UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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)
(619) 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 May 10,
1999, was 35,412,817.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
<PAGE>
TABLE OF CONTENTS
FORM 10-QSB
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
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 12
Results of Operations 13
Liquidity and Capital Resources 14
Year 2000 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
PART III. SIGNATURES 18
</TABLE>
2
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SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1999 1998
(Unaudited)
========================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 139,837 $ 239,885
Restricted time deposit 402,500 402,500
Receivable from TEK-KOL Partnership 78,479 78,479
Trade accounts receivable, less allowance for doubtful
accounts of $84,460 268,356 229,759
Costs and estimated earnings in excess of billings on contracts 50,093 275,967
Inventories 63,879 64,371
Prepaid expenses and other current assets 69,777 83,283
- --------------------------------------------------------------------------------------------------------
Total current assets 1,072,921 1,374,244
- --------------------------------------------------------------------------------------------------------
LFC Process related assets:
Royalty rights, net 1,178,438 1,257,000
LFC cogeneration project, net 289,532 315,853
Investment in LFC investees 491,232 490,232
Notes receivable, net 150,000 150,000
Australia LFC project, net - 86,877
LFC Process Control 53,738 3,834
Other technological assets, net 34,218 27,250
- --------------------------------------------------------------------------------------------------------
2,197,158 2,331,046
Property and equipment, net of accumulated
depreciation of $1,023,393 and $920,941 670,932 766,695
Goodwill, net of accumulated amortization of $156,704 and $144,721 323,540 335,523
- --------------------------------------------------------------------------------------------------------
$ 4,264,551 $ 4,807,508
========================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 396,641 $ 224,310
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and estimated earnings on contracts 12,246 156,411
Current maturities of long-term notes payable 1,451,875 690,000
12% convertible debentures 3,414,898 3,494,880
Accrued salaries, benefits and related taxes 288,525 139,486
Payable to TEK-KOL Partnership 180,172 180,172
Interest payable 171,019 161,991
Other accrued expenses 124,930 189,487
- --------------------------------------------------------------------------------------------------------
Total current liabilities 6,440,306 5,636,737
Long-term notes payable, less current maturities 102,375 104,750
- --------------------------------------------------------------------------------------------------------
Total liabilities 6,542,681 5,741,487
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies
Mandatorily redeemable preferred stock $.01 par value liquidation
value of $1,120,000 plus accumulated dividends (Note 6) 1,035,739 1,449,348
Stockholders' deficiency
Convertible preferred stock 635 641
Common stock 47,209,782 45,688,545
Paid-in capital 7,269,599 8,258,140
Accumulated deficit (57,793,885) (56,330,653)
- --------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (3,313,869) (2,383,327)
- --------------------------------------------------------------------------------------------------------
$ 4,264,551 $ 4,807,508
========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended March 31, 1999 1998
=====================================================================================================
<S> <C> <C>
Revenues:
Net sales $ 683,508 $ 1,088,912
Other 17,732 12,647
- -----------------------------------------------------------------------------------------------------
701,240 1,101,559
- -----------------------------------------------------------------------------------------------------
Expenses:
Cost of sales 476,218 786,600
Engineering, research and consulting 282,725 247,230
Loss on investment in LFC investees - 231,214
Selling, general and administrative 748,624 681,466
Legal and accounting 158,672 185,766
Depreciation and amortization 311,477 192,359
Interest 150,782 136,012
- -----------------------------------------------------------------------------------------------------
2,128,498 2,460,647
- -----------------------------------------------------------------------------------------------------
Net loss (1,427,258) (1,359,088)
Imputed preferred stock dividends and accretion on
convertible and mandatorily redeemable preferred stock 35,974 1,312,519
- -----------------------------------------------------------------------------------------------------
Net loss applicable to common stock (1,463,232) (2,671,607)
=====================================================================================================
Net loss per common share - basic $ (0.06) $ (0.25)
=====================================================================================================
Weighted average common shares outstanding 24,530,552 10,768,073
=====================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
<TABLE>
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 services 60,000 15,000 15,000
Issuance of common stock for
convertible debentures 286,762 68,107 68,107
Issuance of common stock for
mandatorily redeemable preferred stock 3,210,808 449,583 449,583
Conversion of preferred stock (584) (6) 2,490,403 988,547 (988,541) -
Accretion on mandatorily redeemable
preferred stock (35,974) (35,974)
Net loss (1,427,258) (1,427,258)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 63,460 $635 27,616,317 $47,209,782 $7,269,599 $(57,793,885) $(3,313,869)
===================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Three months ended March 31, 1999 1998
==================================================================================================
<S> <C> <C>
Operating activities:
Net loss $ (1,427,258) $ (1,359,088)
Adjustments to reconcile net loss to net cash used
in operating activities:
Equity in net loss of LFC investees - 231,214
Depreciation and amortization 311,477 192,359
Common stock issued for services 15,000 20,612
Non-employee compensation expense on issuance of warrants - 18,300
Changes in operating assets and liabilities:
Receivable from TEK-KOL Partnership - (21,407)
Trade accounts receivable 187,277 (430,921)
Inventories 492 301
Prepaid expenses and other current assets 13,506 142,447
Accounts payable 172,331 106,088
Billings in excess of costs and estimated
earnings on contracts (144,165) 525,607
Accrued salaries, benefits and related taxes 149,039 (58,116)
Interest payable 9,028 (71)
Other accrued expenses (64,557) (92,555)
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (777,830) (725,230)
- --------------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Additions to LFC Process controls and
other technological assets (49,904) -
Investment in LFC investees (1,000) (21,333)
Payable to TEK-KOL Partnership - (100,000)
Purchase of property and equipment (9,692) (115,044)
Other assets (9,247) (3,116)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (69,843) (239,493)
- --------------------------------------------------------------------------------------------------
Financing activities:
Payments of notes payable (2,375) (2,375)
Proceeds from issuance of debt 750,000 -
Proceeds from issuance of common stock - 156,800
Proceeds from issuance of convertible preferred stock - 2,312,700
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 747,625 2,467,125
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (100,048) 1,502,402
Cash at beginning of period 239,885 429,232
- --------------------------------------------------------------------------------------------------
Cash at end of period $ 139,837 $ 1,931,634
==================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 134,215 $ 108,620
Supplemental disclosure of non-cash activities:
Common stock issued for services $ 15,000 $ 20,612
Conversion of preferred stock $ 988,547 $ 1,794,107
Common stock issued for convertible debentures $ 68,107 $ -
Common stock issued for mandatorily redeemable
preferred stock $ 449,583 $ -
==================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International (the "Company") for the three months ended March 31, 1999, and
1998, 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
March 31, 1999, and the consolidated results of operations and cash flows for
the three months ended March 31, 1999, and 1998. The results of operations for
the three months ended March 31, 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, is dependent upon the Company's
ability to adequately fund its on-going development operations and 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 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 $5.4 million and an accumulated
deficit of $57.8 million at March 31, 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 public or private sales of its
securities to fund working capital requirements.
The Company will also seek funding through additional strategic partnerships,
joint ventures or similar arrangements to commercialize the technologies. There
can be no assurance that any
7
<PAGE>
collaborative financing arrangements through a joint venture, and/or with
strategic partners, will be available when needed, or on terms acceptable to
the Company. If adequate funds are not available, the Company may be required
to curtail or terminate one or more of its operating activities. The Company
is engaged in continuing negotiation to secure additional capital and
financing, and while management believes funds can be raised, there is no
assurance that their efforts will be successful. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
(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 March 31, 1999:
Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and
U.S. Clean Coal Refineries, Inc. ("USCCR"). AMS designs, manufactures and
installs automated assembly equipment, and was acquired in October 1995. 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
During the three months ended March 31, 1999, the Company issued one note
payable for $250,000 to one domestic accredited investor and five notes payable
aggregating $500,000 to one foreign corporation pursuant to the exemptions
provided by Section 4(2) of the Securities Act and Regulation D. All notes
are unsecured, have been extended prior to their original due dates, bear
interest at a rate of 12% per annum and are due upon thirty days written
demand, but no sooner than June 27, 1999. All notes payable, with interest
accrued thereon, are payable in cash; except that the five notes due the
foreign corporation aggregating $500,000 may be paid, at the Company's option
in unrestricted common stock.
During the three months ended March 31, 1999, the Company issued 60,000
restricted common shares to two domestic individuals for services rendered,
valued at approximately $15,000. These securities were issued pursuant to the
exemptions provided by Section 4(2) of the Securities Act and Regulation D.
(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 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.
8
<PAGE>
(5) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No.131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 requires the disclosure
of financial information on operating segments on the basis used by management
in evaluating performance and deciding how to allocate resources. SFAS No. 131
supercedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. The Company has adopted SFAS No. 131 as of December 31, 1998.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP generally requires that all start-up costs, as defined, be
expensed as incurred. Any required adjustment, pursuant to SOP 98-5, are to be
accounted for as the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion No. 20, "Accounting Changes."
Entities adopting SOP 98-5 are not required to report the pro forma effects of
retroactive application. SOP 98-5 is effective in 1999 and had no material
impact on the Company's consolidated results of operations or related
disclosures for the three months ended March 31, 1999.
(6) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Property and Equipment
<TABLE>
March 31, December 31,
1999 1998
=================================================================
<S> <C> <C>
Office furniture and fixtures $ 114,000 $ 118,000
Laboratory equipment 1,018,000 1,018,000
Machinery and equipment 126,000 123,000
Computer equipment 382,000 377,000
Leasehold improvements 54,000 52,000
- -----------------------------------------------------------------
1,694,000 1,688,000
Less accumulated depreciation (1,023,000) (921,000)
- -----------------------------------------------------------------
Net property and equipment $ 671,000 $ 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>
March 31, 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 (449,000) -
Accretion of amounts payable
upon redemption 36,000 36,000
- ----------------------------------------------------------------
Balance at end of period $ 1,036,000 $ 1,449,000
================================================================
</TABLE>
9
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(7) SEGMENT REPORTING
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which the Company adopted in 1998. The
Company identifies its segments based on strategic business units that are in
turn based along technological lines. These strategic business units offer
products and services to different markets in accordance with their underlying
technology. Accordingly, the Company's three business segments are centered on
the operations associated with the LFC Process, the OCET Process and automated
assembly and manufacturing systems. The Company's operations are primarily
centered in the United States, however, through its various collaborative
arrangements (formerly with TEK-KOL and now with Mitsubishi Corporation) the
Company will continue to market the LFC Process technology on an international
basis. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance of each segment based on profit or loss from operations before
income taxes. The Company has no significant intersegment sales or transfers.
<TABLE>
Three months ended Automated LFC OCET
March 31, 1999 Assembly Process Process Corporate Total
===============================================================================================================
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 559,000 $ 125,000 $ 10,000 $ 7,000 $ 701,000
Net loss (168,000) (90,000) (347,000) (822,000) (1,427,000)
Identifiable assets, net 1,032,000 2,163,000 554,000 515,211 4,265,000
Depreciation & Amortization 29,000 192,000 87,000 3,000 311,000
Engineering, research and
consulting expenditures - 23,000 260,000 - 283,000
Interest expense 1,000 - - 150,000 151,000
- ---------------------------------------------------------------------------------------------------------------
1998
Revenues 1,089,000 - - 13,000 1,102,000
Net profit (loss) 68,000 (340,000) (304,000) (783,000) (1,359,000)
Equity in operations of investee - (231,000) - - (231,000)
Identifiable assets, net 1,971,000 2,419,000 671,000 2,057,000 7,118,000
Depreciation & Amortization 24,000 112,000 53,000 3,000 192,000
Engineering, research and
consulting expenditures - - 247,000 - 247,000
Interest expense - - - 136,000 136,000
===============================================================================================================
</TABLE>
(8) INVESTMENT IN LFC JOINT VENTURES
Effective January 14, 1999, 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 LFC Joint Venture Formation Agreement between the Company and MLFC provides
for the formation of a limited liability company called LFC Technologies, LLC
("LFC Tech") to conduct research and development activities relating to the LFC
Process, for MLFC to market the LFC Process outside the U.S. and for the Company
to market the LFC Process inside the U.S. The Company
10
<PAGE>
accounts for its investment in LFC Tech using the equity method. Accordingly,
the Company's portion of the quarterly loss on investment in LFC investee, of
$125,000, has been eliminated against $125,000 of service revenues, as if the
joint venture were consolidated.
The License Agreement between LFC Tech and the Company provides for the grant to
LFC Tech of a non-exclusive worldwide royalty-free license in connection with
purposes of LFC Tech, to use the LFC Process and related rights, including
improvements developed by LFC Tech to reduce the costs of an LFC plant, and to
design, contract and sell LFC-related products until January 14, 2001, unless
extended by mutual agreement. The fee for the license to MLFC was the execution
by LFC Tech of a Services Agreement with the Company. The License Agreement
requires the Company to provide all confidential information related to the LFC
Process to LFC Tech. The Company also agreed, among other things, to permit the
technical employees of LFC Tech to inspect the Demonstration Plant, disclose
confidential LFC information, provide copies of technical data regarding the
design, construction and operation of the Demonstration Plant and to provide
copies of all patent applications.
The Operating Agreement, as amended between MLFC and the Company, governs the
management of the new joint venture company, LFC Tech, and is for a term
extending through January 14, 2001. The purpose of LFC Tech is to conduct
research and development activities with respect to the LFC Process and other
approved business. The Company and MLFC each must contribute $125,000 every
three months for two years to LFC Tech. Each will have a 50 percent interest in
profits and losses of the business operated by LFC Tech which is managed by two
managers, one from the Company and one from MLFC. Upon the occurrence of certain
"milestone" events, MLFC and the Company shall determine by mutual agreement the
terms and conditions for forming a new company ("Newco") to hold the LFC patents
and related technology and MLFC will be required to pay to the Company $4.0
million for the transfer of the exclusive license for the LFC Process into Newco
("Transfer Payment"). The Transfer Payment is to be paid to the Company only on
the first to occur of the following: (1) the start of construction or receipt of
an irrevocable commitment to start with construction of an LFC plant with a
minimum capacity of 15,000 tons per day; (2) the receipt by MLFC of at least
$4.0 million in connection with the admission of a new equity participant into
Newco, and the licensing or royalties from one or more LFC plants; or (3) such
other conditions as the parties agree. In addition, the Transfer Payment is also
conditioned on all of the following: (a) MLFC and the Company entering into a
shareholders' agreement satisfactory to both parties; (b) the Company has
obtained and transferred to Newco the entire ownership, subject to an adjustment
provision in the event less than the entire ownership is transferred, in the LFC
Process and improvements, free of liens or encumbrances; (c) through the
formation of Newco, MLFC acquires a 50 percent equity interest in the LFC
Process and improvements; and (d) the Company grants to MLFC exclusive rights to
manufacture and sell new plants incorporating the LFC Process and related
improvements and to use or to grant to third parties sublicenses to use or grant
the LFC Process and improvements.
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 engineering work. The Services Agreement is for a
minimum period of two years and provides a fixed payment to the Company of $1.0
million per year, payable $250,000 per quarter after an initial payment of
$250,000 upon execution of the agreement.
The Security Agreement between the Company and MLFC grants MLFC a security
interest in all the LFC Process related patents, applications, renewals, and
continuations.
11
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(9) SUBSEQUENT EVENTS
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' 50% interest in the Liquids From Coal
("LFC") Process; the ENCOAL corporation, which owns the ENCOAL LFC demonstration
plant; certain existing permits necessary to build an LFC plant near Gillette,
Wyoming; and all other tangible and intangible LFC assets.
The consideration to be paid by the Company for the acquisition of the above
described assets consists of a $2 million dollar promissory note with interest
thereon at the prime rate due in five years, the waiver of a $1.13 million
invoice due Mitsubishi Heavy Industries by Bluegrass and the assumption of
obligations attendant to ownership of ENCOAL Corporation. The acquisition also
calls for a release of all claims between the parties and finalizes the
dissolution of the TEK-KOL Partnership.
The closing of the acquisition is conditioned upon, among other things, the
financing of certain improvements to the ENCOAL plant, 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 assets to be acquired by the Company have been used to provide upgraded coal
and coal liquids to various utilities and industrial customers. The Company
intends to obtain project financing for various planned upgrades to the facility
and continue the use of the assets to produce both PDF and CDL for sale to
utilities, manufacturers and chemical producers. There can be no assurance that
any financing will be obtained, that the Company will complete the acquisition
or if completed that it will generate any revenue or profits for the Company.
(10) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current
period presentation. These changes had no impact on previously reported results
of operations, cash flows or stockholders' equity.
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
12
<PAGE>
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
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.
Net Loss per Common Share. Basic net loss per common share for the period ended
March 31, 1999, decreased approximately $0.07 per share over the same prior year
period after excluding the effect of non-recurring imputed dividends. The 1998,
imputed dividend of approximately $0.12 per common share is primarily associated
with the issuance of convertible preferred stock. Also see Note 4 "Net Loss per
Share" to the condensed consolidated financial statements. The decrease in basic
net loss per share for the current three month period is attributable to an
increase in the weighted average number of common shares outstanding and a net
loss increase before imputed dividends of approximately $68,000 over the prior
three month period.
Sales and Cost of Sales. 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 for the three months
ended March 31, 1999, decreased 37% and 39%, respectively, over 1998. The
Company believes that the decline in sales is primarily the result of a general
slowdown in demand for automated assembly equipment to its high-tech sector.
Although the Company experienced an unanticipated decrease in sales to the
automotive sector it believes that the decrease 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 through the third quarter of 1999.
The continuing weakness of the high-tech sector which began in 1998 as a result
of the turmoil in the Asian financial markets continued into 1999 and the
projected length and severity of the slowdown to this sector is unknown at this
time. Offsetting in part the decrease in to the automotive and high-tech
sectors, AMS experienced a 25% increase in sales to the medical sector over the
same prior year period primarily due to sales to one customer. Sales to this
sector are projected to remain approximately the same for 1999. Gross margin as
a percentage of sales decreased from 28% in 1998 to 16% in 1999 primarily as a
result of reduced business volume.
The decrease in revenues experienced by the Company's automated assembly segment
was partially offset by $125,000 of revenues derived from the Company's services
agreement with LFC Tech, it's joint venture with MLFC.
Other Income. Other income for the three months ended March 31, 1999, remained
substantially unchanged over the same prior year period.
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 months ended March 31,
1999, decreased 100% over the same prior year period. The decrease is primarily
attributable to the termination of the TEK-KOL
13
<PAGE>
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 months ended March 31, 1999,
increased 14% over the same prior year period. The increase is primarily
attributable to an increase in expenses at the OCET laboratory as the Company
continues operation of its process development unit (the "PDU") which began
operation in the third quarter of 1998.
Selling General and Administrative Expenses. Selling general and administrative
expense for the three months ended March 31, 1999, increased 10% over the same
prior year period. The increase is primarily related to the Company's opening of
a marketing office in Denver, Colorado, which occurred in the third quarter of
1998 and an increase in executive personnel. The increase was partially offset
by a reduction in expenses related to public relations and financial
consultants. Selling, general and administrative expenses for AMS remained
relatively unchanged over the same prior year period.
Legal and Accounting Expenses. Legal and accounting expenses for the three
months ended March 31, 1999, decreased 15% over the same prior year period. The
decrease is related primarily to legal 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 months ended March 31, 1999, increased 62% over the same prior
year period due primarily to the Company's PDU being placed in service in the
third quarter of 1998 and construction of additional equipment at the Company's
OCET laboratory. In addition, the Company incurred a non-recurring charge of
approximately $80,000 related primarily to the write-off of start-up costs
pertaining to its Australian LFC project.
Interest Expense. Interest expense for the three months ended March 31, 1999,
increased 11% over the same prior year period. The increase is the result of the
issuance of additional notes payable (see Note 3).
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had assets totaling $4.3 million, including
restricted cash of $0.4 million, and a working capital deficiency of $5.4
million. The Company anticipates continued operating losses over the next twelve
months and has both short-term and long-term liquidity deficiencies as of March
31, 1999. Current notes payable, convertible debentures, and associated accrued
interest aggregating $5.0 million primarily due prior to September 30, 1999,
contribute to the Company's working capital deficiency at March 31, 1999. Other
short-term liquidity requirements are expected to be satisfied from existing
cash balances, proceeds from the sale of future equity securities 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 at March 31, 1999. Over the
long-term, the Company will require substantial additional funds to maintain and
expand its research and
14
<PAGE>
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 future equity
sales, increased positive cash flows from operations, and research or other
collaborative agreements, until such time, if ever, as the commercialization
of the LFC and OCET Processes result in positive cash flows. The Company is
seeking collaborative or other arrangements with larger well capitalized
companies, under which such companies would provide additional capital to the
Company in exchange for exclusive or non-exclusive licenses or other rights to
certain technologies and products the Company is developing. Although the
Company is presently engaged in discussions with a number of suitable
candidate companies, there can be no assurance that an agreement or agreements
will arise from these discussions in a timely manner, or at all, or that
revenues that may be generated thereby will offset operating expenses
sufficiently to reduce the Company's short-term or long-term funding
requirements.
Cash used in operating activities for the three month period ended March 31,
1999, increased 7% over 1998. The use of funds from operating activities is
essentially attributable to the Company's net loss of approximately $1.4
million, for both the three month periods ended March 31, 1999, and 1998. These
losses were incurred primarily as a result of the Company's administrative and
technology development activities.
The Company's investing activities amounted to a use of funds of approximately
$70,000 and $239,000 for the three month period ended March 31, 1999, and 1998,
respectively. This represents a 71% 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 three months ended March 31, 1999, the Company's investing activities
consisted primarily in the acquisition and construction of equipment at the OCET
laboratory; and the acquisition of LFC Process equipment. Additional capital
contributions to the TEK-KOL Partnership are expected to be required from time
to time prior to its final pending dissolution. The Company is required to
contribute one-half of any such required capital contributions. Management
presently estimates that the Company may be required to contribute approximately
$250,000 in 1999 for past operations and dissolution related expenditures. 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 Note 8 of
the notes to condensed consolidated financial statements.) In accordance with
the joint venture agreement, the Company anticipates expenditures of
approximately $500,000 for 1999. This joint venture funding requirement is
anticipated to be offset by the receipt of $1.0 million from the joint venture
in accordance with a service agreement executed by the parties. The amount of
funds used for investing activities in a given period are directly related to
development requirements and funds availability. In 1999 the Company is
projecting capital expenditures for equipment at OCET and AMS to remain
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. The Company intends to make
improvements and obtain project financing estimated at $10 million.
Other than the previously described acquisition, the Company does not have
material commitments for capital expenditures as of March 31, 1999.
The Company's financing activities raised approximately $0.75 million (see Note
3 to the condensed consolidated financial statements) for the three month period
ended March 31, 1999, versus $2.5 million for the same prior year period. These
funds were raised primarily through the private
15
<PAGE>
placement of debt 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
The Year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process financial and operational information incorrectly.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the year 2000 date are a
known risk. The Company has assessed the impact on its computer systems of the
Year 2000 issue. The financial impact of making the required systems changes are
not expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
Additionally, the Company is reviewing the year 2000 issue with it's suppliers,
shippers, customers, and other external business partners. There can by no
assurance, however, that all the systems of its suppliers, shippers, customers
and other external business partners will function adequately. If the systems of
the Company's suppliers, shippers, customers, and other external business
partners are not year 2000 compliant, it could have a material adverse effect on
the Company.
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. The Company is a
named party in the Walsh vs. AMS case, filed on September 7, 1997, in the San
Diego Superior Court. The Walsh case relates to events occurring prior to the
acquisition of AMS by the Company. The lawsuit asserts claims, for among other
things, breach of contract relating to a loan of approximately $300,000. AMS has
filed an answer denying liability and the case in currently in trial. In the
opinion of the Company, the pending litigation, if adversely decided, should not
have a material adverse effect on the Company.
On October 26, 1998, AMS filed a lawsuit against Anatol Automation and Anatol
Manufacturing in Orange County Superior Court. The lawsuit seeks approximately
$600,000 in compensatory damages and in excess of $2,000,000 in punitive damages
for interference with advantageous business relationships, interference with
contract, and appropriation of trade secrets in violation of the California
Uniform Trade Secret Act. Anatol has denied any wrong doing and the case is
currently in discovery.
16
<PAGE>
ITEM 2. CHANGES IN SECURITIES
During the quarter ended March 31, 1999, the Company issued 60,000 restricted
common shares to two domestic individuals for services rendered, valued at
approximately $15,000. These securities were issued pursuant to the exemptions
provided by Section 4(2) of the Securities Act and Regulation D. Investment
representations were obtained from the investors and legends were placed on the
certificates.
During the three months ended March 31, 1999, the Company issued one note
payable for $250,000 to one domestic accredited investor and five notes payable
aggregating $500,000 to one foreign corporation pursuant to the exemptions
provided by Section 4(2) of the Securities Act and Regulation D. All notes
are unsecured, have been extended prior to their original due dates, bear
interest at a rate of 12% per annum and are due upon thirty days written
demand, but no sooner than June 27, 1999. All notes payable, with interest
accrued thereon, are payable in cash; except that the five notes due the
foreign corporation aggregating $500,000 may be paid, at the Company's option
in unrestricted common stock.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
[NONE]
ITEM 5. OTHER INFORMATION
[NONE]
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Promissory note dated January 28, 1999, for $250,000 payable to Ben
Reppond.(1)
4.2 Form of promissory notes payable to Settondown Capital International,
Ltd.(1)
27.1 Financial Data Schedule.(1)
- ----------------
(1) Filed herewith.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the quarter ended March 31, 1999.
17
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
Behalf by the undersigned, thereunto duly authorized.
SGI INTERNATIONAL
/s/ Joseph A. Savoca May 14, 1999
- -----------------------------
Joseph A. Savoca,
Chief Executive Officer
and Chairman of the Board
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.
/s/ Joseph A. Savoca May 14, 1999
- -----------------------------
Joseph A. Savoca,
Chief Executive Officer
and Chairman of the Board
18
AMENDED AND RESTATED
PROMISSORY NOTE
$250,000
SECTION ONE
TERMS OF NOTE
FOR VALUE RECEIVED, SGI INTERNATIONAL, OTC Bulletin Board symbol "SGII"
("the "Debtor"), of 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises
to pay to the order of Ben Reppond (hereinafter "Reppond") of 13217 9th Ave. NW,
Seattle, Washington, 98177-4103, the principal sum of Two Hundred and Fifty
Thousand ($250,000) Dollars with interest thereon at the rate of twelve percent
per annum, payable upon 30 days written demand but no sooner than on June 27,
1999 in cash. The original loan that is the subject of this Promissory Note was
made by Reppond by wire transfer to SGI International on January 28, 1999.
Debtor shall be in default hereunder only after Reppond gives five (5) days
advance written notice to Debtor that it is in default.
SECTION TWO
PREPAYMENT OF NOTE
Prepayment of the full principal balance, along with all unpaid
interest, or any portion of the principal balance, along with any portion
thereof of unpaid interest, is permitted at any time without penalty.
SECTION THREE
EFFECT OF WAIVER OF RIGHTS BY REPPOND
Reppond is not under any obligation to exercise any of his rights under
this note, and failure to exercise his rights under this note or to delay in
exercising any of his rights shall not be deemed a waiver of or in any manner
impair any of the rights of Reppond.
SECTION FOUR
CUMULATIVE RIGHTS AND REMEDIES
The rights and remedies of Reppond specified in this note are
cumulative and do not exclude any other rights or remedies he may otherwise
have.
SECTION FIVE
ACCELERATION ON INSOLVENCY OF DEBTOR
If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy,
or have a petition in bankruptcy filed against it, this note shall become due
and payable immediately without demand or notice.
SECTION SIX
WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR
Debtor hereby waives all acts on the part of Reppond required in fixing
the liability of the party, including among other things presentment, demand,
notice of dishonor, protest, notice of protest, notice of nonpayment, and any
other notice.
SECTION SEVEN
CHOICE OF LAWS
This note shall be governed by and construed in accordance with the
laws of California in all respects, including matters of construction, validity
and performance.
SECTION EIGHT
COSTS OF COLLECTION
Debtor shall pay on demand all costs of collection, including legal
expenses and attorney fees, incurred by Reppond in enforcing this note on
default.
SECTION NINE
INTEREST CHARGES
If a law, which applies to this note and which sets the maximum
interest amount, is finally interpreted so that the interest in connection with
this note exceed the permitted limits, then: (1) any such interest shall be
reduced by the amount necessary to reduce the interest to the permitted limit;
and (2) any sums already collected (if any) from the Debtor which exceed the
permitted limits will be refunded to the Debtor. The note holder may choose to
make this refund by reducing the principal Debtor owes under this note or by
making a direct payment to the Debtor. If a refund reduces the principal, the
reduction will be treated as a partial payment.
SECTION TEN
CONFESSION OF JUDGMENT
The Debtor authorizes any attorney at law to appear in any court of
record in the State of California or any other state or territory of the United
States after this note becomes due, by acceleration, or otherwise, and admit the
maturity of this note, waive the issuing and service of process, and confess
judgment against Debtor in favor of Reppond or any other holder of this note for
the amount then appearing due and the costs of collection, including, reasonable
attorneys fees and legal costs. The Debtor shall also waive all errors, rights
of appeal, and stays of execution. This is a warrant of attorney. However, if
the inclusion of a confession of judgment provision affects the validity,
negotiability, or enforceability of this instrument, the provision shall be
treated as if it did not appear in this instrument; but all remaining terms and
provisions of this instrument shall subsist and be fully effective according to
the tenor of this instrument, as if the confession of judgment provision had
never been included.
Dated: May 10, 1999
SGI INTERNATIONAL
By /s/ JOSEPH A. SAVOCA
-----------------------
Authorized Signatory
PROMISSORY NOTE
$____________
SECTION ONE
TERMS OF NOTE
FOR VALUE RECEIVED, SGI INTERNATIONAL, OTC Bulletin Board symbol "SGII"
(the "Debtor"), of 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises
to pay to the order of SETTONDOWN CAPITAL INTERNATIONAL, LTD. (hereinafter
"SETTONDOWN") of Charlotte House, Charlotte Street, P.O. Box 9204, Nassau,
Bahamas, the principal sum of _______________ ($___________) Dollars with
interest thereon at the rate of twelve percent per annum, payable on _________,
1999, in cash or unrestricted shares of Common Stock of the Debtor at the
closing bid price per share of the Common Stock on the trading date immediately
preceding the day such interest is paid. The original loan that is the subject
of this Promissory Note was made by SETTONDOWN by wire transfer to Union Bank of
California, El Cajon branch, in California, ABA number 122000496, Account number
0080017367 to the account of SGI International on ___________, 1999.
SECTION TWO
PREPAYMENT OF NOTE
Prepayment of the full principal balance, along with all unpaid
interest, or any portion of the principal balance, along with any portion
thereof of unpaid interest, is permitted at any time without penalty.
SECTION THREE
EFFECT OF WAIVER OF RIGHTS BY SETTONDOWN
SETTONDOWN is not under any obligation to exercise any of its rights
under this note, and failure to exercise its rights under this note or to delay
in exercising any of its rights shall not be deemed a waiver of or in any manner
impair any of the rights of SETTONDOWN.
SECTION FOUR
CUMULATIVE RIGHTS AND REMEDIES
The rights and remedies of SETTONDOWN specified in this note are
cumulative and do not exclude any other rights or remedies it may otherwise
have.
SECTION FIVE
ACCELERATION ON INSOLVENCY OF DEBTOR
If Debtor shall be adjudged bankrupt, or file a petition in bankruptcy,
or have a petition in bankruptcy filed against him, this note shall become due
and payable immediately without demand or notice.
SECTION SIX
WAIVER OF PRESENTMENT, PROTEST, AND NOTICE OF DISHONOR
Debtor hereby waives all acts on the part of SETTONDOWN required in
fixing the liability of the party, including among other things presentment,
demand, notice of dishonor, protest, notice of protest, notice of nonpayment,
and any other notice.
SECTION SEVEN
CHOICE OF LAWS
This note shall be governed by and construed in accordance with the
laws of New York in all respects, including matters of construction, validity
and performance.
SECTION EIGHT
COSTS OF COLLECTION
Debtor shall pay on demand all costs of collection, including legal
expenses and attorney fees, incurred by SETTONDOWN in enforcing this note on
default.
SECTION NINE
INTEREST CHARGES
If a law, which applies to this note and which sets the maximum
interest amount, is finally interpreted so that the interest in connection with
this note exceed the permitted limits, then: (1) any such interest shall be
reduced by the amount necessary to reduce the interest to the permitted limit;
and (2) any sums already collected (if any) from the Debtor which exceed the
permitted limits will be refunded to the Debtor. The note holder may choose to
make this refund by reducing the principal Debtor owes under this note or by
making a direct payment to the Debtor. If a refund reduces the principal, the
reduction will be treated as a partial payment.
SECTION TEN
CONFESSION OF JUDGMENT
The Debtor authorizes any attorney at law to appear in any court of
record in the State of New York or any other state or territory of the United
States after this note becomes due, by acceleration, or otherwise, and admit the
maturity of this note, waive the issuing and service of process, and confess
judgment against Debtor in favor of SETTONDOWN or any other holder of this note
for the amount then appearing due and the costs of collection, including,
reasonable attorneys fees and legal costs. The Debtor shall also waive all
errors, rights of appeal, and stays of execution. This is a warrant of attorney.
However, if the inclusion of a confession of judgment provision affects the
validity, negotiability, or enforceability of this instrument, the provision
shall be treated as if it did not appear in this instrument; but all remaining
terms and provisions of this instrument shall subsist and be fully effective
according to the tenor of this instrument, as if the confession of judgment
provision had never been included.
Dated: ___________, 1999
SGI INTERNATIONAL
By /s/ JOHN R. TAYLOR
Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SGI
International's Form 10-QSB for the quarter ended March 31, 1999, and is
qualified in its entirely by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 139,837
<SECURITIES> 402,500
<RECEIVABLES> 481,388
<ALLOWANCES> 84,460
<INVENTORY> 63,879
<CURRENT-ASSETS> 1,072,921
<PP&E> 1,694,325
<DEPRECIATION> 1,023,393
<TOTAL-ASSETS> 4,264,551
<CURRENT-LIABILITIES> 6,440,306
<BONDS> 0
1,035,739
635
<COMMON> 47,209,782
<OTHER-SE> (50,524,286)
<TOTAL-LIABILITY-AND-EQUITY> 4,264,551
<SALES> 683,508
<TOTAL-REVENUES> 701,240
<CGS> 476,218
<TOTAL-COSTS> 476,218
<OTHER-EXPENSES> 1,501,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150,782
<INCOME-PRETAX> (1,427,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,427,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,427,258)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
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