensive experience in operating coal technology plants. These
companies may develop and introduce coal related technologies competitive with
or superior to those of the Company prior to any market acceptance for the LFC
Process or other technologies developed by the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter,
construct, own and operate a plant using the LFC Process which is successful in
supplying processed coal products, are expected to be important competitive
factors. The Company expects that competition will be based, among other things,
on how economically, if at all, the LFC Process coal products can be produced,
their quality, compliance with environmental standards, transportation costs,
government incentive programs, comparison to energy generating alternatives, and
the strength of any patents on the LFC Process or other potential technologies.
The automation assembly industry within which AMS competes is highly
competitive. Competition is based primarily on price, the speed and quantity of
products produced, timely delivery, product quality, safety, product innovation
and assistance in marketing and customer service. AMS competes with at least 85
other companies in the automation assembly business. Many of AMS's competitors
are substantially larger and more diversified, and have substantially greater
financial and marketing resources than AMS. There can be no assurance AMS will
be able to compete successfully.
These factors indicate significant long-term competition for the Company
and AMS. There can be no assurance developments by these various competitors
will not render the Company's or its affiliates' technologies and processes
obsolete or non-competitive. See "Business - Competition."
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Customer Concentration; Dependence on Few Customers
Since AMS typically builds one significant system for each of a small
number of customers annually many of its customers in any one fiscal period may
be responsible for ten percent or more of its revenues for that fiscal year.
AMS expects that a small number of customers will continue to account for a
substantial portion of sales for the foreseeable future. Assembly does not have
long term contracts with any of its customers, and there can be no assurance
they will continue to purchase AMS's products. Due to the small number of annual
projects 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.
Dependence Upon Key Personnel
The Company's success in developing the LFC Process, the OCET Process and
additional marketable products and processes and achieving a competitive
position will depend, in large part, on its ability to retain qualified
scientific and management personnel and, in particular, Dr. Ernest Esztergar and
Joseph Savoca, President and CEO, respectively. There can be no assurance that
the Company will be able to retain such personnel. The loss of either or both of
these individuals could have a material adverse impact on the business and
operations of the Company. The Company's potential growth and any expansion into
areas and activities requiring additional expertise, such as expanded programs
for the LFC Process and OCET Process research, testing, engineering and
marketing, would be expected to place increased demands on the Company's human
resources. These demands are expected to require the addition of new management
and scientific personnel and the development of additional expertise by existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on the Company's prospectus for
success. In addition, the Company relies on consultants and advisors to assist
the Company from time to time in reviewing its marketing, management, and
research and development strategies. Most, if not all, of the Company's
consultants and advisors are self-employed or are employees of other companies,
and may have commitments to, or consulting or advisory contracts with, more than
one other entity that may affect their ability to contribute to the Company.
AMS's success will depend, in large part, on its ability to retain
qualified project management, qualified engineers and management personnel and,
in particular, Amir Khiabani, AMS's President, Gary Vasey, engineering, and
Clarence Dyksterhuis, engineering. There can be no assurance AMS will be able to
retain such personnel or to retain additional qualified personnel. The loss of
any of these individuals could have a material adverse impact on the business
and operations of AMS. AMS's potential growth would be expected to place
increased demands on its human resources. These demands are expected to require
the addition of new management, marketing and sales, and engineering and related
personnel and the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on AMS's prospects for success.
Environmental and Other Government Laws, Regulations and Project Approvals
Potential LFC Process and OCET Plants as well as the operations of AMS are
now and will likely in the future be subject to federal, state and local
environmental and other laws and regulations. These laws and regulations
include, but are not limited to, the Clean Air Act and various regulatory
provisions of the United States Department of Energy, the Environmental
Protection Agency, the United States Treasury Department and Internal Revenue
Service, as well as the laws and regulations of other countries and
international treaties.
The Company's operations may be directly affected by various laws, or
indirectly affected as a result of market changes in response to laws and
regulations, or market participants' economic behavior in response to laws and
regulations. For example, electric utilities under the recent amendments to the
Clean Air Act may have various options
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from which to comply with more stringent standards required under said Act.
These utilities may choose to concentrate and invest their funds in other areas
such as advanced and improved scrubbers for smokestacks to extract pollutants
from their existing power plants in order to reduce emissions rather than
purchase processed fuels, such as the products which could be produced using the
LFC Process. There is no assurance the Company will be in a position to offer
competitive products and incentives for utilities or others to purchase LFC
Process products as a method of complying with regulatory constraints, including
the amended Clean Air Act and other regulations.
Moreover, there can be no assurance future tax policy of the U.S. or other
countries will not negatively impact the Company's prospects and revenue, if
any. For example, the U.S. Government, through the Department of Energy and
other offices of the executive branch, could choose to implement tax and other
policy directives to encourage the production and use of other fuel sources, for
example, natural gas, and discourage the production and use of coal.
It is likely LFC Process Plants will continue to be subject to the
application of various environmental regulations designed to ensure, among other
things, environmentally compatible plant operations. Failure to comply with
applicable regulatory requirements can result in fines, suspensions of
regulatory approvals, operating restrictions, criminal prosecution and other
negative consequences. Furthermore, additional government regulation may be
established in the future, which could prevent or delay the commercialization of
LFC Process and/or OCET Process. See "Business-Government Regulation."
Risk of Hazardous Material Contamination
Future LFC Process Plants and the Demonstration Plant in Wyoming, as well
as the operations of AMS, involve the use of certain hazardous materials.
Although the Company believes the safety procedures which have been employed by
ENCOAL for handling and disposing of such materials, as well as those which
could be employed by any licensees of the LFC Process and by AMS, comply with
the standards prescribed in applicable state and federal laws and regulations,
the risk of an accidental contamination or injury from these materials cannot be
completely eliminated.
No Dividends Paid on Common or Preferred Stock
The Company has never paid any cash dividends on its Common Stock or
Preferred Stock and does not anticipate the payment in the near future of any
cash dividends. Payment of dividends on the Common Stock or Preferred Stock is
within the discretion of the Board of Directors, is subject to state law, and to
preferences of other outstanding securities of the Company, and will depend upon
the Company's earnings, if any, its capital requirements, financial condition
and other relevant factors.
Market Value of Company's Securities
The Company will be required to obtain additional funds from investors in
consideration for the sale and issuance of its debt or equity securities to
continue in business. In the event the market price of the publicly traded
Common Stock of the Company decreases below a certain amount, the Company may be
unable to sell additional equity of the Company, or if it is able to sell
securities, it may not obtain sufficient consideration from the sale of its
securities to provide adequate funding to continue its operations.
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Current Registration Statement and State Blue Sky Compliance or
Exemption Required for Exercise of Existing Warrants and Conversion
of Convertible Preferred Stock
The Company will be able to issue shares of Common Stock registered for
resale herein upon exercise of all of the Existing Warrants and/or the
conversion of any of the Preferred Stock only if there is a then current
prospectus relating to such Common Stock under an effective registration
statement filed with the Securities and Exchange Commission or an applicable
exemption is available, and only if such Common Stock is qualified for sale or
exempt from qualification under applicable state securities laws of each
jurisdiction in which the various holders of the Existing Warrants and the
Preferred Stock reside. Subject to its other contractual obligations, the
Company reserves the right in its sole discretion to determine not to register
or qualify such Common Stock in any jurisdiction where the time and expense do
not justify such registration or qualification. The Existing Warrants and the
Preferred Stock may be deprived of any value in the event the Company does not
satisfy or the Company chooses not to satisfy any such state and federal
requirements. Although it is the present intention of the Company to satisfy
such requirements, there can be no assurance the Company will be able to do so.
Anti-Takeover Provisions and Inadequate Assets for Liquidation
Preference of Preferred Stock
Certain provisions in the Articles of Incorporation and Bylaws of the
Company may be deemed to have an anti-takeover effect and may delay or prevent a
tender offer or takeover attempt that may be favorable to the interests of the
shareholders. Such provisions may also adversely effect market prices of the
Common Stock. These provisions include classification of the Company's Board of
Directors into three classes, each of which serves for a different three-year
period, advance notice procedures for shareholder nominations for the election
of directors and business to be brought by shareholders for an annual meeting.
Such advance notice procedures must be given in the manner provided by the
Bylaws. Amendment or repeal of the classification of directors and advance
notice provisions requires the vote of 70% of all shares entitled to vote for
directors. In addition, the Articles of Incorporation require the affirmative
vote of 70% of the voting power of the outstanding shares of capital stock for
certain business combinations, including mergers, consolidations, sales, leases,
transfers, reclassification and recapitalizations. Amendment or repeal of the
70% vote requirements for business combinations requires the vote of 70% of all
voting shares.
The Company's Board of Directors is authorized to issue up to 20,000,000
shares of preferred stock. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms and privileges with respect to any series of preferred stock.
The issuance of any series of preferred stock having rights superior to those of
the Common Stock may result in a decrease in the value or market price of the
Common Stock, and could further be used by the Board as a device to prevent a
change in control of the Company. Holders of outstanding preferred stock
currently have, and future holders of preferred stock may have, the right to
receive dividends, and certain preferences in liquidation and conversion rights.
The issuance of preferred stock could, under certain circumstances, have the
effect of delaying, deferring or preventing a change in control of the Company
without further vote or action by the shareholders and could adversely affect
the voting and other rights of the holders of Common Stock. In the event of a
sale, dissolution or bankruptcy of the Company, such preferred shareholders
would have a preference over the common shareholders as to any assets remaining
after distribution to creditors. Without a substantial change in the Company's
current financial situation, as of December 31, 1997, there will not be enough
assets upon liquidation to pay any portion of the preferences of any of the
outstanding series of preferred stock, or to provide any distribution to common
shareholders. See "Description of Certain Provisions of the Articles of
Incorporation and Bylaws with Possible Anti-Takeover Effect."
Market for LFC Process Plant Products
The Company believes the potential market for processed coal to be produced
by LFC Process plants includes utilities, independent power producers, certain
manufacturers of steel using new technologies, and other industrial enterprises
which use coal, both in and outside of the United States. The potential market
for the coal-derived liquid
17
<PAGE>
fuels includes industrial fuel users, refineries and makers of chemical products
in the United States and foreign countries. The Company's ability to market the
LFC Process to any significant portion of these markets in the future will be
dependent upon various factors, including such user's current and future
commitment to such coal or oil based energy, changes in the cost of delivered
coal and oil, and the difference between the costs of coal generated power
versus other energy sources. These other sources include but are not limited to
natural gas and petroleum based products, hydroelectric, solar, wind,
geothermal, waste heat, solid waste and nuclear power generation
facilities. The Company's ability to market the LFC Process will also be
impacted by regulatory efforts to reduce acid rain and other emissions;
regulatory incentives to utilize coal based energy sources; and the reliability
and cost effectiveness of LFC Process Plant products relative to gas and other
energy sources currently existing or developed in the future. There can be no
assurance LFC Process plant products will achieve market acceptance at any level
sufficient to provide profits to the Company. See "Business - Markets."
Disclosures Relating to Low Priced Stocks; Possible
Restrictions on Resale of Low Priced Stocks and on
Broker-Dealer Sales; Possible Adverse Effect of
"Penny Stock" Rules on Liquidity for the Company's
Securities
Transactions in the securities of the Company are subject to Rule 15g-9
under the Securities Exchange Act of 1934 (the "Exchange Act"). Rule 15g-9
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 individually, or $300,000 together with their
spouses). For transactions covered by this Rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Consequently,
this Rule could affect the ability of broker-dealers to sell securities of the
Company and may affect the ability of selling security holders to resell any of
the Securities registered herein in the secondary market.
The Commission has adopted regulations which generally define a "penny
stock" to be any security of a company that has a market price (as therein
defined) less than $5.00 per share, or with an exercise price of less than $5.00
per share subject to certain exceptions, and which is not traded on any exchange
or quoted on NASDAQ. For any transaction by broker-dealers involving a penny
stock, unless exempt, the rules require delivery of a risk disclosure document
relating to the penny stock market prior to a transaction in a penny stock.
Disclosure is also required to be made about compensation payable to both
the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in an account
and information on the limited market in penny stocks.
RECENT DEVELOPMENTS
As of the date of this Prospectus, all the Series 97-F and 97-G convertible
Preferred Shares had been converted, at the election of the holders, and no
Series 97-F or 97-G Preferred Shares remain outstanding.
During the three-month period ended June 30, 1998, the Company issued
additional incentive stock options, at fair market value pursuant to its 1996
Omnibus Stock Plan. The incentive options are exercisable for a total of 429,000
shares of Common Stock at $0.625 per share, the closing bid price on the grant
date, to employees of the Company. The options were granted in reliance upon
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of, the end of the years
in the five-year period ended December 31, 1997, are derived from the audited
consolidated financial statements of the Company. The selected data presented
below for the three months ended March 31, 1997, and 1998, are derived from the
unaudited consolidated financial statements of the Company. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
statement of the financial position and results of operations for these periods.
Operating results for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation," and
the financial statements and the related notes thereto which are incorporated by
reference in this Prospectus.
<TABLE>
Three months ended
March 31, Years ended December 31,
------------------------- -------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 1,101,559 $ 1,113,915 $ 5,322,724 $ 4,244,268 $ 900,306(1) $ 552,503 $ 809,910
Net loss (1,359,088) (1,143,545) (5,708,302) (4,259,365) (6,824,940)(1) (5,844,121) (6,116,388)
Imputed Dividends(2) 1,312,519 - 770,226 - - - -
Net Loss Applicable
to Common Stock (2,671,607) (1,143,545) (6,478,528) (4,259,365) (6,824,940) (5,844,121) (6,116,388)
Net Loss Per Common Share - Basic (0.25) (0.19) (0.88) (0.80) (2.46)(1) (3.02) (3.62)
Weighted Average Common
Shares Outstanding 10,768,073 6,175,482 7,324,953 5,357,010 2,774,084 1,933,032 1,691,675
Balance Sheet Data:
Current Assets 3,460,727 1,272,449 $ 1,648,745 $ 2,295,167 $ 944,910 $ 717,406 $ 1,331,381
Working Capital
Deficiency (2,853,531) (5,004,865) (4,284,559) (4,015,187) (2,369,079) (3,348,255) (917,979)
Total Assets 7,118,348 5,554,091 5,590,445 6,628,678 6,592,086 8,198,362 9,240,338
Long-Term Debt
(Excluding Current Portion) 111,875 119,000 114,250 123,750 4,631,250 3,575,835 4,637,997
Stockholders' Equity (Deficiency) 692,215 (842,223) (457,109) 194,574 (1,629,578) 556,866 2,350,981
- ------------------
</TABLE>
(1) The Company acquired AMS effective October 30, 1995. AMS recorded revenue
of $867,000 and income from operations of $238,000 for the period October
31, 1995, through December 31, 1995.
(2) No dividends have been declared since inception.
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BUSINESS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward-looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."
Overview
The Company is in the business of developing and marketing energy-related
technologies. The Company has developed a patented technology which it refers to
as the LFC Process. The LFC Process is intended to convert and upgrade low-rank
coal into a coal substitute and a hydrocarbon liquid. The LFC Process is
intended to produce two products called process derived fuel and coal derived
liquids, and at the same time reduce the PDF's pollution potential when it is
subsequently burned for fuel. The Company believes the LFC Process could upgrade
a significant portion of the world's abundant low-rank coal reserves into coal
and petroleum-based products which could provide cost-effective compliance with
certain environmental legislation and regulations including the Clean Air Act
and other current and possibly future U.S. and international environmental
regulations or concerns.
The LFC Process involves heating coal under carefully controlled conditions
to refine it into alternative fuels. The Company believes many existing users of
coal in the U.S., such as electric utilities, face costly capital expenditures
to modify their coal-powered electricity producing facilities to comply with the
Clean Air Act. In the opinion of the Company, the Clean Air Act impacts over 100
coal fired electrical generating plants in the U.S. and, by the year 2000,
requires many major U.S. power plants to achieve specified reductions in
pollution. The Company believes 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
consists of the Company and Bluegrass, a subsidiary of Zeigler. Zeigler is a
coal producing company in the United States. Over the period of many months the
Partners themselves, and between the Partners and other interested parties,
including MHI, failed to conclude negotiations to sell or license a portion of
the LFC Technology of otherwise significantly advance its development.
Consequently, the Company gave notice on May 11, 1998, to Bluegrass that it was
unilaterally terminating TEK-KOL. Material factors which influenced the
Company's decision included Bluegrass' closure of the Demonstration Plant and
Zeigler's decision to put all of its assets up for sale. Ultimately, the Company
determined it was in its best interest to terminate the TEK-KOL Partnership in
order to more expeditiously advance the development of the LFC Technology.
Upon termination of TEK-KOL, which pursuant to the TEK-KOL agreement is to
take no longer than 18 months, the Company will own an undivided 50% interest in
all intangible assets owned by TEK-KOL including all patents and intellectual
property. Upon termination, the Company has the exclusive worldwide right to
market and license the LFC Process through April 12, 2000. After April 12, 2000,
the Company and Bluegrass each have the right to market and license the LFC
Process. The termination of TEK-KOL could have a material adverse impact on the
business and operations of the Company, including its ability to license or sell
the LFC Process.
The LFC Process has been used to produce PDF and CDL for test burning at
the Demonstration Plant owned by 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
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<PAGE>
and ENCOAL Corporation a Shell Mining Company ("SMC") subsidiary, now called
Bluegrass, 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. Because of the continuing
losses generated by the operation of the Demonstration Plant, ENCOAL suspended
operation of the Demonstration Plant in the fourth quarter of 1997. Since
TEK-KOL has been terminated by the Company, ENCOAL is very unlikely to resume
operations of the Demonstration Plant and the Company is seeking to buy the
Demonstration Plant, find a partner to build another one or market the LFC
Process without the assistance of a demonstration plant. There could be a
material adverse impact on the Company if the Demonstration Plant does not
resume operations, even if a substitute demonstration plant is completed in
place of the Demonstration Plant.
The LFC Process is still in development. PDF produced at the Demonstration
Plant has only been shipped to customers for testing, while CDL has been sold
commercially. Although the Company believes it has completed development of the
LFC Process, additional development to test and demonstrate aspects and uses of
the LFC Process is necessary before the value (if any) of its use on a large
scale commercial basis can be verified. There can be no assurance these
development issues will be successfully concluded or that the LFC Process will
be licensed or sold commercially, or if sold, will generate revenue or profits
for the Company.
The Company intends to license the LFC Process to electric utilities, coal
producers, steel companies, foreign governments or agencies thereof, or
affiliates of these parties. The Company believes that licensing the LFC Process
will lead to its optimum use because of the substantial capital expenditures and
time required to construct and operate a plant using the LFC Process. The
Company is in discussions with a number of candidates, including Mitsubishi
Corporation and Mitsubishi Heavy Industries, Ltd., in an effort to form a joint
venture or other collaboration to market and license the LFC Process worldwide.
The Company is currently negotiating the terms of a letter of intent with
Mitsubishi Corporation. The current proposed terms of the potential letter of
intent include establishment of a joint venture to commercialize the LFC
Process, and Mitsubishi's assumption of certain development and operating costs
and sharing the responsibility for other costs. No letter of intent has been
executed or approved by either party to date, and there can be no assurance
a letter of intent will be entered into, or that if one is entered into, the
proposed terms will include those currently being negotiated, or that any joint
venture or other material transaction will result therefrom.
The OCET Corporation, a wholly owned subsidiary of the Company, is also
developing another energy-related technology referred to as the OCET Process.
The OCET Process is designed to deasphalt crude oil and resid produced in oil
refining in order to increase the efficiency of crude oil refineries. 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 biomedical, automotive, electronics and computer industries. AMS provided
93% of the gross revenues of the Company for the fiscal year ended December 31,
1996, and provided 99% of the gross revenues of the Company for both the three
months ended March 31, 1998, and the fiscal year ended December 31, 1997. While
AMS provides a substantial portion of the current gross revenues of the Company,
the Company intends to focus its business and operations on commercializing and
developing the LFC Process and the OCET Process.
TEK-KOL Partnership
TEK-KOL owns all right, 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
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established in 1989 and the original partner was SMC (now called Bluegrass).
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 the
license issued to the Company, as of the date of this Prospectus, TEK-KOL does
not have any agreements to license the LFC Process. All of the costs of TEK-KOL
are split equally between Bluegrass and the Company. The Company expects the
cost of its continuing to market and license the LFC Technology, including
TEK-KOL's annual budget throughout the Company's exclusive licensing period, to
be approximately $1,500,000 to $2,000,000 per year. There can be no assurance
the Company's obligations to TEK-KOL will not be greater. The Company intends to
finance its marketing and licensing efforts as well as its TEK-KOL and other
obligations from the sale of equity, debt securities, sales of assets and from
licensing. Any acquisition of Bluegrass' interest in TEK-KOL or the
Demonstration Plant would likely have to come from the same potential sources.
There can be no assurance the Company will be able to fund its obligations to
TEK-KOL.
On May 11, 1998, the Company gave notice to Bluegrass, in accordance with
the TEK-KOL Partnership Agreement, that it was unilaterally terminating the
Partnership Agreement effective six months from the date of the notice. Upon
termination the parties are required to take those steps necessary to dissolve
the partnership and wind up all partnership affairs. Pursuant to the Partnership
Agreement, all tangible assets are to be sold upon dissolution and all
intangible assets comprising intellectual property are transferred to both
parties such that each party owns an undivided 50% interest in all patents,
trade secrets, trademarks, and all other intellectual property. However, upon
termination the Company has a worldwide exclusive through April 12, 2000, to
market and license the LFC Technology. After April 12, 2000, both parties have
the right to market and license the present technology worldwide. Bluegrass may
continue to use the LFC Technology on any of its sole projects.
Royalties earned on licenses entered into during the term of the Company's
exclusive licensing period (ending on April 12, 2000) are divided 80% to the
Company and 20% to Bluegrass, for a period ending 10 years from the date of
dissolution. For licenses entered into after April 12, 2000, royalties are
divided equally between the parties for a period of 10 years from the date of
dissolution. Royalties received after 10 years from the date of dissolution are
retained entirely by the Licensor. Both the Company and Bluegrass are obligated
to continue funding the TEK-KOL partnership until dissolution which pursuant to
the Partnership Agreement must be accomplished within 18 months of the date of
notice of termination. Thus, all risks associated with funding continue during
the period of winding up and liquidating the partnership.
Since the Company has terminated the TEK-KOL Partnership Agreement there
can be no assurance that it can continue to fund and carry on the marketing and
licensing of the LFC Technology during its exclusive period through April 12,
2000. To continue to market the LFC Process the Company intends to explore
various options including the possibility of a purchase of Bluegrass' interest
in TEK-KOL, the purchase of the Demonstration Plant, and entering into a new
partnership to license the LFC Process. There can be no assurance that any such
business entity can be formed or that actual agreements can be reached with any
company to market and license the LFC Technology worldwide. Further, there can
be no assurance that present personnel of TEK-KOL will continue to work with or
for the Company to pursue such marketing.
LFC Process
The LFC Process is specifically designed to process subbituminous
(low-rank) or a lignite coal which have a high moisture content. PDF is designed
to be a 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
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Company believes each ton of coal should produce approximately one-half ton
of PDF and one-half barrel of CDL, although differing raw material and operating
conditions may effect these estimates.
To process the coal, the LFC Process uses a drying/partial pyrolsis
technology, which uses low rank coal as a feedstock. Pyrolsis is a process
whereby organic compounds are subjected to very high temperatures. The LFC
Process is a mild gasification technology that employs a series of pyrolysis
zones to produce solids and gas, and a condensation system to produce liquids.
The LFC Process has been used at the Demonstration Plant which has produced and
shipped to customers product for test burning over a hundred tons of PDF and
over a hundred thousand barrels of CDL. The Company believes the operation of
the Demonstration Plant has provided key operational and engineering design data
for the LFC Process which it believes may assist in completing the final stages
of development of the LFC Process.
The Company believes four key factors in the LFC Process differentiate it
from other coal cleaning, liquefaction, or gasification technologies. First, the
process simultaneously produces solids and liquids. Second, the control system
regulates the coal heating rate and temperature level to control the governing
kinetics of gasification and stabilization reactions. Third, the PDF can be
stabilized and is less likely to self-ignite. Fourth, for the purpose of
controlling the gasification conditions (to obtain the desired co-products),
computer models of coal reaction kinetics, sensors, and 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 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, ENCOAL 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 NuCoal (another
subsidiary of Zeigler) executed an engineering, procurement and construction
agreement on December 30, 1996, for the construction of a $460 million LFC
Process plant at North Rochelle, Wyoming. The Company was not a party to this
agreement. Although this agreement was subsequently terminated, Zeigler is
continuing to develop an LFC Process plant at that location, although the
termination of TEK-KOL may adversely impact this process. The Company currently
has no obligation to assist in funding the continued development of the LFC
Process plant at North Rochelle. There can be no assurance the
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<PAGE>
development of any LFC Process plant will be developed by Zeigler or others.
The termination of this agreement to construct an LFC Process plant may have a
material adverse impact on the business and operations of the Company.
Test burns to date, based on the Company's analysis, indicate PDF is a
viable fuel which can be used with minimal modification of the coal burning
equipment. The Company believes PDF can be a means for helping utilities meet
the requirements of the Clean Air Act. There can be no assurance these test
results will be duplicated in a future commercial facility, if any, using the
LFC Process.
Markets
The Company believes the principal markets for PDF will be the electric
utility market where utilities may burn coal to generate electricity, and in the
non-coking coal metallurgical market which produce steel and metals. TEK-KOL
currently believes future PDF production from an LFC Process plant could be sold
into the utility market and the metallurgy market. There can be no assurance the
Company's beliefs will prove to be accurate.
CDL from the Demonstration Plant has been sold into the residual fuel oil
market. Of the approximately 5,010,600 gallons of CDL that have been produced by
the Demonstration Plant and sold to date, the vast majority has been sold to
fuel oil distributors who have blended the CDL or sold it straight as fuel for
use in industrial boilers. Other purchasers of CDL have included one 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 assuming its development is completed.
A number of factors could have a material impact on the size and value of
the utility market for PDF. The Company believes the potential impact of the
Clean Air Act on the utility industry could present marketing opportunities for
PDF. If environmental regulations become stricter, the desirability of PDF may
increase. The Company believes the potential for reduced emissions increases the
likelihood PDF could be marketed successfully. A full or partial repeal of the
Clean Air Act would likely have a material adverse impact on the Company and the
market for PDF in the United States.
PDF Metallurgical Markets. While the Company believes the U.S. electric
utility market is the largest potential market for PDF, based on the current
economics of coal-burning utilities, the Company also believes a relatively
small but potentially growing market for non-coking metallurgical coals could
provide an opportunity for sales of PDF. Potential PDF metallurgical markets
could occur in the steel industry, where the Company believes a demand for coke
substitutes is increasing. In steel making, the Company believes environmental
constraints on coke production and the lower limits on permissible emissions may
motivate development of new technologies to replace the traditional combination
of blast furnaces and coke ovens.
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.
24
<PAGE>
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.
OCET is developing a technology which it believes can deasphalt petroleum
residium, or resid, so it can be more easily or further refined (the "OCET
Process").
In laboratory tests both petroleum resid and heavy crudes have been
successfully deasphalted using lab scale continuous prototype processing
equipment. The results of these laboratory tests have demonstrated the ability
in testing conditions to produce deasphalted oil which OCET believes is
comparable in quality and yield to that produced by commercial solvent
deasphalting processes. There can be no assurance the results of such laboratory
tests will be proved in actual commercial scale developments, or that any
commercial use will be made of the OCET Process.
The Company's principal efforts to commercialize 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
an oil refinery, oil company or other third parties.
The proposed OCET Process uses a solvent additive to destabilize the crude
oil, followed by electrochemical processing to separate the asphaltines, metals
and unwanted contaminants contained in the resid in order to produce a higher
quality liquid which OCET believes could be used in refinery processes. The
electrochemical processing distinguishes the OCET Process from other
deasphalting processes known to the Company, and OCET believes will provide an
additional method for controlling the rate, selectivity and efficiency of the
separation. The OCET Process as currently structured does not require high
temperatures or pressures.
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.
The target application for the OCET Process has been the upgrading of
refinery resid to produce high quality lube oil blend stock, feedstocks for
refinery catalytic upgrading processes, hydrocracking or hydrotreating and
boiler grade coker feed because the liquid product could be reduced in
asphaltines, metals, sulfur, nitrogen, carbon residue and other contaminants.
OCET believes there are other potential markets, including deasphalting heavy
crude oil at the well site, upgrading crude oil before introduction into the
crude distillation tower at the refinery, near complete removal of metals from
deasphalted oils, removal of sulfur compounds from diesel and gasoline,
viscosity reduction as oil is being produced out of the ground, 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 proposed OCET Process is expected to compete with alternative methods
for conversion of resid including thermal processes, solvent extraction
processes and catalytic processes. The primary method for upgrading resid is
delayed coking, which exposes resid to high enough temperatures to break apart
some of the chemical bonds to produce gases, liquids and solid coke.
25
<PAGE>
There can be no assurance the OCET Process will be determined to be
commercially viable, or will be developed to the point it can be determined to
be commercially viable, or if it is there will be a market for the OCET Process,
or, if a market develops, OCET will license its technology or otherwise produce
revenue from the OCET Process or any other enterprise or technology development.
The OCET Process is still in development and has not been licensed or used
in either a pilot plant or on a commercial scale. The OCET Process will require
significant additional research and development, including substantial
additional funding to finish development of the process and demonstrate its
potential (if any) for commercial use. There can be no assurance such efforts
will be successfully completed. At the present time, OCET has no agreements with
any oil refinery or other party to use the OCET Process in a commercial or even
large scale testing facility.
Patents and Proprietary Technology
To date, TEK-KOL has five issued patents and one patent pending in the
United States, which relate to various aspects of the LFC Process. Patent
#5,601,692 was issued in February 1997. Patent #5,401,364 was issued in March
1995; Patent #5,372,497 was issued in December 1994; Patent #5,582,807 was
issued in December 1996; Patent #5,547,548 was issued in August 1996. TEK-KOL
filed a patent in October 1995 for a lean fuel combustion control method which
is pending. OCET filed a patent application in September 1994 for the OCET
Process. AMS owns one patent jointly with Ethicon, a customer, however, AMS does
not believe this patent is critical for the operation of its business.
TEK-KOL has non-exclusive worldwide rights to license the use of the MK
Dust Control System pursuant to the License Agreement with Shell Mining. There
can be no assurance any additional patents will be issued to TEK-KOL as a result
of TEK-KOL's pending applications, or, if issued, such patents combined with the
existing TEK-KOL 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 or the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Litigation over
patent or other intellectual property claims could result in substantial costs
to the Company. The Company is required by the TEK-KOL Partnership Agreement to
contribute to the costs of prosecuting and defending all infringement claims
necessary to enforce TEK-KOL's rights or to determine the scope and validity of
others' proprietary rights. U.S. patents do not provide any remedies for
infringement occurring before a patent is granted. Because patent rights are
territorial, the Company or TEK-KOL may hot have an effective remedy against use
of their patented technology in any country in which TEK-KOL or the Company does
not, at the time, have an issued patent.
The commercial success of the Company may also depend upon avoiding the
infringement of patents issued to competitors. TEK-KOL owns all of the
technology relating to the LFC Process. If competitors prepare and file patent
applications in the United States claiming technology also claimed as
proprietary by TEK-KOL or the Company, the Company may be forced to contribute
to the cost of participating in interference proceedings declared by the PTO to
determine the priority of the invention. Such proceedings could result in
substantial costs to the Company, even if the outcome is favorable to the
Company. An adverse outcome of such proceedings could subject the Company to
significant liabilities to third parties and could require TEK-KOL and/or the
Company to license disputed rights from third parties or cease using the
infringing technology. Although the Company believes its current and proposed
activities do not and will not infringe upon patents for competing technologies,
there can be no assurance the Company's belief would be affirmed in any
litigation over any patent or that the Company's future technological
developments will be outside the scope of these patents. A U.S. patent
application is maintained under conditions of confidentiality while the
application is pending in the PTO, so the Company cannot determine the
inventions being claimed in pending patent
26
<PAGE>
applications filed by its competitors. If competitors infringe on TEK-KOL or
Company patents which are pending but not yet issued, TEK-KOL and the Company
will not be able to pursue infringement claims against them unless the
infringement continues after such patents are issued.
The Company also relies on certain proprietary information which may not be
patentable. Although the Company has taken steps to protect its proprietary
information, in part through the use of confidentiality agreements with certain
employees, consultants and contractors, there can be no assurance these
agreements will not be breached, the Company would have adequate remedies for
any breach, or the Company's proprietary information will not otherwise become
known or be independently developed or discovered by others including its
competitors.
Governmental Regulation
The LFC Process, as it is proposed to be used in the operation of a coal
refinery plant will likely be subject to numerous federal and state regulations.
Any United States LFC Process production plants which may be constructed may be
owned and operated by others since the Company does not now have and is not
expected in the future to have the financing necessary to develop, construct or
operate such plants. LFC Process plants will likely require numerous permits,
approvals and certificates from appropriate federal, state and local
governmental agencies before construction of any such facility may begin, and
will be subject to periodic maintenance or review requirements once any such
facilities begin production. Such permits and regulations include: (i) air
quality; (ii) wastewater discharge; (iii) land quality; and (iv) hazardous waste
treatment storage and disposal. There can be no assurance that such approval
will be granted to any licensees of the LFC Process in the event a plant is
proposed to be constructed and operated using the LFC Process. In addition,
there can be no assurance future domestic or international governmental
regulations will not change and the necessary permits and approvals for any
future commercial-scale production facilities will not be prohibitively
expensive or difficult to obtain. Any failure by any licensee of the LFC Process
to obtain required regulatory approvals, or any substantial delay in obtaining
such approval, could have a material adverse effect on the Company.
Mine Health and Safety Administration ("MHSA") regulations and approvals
may be applicable to any use of the LFC Process at a plant constructed for such
use. The Demonstration Plant in Wyoming has operated under the oversight of the
MHSA since construction began. The Company believes the ideal location for an
LFC Process plant will be on the grounds of or adjacent to a coal mine to
minimize transportation costs.
The Clean Air Act and amendments specify certain air emission requirements
for electrical utility companies and industrial coal users. The Company believes
the Clean Air Act is now, and will in the future be, a significant factor in
creating demand and a market for the LFC Process. The Company believes electric
utilities and industrial coal users who use the LFC Process will be subject to
the Clean Air Act, and compliance with such regulations could be fully or
partially met through the use of the LFC Process. Beginning on January 1, 2000,
Phase II of the Clean Air Act imposes a permanent cap on sulfur dioxide
emissions and requires nitrogen oxide reductions. A full or partial repeal of
the Clean Air Act could have a material adverse impact on the Company. The
Company is unable to predict future regulatory changes and their impact on the
demand for the LFC Process. See "Risk Factors - Environmental and Other
Governmental Laws, Regulations and Project Approvals."
Competition
The principal markets for PDF and CDL are in the energy industry, which is
intensely competitive. There are many companies engaged in research into ways to
clean or convert coal into a more acceptable fuel or other commercially viable
products. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, test and license coal refining
technologies. In addition, some of these companies have extensive experience in
operating refining plants and many of these companies have extensive experience
in operating coal burning plants. These companies may develop and
27
<PAGE>
introduce coal refining technologies competitive with or superior to those of
the Company prior to any market acceptance for the LFC Process or other
technologies developed by the Company or its subsidiaries.
The relative speed with which the Company markets the LFC Process and
enters into license or other agreements with third parties who, thereafter
construct, own and operate a plant using the LFC Process and their success in
supplying processed coal products, are expected to be important competitive
factors. The Company expects principal competitive factors may include, among
other things, how economically LFC Process coal products can be produced, at
what quality levels and demand for such products develops, compliance with
environmental standards, the transportation costs, cost comparisons to energy
fuels, and the strength of any patents on the LFC Process or other related
technologies.
The demand, if any, by coal-fired electrical generation facilities for
processed coal products derived from using the LFC Process may also be
materially impacted by several competing fuels and other costs, such as natural
gas and alternative energy sources including but not limited to hydroelectric
power, synthetic fuels, solar power, wind power, wood, geothermal,
waste heat, solid waste and nuclear sources. The Company believes other
competitive factors which may influence competition for the Company include the
availability and cost of delivered coal, the difference between the costs of
other energy alternatives and coal prices and availability, regulatory efforts
to reduce pollution and other emissions, regulatory incentives, if any, to
utilize clean coal based energy sources and the reliability and cost
effectiveness of the LFC Process relative to other competing technologies.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the period between development and testing of the LFC Process and any possible
introduction of the technology into the commercial market place.
The Company is aware of several entities in the U.S. and foreign countries
which are engaged in producing clean-burning coal. These include the Rosebud
SynCoal Partnership, owned by indirect subsidiaries of Montana Power Company and
Northern States Power Company which processes approximately 1,430 tons of feed
coal a day at its plant in Colstrip, Montana. Also, KFX, Inc., a public company,
is engaged in producing a clean coal product, Carbontec, which produces upgraded
coal at a pilot plant; Custom Coals, International, which makes a clean coal
product; Puron Co.; Cyprus, a coal company, and SOSOI/FT. There can be no
assurance the Company will be able to compete successfully.
Employees
As of the date of this Prospectus the Company including OCET employs 20
full-time employees and AMS employs approximately 33 full-time employees. None
of the Company's or AMS's employees are represented by a labor union or bound by
a collective bargaining agreement. The Company and AMS believe that they
maintain positive relations with their employees.
Properties
The Company leases 5,500 square feet of office space at 1200 Prospect
Street, Suite 325, La Jolla, California 92037. The term of the lease expires in
December 2000. In addition, the Company leases 5,080 square feet of laboratory
space at 11588-20 and 21 Sorrento Valley Road, San Diego, California 92121,
pursuant to a lease which expires in May 2000. AMS leases 20,000 square feet of
office and manufacturing space at 2222 Shasta Way, Simi Valley, California
93065, which includes 15,000 square feet of manufacturing space. The term of the
lease expires in October 1998. The Company and AMS believe their current
facilities will be adequate for their respective expected needs for the
foreseeable future.
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<PAGE>
Legal Proceedings
The Company and its subsidiaries are from time to time involved in
litigation arising in the ordinary course of their respective businesses. In the
opinion of the Company none of the pending litigation, if adversely decided,
should have a material adverse effect on the Company.
ASSEMBLY AND MANUFACTURING SYSTEMS, INC.
Overview
Assembly and Manufacturing Systems, Inc. ("AMS"), a wholly-owned subsidiary
of the Company, is a supplier of custom made precision assembly equipment. AMS
designs and builds custom, automated assembly systems marketed principally to
manufacturers in three principal industries: 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.
Generally automation system functions integrated into products manufactured
by AMS are computer controlled through custom software written by AMS, and
incorporate control, data handling, reporting and safety functions. The
completed automation systems are generally tested and accepted by the customer
at AMS prior to shipment and installation at the customer's site.
AMS believes that a majority of its current customers and future customers
purchase automation systems for several reasons including support of new product
introductions and start-up, labor cost reductions, increase in capacity,
increase in quality, and favorable return on investment and payback. AMS
customers may also choose to automate production of their products to reduce
costs, 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.
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 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.
29
<PAGE>
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 its products and services, AMS
also works to develop new applications for target customers for their various
manufacturing needs.
As part of its current marketing focus, AMS is targeting Fortune 1000
businesses with assembly contracts in the range of $750,000 to $1.5 million per
project to increase market share and benefit from economies of scale.
Major Customers
Sales revenue was derived primarily from contracts to manufacture 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
for more than any one fiscal year. 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 incorporate
control, data handling, reporting and safety features. AMS also uses
state-of-the-art computer-aided design practices to create the customized
assembly processes for its customers.
To manufacture certain of its automation equipment, AMS uses subcontractors
for common industrial services such as machining, fabrication of welded
structures, painting and power coating on an as-needed basis. Manufacturing
operations include purchasing, receiving, cutting, machining, grinding,
electrical fabrication and testing, machine assembly as well as testing and all
other functions required to complete the automated assembly product. When
needed, AMS also employs a number of subcontractors for special assembly
operations including welding, power coating, wire electric discharge machining
and other unique operations.
AMS has implemented certain quality control procedures for its
manufacturing facility. AMS's quality control personnel regularly monitor the
manufacturing process and have initiated numerous procedures which assist in
quality control. AMS believes new customers, particularly Fortune 1000 customers
with large assembly projects, may impose additional quality control standards.
It is possible such customer or other quality control standards may require
additional substantial expenditures over a long period of time, or that AMS may
determine that such expenses are not cost-effective.
Raw Materials
The primary raw materials used by AMS in its assembly systems include such
items as stock steel shapes, aluminum extrusions, billet and plate software.
These raw material items are converted by AMS into the needed support structures
and are custom-machined in house to be incorporated into the automated assembly
systems purchased by AMS customers. Raw materials used by AMS are generally
standard industry materials which AMS believes can be provided
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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 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 automation 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 March 31, 1998, AMS had a backlog of orders of approximately $1.8
million, compared to a backlog as of December 31, 1997, of approximately $1.3
million.
Liability Insurance
The medical, automotive, high-tech and other products sold by AMS expose it
to possible product liability claims, if among other things, the use of such
products results in personal injury, death or property damage. AMS maintains
product liability insurance in the principal amount of $2 million through April
20, 1998, and will be renewed upon expiration. 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.
USE OF PROCEEDS
The Company will not receive any proceeds from conversion of the Preferred
Shares or from the sale of the Selling Shares. If all of the Existing Warrants
are exercised, the Company would receive approximately $4.2 million before
deducting expenses of this offering. The exercise prices of the Existing
Warrants range from $1.03 to $5.75 per share. To the extent the exercise price
of any of the Existing Warrants exceeds the public sale price of the Company's
Common Stock on the OTC Bulletin Board, the Company believes it is unlikely
these Existing Warrants will be exercised. There is no minimum number of
Existing Warrants which are required to be exercised or a minimum number of
Warrant Shares which are required to be sold herein. Accordingly, only a limited
number of Existing Warrants may be exercised and as a result the corresponding
proceeds to the Company may be limited. If received, the Company would utilize
31
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those funds for administrative, general operating expenses, and expenditures
related to development of the LFC and OCET Processes.
The Company cannot precisely determine the cost, timing and amount of funds
required for specific uses at this time. The use of proceeds is subject to
change based on future occurrences, competitive market forces and other
conditions. The rate of commercialization of the LFC and OCET processes, and the
availability of alternative methods of financing will also impact the allocation
and timing of the Company's use of proceeds. The Board of Directors has broad
discretion in determining how the proceeds resulting from the exercise of the
Existing Warrants, if any, will be applied.
SELLING SECURITY HOLDERS
The following table sets forth certain information, as of the date hereof,
with respect to the beneficial ownership of the Company's Warrant Shares and
Preferred Shares (collectively the "Resale Securities") registered herein by
each Selling Security Holder named below. The shares of Common Stock are being
registered to permit public secondary trading of the Resale Securities, and the
Selling Security Holders may offer the Resale Securities for resale from time to
time. Except as described below, none of the Selling Security Holders has had
any position, office or other material relationship with the Company within the
past three years. The following table assumes each Selling Security Holder sells
all of the Resale Securities held by such Selling Security Holder in this
offering. The Company is unable to determine the exact number of Resale
Securities that will actually be sold.
Warrant Shares
Existing Warrant Holders Offered Hereby (1)(2)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Adams, Jack W. .................................................... 18,000
AEM Corporation ................................................... 37,714
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust .................................... 3,000
Avalon Capital Limited ............................................ 8,000
Bangham, June B., Trustee
June B. Bangham Trust ............................................. 3,000
Boe, Charles
Minshew, Janelle .................................................. 3,000
Breault, Jeffrey .................................................. 20,000
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Rev. Liv. Trust ................................. 6,000
Continental Capital ............................................... 22,223
Cuttyhunk Fund, Ltd. .............................................. 12,000
Davis, William .................................................... 20,000
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<PAGE>
Warrant Shares
Existing Warrant Holders Offered Hereby (1)(2)
- --------------------------------------------------------------------------------
Day, Patrick & Geraldine, Trustees
Day Family Trust .................................................. 6,000
Dominion Capital Fund ............................................. 30,000
Endeavour Capital Fund ............................................ 10,000
Farquhar, Thomas H. ............................................... 6,000
Feeney, Terry ..................................................... 61,539
FT Trading ........................................................ 10,000
Ganesh Asset Management ........................................... 5,000
Goldau, Ernest .................................................... 3,000
Hatch, Robert ..................................................... 25,000
Hess, Frederic & Rita, Trustees
Frederic & Rita Hess Liv Trust
Dtd 10/13/89 ...................................................... 3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust ................................... 12,000
Hoover, Thomas .................................................... 87,500
Hurford, John B. .................................................. 6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94 .............................. 3,000
Lard, Whitney ..................................................... 3,000
Mahrdt, Clark ..................................................... 3,000
Millenco, L.P. .................................................... 615,384
Montag, Jeffrey ................................................... 30,000
Newport Capital ................................................... 60,000
Pefley, Gordon V. & Betty-Jane,
JTWROS ............................................................ 18,000
Orndorff, Owen .................................................... 40,000
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<PAGE>
Warrant Shares
Existing Warrant Holders Offered Hereby (1)(2)
- --------------------------------------------------------------------------------
Roberts, Lee R. ................................................... 40,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust U/A Dtd 01/2/70 ............................ 3,000
Senkus, Randy ..................................................... 20,000
Settondown Capital ................................................ 115,000
Shepherd, Mark .................................................... 10,000
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94 .................................. 3,000
Smith, Jeffrey L. ................................................. 50,000
Smith, Lester A.,Trustee
Lester A. Smith Family Trust ...................................... 3,000
Sovereign Partners, L.P. .......................................... 75,000
Thomas, Edward .................................................... 37,000
Trieschmann, Ralph ................................................ 25,000
Total ............................................................. 1,571,360
</TABLE>
(1) Expiration dates of the Existing Warrants range from 60 days following the
effective date of the Registration Statement of which this Prospectus is a
part through December 31, 2006. Exercise prices for the Existing Warrants
vary from $1.03 to $5.75 per share. The holders of the Warrants may own
additional warrants not included herein, and may own additional Common
Stock and/or Preferred Stock, and/or notes of the Company.
(2) All of the holders of the Existing Warrants listed herein own less than 1%
of the issued and outstanding Common Stock of the Company, with the
exception of Millenco L.P. which, assuming exercise of all Existing
Warrants as of the date of this Prospectus, would own approximately 3.82%.
Preferred Shares
Preferred Shareholders Offered Hereby (1)(2)(3)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Adams, Jack W. .................................................... 18,000
Albert, Mr. & Mrs. Harry, Trustees
The Albert Family Living Trust .................................... 3,000
Bangham, June B., Trustee
June B. Bangham Trust ............................................. 3,000
Boe, Charles
Minshew, Janelle .................................................. 3,000
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<PAGE>
Preferred Shares
Preferred Shareholders Offered Hereby (1)(2)(3)
- --------------------------------------------------------------------------------
Brockmueller, Henry & Betty, Trustees
1981 Brockmueller Revocable Living Trust .......................... 6,000
Day, Patrick & Geraldine, Trustees
Day Family Trust .................................................. 6,000
Farquhar, Thomas H. ............................................... 6,000
Feeney, Terry ..................................................... 160,795
Goldau, Ernest .................................................... 3,000
Hess, Frederic & Rita, Trustees
Frederic L. & Rita R. Hess Living
Trust Dtd 10/13/89 ................................................ 3,000
Hezlep III, Herbert, Trustee
Herbert Hezlep III Family Trust ................................... 12,000
Hurford, John B. .................................................. 6,000
Keiser, Gordon L., Trustee
Gordon L. Keiser Trust U/T/D 2/14/94 .............................. 3,000
Lard, Whitney ..................................................... 3,000
Mahrdt, Clark ..................................................... 3,000
Millenco, L.P. .................................................... 1,607,955
Pefley, Gordon V. & Betty-Jane, JTWROS ............................ 18,000
Rushall, Lawrence, Trustee
The Rushall 1970 Trust U/A Dtd 01/02/70 ........................... 3,000
Settondown Capital ................................................ 809,622
Sherda, Betty, Trustee
Betty Sherda Trust U/T/D 2/14/94 .................................. 3,000
Smith, Lester A., Trustee
Lester A. Smith Family Trust ...................................... 3,000
Sovereign Partners, L.P. .......................................... 4,831,235
Total ............................................................. 7,282,093
</TABLE>
(1) On behalf of Sovereign Partners, L.P. and Settondown Capital, and pursuant
to registration rights agreements in their favor, the Company is
registering 200% of the number of the shares of Common Stock underlying
their Series 98-A Preferred Shares, and
35
<PAGE>
on behalf of Millenco L.P. and Terry Feeney the Company is registering 230%
of the number of shares of Common Stock underlying their Series 97-D
Preferred Shares which may be issuable upon conversion of the Preferred
Stock in accordance with the conversion formula for these Preferred Shares.
Notwithstanding the Company's Articles of Incorporation, the securities held
by these parties do not allow the holder to convert any Preferred Share if
the conversion would result in the holder of the Preferred Share having
beneficial ownership (determined in accordance with Rule 13d-3(d)(1) of the
Exchange Act) of more than 4.99% of the total number of shares of Common
Stock of the Company.
(2) All of the holders of the Preferred Shares listed herein, assuming they
were able to convert all of the Preferred Shares on the date of this
Prospectus, would own less than 1% of the Company's Common Stock, with the
exception of the following parties: (1) Sovereign Partners, L.P. would own
approximately 24.06%; (2) Settondown Capital would own approximately 4.76%;
and (3) Millenco L.P. would own approximately 7.42% of the outstanding
Common Stock of the Company. Sovereign Partners, L.P. currently owns 1,700
shares of Series 98-A Preferred Stock. Millenco L.P. currently owns 500
shares of Series 97-D Preferred Stock. Southridge Capital Management,
L.L.C. is the General Partner of Sovereign Partners, L.P. and Steven Hicks
and Daniel Pickett are the principals of and control the General Partner.
Millennium Management, L.L.C., which is controlled by Israel Englander, is
the General Partner of Millenco L.P. Notwithstanding the Company's Articles
of Incorporation, the securities held by these parties do not allow the
holder to convert any Preferred Share if the conversion would result in the
holder of the Preferred Share having beneficial ownership (determined in
accordance with Rule 13d-3(d)(1) of the Exchange Act) of more than 4.99% of
the total number of shares of Common Stock of the Company.
(3) The holders of the Preferred Stock may own additional Preferred Stock, the
underlying shares of which are not included, and may also own warrants,
common stock, and/or notes of the Company.
Number
Shares of Common Stock Offered Herein
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
AEM Corporation ..................................................... 25,714
Continental Capital ................................................. 112,000
Feeney, Terry ....................................................... 10,000
Millenco, L.P. ...................................................... 100,000
Settondown Capital .................................................. 229,065
Sovereign Partners, L.P. ............................................ 660,348
The Taxin Network ................................................... 2,000
Total ............................................................... 1,139,127
</TABLE>
36
<PAGE>
PLAN OF DISTRIBUTION
The Warrants may be exercised by surrendering properly endorsed
certificates therefor to the Company's Controller accompanied by payment in full
of the exercise price for each share of Common Stock as to which the Warrants
are being exercised and any applicable transfer or other taxes. Payment of the
exercise price for the Warrants may be made by tendering cash or a cashier's
check.
The Preferred Stock may be converted into Common Stock of the Company at
the election of the holder by providing proper notice thereof and the
certificate for the Preferred Stock to be converted in whole or in part to the
Company's Controller.
The Company must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the Warrants in order for a
holder to exercise them. The Warrant Shares must also be registered or exempt
for sale under the securities laws of the state in which the holder resides. The
Company intends to use its best efforts to keep the Registration Statement
incorporating this Prospectus current, but there can be no assurance such
Registration Statement (or any other registration statement filed by the Company
covering the Securities) can be kept current. In the event a registration
statement including the Warrant Shares is not kept current, or if the Warrant
Shares are not registered or exempt for sale in the state in which a holder
resides the Warrants may be deprived of some or all of their value.
The Company will not be required to pay a fee to any selling agent with
respect to any exercise of the Warrants.
The Common Stock offered by the Selling Security Holders are not being
underwritten. The Selling Security Holders will act independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Common Stock offered hereby may be sold by the Selling Security Holders from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling Security
Holders may effect such transactions by selling the Common Stock directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Security Holders and/or the purchasers of the
Securities for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in connection
with the sale of the Common Stock as principals may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of such Common Stock as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Security Holders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the Common Stock against certain liabilities, including liabilities arising
under the Securities Act. The Company will not receive any proceeds from the
sales by the Selling Security Holders, although the Company will receive
proceeds from the exercise of the Warrants. Sales of the Securities by the
Selling Security Holders, or even the potential of such sales, could have an
adverse effect on the market price of the Company's outstanding Common Stock.
At the time a particular offer of Common Stock is made, except as herein
contemplated, by or on behalf of a Selling Security Holder or the Company
including following exercise of Warrants, to the extent required, a prospectus
will be distributed which will set forth the number of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for Common Stock purchased from the Selling Security Holder and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may
37
<PAGE>
not be sold unless it has been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not simultaneously engage in
market making activities with respect to the securities of the Company for a
period of at least one, and possibly five, business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, each Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, Rules 101, 102 and 107, which provisions may limit the
timing of purchases and sales of shares of the Company's Common Stock by the
Selling Security Holders.
The Warrants and Preferred Stock were originally issued to certain Selling
Security Holders pursuant to an exemption from the registration requirements of
the Securities Act provided by Sections 3(b) and 4(2) thereof. The Company
agreed to register the Warrant Shares, Preferred Stock Shares and the Selling
Shares under the Securities Act and to indemnify and hold such Selling Security
Holders harmless against certain liabilities under the Securities Act that could
arise in connection with the sale by such Selling Security Holders of such
Common Stock. In connection therewith the Company has agreed to pay all
reasonable fees and expenses except for fees and expenses for counsel to the
Selling Security Holders and any underwriting discounts and commissions.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 95,000,000 shares
of capital stock, of which 75,000,000 shares are shares of common stock, no par
value ("Common Stock"), and 20,000,000 shares may be shares of preferred stock,
par value $0.01 per share (the "Preferred Stock"). Preferred Stock is issuable
in one or more series. As of March 31, 1998, 12,228,771 shares of Common Stock
were issued and outstanding, and 66,686 shares of convertible Preferred Stock
were issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share on all
matters requiring shareholder action. The holders of a majority of shares of
Common Stock represented at a meeting of shareholders can elect all of the
directors to be elected at such meeting. In addition, subject to the preferences
that may be applicable to any then outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available, and upon
liquidation, will be entitled to receive pro rata all assets of the Company
available for distribution to such holders. The Common Stock has no preemptive
or other subscription rights, no cumulative voting rights, and there are no
conversion rights, redemption or sinking fund provisions with respect thereto.
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series will
have such rights and preferences as are fixed by the Board of Directors in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board of Directors may, without further
action by the holders of Common Stock, fix the number of shares constituting
that series, and fix the dividend rights, dividend rate, conversion rights,
voting rights (which may be greater or lesser than the voting rights of the
Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of that series of Preferred Stock.
The Board of Directors may issue one or more series of Preferred Stock
without action of the shareholders of the Company. Accordingly, the issuance of
Preferred Stock may adversely affect the rights of the holders of the Common
38
<PAGE>
Stock. In addition, the issuance of Preferred Stock may be used as an
"anti-takeover" device without further action on the part of the shareholders.
Issuance of Preferred Stock may dilute the voting power of a holder of Common
Stock (such as by issuing Preferred Stock with super-voting rights), may
discourage bids for the Company's Common Stock, and may render more difficult
the removal of current management, even if such removal may be in the best
interests of the shareholders.
Outstanding Preferred Stock
The outstanding Preferred Stock of the Company at March 31, 1998, consisted
of 66,686 shares of Preferred Stock, which were issued in 27 series. The
outstanding Preferred Stock series are: 90-B; 90-C; P-90; PS-90; 91-A; 91-C;
91-D; 91-E; 91-M; 91-P; 91-R; 91-S; 91-V; 92-A; 92-B; 93-A; 93-B; 93-C; 94-A;
94-B; 95-R; 96-A; 96-B; 97-C; 97-D; 97-F and 98-A. The primary distinction
between such series of Preferred Stock relates to the dividend and liquidation
preferences for each.
All outstanding series of Preferred Stock are fully paid and nonassessable.
The Preferred Stock has no preemptive rights to subscribe for any additional
securities which may be issued by the Company. No sinking fund or similar
provision has been provided in respect to any of the outstanding series of
Preferred Stock. The rights of the holders of each series of Preferred Stock are
subordinate to those of the Company's general creditors, and every previously
issued series of Preferred Stock. All of the outstanding series of Preferred
Stock are subject to adjustment in certain events, including for stock
dividends, stock splits, reclassifications, consolidations, mergers, etc. The
Company has never declared or paid a cash dividend on any of its outstanding
Preferred Stock, and it is not likely any dividends will be declared for some
time.
Except as required by mandatory provisions of Utah law, the holders of the
various series of outstanding Preferred Stock have no voting rights.
Series 90-B and 90-C
Dividends. The Series 90-B and 90-C Preferred Stock are entitled to
dividends of $8 per share annually, payable in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock of the Company, other than
a previously issued series of Preferred Stock and before any funds are set aside
for the purchase of, or retirement of, the whole or any part of any series of
Preferred Stock, or any other class of stock of the Company. Dividends are
cumulative and are payable before dividends on any Common Stock are paid.
Redemption. The Series 90-B and 90-C Preferred Stock do not have the right
to require its redemption. The Series 90 Preferred Stock is redeemable by the
Company as a series, in whole or in part, after August 31, 1992, at any time and
from time to time effective on 60 days prior notice, at $100 for each share,
plus the amount of any unpaid cumulative dividends which have then become
payable with respect thereto. The right of the Company to redeem the Series 90-B
and 90-C Preferred Stock is subject to compliance with Utah law, including
without limitation, certain retained earnings requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series 90-B
and 90-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, prior to any distribution
with respect to any other class of stock, liquidating distributions in the
amount of $100 per share, plus all accrued and unpaid dividends up to the date
fixed for distribution, whether or not such dividends have been earned or
declared.
Conversion. Each share of the Series 90-B and 90-C Preferred Stock is
convertible, at the option of the holder thereof without further payment at any
time, into 88 shares of Common Stock unless previously redeemed.
39
<PAGE>
Series P-90
Dividends. The Series P-90 Preferred Stock are entitled to dividends of $8
per share annually, payable in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock of the Company, other than previously issued
series of Preferred Stock and before any funds are set aside for the purchase
of, or retirement of, the whole or any part of any series of Preferred Stock, or
any other class of stock of the Company. Dividends are cumulative and are
payable before dividends on any Common Stock are paid.
Redemption. The Series P-90 Preferred Stock is redeemable by the Company as
a series, in whole or in part, after January 1, 1996, at $100 per share, plus
the amount of any unpaid cumulative dividends which have then become payable
thereto. The right of the Company to redeem this series is subject to compliance
with Utah law, including without limitation certain retained earnings
requirements.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntarily, the holders of the Series P-90
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, prior to any distribution with
respect to any other class of stock, liquidating distributions in the amount of
$100 per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared.
Conversion. Each share of Series P-90 Preferred Stock is convertible into
250 shares of Common Stock of the Company, at the option of the holder and upon
payment to the Company at the time of conversion of $1.375 per common share.
Series PS-90
Dividends. Dividends of $20 per share annually are payable on the Series
PS-90 Preferred Stock, in quarterly installments out of unreserved earned
surplus, before any dividends shall be payable on any other class of stock or
any other series of Preferred Stock other than previously issued series of
Preferred Stock, and before any sum shall be set aside for the purchase of, or
retirement of, the whole or any part of the Series PS-90 Preferred Stock, or any
other class of stock. The dividends on the PS-90 Preferred Stock are cumulative,
and are payable prior to the payment of any dividends on the Common Stock.
Redemption. The holders of the PS-90 Preferred Stock have no right to
require redemption of their Preferred Stock. The Series PS-90 Preferred Stock is
redeemable by the Company as a series, in whole or in part, after December 31,
1993, and any time and from time to time effective on 60 days prior notice, at
$250 per share of Series PS-90 Preferred Stock, plus the amount of any unpaid
cumulative dividends which have become payable with respect thereto. The right
of the Company to redeem this series of Preferred Stock is subject to compliance
with Utah law, including without limitation, certain retained earnings
requirements.
Liquidation. In the event of liquidation, dissolution or other termination
of the Company, the holders of the shares of the Series PS-90 Preferred Stock
are entitled to $250 per share, plus all accrued and unpaid dividends up to the
date fixed for distribution whether or not earned or declared. Such payments
shall be made before any payment or distribution is made to the holders of the
Common Stock or any other series of Preferred Stock and concurrently with the
90-B, 90-C or P-90 series.
Conversion. Each share of the PS-90 Preferred Stock is convertible into 125
shares of Common Stock at the election of the shareholder upon payment to the
Company of $1.375 per common share at the time of conversion.
40
<PAGE>
Series 91-A, 91-C, 91-D and 91-E
Dividends. Dividends of $8 per share annually will be payable on the Series
91-A, 91-C, 91-D and 91-E Preferred Stock in quarterly installments out of
unreserved earned surplus, before any dividends shall be payable on any other
class of stock or any other series of Preferred Stock other than previously
issued series of Preferred Stock and before any sum shall be set aside for the
purchase of, or retirement of, the whole or any part of the Series 91 Preferred
Stock or any other class of stock, other than any previously issued series of
Preferred Stock of the Company. Dividends are cumulative and are payable prior
to the payment of any dividends on the Common Stock of the Company.
Redemption. The holders of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock have no right to require redemption of the shares. The Company may redeem
the shares in a series, in whole or in part after December 31, 1993, at any time
and from time to time effective on 60 days prior notice, at $100 per share, plus
the amount of unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem this series of Preferred
Stock is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of the shares of the Series 91-A,
91-C, 91-D and 91-E Preferred Stock shall be entitled to a cash payment of $100
per share, plus all accrued and unpaid dividends up to the date fixed for
distribution, whether or not such dividends have been earned or declared. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than the
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 91-A, 91-C, 91-D and 91-E Preferred
Stock is convertible into 25 shares of Common Stock at the election of the
shareholder without further payment.
Series 91-M
Dividends. No dividends are payable on the Series 91-M convertible
Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause or
require redemption of the Series 91-M Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of Series 91-M convertible
Preferred Stock are entitled to a cash payment of $2 per share. Such payment
shall be made before any payment or distribution is made to the holders of the
Common Stock, or any other series of Preferred Stock other than the previously
issued series of Preferred Stock of the Company.
Conversion. On or after September 30, 1993, each 5,000 shares of series
91-M Preferred Stock is convertible into 300 shares of Common Stock of the
Company, at the election of the shareholder without further payment. The Company
shall have the absolute right to cause conversion of the 91-M Preferred Shares
at any time, or from time to time without additional payment upon 60 days prior
written notice. In the event the Company elects to convert the 91-M shares to
Common Stock, each share of Series 91-M Preferred Stock shall be converted into
300 shares of the Company's Common Stock.
Series 91-P
Dividends. No dividends are payable on the Series 91-P Preferred Stock.
41
<PAGE>
Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-P Preferred Stock.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-P
Preferred Stock shall be entitled to a cash payment of $2.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after July 15, 1993, each 4,000 shares of Series 91-P
Preferred Stock is convertible into 250 shares of Common Stock of the Company at
the election of the shareholder and without further payment. The Company shall
also have the absolute right to cause conversion of the Series 91-P Preferred
Shares at any time or from time to time upon 60 days prior written notice. In
such event, each share of Series 91-P Preferred Stock shall be convertible into
250 shares of Common Stock.
Series 91-R
Dividends. Dividends of 8% per annum will be payable on the Series 91-R
Preferred Stock, in quarterly installments out of unreserved earned surplus,
before any dividends shall be payable on any other class of stock or any other
shares of Preferred Stock other than previously issued series of Preferred
Stock, and before any sum shall be set aside for the purchase of, or retirement
of, the whole or any part of the Series 91-R Preferred Stock or any other class
of stock, other than any previously issued series of Preferred Stock of the
Company. Dividends payable on the Series 91-R Preferred Stock are cumulative and
are payable prior to the payment of any dividends on the Common Stock of the
Company.
Redemption. The holders do not have the right to require redemption of the
Series 91-R Preferred Stock. The Company may redeem the Series 91-R Preferred
Stock in whole or part, at any time and from time to time effective on 60 days
prior written notice, at $10,000 per Series 91-R Preferred Share, plus the
amount of any unpaid cumulative dividends which have then become payable with
respect thereto. The right of the Company to redeem the Series 91-R Preferred
Shares is subject to compliance with Utah law, including without limitation
certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-R
Preferred Stock shall be entitled to a cash payment of $10,000 per share, plus
all accrued and unpaid dividends up to the date fixed for distribution, whether
or not such dividends have been earned or declared. Such payment shall be made
before any payment or distribution is made to the holders of the Common Stock,
or any other series of Preferred Stock other than previously issued series of
Preferred Stock of the Company.
Conversion. During the 60 day notice period provided for redemption by the
Company, each share of the Series 91-R Preferred Stock is convertible into 167
shares of Common Stock without further payment at the election of the
shareholder. At any time after October 15, 1993, the holders of the preferred
shares may demand conversion into Common Stock.
Series 91-S
Dividends. No dividends are payable on the Series 91-S Preferred Stock.
Redemption. Neither the Company nor the holders have the right to cause
redemption of the Series 91-S Preferred Stock.
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<PAGE>
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-S
Preferred Stock shall be entitled to a cash payment of $3.50 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. On or after September 30, 1993, each share of Series 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock of the
Company, at the election of the shareholder. The Company also has the right to
cause conversion of the Series 91-S Preferred Stock at any time, or from time to
time upon 60 days prior written notice. In such event, each share of 91-S
Preferred Stock shall be convertible into 150 shares of Common Stock.
Series 91-V
Dividends. The holders of the 91-V Preferred Stock have no right to
dividends.
Redemption. The holders of the Series 91-V Preferred Stock do not have the
right to require the redemption of the Series 91-V convertible Preferred Stock.
The Company has a right to cause redemption of the Series 91-V Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
Series 91-V Preferred Stock is subject to compliance with Utah law, including
without limitation certain retained earnings requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 91-V
Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. During the 60 day notice period provided wherein the Company
may redeem the Series 91-V Preferred Stock, or at any other prior time, each
share of the Series 91-V Preferred Stock is convertible into 8 shares of Common
Stock of the Company without further payment at the election of the shareholder.
Series 92-A and 92-B
Dividends. The Series 92-A and 92-B Preferred Stock have no dividend
rights.
Redemption. The Series 92-A and 92-B Preferred Stock holders do not have
the right to require its redemption. The Company may redeem the Preferred Stock
as a series, in whole or in part, at any time and from time to time effective on
60 days prior notice, at $100 per share. The right of the Company to redeem the
shares is subject to compliance with Utah law, including without limitation
certain retained earnings and requirements.
Liquidation. In the event of the voluntary liquidation, dissolution or
other termination of the Company, the holders of shares of the Series 92-A and
92-B Preferred Stock shall be entitled to a cash payment of $100 per share. Such
payment shall be made before any payment or distribution is made to the holders
of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock of the Company.
Conversion. Each share of the Series 92-A Preferred Stock is convertible
into 6 shares of Common Stock. Each share of the Series 92-B Preferred Stock is
convertible into 8 shares of Common Stock. Each share is convertible without
further payment at the election of the shareholder.
43
<PAGE>
Series 93-A, 93-B and 93-C
Dividends. The Series 93-A, 93-B and 93-C Preferred Stock have no dividend
rights.
Redemption. The holders of the Series 93-A, 93-B and 93-C Preferred Stock
have no option or right to require redemption of their shares. The Series 93-A,
93-B and 93-C Preferred Stock is redeemable by the Company as a series, in whole
or in part, effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 93-A,
93-B and 93-C Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 93-A, 93-B and 93-C Preferred Stock is
convertible, at the option of the holder without further payment, into either 15
or 38 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement under which
the shares of these three series of Preferred Stock were issued.
Series 94-A and 94-B
Dividends. The Series 94-A and 94-B Preferred Stock have no dividend
rights.
Redemption. The holders of the Series 94-A and 94-B Preferred Stock have no
option or right to require redemption of their shares. The Series 94-A and 94-B
Preferred Stock is redeemable by the Company as a series, in whole or in part,
effective on 60 days prior notice, at $100 per share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 94-A
and 94-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $100 per share. The liquidation preference shall be payable before
any payment or distribution is made to the holders of the Common Stock, or any
other series of Preferred Stock other than previously issued series of Preferred
Stock.
Conversion. Each share of the Series 94-A and 94-B Preferred Stock is
convertible, at the option of the holder without further payment, into from 25
to 45 shares of the Company depending upon the due date and interest rate on the
promissory note purchased in connection with the private placement with which
the shares of these series of Preferred Stock were issued.
Series 95-R
Dividends. No dividends are payable on the Series 95-R Preferred Stock.
Redemption. The holders of the Series 95-R Preferred Stock have no option
or right to require redemption. The Series 95-R preferred shares are redeemable
by the Company as a series effective on 60 days prior notice, at $10,000 per
share.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 95-R
Preferred Stock are entitled to be paid out of the assets of the Company
available for distribution to shareholders, liquidating distributions in the
amount of $10,000 per share for each share of Series 95-R Preferred Stock. Such
liquidation payments are to be made before any payment or distribution is made
to
44
<PAGE>
the holders of the Common Stock, or any other series of Preferred Stock other
than previously issued series of Preferred Stock.
Conversion. Each share of the Series 95-R Preferred Stock is convertible
after November 1, 1997, at the option of the holder without further payment,
into Common Stock with a bid based market value of (i) $18,000; or (ii) $16,500.
Alternatively, each share of Series 95-R Preferred Stock can be converted into
12,500 shares of Common Stock, at the option of the holder.
Series 96-A and 96-B
Dividends. The Series 96-A and 96-B Preferred Stock have no dividend
rights.
Redemption. Neither the holders of the Series 96-A or 96-B Preferred Stock
nor the Company have any option or right to require or cause redemption.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the Series 96-A
and 96-B Preferred Stock are entitled to be paid out of the assets of the
Company available for distribution to shareholders, liquidating distributions in
the amount of $10,000 and $13,000 per share, respectively. The liquidation
preference shall be payable before any payment or distribution is made to the
holders of the Common Stock, or any other series of Preferred Stock other than
previously issued series of Preferred Stock.
Conversion. Each share of the Series 96-A Preferred Stock is convertible,
at the option of the holder without further payment after April 30, 1998, into
13,500 common shares. Each share of Series 96-B Preferred Stock is convertible
at the option of the holder without further payment after the earlier of August
30, 1998, or the date a registration statement filed by the Company with the SEC
is declared effective, into 3,000 shares of Common Stock.
Series 97-D, 97-F, and 98-A
Dividends. The Amended (the "Series 97-D Preferred Stock") Series 97-D
Preferred Stock has a right to cumulative dividends, out of assets legally
available therefore, at a per share rate equal to 7% per annum of its
liquidation preference of $1,000 per share. The Series 97-F and 97-G Preferred
Stock have a right to cumulative dividends, out of assets legally available
therefore, at a per share rate equal to 8% per annum of the liquidation
preference of $1,000 per share. The Series 98-A Preferred Stock has a right to
cumulative dividends out of assets legally available therefore, at a per share
rate equal to 7% per annum of the liquidation preference of $1,000 per share.
Redemption. Neither the holders of the Series 97-D Preferred Stock nor the
Company have any option or right to require or cause redemption of the Series
97-D Preferred Stock. The holders of the Series 97-F, and 98-A Preferred Stock
may not require its redemption. The Company may redeem the Series 97-F, and 98-A
Preferred Stock at 130% of the liquidation preference ($1,000), plus the amount
of any unpaid cumulative dividends which have become payable with respect
thereto.
Liquidation. The Series 97-D, 97-F, and 98-A are each entitled to be paid
out of the assets of the Company available for distribution to shareholders,
liquidating distributions in the amount of $1,000 per share. The liquidation
preference with respect to each series shall be payable before any payment or
distribution is made to the holders of the Common Stock, or any other series of
Preferred Stock other than previously issued series of Preferred Stock.
Conversion. The Series 97-D Preferred Stock is convertible, at the option
of the holder thereof, at the earlier of: (i) the date a registration statement
shall be declared effective by the SEC for the Common Stock underlying the
Series 97-D Preferred Stock; or (ii) one year from the closing date of the
purchase of such series, which was August 12, 1997.
45
<PAGE>
Each share is convertible into the number of shares of Common Stock derived by
dividing the conversion rate by the conversion price. The conversion rate is the
liquidation preference of $1,000 per share of Series 97-D Preferred Stock and
the Dividend Amount. The Dividend Amount is equal to the Liquidation Preference
of $1,000 per share multiplied by 7% per annum, multiplied by the number of days
since the closing date, divided by 365 days. The conversion price is determined
based on the date that the conversion notice is received ("Conversion Date") and
shall equal the lesser of (a) the average closing bid price of the shares of the
Common Stock over the five day trading period prior to the closing date of
August 12, 1997, or (b) 75% of the average of the closing bid price of the
shares of Common Stock of the Company on the five trading days ending on the
date proceeding the Conversion Date. There are monetary penalties to the Company
if Common Stock is not delivered to the holder within five days of receipt of a
notice of conversion and receipt of the Preferred Stock to be converted.
The Series 97-D Preferred Stock is convertible, subject to the following
limitations. The Series 97-D Preferred Stock is not convertible until the
earlier of (a) the date the registration statement is declared effective or (b)
one year from the closing date of the purchase of such series. The holder is
precluded from converting any portion of the Preferred Stock which would cause
holder to be deemed to be the beneficial owner of 4.99% or more of the issued
and outstanding Common Stock of the Company. The Common Stock underlying the
Series 97-D Preferred Stock and the warrants issued in connection with the sale
thereof have demand registration rights. The Company is obligated to use its
best efforts to maintain any registration statement or post-effective amendment
current until the earlier of the date that all of such securities have been sold
pursuant to the registration statement, or the date the holders receive a legal
opinion of counsel that the securities may be sold under Rule 144, or the second
anniversary of the effective date of the registration statement.
The Series 97-F Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 97-F;
or (ii) one year from November 6, 1997. Each share is convertible into the
number of shares of Common Stock derived by dividing the conversion rate by the
conversion price. The conversion rate is the liquidation preference of $1,000
per share of Series 97-F Preferred Stock and the dividend amount. The dividend
amount is equal to the liquidation preference of $1,000 per share multiplied by
7% per annum, multiplied by the number of days since November 6, 1997, divided
by 365 days. The conversion price is determined based on the date that the
conversion notice is received ("Conversion Date") and shall equal the lesser of
(a) the average closing bid price of the shares of the Common Stock over the
five day trading period prior to November 6, 1997, or (b) 75% of the average of
the closing bid price of the shares of Common Stock of the Company on the five
trading days ending on the date proceeding the Conversion Date. There are
monetary penalties to the Company if the Common Stock is not delivered to the
holder with 5 days of receipt of a notice of conversion and receipt of the
Preferred Stock to be converted. The Series 97-F must be converted no later than
two years from November 6, 1997.
The Series 97-F Preferred Stock is convertible, subject to the following
limitations. 50% of the Series 97-F Preferred Stock issued to purchasers is
convertible on the 61st day from the date that purchasers deliver a demand for
registration to the Company, if the registration statement filed by the Company
is not effective by that date. If the registration statement filed by the
Company is not declared effective by the 121st day from the demand for
registration then the remaining 50% of the Series 97-F Preferred Stock is
convertible. However, in order for purchasers to convert at these times the
purchasers must meet all of the qualifications for trading under Regulation S.
The holder is precluded from converting any portion of the Preferred Stock which
would cause holder to be deemed to be the beneficial owner of 4.99% or more of
the issued and outstanding Common Stock of the Company.
The Series 98-A Preferred Stock is convertible, at the option of the holder
thereof, at the earlier of: (i) the date a registration statement shall be
declared effective by the SEC for the Common Stock underlying the Series 98-A;
or (ii) 61 days from the date of sales of the series (March 6, 1998, and July
28, 1998). Each share is convertible into the number of shares of Common Stock
derived by dividing the conversion rate by the conversion price. The conversion
rate is the liquidation preference of $1,000 per share of Series 98-A Preferred
Stock and the dividend amount. The dividend amount is equal to the liquidation
preference of $1,000 per share multiplied by 7% per annum, multiplied by the
number of days since the date of sales of the series (March 6, 1998, and July
28, 1998), divided by 365 days. The conversion price is determined based on the
date that the conversion notice is received ("Conversion Date")
46
<PAGE>
and shall equal the lesser of (a) the average closing bid price of the shares of
the Common Stock over the five day trading period prior to March 6, 1998, or
(b) 75% of the average of the closing bid price of the shares of Common Stock
of the Company on the five trading days ending on the date proceeding the
Conversion Date. There are monetary penalties to the Company if the Common Stock
is not delivered to the holder with 5 days of receipt of a notice of conversion
and receipt of the Preferred Stock to be converted. The Series 98-A must be
converted no later than two years from the date of sales of the series (March 6,
1998, and July 28, 1998).
The holder of the Series 98-A Preferred Stock is precluded from converting
any portion which would cause the holder to be deemed to be the beneficial owner
of 4.99% or more of the issued and outstanding Common Stock of the Company.
Warrants
As of March 31, 1998, the Company had outstanding warrants entitling the
holders thereof to purchase approximately 4.5 million shares of Common Stock of
the Company at exercise prices which range from $.60 to $47.50 and with varying
warrant expiration dates. The exercise price of the warrants is generally
subject to adjustment in the event of stock splits, stock dividends and similar
events. Some outstanding warrants expire only on the occurrence of certain
conditions precedent, which are not dates certain. The warrants are not divided
into any series or class, and there is currently no public market for any of the
warrants which are outstanding as of the date hereof.
The various warrant exercise prices were determined arbitrarily by the
Company, and there is no assurance the price of the Common Stock will ever rise
to a level where exercise of the warrants would be of economic value to any the
warrant holders.
The warrants do not confer upon the holders any voting or dividend rights
or any other rights of a shareholder of the Company. The warrants may generally
be exercised during the exercise period upon surrender of the warrant
certificate at the offices of the Company, with a form of election to purchase
generally shown on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares being purchased.
Registration Rights
The Company will be able to issue shares of Common Stock upon exercise of
all of the various warrants only if there is a then current prospectus relating
to such Common Stock under an effective registration statement filed with the
Securities and Exchange Commission or pursuant to an applicable exemption from
such requirements, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the states in which
the various holders of the warrants reside. Common Stock underlying warrants
issued in connection with the sale of Series 97-D, 97-F, and 98-A, as well as
other warrants issued under varying circumstances are being registered in this
Registration Statement. See "Selling Security Holders." Many of these warrants
were issued with "piggyback" registration rights. The warrants with "piggyback"
registration rights were all issued with an exercise price equal to the fair
market value of the Common Stock or higher on the date of issue.
In connection with the issuance of the Series 96-B, 97-D and 97-F the
Company is required to use its best efforts to file a registration statement
covering the Preferred Shares with the SEC. For the Series 97-D and 97-F the
Company is further required to use its best efforts to have the registration
statement declared effective, generally within 120 days of the closing of each
of the transactions, wherein the Series 97-D and 97-F Preferred Stock was
purchased. Failure to have the registration statement declared effective
generally within 120 days of the respective closings relative to the Series 97-D
and 97-F Preferred Stock will result in the Company having to pay significant
monetary damages computed on a daily basis until the registration statement is
effective. Damages may be as much as $100,000 per month depending on which
option the holder of the Series 97-F Preferred Stock elects. Liquidated damages
paid through March 1998
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<PAGE>
for the Series 97-D, and 97-F equal $16,500. In the event this registration
statement is not declared effective, damages could equal approximately $800,000.
For the Series 97-D and 97-F Preferred Stock, the Company is required to
register 230% and 200%, respectively, of the number of shares which would be
capable of conversion five days prior to the filing of the registration
statement, and to keep the registration statement effective, until the earlier
of: (i) all of the holders' securities have been registered; (ii) the holders'
securities which are subject to registration may be sold without registration
pursuant to Rule 144, Rule 144(k) or Regulation S; or (iii) one year from the
issuance of the securities subject to registration.
For the Series 98-A Preferred Stock, the Company is required to file an
amended registration statement as soon as possible after March 6, 1998, for the
first tranche and within thirty days of July 28, 1998, for the second
tranche. In the event the amended registration statement is not filed by the
45th day after March 6, 1998, for the first tranche and within thirty (30) days
of July 28, 1998, for the second tranche, or declared effective by the SEC by
the 90th day after March 6, 1998, for the first tranche or sixty (60) days of
July 28, 1998, for the second tranche, the Company must pay liquidated damages
equal to 1.5% of the principal amount of the $2 million in securities sold for
the first month, and 2% of the principal amount of the $2 million in securities
sold each month thereafter until the amended registration statement is declared
effective. The Company is required to register 200% of the number of shares of
common stock underlying the Series 98-A Preferred Stock which would be capable
of conversion five days prior to the filing of the amended registration
statement, until the earlier of (i) all of the holder's securities have been
registered; or (ii) the holder's common stock underlying the Series 98-A
Preferred Stock may be sold with registration pursuant to Rule 144 or Rule
144(k).
Transfer Agent
The Transfer Agent for the Company's Common Stock is Atlas Stock Transfer
Corporation located at 5899 South State Street, Salt Lake City, UT 84107.
48
<PAGE>
DESCRIPTION OF CERTAIN PROVISIONS OF THE ARTICLES
OF INCORPORATION AND BYLAWS WITH POSSIBLE ANTI-TAKEOVER EFFECT
The Company's Articles of Incorporation and Bylaws contain several
provisions that may make acquiring control of the Company by means of tender
offer, over-the-market purchases, a proxy fight or otherwise more difficult. Set
forth below is a description of certain provisions of the Company's Articles of
Incorporation, as amended and the Bylaws.
Classified Board of Directors
The Articles of Incorporation, as amended, divide the Board of Directors
into three classes, with each class having a term of three years, and with each
class expiring in successive years. Each such class is as near equal in number
as possible. At each annual meeting of shareholders, directors are elected to
succeed those directors whose terms have expired.
The Company believes a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and its
business strategies and policies. The classified Board of Directors provision
should increase the likelihood in the event of a takeover of the Company that
incumbent directors will retain their positions. In addition, the classified
board provision will help ensure the Company's Board of Directors, if confronted
with an unsolicited proposal from a third party that has acquired a block of the
voting stock of the Company, will have sufficient time to review the proposal
and appropriate alternatives and seek the best available result for all
shareholders.
Special Meetings
The Company's Articles of Incorporation as amended provide that no action
shall be taken by shareholders except at an annual or special meeting of
shareholders. The Company's Articles of Incorporation, as amended, provide that
special meetings of shareholders of the Company may be called by the President
or Chief Executive Officer, or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors.
Shareholders Nomination of Directors
The Company's Articles of Incorporation and Bylaws, as amended, establish
an advance notice procedure with regard to the nomination, other than by or at
the direction of the Board of Directors, of candidates for election as directors
and the introduction of business. Only persons who are nominated by the Board of
Directors, or by a shareholder who has given timely prior written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected shall be eligible for election as directors of the Company.
Although the Company's Articles of Incorporation and Bylaws, as amended, do
not give the Board of Directors any power to approve or disapprove shareholder
nominations for the election of directors or any other business properly brought
by the Company's shareholders before an annual or special meeting, the Articles
of Incorporation as amended may have the effect of precluding certain methods of
proposing a nomination for the election of a director or precluding a certain
manner of conducting business at a particular meeting if the proper procedures
are not followed, or may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors, or otherwise
attempting to obtain control of the Company.
49
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Certain Voting Requirements and Business Combinations
Under certain circumstances, the Company's Articles of Incorporation as
amended require the affirmative vote of 70% of the voting power of then
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors, voting together as a single class to approve or
authorize (a) any merger or consolidation of the Company or any subsidiary with
any interested shareholder as defined in the Bylaws, or any other corporation
which is or after such merger or consolidation would be an affiliate (as
defined) of an interested shareholder; (b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition to or with any interested shareholder or
any affiliate of any interested shareholder of any assets of the corporation or
any subsidiary having an aggregate fair market value equal to or in excess of
the lesser of Five Million Dollars ($5,000,000) or twenty (20%) percent of the
gross assets of the Company; (c) the issuance or transfer by the Company or any
subsidiary of any securities of the Company or any subsidiary to any interested
shareholder or any affiliate of any interested shareholder in exchange for cash,
securities, or other property having an aggregate fair market value equal to or
in excess of the lesser of $5,000,000 or 20% percent of the gross assets of the
Company; (d) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of an interested shareholder
or any affiliate of any interested shareholder; (e) any reclassification of
securities or recapitalization of the Company or any merger or consolidation of
the Company with any of its subsidiaries or any other transaction which has the
effect directly or indirectly of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
interested shareholder or any affiliate of any interested shareholder. The 70%
vote requirement is not applicable to any business combination, as defined in
the Bylaws, where such business combination is either approved by a majority of
the disinterested directors, or certain price and procedure requirements are
met.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fisher Thurber LLP, 4225 Executive
Square, Suite 1600, La Jolla, California 92037-1483. David A. Fisher, a Partner
of Fisher Thurber LLP, owns an option to purchase 10,000 shares of Common Stock
at $2.00 per share, which was granted on May 14, 1997 in consideration of
services rendered to the Company.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, have been audited by J.H. Cohn LLP, independent public accountants, as set
forth in their report thereon (which is unqualified and contains an explanatory
paragraph with respect to the Company's ability to continue as a going concern)
included therein and incorporated herein by reference. Such consolidated
financial statements referred to above are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the fiscal year ended December 31, 1996,
have been audited by Ernst & Young LLP, independent public accountants, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to the Company's ability to continue as a going concern, as described in
Note 2 to the consolidated financial statements) included therein and
incorporated herein by reference. Such consolidated financial statements
referred to above are incorporated herein by reference in reliance upon such
report given upon the authority of such firm experts in accounting and auditing.
50
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================================================================================
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any of the
securities other than the securities other than the securities to which it
relates, or an offer or solicitation of an offer to buy any of the securities to
which it relates, or an offer or solicitation to any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances create
an implication that information contained herein is correct as of any time
subsequent to the date hereof.
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TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Prospectus Summary .............................. 4
Summary Consolidated Financial Data ............. 7
Risk Factors .................................... 8
Recent Developments ............................. 18
Selected Consolidated Financial Data ............ 19
Business ........................................ 20
Use of Proceeds ................................. 31
Selling Security Holders ........................ 32
Plan of Distribution ............................ 37
Description of Securities ....................... 38
Description of Certain Provisions of
Articles of Incorporation and Bylaws
with Possible Anti-Takeover Effects .......... 49
Legal Matters ................................... 50
Experts ......................................... 50
</TABLE>
----------------
All dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
----------------
SGI International
9,992,580
Shares of Common Stock
----------------
PROSPECTUS
----------------
August 4, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission ("SEC")
registration fee.
<TABLE>
<S> <C>
SEC Filing Fee ....................... $ 3,675
Blue Sky Fees and Expenses ........... 12,000
Printing and Engraving Expenses ...... 5,000
Accounting Fees and Expenses ......... 42,000
Legal Fees and Expenses .............. 90,000
Miscellaneous ........................ 5,000
---------
Total (Estimated) $157,675
=========
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Company's Bylaws, and in accordance with Section 16-10a-901 et
seq. of the Utah Revised Business Corporation Act ("Utah Corporation Act"), the
Company shall indemnify any person who was or is a party or is threatened to
made a party to any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as an officer or director or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses reasonably incurred by him or imposed on him in the connection
with or resulting from the defense of such action, suit or other proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
or in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, or with respect to any criminal action or proceeding,
that the person had reasonable cause to believe that his conduct was unlawful.
The Company's Bylaws provide the Company shall pay for expenses incurred
defending a civil or criminal action, suit or proceeding against a director or
officer of the Company, and shall be paid in advance of the final disposition of
the action, suit or proceeding, upon receipt of an undertaking by or on behalf
of the officer or director, that he shall repay the amount advanced, if it is
ultimately determined he is not entitled to be indemnified by the Company. The
Board of Directors shall approve such undertaking, but shall be liberal with
respect to the requirements for the undertaking, to promote the beneficial and
remedial purposes of protecting those persons who serve as directors and
officers. The Company's Bylaws also provide the Company may purchase and
maintain insurance on behalf of any person who is or was a director or officer,
or employee of the Company, or is or was serving at the request of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or incurred by
II-1
<PAGE>
him in any capacity, or arising but of his status as such, whether or not the
Company would have the power to indemnify him against liability under the
provisions of the Bylaws.
Section 16-10a-901 et seq. of the Utah Corporation Act provides for the
indemnification of officers, directors and agents of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations. The Company currently maintains
officer and director liability insurance with policy limits of $2,000,000.
Pursuant to authorization provided under the Bylaws and the Utah
Corporation Act, the Company has entered into indemnification agreements with
each of its directors and officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Utah law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. The
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification. The Company's Bylaws contain a provision
of similar effect relating to advancement or expenses to a director or officer,
subject to an undertaking to repay if it is ultimately determined that
indemnification is unavailable.
Item 16. EXHIBITS
Exhibit
Number Description
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<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation.(4)
3.2 Registrants' Bylaws as amended to date.(1)
3.3 Certificate of Secretary re: Designation of Series 96-B Preferred Stock.(4)
3.4 Amended Certificate of Secretary re: Designation of Series 97-B Preferred Stock.(4)
3.5 Certificate of Secretary re: Designation of Series 97-C Preferred Stock.(4)
3.6 Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(4)
3.7 Amended Certificate of Secretary re: Designation of Series 97-D Preferred Stock.(4)
3.8 Form of Debenture for Series 97-E.(4)
3.9 Form of Warrant for Series 97-E.(4)
3.10 Certificate of Secretary re: Designation of Series 97-F Preferred Stock.(4)
3.11 Amended Certificate of Secretary re: Designation of Series 97-G Preferred Stock.(4)
3.12 Certificate of Secretary re: Designation of Series 98-A Preferred Stock.(5)
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<PAGE>
3.13 Amended Certificate of Secretary re: Designation of Series 98-A Preferred Stock.(2)
4.1 Form of Common Stock certificate.(4)
4.2 Form of Warrant Certificate re: Existing Warrants.(3)
4.3 Form of Stock Purchase Warrant re: Series 97-B, 97-D and 97-F Preferred Stock.(3)
4.4 Form of Stock Purchase Warrant re: Series 97-G Preferred Stock.(4)
4.5 Form of Stock Purchase Warrant re: Series 98-A Preferred Stock dated July 28, 1998.(2)
4.6 Series 97-D Preferred Stock Purchase Agreement dated August 12, 1997, between the Registrant and the
holders thereof.(3)
4.7 Amended Series 97-D Preferred Stock Purchase Agreement dated April 1, 1998, between the Registrant
and the holders thereof.(4)
4.8 Registration Rights Agreement re: Series 97-D Preferred Stock dated August 12, 1997, between the
Registrant and the holders thereof.(3)
4.9 Amended Registration Rights Agreement re: Series 97-D Preferred Stock, dated April 1, 1998, between
the Registrant and the holders thereof.(4)
4.10 Agreement and General Release re: Series 97-D Preferred Stock, dated April 1, 1998, between the
Registrant and the holders thereof.(4)
4.11 Series 97-F 8% Convertible Preferred Stock Subscription Agreement dated November 6, 1997, between
the Registrant and the holders thereof.(3)
4.12 Registration Rights Agreement re: Series 97-F Preferred Stock dated November 6, 1997, between the Registrant
and the holders thereof.(3)
4.13 Series 97-G 8% Convertible Preferred Stock Subscription Agreement dated January 8, 1998, between
the Registrant and the holders thereof.(4)
4.14 Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998, between the Registrant
and the holders thereof.(4)
4.15 Series 97-G 8% Convertible Preferred Stock Subscription Agreement between Registrant and Dominion Capital
dated January 8, 1998.(4)
4.16 Form Registration Rights Agreement re: Series 97-G Preferred Stock dated January 8, 1998, between the
Registrant and the holders thereof.(4)
4.17 Agreement between the Registrant and AEM dated December 11, 1997.(4)
4.18 Agreement between the Registrant and The Taxin Network dated April 22, 1997.(4)
4.19 Series 98-A Convertible Preferred Stock Subscription Agreement dated March 6, 1998, between the
Registrant and the holders thereof.(5)
4.20 Registration Rights Agreement re: Series 98-A Preferred Stock dated March 6, 1998, between Registrant and the
holders thereof.(5)
4.21 Form of Series 98-A Convertible Preferred Stock Subscription Agreement dated July 28, 1998, between the
Registrant and the holders thereof.(2)
4.22 Form of Registration Rights Agreement re: Series 98-A Preferred Stock dated July 28, 1998, between the
Registrant and the holders thereof.(2)
5.1 Opinion of Fisher Thurber LLP regarding the legality of the securities
being registered.(4)
II-3
<PAGE>
23.1 Consent of Ernst & Young LLP, independent public accountants.(4)
23.2 Consent of J.H. Cohn LLP, independent public accountants.(4)
23.3 Consent of Fisher Thurber LLP (included in Exhibit 5.1).
24.1 Power of attorney (see pg. II- 5).(4)
</TABLE>
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(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1990.
(2) Filed herewith.
(3) Incorporated by reference to the Company's Form 10-Q for the period ended
September 30, 1997.
(4) Previously filed.
(5) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997.
Item 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) To include any additional or changed material information on the
plan of distribution.
(2) That, for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
The Registrant hereby undertakes:
(1) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(l) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and authorized this Post-Effective Amendment
No. 1 and has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of San Diego, State
of California, on August 4, 1998.
SGI International
By: /s/ JOSEPH A. SAVOCA
Joseph A. Savoca, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures
/s/ JOSEPH A. SAVOCA ERNEST P. ESZTERGAR
Joseph A. Savoca Ernest P. Esztergar
Chief Executive Officer, Chief Director
Financial Officer and Director By: Joseph A. Savoca
August 4, 1998 August 4, 1998
WILLIAM A. KERR WILLIAM R. HARRIS
William A. Kerr William R. Harris
Director Director
By: Joseph A. Savoca By: Joseph A. Savoca
August 4, 1998 August 4, 1998
BERNARD V. BAUS NORMAN GRANT
Bernard V. Baus Norman Grant
Director Director
By: Joseph A. Savoca By: Joseph A. Savoca
August 4, 1998 August 4, 1998
II-6
First Amended
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of SGI International, a
Utah Corporation.
2. The Resolution set forth below is a true and correct copy of a
Resolution passed by the SGI Board of Directors on July 17, 1998,
establishing the Series 98-A Convertible Preferred Stock.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the corporation on July 17, 1998.
/s/ JOHN R. TAYLOR
-------------------------------
John R. Taylor, Secretary
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company, as amended (the "Certificate of Incorporation"), and the Corporation
Laws of the State of Utah, the issuance of a series of Preferred Stock, which
shall consist of Two Thousand Seven Hundred Fifty (2,750) shares, out of Twenty
Million (20,000,000) shares of Preferred Stock which the Company has authority
to issue, be, and the same hereby is, authorized, and the Board hereby fixes the
powers, designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restriction thereof, of
the shares of such series (in addition to the powers, designations, preferences,
and relative, participating, optional or to other special rights and the
qualification, limitations or restrictions thereof, set forth in the Certificate
of Incorporation which may be applicable to the Preferred Stock) authorized by
this resolution as follows:
(a) Designation and Rank
The designation of the series of Preferred Stock authorized by this
resolution shall be 98-A six percent (6%) Convertible Preferred Stock (the
"Series 98-A Preferred Stock"). The Series 98-A Preferred Stock shall have a
liquidation preference (the "Liquidation Preference") of One Thousand ($1,000)
per share. The Series 98-A Preferred Stock shall rank prior to the Company's
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued, or outstanding, other than any
classes or series of equity securities of the Company ranking on a parity with
or senior to the Series 98-A Preferred Stock as to dividend rights or rights
upon liquidation, winding up or dissolution of the Company. The Series 98-A
Preferred Stock shall be junior to all previous Series of Preferred Stock as to
both the payment of dividends and the distribution of assets upon liquidation,
dissolution, or winding up of the Company, and shall be junior to all
outstanding debt of the Company. The Series 98-A Preferred Stock shall be
subject to the creation of senior stock, parity stock and junior stock to the
extent not expressly prohibited by the Company's Certificate of Incorporation.
(b) Voting Rights
Each holder of the Series 98-A Preferred Stock shall have no voting
rights or powers whatsoever on any matters concerning the Company.
(c) Dividend Provisions
(1) The holders of shares of Series 98-A Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefore,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock of this Company) on the Common Stock of this Company,
at a per share rate equal to six percent (6%) per annum of the amount of the
respective Liquidation Preference of the Series 98-A Preferred Stock as set
forth in Section (a) hereof, payable on a pro rata basis on conversion. Any
dividends payable pursuant to the provisions of this paragraph shall, at the
Company's option, be payable in cash or Common Stock of the Company.
(2) Such dividends shall accrue on each share from the date of
its original issuance, and shall accrue from day to day whether or not earned or
declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series 98-A Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series 98-A
Preferred Stock or Common Stock. Dividends on the Series 98-A Preferred Stock
shall be nonparticipating and the holders of the Series 98-A Preferred Stock
shall not be entitled to participate in any other dividends beyond the
cumulative dividends specified herein.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series 98-A Preferred Stock shall be entitled to
be paid out of the assets of the Company available for distribution to
stockholders, before any distribution or payment is made upon any Common Stock
or any other stock ranking as to the distribution of assets upon liquidation,
dissolution or winding up of the Company junior to the Series 98-A Preferred
Stock, an amount in cash equal to the amount of any accumulated but unpaid
dividends as described in Paragraph (c) herein, plus the Liquidation Preference
of the Series 98-A Preferred Stock (collectively, the "Liquidation Value"), and
shall not be entitled to any further payment. After the full preferential
Liquidation Value has been paid to, or determined and set apart for the Series
98-A Preferred Stock, the remaining assets shall be paid to, the Common Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the payment and the place where the amounts distributable
shall be payable, shall be mailed by certified or registered mail, return
receipt requested, not less than 60 days prior to the payment date stated
therein, to each record holder of any share of Series 98-A Preferred Stock.
Neither the consolidation or merger of the Company into or with any other
company or companies, nor the sale or transfer by the Company of all or any part
of its assets, nor the reduction of the capital stock of the Company, shall be
deemed to be a liquidation, dissolution, or winding up of the Company for
purposes hereof.
2. Partial Distribution of Assets. If the amounts available
for distribution with respect to the Series 98-A Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series 98-A
Preferred Stock upon liquidation are not sufficient to satisfy the full
liquidation rights of all the outstanding Series 98-A Preferred Stock and stock
ranking on a parity therewith, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock ranking on
a parity with or senior to Series 98-A may include accumulated dividends) to
which they are entitled.
(e) Conversion.
1. General. Subject to the other provisions hereof including
paragraph (f) herein, each share of the Series 98-A Preferred Stock shall be
convertible, at the option of the holder as described in paragraph 2 below, into
that number of shares of fully paid and nonassessable shares of Common Stock
which is to be derived from dividing the Conversion Rate by the Conversion
Price. For purposes of this Certificate, the Conversion Rate shall mean the
Liquidation Preference of $1,000 per share of Preferred Stock. For purposes
hereof, the Conversion Price shall be determined as of the date the notice of
conversion is received by the Company ("Conversion Date") and shall be equal to
the lesser of: (a) the average closing bid price of the shares of Common Stock
over the five (5) day trading period ending on the day immediately prior to the
Closing Date as such Closing Date is defined in the 6% Convertible Preferred
Stock Subscription Agreement (the "Subscription Agreement") for the Series 98-A
Preferred Stock, executed by the Purchaser of Series 98-A Preferred Stock, or
(b) seventy five percent (75%) of the average of the closing bid price on the
five (5) trading days ending on the day immediately prior to the Conversion
Date. The closing bid price shall be deemed to be the reported last bid price
regular way as reported by Bloomberg LP or if unavailable, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading, or if the Common Stock is not listed or admitted to trading on any
national securities exchange, the closing bid price as reported by NASDAQ or
such other system then in use, or, if the Common Stock is not quoted by any such
organization, the closing bid price in the over-the-counter market as furnished
by the principal national securities exchange on which the Common Stock is
traded. In the event that the Common Stock issuable upon conversion of the
Series 98-A Preferred Stock is not delivered, as a direct result of the
negligence or action or inaction of the Company only, within five (5) business
days of receipt by the Company of a valid notice of conversion and the Preferred
Certificate for the Series 98-A Preferred Stock to be converted ("Receipt
Conversion Date"), the Company shall pay to the holder, in immediately available
funds, upon demand, as liquidated damages for such failure and not as a penalty,
for each $100,000 of the Series 98-A Preferred Stock sought to be converted,
$500 for each of the first ten (10) days and $1,000 per day thereafter that the
shares of Common Stock issuable upon conversion of the Series 98-A Preferred
Stock are not delivered, which liquidated damages shall run from the sixth
business day after the Receipt Conversion Date. Any and all payments required
pursuant to this paragraph shall be payable only in cash.
2. Exercise of Conversion Rights. Subject to the limitations
described in paragraph (f) herein, the Series 98-A Preferred Stock shall first
be convertible at the earlier of: (i) the date the amendment (the "Amended
Registration Statement") to the Form S-2 registration statement filed January
23, 1998 for the shares of Common Stock underlying the Series 98-A Preferred
Stock is declared effective by the Securities and Exchange Commission ("SEC") or
(ii) sixty (60) days from the Closing Date as defined in the Subscription
Agreement ("Closing Date"). If the Amended Registration Statement is not filed
by the forty fifth (45) day from the Closing Date or declared effective by the
SEC by the ninetieth (90th) day following the Closing Date, then the Company
shall pay to the holder thereof liquidated damages in cash, at the rate of one
percent and one half (1.5%) of the Liquidation Value pro rata for the first
month, and two percent (2%) of the Liquidation Value for each month thereafter.
The liquidated damages will be payable until the Amended Registration Statement
has been filed and/or has been declared effective. Absent the filing of the
Amended Registration Statement or the Amended Registration Statement having been
declared effective such liquidated damages will be payable up to one year from
the Closing Date, at such time as the Holder shall be allowed to effect
conversions into freely tradable Common Stock pursuant to rule 144. The
liquidated damages will be payable in cash upon demand within five (5) business
days. Subject to the limitations described in this paragraph regarding the
period of time when the Series 98-A Preferred Stock shall first be convertible,
the Series 98-A Preferred Stock shall be convertible for two (2) years from the
Closing Date, and all of the Series 98-A Preferred Stock must be converted by
the second anniversary of the Closing Date. The holder of the Series 98-A
Preferred Stock shall further be prohibited from converting any portion of the
Series 98-A Preferred Stock which would result in the holder being deemed the
beneficial owner in accordance with the provisions of Rule 13d-3 of the
Securities Act of 1934, as amended, of 4.99% or more of the issued and
outstanding Common Stock of the Company.
3. Mechanics of Conversion. The holder of the Series 98-A
Preferred Stock shall exercise its right to convert the Series 98-A Preferred
Stock by telecopying an executed and completed notice of conversion to the
Company and delivering the original notice of conversion and the certificate
representing the Series 98-A Preferred Stock to the Company by express courier.
Each business date on which a notice of conversion is telecopied to and received
by the Company in accordance with the provisions hereof shall be deemed a
Conversion Date. The Company will use its best efforts to transmit the
certificates representing shares of Common Stock issuable upon conversion of any
Series 98-A Preferred Stock (together with the certificates representing the
Series 98-A Preferred Stock not so converted) to the holder via express courier,
by electronic transfer or otherwise within five business days after the
Conversion Date if the Company has received the original duly executed notice of
conversion and Series 98-A Preferred Stock certificate being so converted by
such date. The person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of such date. If
certificates for Common Stock are not delivered within five (5) business days of
actual receipt of a duly completed election to convert and the Preferred
Certificate to be converted, then the holder of the Series 98-A Preferred Stock
will be entitled to revoke the relevant notice of conversion by delivering a
notice to such effect to the Company whereupon the Company and the holder shall
each be restored to their respective positions immediately prior to the delivery
of such notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock
issuable upon the conversion of the Preferred Stock and the Conversion Price
shall be subject to adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock
in Common Stock or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock, (ii) declare a dividend
payable in cash on its Common Stock and at substantially the same time offer
its shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other security entitling a holder thereof to receive
Common Stock) from proceeds of such dividend (all Common Stock so issued shall
be deemed to have been issued as a stock dividend), (iii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iv) combine its outstanding shares of Common Stock into a smaller number
of shares of Common Stock, or (v) issue by reclassification of its Common Stock
any shares of Common Stock of the Company, the number of shares of Common Stock
issuable upon conversion of the Series 98-A Preferred Stock immediately prior
thereto shall be adjusted so that the holders of the Series 98-A Preferred Stock
shall be entitled to receive after the happening of any of the events described
above that number and kind of shares as the holders would have received had such
Series 98-A Preferred Stock been converted immediately prior to the happening of
such event or any record date with respect thereto. Any adjustment made pursuant
to this subdivision shall become effective immediately after the close of
business on the record date in the case of a stock dividend and shall become
effective immediately after the close of business on the record date in the case
of a stock split, subdivision, combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock
issuable hereunder otherwise required to be made by this Section (e)(4) will not
have to be made if such adjustment would not require an increase or decrease in
one percent (1%) or more in the number of shares of Common Stock issuable upon
conversion of the Series 98-A Preferred Stock. No adjustment in the Conversion
Rate will be made for the issuance of shares of capital stock to directors,
employees or independent contractors pursuant to the Company's or any of its
subsidiaries' stock option, stock ownership or other benefit plans or
arrangements or trusts related thereto or for issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under such plan.
(iii) Whenever the number of shares of Common Stock issuable upon
the conversion of the Series 98-A Preferred Stock is adjusted, as herein
provided, the Conversion Price shall be adjusted (to the nearest cent) by
multiplying such Conversion Price immediately prior to such adjustment by a
fraction of which the numerator shall be the number of shares of Common Stock
issuable upon the exercise of each share of Series 98-A Preferred Stock
immediately prior to such adjustment, and of which the denominator shall be the
number of shares of Common Stock issuable immediately thereafter.
5. Mergers, etc. In the case of any (i) consolidation or
merger of the Company into any entity (other than a consolidation or merger that
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of a share of Series 98-A Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
98-A Preferred Stock would have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is not
an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable upon
such consolidation, merger, sale or transfer is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation,
merger, sale or transfer by other than a constituent entity or an affiliate
thereof and in respect of which the Company merged into the Company or to which
such rights or election shall not have been exercised ("non-electing share"),
then for the purpose of this Section (e)(5) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If necessary,
appropriate adjustment shall be made in the application of the provision set
forth herein with respect to the rights and interest thereafter of the holders
of shares of Series 98-A Preferred Stock, to the end that the provisions set
forth herein shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor Company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer shall assume, by written instrument, the obligation to deliver to the
holder of each share of Series 98-A Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section (e) and in taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series 98-A Preferred Stock against impairment.
7. Fractional Shares. Any fractional shares issuable upon
conversion of the Series 98-A Preferred Stock shall be rounded to the nearest
whole share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon conversion shall be determined on the basis
of the total number of shares of Series 98-A Preferred Stock the holder is at
the time converting to Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price of Series 98-A Preferred
Stock pursuant to Section (e)(4), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such Series 98-A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment are based. The Company
shall, upon written request at any time of any holder of Series 98-A Preferred
Stock, furnish or cause to be furnished to such holder a certificate setting
forth (A) the Conversion Price at the time in effect, and (B) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series 98-A Preferred
Stock.
9. Reservation of Common Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of shares of Series 98-A Preferred Stock, such numbers of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series 98-A Preferred Stock. If at any
time the number of authorized but unissued shares of Common Stock shall be
insufficient to satisfy the conversion rights hereunder, in addition to such
other remedies as shall be available to the holder of Series 98-A Preferred
Stock, the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
10. Status of Converted Shares. In the event any shares of
Series 98-A Preferred Stock shall be converted pursuant to Section (e) hereof,
the shares so converted shall be canceled and shall not be issuable by the
Company, shall have the status of authorized but unissued shares of Preferred
Stock and may be reissued by the Company at anytime as shares of any series of
Preferred Stock other than Series 98-A Preferred Stock.
(f) Redemption
1. Optional Redemption by the Company. Holders of Series 98-A
Convertible Preferred Shares do not have the right to cause redemption of their
Series 98-A Convertible Preferred Shares. For any Series 98-A Preferred Stock
for which a notice of conversion has not been sent, the Series 98-A Convertible
Preferred Shares are callable by the Company as a series, in whole or in part,
by the Company thereafter providing thirty (30) days prior written notice to the
holder of the Series 98-A Preferred Stock ("Redemption Date"), by a payment in
U.S. dollars of one hundred thirty percent (130%) of the Liquidation Value of
$1,000 per share as defined in paragraphs (a), (c), and (d) above ("Redemption
Price") which Liquidation Value shall include cumulative dividends as provided
in paragraph (c) herein accrued and unpaid through the Redemption Date. On the
date the Company sends a notice of redemption to the holders of the Series 98-A
Convertible Preferred Stock ("Holders") and wire transfers the appropriate
amount of funds into the escrow account described in the 6% Convertible
Preferred Stock Subscription Agreement, whichever event date is the latter
("Notice of Redemption Date"), the Holder's right to convert the Series 98-A
Convertible Preferred Stock shall terminate and be canceled immediately,
provided, however, the Company shall only have the right to redeem the Series
98-A Preferred Stock when, on the Redemption Date, the closing bid price, as
defined in paragraph (e)(1) herein, of the shares of Common Stock into which the
Series 98-A Preferred Stock is convertible, is less than the closing bid price
on the date the Holder or the original subscriber executed the 6% Convertible
Preferred Stock Subscription Agreement. If fewer than all of the outstanding
shares of Series 98-A Convertible Preferred Stock are to be redeemed, the
Company will select those to be redeemed pro-rata, by lot or by other method
deemed equitable by the Company in its sole discretion.
2. Notice of Redemption. Notice of any redemption, setting
forth (i) the Redemption Date and the place fixed for redemption, (ii) the
Redemption Price, and (iii) a statement that dividends on the shares of Series
98-A Preferred Stock to be redeemed will cease to accrue on such Redemption
Date, and (iv) a statement of or reference to the conversion right set forth in
Section (e) hereof (including that the right to give a notice of conversion in
respect of any shares to be redeemed shall terminate on the Notice of Redemption
Date), shall be mailed, postage prepaid, at least thirty (30) days prior to the
Redemption Date to each holder of record of the Series 98-A Preferred Stock to
be redeemed at his or her address as the same shall appear on the books of the
Company. If fewer than all the shares of the Series 98-A Preferred Stock owned
by such holder are then to be redeemed, the notice shall specify the number of
shares thereof that are to be redeemed and, if practicable, the numbers of the
certificates representing such shares. Upon notice of its right to redeem the
Series 98-A Preferred Stock, the Company shall wire transfer the appropriate
amount of funds into an escrow account mutually agreed upon by both the Company
and the holder of the Series 98-A Preferred Stock within three (3) business days
of such notice. Additionally, if after the passage of three (3) business days
from the receipt by the holder of the notice of the Company's right to redeem
the Series 98-A Preferred Stock and the time funds are received by the escrow
agent, the Company has not deposited into escrow the appropriate amount of funds
to redeem the Series 98-A Preferred Stock, the Company shall pay to the holder
an amount equal to five (5%) percent per month of the Liquidation Preference on
a pro rata basis in cash. After the escrow agent is in receipt of such funds, he
shall notify the holder to surrender the appropriate amount of Series 98-A
Preferred Stock. If after three (3) business days from the date the notice of
redemption is received by the holder the funds have not been received by the
escrow agent, then the holder shall again have the right to convert the Series
98-A Preferred Stock and the Company shall have the right to redeem the Series
98-A Preferred Stock but only upon simultaneously sending a notice of redemption
to the holder and wire transferring the appropriate amount of funds.
3. Mechanics of Redemption. At any time up to the date
immediately prior to the Notice of Redemption Date, the holders shall have the
right to convert the Series 98-A Preferred Stock into Common Stock as more fully
provided in Section (e) hereof. Unless so converted, at the close of business on
the Notice of Redemption Date, subject to the conditions described in paragraph
(f)(1) herein, each share of Series 98-A Preferred Stock to be redeemed shall be
automatically canceled and converted into a right to receive the Redemption
Price, and all rights of the Series 98-A Preferred Stock, including the right to
conversion shall cease without further action. At any time following the Notice
of Redemption Date, holders of the Series 98-A Preferred Stock may surrender
their certificates at the office of the Company or any transfer agent therefor,
duly endorsed and with signature guaranteed. As soon as practicable after
surrender of the certificate, the Company or transfer agent, as the case may be,
shall forward payment of the Redemption Price to the holder thereof or his
assignee.
4. Adjustment of Call Price. The call price shall be adjusted
proportionally upon any adjustment of the Conversion Price under Section (e) (4)
hereof in the event of any stock dividend, stock split, combination of shares or
similar event.
5. Retired Shares. Shares of Series 98-A Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
redemption in accordance with Section (f) hereof, shall after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any Series of Preferred Stock
other than as shares of Series 98-A Preferred Stock.
(g) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof
to be given or made by a holder of shares of Preferred Stock to or upon the
Company shall be sufficiently given or made if sent by facsimile or by mail,
postage prepaid, addressed (until another address is sent by the Company to the
holder) as follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 98-A Preferred Stock Holders. Any notice
pursuant to the terms hereof to be given or made by the Company to or upon any
holder of shares of Series 98-A Preferred Stock shall be sufficiently given or
made if sent by mail, postage Prepaid, addressed (until another address is sent
by the holder to the Company) to the address of such holder on the records of
the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to
be signed by its Senior Vice President, and attested to by its Secretary, this
17th day of July, 1998.
SGI INTERNATIONAL
/s/ RICHARD J. GIBBENS
By:__________________________
Title: VP - Operations
Attest:
/s/ JOHN R. TAYLOR
_____________________________
John R. Taylor, Secretary
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH,
EXCEPT IN THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY.
STOCK PURCHASE WARRANT 98FA-
To Purchase _________ Shares of Common Stock of
SGI INTERNATIONAL
THIS CERTIFIES that, for value received, ____________ (the "Investor"), is
entitled, upon the terms and subject to the conditions hereinafter set forth, at
any time on or after ten days after the date hereof and on or prior to March 6,
2003 (the "Termination Date") but not thereafter, to subscribe for and purchase
from SGI INTERNATIONAL, a Utah corporation (the "Company"), (____) shares of
Common Stock (the "Warrant Shares"). The purchase price of one share of Common
Stock (the "Exercise Price") under this Warrant shall be One Hundred Ten (110%)
percent of the average closing bid price on the OTC BULLETIN BOARD, over the
five (5) day trading period prior to March 6, 1998 (the "Closing Date"). The
Exercise Price and the number of shares for which the Warrant is exercisable
shall be subject to adjustment as provided herein. This Warrant is being issued
in connection with the 6% Convertible Preferred Stock Series 98-A Subscription
Agreement dated on or about July 28, 1998, in the amount of Five Hundred
Thousand ($500,000) Dollars (the "Agreement") between the Company, the Investor,
and another entity, and is subject to its terms. In the event of any conflict
between the terms of this Warrant and the Agreement, the Agreement shall
control.
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with
such issue).
3. Exercise of Warrant. Exercise of the purchase rights
represented by this Warrant may be made at any time or times one day after the
date hereof, in whole or in part, before the close of business on the
Termination Date, or such earlier date on which this Warrant may terminate as
provided in paragraph 12 below, by the surrender of this Warrant and the Notice
of Exercise annexed hereto duly executed, at the office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the registered holder hereof at the address of such holder appearing on the
books of the Company) and upon payment of the Exercise Price of the shares
thereby purchased; whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares purchased hereunder shall be delivered to the holder
hereof within five business days after the date on which this Warrant shall have
been exercised as aforesaid. Payment of the Exercise Price of the shares may be
by certified check or cashier's check or by wire transfer to an account
designated by the Company in an amount equal to the Exercise Price multiplied by
the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant and any Warrant Shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of except as follows:
(i) to a person who, in the opinion of counsel to the Company, is a person to
whom this Warrant or the Warrant Shares may legally be transferred without
registration and without the delivery of a current prospectus under the Act with
respect thereto, and then only against receipt of an agreement of such person to
comply with the provisions of this Section 6(a) with respect to any resale or
other disposition of such securities; or (ii) to any person upon delivery of a
prospectus then meeting the requirements of the Act relating to such securities
and the offering thereof for such sale or disposition, and thereafter to all
successive assignees.
(b) Unless the Warrant Shares have been registered under the
Act, or exempt from registration, upon exercise of any of the Warrant and the
issuance of any of the Warrant Shares, all certificates representing Warrant
Shares shall bear on the face thereof substantially the following legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The holder of the Warrant agrees and acknowledges that the
Warrant is being purchased for the holder's own account, for investment purposes
only, and not for the account of any other person, and not with a view to
distribution, assignment, pledge or resale to others or to fractionalization in
whole or in part. The holder further represents, warrants and agrees as follows:
no other person has or will have a direct or indirect beneficial interest in
this Warrant and the holder will not sell, hypothecate or otherwise transfer the
Warrant except in accordance with the Act thereunder and applicable state
securities laws or unless, in the opinion of counsel for the holder acceptable
to the Company, an exemption from the registration requirements of the Act and
such laws is available.
7. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company prior to the exercise thereof. If, however, at the
time of the surrender of this Warrant and purchase the holder hereof shall be
entitled to exercise this Warrant, the shares so purchased shall be and be
deemed to be issued to such holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been exercised.
9. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company);
provided, however, that this Warrant may not be resold or otherwise transferred
except (i) in a transaction registered under the Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
10. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant or stock certificate, and in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of this Warrant or stock certificate.
11. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
12. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, the Company shall give the holder of this Warrant
thirty (30) days' notice of the proposed effective date of the transaction
specifying that the Warrant shall terminate if the Warrant has not been
exercised by the effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or
Merger Transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) "Piggy-Back" Registration. The Holder of this Warrant
shall have the right to include all of the shares of Common Stock underlying
this Warrant (the "Registrable Securities") as part of any registration of
securities filed by the Company (other than in connection with a transaction
contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8)
and must be notified in writing of such filing; provided, however, that the
holder of this Warrant agrees it shall not have any piggy-back registration
rights pursuant to this Section 12(c) if the shares of Common Stock underlying
this Warrant may be sold in the United States pursuant to the provisions of Rule
144. Holder shall have five (5) business days to notify the Company in writing
as to whether the Company is to include Holder or not include Holder as part of
the registration; provided, however, that if any registration pursuant to this
Section shall be underwritten, in whole or in part, the Company may require that
the Registrable Securities requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the underwriter evidenced in writing of such offering only a limited number of
Registrable Securities should be included in such offering, or no such shares
should be included, the Holder, and all other selling stockholders, shall be
limited to registering such proportion of their respective shares as shall equal
the proportion that the number of shares of selling stockholders permitted to be
registered by the underwriter in such offering bears to the total number of all
shares then held by all selling stockholders desiring to participate in such
offering. Those Registrable Securities which are excluded from an underwritten
offering pursuant to the foregoing provisions of this Section (and all other
Registrable Securities held by the selling stockholders) shall be withheld from
the market by the Holders thereof for a period, not to exceed one hundred eighty
(180) days, which the underwriter may reasonably determine is necessary in order
to effect such underwritten offering. The Company shall have the right to
terminate or withdraw any registration initiated by it under this Section 12(c)
prior to the effectiveness of such registration whether or not any Warrant
holder elected to include securities in such registration. All registration
expenses incurred by the Company in complying with this Section 12(c) shall be
paid by the Company, exclusive of underwriting discounts, commissions and legal
fees and expenses for counsel to the holders of the Warrants.
13. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. An adjustment made pursuant to this paragraph
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
14. Voluntary Adjustment by the Company. The Company may at
its discretion, at any time during the term of this Warrant, reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
15. Notice of Adjustment. Whenever the number of Warrant
shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall promptly mail by registered or certified mail, return receipt
requested, to the holder of this Warrant notice of such adjustment or
adjustments setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
16. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary to
assure that such shares of Common Stock may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the OTC
Bulletin Board or any domestic securities exchange upon which the Common Stock
may be listed.
17. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws and jurisdictions of New York and for all
purposes shall be construed in accordance with and governed by the laws of said
state without regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the
Common Stock acquired upon the exercise of this Warrant, if not registered, may
have restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: July _________, 1998 SGI INTERNATIONAL
By:_________________________
Title:______________________
<PAGE>
NOTICE OF EXERCISE
To: SGI INTERNATIONAL
(1) The undersigned hereby elects to purchase shares of Common
Stock of SGI INTERNATIONAL pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
Dated:
------------------------------
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________,
Holder's Signature: _____________________________
Holder's Address:________________________________
________________________________
Signature Guaranteed: _________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM
REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS.
6% CONVERTIBLE PREFERRED STOCK SERIES 98-A
SUBSCRIPTION AGREEMENT
SGI INTERNATIONAL
THIS AGREEMENT is executed in reliance upon the transaction
exemption afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in
connection with the private placement of the 6% Convertible Preferred Stock
Series 98-A (hereinafter referred to as the "Preferred Stock") of SGI
INTERNATIONAL (OTC Bulletin Board symbol "SGII"), located at 1200 Prospect
Street, Suite 325, La Jolla, CA 92037, a corporation organized under the laws of
Utah, USA (hereinafter referred to as the "Company"). The terms on which the
Preferred Stock may be converted into Common Stock and the other terms of the
Preferred Stock are set forth in the Certificate of Secretary of the 6%
Convertible Preferred Stock Series 98-A (Exhibit A annexed hereto). In addition,
the Company will sell to Subscribers a warrant (the "Warrant") to purchase an
aggregate of Fifty Thousand (50,000) shares of Common Stock of the Company for a
period of five (5) years from the Closing Date (as defined herein), as per the
terms of a separate Stock Purchase Warrant (Exhibit B annexed hereto). This
Subscription and, if accepted by the Company, the offer and sale of the
Preferred Stock, Warrants and the Common Stock underlying the Warrant and
Preferred Stock (collectively the "Securities"), are being made in reliance upon
the provisions of Regulation D under the Act.
The Closing Date shall be determined in accordance with
Sections 1.1 and 15 herein.
The entities listed on Schedule A annexed hereto (hereinafter
referred to as the "Subscribers" or "Purchasers"), hereby represent and warrant
to, and agree with the Company as follows:
Section 1. Agreement to Subscribe; Purchase Price.
1.1 Closing. The Company will sell, and the Subscribers will
buy, on the Closing Date, an aggregate of Five Hundred (500) shares of Preferred
Stock for an aggregate purchase price of Five Hundred Thousand($500,000) U.S.
Dollars (the "Purchase Price") based on U.S.$1,000 per share, and a Warrant to
purchase an aggregate of Fifty Thousand (50,000) shares of Common Stock of the
Company. Dividends will accrue and be paid at the rate of six (6%) percent on
the outstanding principal amount of the Preferred Stock until the Preferred
Stock has been completely converted, provided, however, all interest thereon
shall only be payable in common stock of the Company and not in cash at the time
of conversion. Dividends shall be calculated at the Conversion Price on the
Conversion Date when converted.
1.2 Form of Payment. Subscribers shall pay the Purchase Price
by delivering good funds in United States Dollars by wire transfer to Goldstein,
Goldstein & Reis, LLP, Escrow Agent, against delivery of the original
Securities. The parties have entered into an Escrow Agreement annexed hereto as
Exhibit C.
1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein &
Reis, LLP are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
Section 2. Representations and Warranties of the Subscribers.
Subscribers acknowledge, represent, warrant and agree as follows:
2.1 Organization and Authorization. Each of the Subscribers is
duly incorporated or organized and validly existing in the state or country of
its incorporation or organization and has all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by the Subscribers, the performance by the
Subscribers of its obligations hereunder and the consummation by the Subscribers
of the transactions contemplated hereby have been duly authorized and requires
no other proceedings on the part of the Subscribers. Each of the undersigned's
signatory has all right, power and authority to execute and deliver this
Agreement on behalf of each of the Subscribers. This Agreement has been duly
executed and delivered by the Subscribers and, assuming the execution and
delivery hereof and acceptance thereof by the Company, will constitute the
legal, valid and binding obligations of the Subscribers, enforceable against the
Subscribers in accordance with its terms and the Subscribers can afford the
complete loss of Subscriber's investment.
2.2 Evaluation of Risks. Subscribers have such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of, and bearing the economic risks entailed by, an investment
in the Company and of protecting its interests in connection with this
transaction. It recognizes that its investment in the Company involves a high
degree of risk and the Subscribers can afford the complete loss of Subscriber's
investment.
2.3 Independent Counsel. Subscribers acknowledge that they
have been advised to consult with its own attorney regarding legal matters
concerning the Company and to consult with its tax advisor regarding the tax
consequences of acquiring the Securities.
2.4 Disclosure Documentation. Subscribers have received and
reviewed copies of the Company's reports filed under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-Qs,
8-K's, and registration statements, filed by the Company since December 31,
1996, (collectively, the "Reports"). Except for the Reports, Subscribers are not
relying on any other information relating to the offer and sale of the
Securities. Subscribers acknowledge that the Company has offered to make
available any additional public information that the Subscribers may reasonably
request, including technical information, and other material information about
the Company and Subscribers have been offered Company's full and unconditional
cooperation in making such information available to Subscribers and acknowledge
that the Company has recommended that the Subscribers request and review such
information prior to making an investment decision. No oral or written
representations have been made, or oral or written information furnished to the
undersigned or its advisors, if any, in connection with the offering of the
Securities which were or are in any way inconsistent with the Reports.
2.5 Opportunity to Ask Questions. Subscribers have had a
reasonable opportunity to ask questions of and receive answers from the Company
concerning the Company and the offering, and all such questions, if any, have
been answered to the full satisfaction of Subscribers.
2.6 Reports Constitute Sole Representations. Except as set
forth in the Reports, no representations or warranties have been made to
Subscribers by (a) the Company or any agent, employee or affiliate of the
Company or (b) any other person, and in entering into this transaction
Subscribers are not relying upon any information, other than that contained in
the Reports and the results of independent investigation by Subscribers.
2.7 Subscribers Are Accredited Investors. Each of the undersigned is
an "Accredited Investor" as defined below who represents and warrants it is
included within one or more of the following categories of "Accredited
Investors."
(i) Any bank as defined in Section 3(a)(2) of the
Act, or any savings and loan associated or other institution as defined
in Section 3(a)(5)A of the Act whether acting in it individual or
fiduciary capacity; any broker or dealer registered pursuant to Section
15 of the 1934 Act; any insurance company as defined in Section 2(13)
of the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivision, for the
benefits of its employees if such plan has total assets in excess of
$5,000,000; and employee benefit plan within the meaning of Title I of
the Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of
such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons
that are accredited investors;
(ii) Any private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
(iv) Any director, executive officer, or general
partner of the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general partner of
that issuer;
(v) Any natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(vi) Any natural person who had an individual income
in excess of $200,000 in each of the two (2) most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching that same income
level in the current year;
(vii) Any trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Section 230.506(b)(2)(ii) of Regulation D under
the Act;
(viii) Any entity in which all of the equity owners
are accredited investors; and
(ix) Any self-directed employee benefit plan with
investment decisions made solely by persons that are accredited
investors within the meaning of Rule 501 of Regulation D promulgated
under the Act.
2.8 No Registration, Review or Approval. Subscribers
acknowledge and understand that the limited private offering and sale of
Securities pursuant to this Agreement has not been reviewed or approved by the
SEC or by any state securities commission, authority or agency, and is not
registered under the Act or under the securities or "blue sky" laws, rules or
regulations of any state. Subscribers acknowledge, understand and agree that the
Securities are being offered and sold hereunder pursuant to (i) a private
placement exemption to the registration provisions of the Act pursuant to
Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such
Act, and (ii) a similar exemption to the registration provisions of applicable
state securities laws. Subscribers understand that the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Subscribers set forth herein in order to
determine the applicability of such exemptions and the suitability of
Subscribers to acquire the Securities. Subscribers will advise Company of the
state of its residence prior to executing this or any other agreement to enable
the Company to comply with applicable "blue sky" laws.
2.9 Investment Intent. Without limiting its ability to resell
the Securities pursuant to an effective registration statement, Subscribers are
acquiring the Securities solely for its own account and not with a view to the
distribution, assignment or resale to others. Subscribers understand and agree
that they may bear the economic risk of its investment in the Securities for an
indefinite period of time. Subscribers do not now have any short position or
hedge position in the Company's Common Stock nor will the Subscribers make any
promissory notes and/or pledges to that effect on the Company's Common Stock.
2.10 No Advertisements. The Subscribers are not subscribing
for Securities as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over television or radio, or presented at any seminar or
meeting.
2.11 Registration Rights. The parties have entered into a Registration
Rights Agreement (Exhibit E).
Section 3. Representations and Warranties of the Company. For
so long as any Securities held by Subscribers remain outstanding, the Company
acknowledges, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company is a corporation
duly organized and validly existing under the laws of the State of Utah and is
in good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a material adverse effect on the Company.
3.2 Accuracy of Reports and Information. To the best of its
knowledge, the Company is in compliance, to the extent applicable, with all
reporting obligations under either Section 12(b), 12(g) or 15(d) of the 1934
Act, and shall use its best efforts to maintain such status on a timely basis.
The Company has registered its Common Stock pursuant to Section 12 of the 1934
Act and the Common Stock is listed and trades on the OTC Bulletin Board.
The Company has filed all material required to be filed
pursuant to all reporting obligations, under either Section 13(a) or 15(d) of
the 1934 Act for a period of at least twelve (12) months immediately preceding
the offer and sale of the Securities (or for such shorter period that the
Company has been required to file such material).
3.3 SEC Filings/Full Disclosure. For a period of at least
twelve (12) months immediately preceding this offer and sale, or such shorter
period that the Company has been required to file such Reports as defined
herein, to the best of the Company's knowledge (i) none of the Company's filings
with the Securities and Exchange Commission contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Company has timely filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been publicly
disclosed by the Company or disclosed in writing to the Subscribers which (i)
could reasonably be expected to have a material adverse effect on the condition
(financial or otherwise) or on earnings, business affairs, properties or assets
of the Company, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company to perform its obligations pursuant to this
Agreement.
3.4 Authorization. The Company has all requisite corporate
right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of the Company, its directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Securities and
the performance of the Company's obligations hereunder has been taken. This
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies, and to limitations
of public policy as they may apply to the indemnification provisions set forth
in this Agreement. Upon their issuance and delivery pursuant to this Agreement,
the Securities will be validly issued, fully paid and nonassessable and will be
free of any liens or encumbrances; provided, however, that the Securities are
subject to restrictions on transfer under state and/or federal securities laws.
The issuance and sale of the Securities will not give rise to any preemptive
right or right of first refusal or right of participation on behalf of any
person.
3.5 No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, Bylaws, Stockholders Agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which would have a material adverse
effect on the Company's business and financial condition.
3.6 No Undisclosed Liabilities or Events. The Company has no
liabilities or obligations other than those disclosed in the Reports, this
Agreement or those incurred in the ordinary course of the Company's business
since March 31, 1998, and which individually or in the aggregate, do not or
would not have a material adverse effect on the properties, business, condition
(financial or otherwise), results of operations or prospects of the Company. No
event or circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations
or prospects, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed.
3.7 No Default. The Company is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it is or its property
is bound, and neither the execution, nor the delivery by the Company, nor the
performance by the Company of its obligations under this Agreement, including
the conversion or exercise provision of the Securities, will conflict with or
result in the breach or violation of any of the terms or provisions of, or
constitute a default or result in the creation or imposition of any lien or
charge on any assets or properties of the Company under, any material indenture,
mortgage, deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or any
statute or the Articles of the Company, or any decree, judgment, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or its properties, or the Company's listing agreement for its Common
Stock.
3.8 Absence of Events of Default. Except as set forth in the
Reports and this Agreement, no Event of Default, as defined in the respective
agreement to which the Company is a party, and no event which, with the giving
of notice or the passage of time or both, would become an Event of Default (as
so defined), has occurred and is continuing, which would have a material adverse
effect on the Company's business, properties, prospects, condition (financial or
otherwise) or results of operations.
3.9 Governmental Consent, etc. No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale or issuance of the
Securities, or the consummation of any other transaction contemplated hereby,
except as may be required by applicable securities laws.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the Company's knowledge, neither the Company nor its products is
infringing or will infringe any trademark, trade name, patent right, copyright,
license, trade secret or other similar right of others currently in existence;
and there is no claim being made against the Company regarding any trademark,
trade name, patent, copyright, license, trade secret or other intellectual
property right which could have a material adverse effect on the business or
financial condition of the Company.
3.11 Material Contracts. Except as set forth in the Reports,
the agreements to which the Company is a party described in the Reports are
valid agreements, in full force and effect, and the Company is not in material
breach or material default under any of such agreements.
3.12 Litigation. Except as disclosed in the Reports, there is
no action, proceeding or investigation pending, or to the Company's knowledge
threatened, against the Company which might result, either individually or in
the aggregate, in any material adverse change in the business, prospects,
conditions, affairs or operations of the Company. The Company is not a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the
Company has good and marketable title to all properties and material assets
described in the Reports as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company.
3.14 Subsidiaries. Except as disclosed in the Reports, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
3.15 Required Governmental Permits. The Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
3.16 Listing. The Company will use its best efforts to
maintain the listing of its Common Stock on the OTC Bulletin Board or other
organized United States market or quotation system. The Company has not received
any notice, oral or written, regarding continued listing and, as long as the
Preferred Stock and Warrants are outstanding, the Company will take no action
which would impact their continued listing or eligibility of the Company for
such listing.
3.17 Other Outstanding Securities/Financing Restrictions.
Except as disclosed in the Reports, the Company has no outstanding restricted
shares, or shares of Common Stock sold under Regulation S, Regulation D or
outstanding under any other exemption from registration, which are available for
sale as unrestricted ("free trading") stock.
3.18 Registration Alternative. The Company covenants and
agrees that for so long as any of the shares remain outstanding and continue to
be "restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Subscribers shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock, no par value per share,
20,000,000 shares of non-voting Preferred Stock, $0.01 par value. All issued and
outstanding shares of Common Stock have been duly authorized and validly issued
and are fully paid and nonassessable.
3.20 Dilution. The Company is aware and acknowledges that
conversion of the Preferred Stock, and/or exercise of the Warrant, would cause
dilution to existing Shareholders and could significantly increase the
outstanding number of shares of Common Stock.
Section 4. Further Representations and Warranties of the
Company. For so long as any Securities held by the Subscribers remain
outstanding, the Company acknowledges, represents, warrants and agrees as
follows:
(i) It will reserve from its authorized but unissued
shares of Common Stock a sufficient number of shares of Common Stock to
permit the conversion in full of the outstanding Securities.
(ii) It will use its best efforts to maintain the
listing of its Common Stock on the OTC Bulletin Board.
(iii) It will permit the Subscribers to exercise its
right to convert the Preferred Stock and/or exercise the Warrants by
telecopying an executed and completed Notice of Conversion and/or
Notice of Exercise to the Company and delivering the original Notice of
Conversion and/or original Notice of Exercise and the certificate
representing the Preferred Stock and/or the original Warrant to the
Company by express courier. Each business date on which a Notice of
Conversion and/or Notice of Exercise is telecopied to and received by
the Company in accordance with the provisions hereof shall be deemed a
conversion date and/or exercise date. The Company will use its best
efforts to transmit the certificates representing shares of Common
Stock issuable upon conversion of any Preferred Stock and/or exercise
of any Warrants (together with the certificates representing the
Preferred Stock not so converted) and/or Warrants not so exercised to
the Subscribers via express courier, by electronic transfer or
otherwise within three business days after the conversion and/or
exercise date if the Company has received the original Notice of
Conversion and Preferred Stock certificate being so converted and/or
original Notice of Exercise and Warrants by such date. In addition to
any other remedies which may be available to the Subscribers, in the
event that the Company fails to use its best efforts to effect delivery
of such shares of Common Stock within such three business day period,
the Subscribers will be entitled to revoke the relevant Notice of
Conversion and/or Notice of Exercise by delivering a notice to such
effect to the Company whereupon the Company and the Subscribers shall
each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion and/or Notice of Exercise. The
Notice of Conversion and Preferred Stock and/or the Notice of Exercise
and Warrant representing the portion of the Preferred Stock converted
and/or Warrant exercised shall be delivered as follows:
To the Company:
Controller
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
Fax: (619) 551-0247
In the event that the Common Stock issuable upon conversion of
the Preferred Stock and/or exercise of the Warrants is not delivered, as a
direct result of the negligence or action or inaction of the Company only,
within five (5) business days of receipt by the Company of a valid Notice of
Conversion and the Preferred Stock to be converted and/or Notice of Exercise and
Warrants to be exercised (such date of receipt referred to as the "Conversion
Date" and/or "Exercise Date"), the Company shall pay to the Purchaser, in
immediately available funds, upon demand, as liquidated damages for such failure
and not as a penalty, for each $100,000 of Preferred Stock sought to be
converted, $500 for each of the first ten (10) days and $1,000 per day
thereafter that the Conversion Shares are not delivered, and for each thousand
(1,000) shares of Common Stock sought to be exercised under the Warrant, $7.50
for each of the first ten (10) days and $15 per day thereafter that the shares
of Common Stock underlying the Warrant are not delivered, which liquidated
damages shall run from the sixth business day after the Conversion Date and/or
Exercise Date. Any and all payments required pursuant to this paragraph shall be
payable only in shares of Common Stock and not in cash. The number of such
shares shall be determined by dividing the total sum payable by the Conversion
Price and/or Exercise Price.
Section 5. Opinion of Counsel. The Company shall have their
counsel provide, at the Company's expense, an opinion of counsel acceptable to
the transfer agent (if required) in order to perfect conversion of the Preferred
Stock and/or exercise of Warrants, upon receipt of Notice of Conversion and/or
Notice of Exercise.
Subscribers shall, upon the Closing, receive an opinion letter
from counsel to the Company subject to reasonable and customary limitations and
qualifications to the effect that:
(i) The Company is duly incorporated and validly
existing under the laws and jurisdiction of its incorporation. The
Company and/or its subsidiaries are duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions where
the Company and/or its subsidiaries owns or leases properties,
maintains employees or conducts business, except for jurisdictions in
which the failure to so qualify would not have a material adverse
effect on the Company, and has all requisite corporate power and
authority to own its properties and conduct its business.
(ii) Except as set forth in the Reports to the best
of Counsel's knowledge without an independent investigation, there is
no action, proceeding or investigation pending, or to such counsel's
knowledge, threatened against the Company which might result, either
individually or in the aggregate, in any material adverse change in the
business or financial condition of the Company.
(iii) Except as set forth in the Reports to the best
of counsel's knowledge without an independent investigation, the
Company is not a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency
or in strumentality.
(iv) Except as set forth in the Reports to the best
of counsel's knowledge without an independent investigation, there is
no action, suit, proceeding or investigation by the Company currently
pending, except for a lawsuit against Company's subsidiary, Automative
& Assembly Manufacturing, Inc.
(v) The Preferred Stock, which shall be issued at the
Closing, will be duly authorized and validly issued under the laws of
the Company's State of Incorporation.
(vi) This Subscription Agreement, the issuance of the
Securities and the issuance of Common Stock, upon conversion of the
Securities, have been duly approved by all required corporate action
and that all such securities, upon delivery, shall be validly issued
and outstanding, fully paid and nonassessable.
(vii) The issuance of the Securities will not violate
the applicable listing agreement between the Company and any securities
exchange or market on which the Company's securities are listed.
(viii) Assuming the accuracy of the representation
and warranties of the Company and the Subscribers set forth in this
Subscription Agreement, the offer, issuance and sale of the Preferred
Stock and Conversion Shares to be issued upon exercise to the Purchaser
pursuant to this Agreement are exempt from the registration
requirements of the Act.
(ix) As more specifically described in the Reports,
the authorized capital stock of the Company consists of 75,000,000
shares of Common Stock, no par value per share ("Common Stock") and
20,000,000 shares of Preferred Stock, par value $.01 per shares.
(x) The Common Stock is registered pursuant to
Section 12(b) or Section 12(g) of the 1934 Act and to the best of
Counsel's knowledge without an independent investigation the Company
has timely filed all the material required to be filed pursuant to
Sections 13(a) or 15(d) of such Act for a period of at least twelve
months preceding the date hereof.
(xi) The Company has the requisite corporate power
and authority to enter into the Agreements and to sell and deliver the
Securities and the Common Stock to be issued upon the conversion of the
Securities as described in this Agreement; the Agreement has been duly
and validly authorized by all necessary corporate action by the
Company, to the best of our knowledge, no approval of any governmental
or other body is required for the execution and delivery of each of the
Agreements by the Company or the consummation of the transactions
contemplated thereby; the Agreement has been duly and validly executed
and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights
generally, and except as to compliance with federal, state and foreign
securities laws, as to which no opinion is expressed.
(xii) To the best of our knowledge without an
independent investigation, after due inquiry, the execution, delivery
and performance of the Agreements by the Company and the performance of
its obligations thereunder do not and will not constitute a breach or
violation of any of the terms and provisions of, or constitute a
default under or conflict with or violate any provision of (i) the
Company's Certificate of Incorporation or By-Laws, (ii) any indenture,
mortgage, deed of trust, agreement or other instrument to which the
Company is a party or by which it or any of its property is bound,
(iii) any applicable statute or regulation, (iv) or any judgment,
decree or other of any court or governmental body having jurisdiction
over the Company or any of its property.
Section 6. Opinion of Counsel Upon Conversion. The Company
will obtain for the Subscribers, at the Company's expense, any and all opinions
of counsel which may be reasonably required in order to convert the Preferred
Stock, including, but not limited to, obtaining for the Subscribers an opinion
of counsel, subject only to receipt of a Notice of Conversion in the form of
Exhibit D and receipt by Counsel of such representations, warranties, and
documents as are determined to be necessary to comply with applicable securities
laws, duly executed by the Subscribers which shall be satisfactory to the
Transfer Agent, directing the Transfer Agent to remove the legend from the
certificate.
Section 7. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to use its best efforts to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144 under the Act, at
all times after the effective date on which the Company becomes subject
to the reporting requirements of the Act or the 1934 Act;
(ii) use its best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company
under the Act and the 1934 Act;
(iii) to furnish to Purchaser forthwith upon request
a written statement by the Company as to its compliance with the
reporting requirements of said Rule 144, and of the Act and the 1934
Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the
Company as Purchaser may reasonably request in availing itself of any
rule or regulation of the SEC allowing Purchaser to sell any such
Securities without registration.
Section 8. Representations and Warranties of the Company and
Subscribers. Each of the Subscribers and the Company represent to the other the
following with respect to itself:
8.1 Subscription Agreement. The Subscription Agreement has
been duly authorized, validly executed and delivered on behalf of the Company
and Subscribers and is a valid and binding agreement in accordance with its
terms, subject to general principles of equity and to bankruptcy or other laws
affecting the enforcement of creditors' rights generally.
8.2 No-Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation, and any amendments thereto,
Bylaws and any amendments thereto of the Company or any material mortgage,
indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree statute, law, ordinance, rule or
regulation applicable to the Company, its properties or assets.
8.3 Approvals. Neither the Company nor Subscribers are aware
of any authorization, approval or consent of any governmental body which is
legally required for the issuance and sale of the Securities.
8.4 Indemnification. Each of the Company and the Subscribers
agrees to indemnify the other and to hold the other harmless from and against
any and all losses, damages, liabilities, costs and expenses (including
reasonable attorneys' fees) which the other may sustain or incur in connection
with the breach by the indemnifying party of any representation, warranty or
covenant made by it in this Agreement.
8.5 Transfer Restrictions/Conversion Holding Period. Refer to
Certificate of Secretary (Exhibit A). It is agreed that the Closing Date as
referred to in Section (e)(1) of the Certificate of Secretary shall be the
Closing Date as defined in the Subscription Agreement, which is March 6, 1998.
Section 9. Restrictions on Conversion of Preferred Stock. The
Subscribers or any subsequent holder of the Preferred Stock (the "Holder") shall
be prohibited from converting any portion of the Preferred Stock which would
result in any Subscriber being deemed the beneficial owner, in accordance with
the provisions of Rule 13d-3 of the 1934 Act, as amended, of 4.99% or more of
the then issued and outstanding Common Stock of the Company.
Section 10. Permissive Redemption. The Company has the right
to redeem the Preferred Stock, in whole or in part, in cash at one hundred
thirty (130%) percent of the Liquidation Value, as defined in the Certificate of
Secretary of the 6% Convertible Preferred Stock Series 98-A, plus accrued and
unpaid dividends (the "Redemption Price"), for any Preferred Stock for which a
Notice of Conversion has not been sent. Upon receipt by Subscribers of notice by
the Company (the "Redemption Notice") of its right to redeem the Preferred Stock
(the "Redemption Date"), the Company shall wire transfer the appropriate amount
of funds into an escrow account mutually agreed upon by both the Company and
Subscribers within three (3) business days of the Redemption Date. Additionally,
if the Company has not deposited into escrow the Redemption Price for the
benefit of the Subscribers, within three (3) business days after the Redemption
Date, the Company shall pay to the Subscribers an amount equal to five (5%)
percent per month thereafter of the Liquidation Value of the Preferred Stock
being redeemed on a pro rata basis in cash. After the escrow agent is in receipt
of the Redemption Price, he shall notify the Subscribers to surrender the
appropriate number of shares of Preferred Stock. If the escrow agent has not
received the Redemption Funds within three (3) business days from the Redemption
Date, the Subscribers shall again have the right to convert the Preferred Stock,
and thereafter the Company shall only have the right to redeem the Preferred
Stock by sending a Redemption Notice to the Subscribers and simultaneously wire
transferring the Redemption Price.
Section 11. Mandatory Conversion. In the event the Preferred
Stock has not been converted two (2) years from the Closing Date, the Preferred
Stock shall automatically be converted as if the Subscribers voluntarily elected
such conversion in accordance with the procedure, terms and conditions set forth
in this Agreement.
Section 12. Registration or Exemption Requirements.
Subscribers acknowledge and understand that the Securities may not be resold or
otherwise transferred except in a transaction registered under the Act and any
applicable state securities laws or unless an exemption from such registration
is available. Subscribers understand that the Securities will be imprinted with
a legend that prohibits the transfer of the Securities unless (i) they are
registered or such registration is not required, and (ii) if the transfer is
pursuant to an exemption from registration other than Rule 144 under the Act
and, if the Company shall so request in writing, an opinion of counsel
reasonably satisfactory to the Company is obtained to the effect that the
transaction is so exempt.
Section 13. Legend. The certificates representing the Securities shall
be subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). SUCH SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN
THE UNITED STATES OR TO U.S. PERSONS IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WHICH, EXCEPT IN
THE CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT, IS
CONFIRMED IN A LEGAL OPINION SATISFACTORY TO THE COMPANY."
The certificates representing the Securities, and each
certificate issued in transfer thereof, will also bear any legend required under
any applicable state securities law.
Section 14. Stock Delivery Instructions. The Preferred Stock
Certificates shall be delivered to Subscribers on a delivery versus payment
basis as set forth in the Escrow Agreement.
Section 15. Closing Date. The date Escrow Agent receives the
Securities and Purchase Price, and both the conditions set forth in Sections 16
and 17 and the terms and conditions of the Escrow Agreement (Exhibit C) herein
are satisfied or waived shall be the Closing (the "Closing Date"), and all acts,
deliveries and confirmations comprising the Closing Date regardless of
chronological sequence, shall be deemed to occur contemporaneously and
simultaneously upon the occurrence of the last act, delivery, or confirmation of
the Closing Date, and such acts, deliveries, or confirmations shall not be
effective unless and until the last of same shall have occurred, and as shall be
mutually agreed upon as to time and place. However, a Closing may occur
separately for each Subscriber upon the payment of each Subscribers portion of
the Purchase Price and completion of the conditions set forth in Section 16 and
17 below as they pertain to that particular Subscriber.
Section 16. Conditions to the Company's Obligation to Sell.
Subscribers understand that the Company's obligation to sell the Preferred
Stock, Warrants are conditioned upon:
(i) The receipt and acceptance by the Company of this
Subscription Agreement and all duly executed Exhibits thereto by an
authorized officer of the Company;
(ii) Delivery into escrow by Subscribers of good
cleared funds as payment in full for the purchase of the Securities;
(iii) All representations and warranties of the
Subscribers contain herein shall remain true and correct as of the
Closing Date;
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, Warrants, and the proposed issuance of the Common
Stock underlying the Preferred Stock, and Warrants shall be legally
permitted by all laws and regulations to which the Subscribers and the
Company are subject; and
(v) The Certificate of Secretary for the Preferred
Stock shall have been filed with the Utah Secretary of State.
Section 17. Conditions to Subscriber's Obligation to Purchase.
The Company understands that Subscriber's obligation to purchase the Convertible
Preferred Stock, and Warrants is conditioned upon:
(i) Acceptance by Subscribers of a satisfactory Subscription
Agreement and all duly executed Exhibits hereto for the sale of the
Securities;
(ii) Delivery of the original Securities as described herein;
(iii) All representations and warranties of the
Company contained herein shall remain true and correct as of the
Closing Dates;
(iv) Receipt of opinion of counsel and proof of a filed
Certificate of Secretary; and
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock, and Warrants, or shall have the availability of
exemptions therefrom. At the Closing Date, the sale and issuance of the
Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Company and Subscribers are subject.
Section 18. Miscellaneous.
18.1 Governing Law/Jurisdiction. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Act, without reference to
principles of conflicts of law. Each of the parties consents to the jurisdiction
of the federal courts whose districts encompass any part of the State of New
York or the state courts of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Agreement irrevocably consents to the
service of process in any such proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
18.2 Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
18.3 Facsimile/Counterparts/Entire Agreement. Except as
otherwise stated herein, in lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original. This
Agreement may be executed in counterparts which shall be considered an original
document and which together shall be considered a complete document. This
Agreement and Exhibits hereto constitute the entire agreement between the
Subscribers and the Company with respect to the subject matter hereof. This
Agreement may be amended only by a writing executed by all parties.
18.4 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
18.5 Entire Agreement. This Agreement and Exhibits hereto
constitute the entire agreement between the Subscribers and the Company with
respect to the subject matter hereof. This Agreement may be amended only by a
writing executed by all parties.
18.6 Reliance by Company. The Subscribers represent to the
Company that the representations and warranties of the Subscribers contained
herein are complete and accurate and may be relied upon by the Company in
determining the availability of an exemption from registration under federal and
state securities laws in connection with a private offering of securities.
18.7 Confidentiality. Each of the Company and the Subscribers
agree to keep confidential and not to disclose to or use for the benefit of any
third party the terms of this Agreement or any other information which at any
time is communicated by the other party as being confidential without the prior
written approval of the other party; provided, however, that this provision
shall not apply to information which, at the time of disclosure, is already part
of the public domain (except by breach of this Agreement) and information which
is required to be disclosed by law.
18.8 Legal Fees and Expenses. Each of the parties shall pay
its own fees and expenses (including the fees of any attorneys, accountants,
appraisers or others engaged by such party) in connection with this Agreement
and the transactions contemplated hereby except that the Company shall (i) pay
Ten Thousand ($10,000) Dollars to Goldstein, Goldstein & Reis, LLP for legal,
administrative and escrow fees; and (ii) issue to Settondown Capital
International, Ltd., as placement agent, for services rendered in connection
with this transaction, fifty (50) shares of Preferred Stock, and a Warrant to
purchase twenty thousand (20,000) shares of Common Stock.
18.9 Authorization. Each of the parties hereto represents that
the individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
<PAGE>
IN WITNESS WHEREOF, this Subscription Agreement was duly executed on
the date first written below.
Agreed to and Accepted on
this ____ day of July 1998
SGI INTERNATIONAL
/S/ JOHN R. TAYLOR
By________________________
Title: Sr. Vice President
SETTONDOWN CAPITAL INTER-
-NATIONAL, LTD., Subscriber
By______________________________
Name:
Title:
Executed this ____ day of July 1998
SOVEREIGN PARTNERS, L.P., Subscriber
By___________________________
Name:
Title:
Executed this ____ day of July 1998
SETTONDOWN CAPITAL INTER-
-NATIONAL, LTD., Placement Agent
By______________________________
Name:
Title:
Executed this ____ day of July 1998
<PAGE>
SCHEDULE A
1. Settondown Capital International, Ltd.
Charlotte House, Charlotte Street
Nassau, Bahamas
Investment Amount: $250,000
2. Sovereign Partners, L.P.
c/o South Ridge Capital Management, LLC
Executive Pavilion
90 Grove Street, No. 1
Ridgefield, CT 06877
Investment Amount: $250,000
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the day of July,
1998, between SOVEREIGN PARTNERS, L.P., located c/o South Ridge Capital
Management, LLC, Executive Pavilion, 90 Grove Street, No. 1, Ridgefield, CT
06877, a limited partnership organized under the laws of the State of Delaware
(the "Purchaser"), SETTONDOWN CAPITAL INTERNATIONAL, LTD., located at c/o
Charlotte House, Charlotte Street, Nassau, Bahamas, a limited liability company
organized under the laws of Bahamas, a non-USA jurisdiction (the "Finder", and
also a "Purchaser") (the Purchaser and the Finder are collectively referred to
as "Holder" or "Holders"), issued pursuant to the 6% Convertible Preferred Stock
Series 98-A Subscription Agreement of even date herewith (the "Subscription
Agreement"), and SGI INTERNATIONAL, INC., a Utah corporation having its
principal place of business at 1200 Prospect Street, Suite 325, La Jolla, CA
92037 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchasers are purchasing from the Company, pursuant to the
Subscription Agreement an aggregate of five hundred (500) shares of Preferred
Stock, and a Warrant to purchase an aggregate of fifty thousand (50,000) shares
of Common Stock. The Common Stock of the Company underlying the Preferred Stock
is referred to as the "Conversion Shares", and the Common Stock of the Company
underlying the Warrants is referred to as the "Warrant Shares" (capitalized
terms defined in the Subscription Agreement and not otherwise defined herein
have the meanings specified in the Subscription Agreement); and
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Finder is receiving from the Company, pursuant to the
Subscription Agreement, fifty (50) shares of the Preferred Stock, and a Warrant
to purchase twenty thousand (20,000) shares of common stock of the Company; and
WHEREAS, the Company desires to grant to the Holders the
registration rights set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto, (ii)
registration under the Securities Act is no longer required for the immediate
public distribution of such security as a result of the provisions of Rule 144,
or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holder acknowledges
and understands that prior to the registration of the Securities as provided
herein, the Securities are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. The Holder understands that no disposition
or transfer of the Securities may be made by Holder in the absence of (i) an
opinion of counsel reasonably satisfactory to the Company that such transfer may
be made or (ii) a registration statement under the Securities Act is then in
effect with respect thereto.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date, on one occasion an amendment to the Form S-2 registration
statement filed with the SEC on January 23, 1998 (the "Amended Registration
Statement"), at the sole expense of the Company (except as provided in Section
3(c) hereof), in respect of all holders of Registrable Securities, so as to
permit a non-underwritten public offering and sale of the Registrable Securities
under the Securities Act, provided, the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance pursuant
to this Section 3(a) in any jurisdiction in which the Company would be required
to qualify as a dealer in securities, under the securities or blue sky laws of
such jurisdiction. The Company agrees that it will use its best efforts to cause
the Amended Registration Statement to become effective within sixty (60) days
after the Closing Date. The number of Registrable Securities to be registered
shall be two hundred (200%) percent of the number of shares that would be
required if all of the Registrable Securities were converted in accordance with
the Certificate of Secretary, on a date which is five (5) business days prior to
the filing of the Amended Registration Statement.
(b) The Company will use its best efforts to maintain the
Amended Registration Statement or post-effective amendment filed under this
Section 3 hereof current under the Securities Act until the earlier of (i) the
date that all of the Registrable Securities have been sold pursuant to the
Registration Statement, (ii) the date that the Registrable Securities may be
sold under the provisions of Rule 144 or (iii) two (2) years after the effective
date of the Amended Registration Statement.
(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Amended Registration Statement under Section 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees) shall be borne by the Company. The Holder shall bear the cost
of underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and all of other the fees and expenses of such
registration, including of its counsel and such other expenses as are necessary
to qualify the sale of Securities in compliance with any state Blue Sky laws.
The Company shall use its best efforts to qualify any of the securities for sale
in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 9 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers. The Company at its
expense will supply the Holder with copies of such Registration Statement and
the prospectus or offering circular included therein and other related documents
in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3 to
include Holder's Registrable Securities in the Amended Registration Statement
which is to be filed if, in the opinion of counsel for both the Holder and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not restricted securities, as defined in Rule 144 under the Securities
Act.
(e) In the event the Amended Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed by the Company
by the thirtieth (30th) day after the Closing Date, or if the Amended
Registration Statement is not declared effective by the SEC by the sixtieth
(60th) day after the Closing Date (the Effective Date), then the Company will
pay, in cash, to the Holder on a pro-rata basis by wire transfer, as liquidated
damages for such failure and not as a penalty, one and one-half (1.5%) percent
of the principal amount of the Securities for the first month, and two (2%)
percent of the principal amount of the Securities each month thereafter until
the Amended Registration Statement has been filed and/or declared effective. The
liquidated damages shall be payable within five (5) calendar days of written
demand by the Holder, up to one (1) year after the Closing Date.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. Such payment
shall be made to the Holder in cash immediately if the registration of the
Securities are not effected; provided, however, that the payment of such
liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The registration of the
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
Section 4. Cooperation with Company. Holders will cooperate
with the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is
required by the provisions of this Agreement to effect the registration of any
of the Registrable Securities under the Securities Act, the Company shall
(except as otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as the Holder, shall reasonably request, and
do any and all other acts and things which may be necessary or advisable to
enable each Holder to consummate the public sale or other disposition in such
jurisdiction of the securities owned by such Holder, except that the Company
shall not for any such purpose be required to qualify to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified or to
file therein any general consent to service of process;
(d) use its best efforts to list such securities on the OTC
Bulletin Board or any securities exchange on which any securities of the Company
is then listed, if the listing of such securities is then permitted under the
rules of such exchange or OTC Bulletin Board;
(e) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holder under
this Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer of
the rights granted under this Agreement, the Holder agrees that the Company may
require that the transferee comply with reasonable conditions as determined in
the discretion of the Company. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.
Section 7. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferees or assignees ) upon the occurrence of any of the following:
(a) all Holder's securities subject to this Agreement have been
registered;
(b) such Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 promulgated by the SEC
pursuant to the Securities Act;
(c) such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k).
Section 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Holder and each person, if any, who controls the Holder within the meaning of
the Securities Act (Distributing Holders) against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), to which the Distributing Holders may become subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Amended Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Amended Registration
Statement, preliminary prospectus, final prospectus, offering circular,
notification or amendment, or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Holders, specifically for use in the preparation thereof. This
Section shall not inure to the benefit of any Distributing Holder with respect
to any person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Distributing Holder
failed to send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus contained in the
Amended Registration Statement to such person at or prior to the written
confirmation to such person of the sale of such Registrable Securities, where
the Distributing Holder was obligated to do so under the Securities Act or the
rules and regulations promulgated hereunder. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof); arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Amended
Registration Statement prepared by the Company, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
otherwise than as to the particular item as to which indemnification is then
being sought solely pursuant to this Section. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 9. Contribution. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
Distributing Holder, or the Company, makes a claim for indemnification, but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Agreement provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, or the Company, then the
Company and the applicable Distributing Holder shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Distributing Holder agree that
it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 10. Notices. Any notice pursuant to this Agreement by
the Company or by the Holder shall be in writing and shall be deemed to have
been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holder, to its, his or her address set forth on
the first page of this Agreement.
(b) If to the Company, at the address set forth herein, or to
such other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12. Headings. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 13. Governing Law, Venue. This Agreement will be
construed and enforced in accordance with and governed by the laws of the State
of New York, except for matters arising under the Securities Act, without
reference to principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York or the state courts of the State of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any state or country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 14. Severability/Defined Terms. If any provision of
this Agreement shall for any reason be held invalid or unenforceable, such
invalidity or unenforceability shall not affect any other provision hereof and
this Agreement shall be construed as if such invalid or unenforceable provision
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the 6% Convertible Preferred Stock Series 98-A
Subscription Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
Attest: SGI INTERNATIONAL, INC
/s/ JOHN R. TAYLOR
By:______________________ By:_________________________
Name: John R. Taylor Name:
Title: Sr. Vice President Title:
SOVEREIGN PARTNERS, L.P.
Purchaser
By:_________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
Purchaser
By:_____________________________
Name:
Title:
SETTONDOWN CAPITAL
INTERNATIONAL, LTD.
Finder
By:____________________________
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted form SGI
International's Form 10-Q for the three month period ended March 31, 1998, and
is qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,931,634
<SECURITIES> 402,500
<RECEIVABLES> 1,055,981
<ALLOWANCES> 84,460
<INVENTORY> 64,542
<CURRENT-ASSETS> 3,460,727
<PP&E> 1,493,573
<DEPRECIATION> 655,816
<TOTAL-ASSETS> 7,118,348
<CURRENT-LIABILITIES> 6,314,258
<BONDS> 0
0
667
<COMMON> 41,899,279
<OTHER-SE> (41,207,731)
<TOTAL-LIABILITY-AND-EQUITY> 7,118,348
<SALES> 1,088,912
<TOTAL-REVENUES> 1,101,559
<CGS> 786,600
<TOTAL-COSTS> 786,600
<OTHER-EXPENSES> 1,538,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,012
<INCOME-PRETAX> (1,359,088)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,359,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,359,088)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
