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 June 30, 1999 or [ } Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ________ Commission File Number 2-93124 SGI International (Exact name of small business issuer as specified in its charter) Utah 33-0119035 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Prospect Street, Suite 325, La Jolla, California 92037 (Address of principal executive offices) (858) 551-1090 (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The number of shares of common stock, no par value, outstanding as of August 10, 1999, was 42,722,981. Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No 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 14 Results of Operations 14 Liquidity and Capital Resources 16 Year 2000 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 18 MARKET RISK PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 PART III. SIGNATURES 22 2 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash $ 343,809 $ 239,885 Restricted time deposit 402,500 402,500 Receivable from LFC Investees 203,479 78,479 Trade accounts receivable, less allowance for doubtful accounts of $79,460 538,322 229,759 Costs and estimated earnings in excess of billings on contracts 17,190 275,967 Inventories 63,121 64,371 Prepaid expenses and other current assets 68,019 83,283 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 1,636,440 1,374,244 - ------------------------------------------------------------------------------------------------------------------------ LFC Process related assets: Royalty rights, net 1,099,875 1,257,000 LFC cogeneration project, net 263,211 315,853 Investment in LFC Investees 491,222 490,232 Notes receivable, net 150,000 150,000 Australia LFC project, net - 86,877 LFC Process Control, net 83,031 3,834 Other technological assets, net 31,938 27,250 - ------------------------------------------------------------------------------------------------------------------------ 2,119,277 2,331,046 Property and equipment, net of accumulated depreciation of $1,129,056 and $920,941 573,980 766,695 Goodwill, net of accumulated amortization of $168,687 and $144,721 311,557 335,523 - ------------------------------------------------------------------------------------------------------------------------ $ 4,641,254 $ 4,807,508 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 743,637 $ 224,310 Borrowings on line-of-credit 400,000 400,000 Billings in excess of costs and estimated earnings on contracts 454,838 156,411 Current maturities of long-term notes payable 1,501,875 690,000 12% convertible debentures 3,414,898 3,494,880 Accrued salaries, benefits and related taxes 421,986 139,486 Payable to LFC Investees 305,172 180,172 Interest payable 174,751 161,991 Other accrued expenses 279,139 189,487 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 7,696,296 5,636,737 Long-term notes payable, less current maturities 125,000 104,750 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 7,821,296 5,741,487 - ------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies Mandatorily redeemable preferred stock $.01 par value liquidation value of $377,960 plus accumulated dividends (Note 6) 376,549 1,449,348 Stockholders' deficiency: Convertible preferred stock 635 641 Common stock 48,543,265 45,688,545 Paid-in capital 7,268,813 8,258,140 Accumulated deficit (59,369,304) (56,330,653) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' deficiency (3,556,591) (2,383,327) - ------------------------------------------------------------------------------------------------------------------------ $ 4,641,254 $ 4,807,508 - ------------------------------------------------------------------------------------------------------------------------ See notes to condensed consolidated financial statements. 3 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Revenues: Net sales $ 767,976 $ 1,500,276 $1,451,484 $ 2,589,188 Other 13,157 14,691 30,889 27,338 - ------------------------------------------------------------------------------------------------------------------------------- 781,133 1,514,967 1,482,373 2,616,526 Expenses: Cost of sales 438,619 1,191,510 914,837 1,978,110 Engineering, research and consulting 525,962 258,946 808,687 506,176 Loss from investment in LFC Investees - 196,075 - 427,289 Selling, general and administrative 867,843 796,728 1,616,467 1,478,194 Legal and accounting 167,474 167,792 326,145 353,558 Depreciation and amortization 231,028 195,516 542,506 387,875 Interest 161,566 324,870 312,348 460,882 - ------------------------------------------------------------------------------------------------------------------------------- 2,392,492 3,131,437 4,520,990 5,592,084 - ------------------------------------------------------------------------------------------------------------------------------- Net loss $(1,611,359) $(1,616,470) $(3,038,617) $(2,975,558) Imputed preferred stock dividends and accretion on convertible and mandatorily redeemable preferred stock 36,382 - 36,382 1,312,519 - ------------------------------------------------------------------------------------------------------------------------------- Net loss applicable to common stock $(1,647,741) $(1,616,470) $(3,074,999) $(4,288,077) - ------------------------------------------------------------------------------------------------------------------------------- Net loss per common share - basic $ (0.05) $ (0.12) $ (0.10) $ (0.36) - ------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 35,193,496 13,292,754 29,891,480 12,037,388 - ------------------------------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. 4 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (Unaudited) Convertible Preferred Stock Common Stock ------------------ --------------------- Total Shares Amount Shares Amount Paid-In Accumulated Stockholders' Capital Deficit Deficiency - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1998 64,044 $ 641 21,568,344 $45,688,545 $ 8,258,140 $(56,330,653) $(2,383,327) Issuance of common stock for cash 5,667,584 645,500 645,500 Issuance of commom stock for convertible debentures 286,762 68,107 68,107 Issuance of common stock for mandatorily redeemable preferred stock 10,860,637 1,072,833 1,072,833 Issuance of commom stock for services 271,208 39,075 39,075 Conversion of preferred stock (606) (6) 2,492,204 1,029,205 (1,029,199) - Issuance of warrants to purchase common stock to non-employees 18,765 18,765 Accretion adjustment for mandatorily redeemable preferred stock, net of conversions (34) (34) Interest expense related to issuance of warrants 21,107 21,107 Net Loss (3,038,617) (3,038,617) - ------------------------------------------------------------------------------------------------------------------------------------ Balances at June 30, 1999 63,438 $ 635 41,146,739 $48,543,265 $7,268,813 $(59,369,304) $(3,556,591) - ------------------------------------------------------------------------------------------------------------------------------------ See notes to condensed consolidated financial statements. 5 SGI INTERNATIONAL AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six months ended June 30, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net loss $(3,038,617) $(2,975,558) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of LFC Investees - 427,289 Depreciation and amortization 542,506 387,875 Common stock issued for interest, services, and other operating activities 39,075 128,180 Non-employee compensation expense on issuance of warrants 18,765 44,640 Imputed and accured interest on warrants issued to note holders 21,107 188,033 Changes in operating assets and liabilities: Receivable from LFC Investees - (42,514) Trade accounts receivable (49,786) (189,508) Inventories 1,250 520 Other current assets 15,264 161,770 Accounts payable 519,327 320,420 Billings in excess of costs and estimated earnings on contracts 298,427 (87,802) Accrued salaries, benefits and related taxes 282,500 (49,562) Interest payable 12,760 (142) Other accrued expenses 89,652 (102,007) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,247,770) (1,788,366) - ----------------------------------------------------------------------------------------------------------------------- Investing activities: LFC Process related assets: Additions to LFC Process controls and other technological assets (85,419) - Investment in LFC Investees (990) (441,000) Payable to LFC Investees - (100,000) Purchase of property and equipment (18,400) (264,892) Other assets (9,247) (3,817) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (114,056) (809,709) - ----------------------------------------------------------------------------------------------------------------------- Financing activities: Payments of notes payable (4,750) (4,750) Proceeds from issuance of debt 825,000 - Proceeds from issuance of common stock 645,500 159,800 Proceeds from issuance of preferred stock - 2,313,200 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,465,750 2,468,250 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 103,924 (129,825) Cash at beginning of period 239,885 429,232 - ----------------------------------------------------------------------------------------------------------------------- Cash at end of period $ 343,809 $ 299,407 - ----------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 264,715 $ 229,372 Supplemental disclosure of non-cash activities: Common stock issued for services $ 39,075 $ 128,180 Conversion of preferred stock $1,029,205 $2,831,749 Common stock issued for convertible debentures $ 68,107 - Common stock issued for mandatorily redeemable preferred stock $1,072,833 - - ----------------------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. 6 SGI INTERNATIONAL AND SUBSIDIARIES NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of SGI International (the "Company") for the three and six month periods ended June 30, 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 June 30, 1999, and the consolidated results of operations and cash flows for the six months ended June 30, 1999, and 1998. The results of operations for the three and six month periods ended June 30, 1999, are not necessarily indicative of the results to be expected for the year ending December 31, 1999. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 1998, included in the Company's Form 10-K filed with the Securities and Exchange Commission. The accompanying consolidated financial statements are prepared on a going concern basis. The recovery of amounts invested in the Company's principal assets, the LFC Process and OCET Process assets, is dependent upon the Company's ability to adequately fund its on-going development operations including capital contributions to its new joint venture LFC Technologies, LLC ("LFC Tech") with MLFC Corporation ("MLFC"), a wholly owned subsidiary of Mitsubishi Corporation. Furthermore, the ability to successfully bring both the LFC Process and OCET Process technologies to commercialization will ultimately depend on the Company's ability to attract sufficient additional equity, debt or other third-party financing. Success in commercialization of the LFC Process and OCET Process is dependent in large part upon the ability to enter into satisfactory arrangements with other partners, financiers or customers and upon the ability of these third parties to perform their responsibilities. The resources required to profitably develop, construct and operate an LFC plant are likely to include hundreds of millions of dollars, and expertise in major plant development and operations. There can be no assurance that any licenses, joint venture agreements or other arrangements will be available on acceptable terms, if at all; that any revenue will be derived from such arrangements; or that, if revenue is generated, any of said arrangements will be profitable to the Company. If the Company is unsuccessful in its attempts to license the LFC Process or OCET Process, or if such third parties are unsuccessful in profitably developing and operating LFC plants, the planned business and operations of the Company will likely not succeed and the Company would not be able to recover the carrying value of the long-lived assets related to either the LFC Process or OCET Process. The Company had negative working capital of $6.1 million and an accumulated deficit of $59.4 million at June 30, 1999. These factors and the Company's recurring losses from continuing operations, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company is currently seeking additional financing through public or private sales of its securities to fund working capital requirements. 7 The Company will also seek funding through additional strategic partnerships, joint ventures or similar arrangements to commercialize the technologies. There can be no assurance that any collaborative financing arrangements through a joint venture, and/or with strategic partners, will be available when needed, or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to curtail or terminate one or more of its operating activities. The Company is engaged in continuing negotiation to secure additional capital and financing, and while management believes funds can be raised, there is no assurance that their efforts will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (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 June 30, 1999: Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and U.S. Clean Coal Refineries, Inc. ("USCCR") which is currently inoperative. AMS designs, manufactures and installs automated assembly equipment, and was acquired in October 1995. OCET was organized in February 1995 to research and develop the Opti-Crude Enhancement Technology, a process for further refining residual oil bottoms. USCCR was organized in October 1994, to market clean coal refinery project development programs. (3) FINANCING TRANSACTIONS During the three month period ended June 30, 1999, the Company extended the due dates on $750,000 of notes payable due June 27, 1999, to August 16, 1999. Additionally, the Company granted two warrants to purchase 200,000 shares of common stock, to the holder of five notes payable aggregating $500,000, for accrued interest through June 27, 1999, valued at $21,107. The warrants are exercisable one year from the date of grant. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. One warrant to purchase 150,000 shares of common stock may be exercised at $0.16 per share and another warrant to purchase 50,000 shares of common stock may be exercised at $0.18 per share. During the three month period ended June 30, 1999, the Company issued additional incentive stock options, at fair market value pursuant to its 1996 Omnibus Stock Plan. The incentive options are exercisable for a total of 685,000 shares of common stock at $0.125 per share, the closing bid price on the grant date, to employees of the Company. The options were granted in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. 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. On April 1, 1999, the Company as provided in related service or consulting agreements, granted twelve warrants to purchase an aggregate of 275,000 common shares, to five directors and seven 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 to non-employees of approximately $9,720. The exercise prices were not lower 8 than the closing bid price on the grant date and expire on December 31, 2004. The warrants are exercisable one year from the grant date at $0.125 per share. On April 8, 1999 the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant 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 certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.105 per share. On April 15, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 50,000 common shares, to one consultant 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 certificate. In connection therewith, the Company recorded compensation expense of approximately $4,725. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.08 per share. On May 18, 1999, the Company, as provided in related service or consulting agreements, granted five warrants to purchase an aggregate of 358,000 common shares, to five officers and directors 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 certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160 for the warrants granted to outside directors. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrants are exercisable one year from the grant date at $0.12 per share. On June 24, 1999, the Company in keeping with the intent of a previous settlement agreement with the two purchasers of the 97D preferred shares, agreed to extend the expiration date of six warrants to purchase an aggregate of 676,923 common shares, from September 30, 1999, to January 31, 2000. The warrants are currently exercisable at a price of $2.44 per share. During the three month period ended June 30, 1999, the Company raised $560,500 through the issuance of 5,142,794 restricted common shares to thirteen accredited investors . 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. In connection therewith the Company issued an aggregate of 211,208 shares of restricted common stock valued at $24,075 to two individuals, Mr. J. Russo and Ms. K. Davis, as compensation for placement agent services. (4) NET LOSS PER SHARE Basic net loss per share is computed in accordance with SFAS No. 128, "Earnings per Share." Basic EPS includes no dilution and is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding for the period. For purposes of computing the net loss available to common stockholders, preferred stock dividends and accretion of mandatorily redeemable preferred stock are deducted from the net loss. Preferred stock dividends include "imputed dividends" for preferred stock issued with a non-detachable beneficial conversion 9 feature near the date of issuance. Imputed dividends represent the aggregate difference between conversion price and thefair market value of the common stock as of the date of issuance of the preferred stock, without regard to the actual date on which the preferred stock may be converted. Shares issuable upon conversion of preferred stock, convertible debentures and upon exercise of outstanding stock options and warrants are not included since the effects would be anti-dilutive. (5) RECENT ACCOUNTING PRONOUNCEMENTS 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 adjustments, 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 six months ended June 30, 1999. (6) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS Property and Equipment June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------- Office furniture and fixtures $ 121,000 $ 118,000 Laboratory equipment 1,020,000 1,018,000 Machinery and equipment 126,000 123,000 Computer equipment 382,000 377,000 Leasehold improvements 54,000 52,000 - ------------------------------------------------------------------------------------- 1,703,000 1,688,000 Less accumulated depreciation (1,129,000) (921,000) - ------------------------------------------------------------------------------------- Net property and equipment $ 574,000 $ 767,000 - ------------------------------------------------------------------------------------- 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: Six Months Ended Year-Ended June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------ Balance at beginning of period $ 1,449,000 $ - Issuance of preferred stock - 1,413,000 Conversion to common stock (1,073,000) - Accretion of amounts payable upon redemption - 36,000 - ------------------------------------------------------------------------------------ Balance at end of period $ 376,000 $ 1,449,000 - ------------------------------------------------------------------------------------ 10 (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. Three months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total - -------------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 374,000 $ 375,000 $ 19,000 $ 13,000 $ 781,000 Net loss (322,000) (4,000) (330,000) (955,000) (1,611,000) Equity in operations of investee - - - - - Depreciation & Amortization 29,000 112,000 87,000 3,000 231,000 Engineering, research and consulting expenditures - 268,000 258,000 - 526,000 Interest expense - - - 162,000 162,000 - -------------------------------------------------------------------------------------------------------------------- 1998 Revenues 1,492,000 - 10,000 13,000 1,515,000 Net profit (loss) 45,000 (340,000) (276,000) (1,045,000) (1,616,000) Equity in operations of investee - (196,000) - - (196,000) Depreciation & Amortization 27,000 112,000 53,000 3,000 195,000 Engineering, research and consulting expenditures - 29,000 230,000 - 259,000 Interest expense - - - 325,000 325,000 - -------------------------------------------------------------------------------------------------------------------- 11 Six months ended Automated LFC OCET June 30 Assembly Process Process Corporate Total - -------------------------------------------------------------------------------------------------------------------- 1999 Revenues $ 933,000 $ 500,000 $ 29,000 $ 20,000 $ 1,482,000 Net loss (489,000) (94,000) (677,000) (1,778,000) (3,038,000) Equity in operations of investee - - - - - Depreciation & Amortization 58,000 303,000 174,000 8,000 543,000 Engineering, research and consulting expenditures - 291,000 518,000 - 809,000 Interest expense 1,000 - - 311,000 312,000 - -------------------------------------------------------------------------------------------------------------------- 1998 Revenues 2,581,000 - 10,000 26,000 2,617,000 Net profit (loss) 113,000 (680,000) (580,000) (1,829,000) (2,976,000) Equity in operations of investee - (427,000) - - (427,000) Depreciation & Amortization 51,000 224,000 106,000 7,000 388,000 Engineering, research and consulting expenditures - 29,000 477,000 - 506,000 Interest expense - - - 461,000 461,000 - -------------------------------------------------------------------------------------------------------------------- Total Assets by Segment June 30, 1999 December 31, 1998 ---------------- ----------------- Identifiable assets, net Automated Assembly $ 1,290,000 $ 1,303,000 LFC Process 2,087,000 2,331,000 OCET Process 486,000 632,000 Corporate 778,000 542,000 - ------------------------------------------------------------------------------------------------ Total $ 4,641,000 $ 4,808,000 - ------------------------------------------------------------------------------------------------ (8) INVESTMENT IN LFC JOINT VENTURES In January of this year, the Company entered into a number of agreements with MLFC, a wholly-owned subsidiary of Mitsubishi Corporation, relating to the formation of a joint venture with MLFC regarding the LFC Process. The Company and MLFC entered into a LFC Joint Venture Formation Agreement, Operating Agreement, License Agreement, Services Agreement and Security Agreement with the purpose of further developing the LFC Process and licensing its use in proposed LFC Process plants. The Operating Agreement, as amended 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 fifty 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. 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 12 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. Accordingly, the Company's portion of the quarterly loss on investment in LFC investee has been eliminated against service revenues, as if the joint venture were consolidated. (9) RELATED PARTY TRANSACTIONS During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $50,000 to one outside director for $50,000. The principal and interest on the note payable are both due on November 15, 1999. This security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $25,000 and a warrant to purchase 17,500 shares of common stock to one outside director for $25,000. The note bears simple interest which is payable quarterly, at the Company's option, in cash or restricted common stock. In the event the Company elects to distribute common stock, the price of the common stock used to determine the number of shares to be issued will be the greater of (a) the average stock price for the last ten trading days of each quarter or (b) $0.25 per share. The principal of the note payable is due on April 23, 2001, in cash. The warrant is exercisable one year from the date of grant at a price of $0.12 per share. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. In addition, the Company issued 524,790 shares of restricted common stock to this director in return for $85,000 in cash. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. (10) PENDING ASSET ACQUISITION As previously reported, on April 22, 1999, the Company executed an agreement (the "Acquisition Agreement") with Bluegrass Coal Development Company ("Bluegrass") and Americoal Development Company ("Americoal"), both wholly owned subsidiaries of AEI Resources ("AEI") to purchase Bluegrass' fifty percent interest in the Liquids From Coal ("LFC") Process; the ENCOAL Corporation, which owns the ENCOAL LFC demonstration plant; certain existing permits necessary to build 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 $2.0 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, currently estimated at $10 million, the completion of both fuel supply and product sale agreements, the assumption or waiver of certain bond obligations, the waiver of the $1.13 million invoice due Mitsubishi Heavy Industries by Bluegrass and certain other conditions specified in the agreement. The Company is currently working towards meeting the pre-closing conditions specified in the Acquisition Agreement. At this time several pre-conditions remain outstanding, including but not limited to, the financing of certain improvements, the fuel supply agreement, product sale agreements 13 for CDL and the assumption or waiver of certain bond obligations. While the Company believes it will complete or waive these pre-conditions prior to the closing date of September 19, 1999, there can be no assurance that the acquisition will be completed or that having been completed that the ENCOAL plant will operate. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTORY NOTE This Quarterly Report on Form 10-QSB contains statements relative to (i) projections, (ii) estimates, (iii) future research plans and expenditures, (iv) potential collaborative arrangements, (v) opinions of management and (vi) the need for and availability of additional financing which may be considered "forward looking statements." The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding the Company's business and technology, which involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, as well as risk factors detailed from time to time in the Company's Securities and Exchange Commission reports including this Form 10-QSB, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated will be realized and actual results may differ materially. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Therefore, historical results and percentage relationships will not necessarily be indicative of the operating results of any future period. RESULTS OF OPERATIONS Net Loss per Common Share. Basic net loss per common share for the three and six month periods ended June 30, 1999, decreased approximately $0.07 per share and $0.26 per share, respectively, over the same prior year periods. The decrease in basic net loss per share for both the three and six month periods is attributable to an increase in the weighted average number of common shares outstanding, and a decrease in imputed dividends, as the net loss for both the three and six month periods remained essentially the same as the prior year. 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 June 30, 1999, decreased 74% and 63%, respectively, over the same prior year period. Sales and cost of sales for the six month period ended June 30, 1999, decreased 63% and 54%, respectively, over the same prior year period. This decline in sales for both the three and six month periods occurred in all three sectors in which the Company does business. The Company believes that the decline in sales is primarily the result of a general slowdown in 14 demand for automated assembly equipment. The continuing weakness of the high-tech sector, which has historically represented the Company's largest sector began in 1998 as a result of the turmoil in the Asian financial markets and continued into 1999. The projected length and severity of the slowdown to this sector is unknown at this time. In addition, the Company experienced a decrease in sales to the automotive sector which it believes 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. The Company also experienced a decrease in sales to its medical sector, over the same prior year period. The Company believes that the decrease is primarily the result of the merger of several of its customers, which has resulted in orders being delayed as management re-evaluates their capital spending. The affect on sales to this sector, as the result of these industry mergers, is unknown at this time. Gross margin as a percentage of sales for the three month period ended June 30, 1999, was a negative 16% compared to a positive 20% over the same prior year period. Gross margin as a percentage of sales for the six month period ended June 30, 1999, was 3% compared to 24% over the same prior year period . The decrease in gross margin is primarily attributable to the reduced business volume as previously described. The decrease in revenues experienced by the Company's automated assembly segment was partially offset by $375,000 of net revenues derived from the Company's services agreement with LFC Tech, it's joint venture with MLFC. The parties agreed to the acceleration of the second and third quarter payments, aggregating $250,000, in part due to the significant amount of work performed by the Company in evaluating CDL chemical constituents and their corresponding markets. Other Income. Other income for the three and six month periods ended June 30, 1999, remained substantially unchanged over the same prior year periods. Loss on Investment in LFC Investees. The Company's share of the losses for its LFC joint ventures (TEK-KOL and LFC Tech) for the three and six month periods ended June 30, 1999, decreased 100% over the same prior year period. The decrease is primarily attributable to the termination of the TEK-KOL Partnership and the partners of LFC Tech agreeing to perform certain services for the joint venture at their own expense, without pass through to the partnership. Engineering, Research and Consulting Expenses. Engineering, research and development expenses for the three and six month periods ended June 30, 1999, increased 103% and 60%, respectively, over the same prior year periods. The increase for both the three and six month periods is essentially attributable to an increase in expenses related to the development of the LFC Process technology, as the expenses for the development of the OCET Process technology remained substantially unchanged over the same prior year periods. The increase in expenses for the LFC Process technology are primarily related to engineering studies to reduce the cost of the first commercial plant and in evaluating the chemical constituents of CDL in order to maximize the commercial value of this product. Selling General and Administrative Expenses. Selling general and administrative expense for both the three and six month periods ended June 30, 1999, increased 9%, over the same prior year periods. The increase for both periods is principally related to the Company's opening of a marketing office in Denver, Colorado, an engineering office in Gillette Wyoming and an increase in administrative personnel at the corporate offices. The increase was basically offset by 1998 non-recurring charges of approximately $130,000 in contractual penalties associated with the issuance of the 97 D convertible preferred stock and a reduction in expenses related to public relations and financial consultants. Selling, general and administrative expenses for AMS, for the three and six month periods ended June 15 30, 1999, declined approximately 16% and 11% respectively. The decrease in expenses is primarily related to lower business volume and personnel related costs. Legal and Accounting Expenses. Legal and accounting expenses for the three and six month periods ended June 30, 1999, remained relatively unchanged and decreased 8%, respectively over the same prior year periods. The decrease in expenses for the six month period is related primarily to a reduction in 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 and six month periods ended June 30, 1999, increased 18% and 40%, respectively over the same prior year periods, 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 in the first quarter of this year related to the write-off of start-up costs pertaining to its Australian LFC project. Interest Expense. Interest expense for the three and six month periods ended June 30, 1999, decreased 50% and 32%, respectively over the same prior year period. The decrease for both the three and six month periods is principally due to approximately $188,000 of imputed interest expense associated with the issuance of warrants to certain debt holders in 1998, which did not continue after September 30, 1998. This decrease was partially offset by an increase in short term notes payable primarily issued in the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company had assets totaling $4.6 million, including restricted cash of $0.4 million, and a working capital deficiency of $6.1 million. The Company anticipates continued operating losses over the next twelve months and has both short-term and long-term liquidity deficiencies as of June 30, 1999. Current notes payable, convertible debentures, and associated accrued interest aggregating $5.1 million primarily due prior to September 30, 1999, contribute to the Company's working capital deficiency at June 30, 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 as of June 30, 1999. Over the long-term, the Company will require substantial additional funds to maintain and expand its research and development activities and ultimately to commercialize, with or without the assistance of corporate partners, any of its proposed technologies. Although there are no commitments, the Company believes the long-term liquidity deficiency should be satisfied through 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. 16 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 six month period ended June 30, 1999, decreased 30% over the same period in 1998 principally as a result of an increase in payables. The use of funds from operating activities is essentially attributable to the Company's net loss of approximately $3.0 million, for both the six month periods ended June 30, 1999, and 1998. These losses were incurred primarily as a result of the Company's automated assembly operations and technology development activities. The Company's investing activities amounted to a use of funds of approximately $114,000 and $810,000 for the six month period ended June 30, 1999, and 1998, respectively. This represents a 86% 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 six months ended June 30, 1999, the Company's investing activities consisted primarily of the acquisition of LFC Process equipment. Additional capital contributions to the now terminated 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 the event that the acquisition of AEI's assets does not close (see Note 10 to the condensed consolidated financial statements). In addition, the Company, as of January 14, 1999, has entered into a joint venture with MLFC a wholly-owned subsidiary of Mitsubishi Corporation. (See 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 10 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 June 30, 1999. The Company's financing activities raised approximately $1.5 million (see Note 3 to the condensed consolidated financial statements) for the six month period ended June 30, 1999, versus $2.5 million for the same prior year period. These funds were raised primarily through the private placement of debt and equity securities. The amount of money raised during a given period is dependent upon financial market conditions, technological progress and the Company's projected funding requirements. The Company anticipates that future financing activities will be influenced by the aforementioned factors. 17 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. Year 2000 costs incurred through June 30, 1999, have been charged to operations and have not been material. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [NONE] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its subsidiaries are from time to time involved in litigation arising in the ordinary course of their respective businesses. The Company was named a 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 asserted claims, for among other things, breach of contract relating to a loan of approximately $300,000. AMS filed an answer denying liability. The case was tried and a verdict rendered in favor of AMS. On October 26, 1998, AMS filed a lawsuit against Anatol Automation and Anatol Manufacturing in Orange County Superior Court. The lawsuit sought 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. The case was settled by the parties prior to going to trial. 18 ITEM 2. CHANGES IN SECURITIES During the three month period ended June 30, 1999, the Company extend the due dates on $750,000 of notes payable due June 27, 1999, to August 16, 1999. Additionally, the Company granted two warrants to purchase 200,000 shares of common stock, to the holder of five notes payable aggregating $500,000, for accrued interest through June 27, 1999, valued at $21,107. The warrants are exercisable one year from the date of grant. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. One warrant to purchase 150,000 shares of common stock may be exercised at $0.16 per share and another warrant to purchase 50,000 shares of common stock may be exercised at $0.18 per share. During the three month period ended June 30, 1999, the Company issued additional incentive stock options, at fair market value pursuant to its 1996 Omnibus Stock Plan. The incentive options are exercisable for a total of 685,000 shares of common stock at $0.125 per share, the closing bid price on the grant date, to employees of the Company. The options were granted in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder. 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. On April 1, 1999, the Company as provided in related service or consulting agreements, granted twelve warrants to purchase an aggregate of 275,000 common shares, to five directors and seven 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 to non-employees of approximately $9,720. The exercise prices were not lower than the closing bid price on the grant date and expire on December 31, 2004. The warrants are exercisable one year from the grant date at $0.125 per share. On April 8, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 48,000 common shares, to one consultant 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 certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.08 per share. On April 15, 1999, the Company as provided in a related consulting agreement, granted one warrant to purchase an aggregate of 50,000 common shares, to one consultant 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 certificate. In connection therewith, the Company recorded compensation expense of approximately $4,725. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrant is exercisable one year from the grant date at $0.105 per share. On May 18, 1999, the Company, as provided in related service or consulting agreements, granted five warrants to purchase an aggregate of 358,000 common shares, to five officers and directors for services rendered. The warrants were issued pursuant to the exemptions provided by Section 4(2) of the 19 Securities Act and Regulation D. Investment representations were obtained and legends were placed on the certificate. In connection therewith, the Company recorded compensation expense of approximately $2,160 for the warrants granted to outside directors. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. The warrants are exercisable one year from the grant date at $0.12 per share. On June 24, 1999, the Company in keeping with the intent of a previous settlement agreement with the two purchasers of the 97D preferred shares, agreed to extend the expiration date of six warrants to purchase an aggregate of 676,923 common shares, from September 30, 1999, to January 31, 2000. The warrants are currently exercisable at a price of $2.44 per share. During the three month period ended June 30, 1999, the Company raised $560,500 through the issuance of 5,142,794 restricted common shares to thirteen accredited investors . 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 placed on the certificates. In connection therewith the Company issued an aggregate of 211,208 shares of restricted common stock valued at $24,075 to two individuals, Mr. J. Russo and Ms. K. Davis, as compensation for placement agent services. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $50,000 to one outside director for $50,000. The principal and interest on the note payable are both due on November 15, 1999. This security was issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. During the three month period ended June 30, 1999, the Company issued one 12% note payable with a face value of $25,000 and a warrant to purchase 17,500 shares of common stock to one outside director for $25,000. The note bears simple interest which is payable quarterly, at the Company's option, in cash or restricted common stock. In the event the Company elects to distribute common stock, the price of the common stock used to determine the number of shares to be issued will be the greater of (a) the average stock price for the last ten trading days of each quarter or (b) $0.25 per share. The principal of the note payable is due on April 23, 2001, in cash. The warrant is exercisable one year from the date of grant at a price of $0.12 per share. The exercise price was not lower than the closing bid price on the grant date and expires on December 31, 2004. In addition, the Company issued 524,790 shares of restricted common stock to this director in return for $85,000 in cash. These securities were issued pursuant to the exemptions provided by Section 4(2) of the Securities Act and Regulation D. ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES [NONE] ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. [NONE] 20 ITEM 5. OTHER INFORMATION On May 26, 1999, Joseph A. Savoca, Chairman of the Board and Chief Executive Officer (CEO) resigned from his position as CEO and agreed to continue serving as Chairman. The Board of Directors on that same day elected Michael L. Rose as CEO, succeeding Mr. Savoca. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Form of Restricted Stock Subscription Agreement (1) 4.2 Promissory Note dated April 14, 1999, for $50,000 (1) 4.3 Promissory Note dated April 23, 1999, for $25,000 (1) 4.4 Form of Extension Agreement dated June 24, 1999 (1) 4.5 Form of Note Extension Agreement dated March 24, 1999 (1) 10.1 Form of Compensation Agreement dated March 1, 1999 (1) 27.1 Financial Data Schedule (1) - -------------------- (1) Filed herewith. (b) Reports on 8-K: Initially filed on May 10, 1999, and amended on May 18, 1999, the Company reported on its Current Report on Form 8-K, filed with the Securities and Exchange Commission, that it had entered into an agreement for the purchase of various assets from subsidiaries of AEI Resources. 21 PART III. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SGI INTERNATIONAL /s/ MICHAEL L. ROSE August 12, 1999 - ------------------------------------ Michael L. Rose, President and Chief Executive Officer /s/ GEORGE E. DONLOU August 12, 1999 - ------------------------------------ George E. Donlou Vice President Finance and Controller 22