UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ________
Commission File Number 2-93124
SGI International
(Exact name of small business issuer as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(858) 551-1090
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
The number of shares of common stock, no par value, outstanding as of November
8, 1999, was 51,004,755.
Transitional Small Business Disclosure Format (Check one): Yes X No
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TABLE OF CONTENTS
FORM 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introductory Note 13
Results of Operations 13
Liquidity and Capital Resources 15
Year 2000 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
PART III. SIGNATURES 21
2
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31,
1999 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 212,002 $ 239,885
Restricted time deposit 402,500 402,500
Receivable from LFC Investees 78,479 78,479
Trade accounts receivable, less allowance for doubtful accounts of 79,460 and $84,460 509,979 229,759
Costs and estimated earnings in excess of billings on contracts 62,975 275,967
Inventories 65,120 64,371
Prepaid expenses and other current assets 33,569 83,283
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,364,624 1,374,244
- ------------------------------------------------------------------------------------------------------------------------
LFC Process related assets:
Royalty rights, net 1,021,313 1,257,000
LFC cogeneration project, net 236,889 315,853
Investment in LFC Investees 495,430 490,232
Notes receivable, net 150,000 150,000
Australia LFC project, net - 86,877
LFC Process Control, net 75,593 3,834
Other technological assets, net 29,206 27,250
- ------------------------------------------------------------------------------------------------------------------------
2,008,431 2,331,046
Property and equipment, net of accumulated
depreciation of $1,234,946 and $920,941 486,333 766,695
Goodwill, net of accumulated amortization of $180,670 and $144,721 299,574 335,523
- ------------------------------------------------------------------------------------------------------------------------
$4,158,962 $ 4,807,508
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities:
Accounts payable $ 900,797 $ 224,310
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and estimated earnings on contracts 222,079 156,411
Current maturities of long-term notes payable 809,500 690,000
12% convertible debentures - 3,494,880
Accrued salaries, benefits and related taxes 672,417 139,486
Payable to LFC Investees 180,172 180,172
Interest payable 160,807 161,991
Other accrued expenses 418,396 189,487
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,764,168 5,636,737
Long-term liabilities, less current maturities 4,270,386 104,750
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,034,554 5,741,487
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Mandatorily redeemable preferred stock $.01 par value, liquidation
value of $177,500 and $1,570,000, plus accumulated dividends (Note 5) 196,672 1,449,348
Stockholders' deficiency:
Convertible preferred stock 604 641
Common stock 49,216,500 45,688,545
Paid-in capital 7,120,492 8,258,140
Accumulated deficit (60,409,860) (56,330,653)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (4,072,264) (2,383,327)
- ------------------------------------------------------------------------------------------------------------------------
$ 4,158,962 $ 4,807,508
- ------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 1,338,860 $1,107,021 $ 2,790,344 $ 3,696,209
Other 122,375 7,923 153,264 35,261
- --------------------------------------------------------------------------------------------------------------------------------
1,461,235 1,114,944 2,943,608 3,731,470
Expenses:
Cost of sales 795,396 833,019 1,710,233 2,811,129
Engineering, research and consulting 456,443 283,796 1,265,130 789,972
Loss from investment in LFC Investees (4,198) 100,576 (4,198) 527,865
Selling, general and administrative 714,211 540,665 2,330,678 2,018,859
Legal and accounting 144,032 156,930 470,177 510,488
Depreciation and amortization 232,927 220,623 775,433 608,498
Interest 162,440 138,134 474,788 599,016
- --------------------------------------------------------------------------------------------------------------------------------
2,501,251 2,273,743 7,022,241 7,865,827
- --------------------------------------------------------------------------------------------------------------------------------
Net loss (1,040,016) (1,158,799) (4,078,633) (4,134,357)
Imputed preferred stock dividends and
accretion on convertible and
mandatorily refeemable preferred stock 36,922 122,372 36,922 1,434,891
- --------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,076,938) $ (1,281,171) $ (4,115,555) $ (5,569,248)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.02) $ (0.08) $ (0.12) $ (0.42)
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 44,402,990 15,259,805 34,781,806 13,123,331
- --------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Convertible
Preferred Stock Common Stock Total
---------------------- --------------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 64,044 $ 641 21,568,344 $ 45,688,545 $8,258,140 $(56,330,653) $ (2,383,327)
Issuance of common stock for cash 9,334,186 984,565 984,565
Issuance of common stock for
convertible debentures 286,762 68,107 68,107
Issuance of common stock for
mandatorily redeemable preferred stock 12,913,819 1,253,250 1,253,250
Issuance of common stock for services 271,208 39,075 39,075
Conversion of preferred stock (3,654) (37) 3,145,464 1,182,958 (1,182,921) -
Issuance of warrants to purchase
common stock to non-employees 24,166 24,166
Accretion adjustment for mandatorily
redeemable preferred stock, net
of conversions (574) (574)
Interest expense related to issuance of
warrants 21,107 21,107
Net Loss (4,078,633) (4,078,633)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 60,390 $ 604 47,519,783 $ 49,216,500 $7,120,492 $(60,409,860) (4,072,264)
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (4,078,633) $ (4,134,357)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss (gain) of LFC Investees (4,213) 527,865
Depreciation and amortization 775,433 608,498
Common stock issued for interest, services,
and other operating activities 39,075 162,665
Non-employee compensation expense on issuance of warrants 24,166 44,640
Imputed and accrued interest on warrants issued to note holders 21,107 188,033
Changes in operating assets and liabilities:
Receivable from LFC Investees - (41,437)
Trade accounts receivable (67,228) (250,423)
Inventories (749) 199
Other current assets 49,714 158,948
Accounts payable 676,487 255,381
Billings in excess of costs and estimated
earnings on contracts 65,668 (75,177)
Accrued salaries, benefits and related taxes 532,931 (63,920)
Interest payable 39,304 1,513
Other accrued expenses 228,909 (69,554)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,698,029) (2,687,126)
- ----------------------------------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Additions to LFC Process controls and other
technological assets (85,419) -
Investment in LFC Investees (985) (441,000)
Payable to LFC Investees - (100,000)
Purchase of property and equipment (36,643) (299,590)
Other assets (9,247) (2,375)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (132,294) (842,965)
- ----------------------------------------------------------------------------------------------------------------------
Financing activities:
Payments of notes payable (7,125) (7,125)
Proceeds from issuance of debt 825,000 250,000
Proceeds from issuance of common stock 984,565 171,800
Proceeds from issuance of preferred stock - 2,803,200
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,802,440 3,217,875
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (27,883) (312,216)
Cash at beginning of period 239,885 429,232
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 212,002 $ 117,016
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 393,728 $ 338,452
Supplemental disclosure of non-cash activities:
Common stock issued for services $ 39,075 $ 162,665
Conversion of preferred stock $1,182,958 $4,254,050
Common stock issued for convertible debentures $ 68,107 -
Common stock issued for mandatorily redeemable preferred stock $1,253,250 -
- ----------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
</TABLE>
6
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SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three and nine month
periods ended September 30, 1998, and 1999, are unaudited and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary for a
fair statement of the consolidated financial position as of September 30, 1999,
and the consolidated results of operations and cash flows for the nine months
ended September 30, 1999, and 1998. The results of operations for the three and
nine month periods ended September 30, 1999, are not necessarily indicative of
the results to be expected for the year ending December 31, 1999. For more
complete financial information, these financial statements, and the notes
thereto, should be read in conjunction with the consolidated audited financial
statements for the year ended December 31, 1998, included in the Company's Form
10-K filed with the Securities and Exchange Commission.
The accompanying consolidated financial statements are prepared on a going
concern basis. The recovery of amounts invested in the Company's principal
assets, the LFC Process and OCET Process assets, are dependent upon the
Company's ability to adequately fund its on-going development operations
including capital contributions to its new joint venture LFC Technologies, LLC
("LFC Tech") with MLFC Corporation ("MLFC"), a wholly owned subsidiary of
Mitsubishi Corporation. Furthermore, the ability to successfully bring both the
LFC Process and OCET Process technologies to commercialization will ultimately
depend on the Company's ability to attract sufficient additional equity, debt or
other third-party financing.
Success in commercialization of the LFC Process and OCET Process is dependent in
large part upon the ability to enter into satisfactory arrangements with other
partners, financiers or customers and upon the ability of these third parties to
perform their responsibilities. The resources required to profitably develop,
construct and operate an LFC plant are likely to include hundreds of millions of
dollars, and expertise in major plant development and operations. There can be
no assurance that any licenses, joint venture agreements or other arrangements
will be available on acceptable terms, if at all; that any revenue will be
derived from such arrangements; or that, if revenue is generated, any of said
arrangements will be profitable to the Company. If the Company is unsuccessful
in its attempts to license the LFC Process or OCET Process, or if such third
parties are unsuccessful in profitably developing and operating LFC plants, the
planned business and operations of the Company will likely not succeed and the
Company would not be able to recover the carrying value of the long-lived assets
related to either the LFC Process or OCET Process.
The Company had negative working capital of $2.4 million and an accumulated
deficit of $60.4 million at September 30, 1999. These factors and the Company's
recurring losses from continuing operations, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company is
currently seeking additional financing through the private sales of its equity
and debt securities to fund working capital requirements.
The Company is also seeking additional funding through the acquisition,
financing, sale and operations of the ENCOAL demonstration plant and through
additional strategic partnerships, joint ventures or similar collaborative or
other arrangements with larger well capitalized companies, under which such
companies would provide additional capital to the Company in exchange for
exclusive or non-exclusive licenses or other rights to certain technologies and
products the Company is developing. There can be no assurance that any
7
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collaborative financing arrangements through a joint venture, and/or with
strategic partners, will be available when needed, or on terms acceptable to the
Company. If adequate funds are not available, the Company may be required to
curtail or terminate one or more of its operating activities. The Company is
engaged in continuing negotiations to secure additional capital and financing,
and while management believes funds can be raised, there is no assurance that
their efforts will be successful. The consolidated financial statements do not
include any adjustments that might result from this uncertainty.
(2) ORGANIZATION AND BUSINESS
The principal businesses of the Company are developing, commercializing, and
licensing new energy technologies; and manufacturing automated assembly
equipment.
The Company has the following wholly-owned subsidiaries at September 30, 1999:
Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and
U.S. Clean Coal Refineries, Inc. ("USCCR") which is currently inoperative. AMS
designs, manufactures and installs automated assembly equipment, and was
acquired in October 1995. OCET was organized in February 1995 to research and
develop the Opti-Crude Enhancement Technology, a process for further refining
residual oil bottoms. USCCR was organized in October 1994, to market clean coal
refinery project development programs.
(3) FINANCING TRANSACTIONS
On August 18, 1999 the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 60,000 common shares, to one
consultant for financial consulting services. The warrants were issued pursuant
to the exemptions provided by Section 4(2) of the Securities Act and Regulation
D. In connection therewith, the Company obtained investment representations and
recorded compensation expense of approximately $5,400. The exercise price was
not lower than the closing bid price on the grant date and expires on December
31, 2002. The warrant is exercisable one year from the date of grant at $0.1375
per share.
On August 20, 1999, the Company, as provided in a related service agreement,
granted one warrant to one employee to purchase an aggregate of 5,000 common
shares. The warrant was issued pursuant to the exemptions provided by Section
4(2) of the Securities Act and Regulation D. Investment representations were
obtained. The exercise price was not lower than the closing bid price on the
grant date and the warrant expires on December 31, 2003. The warrant is
exercisable one year from the grant date at $0.136 per share.
During the three month period ended September 30, 1999, the Company by agreement
modified the due dates on $750,000 of notes payable plus associated interest,
due September 27, 1999, to be payable upon demand, which had not been made as of
September 30, 1999.
During the three month period ended September 30, 1999, the Company raised
approximately $339,000 through the issuance of 3,666,602 restricted common
shares to fourteen accredited investors and two officers/directors of the
Company (Also See Note 8). In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. These securities were
issued pursuant to the exemptions provided by Section 4(2) of the Securities
Act and Regulation D. Investment representations were obtained and legends were
placed on the certificates. Partially, in connection therewith the Company
issued an aggregate of 65,446 shares of restricted common stock to one
individual, Mr. B. Leichtling, as compensation for placement agent services.
(4) NET LOSS PER SHARE
Basic net loss per share is computed in accordance with SFAS No. 128, "Earnings
per Share." Basic EPS includes no dilution and is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. For purposes of computing the net loss available to
common stockholders, preferred stock dividends and accretion of mandatorily
redeemable
8
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preferred stock are deducted from the net loss. Preferred stock dividends
include "imputed dividends" for preferred stock issued with a non-detachable
beneficial conversion feature near the date of issuance. Imputed dividends
represent the aggregate difference between conversion price and the fair market
value of the common stock as of the date of issuance of the preferred stock,
without regard to the actual date on which the preferred stock may be converted.
Shares issuable upon conversion of preferred stock, convertible debentures and
upon exercise of outstanding stock options and warrants are not included since
the effects would be anti-dilutive.
(5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
Property and Equipment
September 30 December 31,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Office furniture and fixtures $ 125,000 $ 118,000
Laboratory equipment 1,019,000 1,018,000
Machinery and equipment 136,000 123,000
Computer equipment 387,000 377,000
Leasehold improvements 54,000 52,000
- -------------------------------------------------------------------------------
1,721,000 1,688,000
Less accumulated depreciation (1,235,000) (921,000)
- -------------------------------------------------------------------------------
Net property and equipment $ 486,000 $ 767,000
- -------------------------------------------------------------------------------
</TABLE>
Mandatorily Redeemable Preferred Stock
The difference between the estimated fair value of the redeemable preferred
shares at their issue date and the mandatory redemption amount is being ratably
accreted, over the two-year term of the Series 98C Preferred Stock, by charges
to accumulated deficit. At the redemption date, the carrying amount of such
shares will equal the mandatory redemption amount plus accumulated dividends
unless the shares are converted by the holders prior to the redemption date.
Mandatorily redeemable preferred stock activity comprises the following:
<TABLE>
Nine Months
Ended Year Ended
Sept. 30, December 31,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,449,000 $ -
Issuance of preferred stock - 1,413,000
Conversion to common stock (1,253,000) -
Accretion of amounts payable
upon redemption, net 1,000 36,000
- -------------------------------------------------------------------------------
Balance at end of period $ 197,000 $1,449,000
- -------------------------------------------------------------------------------
</TABLE>
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(6) SEGMENT REPORTING
The following information is presented pursuant to FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Intersegment sales were not significant in any period.
<TABLE>
Three months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues 1,202,000 250,000 1,000 8,000 1,461,000
Net profit (loss) 161,000 (87,000) (322,000) (792,000) (1,040,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 29,000 112,000 88,000 3,000 232,000
Engineering, research and
consulting expenditures - 224,000 232,000 - 456,000
Interest expense - - - 162,000 162,000
- ---------------------------------------------------------------------------------------------
1998
Revenues 1,099,000 - 9,000 7,000 1,115,000
Net profit (loss) 51,000 (263,000) (307,000) (640,000) (1,159,000)
Equity in operations of investee - (101,000) - - (101,000)
Depreciation & Amortization 28,000 112,000 77,000 4,000 221,000
Engineering, research and
consulting expenditures - 50,000 234,000 - 284,000
Interest expense - - - 138,000 138,000
- ---------------------------------------------------------------------------------------------
Nine months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
- ---------------------------------------------------------------------------------------------
1999
Revenues 2,135,000 750,000 30,000 29,000 2,944,000
Net profit (loss) (328,000) (181,000) (999,000)(2,571,000) (4,079,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 87,000 415,000 262,000 11,000 775,000
Engineering, research and
consulting expenditures - 515,000 750,000 - 1,265,000
Interest expense 1,000 - - 474,000 475,000
- ---------------------------------------------------------------------------------------------
1998
Revenues 3,680,000 - 19,000 32,000 3,731,000
Net profit (loss) 164,000 (943,000) (887,000)(2,468,000) (4,134,000)
Equity in operations of investee - (528,000) - - (528,000)
Depreciation & Amortization 79,000 336,000 183,000 10,000 608,000
Engineering, research and
consulting expenditures - 79,000 711,000 - 790,000
Interest expense - - - 599,000 599,000
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Total Assets by Segment Sept. 30, December 31,
1999 1998
-------------- -----------------
<S> <C> <C>
Identifiable assets, net
Automated Assembly $1,205,000 $ 1,303,000
LFC Process 1,979,000 2,331,000
OCET Process 386,000 632,000
Corporate 589,000 542,000
------------------------------------------------------------------------
Total $4,159,000 $ 4,808,000
------------------------------------------------------------------------
</TABLE>
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(7) INVESTMENT IN LFC JOINT VENTURES
In January of this year, the Company entered into a number of agreements with
MLFC, a wholly-owned subsidiary of Mitsubishi Corporation, relating to the
formation of a joint venture with MLFC regarding the LFC Process. The Company
and MLFC entered into a LFC Joint Venture Formation Agreement, Operating
Agreement, License Agreement, Services Agreement and Security Agreement with the
purpose of further developing the LFC Process and licensing its use in proposed
LFC Process plants.
The Operating Agreement, as amended effective January 14, 1999, between MLFC and
the Company, governs the management of the new joint venture company, LFC Tech.
The purpose of LFC Tech is to conduct research and development activities with
respect to the LFC Process and other approved business. The Amended and Restated
Services Agreement between MLFC, LFC Tech and the Company provides that the
Company will provide certain services to LFC Tech including soliciting potential
customers in the U.S., developing LFC projects in the U.S. and performing
related engineering work. Accordingly, the Company's portion of the quarterly
loss on investment in LFC Investee has been eliminated against service revenues,
as if the joint venture were consolidated.
Subsequent to September 30, 1999 the Company and MLFC entered into a series of
agreements modifying the above mentioned agreements. See note 10 for additional
information.
(8) RELATED PARTY TRANSACTIONS
On September 30, 1999, the Company issued an aggregate of 225,226 shares of
restricted common stock to two officers/directors of the Company in return for
$20,000 in cash. In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. On that date, the bid
price of the Company's unrestricted common stock was $0.129 per share. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
and legends were placed on the certificates.
(9) PENDING ASSET ACQUISITION
As previously reported, on April 22, 1999, the Company executed an agreement
(the "Acquisition Agreement") with Bluegrass Coal Development Company
("Bluegrass") and Americoal Development Company ("Americoal"), both wholly owned
subsidiaries of AEI Resources ("AEI") to purchase Bluegrass' fifty percent
interest in the Liquids From Coal ("LFC") Process; the ENCOAL Corporation, which
owns the ENCOAL LFC demonstration plant; certain existing permits necessary to
build a commercial sized LFC plant near Gillette, Wyoming; and all other
tangible and intangible LFC assets (collectively, the "ENCOAL Acquisition").
The closing of the acquisition is conditioned upon, among other things, the
financing of certain improvements to the ENCOAL plant, currently estimated at
$10 million, the completion of both fuel supply and product sale agreements, the
assumption or waiver of certain bond obligations, the waiver of the $1.13
million invoice due Mitsubishi Heavy Industries by Bluegrass and certain other
conditions specified in the agreement.
The Company is currently working towards meeting the pre-closing conditions
specified in the Acquisition Agreement. Prior to September 19, 1999, the parties
realized that certain of the pre-closing conditions could not be accomplished
within the originally projected time frame. Consequently, the parties are
working to resolve these pre-conditions which remain outstanding, including but
not limited to, the financing of certain improvements, the fuel supply
agreement, product sale agreements for CDL and the assumption or waiver of
certain bond obligations. While the Company believes it will complete, resolve
or waive these pre-conditions prior to the new targeted closing date of November
29, 1999, there can be no assurance that the acquisition will be completed or
that having been completed that the ENCOAL plant will operate.
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(10) SUBSEQUENT EVENTS
On October 28, 1999, the Company and MLFC amended the terms of their current
business relationship, by executing certain amendments (the "Restructuring") to
the various joint venture agreements that they had previously entered into on
January 14, 1999. (All payments where noted below are net of the Company's own
matching contribution required under the LFC Tech joint venture agreement.) In
accordance with the Restructuring: (a) LFC Tech accelerated the net payment of
$375,000, payable to the Company, which was acknowledged in the restructured
Amended Services Agreement, thereby ending any further obligation for payments
under this contract through the year 2000, (b) the Company transfered its
present 50% interest in the LFC Process Patents to LFC Tech upon closing of the
Restructuring, (c) the Company is to transfer the remaining 50% interest in the
LFC Process Patents to LFC Tech upon completion of the ENCOAL Acquisition, (d)
Mitsubishi Heavy Industries shall execute a Waiver and Release of the $1.13
million invoice due it from Bluegrass, which is intended to be used by the
Company as partial payment if the ENCOAL acquisition is completed, (e) MHI shall
forgive the Company the payment of the $1.13 million invoice upon the closing of
the ENCOAL Acquisition, (f) LFC Tech shall pay the Company an additional
$750,000 net, payable in two tranches, with the first net payment of $375,00
made upon closing of the Restructuring and the second net payment of $375,000
due upon the closing of the ENCOAL Acquisition, (g) MLFC, subject to and upon
the occurrence of certain milestones (more fully discussed in Note 13 of the
notes to the consolidated financial statements contained in the Company's
December 31, 1998, 10-K.) already contained in the joint venture agreements and
subject to both parties obtaining Board of Director approvals, in lieu of the
$4.0 million payment previously specified in the agreement, shall make a payment
of $3,625,000 to the Company if the ENCOAL Acquisition does not occur and a
payment of $3,250,000 if the ENCOAL Acquisition does occur, (h) LFC Tech
Operating Agreement was extended through the year 2008, and (i) an agreement to
assist with engineering and CDL upgrading work. Other minor changes were made
to the Amended Services Agreement to account for the early payments, the License
Agreement to account for the transfer of the LFC Process Patents to LFC Tech,
the termination of the Security Agreement to reflect the fact that it was no
longer necessary, and the Amended Operating Agreement of LFC Tech to reflect the
terms of the Restructuring.
Effective as of October 30, 1999, the Company was able to extend or exchange
approximately $4.2 million in existing debt for new securities of the Company
including new convertible debt securities, amended warrants and preferred stock
(the "99D Exchange Offering"). The Company retired approximately $3.45 million
in existing 12% convertible debentures which were required to be paid prior to
October 31, 1999, in exchange for new 12% convertible debentures (the "99D
Debentures"), in the same amount, due September 30, 2001. The 99D Debentures may
be prepaid by the Company, in whole or in part, at any time prior to September
30, 2001. Interest on the debentures is payable quarterly in cash. The
debentures are convertible into common stock of the Company, at the option of
the holder, subsequent to November 15, 1999, in whole or in part, at the
greater of: (i) the average of the ten day closing bid price of the Company's
common stock prior to the date the notice of conversion is received by the
Company or (ii) $1.00 per share. In conjunction with the issuance of the 99D
Debentures the Company amended existing warrants set to expire on December 31,
1999, with an exercise price of $1.20 per share to now expire on December 31,
2001, with a new exercise price of $0.30 per share. The number of shares of
common stock underlying the amended warrants aggregate approximately 328,000
shares. In addition, the Company also agreed to grant shares of Series 99D
Convertible Preferred Stock (the "99D Preferred") convertible with no further
payment into approximately 154,000 shares of common stock. The 99D Preferred
shares are convertible at the option of the holder, any time after November 15,
1999, but only if the ten business day average closing bid price of the
Company's common stock is $0.75 per share or greater at the time of conversion.
The 99D Preferred stock has no voting rights, dividend rights or preference in
liquidation and if not previously converted, will automatically convert into
common stock on October 30, 2001.
As part of the 99D Exchange Offering the Company also obtained an extension to
September 30, 2001, of approximately $724,000, including interest, in existing
10%, 11% and 12% interest bearing notes which were required to be paid by
October 30, 1999. In connection therewith, the Company agreed to grant shares
of Series 99D Preferred stock convertible into an aggregate of approximately
46,000 shares of common stock and to amended exisiting warrants set to expire
on December 31, 1999 with an exercise price of $1.20 per share to now expire on
December 31, 2001 with a new exercise price of $0.30 per share. The number of
shares of common stock underlying the amended warrants aggregate approximately
141,000 shares.
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Interest on the notes payable will continue to be made in cash on a quarterly
basis. The 99D Exchange Offering was made only to existing debt holders
pursuant to the exemptions provided by Sections 3(a)(9) and Section 4(2) of the
Securities Act and Regulation D. No registration rights were granted on any of
the securities issued under the 99D Exchange Offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on Form 10-QSB contains statements relative to (i)
projections, (ii) estimates, (iii) future research plans and expenditures, (iv)
potential collaborative arrangements, (v) opinions of management and (vi) the
need for and availability of additional financing which may be considered
"forward looking statements."
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports including this Form 10-QSB, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
RESULTS OF OPERATIONS
Net Loss per Common Share. Basic net loss per common share for the three and
nine month periods ended September 30, 1999, decreased approximately $0.06 per
share and $0.30 per share, respectively, over the same prior year periods. The
decrease in basic net loss per share for both the three and nine month periods
is principally attributable to an increase in the weighted average number of
common shares outstanding, and a decrease in imputed dividends, as the net loss
for both the three and nine month periods remained essentially the same as the
prior year.
Sales and Gross Margin. Sales and cost of sales are primarily attributable to
Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the
percentage of completion method. Sales and cost of sales at AMS for the three
months ended September 30, 1999, remained substantially unchanged, over the same
prior year period with sales to the medical and high-tech sectors meeting or
slightly exceeding prior year levels. Sales to the automotive sector for the
three month period ended September 30, 1999 equaled approximately 57% of prior
year levels
Sales and cost of sales for the nine month period ended September 30, 1999,
decreased 45% and 39%, respectively, over the same prior year period. This
decline in sales for the nine month period primarily occurred in the first and
second quarters of the year as a result of decreased sales in all three sectors
in which
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AMS does business. The Company believes that the decline in sales is primarily
the result of a general slowdown in demand for automated assembly equipment.
Sales to the high-tech sector (electronics and communications industries), which
has historically represented the Company's largest sector, continues to lag
behind prior year levels. Even with the third quarters recovery, sales to this
sector are expected to remain below prior year levels throughout the rest of the
year and until such time as the electronics industry recovers from the effects
of the Asian financial downturn.
Sales to the automotive sector for both the three and nine month periods ended
September 30, 1999 were significantly lower than prior year levels. The Company
believes this decrease in sales to the automotive sector is due to a delay in
orders from two of its larger customers. The Company anticipates that sales to
this sector will continue to be lower than 1998's levels.
For the three months ended September 30, 1999, AMS' sales to the medical sector
showed signs of reviving based on increased bidding activity and sales which
essentially equaled prior year sales. For the nine months ended September 30,
1999 the Company experienced a decrease in sales to its medical sector, over the
same prior year period. The Company believes that the decrease is primarily the
result of the merger of several of its customers, which resulted in orders being
delayed for the first and second quarter of the year. The Company believes that
sales to this sector for the year, will meet or exceed prior year levels.
Gross margin as a percentage of sales for the three month period ended September
30, 1999, remained essentially the same compared to the same prior year period.
Gross margin as a percentage of sales for the nine month period ended September
30, 1999, was 16% compared to 24% over the same prior year period . The decrease
in gross margin is primarily attributable to the reduced business volume as
previously described.
The decrease in revenues experienced by the Company's automated assembly
business segment for both the three and nine month periods ended September 30,
1999 were partially offset by revenues derived from the Company's Services
Agreement with LFC Tech, it's joint venture with MLFC. For both the three and
nine month periods ended September 30, 1999, the Company received net revenues
of $375,000 and $750,000, respectively. The parties agreed to the acceleration
of the payments due under the services agreement in part due to the significant
amount of work performed by the Company in evaluating CDL chemical constituents
and their corresponding markets. As a result of the acceleration of payments no
additional revenues are anticipated from the Services Agreement through the year
2000.
Other Income. Other income for the three and nine month periods ended September
30, 1999, increased primarily due to the settlement of a lawsuit the Company had
pending in Superior Court.
Loss on Investment in LFC Investees. The Company's share of the losses for its
LFC joint ventures (TEK-KOL and LFC Tech) for the three and nine month periods
ended September 30, 1999, decreased 100% over the same prior year period. The
decrease is primarily attributable to the termination of the TEK-KOL Partnership
and the partners of LFC Tech agreeing to perform certain services for the joint
venture at their own expense, without pass through to the partnership.
Engineering, Research and Consulting Expenses. Engineering, research and
development expenses for the three and nine month periods ended September 30,
1999, increased 61% and 60%, respectively, over the same prior year periods. The
increase for both the three and nine month periods is essentially attributable
to an increase in expenses related to the development of the LFC Process
technology, as the expenses for the development of the OCET Process technology
remained essentially the same over the same prior year periods. The increase in
expenses for the LFC Process technology are primarily related to engineering
studies designed to reduce the cost of the first commercial plant and in
evaluating the chemical constituents of CDL, with the goal of maximizing the
commercial value of this product.
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<PAGE>
Selling General and Administrative Expenses. Selling general and administrative
expense for the three month period ended September 30, 1999, increased 32% over
the same prior year period. The increase is principally related to the Company's
opening of a marketing office in Denver, Colorado, an engineering office with
associated personnel in Gillette Wyoming and an increase in administrative
personnel at the corporate offices. Selling, general and administrative expenses
for AMS, for the three month period ended September 30, 1999, increased
approximately $30,000 or 16% as a result of a general increase in sales and
marketing expenses.
Selling general and administrative expense for the nine month period ended
September 30, 1999, increased 15% over the same prior year period. The increase
is principally related to the Company's opening of a marketing office in Denver,
Colorado, an engineering office with associated personnel in Gillette Wyoming
and an increase in administrative personnel at the corporate offices. Selling,
general and administrative expenses for AMS, for the nine month period ended
September 30, 1999, remained substantially unchanged over the same prior year
period.
Legal and Accounting Expenses. Legal and accounting expenses for both the three
and nine month periods ended September 30, 1999, decreased 8%, respectively
over the same prior year periods. The decrease in expenses for both the three
and nine month periods is related primarily to a reduction in legal and
accounting expenses incurred in preparing and filing the Company's Form S-2
with the Securities and Exchange Commission in 1998.
Depreciation and Amortization Expenses. Depreciation and amortization expense
for the three and nine month periods ended September 30, 1999, increased 6% and
27%, respectively over the same prior year periods. The increase for both
periods is due primarily to purchases and construction of equipment at the
Company's OCET laboratory which were initially placed in service in the third
quarter of 1998. In addition, the Company incurred a non-recurring charge of
approximately $80,000 in the first quarter of this year related to the write-off
of start-up costs pertaining to its Australian LFC project.
Interest Expense. Interest expense for the three month period ended September
30, 1999, increased approximately 18% over the same prior year period. The
increase for the three month period is principally due to the interest
associated with an $800,000 increase in short term notes payable, primarily
issued in the first quarter of 1999.
Interest expense for the nine month period ended September 30, 1999, decreased
21% over the same prior year period. The decrease for nine month period is
principally due to approximately $188,033 of imputed interest expense,
associated with the issuance of warrants to certain debt holders in 1998, which
did not continue after September 30, 1998. This decrease was partially offset by
the interest associated with an $800,000 increase in short term notes payable,
primarily issued in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had assets totaling $4.2 million,
including restricted cash of $0.4 million, and a working capital deficiency of
$2.4 million. The Company anticipates continued operating losses over the next
twelve months and has both short-term and long-term liquidity deficiencies as of
September 30, 1999. Current notes payable, convertible debentures, and
associated accrued interest aggregating approximately $4.2 million required to
be paid prior to October 30, 1999, were satisfied subsequent to September 30,
1999, through the Company's 99D Exchange Offering. This exchange offering
extended the due date of these liabilities to September 30, 2001, in exchange
for primarily convertible debt and equity securities. (see Note 10 to the
condensed unaudited consolidated financial statements). In addition, the
Company by agreement modified the due dates on $750,000 of notes payable
15
<PAGE>
plus associated interest due September 27, 1999, to be payable upon demand,
which had not been made as of September 30, 1999. Other short-term liquidity
requirements are expected to be satisfied from existing cash balances, proceeds
from the sale of future equity securities, debt securities, the restructuring
of the joint venture with MLFC (see Note 10 to the condensed unaudited
consolidated financial statements) or other collaborative arrangements.
Negotiations are on-going for the public and private placement of equity
securities, the proceeds of which are intended to be used to satisfy the short-
term liquidity deficiency. In the event that the Company is unable to finance
operations at the current level, various administrative activities would be
curtailed and certain research and development efforts would be reduced. The
Company will not be able to sustain operations if it is unsuccessful in securing
sufficient financing and/or generating revenues from operations.
The Company had long-term liquidity deficiencies as of September 30, 1999. Over
the long-term, the Company will require substantial additional funds to maintain
and expand its research and development activities and ultimately to
commercialize, with or without the assistance of corporate partners, any of its
proposed technologies. Although there are no commitments, the Company believes
the long-term liquidity deficiency should be satisfied through a combination of
increased positive cash flows from operations, future equity sales, and research
or other collaborative agreements, or until such time, if ever, as the
commercialization of the LFC and OCET Processes result in positive cash flows.
The Company is seeking additional funds through the acquisition, financing, sale
and operations of the ENCOAL demonstration plant and through collaborative or
other arrangements with larger well capitalized companies, under which such
companies would provide additional capital to the Company in exchange for
exclusive or non-exclusive licenses or other rights to certain technologies and
products the Company is developing. Although the Company is presently engaged in
discussions with a number of suitable candidate companies, there can be no
assurance that an agreement or agreements will arise from these discussions in a
timely manner, or at all, or that revenues that may be generated thereby will
offset operating expenses sufficiently to reduce the Company's short-term or
long-term funding requirements.
Cash used in operating activities for the nine month period ended September 30,
1999, decreased 37% over the same period in 1998, principally as a result of an
increase in payables and the deferral of certain salaries and related benefits.
The use of funds from operating activities is essentially attributable to the
Company's net loss of approximately $4.0 million, for both the nine month
periods ended September 30, 1999, and 1998. These losses were incurred primarily
as a result of the Company's automated assembly operations and technology
development activities.
The Company's investing activities amounted to a use of funds of approximately
$132,000 and $843,000 for the nine month periods ended September 30, 1999, and
1998, respectively. This represents an 84% decrease in investing activities over
1998. The decrease is primarily attributable to the Company's reduced investment
in the now terminated TEK-KOL partnership and reduced expenditures for OCET's
Process Development Unit which was substantially completed in the third quarter
of 1998.
For the nine months ended September 30, 1999, the Company's investing activities
consisted primarily of the acquisition of LFC Process equipment. Management
presently estimates that the Company may be required to contribute approximately
$250,000 in 1999 for past operations and dissolution related expenditures, in
the event that the acquisition of AEI's assets does not close (see Note 9 to the
condensed unaudited consolidated financial statements). In addition, the
Company, as of January 14, 1999, has entered into a joint venture with MLFC a
wholly-owned subsidiary of Mitsubishi Corporation. (see Notes 8 and 10 of the
notes to condensed unaudited consolidated financial statements.) In accordance
with the Amended Services Agreement between the Company and LFC Tech, the
Company has received approximately $750,000 of net revenues under this agreement
in 1999. This agreement was amended subsequent to September 30, 1999 and the
Company will not be receiving any additional funds pursuant thereto through the
year 2000, except as more fully described in Note 10 to the condensed unaudited
financial statements. The Company is projecting capital expenditures for
equipment at OCET to remain below prior year levels as the need for substantial
capital improvements has ended after completion of the OCET Process Development
Unit and
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lab improvements. AMS' capital expenditures are expected to remain relatively
consistent with prior years. On April 22, 1999, the Company entered into an
agreement to conditionally acquire the ENCOAL Corporation and LFC demonstration
plant, among other assets, from subsidiaries of AEI (see Note 9 to the
condensed consolidated financial statement.). Assuming completion of the
acquisition, for which there is no assurance, the Company will have assumed
various obligations in excess of $3.5 million and obtained assets which it
believes are of equal or greater value. In addition, after acquisition operating
expenses associated with maintaining the LFC demonstration plant in idle
condition are estimated at approximately $350,000 annually. The Company intends
to make improvements and obtain project financing estimated at $10 million
assuming completion of the asset acquisition. Other than the previously
described acquisition, the Company does not have material commitments for
capital expenditures as of September 30, 1999. The amount of funds used for
investing activities in a given period are directly related to development
requirements and funds availability.
The Company's financing activities raised approximately $1.8 million (see Note 3
to the condensed unaudited consolidated financial statements) for the nine month
period ended September 30, 1999, versus $3.2 million for the same prior year
period. These funds were raised primarily through the private placement of debt
and equity securities. The amount of money raised during a given period is
dependent upon financial market conditions, technological progress and the
Company's projected funding requirements. The Company anticipates that future
financing activities will be influenced by the aforementioned factors.
As noted previously, significant future financing activities will be required to
fund future operating and investing activities and to maintain debt service.
While the Company is engaged in continuing negotiations to secure additional
capital and financing, there is no assurance such funding will be available or
if received will be adequate.
YEAR 2000
Year 2000 Issue. The Company is preparing for the impact of the arrival of the
Year 2000 on its business, as well as on the businesses of its customers,
suppliers and business partners. The "Year 2000 Issue" is a term used to
describe the problems created by systems that are unable to accurately interpret
dates after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year" in a
two-digit format. The Year 2000 Issue creates potential risks for the Company,
including potential problems in the Company's products as well as in the
Information Technology ("IT") and non-IT systems that the Company uses in its
business operations. The Company may also be exposed to risks from third parties
with whom the Company interacts who fail to adequately address their own
Year 2000 Issues.
The Company's State of Readiness - The Company believes it has taken the
necessary steps, including contingency planning, to be prepared for the arrival
of the Year 2000. The Company does not anticipate any material adverse financial
impacts to its business from the "Year 2000 Issue". However, while the Company's
Year 2000 efforts have included a limited evaluation of its business partners,
the Company cannot provide a representation on behalf of these third parties.
The Costs to Address the Company's Year 2000 Issues - The Company has assessed
the impact on its computer systems of the Year 2000 issue. The financial impact
of making the required systems changes are not expected to be material to the
Company's consolidated financial position, results of operations or cash flows.
However, the costs of the project are based on management's best estimates,
which were derived utilizing numerous assumptions. Year 2000 Issue costs
incurred through September 30, 1999, have been charged to operations and have
not been material.
The Risks of the Company's Year 2000 Issues - There can be no assurance that the
Company will be completely successful in its efforts to address Year 2000
Issues. If some of the Company's systems are not Year 2000 compliant, the
Company could suffer a disruption of operations or other negative consequences,
17
<PAGE>
including, but not limited to, diversion of resources, damage to the Company's
reputation and increased litigation, any of which could materially adversely
affect the Company's results of operations or financial position. The Company is
also dependent on third parties such as its customers, suppliers, service
providers and other business partners. If these or other third parties with whom
the Company conducts business fail to adequately address Year 2000 Issues, the
Company could experience a negative impact on its results of operations and
financial position. For example, the failure of carriers, power generators
and/or telecommunications companies to have Year 2000 compliant internal systems
could impact the Company's operations.
The Company's Contingency Plans - The Company will continue to refine
contingency plans to address situations that may result if the Company or any of
the third parties upon which the Company is dependent is unable to achieve Year
2000 readiness. This effort is ongoing and will continue to be evaluated as the
Company's situation changes or as new information becomes available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[NONE]
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. As of September
30, 1999 the Company was not involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES
On August 18, 1999 the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 60,000 common shares, to one
consultant for financial consulting services. The warrants were issued pursuant
to the exemptions provided by Section 4(2) of the Securities Act and Regulation
D. In connection therewith, the Company obtained investment representations and
recorded compensation expense of approximately $5,400. The exercise price was
not lower than the closing bid price on the grant date and expires on December
31, 2002. The warrant is exercisable one year from the date of grant at $0.1375
per share.
On August 20, 1999, the Company, as provided in a related service agreement,
granted one warrant to one employee to purchase an aggregate of 5,000 common
shares. The warrant was issued pursuant to the exemptions provided by Section
4(2) of the Securities Act and Regulation D. Investment representations were
obtained. The exercise price was not lower than the closing bid price on the
grant date and the warrant expires on December 31, 2003. The warrant is
exercisable one year from the grant date at $0.136 per share.
During the three month period ended September 30, 1999, the Company by agreement
modified the due dates on $750,000 of notes payable plus associated interest,
due September 27, 1999, to be payable upon demand, which had not been made as of
September 30, 1999.
During the three month period ended September 30, 1999, the Company raised
approximately $339,000 through the issuance of 3,666,602 restricted common
shares to fourteen accredited investors and two officers/directors of the
Company. In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. These securities were
issued pursuant to the exemptions provided by Section 4(2) of the Securities
Act and Regulation D. Investment representations were obtained and legends were
placed on the certificates. Partially, in connection therewith the Company
issued an aggregate of 65,446 shares of restricted common stock to one
individual, Mr. B. Leichtling, as compensation for placement agent services.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on July 30, 1999. At that meeting
the following matters were submitted to a vote of the stockholders of SGI
International:
1999 SGI International Annual Meeting
Final Voting Results
Proposal
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Item No. 1 Election of Directors
The following nominees for director received the number of votes set opposite
their respective names:
Voting Results
- ------------------------------
Votes Percent
------------- ------------
James W. Mahler For 26,750,302 99%
Withhold 220,694 1%
Michael L. Rose For 26,695,237 99%
Withhold 275,759 1%
Joseph A. Savoca For 25,804,506 96%
Withhold 1,166,440 4%
Jeffrey L. Smith For 26,303,655 98%
Withhold 666,841 2%
John R. Taylor For 26,124,271 97%
Withhold 846,725 3%
Directors: Norman A. Grant, William A. Kerr, and Dr. Ernest P. Esztergar, whose
terms of office had not expired, continued in their respective capacities as
directors. Subsequent to the annual meeting William R. Harris resigned for
health reasons.
Item No. 2 Ratification of Selection of J.H. Cohn LLP, as Independent Public
Accountants
Voting Results
--------------------------------------
Votes Percent
--------------- ---------------
For 26,088,494 97%
Against 230,228 1%
Abstain 652,274 2%
ITEM 5. OTHER INFORMATION
On October 28, 1999, the Company and MLFC amended the terms of their current
business relationship, by executing certain amendments (the "Restructuring") to
the various joint venture agreements that they had previously entered into on
January 14, 1999. (All payments where noted below are net of the Company's own
matching contribution required under the LFC Tech joint venture agreement.) In
accordance with the Restructuring: (a) LFC Tech accelerated the net payment of
$375,000, payable to the Company, which was acknowledged in the restructured
Amended Services Agreement, thereby ending any further obligation for payments
under this contract through the year 2000, (b) the Company transfered its
present 50% interest in the LFC Process Patents to LFC Tech upon closing of the
Restructuring, (c) the Company is to transfer the remaining 50% interest in the
LFC Process Patents to LFC Tech upon completion of the ENCOAL Acquisition, (d)
Mitsubishi Heavy Industries shall execute a Waiver and Release of the $1.13
million invoice due it from Bluegrass, which is intended to be used by the
Company as partial payment if the ENCOAL acquisition is completed, (e) MHI shall
forgive the Company the payment of the $1.13 million invoice upon the closing of
the ENCOAL Acquisition, (f) LFC Tech shall pay the Company an additional
$750,000 net, payable in two tranches, with the first net payment of $375,00
made upon closing of the Restructuring and the second net payment of $375,000
due upon the closing of the ENCOAL Acquisition, (g) MLFC, subject to and upon
the occurrence of certain milestones (more fully discussed in Note 13 of the
notes to the consolidated financial statements contained in the Company's
December 31, 1998, 10-K.) already contained in the joint venture agreements and
subject to both parties obtaining Board of Director approvals, in lieu of the
$4.0 million payment previously specified in the agreement, shall make a payment
of $3,625,000 to the Company if the ENCOAL Acquisition does not occur and a
payment of $3,250,000 if the ENCOAL Acquisition does occur, (h) LFC Tech
Operating Agreement was extended through the year 2008, and (i) an agreement to
assist with engineering and CDL upgrading work. Other minor changes were made
to the Amended Services Agreement to account for the early payments, the License
Agreement to account for the transfer of the LFC Process Patents to LFC Tech,
the termination of the Security Agreement to reflect the fact that it was no
longer necessary, and the Amended Operating Agreement of LFC Tech to reflect the
terms of the Restructuring.
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Effective as of October 30, 1999, the Company was able to extend or exchange
approximately $4.2 million in existing debt for new securities of the Company
including new convertible debt securities, amended warrants and preferred stock
(the "99D Exchange Offering"). The Company retired approximately $3.45 million
in existing 12% convertible debentures which were required to be paid prior to
October 31, 1999, in exchange for new 12% convertible debentures (the "99D
Debentures"), in the same amount, due September 30, 2001. The 99D Debentures may
be prepaid by the Company, in whole or in part, at any time prior to September
30, 2001. Interest on the debentures is payable quarterly in cash. The
debentures are convertible into common stock of the Company, at the option of
the holder, subsequent to November 15, 1999, in whole or in part, at the
greater of: (i) the average of the ten day closing bid price of the Company's
common stock prior to the date the notice of conversion is received by the
Company or (ii) $1.00 per share. In conjunction with the issuance of the 99D
Debentures the Company amended existing warrants set to expire on December 31,
1999, with an exercise price of $1.20 per share to now expire on December 31,
2001, with a new exercise price of $0.30 per share. The number of shares of
common stock underlying the amended warrants aggregate approximately 328,000
shares. In addition, the Company also agreed to grant shares of Series 99D
Convertible Preferred Stock (the "99D Preferred") convertible with no further
payment into approximately 154,000 shares of common stock. The 99D Preferred
shares are convertible at the option of the holder, any time after November 15,
1999, but only if the ten business day average closing bid price of the
Company's common stock is $0.75 per share or greater at the time of conversion.
The 99D Preferred stock has no voting rights, dividend rights or preference in
liquidation and if not previously converted, will automatically convert into
common stock on October 30, 2001.
As part of the 99D Exchange Offering the Company also obtained an extension to
September 30, 2001, of approximately $724,000, including interest, in existing
10%, 11% and 12% interest bearing notes which were required to be paid by
October 30, 1999. In connection therewith, the Company agreed to grant
shares of Series 99D Preferred stock convertible into an aggregate of
approximately 46,000 shares of common stock and to amended exisiting warrants
set to expire on December 31, 1999 with an exercise price of $1.20 per share to
now expire on December 31, 2001 with a new exercise price of $0.30 per share.
The number of shares of common stock underlying the amended warrants aggregate
approximately 141,000 shares.
Interest on the notes payable will continue to be made in cash on a quarterly
basis. The 99D Exchange Offering was made only to existing debt holders
pursuant to the exemptions provided by Sections 3(a)(9) and Section 4(2) of the
Securities Act and Regulation D. No registration rights were granted on any of
the securities issued under the 99D Exchange Offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Certificate of Secretary re: Designation of Series 99-D
Preferred Stock (1)
4.1 Form of Restricted Stock Purchase Agreement (2)
4.2 Form of Series 99-D Convertible Preferred Stock (1)
4.3 Form of Series 99-D Convertible Debentures (1)
4.4 Form of Amended Stock Purchase Warrant re: Series 99-D Offering
dtd August 27, 1999 (1)
10.1 Second Amendment to LFC Technologies, LLC Operating Agreement (1)
10.2 Amendment of Security Agreement (1)
10.3 Form of Agreement and Assignment by SGI International to LFC
Technoogies LLC (1)
10.4 LFC Technologies LLC Second Amendment to the License Agreement (1)
10.5 Addendum to Amended and Restated Service Agreement (1)
10.6 Transfer and Development Agreement (1)
27.1 Financial Data Schedule (1)
(1) Filed herewith.
(2) Incorporated by reference to report on Form 10-Q (File No. 2-93124)ending
June 30l 1999.
(b) Reports on 8-K: NONE
20
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE November 12, 1999
- ---------------------------
Michael L. Rose,
President and Chief Executive Officer
/s/ GEORGE E. DONLOU November 12, 1999
- ---------------------------
George E. Donlou
Vice President Finance and Controller
21
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 September 23, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
the corporation on September 23, 1999.
/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 Four Hundred Eighty (480) 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 99-D Convertible Preferred Stock (the "Series 99-D Preferred Stock").
The Series 99-D Preferred Stock shall not have any liquidation preference (the
"Liquidation Preference"). The Series 99-D Preferred Stock shall rank prior to
the Company's Common Stock and to all other classes and series of equity
securities of the Company now or hereafter authorized, issued, or outstanding,
other than any classes or series of equity securities of the Company ranking on
a parity with or senior to the Series 99-D Preferred Stock as to dividend rights
or rights upon liquidation, winding up or dissolution of the Company. The Series
99-D Preferred Stock shall be junior to all previous Series of Preferred Stock
as to both the payment of dividends and the distribution of assets upon
liquidation, dissolution, or winding up of the Company, and shall be junior to
all outstanding debt of the Company. The Series 99-D 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 99-D 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 99-D Preferred Stock shall not be entitled
to receive any dividends.
(d) Liquidation
1. General. Upon any liquidation, dissolution or winding up of the Company, the
holders of the Series 99-D Preferred Stock shall not 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
99-D Preferred Stock. Neither the consolidation or merger of the Company into
or with any other company or companies, nor the sale or transfer by the Company
of all or any part of its assets, nor the reduction of the capital stock of
the Company, shall be deemed to be a liquidation, dissolution, or winding
up of the Company for purposes hereof.
(e) Conversion.
1. General. Subject to the other provisions hereof including paragraph (f)
herein, each share of the Series 99-D Preferred Stock shall be convertible,
at the option of the holder as described in paragraph 2 below, into 1200
shares of fully paid and nonassessable shares of Common Stock.
2. Exercise of Conversion Rights. Subject to the limitations described in
paragraph (f) herein, all of the Series 99-D shall first be convertible at
the option of the holder at any time after November 15, 1999. Subject to the
limitations described in this paragraph regarding the period of time when
the 99-D Preferred Stock shall first be convertible, the Preferred Share
will be convertible into 1,200 shares of common stock of the Company at any
time, but only if the ten (10) business day average closing bid price of the
Company's common stock is $0.75 per share or greater at the time of conversion.
The Preferred Share will automatically convert into common stock on October
30, 2001, if not converted earlier. The holder of the Series 99-D Preferred
Stock shall further be prohibited from converting any portion of the Series
99-D Preferred Stock which would result in the holder being deemed the
beneficial owner in accordance with the provisions of Rule 13d-3 of the
Securities 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 99-D Preferred Stock shall
exercise its right to convert the Series 99-D Preferred Stock by telecopying an
executed and completed notice of conversion to the Company and delivering the
original notice of conversion and the certificate representing the Series 99-D
Preferred Stock to the Company by express courier. Each business date on which a
notice of conversion is telecopied to and received by the Company in accordance
with the provisions hereof shall be deemed a Conversion Date. The Company will
use its best efforts to transmit the certificates representing shares of Common
Stock issuable upon conversion of any Series 99-D Preferred Stock (together with
the certificates representing the Series 99-D Preferred Stock not so converted)
to the holder, 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 99-D 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 certificate to be
converted, then the purchaser of the Series 99-D Preferred Stock will be
entitled to revoke the relevant notice of conversion by delivering a notice to
such effect to the Company whereupon the Company and the purchaser shall each be
restored to their respective positions immediately prior to the delivery of such
notice of conversion.
4. Adjustment Provisions. The number of shares of Common Stock issuable upon the
conversion of the Preferred Stock and the Conversion Price shall be subject to
adjustment as follows:
(i) In case the Company shall (i) pay a dividend on Common Stock in Common Stock
or securities convertible into, exchangeable for or otherwise entitling a
holder thereof to receive Common Stock, (ii) declare a dividend payable in
cash on its Common Stock and at substantially the same time offer its
shareholder a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other entitling a holder thereof to receive Common
Stock) from proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend), (iii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iv) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (v) issue by reclassification of its
Common Stock any shares of Common Stock of the Company, the number of shares of
Common Stock issuable upon conversion of the Series 99-D Preferred Stock
immediately prior thereto shall be adjusted so that the holders of the Series
99-D Preferred Stock shall be entitled to receive after the happening of
any of the events described above that number and kind of shares as the holders
would have received had such Series 99-D Preferred Stock been converted
immediately prior to the happening of such event or any record date with
respect thereto. Any adjustment made pursuant to this subdivision shall
become effective immediately after the close of business on the record date in
the case of a stock dividend and shall become effective immediately after the
close of business on the record date in the case of a stock split, subdivision,
combination or reclassification.
(ii) Any adjustment in the numbers of shares of Common Stock issuable hereunder
otherwise required to be made by this Section (e)(4) will not have to be made if
such adjustment would not require an increase or decrease in one (1%) percent or
more in the number of shares of Common Stock issuable upon conversion of the
Series 99-D Preferred Stock. No adjustment in the Conversion Rate will be
made for the issuance of shares of capital stock to directors, employees or
independent contractors pursuant to the Company's or any of its subsidiaries'
stock option, stock ownership or other benefit plans or arrangements or
trusts related thereto or for issuance of any shares of Common Stock pursuant
to any plan providing for the reinvestment of dividends or interest payable
on securities of the Company and the investment of additional optional
amounts in shares of Common Stock under such plan.
<PAGE>
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 99-D Preferred Stock then outstanding shall have
the right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such consolidation,
merger, sale, transfer, capital reorganization or reclassification by a holder
of the number of shares of Common Stock of the Company into which such shares
of Series 99-D Preferred Stock would have been converted immediately prior to
such consolidation, merger, sale, transfer, capital reorganization or
reclassification, assuming such holder of Common Stock of the Company (A) is
not an entity with which the Company consolidated or into which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate
of the constituent entity, and (B) failed to exercise his or her rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer (provided
that if the kind or amount of securities, cash or other property receivable
upon such consolidation, merger, sale or transfer is not the same for each
share of Common Stock of the Company held immediately prior to such
consolidation, merger, sale or transfer by other than a constituent entity or an
affiliate thereof and in respect of which the Company merged into the Company or
to which such rights or election shall not have been exercised ("non-electing
share"), then for the purpose of this Section (e)(5) the kind and amount of
securities, cash or other property receivable upon such consolidation, merger,
sale or transfer by each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares). If
necessary, appropriate adjustment shall be made in the application of the
provision set forth herein with respect to the rights and interest thereafter of
the holders of shares of Series 99-D Preferred Stock, to the end that the
provisions set forth herein shall thereafter correspondingly be made applicable,
as nearly as may reasonably be, in relation to any shares of stock or other
securities or property thereafter deliverable on the conversion of the shares.
The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers, capital reorganizations and reclassifications. The
Company shall not effect any such consolidation, merger, sale or transfer unless
prior to or simultaneously with the consummation thereof the successor Company
or entity (if other than the Company) resulting from such consolidation, merger,
sale or transfer shall assume, by written instrument, the obligation to deliver
to the holder of each share of Series 99-D Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive under this Section (e)(5).
6. No Impairment. This Company will not, by amendment of its 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 99-D Preferred Stock against impairment.
<PAGE>
7. Fractional Shares. Any fractional shares issuable upon conversion of the
Series 99-D Preferred Stock shall be rounded to the nearest whole share or, at
the election of the Company, the Company shall pay the holder thereof an amount
in cash equal to the closing bid price thereof. Whether or not fractional
shares are issuable upon conversion shall be determined on the basis of the
total number of shares of Series 99-D Preferred Stock the holder is at the time
converting to Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
8. 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 99-D Preferred Stock, such numbers of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series 99-D Preferred Stock. If at any time the number
of authorized but unissued shares of Common Stock shall be insufficient to
satisfy the conversion rights hereunder, in addition to such other remedies as
shall be available to the holder of Series 99-D Preferred Stock, the Company
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
9. Status of Converted Shares. In the event any shares of Series 99-D Preferred
Stock shall be converted pursuant to Section (e) hereof, the shares so
converted shall be canceled and shall have the status of authorized but
unissued shares of Preferred Stock and may be reissued by the Company at
anytime as shares of any series of Preferred Stock other than Series 99-D
Preferred Stock.
10. Status of Retired Shares. Shares of Series 99-D Preferred Stock, purchased
or otherwise acquired for value by the Company, or converted by the holder,
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 99-D Preferred
Stock.
(f) Notices.
1. Upon the Company. Any notice pursuant to the terms thereof to be given or
made by a holder of shares of Preferred Stock to or upon the Company shall be
sufficiently given or made if sent by facsimile or by mail, postage prepaid,
addressed (until another address is sent by the Company to the holder) as
follows:
SGI International
1200 Prospect Street, Suite 325
La Jolla, CA 92037
2. Upon Series 99-D Preferred Stock Holders. Any notice pursuant to the terms
hereof to be given or made by the Company to or upon any holder of shares of
Series 99-D Preferred Stock shall be sufficiently given or made if sent by mail,
postage Prepaid, addressed (until another address is sent by the holder to the
Company) to the address of such holder on the records of the Company.
IN WITNESS WHEREOF, SGI International, has caused this Certificate to be signed
by its Senior Vice President, and attested to by its Secretary, this 23rd day of
September, 1999.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE
By:---------------------------------
Michael L. Rose
President and CEO
Attest:
/s/ JOHN R. TAYLOR
- -----------------------------
John R. Taylor, Secretary
Incorporated Under the Laws of Utah
========== =============
99-D-000 Number Shares
========== =============
* * *
This certifies that: __________________is the registered Holder of *_______*
FULLY PAID AND NON-ASSESSABLE SERIES 99-D PREFERRED SHARE(S),
$.01 PAR VALUE OF
SGI INTERNATIONAL
1. Each Series 99-D Preferred Share evidenced by this Certificate is
transferable on the books of the Corporation by the Holder hereof, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed.
2. On or after November 15, 1999, or upon effective registration with the
Securities and Exchange Commission, each Series 99-D Convertible Preferred Share
may be converted into Twelve Hundred (1,200) SGI International Common Shares,
but shall be deemed to be converted in any event on October 30, 2001, if not
earlier converted.
3. Series 99-D Preferred Shares have no voting or dividend rights.
4. Series 99-D Preferred Shares and the Common Stock into which they are
convertible will, upon issuance, be fully paid and non-assessable.
5. In the event that the Corporation shall at any time after issuance of a
Series 99-D Preferred Share: (i) declare or pay to the holders of the Common
Stock a dividend payable in any kind of shares of stock of the Corporation; or
(ii) split, reverse split or otherwise reclassify its Common Stock into the same
or a different number of shares with or without par value or into shares of any
class or classes; or (iii) consolidate or merge with or transfer its property as
an entirety or substantially as an entirety to any other corporation; or (iv)
make any distribution of its assets to holders of its Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital;
then, upon subsequent conversion of a Series 99-D Preferred Share, a shareholder
shall receive in exchange for a Series 99-D Preferred Share, in addition to, in
reduction of, or in substitution for, the shares of Common Stock to which he
would otherwise be entitled upon such exercise, such additional shares of Common
Stock, or lesser number of shares of Common Stock, as the case may be, or stock
or script of the Corporation, or such reclassified shares of stock of the
Corporation, or such shares or securities or property of the Corporation
resulting from such consolidation or merger or transfer, or such assets of the
Corporation, so that the value so received by the shareholder is equivalent to
the value which would have been received (and the total consideration
exchangeable by the shareholder is equivalent to the total consideration which
would otherwise have been exchangeable) had the shareholder converted a Series
99-D Preferred Share into shares of Common Stock immediately prior to the
happening of any of the foregoing events.
6. THE SERIES 99-D PREFERRED SHARE(S) REPRESENTED BY THIS CERTIFICATE AND THE
COMMON STOCK INTO WHICH THEY ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARE(S) HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SHARES UNDER THE SECURITIES ACT OF 1933, OR A
PRIOR OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, THAT REGISTRATION IS NOT
REQUIRED UNDER THAT ACT.
7. In the event of the voluntary liquidation, dissolution or other termination
of the Corporation, the holders of the Series 99-D Preferred Shares shall not be
entitled to recover any cash payment for the Series 99-D Preferred Share.
In witness whereof the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be affixed
hereto this day of __________, 1999.
- ------------------ -----------------
SECRETARY PRESIDENT AND CEO
99-D DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE
BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE, OR UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED,
RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO
REGISTRATION OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
No._________ US $______________
SGI International
99-D 12% CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2001
THIS DEBENTURE is one of a duly authorized issue of $3,590,000.00 in Debentures
of SGI International, a corporation organized and existing under the laws of
Utah (the "Company") designated as the Series 99-D 12% Convertible Debentures
(the "99-D Debentures"), due on September 30, 2001.
FOR VALUE RECEIVED, the Company promises to pay to_____________________________,
the registered holder hereof (the "Holder"), the principal sum of ($_________)
Dollars on September 30, 2001, (the "Maturity Date") and to pay interest on
the principal sum outstanding from time to time in arrears as provided herein
quarterly, beginning on October 1, 1999, at the rate of 12% per annum accruing
from the date of initial issuance. Accrual of interest shall commence on the
first such business day to occur after the date hereof until payment in full
of the principal sum has been made or other consideration paid in accordance
with Paragraph 5. Subject to the provisions of paragraph 5 below, the
principal of, and interest on, this 99-D Debenture is convertible on or after
November 15, 1999, (the "Conversion Date") as described in the August 27,
1999, Private Placement Memorandum (the "Memorandum" or "Exchange Offering")in
whole or in part at the option of the Holder, into shares of Common Stock of
the Company. The Company will pay the principal of, and interest upon, this 99-D
Debenture on the Maturity Date, less any amounts converted or required by law to
be deducted, to the Holder of this 99-D Debenture, and addressed to such Holder.
The forwarding of such check or other consideration in accordance with Paragraph
5 shall constitute a full payment of principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Debenture
to the extent of the sum represented by such check plus any amounts so deducted.
This 99-D Debenture is subject to the following additional provisions:
1. The 99-D Debentures are exchangeable for an equal aggregate principal amount
of Debentures of different authorized denominations, as requested by the Holder
surrendering the same. No service charge will be made for such registration or
transfer or exchange.
2. Interest will be paid in cash on a quarterly basis.
3. The Company shall be entitled to withhold from all payments of principal of,
and interest on, this Debenture any amounts required to be withheld under the
applicable provisions of the United States income tax laws or other applicable
laws at the time of such payments, and Holder shall execute and deliver all
required documentation in connection therewith.
4. This 99-D Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this 99-D Debenture, the Company may require, prior to issuance of a
new Debenture in the name of such other person, that it receive reasonable
transfer documentation including legal opinions that the issuance of the 99-D
Debenture in such other name does not and will not cause a violation of the Act
or any applicable state or foreign securities laws. Prior to due presentment for
transfer of this 99-D Debenture, the Company and any agent of the Company may
treat the person in whose name this 99-D Debenture is duly registered on the
Company's Debenture Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this 99-D
Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
5. The Holder of this 99-D Debenture is entitled, at its option, to convert at
any time commencing on the Conversion Date, the principal amount of this 99-D
Debenture, and any and all interest payable thereon, provided that the principal
amount is at least US $5,000 (unless if at the time of such election to convert
the aggregate principal amount of all Debentures registered to the Holder is
less than Five Thousand Dollars (US $5,000), than the whole amount thereof). The
99-D Debenture will, at the option of the Holder, be convertible at any time
after the Conversion Date, in whole or in part into the number of shares of SGI
International common stock ("Common Stock") determined by dividing the face
amount of the Debenture or any part thereof in an amount of $5,000 or more, and
all interest payable thereon, by the greater of: (i) the average of the closing
bid price of the Company's Common Stock for the ten (10) business days prior to
the Conversion Notice Date or (ii) one dollar ($1.00) per share. The date (the
"Conversion Notice Date") on which notice of conversion is given shall be deemed
to be the date on which the Company receives the conversion notice (the "Notice
of Conversion") duly executed, provided the original Debenture is received by
the Company within five (5) business days thereafter. In the event the original
Debenture is not received within such five (5) business days, the Notice of
Conversion, at the Company's option, may be considered void. Facsimile delivery
of the Notice of Conversion shall be accepted by the Company at facsimile number
(858) 551-0247; Attn: Controller. In the event that the Debenture is not
converted by Holder by September 30, 2001, then SGI International shall on
September 30, 2001, pay the full amount owing under the 99-D Debenture, which
shall be the face amount plus all accrued and unpaid interest payable thereon,
less any amount converted into Common Stock. Conversion shall be effectuated by
surrendering the 99-D Debentures to be converted to SGI International at 1200
Prospect, Suite 325, La Jolla, California 92037, with the form of conversion
notice attached hereto as Exhibit A, executed by the Holder of the 99-D
Debenture evidencing such Holder's intention to convert this Debenture (as above
provided) hereof, and accompanied, if required by the Company, by proper
assignment hereof in blank. No fraction of shares or certificates representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded to the nearest whole share. Certificates representing
Common Stock issued upon conversion, will be delivered within five (5) days or
as soon as practicable from the date the notice of conversion and the original
Debenture, is delivered to the Company. No payment or adjustment shall be made
upon conversion with respect to any interest accrued on any Debenture guaranteed
for conversion prior to an interest payment date or to any dividend on the
Common Stock delivered upon conversion. (Such notice shall be effective when
mailed to last known address on date mailed.)
6. Company may prepay this Debenture, in whole or in part, at any time without
incurring any penalty for such prepayment. After Company gives Holder written
notice of its intent to repay by depositing such notice with the U.S.Post
Office, postage prepaid, Holder may not thereafter convert any part of this
Debenture. No provision of this 99-D Debenture, except as is specifically
described in Paragraph 5, shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, and interest on,
this 99-D Debenture at the time, place, and rate, and in the coin or currency,
herein prescribed. This 99-D Debenture and all other debentures now or hereafter
issued of similar terms are direct obligations of the Company.
7. No recourse shall be had for the payment of the principal of, or the interest
on, this 99-D Debenture, or for any claim based hereon, or otherwise in respect
hereof, against any incorporator, shareholder, officer or director, as such,
past, present or future, of the Company or any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
8. If the Company merges or consolidates with another corporation or sells or
transfers all or substantially all of its assets to another person and the
holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the 99-D Debenture may thereafter
be converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a Holder of the number of shares of Common
Stock into which this 99-D Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, subject to adjustments
which shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right,
but not the obligation, to convert by delivering a Notice of Conversion to the
Company within only a fifteen (15) day period of receipt of notice of such Sale
from the Company.
9. The Holder of the 99-D Debenture, by acceptance hereof, agrees that this 99-D
Debenture is being acquired for investment and that, notwithstanding any other
provision of this 99-D Debenture, such Holder will not offer, sell or otherwise
dispose of this 99-D Debenture or the Shares of Common Stock issuable upon
conversion thereof, except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky or foreign laws or similar
laws relating to the sale of securities.
10. This 99-D Debenture shall be governed by and construed in accordance with
the laws of the State of Utah. Each of the parties consents to either the
exclusive jurisdiction of the federal courts whose districts encompass any part
of the City of San Diego or the exclusive jurisdiction of state courts of the
State of California sitting in the City of San Diego in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
coveniens, to the bringing of any such proceeding in such jurisdiction.
11. The occurrence of the following, which is not cured within a period of ten
(10) days after receipt of written notice from Holder, shall constitute an
"Event of Default":
a. The Company shall fail to make any payment due under this 99-D Debenture and
the same shall continue for a period of more than thirty (30) days; or
b. The Company shall make (1) an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (2) apply for or consent to the
appointment of a trustee, liquidator or receiver for its or for a substantial
part of its property or business; or
c. A trustee, liquidator or receiver shall be appointed for the Company or for a
substantial part of its property or business without its consent and shall not
be discharged within sixty (60) days after such appointment; or
d. Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Company and, if instituted against
the Company, shall not be dismissed within ninety (90) days after such
institution or the Company shall by any action or answer approve of, consent to,
or acquiesce in any such proceedings or admit the material allegations of, or
default in answering a petition filed in any such proceeding; or
In the Event of Default or at any time thereafter, and in each and every such
case, unless such Event of Default shall have been waived in writing by the
Holder at the option of the Holder and in the Holder's sole discretion, the
Holder may consider this 99-D Debenture immediately due and payable, without
presentment, demand, protest or notice of any kinds, all of which are hereby
expressly waived, anything herein or in any note or other instruments contained
to the contrary notwithstanding, and the Holder may immediately enforce any and
all of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law.
12. Nothing contained in this 99-D Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or any
rights whatsoever as a shareholder of the Company, unless and to the extent
converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer thereunto duly authorized.
Dated: __________________, 1999
SGI INTERNATIONAL
By:_______________________________________
Michael L. Rose, President and CEO
Warrant Certificate No. 97FA-000-A
AMENDED WARRANT TO PURCHASE _________ SHARES OF COMMON STOCK
SGI INTERNATIONAL
INCORPORATED UNDER THE LAWS OF THE STATE OF UTAH
"The securities represented by this Certificate have not been registered under
the Securities Act of 1933 or any state securities law and may not be sold,
exchanged, hypothecated or transferred in any manner except in compliance with
Paragraph 4 hereof."
1. Grant of Warrant. This certifies that, effective ________________,
____________________________, the registered holder hereof (the
"Warrantholder"), is entitled to purchase from SGI International, a Utah
corporation (the "Company"), at any time during the Exercise Period (as defined
in Paragraph 2 hereof), at the purchase price per Share of $0.30 (the "Warrant
Price"), the number of shares of common stock, no par value, of the Company set
forth above (the "Shares"), subject to the terms and conditions set forth
herein.
2. Exercise of Warrant. The Warrant evidenced hereby may be exercised at any
time the dates after the date hereof, from time to time, in whole or in part, by
presentation of this Warrant certificate with the Warrant Exercise Form included
herewith, duly executed and simultaneous payment of the Warrant Price at the
principal office of the Company. Payment shall be made by check. The "Exercise
Period" shall be the period of time from the effective date through December 31,
2001.
3. Legend on Shares. Each certificate for Shares issued upon exercise of the
Warrant shall bear the following legend, unless, at the time of exercise, such
Shares are subject to a currently effective Registration Statement under the
Securities Act of 1933 (the "Act"):
"The securities represented by this Certificate have not been registered under
the Securities Act of 1933 or any state securities law and may not be sold,
exchanged, hypothecated or transferred in any manner except in compliance with
Paragraph 4 of the Warrant pursuant to which they were issued."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
This Warrant and the Common stock underlying its exercise are restricted and
there is no agreement that either will be registered under the Securities Act of
1933.
4. Restrictions on Transfer; Registration Rights.
(a) By acceptance of this Warrant, the Warrantholder agrees that prior to making
any disposition of the Warrant or the Shares, the Warrantholder shall give
written notice to the Company describing briefly the manner in which any such
proposed disposition is to be made; and no such disposition shall be made unless
Warrantholder provides Company with an opinion of legal counsel acceptable to
Company that a registration statement or other notification or post-effective
amendment thereto (hereinafter, collectively, a "Registration Statement") under
the Act is not required with respect to such disposition, or unless such a
Registration Statement has been filed by the Company with, and declared
effective, if necessary, by the Securities and Exchange Commission (the
"Commission").
(b) The Company agrees that until all Shares have been sold under a Registration
Statement or pursuant to Rule 144 under the Act, it will keep current in filing
all materials required to be filed with the Commission in order to permit the
holders of such Shares to sell the same under Rule 144.
5. Reservation of Shares Issuable on Exercise of Warrants. The Company will at
all times reserve and keep available out of its authorized Shares, solely for
the issuance upon the exercise of this Warrant and other similar Warrants, such
number of Shares as from time to time shall be issuable upon the exercise of
this Warrant and all other similar Warrants at the time outstanding.
6. Warrantholder Not a Shareholder. The Warrantholder, as such, shall not be
entitled by reason of this Warrant to any rights whatsoever of a shareholder of
the Company.
7. Notices. Any notice pursuant to this Warrant by the Company or by a
Warrantholder or a holder of Shares shall be in writing and shall be deemed to
have been duly given if delivered or mailed by certified mail, return receipt
requested:
(a) If to a Warrantholder or a holder of Shares -addressed to it at its address
as set forth in the register for the Warrants maintained by the Company or in
the records of the transfer agent for the Shares;
(b) If to the Company - addressed to it at 1200 Prospect Street, #325, La Jolla,
California 92037, attention: Investor Relations.
Warrantholder and/or Company may from time to time change the address to which
notices to it are to be delivered or mailed hereunder by giving notice to the
other in accordance herewith.
8. Successors and Assigns. The provisions of this Warrant by or for the benefit
of the Company, any Warrantholder or successor holder(s) of Warrants or the
holders of Shares shall bind and inure to the benefit of their respective heirs,
successors and/or assigns hereunder.
9. Applicable Law. This Warrant shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be construed in
accordance with the laws of said State.
10. Investment Intent of Warrantholder. Notwithstanding anything herein to the
contrary, this Warrant is issued subject to the condition that the Warrant has
been acquired for the account of the Warrantholder and not with a view to, or
for sale in connection with, any distribution thereof.
SGI INTERNATIONAL
By
- ------------------------------
Michael L. Rose, President/CEO
SECOND AMENDMENT TO LFC TECHNOLOGIES, LLC
OPERATING AGREEMENT
This SECOND AMENDMENT TO OPERATING AGREEMENT (this "Second Amendment") is
entered into as of the 29th day of October, 1999, by and between MLFC
Corporation, a California corporation, ("MLFC"), and SGI INTERNATIONAL, a Utah
corporation ("SGI," and together with MLFC, the "Members").
RECITALS
A. The parties hereto have entered into that certain Operating Agreement and
certain amendment thereto for LFC Technologies, LLC (the "Company" or "LFC Co.")
dated as of January 14, 1999 (collectively the "Original Agreement").
B. MLFC and SGI executed with Mitsubishi Corporation and Mitsubishi Heavy
Industries, Ltd., a letter of intent dated as of September 24, 1999 whereby the
parties thereto expressed their intentions to further amend the Original
Agreement and certain other agreements related thereto in order to reflect a
change in the payment terms of certain monies payable by the Company to SGI and
payable by MLFC to SGI, and to reflect the transfer by SGI of the interests in
the LFC Technology to the Company.
C. Subject to the terms and conditions hereof, the parties hereto desire to
amend the Original Agreement.
NOW, THEREFORE, the parties hereto hereby amend the Original Agreement as
follows:
1. Section 3.3 of the Original Agreement is hereby amended and restated to read
in its entirety as follows:
3.3 Transfers and Further Contributions.
(a) SGI Transfer and First Transfer Payment. SGI shall transfer and assign to
LFC Co. all of its fifty percent (50%) undivided rights and interests in the
LFC Technology including without limitation, the LFC Patents and the
Intellectual Property Rights with respect to the LFC Technology, free from any
lien, license, claim or encumbrance in accordance with the terms and conditions
as set forth in Schedule 3.3 (a) attached hereto by November 5, 1999 (the "First
Transfer). In consideration of and subject to the First Transfer by SGI to LFC
Co, the parties shall cause LFC Co to pay to SGI the sum of $750,000 within five
(5) business days after the completion of the First Transfer.
(b) SGI Transfer and Second Transfer Payment. Subject to the completion of the
First Transfer and only if SGI has obtained from AEI Resources, Inc., a
Delaware corporation, or its subsidiary Bluegrass Coal Holding Co. ("AEI"), the
sole, absolute and exclusive title to the ENCOAL demonstration plant (the
"ENCOAL Plant"), free and clear of any lien, license, claim or encumbrance
(excepting only a security interest in the ENCOAL Plant that may be used to
secure SGI's note obligation to AEI in the principal amount of Two Million
Dollars ($2,000,000) and bearing interest at the prime interest rate, as may be
set by the Bank of America NT&SA's office in San Francisco, California, in
effect on January 1 of each calendar year, with principal and interest under
such note due and payable on a date five (5) years from the closing date of the
pending AEI-SGI transaction), and an of AEI's interests in the LFC Technology
<PAGE>
free and clear of any lien, license, claim or encumbrance (AEI's Interests in
the LFC Technology"), subject to terms and conditions satisfactory to MLFC, SGI
shall assign and transfer to LFC Co AEI's Interests in the LFC Technology
within ten (10) business days after obtaining AEI's Interests in the LFC
Technology (the Second Transfer"). In consideration of and subject to the
Second Transfer by SGI to LFC Co, the parties shall cause LFC Co to pay to SGI
the sum of $750,000 within five (5) business days after the completion of the
Second Transfer (the"Second Payment"). SGI shall use its best efforts to
conclude the Second Transfer as quickly as possible following the date of this
Second Amendment.
In the event that the Second Transfer does not occur pursuant to the terms set
forth above after the completion of the First Transfer, the Company shall not
be obligated to make the Second Payment and neither SGI nor MLFC shall be
obligated to make the related additional equity contributions.
SGI hereby represents and warrants that (i) the First Transfer shall result in
the Company's having fifty percent (50%) undivided rights and interests in the
LFC Technology and (ii) the First and Second Transfers shall result in the
Company's having the fun and exclusive rights and interests in the LFC
Technology.
(c) Further Contributions. The liability of the Members to the Company is
limited to the Capital Contributions as specified in Schedule 3.2 attached
hereto, as it may be amended from time to time pursuant to Section 14.2. No
additional Capital Contributions, or other funds, whether by way of contribution
of capital, loan or otherwise, shall be required of any Member except by
Supermajority Vote of the Members; provided. however, that each of the parties
hereto shall contribute in cash to the capital of the Company (a) the amounts of
US$375,000 within five (5) business days after execution of an agreement between
SGI and LFC Co with respect to the First Transfer; and (b) the amounts of
US$375,000 within (5) business days after execution of an agreement between SGI
and LFC Co with respect to the Second Transfer, if any. Further, no interest
shall accrue on any Capital Contribution and no Member shall have the right to
withdraw or be repaid any Capital Contribution except as provided in the
Agreement and any amendments thereto.
2. The Original Agreement shall be amended by adding thereto a new Schedule 3.3
(a) as attached hereto.
3. Article XII of the Original Agreement is hereby amended by deleting Sections
12.1(a)(vi) and 12.1(a)(vii) thereof.
4. Article XIII of the Original Agreement is hereby amended and restated to read
in its entirety as follows:
13.1 New Company. Upon the occurrence of a Milestone Event (as such
term is defined below), MLFC and SGI shall determine by mutual agreement the
terms and conditions for (a) the establishment and formation of a new company
("Newco") as holder of the LFC Patents and LFC Improvements or the
transformation of the Company into a corporation engaged in business and
commercial operations and activities with respect to the LFC Technology
("BizCo"), (b) contribution by MLFC and SGI into or additional equity
contribution by MLFC and SGI into BizCo and (c) if and only if all of the
conditions as set forth in Article 13.3 hereof have been satisfied, additional
consideration payable to SGI of Three Million Two Hundred Fifty Thousand Dollars
($3,250,000) (the "Transfer Payment") for the Second Transfer by SGI to LFC Co.
<PAGE>
13.2 Milestone Event. The Transfer Payment shall be paid to SGI by MLFC,
subject to satisfaction of the provisions of Section 13.3 below, upon the
occurrence of the earlier to occur of either of the following (each, a
"Milestone Event"):
(a) The commencement of construction or irrevocable commitment to proceed with
construction of LFC Plants with a minimum of 15,000 tons per day in capacity;
(b) The receipt by MLFC of an aggregate of at least Four Million Dollars
($4,000,000) in connection with (i) the admission by MLFC and SGI of new equity
participants into Newco or BizCo and (ii) the licensing or royalties from one
or more LFC Plants (as such term is defined in the License Agreement)
constructed by a third party or one of the parties hereto; or
(c) Such other event as all the parties hereto mutually agree to constitute a
Milestone Event;
provided that if and only if the Second Transfer has been completed, the license
fees and royalty payments with respect to licensing the LFC Technology from LFC
Plants involving MLFC or its Affiliate and constructed prior to the
establishment of Newco or the transformation of the Company into BizCo
(collectively, "Preferred LFC Technology Royalties") shall be distributed
exclusively to SGI until SGI receives the aggregate amount of Six Million Five
Hundred Thousand Dollars ($6,500,000) in Preferred LFC Technology Royalties. Any
and all amounts of Preferred LFC Technology Royalties exceeding the aggregate
amount of Six Million Five Hundred Thousand Dollars ($6,500,000) shall be
distributed to SGI and MLFC in proportion to each party's respective Ownership
Percentages. The amount of the Transfer Payment described in Section 13.1 above
shall be reduced by one-half of the aggregate value of the Preferred LFC
Technology Royalties received by SGI until all of the conditions as provided for
in Section 13.3 below are satisfied. In no event shall SGI receive Preferred LFC
Technology Royalties after the expiration or termination of this Agreement, in
which case SGI shall not use any of the MLFC Technology without the prior
written consent of MLFC.
13.3 Conditions to Transfer Payment. MLFC shall be obligated to pay the
Transfer Payment to SGI upon the occurrence of a Milestone Event and all of the
following:
(a) MLFC and SGI enter into (i) a shareholders' agreement (the "SH
Agreement") with respect to the establishment and operation of Newco as holder
of the LFC Technology and LFC Improvements or (ii) an amendment to this
Agreement and other agreements related thereto (the "Additional Amendment") with
respect to the transformation of the Company into BizCo, in form and substance
satisfactory to MLFC and SGI, and obtain prior approval from each party's
management, Board of Directors or investment committee, as the case may be, as
is necessary for an of the issues, including without limitation, the Transfer
Payment, SH Agreement, Additional Amendment and structure how to further proceed
with this transaction with SGI;
(b) SGI has obtained and transferred to the Company, Newco or BizCo the
entire ownership interests in the LFC Technology and LFC Improvements, free and
clear from any liens, claims, licenses or encumbrances whatsoever, upon terms
and with conditions satisfactory to MLFC;
(c) MLFC acquires a fifty percent (50(degree)/0) interest in the LFC
Technology and LFC Improvements through its equity participation in the Company,
Newco or BizCo; and
(d) pursuant to agreements acceptable to both parties, MLFC is duly
granted exclusive rights to manufacture and sea new plants incorporating the LFC
Technology and LFC Improvements ("LFC Plants").
13.4 Rights upon Formation of Newco. In the event that Newco is formed or the
Company is transformed into BizCo pursuant to this Article XIII,
(a) Neither MLFC nor SGI shall have the ability to transfer to any
third party ownership or interest in its respective ownership interest in the
LFC Technology or LFC Improvements without granting to the other party a right
of first refusal with respect thereto; and
(b) SGI shad promptly notify MLFC with respect to any offer of which it
becomes aware in connection with a proposed purchase or sale of any LFC Plant.
13.5 Assistance. Subject to the fun, complete and timely performance by SGI of
its obligations hereunder, MLFC shall use its reasonable efforts to arrange for
Mitsubishi Heavy Industries, Ltd. ("MHI") to provide SGI, in a manner
acceptable to MHI, with advice and/or comments with terms and upon conditions
satisfactory to MHI, in order to support SGI's efforts to pursue the most cost
effective means for upgrading coal liquids that are produced from LFC plants,
marketing the products of such upgrading and reducing the costs of an LFC
plants.
13.6 New Equity Participant. Up to one-third of ad the interests in the LFC
Technology vested in LFC Co. as a result of the First and Second Transfers may
be sold to a strategic partner to be agreed upon between SGI and MLFC by way of
an equity participation by such strategic partner in LFC Co. upon the terms and
with conditions acceptable to SGI and MLFC.
13.7 Patent Prosecution and Maintenance. LFC Co. shall have full control over
prosecution and maintenance of the patent applications and patents owned by it
and the Members shall cooperate to the extent required to fully and completely
protect all LFC Co. intellectual property from infringement or use by others.
(a) Defense and Claims Against Infringement. In the event
either Member becomes aware of any actual or threatened infringement of
the LFC Technology, that Member shall promptly notify the other Member,
and the Members shall discuss the most appropriate action to take. The
Members shall use their best efforts in cooperating with each other to
terminate such infringement without litigation. If, within one hundred
twenty (120) days after the date of notification of infringement,
attempts to abate such infringement are unsuccessful, and both Members
do not agree to jointly bring an action, then either Member may, at its
own expense, initiate such action on behalf of and in the name of LFC
Co. and any non-initiating Member may participate in and share the
expense of such action if it desires. Each Member shall cooperate and
shall join in the action if required to perfect an infringement or
other claim or defense with the other as may be reasonably requested by
the initiating Member. AU recoveries, damages and awards in such suit
shall be divided among the Members, with the initiating Member first
recovering all costs it incurred before sharing in such recoveries,
damages, or awards.
5. (a) Each Member agrees to treat as confidential, not to disclose to third
parties other than to its own Affiliates, and to use only in the manner and for
the purposes expressly permitted in this Agreement, all Confidential Information
(as defined in the License Agreement). Each Member covenants that it will
exercise reasonable precautions to preclude the unauthorized disclosure by any
of its directors, officers, and employees to other parties. In addition, each
<PAGE>
Member agrees that it shall comply with reasonable control procedures with
respect to Confidential Information (for example, restriction of access to
certain information to only a few designated Member employees and a requirement
that specified documents be kept in a safe when not used) and shall further
require any consultant or other agent to whom such Confidential Information is
provided to execute a confidentiality agreement precluding the disclosure of
such information. To the extent any software is included in the Confidential
Information, each Member agrees that it shall not decompile, disassemble or
reverse engineer such software.
(b) Notwithstanding the provisions of Section 5.1, each Member may
disclose, to the extent reasonably necessary, the Confidential Information to
any of its Affiliates or to those employees, agents, consultants or
representatives of each Member or any Affiliate that require such information in
order to accomplish the purposes of this Agreement, provided that prior to any
such disclosure, each Member notifies the other Member(s) of the identity of
such persons and such persons execute confidentiality undertakings precluding
the use or disclosure of such information.
(c) The obligations of Section 5.1 shall not apply to Confidential
Information which (a) becomes generally known to the industry through no fault
of the subject Member or the disclosures permitted by Section 5.2 or (b) is
rightfully obtained by a Member from a third party with no obligation of
confidentiality.
6. As amended by the provisions of this Second Amendment, the Original Agreement
and the First Amendment shall remain in full force and effect in accordance with
their terms. To the extent that this Second Amendment conflicts with the First
Amendment or the Original Agreement, the conflict shall be resolved by giving
effect to this Second Amendment terms, then to the First Amendment, and then to
the Original Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment as of
the day and year first above written.
MLFC CORPORATION
By: /S/ MASAHIDE KONISHI
Name: Masahide Konishi
Title: President
SGI INTERNATIONAL
By: /S/ MICHAEL L. ROSE
Name: Michael L. Rose
Title: President and CEO
AMENDMENT OF SECURITY AGREEMENT
This AMENDMENT OF SECURITY AGREEMENT {this "Agreement") is made and
entered into this 29th day of October, 1999, by and between MLFC Corporation, a
California corporation (hereinafter "Secured Party"), and SGI INTERNATIONAL, a
Utah corporation (hereinafter "SGI").
A. SGI and Secured Party previously entered into a Security Agreement
dated January 14, 1999 (the "Security Agreement"), pursuant to which SGI granted
secured Party a security interest in the Collateral to secure payment and
performance of the Obligations (as such terms are defined in the Security
Agreement).
B. The parties desire to terminate the Security Agreement as hereinafter
provided.
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual premises herein contained, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereto agree as
follows:
1. Termination of Security Agreement The Security Agreement shall
terminate, and neither SGI nor Secured Party shall have any further rights or
obligations thereunder, upon completion of the First Transfer contemplated by
that certain Agreement and Assignment between SGI and LFC Technologies LLC
executed concurrently herewith.
2. Effect of Amendment. Until the First Transfer has occurred, the
Security Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
SGI INTERNATIONAL, a Utah corporation
By /S/ MICHAEL L. ROSE
Name: Michael L. Rose
Title: President and Chief Executive Officer
MLFC CORPORATION, a California corporation
By: /S/ MASAHIDE KONISHI
Name: Masahide Konishi
Title: President
FORM OF AGREEMENT AND
ASSIGNMENT BY SGI INTERNATIONAL
TO
LFC TECHNOLOGIES LLC
(First Transfer)
This AGREEMENT AND ASSIGNMENT (this "Agreement"), is made effective as of
October 29, 1999, by and between SGI International ("SGI") and LFC Technologies
LLC ("LFC Co."),
WITNESSETH:
WHEREAS, SGI is the inventor of the LFC Technology, which upgrades low grade
coal into a higher Btu coal and produces coal liquids;
WHEREAS, SGI entered into a partnership with SMC Mining Company whose name was
later changed to Bluegrass Coal Holding Company ("Bluegrass") and whose
wholly-owned subsidiary, ENCOAL Corporation ("Encoal") constructed a Liquids
from Coal ("LFC") Demonstration Plant (the "Plant") in Gillette, Wyoming;
WHEREAS, SGI holds a fifty percent (50%) partnership interest (the "Partnership
Interest") and Bluegrass owns the remaining fifty percent (50%) partnership
interest in, a California Partnership, the TEK-KOL Partnership (the
"Partnership"), that owns the technology used in the Plant;
WHEREAS, in connection with termination of the Partnership, (i) a fifty percent
(50%) undivided interest in the LFC Technology has been assigned to SCI and (ii)
after SGI has acquired the Bluegrass Partnership Interest, the remaining fifty
percent (50%) interest in the LFC Technology will be assigned to SGI;
WHEREAS, SGI entered into various agreements with MLFC Corporation, a wholly
owned subsidiary of Mitsubishi Corporation, as of January 14, 1999, to establish
LFC Co.;
WHEREAS, as part of a restructuring of the joint venture between MLFC and SGI
described more specifically in a Letter of Intent dated as of September 24, 1999
(the "LOI"), SGI intends to convey all of its present interests in the LFC
Technology (defined below), including without limitation, all interests in the
Intellectual Property Rights (defined below) with respect to the LFC Technology
and the LFC Patents (defined below) (but excluding the Plant and the Partnership
Interest) to LFC Co.; and
WHEREAS, after the completion of the acquisition of the Bluegrass Partnership
Interest, SGI will assign the remaining fifty percent (50%) interest in the LFC
Technology to LFC Co. in order to enable LFC Co. to have the full and exclusive
right, title and interest in and to the LFC Technology,
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
Article 1. Definition
The following words and phrases, unless the context clearly indicates otherwise,
shall have the meanings set forth below:
"LFC Affiliate" shall mean and collectively include Mitsubishi Corporation, MLFC
Corporation, Mitsubishi Heavy Industries, Ltd. and any person, corporation,
company, partnership, joint venture, entity and/or firm which, directly or
indirectly, controls, is controlled by or is under common control with
Mitsubishi Corporation, MLFC Corporation and/or Mitsubishi Heavy Industries,
<PAGE>
Ltd. A person shall be deemed to be "controlled by" any other person if such
person possesses, directly or indirectly, power (a) to vote 50% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners; or (b) to direct or cause
the direction of the management and policies of such person whether by contract
or otherwise.
"Intellectual Property Rights" shall mean all rights and intangible property and
confidential information, worldwide, both statutory and nonstatutory, and
includes but is not limited to: ideas, concepts, designs, inventions,
improvements, works of authorship (e.g., computer programs, drawings, and other
works subject to copyrights, design rights or like protection), trade secrets,
and other intangible personal property of any kind, which can be protected
against unauthorized manufacture, use, sale, copying, distribution or
importation by persons other than the owner or authorized user thereof,
including, without limitation:
(a) patents, utility models, inventor certificates, registered designs, mask
works and applications for securing such rights;
(b) copyright registrations and applications for securing copyright
registrations; and
(c) all other rights available to prevent the unlawful use or disclosure of
trade secrets and other confidential information; provided, however, that
Intellectual Property Rights shall not include trademarks, service marks,
trade names or other designations of origin.
"LFC Patents" shall mean those patents and patent applications listed on
Schedule A attached hereto.
"LFC Technology" shall mean any and all information and know-how, as of the
execution date of this Agreement, relating to SGI's (or SGI's sublicensees)
existing and future products with respect to (i) methods of production relating
to the mild pyrolysis upgrading of low-rank subbituminous and lignite coal
including without limitation the convection drying and mild pyrolysis of
low-rank subbituminous coal, with controlled convection gas composition,
temperature, and flow rate; (ii) methods for controlled cooling and
stabilization of the solid product; and (iii) methods for providing process heat
through the efficient and controlled combustion of low-heating-value recycled
gas. LFC Technology shall include without limitation, the LFC Patents, printed
and unprinted technical data, trade secrets, inventions, discoveries,
techniques, works, processes, methods, plans, software, designs, specifications,
communications, protocols, source and object codes and modifications, test
procedures, program cards, tapes, disks and all other scientific or technical
information in whatever form, including all Intellectual Property Rights arising
therefrom.
"Related Agreements" shall mean the Operating Agreement for LFC Co., the LFC
Joint Venture Formation Agreement dated as of January 14, 1999 between SGI and
MLFC, the Services Agreement dated as of January 14, 1999 among SGI, MLFC and
LFC Co. and any other agreements and amendments related thereto.
Article 2. Assignment and Acceptance
SGI hereby irrevocably assigns, sets over, transfers and conveys to LFC Co.,
free and clear of all liens and encumbrances, and LFC Co. hereby accepts, (a)
all of SGI's undivided fifty percent (50%) worldwide right, title and interest
in and to the LFC Technology, including without limitation, the LFC Patents and
the Intellectual Property Rights with respect to the LFC Technology, and (b)all
rights, interests, claims and demands recoverable, in law and equity, that SGI
has or may have in profits and damages for past, present and future
infringements of any of the foregoing, including but not limited to, the right
to compromise, sue and collect such profits and damages, in each case, for the
full term or terms for which the same may be granted (collectively, the
"Assigned Rights").
Article 3. Representations and Warranties
In order to induce LFC Co. to enter into this Agreement, SGI hereby represents
and warrants that:
<PAGE>
(a) SGI is the sole and exclusive owner of all right, title and interest in and
to the Assigned Rights, free and clear of all liens, encumbrances and
restrictions,
(b) All necessary action has been taken by SGI under the laws of the State of
Utah to approve the execution and consummation of this Agreement,
(c) SGI has all necessary corporate power to enter into and perform its
obligations under this Agreement and has taken all necessary corporate action
under the laws of Utah and its certificate of incorporation and by-laws (or
similar documents) to authorize the execution and consummation of this
Agreement,
(d) Neither the execution nor the delivery of this Agreement, nor the
consummation of the transactions herein contemplated nor the fulfillment of or
compliance with the terms and provisions hereof, will (1) violate any provision
of law, regulations, ordinances, government orders, court decrees or similar
items applicable to SGI or otherwise in force and effect in the United States,
or (2) conflict with or result in a breach of any of the terms, conditions or
provisions of or constitute a default under the certificate of incorporation or
by-laws of SGI, or any agreement or instrument to which SGI is a party or by
which it is bound,
(e) All necessary government approvals have been obtained, and all government
filings have been made, as necessary for the parties to enter into this
Agreement and to perform in accordance with its terms,
(f) SGI has the full right, power and authority to assign and transfer to LFC
Co. the Assigned Rights in accordance with the terms and provisions of this
Agreement,
(g) The Assigned Rights do not infringe on or violate any right of any third
party, and
(h) There is no action, suit, claim, proceeding or governmental investigation
pending or, to the best of SGI's knowledge, threatened against SGI with respect
to the Assigned Rights.
Article 4. Indemnification
SGI agrees to indemnify, hold harmless and defend LFC, LFC Affiliates, their
respective directors, officers, employees and agents, the directors, officers,
and employees (collectively, the Indemnified LFC Parties") from, against and
with respect to any claims, suits, demands, judgments, causes of action,
damages, costs and expenses (including, without limitation, attorneys fees and
litigation costs and expenses) arising out of (i) any breach of any
representation, warranty, statement or covenant by SGI, or any distributor,
agent or representative of SGI, made or given in or in connection with this
Agreement and (ii) any actual or alleged infringement of the Assigned Rights
arising out of acts or events occurring prior to the date of this Agreement.
This indemnification shall survive the execution of this Agreement and payment
by LFC Co. of the Contract Price (defined below).
Article 5. Covenants
5.1 SGI shall obtain, comply with the terms of and do all that is necessary to
maintain in full force and effect all authorizations, approvals, licenses and
consents required in or by the applicable laws and regulations to enable it
lawfully to enter and perform its obligations under this Agreement or to ensure
the legality, validity, enforceability or admissibility in evidence of this
Agreement.
5.2 SGI shall, whenever requested, promptly communicate to LFC Co. or its
representatives any facts known to it relating to any of the Assigned Rights,
testify by affidavit or otherwise in any interference or legal proceedings
involving any of the Assigned Rights, and execute any additional instruments,
documents, conveyances or assurances, or take such other actions, that may be
necessary or reasonably desirable to enable LFC Co. or its representatives,
successors, nominees or assigns to secure full and complete protection for each
of the Assigned Rights or that may be necessary or reasonably desirable to vest
LFC Co. or its successor, nominee or assign the rights conveyed hereunder in and
to each of the Assigned Rights, including, but not limited to, authorizing and
permitting LFC Co. to record singly, without need of further participation of
<PAGE>
SGI, LFC Co.'s ownership of any thereof with the US Patent office or any other
governmental authority, agency or body.
5.3 SGI shall not assign, mortgage, charge, pledge or encumber the whole or any
part of the Assigned Rights, any Partnership Interest or any of the LFC
Technology to any third party.
Article 6. Price and Pavment
In consideration of the assignment by SGI to LFC of the Assigned Rights, LFC Co.
shall pay to SGI Seven Hundred Fifty Thousand US Dollars (US$750,000) (the
"Contract Price") upon the Closing Date (defined below) by wire transfer to a
bank account of SGI designated no less than three (3) business days prior to the
Closing Date.
Article 7. Closing
The Closing Date shall be the date upon which MLFC receives written confirmation
that the instruments of assignment of each and all of the LFC Patents have been
filed for recordation with the U.S. Patent and Trademark office evidencing
assignments of the LFC Patents (a) from the Partnership to SGI and (b) from SGI
to LFC Co.
Article 8. Confidentiality
The parties agree that Section 4 of the Second Amendment to LFC Technologies LLC
Operating Agreement executed concurrently herewith shall be applicable to all
confidential information with respect to the Assigned Rights and the LFC
Technology.
Article 9. Miscellaneous
9.1 This Agreement and the Related Agreements, together with any exhibits and
schedules hereto and thereto, contain the entire agreement and understanding
between the parties with respect to the subject matter hereof, and merge all
prior discussions, representations and negotiations with respect to the subject
matter of this Agreement.
9.2 SGI shall not assign or transfer any of the rights or obligations hereunder
without the prior written consent of LFC Co.
9.3 This Agreement is made in accordance with and shall be governed by and
construed in accordance with the laws of the State of California, U.S.A., as
applied to contracts executed and performed entirely with the State of
California, without regard to conflicts of laws rules.
9.4 If a dispute arises between the parties relating to the interpretation or
performance of or non-performance under this Agreement or the grounds for the
termination thereof, the parties agree to hold a meeting promptly following the
request of a party, attended by individuals with decision-making authority
regarding the dispute, to attempt in good faith to negotiate a resolution of the
dispute prior to pursuing other available remedies. If, within thirty (30) days
after such meeting, the parties have not succeeded in negotiating a resolution
of the dispute, such dispute shall be submitted to final and binding arbitration
in Los Angeles, California in accordance with the rules of the American
Arbitration Association as in effect as of the date of this Agreement. To the
extent not provided under the rules of the American Arbitration Association, the
parties shall have the right of discovery as accorded to parties in civil
litigation under the U.S. Federal Rules of Civil Procedure. The parties shall
bear the cost of arbitration equally unless the arbitrators require the
non-prevailing party to bear all or any unequal portion of the prevailing
party's costs (including, without limitation, the prevailing party's reasonable
attorneys' fees). The arbitrators will be instructed to prepare and deliver a
written, reasoned opinion conferring their decision. Decisions of the
arbitrators shall be made by a majority vote. The award rendered in an
arbitration commenced hereunder shall be final and conclusive and judgment
thereon may be rendered in any court having jurisdiction for its enforcement.
<PAGE>
The rights and obligations of the parties to arbitrate any dispute relating to
the interpretation or performance of or non-performance under this Agreement or
the grounds for the termination thereof shall survive the expiration or
termination of this Agreement for any reason and shall apply notwithstanding
compliance or non-use of the good faith resolution procedures of this Section.
Notwithstanding the foregoing, in the event of any breach or threatened or
imminent breach of the provisions of this Agreement intended to protect
proprietary information or designed to restrict the use of intellectual or
industrial property rights, the parties hereto may seek temporary or
intermediate injunctive relief (and similar remedies) from a court of competent
jurisdiction and without having to pursue the good faith resolution efforts of
this Section. For purposes of any litigation pursuant to the foregoing sentence
or for purposes of enforcing the decision of the arbitrator pursuant to this
Section, SGI and LFC Co. hereby (i) consent to the exclusive jurisdiction of
Federal and state courts located in Los Angeles, California, (ii) agree not to
contest venue before such courts on grounds of forum non conveniens or
otherwise, and (iii) agree that service of process may be had by mail or by any
other method permitted by applicable laws and rules.
Upon written request by either party, the arbitration shall be consolidated with
any other arbitration involving any dispute, claim or controversy arising out of
or in relation to any of the Related Agreements or any other document with
respect thereto, or the breach, termination or invalidity thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date and year first above
written.
SGI International, a Utah Corporation LFC Technologies, LLC
By: /S/ MICHAEL L. ROSE By: /S/ SEIJI SHIRAKI
Name: Michael L. Rose Name: Se Shiraki
Title: President and CEO Title: Chief Executive Officer
LFC TECHNOLOGIES, LLC
Second Amendment to the License Agreement
This Second Amendment to the License Agreement (this Second Amendment"), made
and entered into as of October 29, 1999, by and between LFC Technologies, LLC, a
Delaware Limited Liability Company ("LFC Co.") and SGI International, a Utah
corporation (~SGI"),
WITNESSETH:
WHEREAS, LFC Co. and SGI entered into a License Agreement and Amendment thereto
dated as of January 14, 1999 (the "Original Agreement") whereby SGI agreed to
grant to LFC Co. the license to use the LFC Technology;
WHEREAS, the parties hereto executed a letter of intent dated as of September
24, 1999 (the "Letter of Intent") with Mitsubishi Corporation, MLFC Corporation
and Mitsubishi Heavy Industries, Ltd. whereby SGI expressed its intention to
sell and assign to LFC Co. (i) all of its present interests in the LFC
Technology free from any lien or encumbrance in consideration of the payment by
LFC Co. in the sum of US$750,000 upon terms and with the conditions acceptable
to MLFC Corporation (the "First Transfer"); and (ii) an additional fifty percent
(50%) interest in the LFC Technology free from any lien or encumbrance in
consideration of the payment by LFC Co. of an additional US$750,000 upon terms
and conditions acceptable to MLFC Corporation (the "Second Transfer"); and
WHEREAS, subject to the completion of the First Transfer, the parties hereto
desire to amend the Original Agreement in accordance with the terms and
conditions hereof,
NOW, THERFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree to amend the Original Agreement as follows:
Article 1. Definition
Unless otherwise specifically provided for herein, all of the capitalized terms
shall have the same meaning as set forth in the Original Agreement.
Article 2. Acknowledgement and Amendment
2.1 It is hereby acknowledged and agreed that:
(a) MLFC Corporation entered into a Services Agreement with SGI pursuant to
Article 5 of the Original Agreement;
(b) As a result of the First Transfer by SGI to LFC Co. of its fifty percent
(50%) undivided rights and interests in the LFC Technology, SGI can no longer
grant the license to LFC Co. pursuant to the terms and conditions of the
Original Agreement, but SGI shall remain liable to LFC Co. for the performance
of its obligations under Section 3.2 of the Original Agreement;
(c) The parties hereto shall be released and forever discharged from all of the
obligations under Sections 2, 3.1, 4, 5, 6, 8, 9, 10.1-10.4 and 13.8 of the
Original Agreement (the Deleted Rights and Obligations") and the Original
Agreement shall terminate partially with respect to the Deleted Rights and
Obligations.
(d) From and after SGI's acquisition of an additional fifty percent (50%)
interest in the LFC Technology from Bluegrass Coal Holding Company or any
affiliate thereof and until completion of the Second Transfer, SGI shall not
sell, asign,
<PAGE>
license or otherwise convey to any third party any right, title or interest in
or to the LFC Technology.
2.2 Except for the Deleted Rights and Obligations, the Original Agreement shall
remain in full force and effect, as amended by the provisions hereof, and the
parties hereto shall perform all of its obligations and exercise all of its
rights in accordance with the terms and conditions of the Original Agreement as
so amended.
Article 3. Effectiveness
3.1 This Second Amendment shall become effective only upon the completion of the
First Transfer pursuant to the terms and conditions acceptable to MLFC
Corporation (the "Closing").
3.2 Until the Closing has occurred, the Original Agreement shall remain in full
force and effect without any amendment as set forth herein.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be
executed by their respective duly authorized representatives as of the day and
year first above written.
LFC Technologies, LLC, a California SGI International,
limited liability corporation a Utah corporation
By: /S/ SEIJI SHIRAKI By: /S/ MICHAEL L. ROSE
Name: Seiji Shiraki Name: Michael L. Rose
Title: Chief Executive Officer Title: President and CEO
MLFC Corporation, a California corporation
By: /S/ MASAHIDE KONISHI
Name: Masahide Konishi
Title: President
LFC TECHNOLOGIES. LLC
ADDENDUM TO THE AMENDED AND RESTATED SERVICE AGREEMENT
This Addendum to the Amended and Restated Service Agreement (this "Agreement")
is entered into effective as of October 29, 1999 (the "Effective Date"), by and
among MLFC Corporation, a California corporation ("MLFC"), LFC Technologies,
LLC, a Delaware limited liability company ("LFC Co.") and SGI International, a
Utah corporation ("Developer") with respect to the Amended and Restated Service
Agreement dated as of January 14, 1999 among MLFC, LFC Co. and the Developer
(the "Original Agreement").
The parties hereto agree as follows:
1. Notwithstanding the provisions of Article 4 of the Original Agreement, the
Developer requested and LFC Co. accepted to accelerate the due date of the sum
of US$500,000 as the Annual Payment payable for the remainder of the initial
term of the Original Agreement (the "Second Annual Payment").
2. Pursuant to the request of the Developer, LFC Co. has paid to the Developer
in full the Second Annual Payment in August, 1999.
3. As a result of payment by LFC Co. of the Second Annual Payment as set forth
in Section 2 above, LFC Co. has paid to the Developer the aggregate amounts of
US$1,000,000 equivalent to full payment of the Annual Payments due during the
initial term of the Original Agreement under Article 4 thereof, and LFC Co.
shall be released and forever discharged from any and all obligation to pay any
further Annual Payments during such initial term under Article 4 of the Original
Agreement.
4. The Developer shall continue to perform all of its obligations under the
Original Agreement during the initial term thereof strictly in accordance with
the terms and conditions thereof.
5. Except for the due date of the Second Annual Payment, the Original Agreement
shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives as of the date and year
first above written.
LFC Technologies, LLC SGI International, a Utah Corporation
By: /S/ SEIJI SHIRAKI By: /S/ MICHAEL L. ROSE
Name: Seiji, Shiraki Name: Michael L. Rose
Title: Chief Executive Officer Title: President and CEO
MLFC Corporation, a California corporation
By: /S/ MASAHIDE KONISI
Name: Masahide Konishi
Title: President
TRANSFER AND DEVELOPMENT AGREEMENT
This Transfer and Development Agreement (the "Agreement") is made effective as
of October 29, 1999 (the "Effective Date"), by and between SGI International, a
corporation organized and existing under the laws of Utah, having a place of
business at 1200 Prospect St., Suite 325, La Jolla, California 92037, USA
("SGI") and Mitsubishi Heavy Industries, a corporation ("MHI") organized and
existing under the laws of Japan, having a place of business at 5-1 Marunouchi 2
Chome, Chiyoda-Ku, Tokyo, Japan ("MHI" ).
RECITALS
A. SGI is the inventor of the LFC technology which upgrades low grade coal into
a higher Btu coal and produces coal liquids.
B. SGI entered into a partnership with SMC Mining Company whose name was later
changed to Bluegrass Coal Holding Company and whose wholly-owned subsidiary,
ENCOAL Corporation constructed a liquids from Coal ("LFC") Demonstration Plant
(the "Plant") in Gillette, Wyoming.
C. SGI holds a fifty percent (50%) partnership interest (the "Partnership
Interest") and Bluegrass holds the other fifty percent (50%) partnership
interest (the "Bluegrass Partnership Interest") in a California Partnership,
the TEK-KOL Partnership that owns the technology used in the Plant.
D. SGI entered into a joint venture with Mitsubishi Corporation ("MC") on
January 14, 1999 and created LFC Technologies LLC ("LFC Co."), which is
equally owned by SGI and MC.
E. MHI has provided assistance to SGI and LFC Co. in attempting to develop the
LFC Technology and be involved in product sales in China and throughout the
world.
F. On April 22, 1999, SGI entered into an acquisition agreement with the
present owners (AEI Resources) of Bluegrass and ENCOAL Corporation to
acquire the Plant, the Bluegrass Partnership Interest and all LFC interests
(the "Acquisition") owned by Bluegrass or AEI Resources.
G. As part of a restructuring of the joint venture between MC and SGI described
more specifically in a Letter of Intent dated September 24, 1999 (the "LOI") SGI
intends to convey all of the interest in the LFC Technology to LFC Co. The
first Assignment (the "First Transfer") will convey all of SGI's interests
prior to the close of the Acquisition in the LFC patents (described hereto in
Exhibit A), and in the LFC trade secret information (but excluding the Plant
and all tangible property) (the "LFC Technology") to LFC Co.
H. Effective on the completion of the Acquisition (the "Close",) from AEI
Resources, SGI intends to assign (the "Second Transfer") the other fifty
percent (50%) of the LFC Technology to LFC Co such that LFC Co. will own
one hundred percent (100%) of the LFC Technology.
I. In order to assist SGI in completing the Close with AEI Resources MHI is
willing to execute an agreement titled Waiver and Release (the "Release")
by and Between Mitsubishi Heavy Industries and AEI Resources substantially
in the form attached hereto as Exhibit B in order to obtain certain rights
set forth in the LOI and to be able to be involved in marketing the LFC
Technology and provide engineering services related thereto.
J. The Release releases AEI Resources' subsidiary from an obligation to pay
$1.13 million dollars for engineering work performed for that subsidiary.
<PAGE>
AGREEMENT
Now Therefore, in consideration of the matters set forth in the Recitals, and
for other good and valuable consideration, the parties hereto agree as follows:
1. The Release. MHI shall immediately upon the execution of this Agreement
execute the Release attached hereto as Exhibit B and mail the original by UPS,
FED-EX or the like to SGI for its benefit in completing the Close with AEI
Resources.
2. The Close. SGI agrees that it will not transfer the Release absolutely to AEI
Resources unless it completes the Close of the Acquisition and SGI has executed
an assignment for the Second Transfer making that Second Transfer occur
concurrent with the Close. A copy of the assignment which will be executed in
substantially the same form for the Second Transfer is attached hereto as
Exhibit C.
3. SGI's Obligations. SGI agrees that as consideration to MHI for its execution
of the Release, SGI will assume the obligation to make payment of the sum of
$1.13 million (the "Payment Obligation").
4. SGI's Release. MHI agrees that it hereby releases SGI from the Payment
Obligation on the occurrence of the Second Transfer.
5. Lack of Second Transfer. Both parties hereto agree that if the Second
Transfer does not occur or is terminated or cancelled for any reason that SGI
will continue to have the Payment Obligation until it transmits the Release back
to MHI, at which time it shall be released from any obligation under the Payment
Obligation, and AEI Resources shall have the obligation to perform the Payment
Obligation immediately after such termination, cancellation or failure to occur
of the Second Transfer.
6. Further Agreements. Neither party shall have any obligation to enter into any
further agreement with the other except as is, in its sole judgement may deem
advisable. It is understood that no patent, copyright, trademark or other
proprietary right or license is granted by this Agreement.
7. Effective Date and Termination This agreement shall be effective as of the
Effective Date and shall continue until December 31, 1999.
8. Authority. Each party warrants and represents that it possesses all necessary
powers, rights and authority to lawfully make the disclosures subject in the
Agreement
9. Miscellaneous. This Agreement represents the entire understanding and
agreement of the parties and supersedes all prior communications, agreements and
understandings relating to the subject matter hereof. This Agreement may not be
assigned by either party without the prior written consent of the other.
In Witness Whereof, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives on dates specified below.
Mitsubishi Heavy Industries
BY:
Its:
Dated:
SGI International, Inc.
BY:
Its:
Dated:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SGI
International's Form 10-QSB for the nine month period ended September 30, 1999,
and is qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<TOTAL-LIABILITY-AND-EQUITY> 4,158,962
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