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, 2000
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 May 4,
2000, was 62,792,454.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [x] No
<PAGE>
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 10
Results of Operations 11
Liquidity and Capital Resources 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
PART III. SIGNATURES 17
SGI International
2
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
2000 1999
(Unaudited)
===========================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 568,189 $ 278,391
Restricted time deposit 402,500 402,500
Trade accounts receivable, less allowance for doubtful accounts of $80,320 1,104,310 661,880
Costs and estimated earnings in excess of billings on contracts 106,188 99,580
Inventories 415,234 413,716
Prepaid expenses and other current assets 82,582 102,624
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 2,679,003 1,958,691
- ---------------------------------------------------------------------------------------------------------------------------
LFC royalty rights, net 864,188 942,750
LFC cogeneration project, net 184,247 210,568
Investment in LFC investees 247,960 266,813
LFC related notes receivable, net 150,000 150,000
LFC process equipment, net 395,471 355,886
Other LFC assets, net 26,034 26,757
Property, plant and equipment, net of accumulated
depreciation of $1,416,726 and $1,340,622 2,441,212 2,514,595
Goodwill, net of accumulated amortization of $204,637 and $192,653 275,607 287,591
Interest receivable on notes from stockholders 9,394 -
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,273,116 $ 6,713,651
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 857,124 $ 849,140
Notes payable 946,408 881,408
Accrued salaries, benefits and related taxes 793,168 770,167
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and estimated earnings on contracts 790,686 500,407
Interest payable 185,332 182,492
Other accrued expenses 176,990 188,530
Current maturities of long-term debt 4,750 7,125
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,154,458 3,779,269
Long-term debt, less current maturities 6,277,191 6,250,386
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,431,649 10,029,655
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Minority interest 465,835 471,000
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency:
Convertible preferred stock 605 605
Common stock 51,578,366 49,890,623
Paid-in capital 6,983,567 7,021,879
Accumulated deficit (61,715,906) (60,229,111)
Less notes receivable from stockholders (471,000) (471,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (3,624,368) (3,787,004)
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,273,116 $ 6,713,651
===========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI International
3
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended March 31, 2000 1999
======================================================================================================
<S> <C> <C>
REVENUES:
Contract revenues $ 1,055,711 $ 683,508
EXPENSES:
Cost of sales 809,715 476,218
Engineering, research and development 368,730 282,725
Selling, general and administrative 835,584 748,624
Loss on LFC investees 18,853 -
Legal and accounting 97,475 158,672
Depreciation and amortization 226,109 311,477
- ------------------------------------------------------------------------------------------------------
Total expenses 2,356,466 1,977,716
- ------------------------------------------------------------------------------------------------------
Loss from operations (1,300,755) (1,294,208)
NON-OPERATING INCOME (EXPENSES):
Interest expense (210,227) (150,782)
Other income 19,023 17,732
- ------------------------------------------------------------------------------------------------------
Net loss before minority interests in consolidated subsidiaries (1,491,959) (1,427,258)
Minority interest in loss of consolidated subsidiary 5,164 -
- ------------------------------------------------------------------------------------------------------
Net loss (1,486,795) (1,427,258)
======================================================================================================
PREFERRED STOCK DIVIDENDS:
Imputed dividends for Series 98C 6% mandatorily
redeemable preferred stock - (35,974)
- ------------------------------------------------------------------------------------------------------
Net loss applicable to common stock (1,486,795) (1,463,232)
======================================================================================================
Loss per common share - basic $ (0.03) $ (0.06)
======================================================================================================
Weighted average shares outstanding 57,171,299 24,530,552
======================================================================================================
</TABLE>
SGI International
4
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
<TABLE>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------- ------------------------- ACCUMULATED NOTES STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT RECEIVABLE DEFICIENCY
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1999 60,541 $ 605 54,053,293 $49,890,623 $7,021,879 $(60,229,111) $(471,000) $(3,787,004)
Issuance of common
stock for services and
operating activities 227,446 40,025 40,025
Issuance of common stock
for cash, net 5,337,495 1,209,028 1,209,028
Issuance of common stock
for notes payable
and interest 1,617,407 400,378 400,378
Conversion of preferred
stock (23) - 312,386 38,312 (38,312) -
Net loss (1,486,795) (1,486,795)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2000 60,518 $ 605 61,548,027 $51,578,366 $6,983,567 $(61,715,906) $(471,000) $(3,624,368)
====================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI International
5
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Three months ended March 31, 2000 1999
=================================================================================================
<S> <C> <C>
Operating activities:
Net loss $ (1,486,795) $ (1,427,258)
Adjustments to reconcile net loss to net cash used
in operating activities:
Equity in net loss of LFC investees 18,853 -
Depreciation and amortization 226,109 311,477
Common stock issued for services 40,025 15,000
Accrued long-term interest expense 51,805 -
Accrued interest income (9,394) -
Minority interest in loss of consolidated subsidiary (5,165) -
Changes in operating assets and liabilities:
Trade accounts receivable (449,038) 187,277
Inventories (1,518) 492
Prepaid expenses and other current assets 20,042 13,506
Accounts payable 7,984 172,331
Billings in excess of costs and estimated earnings on contracts 290,279 (144,165)
Accrued salaries, benefits and related taxes 23,001 149,039
Interest payable 17,513 9,028
Other accrued expenses (11,540) (64,557)
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,267,839) (777,830)
- -------------------------------------------------------------------------------------------------
Investing activities:
Additions to LFC Process equipment (72,000) (49,904)
Investment in LFC investees - (1,000)
Purchase of property and equipment (2,721) (9,692)
Other assets - (9,247)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (74,721) (69,843)
- -------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of common stock 1,209,028 -
Proceeds from issuance of debt 425,705 750,000
Payments of notes payable (2,375) (2,375)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,632,358 747,625
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 289,798 (100,048)
Cash at beginning of period 278,391 239,885
- -------------------------------------------------------------------------------------------------
Cash at end of period $ 568,189 $ 139,837
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 131,304 $ 134,215
Supplemental disclosure of non-cash activities:
Conversion of preferred stock 38,312 988,547
Common stock issued for convertible debentures - 68,107
Common stock issued for mandatorily redeemable preferred stock - 449,583
Common stock issued for debt and interest payable 400,378 -
=================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
SGI International
6
<PAGE>
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(1) BUSINESS
SGI International, a Utah corporation, (together with its subsidiaries,
hereinafter referred to as the "Company"), has its principal office in La Jolla,
California. The Company is primarily in the business of developing and marketing
energy-related technologies, which at the present includes the Liquids From Coal
("LFC") Process and the Opti-Crude Enhancement Technology ("OCET") Process. The
LFC Process is designed to convert and upgrade low-rank coal into a higher Btu
more efficient fuel to produce power and simultaneously produce a low
temperature coal tar, which contains valuable specialty chemicals. The OCET
Process is designed to increase the efficiency of oil refineries by deasphalting
crude oil as well as residual oil bottoms ("resid"), which is produced in oil
refining. Through Assembly & Manufacturing Systems, Inc. ("AMS"), a wholly-owned
subsidiary, the Company is also in the business of supplying custom precision
automated assembly equipment.
(2) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three months ended March
31, 2000, 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 March 31, 2000, and the consolidated results of
operations and cash flows for the three months ended March 31, 2000, and 1999.
The results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. 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, 1999,
included in the Company's Form 10-KSB filed with the Securities and Exchange
Commission.
The accompanying consolidated financial statements are prepared on a going
concern basis and in conformity with generally accepted accounting principles,
which contemplates continuation of the Company as a going concern and
realization of assets and settlement of liabilities and commitments in the
normal course of business. The recovery of amounts invested in the Company's
principal assets, the LFC Process and OCET Process assets, is dependent upon,
among other things, the Company's ability to adequately fund its on-going
development operations and eventual commercialization of these technologies.
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
SGI International
7
<PAGE>
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 $1.5 million and an accumulated
deficit of $61.7 million at March 31, 2000. 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 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 the outcome of this uncertainty.
(3) FINANCING TRANSACTIONS
In January of 2000, the Company exchanged one 12% note payable in the amount of
$100,000 due in November 2000 for approximately 367,000 shares of common stock.
In connection therewith, the Company also issued 46,192 shares of common stock
for accrued interest of $12,600. No gain or loss was recorded on the transaction
as the fair value of the securities exchanged were equal to one another.
Also in January the Company issued for cash a $100,000 unsecured 12% note
payable to one accredited investor. The note is payable upon 30 days written
demand but no sooner than November 15, 2000. Both the principal and accrued
interest thereon may be paid in cash or at the option of either the Company or
noteholder in restricted common stock of the Company, conditional only on the
bid price of the Company's common stock as determined in accordance with the
conversion formula being above $0.40 per share. The note is convertible into
common stock by dividing all principal and interest by 75% of the average
closing bid price for the ten trading days prior to the demand date.
During January and February 2000, the Company raised approximately $286,000
through the issuance of three short-term 9% notes payable. The notes and accrued
interest thereon were unsecured and payable in cash or at the Company's option
in restricted common stock, upon 30 days written demand but no sooner than March
14, 2000. Prior to March 31, 2000, demand for payment was made on each of these
three notes payable and the Company exchanged approximately 1.2 million shares
of restricted common stock for the notes and associated accrued interest.
During the three month period ended March 31, 2000, the Company raised
approximately $40,000 through the issuance of two short-term 9% notes payable.
The notes and accrued interest thereon are unsecured and payable in cash or at
the Company's option in restricted common stock, upon 30 days written demand but
no sooner than June 15, 2000.
During the three month period ended March 31, 2000, the Company issued
approximately 5.3 million shares of restricted common stock to accredited
investors for approximately $1.2 million in cash. In connection therewith the
Company issued 98,500 shares of restricted common stock valued at approximately
$26,000 to two placement agents for services rendered.
SGI International
8
<PAGE>
During the three month period ended March 31, 2000, the Company issued warrants
and incentive stock options, at fair market value to employees of the Company.
The exercise price was not lower than the closing bid price on the grant date.
The warrants and incentive options are exercisable for a total of 1,244,001 and
149,990 shares of common stock respectively, between $0.16 and $0.37 per share,
the closing bid prices on the grant dates. The options are exercisable upon
effective registration under the Securities Act of 1933 or the common shares
underlying the options are issuable under an exemption from the registration
requirements under the Securities Act. The options shall expire on April 1,
2004. The warrants are exercisable one year from the date of grant and expire on
December 31, 2005.
On March 2, 2000, the Company as provided in related consulting agreements,
granted four warrants to purchase an aggregate of 20,000 common shares, to four
consultants for services rendered. In connection therewith, the Company recorded
compensation expense of $4,500. The exercise price was not lower than the
closing bid price on the grant date. The warrants are exercisable one year from
the grant date at $0.37 per share and expire on December 31, 2004.
During the three month period ended March 31, 2000, the Company as provided in
their related consulting agreements, issued approximately 129,000 restricted
common shares to four consultants for services rendered, valued at approximately
$14,500.
(4) NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number of
common shares outstanding and includes preferred stock dividends. Diluted net
loss per share is not presented since the effect of shares issuable upon the
assumed conversion of preferred stock and convertible debentures and the assumed
exercise of outstanding stock options and warrants would be anti-dilutive. For
purposes of computing net loss per share, preferred stock dividends include
"imputed dividends" for preferred stock issued with a non-detachable beneficial
conversion feature near the date of issuance. Imputed dividends represent the
aggregate difference between conversion price and the fair market value of the
common stock as of the date of issuance of the preferred stock, without regard
to the actual date on which the preferred stock may be converted.
(5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Inventories
Inventories are stated at the lower of cost or market, using the first-in,
first-out cost method. Substantially, all inventories represent finished goods
held for use in operations.
Property and Equipment
<TABLE>
March 31, December 31,
2000 1999
===============================================================
<S> <C> <C>
ENCOAL LFC Plant $ 2,121,000 $ 2,121,000
Laboratory equipment 1,020,000 1,020,000
Machinery and equipment 136,000 136,000
Computer equipment 402,000 400,000
Office furniture and fixtures 125,000 125,000
Leasehold improvements 54,000 54,000
- ---------------------------------------------------------------
3,858,000 3,856,000
Less accumulated depreciation (1,417,000) (1,341,000)
- ---------------------------------------------------------------
Net property and equipment $ 2,441,000 $ 2,515,000
===============================================================
</TABLE>
SGI International
9
<PAGE>
(6) INFORMATION ON INDUSTRY SEGMENTS
The Company manages 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 joint venture in LFC
Technologies LLC ("LFC Tech"), with MLFC, a subsidiary of Mitsubishi Corp. the
Company will continue its efforts to market the LFC Process technology on an
international basis. The Company evaluates performance of each segment based on
profit or loss from operations before income taxes. The Company has no
significant intersegment sales. Reclassification of certain items has been made
to the 1999 schedule to conform to the 2000 presentation.
<TABLE>
Three months ended Automated LFC OCET
March 31, Assembly Process Process Corporate Total
============================================================================================================
<S> <C> <C> <C> <C> <C>
2000
Revenues $1,054,000 $ - $ 2,000 $ - $ 1,056,000
Net income (loss) 35,000 (679,000) (172,000) (671,000) (1,487,000)
Equity in operating of investee - 19,000 - - 19,000
Identifiable assets, net 1,777,000 4,316,000 186,000 994,000 7,273,000
Depreciation and amortization 31,000 138,000 53,000 4,000 226,000
Engineering, R&D expenditures - 235,000 134,000 - 369,000
Interest expense 1,000 - - 209,000 210,000
- ------------------------------------------------------------------------------------------------------------
1999
Revenues $ 559,000 $ 125,000 $ - $ - $ 684,000
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 and amortization 29,000 192,000 87,000 3,000 311,000
Engineering, R&D expenditures - 23,000 260,000 - 283,000
Interest expense 1,000 - - 150,000 151,000
============================================================================================================
</TABLE>
(7) 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' deficiency.
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
SGI International
10
<PAGE>
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. 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, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31,
1999.
Net Loss per Common Share. Basic net loss per common share for the period ended
March 31, 2000, decreased approximately $0.03 per share. Imputed dividends of
approximately $36,000 contributed to the prior year net loss applicable to
common 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 as the net loss for quarter remained substantially
unchanged from the prior year.
Revenues and Gross Margin. Revenues and cost of sales are primarily attributable
to Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the
percentage of completion method. Revenues and gross margin at AMS for the three
months ended March 31, 2000, increased 89% and 6%, respectively, over 1999.
Gross margins may vary in any given period as a result of the variations in
profitability of contracts for large orders of automated production systems or
specialty machines, as well as efficiencies related to the overall utilization
of AMS' manufacturing resources.
The Company attributes the increase in revenues primarily to strong sales to the
medical industry which continues from the prior year and renewed sales to the
automotive industry. The Company anticipates sales to both these industries in
2000 to exceed prior year levels, based on current order activity. The Company
is continuing to experience weak sales to the high-tech industry (electronics
and communications) which negatively impacted overall revenues in the prior
year. The Company anticipates that sales to this sector will continue to be slow
throughout 2000. The projected length and severity of the slowdown to this
sector is unknown at this time.
In the prior year's quarter the Company received net revenues of $125,000 from
its services agreement with LFC Tech, it's joint venture with MLFC. No
additional revenues are anticipated from the services agreement in 2000.
Loss on Investment in LFC Investee. The Company's share of the losses for its
LFC joint venture (LFC Tech) for the three months ended March 31, 2000,
increased 100% over the same prior year period. The increase is primarily
attributable to the amortization of assets which LFC Tech acquired in late 1999.
Engineering, Research and Development Expenses. Engineering, research and
development expenses for the three months ended March 31, 2000, increased 30%
over the same prior year period. The increase is primarily attributable to an
increase in expenses for engineering and development work related to the ENCOAL
LFC plant. This increase is partially offset by a 49% decrease in expenses on
the OCET
SGI International
11
<PAGE>
Process due to the Company shifting its laboratory resources to increase the
value of CDL produced from the LFC Process. Work on increasing the value of CDL
is expected to continue throughout most of the year.
Selling General and Administrative Expenses. Selling general and administrative
expense for the three months ended March 31, 2000, increased 12% over the same
prior year period. The increase is primarily attributable to the carrying costs
associated with the ENCOAL LFC plant which the Company acquired in late 1999.
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, 2000, decreased 39% over the same prior year period. The
decrease is related primarily to a reduction in legal and accounting salaries
and the settlement of various lawsuits to which the Company and AMS were
parties.
Depreciation and Amortization Expenses. Depreciation and amortization expense
for the three months ended March 31, 2000, decreased 27% over the same prior
year period due primarily to a non-recurring charge of approximately $80,000
related primarily to the write-off of the Company's Australian LFC project costs
in 1999. Partially offsetting this decrease is the Company's acquisition of
various LFC related assets late in the prior year.
Interest Expense. Interest expense for the three months ended March 31, 2000,
increased 39% over the same prior year period. The increase is primarily due to
the addition of $2.0 million in long-term debt associated with the purchase of
the ENCOAL LFC plant and various LFC assets in late 1999.
Other Income. Other income for the three months ended March 31, 2000, remained
relatively unchanged over the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had assets totaling $7.3 million, including
restricted cash of $0.4 million, and a working capital deficiency of $1.5
million. This is compared to assets of $4.3 million and a $5.4 million working
capital deficiency as of March 31, 1999. Current notes payable, accounts payable
and accrued salaries primarily contribute to the working capital deficiency at
March 31, 2000. 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, 2000.
Short-term liquidity requirements are expected to be satisfied from existing
cash balances, proceeds from the sale of future equity and debt securities or
other collaborative arrangements. Negotiations are on-going for the public and
private placement of equity and debt 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, 2000. 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 may be satisfied through a combination of future
equity and debt sales, 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
SGI International
12
<PAGE>
seeking additional funds through the financing, sale and
operations of the ENCOAL LFC plant and through collaborative or other
arrangements with larger well capitalized companies, under which such companies
may provide additional capital to the Company in exchange for exclusive or
non-exclusive licenses or other rights to certain commercial projects,
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,
2000, increased 63% over the same prior year period. This increase is primarily
attributable to an increase in sales at AMS and a corresponding increase in
accounts receivable. The use of funds from operating activities is essentially
attributable to the Company's net loss of approximately $1.49 million and $1.43
million for the quarter ended March 31, 2000, and 1999, respectively. These
losses were incurred primarily as a result of the Company's administrative and
technology development activities.
In the fourth quarter of 1999 the Company acquired various LFC related assets,
including the ENCOAL Demonstration Plant. As a result of this acquisition, the
Company is projecting operating expenses associated with maintaining the ENCOAL
LFC plant in idle condition at approximately $350,000 in 2000.
The Company's investing activities amounted to a use of funds of approximately
$75,000, a 7% increase over the same prior year period. This use of funds is
primarily related to the acquisition of LFC Process related equipment. The
amount of funds used for investing activities in a given period are directly
related to development requirements and funds availability.
In January of 1999 the Company and MLFC formed LFC Tech. Accordingly, the
Company may be required from time to time to make capital contributions to LFC
Tech. The Company is required to contribute one-half of any such required
capital contributions. In the prior year, in accordance with the Amended
Services Agreement between the Company and LFC Tech, the Company received
approximately $125,000 of net revenues each quarter under this agreement. This
agreement was amended subsequent to October 1999, and the Company will not be
receiving any additional funds pursuant thereto through the year 2000.
In 2000 the Company is projecting capital expenditures for equipment at OCET to
remain consistent with the prior year and an increase in capital expenditures at
AMS of approximately $300,000 to improve manufacturing capabilities and
efficiencies. Further, the Company intends to make improvements at the ENCOAL
LFC plant estimated at $10.1 million. These improvements are necessary to set
the plant on more of a commercial footing and to position it as a reference
plant for potential future commercial LFC facilities. As of March 31, 2000,
other than the improvements which the Company intends to make to the ENCOAL LFC
plant, the Company does not have any material requirements or commitments for
capital expenditures. 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 $1.6 million and $0.7
million for the three month period ended March 31, 2000, and 1999, respectively.
These funds were raised primarily through the private placement of debt and
equity securities in 2000 and debt securities in 1999. As stated earlier the
Company intends to make improvements and obtain project financing related to the
ENCOAL LFC plant estimated at $10.1 million. The Company believes, due to the
plant's special nature, that financing for these improvements will not likely be
obtained through conventional methods and that a strategic partner or financier
capable of utilizing Internal Revenue Code section 29 tax credits will be
required.
SGI International
13
<PAGE>
There is no assurance that the Company will be able to obtain this
financing, or if available, the terms will be acceptable.
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. 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.
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. Currently the
Company is not party to any pending legal proceeding.
ITEM 2. CHANGES IN SECURITIES
In January of 2000, the Company exchanged one 12% note payable in the amount of
$100,000 due in November 2000 for approximately 367,000 shares of common stock.
In connection therewith, the Company also issued 46,192 shares of common stock
for accrued interest of $12,600. No gain or loss was recorded on the transaction
as the fair value of the securities exchanged were equal to one another. The
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 accredited investor involved and restrictive legends were placed on the
certificates.
Also in January the Company issued for cash a $100,000 unsecured 12% note
payable to one accredited investor. The note is payable upon 30 days written
demand but no sooner than November 15, 2000. Both the principal and accrued
interest thereon may be paid in cash or at the option of either the Company or
noteholder in restricted common stock of the Company, conditional only on the
bid price of the Company's common stock as determined in accordance with the
conversion formula being above $0.40 per share. The note is convertible into
common stock by dividing all principle and interest by 75% of the average
closing bid price for the ten trading days prior to the demand date. The
security was issued pursuant to the exemptions provided by Section 4(2) of the
Securities Act and Regulation D. Investment representations were obtained from
the accredited investor and legends were placed on the certificates.
During January and February 2000, the Company raised approximately $286,000
through the issuance of three short-term 9% notes payable. The notes and accrued
interest thereon were unsecured and payable in cash or at the Company's option
in restricted common stock, upon 30 days written demand but no sooner than March
14, 2000. Prior to March 31, 2000, demand for payment was made on each of these
three notes payable and the Company exchanged approximately 1.2 million shares
of restricted common stock for the notes and associated accrued interest. 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 three accredited investors involved and restrictive legends were placed
on the certificates.
During the three month period ended March 31, 2000, the Company raised
approximately $40,000 through the issuance of two short-term 9% notes payable.
The notes and accrued interest thereon are unsecured and payable in cash or at
the Company's option in restricted common stock, upon 30 days
SGI International
14
<PAGE>
written demand but no sooner than June 15, 2000. 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 accredited
investor.
During the three month period ended March 31, 2000, the Company issued
approximately 5.3 million shares of restricted common stock to accredited
investors for approximately $1.2 million in cash. In connection therewith the
Company issued 98,500 shares or restricted common stock valued at approximately
$25,600 to two placement agents, J. Russo and K. Davis, for services rendered.
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 accredited investors and legends were placed on the certificates.
During the three month period ended March 31, 2000, the Company issued warrants
and incentive stock options, at fair market value to employees of the Company.
The exercise price was not lower than the closing bid price on the grant date.
The warrants and incentive options are exercisable for a total of 1,244,001 and
149,990 shares of common stock respectively, between $0.16 and $0.37 per share,
the closing bid prices on the grant dates. The warrants and options were granted
in reliance upon exemptions from registration pursuant to Section 4(2) of the
Securities Act and Regulation D promulgated thereunder and investment
representations were obtained. The options are exercisable upon effective
registration under the Securities Act of 1933 or the common shares underlying
the options are issuable under an exemption from the registration requirements
under the Securities Act. The options shall expire on April 1, 2004. The
warrants are exercisable one year from the date of grant and expire on December
31, 2005.
On March 2, 2000, the Company as provided in related consulting agreements,
granted four warrants to purchase an aggregate of 20,000 common shares, to four
consultants for services rendered. The warrants 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. In connection therewith, the Company recorded compensation expense
of $4,500. The exercise price of the warrants was not lower than the closing bid
price on the grant date and they expire on December 31, 2004. The warrants are
exercisable one year from the grant date at $0.37 per share.
During the three month period ended March 31, 2000, the Company as provided in
their related consulting agreements issued approximately 129,000 restricted
common shares to four consultants for services rendered, valued at approximately
$14,500. 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.
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]
SGI International
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Promissory note dated January 26, 2000, for $100,000. (1)
4.2 Form of short term promissory notes payable. (1)
4.3 Form of Restricted Stock Subscription Agreement. (2)
27.1 Financial Data Schedule.(1)
----------------
(1) Filed herewith.
(2) Incorporated by reference to report on Form 10QSB (File No. 2-93124)
ending June 30, 1999.
(b) Reports on Form 8-K: On April 12, 2000, the Company reported on its
Current Report on form 8-K, filed with the Securities and Exchange
Commission, that it had amended effective March 28, 2000, (the "First
Amendment") certain terms and conditions of the Amended and Restated
Acquisition Agreement (the "Acquisition Agreement") between itself and
certain subsidiaries of AEI Resources, dated December 9, 1999. The
First Amendment essentially provides SGI with an extension of the March
31, 2000, date to June 30, 2000, in which to satisfy various terms and
conditions more fully described in the Acquisition Agreement.
SGI International
16
<PAGE>
PART III. SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE May 12, 2000
- ------------------------------------
Michael L. Rose
Chairman of the Board, President
and Chief Executive Officer
/s/ GEORGE E. DONLOU May 12, 2000
- ------------------------------------
George E. Donlou
Vice President Finance/Controller
SGI International
17
PROMISSORY NOTE
$100,000 Dated: January 26, 2000
- ---------- -------------------------
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 One Hundred Thousand
($100,000) Dollars with interest thereon at the rate of twelve percent (12%) per
annum, payable upon 30 days written demand but no sooner than on November 15,
2000 (the "Demand Date") in cash or at the option of either Debtor or Reppond,
conditional only on the bid price as described below of SGI's stock being above
$0.40, the principal sum and interest thereon can be paid in restricted stock by
issuing a number of shares determined by dividing all principal and interest by
75% of the average of the bid prices for the ten (10) trading days prior to the
Demand Date. The original loan that is the subject of this Promissory Note was
made by Reppond by wire transfer to SGI International on January 26, 2000.
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 Debtor, including among other things presentment, 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.
Dated: January 26, 2000
SGI INTERNATIONAL
By
Authorized Signatory
PROMISSORY NOTE
$000.000 Dated:
- ---------- ----------------------
SECTION ONE
TERMS OF NOTE
FOR VALUE RECEIVED, SGI INTERNATIONAL, OTC Bulletin Board symbol "SGII"
("the "Debtor"), of 1200 Prospect Street, Suite 325, La Jolla, CA 92037 promises
to pay to the order of _________ (hereinafter "_____________") of
______________________, the principal sum of _______________ ($______) Dollars
with interest thereon at the rate of nine percent (9%) per annum, payable upon
30 days written demand but no sooner than on March 14, 2000 in cash or at the
option of Debtor, all principal and interest can by paid by issuing _________
_______ shares of restricted stock of Debtor and an additional 5,000 shares to
cover interest up through the due date of the loan. The original loan that is
the subject of this Promissory Note was made by ______________ by wire transfer
to SGI International on ___________, 2000. Debtor shall be in default hereunder
only after ____________ gives five (5) days advance written notice to Debtor
that it is in default, and Debtor does not cure such default within this
prescribed period.
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 ____________
______________ 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 _____________.
SECTION FOUR
CUMULATIVE RIGHTS AND REMEDIES
The rights and remedies of _________________ 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 ____________ required in
fixing the liability of the Debtor, including among other things presentment,
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 ____________ 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.
Dated: ___________________
SGI INTERNATIONAL
By
Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SGI
International's Form 10-QSB for the three month period ended March 31, 2000,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000737955
<NAME> SGI International
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.000
<CASH> 568,189
<SECURITIES> 402,500
<RECEIVABLES> 1,290,818
<ALLOWANCES> 80,320
<INVENTORY> 415,234
<CURRENT-ASSETS> 2,679,003
<PP&E> 3,857,938
<DEPRECIATION> 1,416,726
<TOTAL-ASSETS> 7,273,116
<CURRENT-LIABILITIES> 4,154,458
<BONDS> 0
0
605
<COMMON> 51,578,366
<OTHER-SE> (55,203,339)
<TOTAL-LIABILITY-AND-EQUITY> 7,273,116
<SALES> 1,055,711
<TOTAL-REVENUES> 1,055,711
<CGS> 809,715
<TOTAL-COSTS> 809,715
<OTHER-EXPENSES> 1,320,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,227
<INCOME-PRETAX> (1,486,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,486,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,486,795)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
