<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 COMMISSION FILE NO. 1-11602
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SI DIAMOND TECHNOLOGY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN CHARTER)
----------------
TEXAS 76-0273345
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
12100-A TECHNOLOGY BLVD.
AUSTIN, TEXAS 78727
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER,
INCLULDING AREA CODE: (512) 331-6200
Indicate by check mark whether the issuer (1) 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.
Yes [X] No [ ]
As of November 6, 1996, the registrant had 13,125,083 shares of Common Stock,
par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
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<PAGE>
SI DIAMOND TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 1996 and December 31, 1995. 3
Consolidated Statements of Operations--Three Months and Nine Months
Ended September 30, 1996 and 1995.................................... 4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and 1995........................................................ 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
Part II Other Information
Item 1. Legal Proceedings............................................... 14
Item 4. Submission of Matters to a Vote of Security-Holders............. 14
Item 5. Other Information............................................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
Signatures................................................................ 16
</TABLE>
2
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
ASSETS ------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 336,334 $ 293,593
Restricted cash................................... 106,550 259,880
Accounts receivable, trade........................ 1,685,948 267,318
Stock subscriptions receivable.................... -- 9,583,750
Notes receivable.................................. 15,000 400,000
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 42,234 300,485
Inventory......................................... 346,868 45,368
Prepaid expenses and other assets................. 176,016 102,098
----------- -----------
Total current assets.......................... 2,708,950 11,252,492
----------- -----------
Property, plant and equipment, net................ 2,974,291 4,147,849
Intangible assets, net............................ 677,331 788,530
Net assets of discontinued operations and assets
held for sale.................................... 240,779 513,216
Other assets, net................................. 32,252 36,766
----------- -----------
Total assets.................................. $ 6,633,603 $16,738,853
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,062,135 $ 794,154
Notes payable..................................... 355,772 862,513
Capital lease obligations......................... 121,899 190,326
Accrued liabilities............................... 827,558 2,215,357
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 157,424 49,891
----------- -----------
Total current liabilities..................... 4,524,788 4,112,241
----------- -----------
Notes payable, long-term............................ -- 86,687
Capital lease obligations, long-term................ -- 77,422
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1.00 par value, 2,000,000 shares
authorized;
Series A convertible preferred, 100 shares
issued and outstanding at September 30, 1996
and December 31, 1995 ($100,000 aggregate
liquidation preference)........................ 100 100
Series E convertible preferred, 666 shares
issued and outstanding at September 30, 1996
($7,059,600 aggregate liquidation preference).. 666 --
Common Stock, $.00l par value , 120,000,000 shares
authorized,
12,933,987 shares issued and outstanding at
September 30, 1996;
10,858,889 shares issued and outstanding at
December 31, 1995.................................. 12,934 10,859
Additional paid-in capital.......................... 45,296,089 34,681,872
Preferred stock subscribed, but unissued............ -- 8,905,072
Accumulated deficit................................. (43,103,238) (30,991,571)
Unearned compensation............................... (97,736) (143,829)
----------- -----------
Total stockholders' equity.................... 2,108,815 12,462,503
----------- -----------
Total liabilities and stockholders' equity.... $ 6,633,603 $16,738,853
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues.................. $ 1,272,718 $ 881,116 $ 4,157,070 $ 1,744,770
----------- ----------- ------------ -----------
Cost of sales............. 1,266,043 678,575 3,526,181 1,183,253
Selling, general and
administrative expenses.. 1,158,098 2,260,607 5,692,750 4,499,505
Research and development.. 765,005 652,816 5,402,275 2,790,872
Loss on impairment of
assets................... -- -- 850,000 --
----------- ----------- ------------ -----------
Operating costs and
expenses............... 3,189,146 3,591,998 15,471,206 8,473,630
----------- ----------- ------------ -----------
Other income (expense),
net...................... (55,676) 86,399 201,969 169,800
----------- ----------- ------------ -----------
Loss from continuing
operations............... (1,972,104) (2,624,483) (11,112,167) (6,559,060)
----------- ----------- ------------ -----------
Discontinued operations:
Loss from discontinued
operations............. -- (327,500) (649,500) (977,000)
Provision for loss on
disposition of
discontinued
operations............. -- -- (350,000) --
----------- ----------- ------------ -----------
Total losses on
discontinued
operations............. -- (327,500) (999,500) (977,000)
----------- ----------- ------------ -----------
Net loss.................. $(1,972,104) $(2,951,983) $(12,111,667) $(7,536,060)
=========== =========== ============ ===========
Less preferred stock
dividend................. (205,768) -- (1,128,894) --
----------- ----------- ------------ -----------
Net loss applicable to
common shareholders...... $(2,177,872) $(2,951,983) $(13,240,561) $(7,536,060)
=========== =========== ============ ===========
Net loss per common share:
Continuing operations... $ (0.18) $ (0.27) $ (1.07) $ (0.77)
Discontinued operations. -- (0.04) (0.09) (0.12)
----------- ----------- ------------ -----------
Net loss per common
share.................. $ (0.18) $ (0.31) $ (1.16) $ (0.89)
=========== =========== ============ ===========
Weighted average shares
outstanding.............. 12,285,750 9,605,648 11,443,123 8,474,600
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Continuing operations:
Loss from continuing operations................. $(11,112,167) $(6,559,060)
Adjustments to reconcile net loss to net cash
required by operating activities:
Stock compensation.............................. 46,093 42,356
Depreciation and amortization expense........... 814,486 672,033
Revaluation of stock warrants................... 450,000 --
Loss on settlement of note receivable........... 300,000 --
Loss on impairment of net assets................ 850,000 --
Changes in assets and liabilities:
Accounts receivable, trade.................... (1,433,630) 459,579
Inventory..................................... (301,500) --
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 258,251 (397,795)
Prepaid expenses.............................. (73,918) (208,791)
Accounts payable and accrued liabilities...... 880,182 508,771
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 107,533 (47,202)
------------ -----------
Total adjustments........................... 1,897,497 1,028,951
------------ -----------
Net cash required by continuing operations.... (9,214,670) (5,530,109)
------------ -----------
Discontinued operations:
Net loss from discontinued operations........... (999,500) (977,000)
Change in net assets of discontinued operations. 47,437 --
------------ -----------
Net cash required by discontinued operations.... (952,063) (977,000)
------------ -----------
Net cash required by operations............... (10,166,733) (6,507,109)
------------ -----------
Cash flows from investing activities:
Capital expenditures.............................. (606,994) (3,803,465)
Proceeds from disposition of equipment and assets
held for sale.................................... 552,265 --
Net change in intangibles and other assets........ 4,514 (1,307,331)
------------ -----------
Net cash required by investing activities....... (50,215) (5,110,796)
------------ -----------
Cash flows from financing activities:
Restricted cash................................... 153,330 (437,200)
Proceeds from notes payable....................... 11,500 1,203,956
Repayment of notes payable and capital lease
obligations...................................... (750,776) (107,716)
Proceeds of stock issuance, net of costs.......... 10,845,635 10,933,152
------------ -----------
Net cash provided by financing activities....... 10,259,689 11,592,192
------------ -----------
Net increase (decrease) in cash and cash
equivalents........................................ 42,741 (25,713)
Cash and cash equivalents, beginning of year........ 293,593 1,687,104
------------ -----------
Cash and cash equivalents, end of the period........ $ 336,334 $ 1,661,391
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in compliance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments consisting only of
normal recurring adjustments considered necessary for a fair presentation,
have been included. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 1995, included in the
Company's 1995 Annual Report on Form 10-KSB (as amended by Form 10-KSB/A as
filed on April 29, 1996 and Form 10-KSB/A as filed on November 7, 1996). The
balance sheet information for December 31, 1995 has been derived from the
audited financial statements at that date and has been reclassified to present
comparative information related to discontinued operations.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest for the nine months was $23,293 and $4,400 for 1996
and 1995, respectively. The following non-cash transactions have been excluded
from the statement of cash flows for the nine months ended September 30:
<TABLE>
<CAPTION>
1996 1995
------ --------
<S> <C> <C>
Purchase of intangible assets through the issuance of
common stock............................................ $ -- $900,000
Recognition of deferred offering costs as contra equity
in additional paid-in capital........................... -- 150,000
</TABLE>
3. CAPITAL STOCK:
Common Stock
In December 1995, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 (the "December 1995 Offering"). The Company
collected cash proceeds of $1,511,575, for the issuance of 287,919 shares of
common stock. At December 31, 1995, the Company recorded a subscription
receivable for $15,750 of these proceeds as they were received in January
1996. The registration statement covering these shares was declared effective
on April 18, 1996 and updated by a post-effective amendment as filed on
November 7, 1996.
Preferred Stock
In December 1995, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company received subscriptions for 1,040 shares of
its Series E Convertible Preferred Stock ("Series E Preferred"). As of
December 31, 1995, $9,568,000 was recorded as subscriptions receivable from
issuance of the Series E Preferred. In January 1996, the Company received
subscriptions for an additional 150 shares of Series E Preferred. The Company
received the proceeds of these subscriptions and issued 1,190 shares of Series
E Preferred in January 1996. The offering provided proceeds of $11,900,000 to
the Company less expenses of approximately $1,631,000. The registration
statement covering the shares of Common Stock into which the Series E
Preferred are convertible was declared effective on April 18, 1996 and updated
by a post-effective amendment as filed on November 7, 1996. During the nine
months ended September 30, 1996, 522 shares of Series E Preferred were
converted into 2,049,057 shares of the Company's Common Stock and 2 shares of
the Series E Preferred were redeemed for cash of $24,867. The difference
between the conversion price of the Series E Preferred and the trading price
of the Common Stock (into which the Series E Preferred is convertible) at the
date of conversion has been treated as a preferred stock dividend to the
Series E Preferred shareholders. This treatment increases the net loss
applicable to the Common Stock shareholders by the amount of the benefit
received by the Series E Preferred shareholders. It is used in the calculation
of earnings per share, but it does not affect the actual net loss of the
Company.
6
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DISCONTINUED OPERATIONS
During May 1996, the Company adopted a corporate reorganization plan to cut
costs and streamline operations. Pursuant to this plan, the Company has ceased
operations of the SIDT Coatings, Inc. ("Coatings") business unit. The Company
has sold the majority of the assets of Coatings and is in the process of
disposing of the remaining assets. Net assets of discontinued operations are
stated at estimated net realizable value and consist of equipment with a
carrying value of $65,779. This amount has been classified on the balance
sheet as a non-current asset.
5. DIAMOND TECH ONE
Earlier this year, the Company announced it was considering the sale of the
Company's Diamond Tech One, Inc. subsidiary (hereinafter referred to as "DTO"
or "Diamond Tech One") as part of a company wide reorganization focusing on
commercialization of the Company's field emission products. After further
consideration, the Company has determined that DTO has the potential to be a
leading force in the high density electronics assembly industry. In addition,
DTO will play an important roll in meeting the Company's needs for advanced
electronics, bringing unique technology to the continuing development of it's
field emission lamp and display products. During the quarter ended March 31,
1996, the Company recorded an $850,000 reserve for impairment of assets of
this division to write down the carrying value of the assets to the estimated
net realizable value.
6. CUSTOMER CLAIM AT PLASMATRON COATINGS AND SYSTEMS, INC.
On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer of
Plasmatron Coatings and Systems, Inc. ("Plasmatron"), filed a complaint with
the Supreme Court of the State of New York, County of Westchester. The
complaint names Plasmatron, the Company and Westchester Fire Insurance Company
as defendants. Plaintiff claims a breach of contract related to $1 million of
coating equipment that Plasmatron delivered in 1993. The Plaintiff claims the
equipment does not perform as required under the contract. Plaintiff seeks to
recover compensatory, consequential and incidental damages. The amount of this
claim is to be determined at trial. No trial date has been set at this time.
The Company believes it has a meritorious defense to the Plaintiff's claim and
is seeking dismissal of this claim. The Company believes that the ultimate
resolution of this matter will not have a material adverse effect on its
financial position, results of operations or cash flows.
7. WARRANT REPRICING
In February 1996, the Company repriced 219,149 warrants held by GH
Securities, Ltd. ("GH"), its former underwriter. The warrants were repriced to
compensate GH in connection with relinquishing its disputed right to place
current and future offerings. The Company recognized a $450,000 charge,
reflected in selling, general and administrative expense, in connection with
the repricing.
8. NET ASSETS AVAILABLE FOR SALE
In May, 1996, the Company negotiated to receive payment on a note receivable
from Plasmaco, Inc. The settlement included receipt by the Company of an
estimated $100,000 worth of equipment in lieu of a $400,000 note receivable.
In addition, the Company has incurred approximately $79,500 worth of expenses
associated with relocation and storage of the assets. This transaction
resulted in a charge of approximately $379,500 to selling, general and
administrative expense during the nine months ended September 30, 1996. The
Company is soliciting offers to buy this equipment. The estimated net
realizable value of $100,000 is being carried on the balance sheet as assets
held for sale. In addition, the Company has certain other assets not used in
the normal course of business that are also classified as assets held for
sale. The Company is in the process of soliciting offers for these assets.
7
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RECENTLY ISSUED PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS 121").
As of January 1, 1996, the Company adopted SFAS 121. In connection with this
pronouncement, the Company recorded an $850,000 impairment to assets in the
quarter ended March 31, 1996.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Nine months ended September 30, 1996 and 1995
OVERVIEW
During the nine months ended September 30, 1996, the Company's primary
revenues from continuing operations were earned through the manufacture of
coatings systems at Plasmatron Coatings and Systems, Inc. ("Plasmatron"), from
the assembly of high density electronics at Diamond Tech One, Inc.
(hereinafter referred to as "DTO" or "Diamond Tech One") and from performing
research under government contracts. In May 1996, the Company adopted a
corporate reorganization plan to reduce expenditures and streamline
operations. See "Recent Developments." The Company continued to incur
substantial expenses in support of the development of a diamond-based field
emission lamp and a diamond-based flat panel display. As more fully discussed
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 (as amended by Form 10-KSB/A filed as of April 29, 1996 and Form 10-KSB/A
filed as of November 7, 1996), the Company expects to incur substantial
research and development expenses throughout 1996 in developing the Company's
proprietary Diamond Based Field Emission Lamp ("DFEL") and Diamond Based Field
Emission Display ("DFED")./1/
RECENT DEVELOPMENTS
During May 1996, the Company adopted a corporate reorganization plan to
reduce expenditures and streamline operations. Pursuant to this plan, the
Company has ceased operations of its subsidiary, SIDT Coatings, Inc.
("Coatings") which provided industrial hard coatings services. The Company has
sold the majority of the subsidiary's assets and is in the process of selling
the remaining assets of the subsidiary.
During the quarter ended June 30, 1996, the Company completed a Company-wide
reduction in work force as part of the reorganization plan, to reduce
operating costs. The reduction of approximately 45% of its employees, which
occurred primarily in June, was 5% less than originally anticipated. As a
result of this reorganization, the Company has recorded total losses on
discontinued operations of $999,500 and an $850,000 loss on impairment of net
assets, for the nine months ended September 30, 1996.
On October 31, 1996 the Company's DTO subsidiary entered into a $500,000
revolving line of credit with a commercial bank. This line of credit is
collateralized by the equipment of DTO and is guaranteed by the Company. The
rate of interest is tied to the bank's variable lending rate and is initially
set at 10%. As of the date of this filing, no funds have been borrowed under
this line of credit.
On October 31, 1996, the Company completed a transaction whereby its DTO
subsidiary issued debt totaling $1,000,000 in the form of promissory notes due
June 1, 1997. These notes bear interest at a rate of 15% and are
collateralized by the equipment of DTO. The security interests of these
promissory notes are subordinated to the security interest granted under the
previously described line of credit. These notes are also guaranteed by the
Company. In connection with these notes, the Company also issued warrants,
expiring June 1, 2000, allowing the note holders to purchase 200,000 shares of
the Company's Common Stock at a price of $1.00 per share.
In September 1996 the Company entered into an agreement with its Series E
Preferred shareholders, where in exchange for a revision in the conversion
formula that reduced the maximum conversion price, the shareholders agreed to
limit the number of shares converted prior to January 15, 1997 and March 1,
1997. The shareholders agreed to defer conversion of two-thirds of the shares
outstanding at the time of the agreement until after March 1, 1997 and convert
only enough shares to receive a total of 300,000 additional shares of Common
Stock prior to January 15, 1997.
On October 4, 1996 the Company entered into an agreement with Phillips
Components B. V. that amended the previous agreement dated July 14, 1995. The
parties mutually agreed to terminate their technology cooperation agreement
effective as of that date. This amendment will have no financial impact on the
Company.
9
<PAGE>
RESULTS OF OPERATIONS
The Company's revenues for the third quarter ended September 30, 1996
totaled $1,272,718 compared to $881,116 for the third quarter of 1995. The
Company earned $4,157,070 in revenues during the nine month period ended
September 30, 1996, (the "1996 Period") as compared with $1,774,770 during the
nine month period ended September 30, 1995 (the "1995 Period"). Commercial
sales were $1,894,243 for the 1996 Period compared to $921,602 for the 1995
Period. The majority of the Company's commercial revenues are from production
under vacuum equipment contracts through its subsidiary, Plasmatron, and from
the assembly of high density electronics through its subsidiary, Diamond Tech
One. Plasmatron's commercial backlog as of September 30, 1996 was
approximately $922,000 as compared with approximately $1,200,000 at September
30, 1995. Diamond Tech One's commercial backlog as of September 30, 1996 was
approximately $648,000 as compared with approximately $965,000 at September
30, 1995. Contract research revenues for the 1996 Period were $2,659,887
compared to $936,168 for the 1995 Period. At September 30, 1996, the Company
had a research backlog of approximately $1,467,000 in anticipated future
revenues from its existing contracts, as compared with a backlog of
approximately $2,800,000 at September 30, 1995. The increased contract revenue
for the 1996 Period resulted primarily from the Company's increased DFEL and
DFED development related to the $3,465,000 National Institute of Science and
Technology ("NIST") contract which commenced during the third quarter of 1995.
The NIST contract is intended to provide matching grants to facilitate further
research and development on the Company's DFEL and DFED. Many of the personnel
previously performing Company sponsored research on the DFEL and DFED are now
performing the contract research for the NIST contract which is also related
to displays.
For the 1996 Period, the Company's cost of sales were $3,526,181, or a 15%
gross margin, as compared with $1,183,253, or a 32% gross margin, for the 1995
Period. The decreased margin resulted primarily from a larger concentration of
revenues and related expenditures under the NIST contract, which has no
margin, in the 1996 Period. The Company's selling, general and administrative
expenses were $5,692,750 for the 1996 Period, compared with $4,499,505 for the
1995 Period. The expense increase resulted primarily from a higher level of
fund raising activity during the 1996 Period, as well as $450,000 in contract
settlements and a $379,500 loss on settlement of a note receivable, and
associated expenses, during this time. Company sponsored research and
development expenses for the 1996 Period were $5,402,275 as compared to
$2,790,872 for the 1995 Period. These increased costs are a result of the
Company's efforts to develop a diamond-based field emission lamp and a
diamond-based flat panel display. The Company expects to incur substantial
expenses in support of additional research and development activities related
to the commercial development of a diamond-based field emission lamp, and the
related diamond-based flat panel display./1/
During May 1996, the Company adopted a corporate reorganization plan to cut
costs and streamline operations. Pursuant to this plan, it has ceased
operations of its subsidiary, SIDT Coatings, Inc. The Company has sold the
majority of the assets of the subsidiary and is the process of selling the
remaining assets of the subsidiary. Net assets of discontinued operations are
stated at estimated realizable value of $65,779. In addition, during the
second quarter of 1996, the Company received an estimated $100,000 worth of
equipment in lieu of a $400,000 note receivable. The Company is soliciting
offers to buy this equipment. This equipment is classified as assets held for
sale and presented in non-current assets on the balance sheet.
Earlier this year, the Company announced it was considering the sale of the
Company's Diamond Tech One subsidiary as part of a Company-wide reorganization
focusing on commercialization of the Company's field emission products. After
further consideration, the Company has determined that DTO has the potential
to be a leading force in the high density electronics assembly industry. In
addition, DTO will play an important roll in meeting the Company's needs for
advanced electronics, bringing unique technology to the continuing development
of it's field emission display and lamp products. The Company did record an
$850,000 reserve for impairment of assets of this division in the first
quarter of 1996 to write down the carrying value of the assets to the
estimated net realizable value.
10
<PAGE>
FINANCIAL CONDITION
At September 30, 1996, the Company had cash and cash equivalents in the
amount of $336,334 as compared with cash and cash equivalents of $293,593 at
December 31, 1995. This increase in cash is a result of the Company's
successful Regulation D stock offerings in December 1995, for which the
Company received cash in January 1996, less expenditures incurred. Based on
the developmental stages of the Company's DFEL and DFED technologies,
additional equity, sale of product distribution or technology rights, or other
financing will be necessary in the future. There can be no assurance that any
of these financing alternatives can be arranged on commercially acceptable
terms./1/
In December 1995, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 (the "December Offering"). The Company collected
cash proceeds of $1,511,575, for the issuance of 287,919 shares of Common
Stock. At December 31, 1995, the Company recorded a subscription receivable
for $15,750 of these proceeds as they were received in January 1996. The
registration statement concerning these shares became effective April 18, 1996
and was updated by a post-effective amendment filed as of November 7, 1996.
Also in December 1995, through an exempt offering under Regulation D of the
Securities Act of 1933, the Company received subscriptions for 1,040 shares of
its Series E Convertible Preferred Stock ("Series E Preferred"). As of
December 31, 1995, $9,568,000 was recorded as subscriptions receivable from
issuance of the Series E Preferred. In January 1996, the Company received
subscriptions for an additional 150 shares of Series E Preferred. The Company
received the proceeds of these subscriptions and issued 1,190 shares of Series
E Preferred in January 1996. The offering provided proceeds of $11,900,000 to
the Company less expenses of approximately $1,631,000. The registration
statement covering shares of Common Stock into which the Series E Preferred
are convertible was declared effective on April 18, 1996 and updated as of
November 7, 1996 by a post-effective amendment.
Subject to adjustment in certain circumstances, each share of Series E
Preferred is convertible into that number of shares of Common Stock determined
by dividing (i) the original issue price of the Series E Preferred (the "Issue
Price") plus an amount equal to 8% of the Issue Price per annum from the date
the escrow agent first had in its possession the funds representing payment of
the Series E Preferred to the conversion date by (ii) the conversion price,
which was the lesser of $6.575 or 85% of the average closing bid price for the
Company's Common Stock for the five trading days immediately preceding the
conversion date. Any shares of Series E Preferred outstanding on January 15,
1999 shall be automatically converted into the Company's Common Stock on such
date. The Company amended its Amended and Restated Articles of Incorporation
on September 27, 1996 pursuant to an agreement (the "Series E Agreement") with
the remaining holders of the Series E Preferred to replace the upper limit of
$ 6.575 on the conversion price with an upper limit of $ 3.00. In exchange for
this reduction, the Series E Preferred shareholders agreed to limit the
conversion of their shares. The Series E Preferred shareholders agreed to
defer conversion of two-thirds of their shares to March 1, 1997 or later. Of
the remaining one-third of the shares, enough shares to convert to
approximately 300,000 shares of Common Stock were converted at the time of the
Series E Agreement. The conversion of the remaining portion of the one-third
of the existing Series E Preferred will be deferred to at least January 15,
1997. The agreement also contained a provision that required the Company to
raise a total of at least $1,000,000 by October 31, 1996. If the Company
failed to raise this money, the shareholders would have been allowed to
convert any or all of the remaining shares of Series E Preferred as of
November 1, 1996. As described elsewhere, the Company did raise this money and
the agreement to defer conversion remains as described.
During the nine months ended September 30, 1996, 522 shares of the Series E
Preferred were converted into 2,049,057 shares of Common Stock and 2 shares of
Series E Preferred were redeemed for cash of $24,867. The difference between
the conversion price of the Series E Preferred and the trading price of the
Company's Common Stock at the date of conversion has been treated as a
preferred stock dividend to the Series E Preferred shareholders. This
treatment increases the net loss applicable to the Common Stock shareholders
by the amount of the benefit received by the Series E Preferred shareholders.
It is used in the calculation of earnings per share, but it does not affect
the actual net loss of the Company.
11
<PAGE>
Cash required by operating activities was $10,166,733 for the 1996 Period
compared to $6,507,109 for the 1995 Period. The increase in the requirement of
cash flows was primarily the result of a higher level of Company sponsored
research and development and selling, general and administrative expenses
during the 1996 Period. Cash required by investing activities during the 1996
period was $50,215 as compared with $5,110,796 for the 1995 Period. The
significantly higher activity for the 1995 period resulted from the purchase of
DFED licensing rights from MCC during that period.
The principal source of the Company's liquidity has been the funds received
from its initial public offering and from the subsequent foreign and exempt
offerings of Common Stock. The Company may receive additional funds from the
exercise of warrants, although there can be no assurance that such warrants
will be exercised./1/ In the event that the Company needs additional funds, the
Company may seek to sell additional debt or equity securities or certain
technology rights./1/ The Company may seek to increase its liquidity through
bank borrowings or other financing./1/ There can be no assurance that any of
these financing alternatives can be arranged on commercially acceptable terms.
The Company believes that its success in reaching profitability will be
dependent upon the viability of its products and their acceptance in the
marketplace, and its ability to obtain additional debt or equity financing in
the future./1/
The Company expects to incur substantial expenses for research and
development ("R&D"), product testing, product marketing and administrative
overhead./1/ Further, the Company believes that certain proposed products may
not be available for commercial sale or routine use for a period of one to two
years./1/ Therefore, it is anticipated that the commercialization of the
Company's existing and proposed products will require additional capital in
excess of the Company's current funding./1/ The combined effect of the
foregoing may prevent the Company from achieving profitability for an extended
period of time./1/ The Company is currently pursuing several alternatives,
including discussions with potential joint venture partners, that would allow
it to achieve profitability in 1997./1/ Because the timing and receipt of
revenues from the sale of products will be tied to the achievement of certain
product development, testing and marketing objectives which cannot be predicted
with certainty, there may be substantial fluctuations in the Company's results
of operations./1/ If revenues do not increase as rapidly as anticipated, or if
product development and testing and marketing require more funding than
anticipated, the Company may be required to curtail its expansion and seek
additional financing from other sources./1/
The Company anticipates that its existing resources, including its line of
credit, will enable it to maintain its planned operations for approximately
four and one half months after the date of this filing./1/ This belief is based
on current development plans, the successful implementation of the Company's
May 1996 restructuring plan, the current regulatory environment, historical
experience in the development of electronic products and general economic
conditions./1/ No assurance can be given that other factors will not arise that
would cause available resources to be consumed before such time./1/ It is the
Company's intention to raise additional funds prior to the end of the four and
one half month period, either through previously mentioned joint venture
alternatives or through additional equity funding/1/. If adequate funds are not
available from operations or additional sources of financing, the Company may
have to reduce substantially or eliminate expenditures for research and
development, testing and production of its products or obtain funds through
arrangements with other entities that may require the Company to relinquish
rights to certain of its technologies or products./1/ Such results would
materially and adversely affect the Company.
12
<PAGE>
OUTLOOK
It is anticipated that losses will continue throughout 1996, and into 1997,
as the Company continues to fund the development of its DFEL lamp products and
DFED flat panel display./1/ Increased commercial revenues are anticipated in
the Company's Plasmatron and DTO subsidiaries; however, they will not be
sufficient to fund the planned research and development efforts. Sales from
the DFEL product are not anticipated before 1997./1/ The Company is currently
pursuing alternatives, including discussions with potential joint venture
partners, that would allow it to achieve profitability in 1997./1/ There is no
assurance that any of these alternatives will actually result in profitability
by the time indicated./1/ Full commercial development of the Company's DFEL
and DFED technologies may require additional funds that may not be available
at terms acceptable to the Company./1/ Should the Company be unable to obtain
acceptable additional debt or equity financing, if needed, management intends
to reduce the level of internally funded research and development and selling,
general, and administrative expenses./1/
- - --------
END NOTE
/1/ This sentence is a forward-looking statement. Please refer to the
disclosure on pages ii--v of the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995, incorporated herein by reference,
and the discussion under "Item 5. Other Information" in this Quarterly Report
on Form 10-QSB for factors that could cause actual results to differ from
those projected in this statement.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer of
Plasmatron Coatings and Systems, Inc. ("Plasmatron"), a wholly-owned subsidiary
of the Company, filed a complaint with the Supreme Court of the State of New
York, County of Westchester. The complaint names Plasmatron, the Company and
Westchester Fire Insurance Company as defendants. Plaintiff claims a breach of
contract related to $1 million of coating equipment that Plasmatron delivered
in 1993. The Plaintiff claims the equipment does not perform as required under
the contract. Plaintiff seeks to recover compensatory, consequential and
incidental damages. The amount of this claim is to be determined at trial. No
trial date has been set at this time. The Company believes it has a meritorious
defense to the Plaintiff's claim and is seeking dismissal of this claim. The
Company believes that the ultimate resolution of this matter will not have a
material adverse effect on its financial position, results of operations or
cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On July 29, 1996 the Company held its 1996 Annual Meeting of Shareholders.
The following items were presented to a vote of holders (the "Shareholders") of
the Company's issued and outstanding Common Stock, Series A Preferred Stock and
Series E Preferred Stock:
(1) The Shareholders elected (a) Ronald J. Berman, (b) Howard K. Schmidt,
and (c) Thomas J. Smith to the Company's Board of Directors as Class III
Directors, whose terms expire at the Company's 1999 Annual Meeting of
Shareholders.
(2) The Shareholders elected (a) Lee B. Arberg and (b) Marc W. Eller to
the Company's Board of Directors as Class I Directors, whose terms expire
at the Company's 1997 Annual Meeting of Shareholders.
(3) The Shareholders approved and adopted the Company's Amended and
Restated 1992 Outside Directors' Stock Option Plan (the "Outside Director
Plan").
(4) The Shareholders approved and adopted the Company's Amended and
Restated 1992 Stock Option Plan (the "Employee Plan").
(5) The Shareholders ratified the appointment of Coopers & Lybrand,
L.L.P. as the Company's auditors for the 1996 fiscal year.
The number of votes cast for each of the above is summarized in the table
below. (Pursuant to the Company's Amended and Restated Articles of
Incorporation, the holders of the Company's Series A Preferred Stock and Series
E Preferred Stock cast votes equivalent to the number of shares of the
Company's Common Stock into which the shares of Series A Preferred Stock and
Series E Preferred were convertible as of June 17, 1996. All numbers in the
table below represent shares of Common Stock or the voting equivalent thereof):
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BROKER
ITEM SUBMITTED TO SHAREHOLDERS FOR AGAINST ABSTAIN NON-VOTES TOTAL
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(1)(a) Election of Ronald J.
Berman 8,739,578 0 58,624 0 8,798,202
- - --------------------------------------------------------------------------------
(1)(b) Election of Howard K.
Schmidt 8,745,619 0 52,583 0 8,798,202
- - --------------------------------------------------------------------------------
(1)(c) Election of Thomas J.
Smith 8,739,178 0 59,024 0 8,798,202
- - --------------------------------------------------------------------------------
(2)(a) Election of Lee B.
Arberg 8,735,521 0 62,681 0 8,798,202
- - --------------------------------------------------------------------------------
(2)(b) Election of Marc W.
Eller 8,739,478 0 58,724 0 8,798,202
- - --------------------------------------------------------------------------------
(3) Approval of Outside
Directors' Plan 4,862,137 205,042 289,947 3,441,076 8,798,202
- - --------------------------------------------------------------------------------
(4) Approval of Employee Plan 4,445,511 186,415 258,347 3,907,929 8,798,202
- - --------------------------------------------------------------------------------
(5) Ratification of Coopers &
Lybrand, L.L.P., as auditors 8,523,533 35,143 226,678 12,848 8,798,202
- - --------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
After the Company's 1996 Annual Meeting of Shareholders, David R. Sincox
continued as a Class I Director, whose term expires at the Company's 1997
Annual Meeting of Shareholders, and Philip C. Shaffer and Igor Leontiev
continued as Class II Directors, whose terms expire at the Company's 1998
Annual Meeting of Shareholders.
In July 1996, Dr. Zvi Yaniv was elected by the Board of Directors as an
additional Class II Director. In accordance with state law, Dr. Yaniv's term
expires at the 1997 Annual Meeting of Shareholders. Effective October 1, 1996
Thomas J. Smith resigned as a Class III Director of the Company.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-QSB contains forward-looking statements and
estimates such as forecasts and projections of the Company's future performance
or statements of management's plans and objectives. Additional forward-looking
statements may be contained in the Company's other Securities and Exchange Act
filings, press releases, oral statements made by the officers of the Company,
and other sources. Actual results could differ materially from such forward
looking statements. Therefore, no assurance can be given that the results
estimated or anticipated in a forward-looking statement will be achieved. THE
COMPANY HAS ATTEMPTED TO IDENTIFY THE FORWARD-LOOKING STATEMENTS IN THE TEXT OF
THIS REPORT BY ENDNOTE 1 ON PAGE 13.
Important factors that could cause the Company's actual results to differ
from results in forward-looking statements are incorporated herein by
reference, with the following additions and revisions, from pages ii-v of the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates its existing resources, including lines of credit,
will enable it to maintain its current and planned operations for approximately
four and one half months after the date of this filing./1/ This belief is based
on current development plans, the successful implementation of the Company's
May 1996 restructuring plan, the current regulatory environment, historical
experience in the development of electronic products and general economic
conditions. It is the Company's intention to raise additional funds either
through previously mentioned joint venture possibilities or additional equity
financing. No assurance can be made that this effort will be successful or that
other factors may not arise that will affect the Company's solvency.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits on page 17 for a descriptive response to
this item.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated as of July 26, 1996.
(2) Current Report on Form 8-K and Form 8-K/A dated as of September 30,
1996.
15
<PAGE>
SIGNATURES
In accordance with the requirements 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.
SI DIAMOND TECHNOLOGY, INC.
(Registrant)
Date: November 12, 1996 /s/ Zvi Yaniv
-------------------------------------
Dr. Zvi Yaniv
President and Chief Operating
Officer
(Principal Executive Officer)
Date: November 12, 1996 /s/ Douglas P. Baker
-------------------------------------
Douglas P. Baker
Vice President and Chief Financial
Officer
(Principal Financial Officer)
16
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
Employment Agreement between the Company and Dr. Zvi Yaniv dated
10.1 as of May 31, 1996
10.2 Termination of Technology Cooperation Agreement between SI Diamond
Technology, Inc. and Philips Components B.V. dated October 4,
1996
11 Computation of (Loss) Per Common Share
13 Forward-Looking Statements and Important Factors Affecting Future
Results (Pages ii-v of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995, incorporated by
reference into this Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1996)
27 Financial Data Schedule
</TABLE>
17
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made this 1st day of June,
1996, by and between SI DIAMOND TECHNOLOGY, INC., a corporation with principal
offices located at 12100 Technology Boulevard, Austin, Texas 78727 ("Company")
and Zvi Yaniv, whose address is Austin, Texas 787 ("Employee").
ARTICLE I.
Employment
The Company hereby employs the Employee and the Employee hereby accepts
employment with the Company upon the terms and conditions hereinafter set
forth. The Employee is hereby employed as Executive Vice President and Chief
Operating Officer of the Company and shall perform such duties and
responsibilities commensurate with such position for the Company and
corporations and other business entities affiliated with the Company (the
"Company's Affiliates") as may be assigned him by the Board of Directors of
the Company (the "Board"). The Employee shall be invited to Company Board of
Directors meetings and will be recommended for election to the Board.
The Employee shall be a full-time employee of the Company and, subject to
the last sentence of this paragraph, shall devote his reasonable best efforts
and undivided time, attention and energy to the business of the Company and
the Company's Affiliates and shall not during the term of his employment
hereunder be engaged in any other business activity pursued for gain, profit
or other pecuniary advantage without the written consent of the Company's
Board of Directors, which shall not be arbitrarily withheld. The foregoing
limitations, however, shall not be construed as prohibiting the Employee from
making personal investments in such form or manner as will not require his
services in the operation or affairs of the companies or enterprises in which
such investments are made. The Company expressly approves the pre-existing
consulting arrangements entered into by Employee listed in that certain April
15, 1996 letter from Howard K. Schmidt to Employee, for which Employee shall
devote no more than an aggregate of 10% of his working time.
The Employee agrees that he shall abide by reasonable business record-
keeping requirements uniformly imposed by the Company on its employees
generally and shall strictly adhere to and obey all uniformly enforced rules
and regulations now in effect or subsequently promulgated governing the
conduct of employees generally of the Employer.
ARTICLE II.
Compensation
In consideration of the services provided under this Agreement, the Employer
will pay the Employee a base salary of $125,000 per year of the term of this
Agreement payable in equal semi-monthly installments on the last business day
on or before the fifteenth day and the last day of each month.
Quarterly performance goals shall be mutually agreed to by the Company and
the Employee at the beginning of each quarter during the first year of this
Agreement (through June 30, 1997). Thereafter, such goals shall be determined
annually at the beginning of each year of this agreement. The goals for the
quarter ending September 30, 1996 shall be as set forth on Exhibit A.
If the Employee's goals for the four quarters ending June 30, 1997 are
reached, such salary shall be retroactively adjusted to $200,000, effective as
of June 1, 1996. If the Employee's goals for the annual period ending June 30,
1998 are reached, the Company shall pay the Employee a one-time bonus of
$100,000.
Page 1
<PAGE>
In addition, subject to approval of the Company's shareholders, the Employee
is hereby granted 10-year options to acquire 1,000,000 shares of Company
common stock under its Employee Stock Option Plan and such grants are subject
to the terms and conditions described in the Plan, including exercisability
upon termination of employment, such that Employee shall have two years
following termination of his employment other than for cause (as hereinafter
defined) to exercise previously granted options, with vesting upon termination
and other termination issues more particularly addressed in Article IV hereof;
Employee shall have ninety (90) days following termination of his employment
for cause (as hereinafter defined) to exercise previously granted and vested
options. Such options shall vest at the rate of 200,000 shares per year as
follows: 100,000 shall be vested immediately and shall be exercisable at the
per share closing price on May 31, 1996; after the period ending December 31,
1996, another 100,000 shares shall be vested at the per share closing price on
the last trading day in December 1996, if all of the previous two (2)
quarterly goals for the Employee have then been met; additional options shall
vest at the rate of 200,000 per annual period ending on December 31, 1997,
1998, 1999 and 2000 at the end of each of such four (4) periods, assuming the
annual goals for the aforementioned periods have then been met, and shall be
exercisable at the per share closing price on the last trading day in each of
the aforementioned 4 annual periods.
Additionally, the Company shall provide the Employee with and pay for group
insurance benefits in accordance with its customary practices. Employee shall
also be entitled to participate in employee benefit programs established by
the Company, and shall be entitled to such fringe benefits and vacation as are
provided other employees of the Company of a similar level and station, all
according to standard Company policies in effect from time to time; except
that Company shall reimburse Employee for moving expenses from Bloomfield
Hills to Austin in accordance with current Company policy concerning moving
employees from Houston to Austin (attached). The Company will also provide
Employee with the use of an automobile owned by the Company and will pay
reasonable approved living expenses in Austin, Texas, for a period of up to
one (1) year following the date hereof.
The compensation and benefits described in this article are the only
compensation the Employee shall be entitled to receive for his services under
this contract.
ARTICLE III.
Reimbursement of Expenses Incurred
By Employee
The Employee is authorized to incur reasonable business expenses for
promoting the business of the Employer, including expenditures for
entertainment and travel consistent with Company policy and budgets. The
Employer will reimburse the Employee for all such expenses by the last
business day of the month following the month in which the expenses were
incurred.
ARTICLE IV.
Term; Termination
Termination by Either Party
This Agreement may be terminated by either party, with or without cause, by
giving thirty (30) days written notice of termination to the other party. Such
termination shall not prejudice any remedy that the terminating party may have
at law or in equity. This Agreement may be terminated by the Company for
cause, effective immediately upon notice of termination to the Employee.
Page 2
<PAGE>
Effect of Termination on Compensation and Employee Benefits
In the event of the termination of this Agreement by either party prior to
the completion of the term of employment specified herein, other than by the
Company for cause, Employee shall be entitled to his compensation earned prior
to the effective date of termination, computed pro rata up to and including
that date. In the event of termination by Company other than for cause,
Employee shall also be entitled to continue to receive his then current base
salary for nine (9) months following the effective date of termination as
severance pay and shall also be entitled to be vested in options that would
have vested during the next twelve (12) months following such termination (in
addition to then currently vested options). In the event of the termination of
this Agreement by Company prior to the completion of the term of employment
specified herein for "cause", Employee shall be entitled only to the base
salary and stock options earned prior to termination.
For purposes of this Agreement, "cause" is defined to mean the following
circumstances:
(i) conviction of Employee of crime involving moral turpitude;
(ii) commission, or attempted commission, by Employee of act of fraud on
Company;
(iii) misappropriation, or attempted misappropriation, by Employee of any
funds or property of the Company;
(iv) Employee's breach or non-observance of a material term hereof, if
such breach, etc. continues beyond a period of 10 days after notice by
Company;
(v) any action by Employee involving willful and deliberate malfeasance
in the performance of Employee's duties:
(vi) any action by Employee involving gross negligence in the performance
of Employee's duties, if such action continues for a period of 5 days after
notice by Company;
(vii) death of Employee;
(viii) disability causing Employee's inability to perform duties
hereunder for thirty consecutive days; and
(ix) breach of Employee's fiduciary duty of loyalty to the Company.
Effective with the termination hereof, Employee shall no longer be an
employee of the Company.
ARTICLE V.
Confidential and Proprietary Information
The Company and the Employee acknowledge and agree that ancillary to the
execution of this Agreement, Employee has executed an Agreement for Use and
Non-Disclosure of Confidential and Proprietary Information ("Confidentiality
Agreement") substantially in the form of document attached hereto as Exhibit B.
Such agreement shall be incorporated herein and made a part hereof as if copied
herein verbatim. The Company and the Employee further acknowledge and agree
that the intent of the non-complete portion of the Confidentiality Agreement is
to place a reasonable restriction upon the Employee against directly or
indirectly engaging in or obtaining an interest (other than strictly as a non-
controlling passive investor) in any business in the Field as defined in the
Confidentiality Agreement and certain other businesses described therein. The
Company and Employee acknowledge and agree that the Confidentiality Agreement
is to be interpreted in accordance with the expressions of intent contained in
this Agreement.
ARTICLE VI.
Business Papers
Upon termination of this Agreement for any reason whatsoever, the Employee
agrees immediately to turn over to the Company all business correspondence,
letters, papers, reports, customer lists and each and every
Page 3
<PAGE>
writing or record in the possession or control of the Employee and pertaining
to the Business of the Company or the Company's Affiliates.
ARTICLE VII.
General
It is understood that this Agreement or any rights accruing hereunder shall
not be assigned by the Employee, in whole or in part, without the prior
written consent of the Company.
ARTICLE VIII.
Subject to the provisions regarding assignment, this Agreement shall be
binding on the heirs, executors, administrators, legal representatives,
successors, and assigns of the respective parties.
ARTICLE IX.
This Agreement shall become valid when executed and accepted by the Company
in Austin, Travis County, Texas; it shall be deemed made and entered into in
the State of Texas and shall be governed by the laws of the State of Texas,
both as to interpretation and performance.
ARTICLE X.
Any notices to be given hereunder by either party to the other may be
effected either by personal delivery in writing or by mail, registered or
certified, postage prepaid, with return receipt requested. Notice to the
respective parties hereto shall be sufficient if addressed to the persons or
entities at the locations indicated below. Notices delivered personally shall
be deemed communicated as of the date of actual receipt; mailed notices shall
be deemed communicated as of five (5) days after mailing. Each party may
change the address for notice to the other party by giving notice of such
change in accordance with the provisions of this paragraph:
Howard K. Schmidt Zvi Yaniv
SI Diamond Technology, Inc.
12100 Technology Boulevard
Austin, Texas 78727
ARTICLE XI.
The waiver by the Company in whole or in part of a breach of any provision
of this Agreement by the Employee shall not operate or be construed as a
waiver of any subsequent breach.
ARTICLE XII.
The provisions hereof shall be deemed independent and severable, and the
invalidity or partial invalidity or unenforceability of any one provision or
portion thereof shall not affect the validity or enforceability of any other
provision hereof. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating or rendering unenforceable the remaining provisions hereof. Any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
Page 4
<PAGE>
ARTICLE XIII.
This Agreement may be amended at any time, but only by the mutual Agreement
of the parties hereto in a writing to be attached to and incorporated into
this Agreement.
ARTICLE XIV.
Any controversy or claim arising out of or relating to this Agreement or a
breach hereof, shall be settled by arbitration in Austin, Texas, in accordance
with the rules of the American Arbitration Association, and judgment upon the
award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof.
EXECUTED in duplicate originals at Austin, Travis County, Texas, and
effective for all purposes on the day and year first written above.
SI DIAMOND TECHNOLOGY, INC.
/s/ Howard K. Schmidt
By: _________________________________
Name: Howard K. Schmidt
Title: Chief Executive Officer
/s/ Zvi Yaniv
_____________________________________
Dr. Zvi Yaniv
_____________________________________
Employee
Page 5
<PAGE>
AMENDED AND RESTATED AGREEMENT FOR USE AND NON-DISCLOSURE OF CONFIDENTIAL AND
PROPRIETARY IFORMATION
Between
SI Diamond Technology, Inc.
and
Zvi Yaniv
THIS AMENDED AND RESTATED AGREEMENT FOR USE AND NON-DISCLOSURE OF
CONFIDENTIAL AND PROPRIETARY INFORMATION entered into to be effective June 1,
1996 (hereafter "Effective Date"), between SI Diamond Technology, Inc. (herein
"Company") and Zvi Yaniv (herein "Employee") to assure the protection and
preservation of the confidential and/or proprietary nature of information to
be disclosed or made available by Company, during the course of employment or
engagement as a consultant. For purposes of this Agreement, "Company" shall
include Company and all its subsidiary corporations.
(a) For purposes of this Agreement, "Proprietary Information" shall mean
all information, ideas, concepts, improvements, copyrightable material,
patentable material, discoveries and inventions (including those relating
to research, development, financial and sales data, pricing or trading
terms, evaluations, opinions, interpretations, the identity of Company
customers or of their requirements or of key contacts within such
customer's organizations, and marketing and merchandising techniques) (i)
possessed, acquired, developed or reduced to practice by Company at any
time, irrespective of the subject or nature of these, or (ii) conceived,
made, developed, acquired or reduced to practice by Employee or disclosed
or made known to Employee, individually or jointly with others, that relate
or pertain to the business of Company or any Company actual or demonstrably
anticipated research or development and whether or not conceived, made,
developed, acquired or reduced to practice during regular working hours,
but excluding any information, ideas, concepts, improvements, copyrightable
material, patentable material, discoveries and inventions possessed,
acquired, developed or reduced to practice by Employee which are excluded
under Paragraph (c). The terms shall include without limitation all test
data, documents, memoranda, notes, records, files, correspondence,
drawings, manuals, models, specifications, designs, computer programs, maps
and all other writings or materials of any type embodying any of such
Proprietary Information.
(b) All Proprietary Information shall be the sole and exclusive property
of Company. Employee agrees that he or she shall promptly and completely
inform and disclose to Company all Proprietary Information. Employee shall
transfer to Company all Proprietary Information conceived, made, developed,
acquired or reduced to practice by Employee as a result of Employee's work
on behalf of Company, and Employee agrees to execute any additional
documents that Company may reasonably request to evidence such transfer of
rights in connection with the development in every proper way in obtaining,
at its expense, protection for all such inventions and copyrightable
materials, and will execute any and all lawful documents desired or
required by Company to achieve that end. Employee agrees to assign to
Company, his or her entire right, title and interest in and to all such
copyrightable or patentable materials, discoveries, inventions,
improvements, and developments, as well as any applications for patent or
copyright registration thereon, during and subsequent to his or her
employment.
(c) Employee shall not be obligated under or bound by Paragraph (a) or
(b) above for any copyrightable or patentable material, discovery,
invention, improvement, or development for which no equipment, supplies,
facility, or trade secret information of Company was used and which was
developed entirely on his or her own time, and which neither (1) relates
directly or indirectly to any one or more of the following fields: (i)
field emission materials and devices, (ii) diamond materials and devices,
(ii) diamond materials and devices, (iii) open discharge lamps or (iv) high
density packaging and/or interconnect technology (collectively, the
"Field"), nor (2) results from any work performed by him or her for
Company, including without limitation any information covered by the
definition of Proprietary Information in Paragraph (a) concerning the
proposed vacuum fluorescent display, light emitting diode or plasma display
business relations that the Company is endeavoring to establish relating to
the former Soviet Union. The burden of proof whether items are covered by
this Paragraph (c) shall rest with Employee.
1
<PAGE>
Employee agrees that any improvements made to inventions or revisions of
copyrightable materials, authored, conceived, developed or reduced to
practice during his or her employment or engagement as a consultant by
Company shall be the property of Company if otherwise covered by the
definition of Proprietary Information in Paragraph (a) and not otherwise
excluded under Paragraph (c), irrespective of whether original inventions,
prior improvements or prior copyrightable materials are excluded under
Paragraph (c). Any information covered by the definition of Proprietary
Information in Paragraph (a) and not excluded under Paragraph (c) that is
possessed, acquired, developed or reduced to practice by Employee within
one (1) year following termination of Employee's employment or engagement
as a consultant with Company shall be presumed to be Proprietary
Information.
(d) Employee recognizes and acknowledges that the protection of the
Proprietary Information of Company against unauthorized disclosure and use
is of critical importance to Company, and therefore Employee agrees to use
his or her best efforts and exercise utmost diligence to protect and
safeguard the Proprietary Information of Company and its affiliates, if
any, and, except as may be expressly required by Company in connection with
Employee's performance of his or her obligations to Company. Employee shall
not, either during the term of his or her employment or engagement as a
consultant with Company or for a period of five (5) years thereafter,
directly or indirectly, use for his own benefit or for the benefit of
another, or disclose to another, any of such Proprietary Information.
(e) Upon termination of employment, or at any time prior to the
expiration of five (5) years thereafter, upon request of Company, Employee
shall immediately deliver to Company all originals and all copies of any
documents (including computer files) embodying any Proprietary Information,
including all test data.
(f) The Employee represents that his employment by Company will not
conflict with any obligations which he has to any other person, firm or
entity. The Employee specifically represents that he has not brought to
Company (during the period before the signing of this Agreement) and he
will not bring to Company any materials or documents of a former or present
employer, or any confidential information or property of any other person,
firm, or entity.
(g) During the course of employment, the Employee will promptly disclose
to the directors of Company, in accordance with Company's policies, full
information concerning any interests, direct or indirect, he holds (whether
as a principal, stockholder, lender, employee, director, officer, partner,
venturer, consultant or otherwise) in any business which, as reasonably
known to the Employee, purchases or provides services or products to,
Company or any of its subsidiaries.
(h) During the course of employment or engagement as a consultant with
the Company, the Employee shall not, without disclosure to and approval of
the Company's board of directors, directly or indirectly, engage or be
interested (whether as a principal, stockholder or other owner [other than
strictly in accordance with Article I of the Employment Agreement dated to
be effective June 1, 1996 by and between Company and Employee], lender,
employee, officer, director, partner, venturer, consultant or otherwise) in
any business that is engaged directly or indirectly in the Field or in any
other business (i) in which Employee is not presently engaged and (ii) in
which Company engages during the term hereof. Such activities may be
further restricted by other agreements between the parties, including the
aforementioned Employment Agreement.
(i) For a period of two years after termination of employment or the
engagement as a consultant with the Company, the Employee shall not,
without disclosure to and approval of the Company's Board of Directors,
directly or indirectly, (i) engage or be interested (whether as a
principal, stockholder or other owner [strictly in accordance with Article
I of the Employment Agreement dated to be effective June 1, 1996 by and
between Company and Employee], lender, employee, officer, director,
partners, venturer, consultant or otherwise) in any business that is
engaged directly or indirectly in the Field or (ii) contact for any reason
any customers, vendors, suppliers or employees of the Company.
(j) If any of the provisions of this Agreement is held to be
unenforceable because of the scope, duration, or area of its applicability,
the court making such determination shall have the power to modify such
scope, duration, or area or all of them, and such provision shall then be
applicable in such modified form.
2
<PAGE>
(k) This Agreement shall not be considered to be an agreement by Company to
employ Employee.
Specific Performance: Since Company will be irreparably damaged if the
provisions of this agreement are not specifically enforced, Company shall be
entitled to an injunction restraining any violation of this agreement by the
Employee (without any bond or other security being required), or any other
appropriate decree of specific performance. Such remedies shall not be
exclusive and shall be in addition to any other remedy which Company may have.
SI DIAMOND TECHNOLOGY, INC.
/s/ Howard K. Schmidt
By: _________________________________
Howard K. Schmidt
Chief Executive Officer
/s/ Zvi Yaniv
_____________________________________
Zvi Yaniv
3
<PAGE>
EXHIBIT 10.2
AMENDMENT TO THAT CERTAIN
TECHNOLOGY COOPERATION AGREEMENT
BETWEEN SI DIAMOND TECHNOLOGY, INC.
AND PHILIPS COMPONENTS B.V.
DATED JULY 14, 1996
This Amendment is entered into between SI DIAMOND TECHNOLOGY, INC., having
an office at 12100 Technology Boulevard, Austin, Texas 78727 (hereinafter
referred to as "SIDT") and PHILIPS COMPONENTS B.V., having an office at
Hurksestraat 9, 5652 AH, Eindhoven, The Netherlands (hereinafter referred to
as "Philips").
WHEREAS, SIDT and Philips have entered into that certain Technology
Cooperation Agreement on July 14, 1995 (the "Agreement") and desire to amend
the Agreement as set forth in this Amendment in order to fully and completely
terminate the Agreement.
1. SIDT and Philips agree to terminate the Agreement effective on the date
that both parties have signed this Amendment.
2. Only the provisions of Article 5, Article 7, Article 10, Section 11.1,
Section 11.2, Section 11.3, Section 11.5, Section 11.6, Article 12, and
Article 13 shall survive termination of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment the day and
year written below.
SI DIAMOND TECHNOLOGY, INC. PHILIPS COMPONENTS B.V.
By: /s/ ZVI YANIV By: /s/ J.C. STUVE
-------------------------- ----------------------------------
Zvi Yaniv J.C. Stuve,
President/COO Managing Director October 4, 1996
<PAGE>
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Computation of (loss) per
common share:
Net loss applicable to
common shareholders:
Continuing operations... $(2,177,872) $(2,624,483) $(12,241,061) $(6,559,060)
Discontinued operations. -- (327,500) (999,500) (977,000)
----------- ----------- ------------ -----------
Net loss applicable to
common shareholders.... $(2,177,872) $(2,951,983) $(13,240,561) $(7,536,060)
----------- ----------- ------------ -----------
Weighted average number of
common shares
outstanding.............. 12,285,750 9,605,648 11,443,123 8,474,600
Net loss per common share:
Continuing operations... $ (0.18) $ (0.27) $ (1.07) $ (0.77)
Discontinued operations. -- (0.04) (0.09) (0.12)
----------- ----------- ------------ -----------
Net loss per common
share.................. $ (0.18) $ (0.31) $ (1.16) $ (0.89)
=========== =========== ============ ===========
Computation of (loss) per
common share assuming
full dilution (A):
Net loss applicable to
common shareholders:
Continuing operations... $(2,177,872) $(2,624,483) $(12,241,061) $(6,559,060)
Discontinued operations. -- (327,500) (999,500) (977,000)
----------- ----------- ------------ -----------
Net loss applicable to
common shareholders.... $(2,177,872) $(2,951,983) $(13,240,561) $(7,536,060)
----------- ----------- ------------ -----------
Weighted average number of
common shares
outstanding.............. 12,285,750 9,605,648 11,443,123 8,474,600
Common shares issuable
under outstanding
convertible instruments,
stock options and
warrants................. 6,753,789 3,281,824 6,753,789 3,281,824
Less shares assumed
repurchased with
proceeds................. (7,121,563) (1,390,614) (2,159,238) (1,585,884)
----------- ----------- ------------ -----------
11,917,976 11,496,858 15,384,051 10,170,540
Net loss per common share:
Continuing operations--
fully diluted.......... $ (0.18) $ (0.23) $ (0.80) $ (0.64)
Discontinued
operations--fully
diluted................ -- (0.03) (0.06) (0.10)
----------- ----------- ------------ -----------
Net loss per common
share--fully diluted... $ (0.18) $ (.0.26) $ (0.86) $ (0.74)
=========== =========== ============ ===========
</TABLE>
- - --------
(A) This calculation is submitted in accordance with the Securities and
Exchange Act of 1934 Release No. 9083 although it is contrary to APB
Opinion 15 because it does not result in any dilution.
<PAGE>
EXHIBIT 13
FORWARD - LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
(From Form 10-KSB for fiscal year ended December 31, 1995)
SI Diamond Technology, Inc. and its subsidiaries (collectively
referred to as the "Company") unless the context requires otherwise, are
including the following cautionary statement in this Annual Report on Form 10-
KSB to make applicable and take advantage of the new "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED THROUGHOUT THE TEXT OF THIS
REPORT BY ENDNOTE 1, WHICH APPEARS ON PAGE 15.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of the
Company.
EARLY STAGE OF DFED PRODUCT DEVELOPMENT; NO DFED PRODUCT REVENUES; DFED PRODUCT
UNCERTAINTY
The Company's Diamond Field Emission Display ("DFED") and related
products will require significant additional development, engineering, testing
and investment prior to commercialization. There can be no assurance that the
DFED, the Company's leading product, will be successfully developed, be capable
of being produced in commercial quantities on a cost-effective basis or be
successfully marketed.
HISTORY OF OPERATING LOSSES
For the year ended December 31, 1995, the Company suffered a net loss
of $14,389,856. For the years ended December 31, 1992, 1993, and 1994, the
Company suffered net losses of $1,630,978, $7,527,677, and $7,255,420,
respectively. The Company expects to continue to incur additional operating
losses, at least through 1996, as it continues to develop products for
commercialization, and there can be no assurance that the Company will be
profitable in the future. The Company's operations to date have been primarily
financed by the proceeds of the sale of equity securities of the Company and
from revenues generated from research and development conducted for third
parties, although since the second quarter of 1994, revenues from commercial
services and product sales have exceeded those earned through such research and
development ("R&D") activities. In order to continue its transition from a
contract research and development organization into a company with viable
operations, the Company anticipates substantial product development expenditures
for the foreseeable future.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
The Company expects to incur substantial expenses for R&D, product
testing, production, manufacturing, product marketing and administrative
overhead. Further, the Company believes that certain proposed products may not
be available for commercial sale or routine use for a period of one to two
years. Therefore, it is anticipated that the commercialization of the Company's
existing and proposed products will require additional capital in excess
Page ii
<PAGE>
of the Company's other current sources of funding. The combined effect of the
foregoing may prevent the Company from achieving profitability at least through
1996. Because the timing and receipt of revenues from the sale of products will
be tied to the achievement of certain product development, testing,
manufacturing and marketing objectives which cannot be predicted with certainty,
there may be substantial fluctuations in the Company's results of operations.
If revenues do not increase as rapidly as anticipated, or if product development
and testing and marketing require more funding than anticipated, the Company may
be required to curtail its expansion and/or seek additional financing from other
sources. The Company may seek such additional financing through the offer of
debt or equity or any combination thereof at any time.
The Company anticipates that its existing resources will enable it to
maintain its current and planned operations for approximately the next twelve
(12) to eighteen (18) months. This belief is based on current development
plans, the current regulatory environment, historical experience in the
development of electronic products and general economic conditions. Changes
could occur to cause available resources to be consumed before such time. If
adequate funds are not available from operations or additional sources of
financing, the Company may have to reduce substantially or eliminate
expenditures for research and development, testing and production of its
products or obtain funds through arrangements with other entities that may
require the Company to relinquish rights to certain of its technologies or
products. Such results would materially and adversely affect the Company.
DEPENDENCE ON PRINCIPAL PRODUCTS; NO ASSURANCE OF MARKET ACCEPTANCE
The Company's DFED and related products are emerging technologies.
The financial condition and prospects of the Company are dependent upon market
acceptance and sales of the Company's DFED in the next two years. Additional
R&D needs to be conducted with respect to the DFED before marketing and sales
efforts can be commenced. Market acceptance of the Company's DFED will be
dependent upon the perception within the electronics and instrumentation
industries of the quality, reliability, performance, efficiency, breadth of
application and cost-effectiveness of the DFED. There can be no assurance that
the Company will be able to gain commercial market acceptance for its DFED or
develop other products for commercial use.
COMPETITION; POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The display, semiconductor, coating system and industrial coating
industries are highly competitive and are characterized by rapid technological
change. The Company's existing and proposed products will compete with other
existing products and may compete against other developing technologies.
Development by others of new or improved products, processes or technologies may
reduce the size of potential markets for the Company's products. There can be
no assurance that such products, processes or technologies will not render the
Company's proposed products obsolete or less competitive. Many of the Company's
competitors have greater financial, managerial distribution and technical
resources than the Company. The Company will be required to devote substantial
financial resources and effort to further R&D. There can be no assurance that
the Company will successfully differentiate its products from its competitors'
products or that the Company will be able to adapt to evolving markets and
technologies, develop new products or achieve and maintain technological
advantages.
TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies, the Company has
various license agreements with Philips Components B.V., Microelectronics and
Computer Technology Corporation, The University of Texas at Dallas and
DiaGasCrown, Inc., wherein the Company has acquired rights to develop and
commercialize certain research technologies. In certain cases, agreements
require the Company to pay royalties on sale of products developed from the
licensed technologies and fees on revenues from sublicensees, where applicable,
and to pay for the costs of filing and prosecuting patent applications. The
Company's principal license agreement with MCC requires the Company to pay
exclusivity fees under certain circumstances in order to maintain the Company's
exclusive rights under the MCC Agreement. The Company's license agreement with
the University of Texas at Dallas requires the Company to pay annual license
maintenance fees. Each agreement is subject to termination by either party,
upon notice, in
Page iii
<PAGE>
the event of certain defaults by the other party. The payment of such royalties
may adversely affect the future profitability of the Company.
LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
The Company has no established commercial display manufacturing
facilities and the present management has limited commercial manufacturing and
marketing experience. Accordingly, the Company will be required to either
employ qualified personnel to establish manufacturing facilities or enter into
appropriate manufacturing agreements with others. There is no assurance that
the Company will be successful in attracting experienced personnel or financing
the cost of establishing commercial manufacturing facilities, if required, or be
capable of producing a high quality product in quantity for sale at competitive
prices.
MARKETING AND SALES UNCERTAINTIES
There can be no assurance that the DFED and related products will be
successfully developed or that such products will be commercially successful.
The Company intends to establish a sales organization to promote, market, and
sell its products. To develop a sales organization will require significant
additional expenditures, management resources and training time. There can be
no assurance that the Company will be able to establish such a sales
organization.
UNPROVEN TECHNOLOGY; NEED FOR SYSTEM INTEGRATION
In order to prove that the Company's technologies work and will
produce a complete product, the Company must ordinarily integrate a number of
highly technical and complicated subsystems into a fully-integrated prototype.
There can be no assurance that the Company will be able to successfully complete
the development work on any of its proposed products or ultimately develop any
marketable products.
DEPENDENCE UPON GOVERNMENT CONTRACTS
A significant, but diminishing, portion of the Company's revenues has
been derived from contracts with agencies of the United States government. In
the years ended December 31, 1992, 1993, 1994 and 1995, such contracts accounted
for approximately $930,000, $1,147,000, $820,000 and $1,009,000, respectively,
or approximately 99%, 89%, 41%, and 33% of the Company's total revenues for each
of those periods. The Company's contracts involving the United States
government are or may be subject to various risks, including unilateral
termination for the convenience of the government, reduction or modification in
the event of changes in the government's requirements or budgetary constraints,
increased or unexpected costs causing losses or reduced profits under fixed-
price contracts or unallowable costs under cost reimbursement contracts, risks
of potential disclosure of the Company's confidential information to third
parties, the failure or inability of the prime contractor to perform its prime
contract in circumstances where the Company is a subcontractor, the failure of
the government to exercise options provided for in the contracts and the
exercise of "march-in" rights by the government. March-in rights refer to the
right of the government or government agency to exercise a non-exclusive,
royalty-free, irrevocable, worldwide license to any technology developed under
contracts funded by the government if the contractor fails to continue to
develop the technology. The programs in which the Company participates may
extend for several years but are normally funded on an annual basis. There can
be no assurance that the government will continue its commitment to programs to
which the Company's development projects are applicable or that the Company can
compete successfully to obtain funding available pursuant to such programs. A
reduction in, or discontinuance of, such commitment or of the Company's
participation in these programs would have a material adverse effect on the
Company's business, operating results and financial condition.
Page iv
<PAGE>
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technology. Although the Company has been awarded, has filed
applications for or has been licensed technology under numerous patents, there
can be no assurance as to the degree of protection offered by these patents or
as to the likelihood that pending patents will be issued. There can be no
assurance that competitors in both the United States and foreign countries, many
of which have substantially greater resources and have made substantial
investments in competing technologies, have not already or will not apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make and sell its products. There can also be no assurance that
competitors will not intentionally infringe the Company's patents. The defense
and prosecution of patent suits are both costly and time-consuming, even if the
outcome is favorable to the Company. In foreign countries, the expenses
associated with such proceedings can be prohibitive. In addition, there is an
inherent unpredictability in obtaining and enforcing patents in foreign
countries. An adverse outcome in the defense of a patent suit could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease selling its
products. Although third parties have not asserted infringement claims against
the Company, there can be no assurance that third parties will not assert such
claims in the future. Claims that the Company's products infringe on the
proprietary rights of others are more likely to be asserted after commencement
of commercial sales incorporating the Company's technology. The Company also
relies on unpatented proprietary technology, and there can be no assurance that
others may not independently develop the same or similar technology or otherwise
obtain access to the Company's proprietary technology. To protect its rights in
these areas, the Company requires all employees and most consultants, advisors
and collaborators to enter into confidentiality agreements. There can be no
assurance that these agreements will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information. While the Company has attempted to
protect proprietary technology it may develop or acquire and will attempt to
protect future developed proprietary technology through patents, copyrights and
trade secrets, it believes that its success will depend more upon further
innovation and technological expertise.
AVAILABILITY OF MATERIALS AND DEPENDENCE ON SUPPLIES
It is anticipated that materials to be used by the Company in
producing its future products will be purchased by the Company from outside
vendors and, in certain circumstances, the Company may be required to bear the
risk of material price fluctuations. It is anticipated by the Company's
management that the majority of raw materials to be used in products to be
manufactured by the Company will be readily available. However, there can be no
assurance that such materials will be available in the future or if available
will be procurable at prices which will be favorable to the Company.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company will depend in large part on its
ability to attract and retain highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense and there can
be no assurance that the Company will be able to attract and retain all
personnel necessary for the development of its business. In addition, much of
the know-how and processes developed by the Company reside in its key scientific
and technical personnel and such know-how and processes are not readily
transferable to other scientific and technical personnel. The loss of the
services of key scientific, technical and managerial personnel could have a
material adverse effect on the Company.
Page v
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFILED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 442,884
<SECURITIES> 0
<RECEIVABLES> 1,700,948
<ALLOWANCES> 0
<INVENTORY> 346,868
<CURRENT-ASSETS> 2,708,950
<PP&E> 2,974,291
<DEPRECIATION> 814,486
<TOTAL-ASSETS> 6,633,603
<CURRENT-LIABILITIES> 4,524,788
<BONDS> 0
0
766
<COMMON> 12,934
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,633,603
<SALES> 4,157,070
<TOTAL-REVENUES> 4,157,070
<CGS> 3,526,181
<TOTAL-COSTS> 15,471,206
<OTHER-EXPENSES> (201,969)
<LOSS-PROVISION> 350,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,111,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,112,167)
<DISCONTINUED> (999,500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,111,667)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
<FN>
<F1>A preferred stock dividend of $1,128,894 is included for calculating net
(loss) per common share.
</TABLE>
