UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ________
Commission File Number 2-93124
SGI International
(Exact name of small business issuer as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(858) 551-1090
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
The number of shares of common stock, no par value, outstanding as of November
8, 1999, was 51,004,755.
Transitional Small Business Disclosure Format (Check one): Yes X No
TABLE OF CONTENTS
FORM 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Deficiency 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introductory Note 13
Results of Operations 13
Liquidity and Capital Resources 15
Year 2000 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
PART III. SIGNATURES 21
2
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31,
1999 1998
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 212,002 $ 239,885
Restricted time deposit 402,500 402,500
Receivable from LFC Investees 78,479 78,479
Trade accounts receivable, less allowance for doubtful accounts of 79,460 and $84,460 509,979 229,759
Costs and estimated earnings in excess of billings on contracts 62,975 275,967
Inventories 65,120 64,371
Prepaid expenses and other current assets 33,569 83,283
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,364,624 1,374,244
- ------------------------------------------------------------------------------------------------------------------------
LFC Process related assets:
Royalty rights, net 1,021,313 1,257,000
LFC cogeneration project, net 236,889 315,853
Investment in LFC Investees 495,430 490,232
Notes receivable, net 150,000 150,000
Australia LFC project, net - 86,877
LFC Process Control, net 75,593 3,834
Other technological assets, net 29,206 27,250
- ------------------------------------------------------------------------------------------------------------------------
2,008,431 2,331,046
Property and equipment, net of accumulated
depreciation of $1,234,946 and $920,941 486,333 766,695
Goodwill, net of accumulated amortization of $180,670 and $144,721 299,574 335,523
- ------------------------------------------------------------------------------------------------------------------------
$4,158,962 $ 4,807,508
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities:
Accounts payable $ 900,797 $ 224,310
Borrowings on line-of-credit 400,000 400,000
Billings in excess of costs and estimated earnings on contracts 222,079 156,411
Current maturities of long-term notes payable 809,500 690,000
12% convertible debentures - 3,494,880
Accrued salaries, benefits and related taxes 672,417 139,486
Payable to LFC Investees 180,172 180,172
Interest payable 160,807 161,991
Other accrued expenses 418,396 189,487
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,764,168 5,636,737
Long-term liabilities, less current maturities 4,270,386 104,750
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,034,554 5,741,487
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Mandatorily redeemable preferred stock $.01 par value, liquidation
value of $177,500 and $1,570,000, plus accumulated dividends (Note 5) 196,672 1,449,348
Stockholders' deficiency:
Convertible preferred stock 604 641
Common stock 49,216,500 45,688,545
Paid-in capital 7,120,492 8,258,140
Accumulated deficit (60,409,860) (56,330,653)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (4,072,264) (2,383,327)
- ------------------------------------------------------------------------------------------------------------------------
$ 4,158,962 $ 4,807,508
- ------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
3
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months Nine months
ended September 30, ended September 30,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 1,338,860 $1,107,021 $ 2,790,344 $ 3,696,209
Other 122,375 7,923 153,264 35,261
- --------------------------------------------------------------------------------------------------------------------------------
1,461,235 1,114,944 2,943,608 3,731,470
Expenses:
Cost of sales 795,396 833,019 1,710,233 2,811,129
Engineering, research and consulting 456,443 283,796 1,265,130 789,972
Loss from investment in LFC Investees (4,198) 100,576 (4,198) 527,865
Selling, general and administrative 714,211 540,665 2,330,678 2,018,859
Legal and accounting 144,032 156,930 470,177 510,488
Depreciation and amortization 232,927 220,623 775,433 608,498
Interest 162,440 138,134 474,788 599,016
- --------------------------------------------------------------------------------------------------------------------------------
2,501,251 2,273,743 7,022,241 7,865,827
- --------------------------------------------------------------------------------------------------------------------------------
Net loss (1,040,016) (1,158,799) (4,078,633) (4,134,357)
Imputed preferred stock dividends and
accretion on convertible and
mandatorily refeemable preferred stock 36,922 122,372 36,922 1,434,891
- --------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (1,076,938) $ (1,281,171) $ (4,115,555) $ (5,569,248)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic $ (0.02) $ (0.08) $ (0.12) $ (0.42)
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 44,402,990 15,259,805 34,781,806 13,123,331
- --------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
4
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Convertible
Preferred Stock Common Stock Total
---------------------- --------------------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 64,044 $ 641 21,568,344 $ 45,688,545 $8,258,140 $(56,330,653) $ (2,383,327)
Issuance of common stock for cash 9,334,186 984,565 984,565
Issuance of common stock for
convertible debentures 286,762 68,107 68,107
Issuance of common stock for
mandatorily redeemable preferred stock 12,913,819 1,253,250 1,253,250
Issuance of common stock for services 271,208 39,075 39,075
Conversion of preferred stock (3,654) (37) 3,145,464 1,182,958 (1,182,921) -
Issuance of warrants to purchase
common stock to non-employees 24,166 24,166
Accretion adjustment for mandatorily
redeemable preferred stock, net
of conversions (574) (574)
Interest expense related to issuance of
warrants 21,107 21,107
Net Loss (4,078,633) (4,078,633)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 60,390 $ 604 47,519,783 $ 49,216,500 $7,120,492 $(60,409,860) (4,072,264)
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
SGI INTERNATIONAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net loss $ (4,078,633) $ (4,134,357)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in net loss (gain) of LFC Investees (4,213) 527,865
Depreciation and amortization 775,433 608,498
Common stock issued for interest, services,
and other operating activities 39,075 162,665
Non-employee compensation expense on issuance of warrants 24,166 44,640
Imputed and accrued interest on warrants issued to note holders 21,107 188,033
Changes in operating assets and liabilities:
Receivable from LFC Investees - (41,437)
Trade accounts receivable (67,228) (250,423)
Inventories (749) 199
Other current assets 49,714 158,948
Accounts payable 676,487 255,381
Billings in excess of costs and estimated
earnings on contracts 65,668 (75,177)
Accrued salaries, benefits and related taxes 532,931 (63,920)
Interest payable 39,304 1,513
Other accrued expenses 228,909 (69,554)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,698,029) (2,687,126)
- ----------------------------------------------------------------------------------------------------------------------
Investing activities:
LFC Process related assets:
Additions to LFC Process controls and other
technological assets (85,419) -
Investment in LFC Investees (985) (441,000)
Payable to LFC Investees - (100,000)
Purchase of property and equipment (36,643) (299,590)
Other assets (9,247) (2,375)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (132,294) (842,965)
- ----------------------------------------------------------------------------------------------------------------------
Financing activities:
Payments of notes payable (7,125) (7,125)
Proceeds from issuance of debt 825,000 250,000
Proceeds from issuance of common stock 984,565 171,800
Proceeds from issuance of preferred stock - 2,803,200
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,802,440 3,217,875
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (27,883) (312,216)
Cash at beginning of period 239,885 429,232
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 212,002 $ 117,016
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 393,728 $ 338,452
Supplemental disclosure of non-cash activities:
Common stock issued for services $ 39,075 $ 162,665
Conversion of preferred stock $1,182,958 $4,254,050
Common stock issued for convertible debentures $ 68,107 -
Common stock issued for mandatorily redeemable preferred stock $1,253,250 -
- ----------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
6
SGI INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International and subsidiaries (the "Company") for the three and nine month
periods ended September 30, 1998, and 1999, are unaudited and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary for a
fair statement of the consolidated financial position as of September 30, 1999,
and the consolidated results of operations and cash flows for the nine months
ended September 30, 1999, and 1998. The results of operations for the three and
nine month periods ended September 30, 1999, are not necessarily indicative of
the results to be expected for the year ending December 31, 1999. For more
complete financial information, these financial statements, and the notes
thereto, should be read in conjunction with the consolidated audited financial
statements for the year ended December 31, 1998, included in the Company's Form
10-K filed with the Securities and Exchange Commission.
The accompanying consolidated financial statements are prepared on a going
concern basis. The recovery of amounts invested in the Company's principal
assets, the LFC Process and OCET Process assets, are dependent upon the
Company's ability to adequately fund its on-going development operations
including capital contributions to its new joint venture LFC Technologies, LLC
("LFC Tech") with MLFC Corporation ("MLFC"), a wholly owned subsidiary of
Mitsubishi Corporation. Furthermore, the ability to successfully bring both the
LFC Process and OCET Process technologies to commercialization will ultimately
depend on the Company's ability to attract sufficient additional equity, debt or
other third-party financing.
Success in commercialization of the LFC Process and OCET Process is dependent in
large part upon the ability to enter into satisfactory arrangements with other
partners, financiers or customers and upon the ability of these third parties to
perform their responsibilities. The resources required to profitably develop,
construct and operate an LFC plant are likely to include hundreds of millions of
dollars, and expertise in major plant development and operations. There can be
no assurance that any licenses, joint venture agreements or other arrangements
will be available on acceptable terms, if at all; that any revenue will be
derived from such arrangements; or that, if revenue is generated, any of said
arrangements will be profitable to the Company. If the Company is unsuccessful
in its attempts to license the LFC Process or OCET Process, or if such third
parties are unsuccessful in profitably developing and operating LFC plants, the
planned business and operations of the Company will likely not succeed and the
Company would not be able to recover the carrying value of the long-lived assets
related to either the LFC Process or OCET Process.
The Company had negative working capital of $2.4 million and an accumulated
deficit of $60.4 million at September 30, 1999. These factors and the Company's
recurring losses from continuing operations, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company is
currently seeking additional financing through the private sales of its equity
and debt securities to fund working capital requirements.
The Company is also seeking additional funding through the acquisition,
financing, sale and operations of the ENCOAL demonstration plant and through
additional strategic partnerships, joint ventures or similar collaborative or
other arrangements with larger well capitalized companies, under which such
companies would provide additional capital to the Company in exchange for
exclusive or non-exclusive licenses or other rights to certain technologies and
products the Company is developing. There can be no assurance that any
7
collaborative financing arrangements through a joint venture, and/or with
strategic partners, will be available when needed, or on terms acceptable to the
Company. If adequate funds are not available, the Company may be required to
curtail or terminate one or more of its operating activities. The Company is
engaged in continuing negotiations to secure additional capital and financing,
and while management believes funds can be raised, there is no assurance that
their efforts will be successful. The consolidated financial statements do not
include any adjustments that might result from this uncertainty.
(2) ORGANIZATION AND BUSINESS
The principal businesses of the Company are developing, commercializing, and
licensing new energy technologies; and manufacturing automated assembly
equipment.
The Company has the following wholly-owned subsidiaries at September 30, 1999:
Assembly & Manufacturing Systems, Inc. ("AMS"); OCET Corporation ("OCET"); and
U.S. Clean Coal Refineries, Inc. ("USCCR") which is currently inoperative. AMS
designs, manufactures and installs automated assembly equipment, and was
acquired in October 1995. OCET was organized in February 1995 to research and
develop the Opti-Crude Enhancement Technology, a process for further refining
residual oil bottoms. USCCR was organized in October 1994, to market clean coal
refinery project development programs.
(3) FINANCING TRANSACTIONS
On August 18, 1999 the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 60,000 common shares, to one
consultant for financial consulting services. The warrants were issued pursuant
to the exemptions provided by Section 4(2) of the Securities Act and Regulation
D. In connection therewith, the Company obtained investment representations and
recorded compensation expense of approximately $5,400. The exercise price was
not lower than the closing bid price on the grant date and expires on December
31, 2002. The warrant is exercisable one year from the date of grant at $0.1375
per share.
On August 20, 1999, the Company, as provided in a related service agreement,
granted one warrant to one employee to purchase an aggregate of 5,000 common
shares. The warrant was issued pursuant to the exemptions provided by Section
4(2) of the Securities Act and Regulation D. Investment representations were
obtained. The exercise price was not lower than the closing bid price on the
grant date and the warrant expires on December 31, 2003. The warrant is
exercisable one year from the grant date at $0.136 per share.
During the three month period ended September 30, 1999, the Company by agreement
modified the due dates on $750,000 of notes payable plus associated interest,
due September 27, 1999, to be payable upon demand, which had not been made as of
September 30, 1999.
During the three month period ended September 30, 1999, the Company raised
approximately $339,000 through the issuance of 3,666,602 restricted common
shares to fourteen accredited investors and two officers/directors of the
Company (Also See Note 8). In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. These securities were
issued pursuant to the exemptions provided by Section 4(2) of the Securities
Act and Regulation D. Investment representations were obtained and legends were
placed on the certificates. Partially, in connection therewith the Company
issued an aggregate of 65,446 shares of restricted common stock to one
individual, Mr. B. Leichtling, as compensation for placement agent services.
(4) NET LOSS PER SHARE
Basic net loss per share is computed in accordance with SFAS No. 128, "Earnings
per Share." Basic EPS includes no dilution and is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. For purposes of computing the net loss available to
common stockholders, preferred stock dividends and accretion of mandatorily
redeemable
8
preferred stock are deducted from the net loss. Preferred stock dividends
include "imputed dividends" for preferred stock issued with a non-detachable
beneficial conversion feature near the date of issuance. Imputed dividends
represent the aggregate difference between conversion price and the fair market
value of the common stock as of the date of issuance of the preferred stock,
without regard to the actual date on which the preferred stock may be converted.
Shares issuable upon conversion of preferred stock, convertible debentures and
upon exercise of outstanding stock options and warrants are not included since
the effects would be anti-dilutive.
(5) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Property and Equipment
September 30 December 31,
1999 1998
- -------------------------------------------------------------------------------
Office furniture and fixtures $ 125,000 $ 118,000
Laboratory equipment 1,019,000 1,018,000
Machinery and equipment 136,000 123,000
Computer equipment 387,000 377,000
Leasehold improvements 54,000 52,000
- -------------------------------------------------------------------------------
1,721,000 1,688,000
Less accumulated depreciation (1,235,000) (921,000)
- -------------------------------------------------------------------------------
Net property and equipment $ 486,000 $ 767,000
- -------------------------------------------------------------------------------
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:
Nine Months
Ended Year Ended
Sept. 30, December 31,
1999 1998
- -------------------------------------------------------------------------------
Balance at beginning of period $ 1,449,000 $ -
Issuance of preferred stock - 1,413,000
Conversion to common stock (1,253,000) -
Accretion of amounts payable
upon redemption, net 1,000 36,000
- -------------------------------------------------------------------------------
Balance at end of period $ 197,000 $1,449,000
- -------------------------------------------------------------------------------
9
(6) SEGMENT REPORTING
The following information is presented pursuant to FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information.
Intersegment sales were not significant in any period.
Three months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
- ---------------------------------------------------------------------------------------------
1999
Revenues 1,202,000 250,000 1,000 8,000 1,461,000
Net profit (loss) 161,000 (87,000) (322,000) (792,000) (1,040,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 29,000 112,000 88,000 3,000 232,000
Engineering, research and
consulting expenditures - 224,000 232,000 - 456,000
Interest expense - - - 162,000 162,000
- ---------------------------------------------------------------------------------------------
1998
Revenues 1,099,000 - 9,000 7,000 1,115,000
Net profit (loss) 51,000 (263,000) (307,000) (640,000) (1,159,000)
Equity in operations of investee - (101,000) - - (101,000)
Depreciation & Amortization 28,000 112,000 77,000 4,000 221,000
Engineering, research and
consulting expenditures - 50,000 234,000 - 284,000
Interest expense - - - 138,000 138,000
- ---------------------------------------------------------------------------------------------
Nine months ended Automated LFC OCET
September 30 Assembly Process Process Corporate Total
- ---------------------------------------------------------------------------------------------
1999
Revenues 2,135,000 750,000 30,000 29,000 2,944,000
Net profit (loss) (328,000) (181,000) (999,000)(2,571,000) (4,079,000)
Equity in operations of investee - 4,000 - - 4,000
Depreciation & Amortization 87,000 415,000 262,000 11,000 775,000
Engineering, research and
consulting expenditures - 515,000 750,000 - 1,265,000
Interest expense 1,000 - - 474,000 475,000
- ---------------------------------------------------------------------------------------------
1998
Revenues 3,680,000 - 19,000 32,000 3,731,000
Net profit (loss) 164,000 (943,000) (887,000)(2,468,000) (4,134,000)
Equity in operations of investee - (528,000) - - (528,000)
Depreciation & Amortization 79,000 336,000 183,000 10,000 608,000
Engineering, research and
consulting expenditures - 79,000 711,000 - 790,000
Interest expense - - - 599,000 599,000
- ---------------------------------------------------------------------------------------------
Total Assets by Segment Sept. 30, December 31,
1999 1998
-------------- -----------------
Identifiable assets, net
Automated Assembly $1,205,000 $ 1,303,000
LFC Process 1,979,000 2,331,000
OCET Process 386,000 632,000
Corporate 589,000 542,000
------------------------------------------------------------------------
Total $4,159,000 $ 4,808,000
------------------------------------------------------------------------
10
(7) INVESTMENT IN LFC JOINT VENTURES
In January of this year, the Company entered into a number of agreements with
MLFC, a wholly-owned subsidiary of Mitsubishi Corporation, relating to the
formation of a joint venture with MLFC regarding the LFC Process. The Company
and MLFC entered into a LFC Joint Venture Formation Agreement, Operating
Agreement, License Agreement, Services Agreement and Security Agreement with the
purpose of further developing the LFC Process and licensing its use in proposed
LFC Process plants.
The Operating Agreement, as amended effective January 14, 1999, between MLFC and
the Company, governs the management of the new joint venture company, LFC Tech.
The purpose of LFC Tech is to conduct research and development activities with
respect to the LFC Process and other approved business. The Amended and Restated
Services Agreement between MLFC, LFC Tech and the Company provides that the
Company will provide certain services to LFC Tech including soliciting potential
customers in the U.S., developing LFC projects in the U.S. and performing
related engineering work. Accordingly, the Company's portion of the quarterly
loss on investment in LFC Investee has been eliminated against service revenues,
as if the joint venture were consolidated.
Subsequent to September 30, 1999 the Company and MLFC entered into a series of
agreements modifying the above mentioned agreements. See note 10 for additional
information.
(8) RELATED PARTY TRANSACTIONS
On September 30, 1999, the Company issued an aggregate of 225,226 shares of
restricted common stock to two officers/directors of the Company in return for
$20,000 in cash. In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. On that date, the bid
price of the Company's unrestricted common stock was $0.129 per share. These
securities were issued pursuant to the exemptions provided by Section 4(2) of
the Securities Act and Regulation D. Investment representations were obtained
and legends were placed on the certificates.
(9) PENDING ASSET ACQUISITION
As previously reported, on April 22, 1999, the Company executed an agreement
(the "Acquisition Agreement") with Bluegrass Coal Development Company
("Bluegrass") and Americoal Development Company ("Americoal"), both wholly owned
subsidiaries of AEI Resources ("AEI") to purchase Bluegrass' fifty percent
interest in the Liquids From Coal ("LFC") Process; the ENCOAL Corporation, which
owns the ENCOAL LFC demonstration plant; certain existing permits necessary to
build a commercial sized LFC plant near Gillette, Wyoming; and all other
tangible and intangible LFC assets (collectively, the "ENCOAL Acquisition").
The closing of the acquisition is conditioned upon, among other things, the
financing of certain improvements to the ENCOAL plant, currently estimated at
$10 million, the completion of both fuel supply and product sale agreements, the
assumption or waiver of certain bond obligations, the waiver of the $1.13
million invoice due Mitsubishi Heavy Industries by Bluegrass and certain other
conditions specified in the agreement.
The Company is currently working towards meeting the pre-closing conditions
specified in the Acquisition Agreement. Prior to September 19, 1999, the parties
realized that certain of the pre-closing conditions could not be accomplished
within the originally projected time frame. Consequently, the parties are
working to resolve these pre-conditions which remain outstanding, including but
not limited to, the financing of certain improvements, the fuel supply
agreement, product sale agreements for CDL and the assumption or waiver of
certain bond obligations. While the Company believes it will complete, resolve
or waive these pre-conditions prior to the new targeted closing date of November
29, 1999, there can be no assurance that the acquisition will be completed or
that having been completed that the ENCOAL plant will operate.
11
(10) SUBSEQUENT EVENTS
On October 28, 1999, the Company and MLFC amended the terms of their current
business relationship, by executing certain amendments (the "Restructuring") to
the various joint venture agreements that they had previously entered into on
January 14, 1999. (All payments where noted below are net of the Company's own
matching contribution required under the LFC Tech joint venture agreement.) In
accordance with the Restructuring: (a) LFC Tech accelerated the net payment of
$375,000, payable to the Company, which was acknowledged in the restructured
Amended Services Agreement, thereby ending any further obligation for payments
under this contract through the year 2000, (b) the Company transfered its
present 50% interest in the LFC Process Patents to LFC Tech upon closing of the
Restructuring, (c) the Company is to transfer the remaining 50% interest in the
LFC Process Patents to LFC Tech upon completion of the ENCOAL Acquisition, (d)
Mitsubishi Heavy Industries shall execute a Waiver and Release of the $1.13
million invoice due it from Bluegrass, which is intended to be used by the
Company as partial payment if the ENCOAL acquisition is completed, (e) MHI shall
forgive the Company the payment of the $1.13 million invoice upon the closing of
the ENCOAL Acquisition, (f) LFC Tech shall pay the Company an additional
$750,000 net, payable in two tranches, with the first net payment of $375,00
made upon closing of the Restructuring and the second net payment of $375,000
due upon the closing of the ENCOAL Acquisition, (g) MLFC, subject to and upon
the occurrence of certain milestones (more fully discussed in Note 13 of the
notes to the consolidated financial statements contained in the Company's
December 31, 1998, 10-K.) already contained in the joint venture agreements and
subject to both parties obtaining Board of Director approvals, in lieu of the
$4.0 million payment previously specified in the agreement, shall make a payment
of $3,625,000 to the Company if the ENCOAL Acquisition does not occur and a
payment of $3,250,000 if the ENCOAL Acquisition does occur, (h) LFC Tech
Operating Agreement was extended through the year 2008, and (i) an agreement to
assist with engineering and CDL upgrading work. Other minor changes were made
to the Amended Services Agreement to account for the early payments, the License
Agreement to account for the transfer of the LFC Process Patents to LFC Tech,
the termination of the Security Agreement to reflect the fact that it was no
longer necessary, and the Amended Operating Agreement of LFC Tech to reflect the
terms of the Restructuring.
Effective as of October 30, 1999, the Company was able to extend or exchange
approximately $4.2 million in existing debt for new securities of the Company
including new convertible debt securities, amended warrants and preferred stock
(the "99D Exchange Offering"). The Company retired approximately $3.45 million
in existing 12% convertible debentures which were required to be paid prior to
October 31, 1999, in exchange for new 12% convertible debentures (the "99D
Debentures"), in the same amount, due September 30, 2001. The 99D Debentures may
be prepaid by the Company, in whole or in part, at any time prior to September
30, 2001. Interest on the debentures is payable quarterly in cash. The
debentures are convertible into common stock of the Company, at the option of
the holder, subsequent to November 15, 1999, in whole or in part, at the
greater of: (i) the average of the ten day closing bid price of the Company's
common stock prior to the date the notice of conversion is received by the
Company or (ii) $1.00 per share. In conjunction with the issuance of the 99D
Debentures the Company amended existing warrants set to expire on December 31,
1999, with an exercise price of $1.20 per share to now expire on December 31,
2001, with a new exercise price of $0.30 per share. The number of shares of
common stock underlying the amended warrants aggregate approximately 328,000
shares. In addition, the Company also agreed to grant shares of Series 99D
Convertible Preferred Stock (the "99D Preferred") convertible with no further
payment into approximately 154,000 shares of common stock. The 99D Preferred
shares are convertible at the option of the holder, any time after November 15,
1999, but only if the ten business day average closing bid price of the
Company's common stock is $0.75 per share or greater at the time of conversion.
The 99D Preferred stock has no voting rights, dividend rights or preference in
liquidation and if not previously converted, will automatically convert into
common stock on October 30, 2001.
As part of the 99D Exchange Offering the Company also obtained an extension to
September 30, 2001, of approximately $724,000, including interest, in existing
10%, 11% and 12% interest bearing notes which were required to be paid by
October 30, 1999. In connection therewith, the Company agreed to grant shares
of Series 99D Preferred stock convertible into an aggregate of approximately
46,000 shares of common stock and to amended exisiting warrants set to expire
on December 31, 1999 with an exercise price of $1.20 per share to now expire on
December 31, 2001 with a new exercise price of $0.30 per share. The number of
shares of common stock underlying the amended warrants aggregate approximately
141,000 shares.
12
Interest on the notes payable will continue to be made in cash on a quarterly
basis. The 99D Exchange Offering was made only to existing debt holders
pursuant to the exemptions provided by Sections 3(a)(9) and Section 4(2) of the
Securities Act and Regulation D. No registration rights were granted on any of
the securities issued under the 99D Exchange Offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on Form 10-QSB contains statements relative to (i)
projections, (ii) estimates, (iii) future research plans and expenditures, (iv)
potential collaborative arrangements, (v) opinions of management and (vi) the
need for and availability of additional financing which may be considered
"forward looking statements."
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions regarding the Company's business and
technology, which involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business decisions,
as well as risk factors detailed from time to time in the Company's Securities
and Exchange Commission reports including this Form 10-QSB, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated will be realized and actual results may differ materially.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business. Therefore,
historical results and percentage relationships will not necessarily be
indicative of the operating results of any future period.
RESULTS OF OPERATIONS
Net Loss per Common Share. Basic net loss per common share for the three and
nine month periods ended September 30, 1999, decreased approximately $0.06 per
share and $0.30 per share, respectively, over the same prior year periods. The
decrease in basic net loss per share for both the three and nine month periods
is principally attributable to an increase in the weighted average number of
common shares outstanding, and a decrease in imputed dividends, as the net loss
for both the three and nine month periods remained essentially the same as the
prior year.
Sales and Gross Margin. Sales and cost of sales are primarily attributable to
Assembly and Manufacturing Systems, Inc. (AMS) and are recorded using the
percentage of completion method. Sales and cost of sales at AMS for the three
months ended September 30, 1999, remained substantially unchanged, over the same
prior year period with sales to the medical and high-tech sectors meeting or
slightly exceeding prior year levels. Sales to the automotive sector for the
three month period ended September 30, 1999 equaled approximately 57% of prior
year levels
Sales and cost of sales for the nine month period ended September 30, 1999,
decreased 45% and 39%, respectively, over the same prior year period. This
decline in sales for the nine month period primarily occurred in the first and
second quarters of the year as a result of decreased sales in all three sectors
in which
13
AMS does business. The Company believes that the decline in sales is primarily
the result of a general slowdown in demand for automated assembly equipment.
Sales to the high-tech sector (electronics and communications industries), which
has historically represented the Company's largest sector, continues to lag
behind prior year levels. Even with the third quarters recovery, sales to this
sector are expected to remain below prior year levels throughout the rest of the
year and until such time as the electronics industry recovers from the effects
of the Asian financial downturn.
Sales to the automotive sector for both the three and nine month periods ended
September 30, 1999 were significantly lower than prior year levels. The Company
believes this decrease in sales to the automotive sector is due to a delay in
orders from two of its larger customers. The Company anticipates that sales to
this sector will continue to be lower than 1998's levels.
For the three months ended September 30, 1999, AMS' sales to the medical sector
showed signs of reviving based on increased bidding activity and sales which
essentially equaled prior year sales. For the nine months ended September 30,
1999 the Company experienced a decrease in sales to its medical sector, over the
same prior year period. The Company believes that the decrease is primarily the
result of the merger of several of its customers, which resulted in orders being
delayed for the first and second quarter of the year. The Company believes that
sales to this sector for the year, will meet or exceed prior year levels.
Gross margin as a percentage of sales for the three month period ended September
30, 1999, remained essentially the same compared to the same prior year period.
Gross margin as a percentage of sales for the nine month period ended September
30, 1999, was 16% compared to 24% over the same prior year period . The decrease
in gross margin is primarily attributable to the reduced business volume as
previously described.
The decrease in revenues experienced by the Company's automated assembly
business segment for both the three and nine month periods ended September 30,
1999 were partially offset by revenues derived from the Company's Services
Agreement with LFC Tech, it's joint venture with MLFC. For both the three and
nine month periods ended September 30, 1999, the Company received net revenues
of $375,000 and $750,000, respectively. The parties agreed to the acceleration
of the payments due under the services agreement in part due to the significant
amount of work performed by the Company in evaluating CDL chemical constituents
and their corresponding markets. As a result of the acceleration of payments no
additional revenues are anticipated from the Services Agreement through the year
2000.
Other Income. Other income for the three and nine month periods ended September
30, 1999, increased primarily due to the settlement of a lawsuit the Company had
pending in Superior Court.
Loss on Investment in LFC Investees. The Company's share of the losses for its
LFC joint ventures (TEK-KOL and LFC Tech) for the three and nine month periods
ended September 30, 1999, decreased 100% over the same prior year period. The
decrease is primarily attributable to the termination of the TEK-KOL Partnership
and the partners of LFC Tech agreeing to perform certain services for the joint
venture at their own expense, without pass through to the partnership.
Engineering, Research and Consulting Expenses. Engineering, research and
development expenses for the three and nine month periods ended September 30,
1999, increased 61% and 60%, respectively, over the same prior year periods. The
increase for both the three and nine month periods is essentially attributable
to an increase in expenses related to the development of the LFC Process
technology, as the expenses for the development of the OCET Process technology
remained essentially the same over the same prior year periods. The increase in
expenses for the LFC Process technology are primarily related to engineering
studies designed to reduce the cost of the first commercial plant and in
evaluating the chemical constituents of CDL, with the goal of maximizing the
commercial value of this product.
14
Selling General and Administrative Expenses. Selling general and administrative
expense for the three month period ended September 30, 1999, increased 32% over
the same prior year period. The increase is principally related to the Company's
opening of a marketing office in Denver, Colorado, an engineering office with
associated personnel in Gillette Wyoming and an increase in administrative
personnel at the corporate offices. Selling, general and administrative expenses
for AMS, for the three month period ended September 30, 1999, increased
approximately $30,000 or 16% as a result of a general increase in sales and
marketing expenses.
Selling general and administrative expense for the nine month period ended
September 30, 1999, increased 15% over the same prior year period. The increase
is principally related to the Company's opening of a marketing office in Denver,
Colorado, an engineering office with associated personnel in Gillette Wyoming
and an increase in administrative personnel at the corporate offices. Selling,
general and administrative expenses for AMS, for the nine month period ended
September 30, 1999, remained substantially unchanged over the same prior year
period.
Legal and Accounting Expenses. Legal and accounting expenses for both the three
and nine month periods ended September 30, 1999, decreased 8%, respectively
over the same prior year periods. The decrease in expenses for both the three
and nine month periods is related primarily to a reduction in legal and
accounting expenses incurred in preparing and filing the Company's Form S-2
with the Securities and Exchange Commission in 1998.
Depreciation and Amortization Expenses. Depreciation and amortization expense
for the three and nine month periods ended September 30, 1999, increased 6% and
27%, respectively over the same prior year periods. The increase for both
periods is due primarily to purchases and construction of equipment at the
Company's OCET laboratory which were initially placed in service in the third
quarter of 1998. In addition, the Company incurred a non-recurring charge of
approximately $80,000 in the first quarter of this year related to the write-off
of start-up costs pertaining to its Australian LFC project.
Interest Expense. Interest expense for the three month period ended September
30, 1999, increased approximately 18% over the same prior year period. The
increase for the three month period is principally due to the interest
associated with an $800,000 increase in short term notes payable, primarily
issued in the first quarter of 1999.
Interest expense for the nine month period ended September 30, 1999, decreased
21% over the same prior year period. The decrease for nine month period is
principally due to approximately $188,033 of imputed interest expense,
associated with the issuance of warrants to certain debt holders in 1998, which
did not continue after September 30, 1998. This decrease was partially offset by
the interest associated with an $800,000 increase in short term notes payable,
primarily issued in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had assets totaling $4.2 million,
including restricted cash of $0.4 million, and a working capital deficiency of
$2.4 million. The Company anticipates continued operating losses over the next
twelve months and has both short-term and long-term liquidity deficiencies as of
September 30, 1999. Current notes payable, convertible debentures, and
associated accrued interest aggregating approximately $4.2 million required to
be paid prior to October 30, 1999, were satisfied subsequent to September 30,
1999, through the Company's 99D Exchange Offering. This exchange offering
extended the due date of these liabilities to September 30, 2001, in exchange
for primarily convertible debt and equity securities. (see Note 10 to the
condensed unaudited consolidated financial statements). In addition, the
Company by agreement modified the due dates on $750,000 of notes payable
15
plus associated interest due September 27, 1999, to be payable upon demand,
which had not been made as of September 30, 1999. Other short-term liquidity
requirements are expected to be satisfied from existing cash balances, proceeds
from the sale of future equity securities, debt securities, the restructuring
of the joint venture with MLFC (see Note 10 to the condensed unaudited
consolidated financial statements) or other collaborative arrangements.
Negotiations are on-going for the public and private placement of equity
securities, the proceeds of which are intended to be used to satisfy the short-
term liquidity deficiency. In the event that the Company is unable to finance
operations at the current level, various administrative activities would be
curtailed and certain research and development efforts would be reduced. The
Company will not be able to sustain operations if it is unsuccessful in securing
sufficient financing and/or generating revenues from operations.
The Company had long-term liquidity deficiencies as of September 30, 1999. Over
the long-term, the Company will require substantial additional funds to maintain
and expand its research and development activities and ultimately to
commercialize, with or without the assistance of corporate partners, any of its
proposed technologies. Although there are no commitments, the Company believes
the long-term liquidity deficiency should be satisfied through a combination of
increased positive cash flows from operations, future equity sales, and research
or other collaborative agreements, or until such time, if ever, as the
commercialization of the LFC and OCET Processes result in positive cash flows.
The Company is seeking additional funds through the acquisition, financing, sale
and operations of the ENCOAL demonstration plant and through collaborative or
other arrangements with larger well capitalized companies, under which such
companies would provide additional capital to the Company in exchange for
exclusive or non-exclusive licenses or other rights to certain technologies and
products the Company is developing. Although the Company is presently engaged in
discussions with a number of suitable candidate companies, there can be no
assurance that an agreement or agreements will arise from these discussions in a
timely manner, or at all, or that revenues that may be generated thereby will
offset operating expenses sufficiently to reduce the Company's short-term or
long-term funding requirements.
Cash used in operating activities for the nine month period ended September 30,
1999, decreased 37% over the same period in 1998, principally as a result of an
increase in payables and the deferral of certain salaries and related benefits.
The use of funds from operating activities is essentially attributable to the
Company's net loss of approximately $4.0 million, for both the nine month
periods ended September 30, 1999, and 1998. These losses were incurred primarily
as a result of the Company's automated assembly operations and technology
development activities.
The Company's investing activities amounted to a use of funds of approximately
$132,000 and $843,000 for the nine month periods ended September 30, 1999, and
1998, respectively. This represents an 84% decrease in investing activities over
1998. The decrease is primarily attributable to the Company's reduced investment
in the now terminated TEK-KOL partnership and reduced expenditures for OCET's
Process Development Unit which was substantially completed in the third quarter
of 1998.
For the nine months ended September 30, 1999, the Company's investing activities
consisted primarily of the acquisition of LFC Process equipment. Management
presently estimates that the Company may be required to contribute approximately
$250,000 in 1999 for past operations and dissolution related expenditures, in
the event that the acquisition of AEI's assets does not close (see Note 9 to the
condensed unaudited consolidated financial statements). In addition, the
Company, as of January 14, 1999, has entered into a joint venture with MLFC a
wholly-owned subsidiary of Mitsubishi Corporation. (see Notes 8 and 10 of the
notes to condensed unaudited consolidated financial statements.) In accordance
with the Amended Services Agreement between the Company and LFC Tech, the
Company has received approximately $750,000 of net revenues under this agreement
in 1999. This agreement was amended subsequent to September 30, 1999 and the
Company will not be receiving any additional funds pursuant thereto through the
year 2000, except as more fully described in Note 10 to the condensed unaudited
financial statements. The Company is projecting capital expenditures for
equipment at OCET to remain below prior year levels as the need for substantial
capital improvements has ended after completion of the OCET Process Development
Unit and
16
lab improvements. AMS' capital expenditures are expected to remain relatively
consistent with prior years. On April 22, 1999, the Company entered into an
agreement to conditionally acquire the ENCOAL Corporation and LFC demonstration
plant, among other assets, from subsidiaries of AEI (see Note 9 to the
condensed consolidated financial statement.). Assuming completion of the
acquisition, for which there is no assurance, the Company will have assumed
various obligations in excess of $3.5 million and obtained assets which it
believes are of equal or greater value. In addition, after acquisition operating
expenses associated with maintaining the LFC demonstration plant in idle
condition are estimated at approximately $350,000 annually. The Company intends
to make improvements and obtain project financing estimated at $10 million
assuming completion of the asset acquisition. Other than the previously
described acquisition, the Company does not have material commitments for
capital expenditures as of September 30, 1999. The amount of funds used for
investing activities in a given period are directly related to development
requirements and funds availability.
The Company's financing activities raised approximately $1.8 million (see Note 3
to the condensed unaudited consolidated financial statements) for the nine month
period ended September 30, 1999, versus $3.2 million for the same prior year
period. These funds were raised primarily through the private placement of debt
and equity securities. The amount of money raised during a given period is
dependent upon financial market conditions, technological progress and the
Company's projected funding requirements. The Company anticipates that future
financing activities will be influenced by the aforementioned factors.
As noted previously, significant future financing activities will be required to
fund future operating and investing activities and to maintain debt service.
While the Company is engaged in continuing negotiations to secure additional
capital and financing, there is no assurance such funding will be available or
if received will be adequate.
YEAR 2000
Year 2000 Issue. The Company is preparing for the impact of the arrival of the
Year 2000 on its business, as well as on the businesses of its customers,
suppliers and business partners. The "Year 2000 Issue" is a term used to
describe the problems created by systems that are unable to accurately interpret
dates after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year" in a
two-digit format. The Year 2000 Issue creates potential risks for the Company,
including potential problems in the Company's products as well as in the
Information Technology ("IT") and non-IT systems that the Company uses in its
business operations. The Company may also be exposed to risks from third parties
with whom the Company interacts who fail to adequately address their own
Year 2000 Issues.
The Company's State of Readiness - The Company believes it has taken the
necessary steps, including contingency planning, to be prepared for the arrival
of the Year 2000. The Company does not anticipate any material adverse financial
impacts to its business from the "Year 2000 Issue". However, while the Company's
Year 2000 efforts have included a limited evaluation of its business partners,
the Company cannot provide a representation on behalf of these third parties.
The Costs to Address the Company's Year 2000 Issues - The Company has assessed
the impact on its computer systems of the Year 2000 issue. The financial impact
of making the required systems changes are not expected to be material to the
Company's consolidated financial position, results of operations or cash flows.
However, the costs of the project are based on management's best estimates,
which were derived utilizing numerous assumptions. Year 2000 Issue costs
incurred through September 30, 1999, have been charged to operations and have
not been material.
The Risks of the Company's Year 2000 Issues - There can be no assurance that the
Company will be completely successful in its efforts to address Year 2000
Issues. If some of the Company's systems are not Year 2000 compliant, the
Company could suffer a disruption of operations or other negative consequences,
17
including, but not limited to, diversion of resources, damage to the Company's
reputation and increased litigation, any of which could materially adversely
affect the Company's results of operations or financial position. The Company is
also dependent on third parties such as its customers, suppliers, service
providers and other business partners. If these or other third parties with whom
the Company conducts business fail to adequately address Year 2000 Issues, the
Company could experience a negative impact on its results of operations and
financial position. For example, the failure of carriers, power generators
and/or telecommunications companies to have Year 2000 compliant internal systems
could impact the Company's operations.
The Company's Contingency Plans - The Company will continue to refine
contingency plans to address situations that may result if the Company or any of
the third parties upon which the Company is dependent is unable to achieve Year
2000 readiness. This effort is ongoing and will continue to be evaluated as the
Company's situation changes or as new information becomes available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
[NONE]
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time involved in litigation
arising in the ordinary course of their respective businesses. As of September
30, 1999 the Company was not involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES
On August 18, 1999 the Company as provided in a related consulting agreement,
granted one warrant to purchase an aggregate of 60,000 common shares, to one
consultant for financial consulting services. The warrants were issued pursuant
to the exemptions provided by Section 4(2) of the Securities Act and Regulation
D. In connection therewith, the Company obtained investment representations and
recorded compensation expense of approximately $5,400. The exercise price was
not lower than the closing bid price on the grant date and expires on December
31, 2002. The warrant is exercisable one year from the date of grant at $0.1375
per share.
On August 20, 1999, the Company, as provided in a related service agreement,
granted one warrant to one employee to purchase an aggregate of 5,000 common
shares. The warrant was issued pursuant to the exemptions provided by Section
4(2) of the Securities Act and Regulation D. Investment representations were
obtained. The exercise price was not lower than the closing bid price on the
grant date and the warrant expires on December 31, 2003. The warrant is
exercisable one year from the grant date at $0.136 per share.
During the three month period ended September 30, 1999, the Company by agreement
modified the due dates on $750,000 of notes payable plus associated interest,
due September 27, 1999, to be payable upon demand, which had not been made as of
September 30, 1999.
During the three month period ended September 30, 1999, the Company raised
approximately $339,000 through the issuance of 3,666,602 restricted common
shares to fourteen accredited investors and two officers/directors of the
Company. In addition, the Company granted purchasers of these
restricted securities piggy-back registration rights. These securities were
issued pursuant to the exemptions provided by Section 4(2) of the Securities
Act and Regulation D. Investment representations were obtained and legends were
placed on the certificates. Partially, in connection therewith the Company
issued an aggregate of 65,446 shares of restricted common stock to one
individual, Mr. B. Leichtling, as compensation for placement agent services.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
[NONE]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on July 30, 1999. At that meeting
the following matters were submitted to a vote of the stockholders of SGI
International:
1999 SGI International Annual Meeting
Final Voting Results
Proposal
18
Item No. 1 Election of Directors
The following nominees for director received the number of votes set opposite
their respective names:
Voting Results
- ------------------------------
Votes Percent
------------- ------------
James W. Mahler For 26,750,302 99%
Withhold 220,694 1%
Michael L. Rose For 26,695,237 99%
Withhold 275,759 1%
Joseph A. Savoca For 25,804,506 96%
Withhold 1,166,440 4%
Jeffrey L. Smith For 26,303,655 98%
Withhold 666,841 2%
John R. Taylor For 26,124,271 97%
Withhold 846,725 3%
Directors: Norman A. Grant, William A. Kerr, and Dr. Ernest P. Esztergar, whose
terms of office had not expired, continued in their respective capacities as
directors. Subsequent to the annual meeting William R. Harris resigned for
health reasons.
Item No. 2 Ratification of Selection of J.H. Cohn LLP, as Independent Public
Accountants
Voting Results
--------------------------------------
Votes Percent
--------------- ---------------
For 26,088,494 97%
Against 230,228 1%
Abstain 652,274 2%
ITEM 5. OTHER INFORMATION
On October 28, 1999, the Company and MLFC amended the terms of their current
business relationship, by executing certain amendments (the "Restructuring") to
the various joint venture agreements that they had previously entered into on
January 14, 1999. (All payments where noted below are net of the Company's own
matching contribution required under the LFC Tech joint venture agreement.) In
accordance with the Restructuring: (a) LFC Tech accelerated the net payment of
$375,000, payable to the Company, which was acknowledged in the restructured
Amended Services Agreement, thereby ending any further obligation for payments
under this contract through the year 2000, (b) the Company transfered its
present 50% interest in the LFC Process Patents to LFC Tech upon closing of the
Restructuring, (c) the Company is to transfer the remaining 50% interest in the
LFC Process Patents to LFC Tech upon completion of the ENCOAL Acquisition, (d)
Mitsubishi Heavy Industries shall execute a Waiver and Release of the $1.13
million invoice due it from Bluegrass, which is intended to be used by the
Company as partial payment if the ENCOAL acquisition is completed, (e) MHI shall
forgive the Company the payment of the $1.13 million invoice upon the closing of
the ENCOAL Acquisition, (f) LFC Tech shall pay the Company an additional
$750,000 net, payable in two tranches, with the first net payment of $375,00
made upon closing of the Restructuring and the second net payment of $375,000
due upon the closing of the ENCOAL Acquisition, (g) MLFC, subject to and upon
the occurrence of certain milestones (more fully discussed in Note 13 of the
notes to the consolidated financial statements contained in the Company's
December 31, 1998, 10-K.) already contained in the joint venture agreements and
subject to both parties obtaining Board of Director approvals, in lieu of the
$4.0 million payment previously specified in the agreement, shall make a payment
of $3,625,000 to the Company if the ENCOAL Acquisition does not occur and a
payment of $3,250,000 if the ENCOAL Acquisition does occur, (h) LFC Tech
Operating Agreement was extended through the year 2008, and (i) an agreement to
assist with engineering and CDL upgrading work. Other minor changes were made
to the Amended Services Agreement to account for the early payments, the License
Agreement to account for the transfer of the LFC Process Patents to LFC Tech,
the termination of the Security Agreement to reflect the fact that it was no
longer necessary, and the Amended Operating Agreement of LFC Tech to reflect the
terms of the Restructuring.
19
Effective as of October 30, 1999, the Company was able to extend or exchange
approximately $4.2 million in existing debt for new securities of the Company
including new convertible debt securities, amended warrants and preferred stock
(the "99D Exchange Offering"). The Company retired approximately $3.45 million
in existing 12% convertible debentures which were required to be paid prior to
October 31, 1999, in exchange for new 12% convertible debentures (the "99D
Debentures"), in the same amount, due September 30, 2001. The 99D Debentures may
be prepaid by the Company, in whole or in part, at any time prior to September
30, 2001. Interest on the debentures is payable quarterly in cash. The
debentures are convertible into common stock of the Company, at the option of
the holder, subsequent to November 15, 1999, in whole or in part, at the
greater of: (i) the average of the ten day closing bid price of the Company's
common stock prior to the date the notice of conversion is received by the
Company or (ii) $1.00 per share. In conjunction with the issuance of the 99D
Debentures the Company amended existing warrants set to expire on December 31,
1999, with an exercise price of $1.20 per share to now expire on December 31,
2001, with a new exercise price of $0.30 per share. The number of shares of
common stock underlying the amended warrants aggregate approximately 328,000
shares. In addition, the Company also agreed to grant shares of Series 99D
Convertible Preferred Stock (the "99D Preferred") convertible with no further
payment into approximately 154,000 shares of common stock. The 99D Preferred
shares are convertible at the option of the holder, any time after November 15,
1999, but only if the ten business day average closing bid price of the
Company's common stock is $0.75 per share or greater at the time of conversion.
The 99D Preferred stock has no voting rights, dividend rights or preference in
liquidation and if not previously converted, will automatically convert into
common stock on October 30, 2001.
As part of the 99D Exchange Offering the Company also obtained an extension to
September 30, 2001, of approximately $724,000, including interest, in existing
10%, 11% and 12% interest bearing notes which were required to be paid by
October 30, 1999. In connection therewith, the Company agreed to grant
shares of Series 99D Preferred stock convertible into an aggregate of
approximately 46,000 shares of common stock and to amended exisiting warrants
set to expire on December 31, 1999 with an exercise price of $1.20 per share to
now expire on December 31, 2001 with a new exercise price of $0.30 per share.
The number of shares of common stock underlying the amended warrants aggregate
approximately 141,000 shares.
Interest on the notes payable will continue to be made in cash on a quarterly
basis. The 99D Exchange Offering was made only to existing debt holders
pursuant to the exemptions provided by Sections 3(a)(9) and Section 4(2) of the
Securities Act and Regulation D. No registration rights were granted on any of
the securities issued under the 99D Exchange Offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Certificate of Secretary re: Designation of Series 99-D
Preferred Stock (1)
4.1 Form of Restricted Stock Purchase Agreement (2)
4.2 Form of Series 99-D Convertible Preferred Stock (1)
4.3 Form of Series 99-D Convertible Debentures (1)
4.4 Form of Amended Stock Purchase Warrant re: Series 99-D Offering
dtd August 27, 1999 (1)
10.1 Second Amendment to LFC Technologies, LLC Operating Agreement (1)
10.2 Amendment of Security Agreement (1)
10.3 Form of Agreement and Assignment by SGI International to LFC
Technoogies LLC (1)
10.4 LFC Technologies LLC Second Amendment to the License Agreement (1)
10.5 Addendum to Amended and Restated Service Agreement (1)
10.6 Transfer and Development Agreement (1)
27.1 Financial Data Schedule (1)
(1) Filed herewith.
(2) Incorporated by reference to report on Form 10-Q (File No. 2-93124)ending
June 30l 1999.
(b) Reports on 8-K: NONE
20
PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SGI INTERNATIONAL
/s/ MICHAEL L. ROSE November 12, 1999
- ---------------------------
Michael L. Rose,
President and Chief Executive Officer
/s/ GEORGE E. DONLOU November 12, 1999
- ---------------------------
George E. Donlou
Vice President Finance and Controller
21