1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1996 COMMISSION FILE NO. 2-93124
SGI INTERNATIONAL
(Exact name of registrant 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 - Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (619) 551-1090
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934: COMMON STOCK (NO PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
THE NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AS OF MAY 10,
1996, WAS 5,252,000.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1996
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 registrant as specified in its charter)
Utah 33-0119035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Prospect Street, Suite 325, La Jolla, California 92037
(Address of principal executive offices)
(619) 551-1090
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of Common Stock, no par value, outstanding as of May 10,
1996 was 5,252,000.
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TABLE OF CONTENTS
FORM 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3 - 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Stockholders' Deficit 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9 - 11
PART II. OTHER INFORMATION 12
SIGNATURES 13
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4
SGI International
Consolidated Balance Sheets
MARCH 31, December 31,
1996 1995
---------------------------
(UNAUDITED)
Assets
Current assets:
Cash $ 285,589 $ 74,154
Trade accounts receivable, less allowance for doubtful
accounts of $7,343 in 1996 and 1995 649,501 341,352
Costs and estimated earnings in excess of billings
on uncompleted contracts 86,074 271,448
Inventories 69,292 68,289
Prepaid expenses and other current assets 117,940 114,143
---------------------------
Total current assets 1,208,396 869,386
LFC Process related assets:
Notes receivable 1,067,932 1,123,948
Royalty rights 2,121,188 2,199,750
LFC cogeneration project 605,384 631,705
Investment in TEK-KOL partnership 672,379 596,276
Australia LFC project 166,515 173,754
Other technological assets 26,440 26,440
Process demonstration equipment, net
of accumulated depreciation of
$646,711 and $608,592 in 1996
and 1995, respectively 115,662 153,781
---------------------------
4,775,500 4,905,654
Property and equipment, net of accumulated
depreciation and amortization of $291,072
and $269,040 in 1996 and 1995, respectively 252,250 249,328
Other assets -- 12,876
Goodwill, net 467,335 479,318
---------------------------
$6,703,481 $6,516,562
========== ==========
See notes to condensed consolidated financial statements.
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SGI International
Consolidated Balance Sheets
MARCH 31, December 31,
1996 1995
--------------------------------
(UNAUDITED)
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 566,461 $ 683,583
Billings in excess of costs and estimated earnings
on uncompleted contracts 184,403 175,745
Current maturities of long-term obligations 511,625 909,016
Notes payable to Director -- 304,000
Accrued salaries, benefits and related taxes 176,870 139,103
Royalties payable to related party -- 141,790
Contributions payable to TEK-KOL Partnership 336,476 336,476
Interest payable 78,219 139,663
Other accrued expenses 477,241 409,089
--------------------------------
Total current liabilities 2,331,295 3,238,465
Interest payable 377,275 276,425
Long-term notes payable, less current maturities 4,524,246 4,631,250
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock, $.01 par value; 20,000,000 shares authorized
103,765 shares issued and outstanding (103,729 at December 31, 1995),
preference in liquidation of $2,960,000 1,037 1,037
Common stock, no par value; 75,000,000 shares
authorized, 4,826,770 shares issued and
outstanding (3,859,671 at December 31, 1995) 33,369,542 32,255,357
Paid-in capital 5,131,397 4,582,215
Accumulated deficit (38,722,888) (38,159,764)
Notes receivable from employees for common stock (308,423) (308,423)
--------------------------------
Total stockholders' deficit (529,335) (1,629,578)
--------------------------------
$ 6,703,481 $ 6,516,562
============ ============
See notes to condensed consolidated financial statements.
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SGI International
Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
1996 1995
------------------------------
Revenues:
Net sales $ 1,056,677 $ --
Income from Investment in TEK-KOL 76,103 --
Other 141,936 11,856
------------------------------
1,274,716 11,856
Expenses:
Cost of sales 794,066
Engineering, research and consulting 154,774 665,654
Selling, general and administrative 432,344 276,577
Legal and accounting 139,144 207,166
Depreciation and amortization 165,734 251,110
Interest 151,778 241,516
------------------------------
1,837,840 1,642,023
------------------------------
Net loss $ (563,124) $(1,630,167)
==============================
Net loss per share $ (.13) $ (.76)
==============================
Weighted average shares outstanding 4,270,607 2,138,618
==============================
See notes to condensed consolidated financial statements.
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SGI International
Consolidated Statement of Stockholders' Deficit
(Unaudited)
Convertible
preferred stock Common stock
------------------ -----------------
Shares Amount Shares Amount Paid-in capital
------ ------ ------ ------ ---------------
Balances at December 31, 1995 103,729 $ 1,037 3,859,671 $32,255,357 $ 4,582,215
Issuance of common stock for cash 677,306 737,392
Exercise of warrants to purchase common stock for cash 6,593 1,654
Issuance of convertible preferred stock for notes
payable and interest 36 -- 407,579
Issuance of common stock for notes payable and interest 283,200 375,139
Warrants granted for accounts payable, notes
payable, interest and services 141,603
Net loss
-------------------------------------------------------------------
Balances at March 31, 1996 103,765 $ 1,037 4,826,770 $33,369,542 $ 5,131,397
===================================================================
Total
Accumulated Notes stockholders'
deficit receivable deficit
------- ---------- -------
Balances at December 31, 1995 $ (38,159,764) $(308,423) $(1,629,578)
Issuance of common stock for cash 737,392
Exercise of warrants to purchase common stock for cash 1,654
Issuance of convertible preferred stock for notes
payable and interest 407,579
Issuance of common stock for notes payable and interest 375,139
Warrants granted for accounts payable, notes
payable, interest and services 141,603
Net loss (563,124) (563,124)
-----------------------------------------
Balances at March 31, 1996 $ (38,722,888) $(308,423) $ (529,335)
=========================================
See accompanying notes to consolidated financial statements.
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SGI International
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
1996 1995
--------------------------------------
Operating activities
Net loss $ (563,124) $ (1,630,167)
Adjustments to reconcile net loss to net cash flows used for
operating activities:
Depreciation and amortization 184,256 251,110
Amortization of note discounts -- 46,610
Preferred stock issued for interest 23,170 --
Changes in assets and liabilities:
Receivable from joint venture partner -- 45,823
Trade accounts receivable (122,775) --
Inventories (1,003) --
Receivable from officers and directors -- (7,752)
Prepaid expenses and other current assets (3,797) 842
Accounts payable (117,122) 2,922
Billings in excess of costs and estimated earnings
uncompleted contracts 8,658 --
Accrued salaries, benefits and related taxes 37,767 (4,841)
Royalty payable to related party (141,790) 12,500
Interest payable 100,162 21,976
Other accrued expenses 68,152 --
--------------------------------------
Net cash flows used for operating activities (527,446) (1,260,977)
Investing activities
LFC process related assets:
Collection of notes receivable and related interest 56,016 --
Additions to other technological assets -- (20,876)
Additions to process demonstration equipment -- (23,268)
Investment in TEK-KOL (76,103) --
Purchase of property and equipment (24,954) --
Other assets 12,876 (406)
--------------------------------------
Net cash flows used for investing activities (32,165) (44,550)
Financing activities
Proceeds from issuance of notes payable 50,000 14,696
Payments of notes payable (18,000) (419,750)
Proceeds from issuance of preferred stock -- 1,113,943
Proceeds from issuance of common stock 739,046 280,125
--------------------------------------
Net cash flows provided by financing activities 771,046 989,014
--------------------------------------
Net increase (decrease) in cash 211,435 (316,513)
Cash at beginning of the period 74,154 551,299
--------------------------------------
Cash at end of the period $ 285,589 $ 234,786
=====================================
Supplemental disclosure of non-cash activities:
Series 96 convertible preferred stock issued for notes payable $ 360,000 --
=====================================
Warrants granted for accounts payable, notes
payable, interest and services $ 141,603 --
=====================================
See accompanying notes to consolidated financial statements.
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SGI International
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SGI
International (the Company) for the three months ended March 31, 1996
and 1995 are unaudited. These financial statements reflect all
adjustments, consisting of only normal recurring adjustments which, in
the opinion of management, are necessary for a fair statement of the
consolidated financial position as of March 31, 1996, and the
consolidated results of operations for the three months ended March 31,
1996 and 1995. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results to be
expected for the year ending December 31, 1996. 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, 1995 included in
the Company's Form 10-K filed with the Securities and Exchange
Commission.
(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's principal assets are related to the LFC (Liquid From
Coal) Process. The recovery of these assets is dependent upon future
events, including the Company's ability to attract sufficient
additional equity and/or financing needed to fund its portion of the
TEK-KOL Partnership, that is responsible for completion and
commercialization of the LFC Process. The Company is engaged in
continuing negotiations to secure additional capital and financing, and
while management believes it will be successful, there is no assurance
that these efforts will be successful.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROJECTIONS AND ESTIMATES
The projections, estimates and opinions of management contained herein
relative to the LFC and OCET Processes and to the business of Company set forth
herein are forward looking statements and statements of management's belief:
thus, there can be no assurance that these projections, estimates, or opinions
of management will ultimately be correct or that actual results or events will
not differ materially from those discussed herein. Further, until agreements are
actually executed, LFC plants actually begin construction, the OCET Process is
actually commercialized and operating revenues are actually earned, there can be
no assurance that such events will occur. The Company undertakes no obligation
to publicly release the results of any revisions to these forward-looking
statements, which are made herein to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
The Company's stockholders' deficit has decreased from $1.63 million at
December 31, 1995 to $529,000 at March 31, 1996. The improvement results from
the continuing conversion of debt into equity and significantly reduced
expenditure of the Company's funds. Management believes the financial condition
of the Company has improved and will continue to improve in the coming months.
Many challenges are ahead as the Company and TEK-KOL commercialize the LFC
process. Expenditures for OCET process development are continuing and are
expected to increase.
During the first quarter, TEK-KOL entered into an agreement with
Mitsubishi pursuant to which MHI will pay a royalty to TEK-KOL based on the
revenue received by MHI from its sale of equipment and services to LFC plants,
if and when constructed. MHI will also assist in completing engineering for a
potential Powder River LFC plant and adapt that engineering to specific
international projects. Further, MHI has an option to obtain a four year
scope-of-supply exclusive in the Pacific Rim. If the option is exercised, MHI
will pay TEK- KOL $1 million per year during the exclusivity period, which is
subject to termination on written notice by either party. TEK-KOL
representatives are negotiating an agreement with Mitsui, which, if executed,
will provide for a LFC product marketing study by Mitsui, an analysis of the
opportunity for development of LFC plants at several Mitsui mines, and
assistance by Mitsui in developing and optimizing an upgrading process for CDL.
The OCET process is designed to convert refinery Resid into higher
value petroleum distillate products and a synthetic coal. OCET Corporation, a
wholly-owned SGI subsidiary, entered into an agreement in 1995 to test a series
of crude oil and Resid oil samples provided by Maraven, a Venezuelan state-owned
oil company. Laboratory data is currently being extrapolated to a larger bench
scale continuous process design in order to complete this testing. Favorable
results could lead to licensing and royalty agreements with Maraven and its
affiliates. The Company also continued discussions in the first quarter of 1996
with the Department of Energy regarding a cooperative agreement and funding for
OCET's research and development efforts. The Company is drafting a written
program plan to submit to the DOE, which management expects will form the basis
for a cooperative research and development agreement.
The continuing need to fund Company operations with equity based
financing is causing significant dilution. Management is committed to
accelerating commercialization of the LFC and OCET technologies and increasing
cash flows from AMS's operations, rather than obtaining funds through the sale
of equity. However, equity sales will be required in the short-term.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995.
The Company acquired AMS effective October 30, 1995. AMS recorded net
sales, cost of sales, and selling, general and administrative expense of $1.1
million, $794,000, and $208,000 for the three months ended March 31, 1996. The
following discussion does not include AMS's results of operations for that
period.
The Company recorded $76,000 as its share of income from TEK-KOL for
the three months ended March 31, 1996. TEK-KOL recorded no activity during the
three months ended March 31, 1995 as the partners were bearing the expenses
directly. Other income for the three months ended March 31, 1996 includes
$142,000 from the forgiveness of certain royalty obligations by a related party.
Engineering, research and development expenses for the three months
ended March 31, 1996 decreased 77% ($511,000) from the same prior year period.
SGI previously incurred LFC process marketing and candidate coal testing
expenditures which are now TEK-KOL's responsibility.
General and administrative expense for the three months ended March 31,
1996 decreased 19% ($52,000) from the same prior year period. Personnel and
overhead reductions, instituted during the last two quarters of 1995, have
caused on-going general and administrative expenses to decrease.
Legal and accounting expense for the three months ended March 31, 1996
decreased 33% ($68,000) from the same prior year period. The prior year period
included legal expense related to implementing the one-for-twenty share
reduction.
Depreciation and amortization expense for the three months ended March
31, 1996 decreased 34% ($85,000) from the same prior year period. Certain LFC
process related assets were written down in 1995 based on management's net
realizable value estimates. The 1995 write-downs cause depreciation and
amortization to be lower future periods.
Interest expense deceased 37% ($90,000) from the same prior year
period. The conversion of debt into equity during 1995 and 1996 has caused
interest expense to decrease.
LIQUIDITY AND CAPITAL RESOURCES
The Company acquired AMS effective October 30, 1995. The discussion on
Liquidity and Capital Resources includes the effect of this transaction unless
otherwise indicated.
The Company had short-term liquidity deficiencies at March 31, 1996 and
1995 of $1.1 million and $3.4 million, respectively. The net improvement was
achieved primarily through the conversion of notes payable and accrued interest
into equity. Current notes payable and accrued interest of $590,000 contribute
to the Company's short-term deficiency at March 31, 1996. Based on continuing
interaction with the noteholders, management believes that the Company should
procure subscriptions to convert the remaining current notes payable to
preferred stock or secure agreements to extend the note due dates to September
30, 1997. Dr. Esztergar has agreed to forego any and all royalties owed him for
the transfer of the LFC process patent to the Company. The Company raised
approximately $1.58 million through the issuance of 1,084,000 common shares
through May 10, 1996. These funds have been used to fund current operations and
to satisfy a portion of the Company's short-term liquidity deficiency. The
Company plans to satisfy the remaining short-term liquidity deficiency through
the sale of equity securities and the collection of receivables.
The Company had a long-term liquidity deficiency at March 31, 1996. The
Company expects this long-term liquidity deficiency to be satisfied by equity
sales, and increased positive cash flows from AMS's operations until such
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time as the commercialization of the LFC and OCET Processes results in positive
cash flows.
The Company's first quarter 1996 cash flows used for operating
activities decreased 59% ($746,000) from 1995. This decrease is primarily
attributable to TEK-KOL's assuming candidate coal testing and LFC plant
marketing activities, and the personnel and overhead reductions made in 1995.
The Company's financing activities raised approximately $789,000 and
$1,409,000 during the first quarter of 1996 and 1995, respectively. 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. Significant future financing
activities will be required to fund future operating and investing activities
and to maintain debt service. At present, the Company has no commitments for
future purchases of its securities.
The Company's investing activities were minimal in the first quarter of
1996 and 1995.
Additional capital contributions to the TEK-KOL Partnership are
expected to be required from time to time prior to profitable operations. The
Company is required to contribute one-half of any such required capital
contributions. The Company has recorded contributions payable to TEK-KOL of
$412,000 at March 31, 1996. Management believes substantially all of the 1996
funding requirements for TEK-KOL will be paid by third parties with whom TEK-KOL
has or expects to have agreements. The Company will be required to contribute
approximately $750,000 towards the 1996 TEK-KOL operating budget if none of
these agreements are consummated.
The Company does not have material commitments for capital expenditures
as of March 31, 1996.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
1. EXHIBITS
4.44 Form of Series 96-A Convertible Preferred Stock
10.3.3 Second Amendment to Assignment Agreement and Release
dated as of 3/29/96 with Ernest P. Esztergar
27 Financial Data Schedule
28.9 Acquisition Agreement dated as of 3/4/96 with Kerr
Foundation
28.9.1 Settlement & General Release dated as of 3/4/96 with
Kerr Foundation
2. REPORTS ON FORM 8-K
None
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SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SGI INTERNATIONAL
By: /s/ JOSEPH A. SAVOCA May 10 , 1996
----------------------------
Joseph A. Savoca,
Chief Executive Officer
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.
Name Title Date
---- ----- ----
Chief Executive Officer May 10, 1996
/s/JOSEPH A. SAVOCA and Chairman of the Board
- - --------------------------
Joseph A. Savoca
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