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