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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1996; or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
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COMMISSION FILE NO. 1-11602
SI DIAMOND TECHNOLOGY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0273345
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
12100 Technology Boulevard, Austin, Texas 78727
(Address of principal executive office, including Zip Code)
Registrant's telephone number, including area code: (512) 331-6200
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $0.001 par value The NASDAQ Stock Market
Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check 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 past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year: $ 5,772,620
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on the
NASDAQ/Small Cap Market on March 21, 1997, was approximately $12,821,637. Shares
of Common Stock held by each officer and director and by each person who may be
deemed to be an affiliate have been excluded.
As of March 21, 1997, the registrant had 13,943,456 shares of Common Stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one).
Yes No X
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TABLE OF CONTENTS
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PART I....................................................................................... Page 1
Item 1. Business................................................................... Page 1
Item 2. Properties................................................................. Page 10
Item 3. Legal Proceedings.......................................................... Page 10
Item 4. Submission of Matters to a Vote of Security Holders........................ Page 10
PART II...................................................................................... Page 10
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....... Page 10
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. Page 11
Item 7. Financial Statements....................................................... Page 16
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. Page 43
PART III..................................................................................... Page 44
Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance
with Section 16 (a) of the Exchange Act.................................. Page 44
Item 10. Executive Compensation..................................................... Page 45
Item 11. Security Ownership of Certain Beneficial Owners and Management............. Page 50
Item 12. Certain Relationships and Related Transactions............................. Page 53
Item 13. Exhibits and Reports on Form 8-K........................................... Page 53
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FORWARD - LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
Certain statements in this annual report are forward-looking statements
concerning the future operations of SI Diamond Technology, Inc. and it
subsidiaries (collectively referred to as the "Company"). The Company is
including the following cautionary statement in this Annual Report on Form 10-
KSB to make applicable and take advantage of the 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.
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 (but not all 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 DFE PRODUCT DEVELOPMENT; NO DFE PRODUCT REVENUES; DFE
PRODUCT UNCERTAINTY
The Company's Diamond Field Emission ("DFE") technology and products
resulting therefrom will require significant additional development,
engineering, testing and investment prior to commercialization. The Company's
leading potential DFE product is the Diamond Field Emission Lamp ("DFEL"). If
the DFEL is successful, the Diamond Field Emission Display ("DFED) is also a
possibility. There can be no assurance that either the DFEL or the DFED 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, 1996, the Company suffered a net loss
of $13,709,006. For the years ended December 31, 1992, 1993, 1994, and 1995, the
Company suffered net losses of $1,630,978, $7,527,677, $7,255,420, and
$14,389,856, respectively. The Company expects to continue to incur additional
operating losses for an extended period of time 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.
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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. The majority of R&D expenditures are for the development of the
Company's DFE technology. 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 of the Company's current sources of funding. The combined effect of the
foregoing may prevent the Company from achieving profitability for an extended
period of time. 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 has developed a plan to maintain operations for 12-18
months from the date of this Annual Report. However, existing resources at
current spending levels are only available for approximately 2-3 months. This
estimate is based on current development plans, current operating 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. The Company's plan is
primarily dependent on increasing revenues and raising additional funds through
strategic partners, additional debt offerings, or additional equity offerings.
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
The Company's DFE technology is an emerging technology. The financial
condition and prospects of the Company are dependent upon market acceptance and
sales of the Company's DFE products and its Electronic Billboard. Additional R&D
needs to be conducted with respect to the DFE products and the Electronic
Billboard before marketing and sales efforts can be commenced. Market acceptance
of the Company's products 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
products. There can be no assurance that the Company will be able to gain
commercial market acceptance for its products or develop other products for
commercial use.
COMPETITION; POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The display, semiconductor, and coating system 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. Most 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.
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TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies, the Company has
various license agreements with Microelectronics and Computer Technology
Corporation ("MCC") 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. Each agreement is
subject to termination by either party, upon notice, in the event of certain
defaults by the other party. The payment of such royalties may adversely affect
the future profitability of the Company.
NO ASSURANCE OF MARKET ACCEPTANCE
Since its inception, the Company has focused its product development efforts on
R&D technologies that the Company believes will be a significant advance over
currently available technologies. The Company has limited experience in
manufacturing and marketing. The new management team that was put in place in
1996 has experience in manufacturing and marketing; however, with any new
technology there is a risk that the market may not appreciate the benefits or
recognize the potential applications of the technology. Market acceptance of the
Company's products will depend, in part, on the Company's ability to convince
potential customers of the advantages of such products as compared to
competitive products, and will also depend upon the Company's ability to train
manufacturers and others to use the Company's products. There can be no
assurance that the Company will be able to successfully market its proposed
products even if such products perform as anticipated.
LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
The Company has no established commercial manufacturing facilities in
the areas in which it is conducting its principal research. Its existing
manufacturing, while related, would not directly support manufacturing of the
proposed new products. The new management team that was put in place has
commercial manufacturing and marketing experience; however, the Company will be
required to either employ additional 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 DFE related products or the
Electronic Billboard 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.
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DEPENDENCE UPON GOVERNMENT CONTRACTS
A significant portion of the Company's revenues have been derived from
contracts with agencies of the United States government. In the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, such contracts accounted for
approximately $930,000, $1,147,000, $820,000, $1,009,000, and $2,869,000,
respectively, or approximately 99%, 89%, 41%, 33%, and 50% 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.
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
investment 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.
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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 hear 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.
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PART I.
When used in this document, the words "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, or projected. For additional discussion of such risks, uncertainties,
and assumptions, see "Forward-Looking Statements and Important Factors Affecting
Future Results" included elsewhere in this report.
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
GENERAL
SI Diamond Technology, Inc., a Texas corporation (the "Company"), is
engaged in the development of products and services based principally on novel
applications of thin films and microelectronic fabrication and assembly. The
Company believes that microelectronic and other applications of diamond thin
film technology will play an important role in the electronics industry. The
Company's research is focused on identifying key applications of such
technology. Based on this research, the Company provides microelectronic
fabrication and assembly services, manufactures high-vacuum coating systems and
is currently engaged in the development of products based on DFE technology and
the development of an electronic billboard based on existing technology.
Electronic billboards would provide a market for the Company's DFEL product when
completed. Management believes that the Company's greatest growth opportunity
lies in DFE products and the development of an electronic billboard.
Consequently, each of the Company's operations comprises a product, technology
or service useful in the development and production of such items.
The Company was incorporated in Texas in 1987. The Company's directly
and indirectly owned subsidiaries are as follows: Northlight Displays, Inc., a
Delaware corporation ("Northlight"); Diamond Tech One, Inc., a Delaware
corporation ("DTO"); SIDT Coatings, Inc., a Delaware corporation ("Coatings"):
Plasmatron Coatings and Systems, Inc., a Pennsylvania corporation
("Plasmatron"); Electronic Billboard Technology, Inc., a Delaware Corporation
("EBT"); Field Emission Picture Element Technology, Inc., a Delaware Corporation
("FEPET"); and SDI Acquisition Corp., a Texas corporation. FEPET and EBT were
incorporated in January 1997 to focus on commercialization of specific aspects
of the Company's R&D. The "Company" and "SI Diamond", as used herein, refer to
SI Diamond Technology, Inc. and its subsidiaries, unless the context indicates
otherwise.
SI Diamond's business includes: the development and commercialization
of electronic billboards; the development and commercialization of DFE products;
the manufacture and sale of high vacuum process systems; and microelectronics
fabrication and assembly services. Additionally, the Company conducts contract
research and development principally under United States governmental agencies'
sponsorship. The business efforts of the Company have arisen out of the
Company's interest in thin film materials, notably thin film diamond and
diamond-like carbon ("DLC"); these interests have led the Company into
microelectronics-related processes, coating and other high vacuum systems,
thin film based DFE products, and electronic billboards.
SI Diamond conducts its operations through its subsidiaries and
through its research division. DTO concentrates on back-end semiconductor wafer
processing and multi-chip module fabrication and assembly services. Plasmatron
manufactures and sells high vacuum process equipment and custom coating
equipment. EBT is engaged in the development of an electronic billboard. FEPET
is conducting research and developing the DFEL. Northlight and Coatings are
currently inactive.
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Where appropriate, the Company enters into collaborations with third
parties. In 1993, the Company established a broad-based collaboration with
Microelectronics and Computer Technology Corporation ("MCC") to jointly develop
products based on MCC's and the Company's flat panel display and cold cathode
technologies. The MCC collaboration was amended in January 1995 to provide that
the Company would be the exclusive licensee of the technology and the sole
sublicensing agent. In February 1995, the Company entered into a teaming
agreement concerning flat panel displays and cold cathodes with DiaGasCrown,
Inc. ("DGC"), a Russian joint stock Company owned by Gazcomplektimpex, a
subsidiary of Gazprom, the Russian natural gas conglomerate, and several Russian
research institutes. In July 1995, the Company entered into a display technology
cooperation agreement with Philips Components B.V. ("Philips"). In October 1996,
the Philips agreement was terminated by mutual agreement of the parties.
The DFE related products and the electronic billboard will require
significant additional development, engineering, testing and investment prior to
commercialization. There can be no assurance that the DFE products or the
electronic billboard, the Company's leading products, will be successfully
developed, produced in commercial quantities on a cost-effective basis or
successfully-marketed.
During 1996 and 1995, the Company incurred $6,185,943 and $8,726,355,
respectively, in research and development expenses. The Company expects to incur
substantial expenses for research and development, product testing, 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.
BUSINESS GROUPS
ELECTRONIC BILLBOARD TECHNOLOGY, INC. EBT is planning to develop an
electronic billboard which will enable the outdoor advertising industry to fully
exploit the internet and information revolution by placing ads at any location
at any time. Advertisers could benefit substantially from this product which
would allow them greater precision in reaching their target audience. Billboard
companies could benefit substantially by increasing revenues at each site by
being able to sell the same space to different advertisers at different times
during the day. The market potential for this product is substantial. The
Outdoor Advertising Association of America has indicated that over 275,000 large
roadside billboards exist in the United States. The Company's initial strategy
is to target those locations with the highest viewership.
The Company's Billboard is based on a proprietary version of a mature
existing technology. The base technology is widely used in a variety of
applications and is readily available from many component suppliers. This
product offers many advantages over existing technologies used in the outdoor
advertising industry. These include full video capability, full color, wide
viewing angle with excellent outdoor readability, relatively low cost compared
with competing technologies and high reliability. The Company has built a proof
of concept which clearly demonstrates high contrast, sunlight readability, and
video range speeds. The Company is currently in the process of seeking a
strategic partner. EBT would also provide a market for the Company's DFEL, if
successfully developed.
FIELD EMISSION PICTURE ELEMENT TECHNOLOGY, INC. FEPET is developing
the Company's proprietary DFE technology for use in a Diamond Field Emission
Lamp ("DFEL"). The DFEL is a unique, high brightness, multi-color light source
intended for use initially in outdoor billboards, indoor video walls, and
alphanumeric displays. The DFEL is a pixel, which is the basic unit or picture
element that makes up the image displayed on a video screen. The DFE technology
provides several advantages over the existing technologies used in these areas.
It generally has a higher image quality, better sunlight readability, lower
cost, lower energy usage, improved viewing angle and excellent video
capabilities. This technology when fully developed would be a natural step in
the improvement progression in the Company's electronic billboard.
The Company is currently in the process of seeking a strategic partner
to aid in the development, funding, commercialization and marketing of the DFEL
product. The Company has already built prototypes that clearly demonstrate the
desired features. The Company estimates that it will take an investment of $ 3.5
million to fund final product development and introduction. The Company expects
that within 12-24 months of such investment, systems would be in place to meet
initial demand for the product and the Company would be ready to begin to ramp
up production.
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DIAMOND TECH ONE, INC. DTO provides manufacturing and engineering
services for the microelectronics and display industries. DTO includes the
former microelectronics packaging operations and production assets of MCC, the
Austin-based consortium of North American electronics leaders which was
established in 1982 to accelerate computer and multichip module development. In
addition to Class 100 clean rooms and an array of fabrication equipment, a
production license to 150 patents of the packaging technologies developed by MCC
was acquired. DTO is engaged in design and fabrication of high performance
copper-polyimide MCM substrates, bonded and packaged high density assemblies,
and the highest quality gold, solder or compliant "bumped" wafers. These
technologies are key technologies used in the electronics industry.
PLASMATRON COATINGS AND SYSTEMS, INC. Plasmatron manufactures and
sells high vacuum process systems for coatings used in the microelectronics
industry. Plasmatron's products are typically custom designed, fabricated in-
house and then installed at the customer's facility. Plasmatron recognizes
revenue on the percentage-of-completion basis because of the long-term nature of
its contracts. Plasmatron's equipment sales contracts range in size from $75,000
to over $1 million. Plasmatron markets its products utilizing employees engaged
in direct sales and several outside representatives on a commission basis.
NORTHLIGHT DISPLAYS, INC. Northlight previously was involved in
applying the Company's proprietary DFE technology to the development of a flat
panel display. The Company's research has indicated that the quality of the
emission needs to be improved by a significant order of magnitude to support
this application. The Company is not pursuing this research at the present
time. Management believes that the DFEL can be developed and taken to market
much more quickly than the DFED and that the knowledge gained in the development
of the DFEL would aid in the eventual development of the DFED. Northlight is
presently inactive.
RESEARCH DIVISION. The Company's original business purpose was to
provide contract research and development services to various governmental
agencies under the SBIR Program. In general, research grants under the SBIR
Program involve a two-step process where Phase I funding in the amount of up to
$75,000 provides for a 6-month feasibility study and Phase II funding of up to
$750,000 provides for a 2-year technology development program. Upon the
completion of the Phase II program, the Government is ordinarily granted a
royalty-free license to use the newly developed technology for its own purposes,
and the development contractor retains all other rights to use and further
commercialize the newly developed technology. Despite intense competition, the
Company, historically, has been successful in obtaining SBIR funding.
During the period from inception in 1987 to the date of this report,
the Company has received total third party funding commitments in excess of $10
million, including $1,882,000 in SBIR Phase I grants, $4,723,000 in SBIR Phase 2
or similar grants, and $3,500,000 which is the Company's share of the U.S.
Department of Commerce's $7 million Advanced Technology Development Program
("ATP") award administered by the National Institute of Standards and Technology
("NIST"). The ATP was obtained by the American Diamond Display Venture
("ADDVent"), a joint venture between the Company and another electronics
manufacturer interested in the development of the DFED. Virtually all work done
under the project is either performed by or managed by the Company. The project
began in June 1995 and is scheduled to last until May, 1997 although the Company
has applied for a no cost extension of time for completion of the project.
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BUSINESS DEVELOPMENT STRATEGIES
OVERALL. The Company is today primarily a technology driven Company.
The Company currently plans to expand its manufacturing capabilities through
manufacturing partnerships or joint ventures. The Company may also license its
technology to others to fund further development projects with the royalties
received from such licenses.
ELECTRONIC BILLBOARDS. After securing a strategic partner, EBT plans
to attack the market in phases. The target market for the first phase will be
Premium Billboard sites - those sites that generate monthly advertising revenues
of approximately $ 25,000 or more. It is estimated that there are approximately
700 of these sites in the United States and another 1,500 outside of the United
States. It is estimated that EBT could begin supplying billboards to meet the
initial demand for these sites within 12 months of obtaining a strategic
partner. Once demand in the premium market has been met and increased
manufacturing volumes have lowered the unit manufacturing costs, EBT will target
the remaining billboard market. As the Company's FEPET subsidiary continues to
develop its DFEL, EBT expects to integrate the DFEL as a component of its
electronic billboard because of the expected advantages that it is expected to
provide related to cost and quality. EBT expects its electronic billboard
product to be successful regardless of the timing of the availability of the
DFEL provided by FEPET.
DFEL PRODUCTS. The major short run focus of FEPET is continued
development and commercialization of its DFEL product. As soon as the product is
commercially viable, the Company plans to introduce it in its electronic
billboard product. In addition the Company would then target other large display
manufacturers that manufacture displays for such uses as sports arenas, video
walls, alphanumeric signs, etc.
MICROELECTRONICS PACKAGING AND BACK-END WAFER PROCESSING. Prior to
1996, DTO primarily provided services related to prototype or development
projects. In mid 1996, DTO began pursuing a new strategy of soliciting orders
that involve ongoing repetitive manufacturing of small volume orders. The
Company is currently seeking a strategic partner that would aid in the
construction of a high volume manufacturing facility if or when conditions
warrant.
COATING SYSTEMS. Plasmatron is continuing its efforts to increase the
sales of its coating systems. Plasmatron is currently focused on marketing in-
line coating systems using modular designs that management believes will enable
Plasmatron to deliver customized systems at lower costs and with shorter lead-
times. Its current marketing efforts are focusing on equipment for manufacturing
optical coatings, flat panel displays, electronic and semiconductor components,
and magnetic recording media.
RESEARCH DIVISION. The Company is attempting to reduce its reliance on
government contract revenues. It currently only applies for grants that relate
directly to its existing business strategy and would involve expenditures that
the Company would plan to make in pursuit of its objectives, regardless of the
existence of a government contract. The only major government contract currently
in process is the ATP contract described above. Under the terms of the ATP
contract, the Company is reimbursed for 49% of qualifying expenditures. The
ATP Contract expires at the end of May 1997. If this contract is not either
extended or replaced by another government contract and the Company is
unsuccessful in locating other funding, R&D activity will have to be
significantly curtailed.
COMPETITION
ELECTRONIC BILLBOARDS. The Company believes that the proprietary
version of the technology that the Company is planning to develop is superior to
existing technology when combining the issues of brightness, cost, and image
quality required for electronic billboards. Competing technologies include LEDs
which have a grainy picture and do not allow certain colors to be viewed in
direct sunlight, Incandescent bulbs that are high maintenance and result in poor
graphics, Electromechanical systems that have poor image qualities, and Vacuum
Fluorescent (VFD) which are used currently in large stadium displays, but are
not considered cost effective for this application at the present time.
The Company is unaware of any other organizations developing an
electronic billboard using a version of this technology. However, this is an
existing technology used in many applications. Competition from other
manufacturers could develop at any time.
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<PAGE>
DFE PRODUCTS. The short term focus in DFE products is the development
of the DFEL to be used as the pixel light source in a large display. The light
source is the most vital and costly part of a large display, accounting for
approximately 25 - 30% of the cost of the display. Since the pixel light source
directly equates to the visual quality and reliability of the display, the
characteristics of the pixel light source are critical to a purchase decision.
Competition for the Company's DFEL will come from other technologies. Following
is a summary of some of those technologies and key differences.
LEDs (Light emitting devices) have long lifetimes and low operating costs.
However, they are high priced initially and produce a grainy picture which can't
be viewed in direct sunlight. VFDs (Vacuum Fluorescent) offer excellent picture
quality and color, but they are extremely expensive to install and operate.
Electromechanical displays have poor image quality and limited colors.
Incandescent bulbs have high maintenance costs and poor graphics. LCDs are
attractive because they have a long lifetime and an existing manufacturing base.
It is expected however that the DFEL will provide wider viewing angles, a wider
range of operating temperatures and higher brightness.
There are also other companies attempting to develop non diamond based FED
technologies. It is the Company's opinion that these technologies will not be as
cost efficient or demonstrate as high a level of brightness as the DFE
technology. In addition, these companies are attempting to develop these
technologies for use in computer screens rather than large display applications.
MICROELECTRONICS PACKAGING AND BACK-END WAFER PROCESSING. DTO faces
intense competition from companies having greater financial and marketing
resources than DTO. Consequently, DTO is attempting to develop niche markets for
its products and services. DTO is also seeking a strategic partner that would
assist in the expansion of the business and participate in the construction of a
high volume manufacturing facility when conditions support such a need.
RESEARCH DIVISION. The greatest portion of the Company's business in
the Research Division is obtained by competitive bidding, while some is sole
source negotiation. The Company competes with major U.S. corporations from time
to time; however, some of the competition comes from corporations which are
similar in size to the Company. Technical capability, reputation, price, ability
to meet delivery schedules and reliability are the principal competitive
factors.
TECHNOLOGY AGREEMENTS
MCC. The Company currently has three technology agreements with MCC.
In 1993, the Company agreed to cross-license DFED-related technologies with MCC
(the "Cross-License"). The Cross-License was amended in 1995 to provide that the
Company is the exclusive licensee of the DFED-technology and the sole agent for
sublicensing the technology. MCC also has the right to bring bonafide
sublicensing candidates to the Company from time to time beginning in 1996;
however, the Company can maintain exclusive rights by paying an exclusivity fee
to MCC of $41,666 per month. MCC and the Company will share ownership of certain
technology and royalties from the sublicense of such technology. MCC's share of
sublicensing royalties will be 30%, with the Company retaining a 70% share. MCC
has brought no sublicensing candidates to the Company as of yet. The Cross-
License also provided that technology shared by SI Diamond with certain other
joint venture partners may be excluded from joint ownership by MCC and the
royalty sharing provisions. Additionally, the Company will owe MCC a royalty
equal to .9% of sales of DFED-related products to third parties.
In April 1995, the Company obtained from MCC worldwide non-exclusive
licenses of back-end wafer processing and related technologies, including
packaging, interconnect and rapid prototyping technologies. The Company will owe
MCC a royalty ranging from .9% to 3% of sales to third parties, depending on the
product sold, up to a maximum cumulative royalty of $2,000,000. Additionally,
the Company is required to have paid a cumulative minimum royalty of $500,000 on
or before December 31, 1997 and $1,000,000 on or before December 31, 2000. The
Company has had only nominal sales of products subject to the royalty agreement.
Cumulative royalties paid have not exceeded $25,000 through December 31, 1996.
Page 5
<PAGE>
DIAGASCROWN. In February 1995, the Company entered into a series of
agreements with DGC. Under the DGC agreements, the Company exchanged 600,150
shares of its Common Stock, 90,000 shares of Series C Preferred Stock which were
converted into 900,000 shares of Common Stock, and warrants to purchase an
additional 75,000 shares of Series C Preferred Stock for cash of $5 million and
technology licenses. Additionally, the Company and DGC agreed to collaborate on
the further development of DFED-related technology. The Company will be able to
use the Russian technology on a royalty-free basis. All technology developed
under the DGC collaboration will be owned jointly by the Company and DGC,
although DGC has agreed to assign its interest to the Company. Consequently, the
Company will have the sole authority to sublicense the technology obtained under
the collaboration, should it elect to do so. (See Note 11 to the Consolidated
Financial Statements). The Company has committed to perform $2.5 million in
research and development in Russia through February 1997. According to its
internal records, the Company has spent approximately $2,000,000 on this
research through December 31, 1996. Further spending in Russia has been
temporarily halted pending agreement as to the nature and amount of services to
be performed in Russia for the remaining balance to be spent under the original
agreement. This research can be in the form of travel and service performed by
the Company's employees or representatives in Russia, government funded research
performed in Russia and through direct funding of Russian efforts related to
displays.
PHILIPS. In July 1995, the Company and Philips entered into a
technology cooperation agreement under which Philips agreed to provide $10
million of development support over the next two years to accelerate
commercialization of the Company's DFED. Under the terms of the agreement, each
of Philips and SI Diamond committed at least $5 million per year for two years
to the joint effort. The commitment could include in-kind contributions or cash.
Philips and the Company agreed to jointly conduct certain research concerning
the DFED. In October 1996 this agreement was terminated by mutual agreement of
the parties with no ongoing commitment by either party to the agreement. No cash
was paid either by or to either party in connection with this agreement, nor
were any technology rights granted either by or to either party in connection
with this agreement.
ADDVENT. In May 1995, the Company entered into the ADDVent joint
venture agreement with another electronics manufacturer to develop a 10-inch
field emission display under the ATP administered by NIST. The ATP contract
provides for $7.0 million in expenditures from 1995 through 1997 by the Company,
to be funded 49% by NIST. Under the ATP, the Company will own the rights to the
technology, subject to the license rights of the United States government and
the rights of its partner to own the high-voltage driver which it develops under
the ATP and which its partner has agreed to supply the Company. The Company's
right to its partner's driver shall be exclusive for a period of two years
following acceptance by the Company of its partner's driver design. The project
is being managed by the Company and the majority of the expenditures made under
the this program are being made by the Company.
PATENTS AND PROPRIETARY RIGHTS
An important part of the Company's product development strategy is to
seek, when appropriate, protection for its products and proprietary technology
through the use of various United States and foreign patents and contractual
arrangements.
The Company owns twelve issued patents, 4 allowed patents, and has
twenty patent applications pending in the United States. The Company also
several patent applications in process. In addition, the Company is exclusively
licensed by MCC under six issued patents, five allowed applications and twenty
pending applications, all in the United States. The patents, allowances and
applications relate to the DFED, coatings services and systems and other
technologies. The Company has non-exclusive licenses from MCC under 144 patents
and allowances and six pending applications in the United States, all of which
relate to DTO's operations. In addition, there are foreign counterparts to
certain United States patents and applications.
Page 6
<PAGE>
The patenting of technology-related products and processes involves
uncertain and complex legal and factual questions and, to date, no consistent
policy has emerged regarding the breadth of claims of such technology patents.
Therefore, there is no assurance that the Company's and MCC's pending United
States and foreign applications will issue or what scope of protection any
issued patents will provide or whether any such patents ultimately will be
upheld as valid by a court of competent jurisdiction in the event of a legal
challenge. Interference proceedings, to determine priority of invention, also
could arise in any of the Company's or MCC's pending patent applications. The
costs of such proceedings would be significant and an unfavorable outcome could
result in the loss of rights to the invention at issue in the proceedings. If
the Company or MCC fails to obtain patents for its technology and is required to
rely on unpatented proprietary technology, no assurance can be given that the
Company can meaningfully protect its rights in such unpatented proprietary
technology or that others will not independently develop substantially
equivalent proprietary products and techniques or otherwise gain access to the
Company's proprietary technology.
Competitors have filed applications for or have been issued patents
and may obtain additional patent and proprietary rights relating to products or
processes used in, necessary to, competitive with or otherwise related to, those
of the Company. The scope and validity of these patents, the extent to which the
Company may be required to obtain licenses under these patents or under other
proprietary rights and the cost and availability of licenses are unknown, but
they may limit the Company's ability to market its products. Litigation
concerning these or other patents could be protracted and expensive. If suit
were brought against the Company for patent infringement, a challenge in the
suit by the Company to the validity of the other patent would have to overcome a
legal presumption of validity. There can be no assurance that the validity of
the patent would not be upheld by the court or that, in such event, a license of
the patent to the Company would he available. Moreover, even if a license were
available, the payments that would be required are unknown and could materially
reduce the value of the Company's interest in the affected products. Should the
Company elect to manufacture or market these products without a license or a
favorable determination as to the invalidity of these patents, damages could
result which could be materially adverse to the Company. Further, failure to
obtain a license could result in an injunction prohibiting the Company from
manufacturing or selling the affected lines of products.
The Company also relies upon unpatented trade secrets and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology or that the Company can meaningfully
protect its rights to its unpatented trade secrets.
The Company requires its employees, directors, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
relationship is to be kept confidential and not disclosed to third parties
except in specific circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual shall be the exclusive
property of the Company. There can he no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The Company's products will be subject to extensive government
regulation in the United States and in other countries. In order to produce and
market its existing and proposed products, the Company must satisfy mandatory
safety standards established by the U.S. Occupational Safety and Health
Administration ("OSHA".), pollution control standards established by the U.S.
Environmental Protection Agency ("EPA") and comparable state and foreign
regulatory agencies. The Company may also be subject to regulation under the
Radiation Control for Health and Safety Act administered by the Center for
Devices and Radiological Health ("CDRH") of the U.S. Food and Drug
Administration. The Company does not believe that its DFE products will present
any significant occupational risks to the operators of such equipment. In
addition, the DFE products are not expected to produce significant hazardous or
toxic waste that would require extraordinary disposal procedures. Nevertheless,
OSHA, the EPA, the CDRH and other governmental agencies, both in the United
States and in foreign countries, may adopt additional rules and regulations that
may affect the Company and its products. Additionally, the Company's
arrangements with its customers and affiliates may subject its products to
export and import control regulations of the U.S. and other countries.
Page 7
<PAGE>
A significant portion of the Company's revenues consist of earnings
under U.S. government contracts. Government contracts are subject to delays and
risk of cancellation. Also, government contractors generally are subject to
various kinds of audits and investigations by government agencies. These audits
and investigations involve review of a contractor's performance on its
contracts, as well as its pricing practices, the costs it incurs and its
compliance with all applicable laws, regulations and standards. The Company is,
and in the future expects to be, audited by the government. The Company's ATP
program is required to be audited in accordance with NIST standards. The Company
expects the results of this audit to have no material impact on the Company.
EMPLOYEES
As of March 15, 1996, the Company had 61 full-time employees,
including four executive officers. Within the next twelve months, the Company
expects to hire additional employees, if business conditions or funded research
needs support the need for additional employees. The Company is not subject to
any collective bargaining agreements and it considers its relations with its
employees to be good.
Page 8
<PAGE>
EXECUTIVE OFFICERS
The names of executive officers of the Company and certain information
with respect to each of them are set forth below.
-------------------------------------------------------------------------------
Name Age Position
-------------------------------------------------------------------------------
Marc W. Eller 41 Chairman and Chief Executive Officer
Zvi Yaniv 48 President and Chief Operating Officer
Douglas P. Baker 40 Vice President and Chief Financial Officer
Trey Fecteau 44 Senior Vice President and Secretary
Howard K. Schmidt 38 Vice President
-------------------------------------------------------------------------------
Marc W. Eller has served as the Company's Chief Executive Officer
since July 29, 1996. Mr. Eller is Chairman of the Board of Directors and has
been a Director since November, 1995. Mr. Eller co-founded BEG Enterprises, Inc.
in 1989 and has been its Vice President since that date. For the past five
years, Mr. Eller has been involved in commercial real estate investment and in
investment banking activities for publicly traded companies. Mr. Eller has a
B.A. degree in Economics.
Dr. Zvi Yaniv has served as the Company's President and Chief
Operating Officer since July 29, 1996. Dr. Yaniv has degrees in physics,
mathematics, and electro-optics as well as a Ph.D. in Physics. Prior to joining
the Company in May, 1996, Dr. Yaniv operated a consulting practice and
previously was President and CEO of OIS Optical Imaging Systems Inc., a supplier
of flat panel color liquid crystal displays to the avionics and defense
industries.
Douglas P. Baker has been Vice President and Chief Financial Officer
since June 17, 1996. Mr. Baker is a C.P.A and has both a B.B.A and a M.B.A.
Immediately prior to joining SI Diamond Technology, Inc., Mr. Baker was a
divisional controller for MascoTech, Inc. Mr. Baker also has experience in
public accounting and as CFO of a privately held Company.
Trey Fecteau became Senior Vice President and Secretary of the Company
on July 29, 1996. Prior to that he had been Director of Corporate Communications
of the Company since January 1996. Previously, he was a consultant, an
institutional securities broker for nine years, and an institutional investment
adviser specializing in financial institutions and pension funds.
Howard K. Schmidt served as the Company's President and Chief
Executive Officer until July 29, 1996. From July 29, 1996 until his resignation
February 28, 1997, Dr. Schmidt was Vice President of Research and Development.
Dr. Schmidt has served as a member of the Company's Board of Directors since
inception. Dr. Schmidt holds a Ph.D. in Chemistry from Rice University.
Page 9
<PAGE>
ITEM 2. PROPERTIES
The Company currently occupies 22,000 square feet in a leased facility
in Austin, Texas. The monthly rental is approximately $17,000. (See Note 11 to
the Consolidated Financial Statements). In addition, DTO leases an adjacent
28,000 square foot fabrication and clean room facility in Austin for a monthly
rental of approximately $23,000. The Company also leases a 7,700 square foot
laboratory and storage facility previously occupied by its now closed industrial
coatings business. This space is rented from an unaffiliated landlord for a
monthly rental of $2,842. Approximately 50% of this space has been subleased to
an unaffiliated Company. The Company believes that these facilities will be
adequate for its anticipated research and manufacturing activities until
additional products or alternative applications are developed. If and when such
additional products or alternative applications are developed, the Company may
be required to establish additional manufacturing facilities or enter into
manufacturing agreements with others.
ITEM 3. 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, prior to the Company's ownership of Plasmatron. 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. Although there is uncertainty associated with any litigation, 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 cashflow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $0.001 par value (the "Common Stock") is
traded on the Boston and Pacific Stock Exchanges under the symbol "SDI", and is
also traded via the National Association of Securities Dealers Automated
Quotation (NASDAQ) system in the Small Cap Market under the symbol "SIDT". The
following table sets forth, on a per share basis for the periods indicated, the
high and low sale prices for the Common Stock as reported by the NASDAQ system.
These NASDAQ quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C> <C>
1995
First Quarter........................................ $ 7.88 $ 5.88
Second Quarter....................................... $ 7.94 $ 6.25
Third Quarter........................................ $10.00 $ 6.88
Fourth Quarter....................................... $ 8.88 $ 6.38
1996 First Quarter........................................ $ 8.18 $ 6.38
Second Quarter....................................... $ 7.62 $ 3.69
Third Quarter........................................ $ 3.88 $ 1.25
Fourth Quarter....................................... $ 2.88 $ 1.12
1997
First Quarter (through March 21, 1997)............... $ 2.06 $ 1.16
</TABLE>
On March 21, 1997, the closing sale price for the Common Stock as
reported on the NASDAQ system was $1.1875 As of March 21, 1997, there were
approximately 3,111 record holders of Common Stock.
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<PAGE>
The Company has never paid cash dividends on its Common Stock, nor
does it have any plans to pay dividends. Its board of directors currently intend
to invest future earnings, if any, to finance expansion of its business. Any
payment of cash dividends in the future will be dependent upon the Company's
earnings, financial condition, capital requirements, and other factors deemed
relevant by its board of directors. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should assist in an understanding of the
Company's financial position and results of operations for the years ended
December 31,1996 and 1995. The Notes to Consolidated Financial Statements of the
Company included elsewhere herein contain detailed information that should be
referred to in conjunction with this discussion.
OVERVIEW
Throughout 1996, the Company continued its efforts to move from a
contract research and development organization toward commercial viability.
Commercial revenues have largely resulted from the production and sale of
coating systems at Plasmatron Coatings and Systems, Inc. ("Plasmatron") and the
manufacture and assembly of high density electronics at Diamond Tech One, Inc.
("DTO"). The Company implemented a Company wide reorganization in May 1996 which
resulted in a work force reduction of about 45%. In connection with this
reorganization, the Company closed its commercial coating operation and that
subsidiary, SIDT Coatings, Inc. is now inactive. The Company also relocated its
corporate headquarters to Austin to consolidate its operations geographically.
The Company continued its expenditures and efforts in 1996 for the development
of its DFE technology. Overall R&D expenditures declined as the Company focused
its research on those areas with the highest probability of yielding
commercially viable products in the near future. Company sponsored research and
development expenses in the DFE technology product area should continue (See
Note 1 to the Consolidated Financial Statements). Plasmatron's sales for 1996
increased as compared to 1995, but it is not yet at profitable levels.
Management has continued to increase the selling and marketing efforts for
Plasmatron's product lines in an effort to improve the sales performance and
expects Plasmatron to be profitable in 1997. During 1996 a complaint was filed
by a customer of Plasmatron's related to an item of equipment delivered in 1993,
prior to the Company's ownership of Plasmatron. Management believes that
Plasmatron has meritorious defenses to the claim and that the ultimate
resolution of this matter will not have a material adverse effect on the
Company's financial position and results of operations. (See Note 11 to the
Consolidated Financial Statements). 1996 was Diamond Tech One's ("DTO") first
full year of operation as a subsidiary of the Company. In 1996, DTO increased
its revenues over its annualized 1995 revenues, but continued to operate at a
loss. DTO continues to work on increasing sales and reducing costs and expects
to reach break-even on a monthly basis in the 3rd quarter of 1997 if its plans
are successful.
RESULTS OF OPERATIONS
1996 Compared to 1995. The Company earned $5,772,620 in revenues
during 1996, as compared with $3,042,942 during 1995. Commercial sales were
$2,903,835 for 1996 compared to $2,033,276 for 1995. The 1995 commercial
revenues only include revenues from DTO for the eight months that it was owned
by the Company. Such revenues were $772,920 in 1995. The majority of the
Company's commercial revenues are from the production under equipment contracts
through the Company's subsidiary, Plasmatron and the manufacture and assembly of
high density electronic products by DTO. Plasmatron's revenues are being
recognized on a percentage of completion basis and totaled approximately
$1,400,000 in 1996. Plasmatron's commercial backlog was approximately $289,000
at December 31, 1996. Not included in Plasmatron's backlog amount above are
contracts totaling approximately $900,000 which were signed subsequent to
December 31, 1996. DTO's revenues are recognized when the product is shipped or
services completed and totaled approximately $1,488,000 in 1996. DTO's
commercial backlog was approximately $360,000 at December 31, 1996 and $480,000
at February 28, 1997. Contract research revenues for 1996 were $2,868,785
compared to $1,009,666 for 1995. At December 31, 1996, the Company had a
research backlog of $1,050,000 in anticipated future revenues from its existing
contracts, as compared with a backlog of $2,743,000 at December 31, 1995. The
reduced backlog and increased contract revenue amounts both resulted from
spending in 1996 under the $3,500,000 National Institute of Science and
Technology ("NIST") contract which commenced during the third quarter of 1995.
The entire research backlog relates to this contract. The Company has applied
for additional research grants, but expects contract research revenues to
decline in 1997 as the NIST contract is completed and the focus shifts to
commercialization of the Company's products. The Company's ability to perform
the research on its backlog and any new awards should not require significant
addition of personnel.
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<PAGE>
For 1996, the Company's costs of sales were $5,317,186 resulting in a
margin of 8% as compared with $3,413,623 and a margin of negative 12% during
1995. This improvement in margin resulted primarily from the increase in
commercial revenues at the Plasmatron and DTO subsidiaries. The low margin for
the Company results from the significant amount of revenue derived by the
Company from government contracts which generally have little or no margin. In
addition, both the Plasmatron and DTO subsidiaries are operating significantly
below capacity which results in lower margins because of the lower sales volumes
available to absorb fixed overhead costs. The Company's selling, general and
administrative expenses increased from $5,328,310 in 1995 to $6,924,068 in 1996.
This increase is the primarily the result of a higher level of fund raising
activity, a $450,000 contract settlement, and a $400,000 loss on the settlement
of a note receivable. The Company expects these costs to be significantly
reduced in 1997. Company sponsored research and development expenses declined in
1996 to $6,185,943 from $8,726,355 in 1995. The decrease is a result of the
Company's curtailment of research expenditures that were unrelated to the
Company's primary business strategies. Research and Development in 1995 also
included a charge of $900,000 related to the technology acquired in the
DiaGasCrown, Inc. transaction. This valuation was based on an assessment of
potential uses of the licenses and other rights as well as the stock price
relative to its market value. The Company determined that the technology
acquired was in process research and development and charged the $900,000 to
research and development expense for 1995. The Company expects to incur
substantial expenses in support of additional research and development
activities related to the commercial development of its DFE technology. The
Company has applied for additional government grants and is seeking a strategic
partner to fund this continued research. If the Company is unsuccessful in
obtaining this funding, it will be forced to raise additional capital through
debt or equity financing or substantially reduce the level of R&D spending.
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 "Earnings per Share" and No. 129 "Disclosure of Information
About Capital Structure." SFAS No. 128 specifies the computation, presentation,
and disclosure requirements for earnings per share and is designed to improve
earnings per share information by simplifying the existing computational
guidelines and revising previous disclosure requirements. SFAS No. 129
consolidates the existing disclosure requirements to disclose certain
information about an entity's capital structure. Both statements are effective
for periods ending after December 15, 1997. Management has not yet determined
the impact that SFAS No. 128 will have on earnings per share, and there are no
changes in disclosures associated with adoption of SFAS No. 129.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123, which is effective for fiscal
years beginning after December 15, 1995, encourages but does not require
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. The Company has decided not to adopt the fair value based method of
accounting for its stock-based incentive plans, but rather will disclose in a
footnote to the financial statements what the effect of adopting SFAS No. 123
would have been.
FINANCIAL CONDITION
At December 31, 1996, the Company had cash and cash equivalents in the
amount of $16,290 as compared with cash and cash equivalents of $293,593 at
December 31, 1995. This decrease in cash is primarily a result of the
significant operating losses incurred by the Company's, offset by substantial
equity funding. Throughout 1995 and 1996, the Company has continued to raise
additional funds through equity and debt funding. Based on the developmental
stages of the Company's technology, additional equity or other financing will
likely be necessary in the future. If all of the Company's warrants outstanding
as of December 31, 1996, were exercised, the Company would collect proceeds in
excess of $9,000,000. (See Note 9 to the Consolidated Financial Statements.)
Proceeds from the exercise of warrants totaling $100,000 have been received in
1997, however, the Company has no assurance or expectation that any of the
remaining warrants will be exercised in 1997.
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. The Company recorded a subscription receivable for
$15,750 of these proceeds as they were received in January 1996. Additionally,
since the registration statement which was demanded by the written request of
such shareholders was not declared effective within ninety (90) days following
such demand, each of those shareholders were issued warrants to purchase
additional shares of the Company's Common Stock in an amount equivalent to 10 %
of the number of shares purchased (28,792 shares in the aggregate) by each
shareholder in the December 1995 offering. The warrants are exercisable for
three years from the date of issuance at a price of $6.30 per share of Common
Stock.
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<PAGE>
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. Additionally, the Company issued warrants
to purchase 144,792 shares of common stock as described in Note 9. The Series E
Preferred is noncumulative. It has a liquidation preference of $10,000 per share
plus 8% per annum from the date of issuance, and is entitled to vote on all
matters submitted to a vote of the stockholders on an "as if converted" basis.
Each share of Series E Preferred Stock is convertible into that number of shares
of Common Stock determined by dividing (i) the original issue price of the
Series E Preferred Stock (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 Stock to the conversion
date by (ii) the conversion price, which is the lesser of $1.875 (the "Low Fixed
Conversion Price") or 85% of the average Closing Bid Price of the Company's
Common Stock for the five (5) trading days immediately preceding the Date of
conversion for one-third (1/3) of the shares (the "Low Fixed Preferred Shares")
of Series E Preferred held by a holder as of January 16, 1997 or (y) the lesser
of $3.00 (the "High Fixed Conversion Price") or 85% of the average Closing Bid
Price of the Company's Common Stock for the five (5) trading days immediately
preceding the Date of Conversion for the remaining two-thirds (2/3) of the
shares (the "High Fixed Preferred Shares") of Series E Preferred held by a
Holder as of January 16, 1997, provided, however, that the High Fixed Conversion
Price applicable to the High Fixed Preferred Shares shall be reduced from $3.00
to $2.75 after April 15, 1997, if the arithmetic average of the Closing Bid
Price of the Company's Common Stock for the five trading day period immediately
preceding April 1, 1997 is less than $3.00.
In October 1996, DTO, a subsidiary of the Company, issued notes payable totaling
$1,000,000. These notes bear interest at a rate of 15%, payable quarterly. The
principal balance is due June 1, 1997. In connection with these notes, the
Company also issued 200,000 warrants enabling the holder to purchase shares of
the Company's Common Stock at a price of $1.00 per share. 100,000 of these
warrants have been exercised through March 21, 1997. The notes are
collateralized by the assets of the subsidiary and guaranteed by the Company.
In February 1997, the Company closed an offering of Eight Percent (8%)
Convertible Debentures (the "Debentures")
Page 13
<PAGE>
under Regulation S of the Securities Act of 1933. The Company agreed to issue
two Convertible Debentures, each with a face amount of $555,555. The second
debenture is to be issued within 60 days of issuance of the first debenture. On
March 7, 1997 the Company received gross proceeds of $555,555, less expenses of
$55,755, for the issuance of the first debenture. The Debentures bear interest
at a rate of 8%. The entire unpaid principal and accumulated interest on the
Debentures shall be due and payable on the second anniversary of the date on
which the Debentures were issued. The Company may elect to pay interest payments
in either cash or common stock as described below.
At the option of the holder, the outstanding principal amount of the Debentures
(including accrued interest payments at the election of the Company) shall be
convertible, in whole or in part, into the Common Stock of the Company
("Conversion Shares") at any time after sixty (60) days from the date the
Debentures were issued until such time as the Debentures are paid or converted
into the Company's Common Stock. For purposes of determining the number of
Conversion Shares to be issued to the holder upon any such conversion, the price
of each of the Conversion Shares shall conclusively be deemed to be seventy-five
percent (75%) of the average of the closing bid price of a share of the
Company's Stock on the NASDAQ Small Cap Market for the ten consecutive trading
days immediately prior to the conversion date.
In March 1997 the Company closed an exempt offering under Regulation D of the
Securities Act of 1933 (the "March 1997 Offering") for 1700 shares of its Series
F Convertible Preferred Stock ("Series F Preferred"). The Series F Preferred has
a par value of $1 and a stated value of $1,000. The Company received net
proceeds of $1,527,500 which represented gross proceeds of $1,700,000 less
expenses of $172,500. Each share has a liquidation preference of $1,000 plus 4%
per annum from the date of issuance. Each share of Series F Preferred is
convertible into that number of shares of Common Stock determined by dividing
(i) the original issue price of the Series F Preferred Stock (the "Issue Price")
plus an accretion amount equal to 4% of the issue price per annum from the
issue date of the Series F Preferred Stock until the conversion date by (ii) the
conversion price. The conversion price is the lesser of $1.75 or 80% of the 10
day average closing bid price prior to the conversion date. The Series F
Preferred bears no dividends and holders of the Series F Preferred have no
voting power, except in certain circumstances as required by Texas state law.
Pursuant to the terms of the March 1997 Offering, the Company shall use its best
efforts to have a registration statement declared effective no later than June
9, 1997 covering all shares of common stock issuable or issued upon conversion
of the Series E Preferred Stock to such shareholders. If the registration
statement is not declared effective by the due date as a result of the Company's
failure to file such registration timely or failure to diligently strive to have
such registration statement declared effective by the due date, the Company
shall pay to the holders of the Series F Preferred an amount equal to one and
one-half percent (1.5%) per month of the aggregate amount of Series F Preferred
sold in the March 1997 Offering. Such payment would accrue daily and compound
monthly until such time as the registration statement is declared effective.
Cash required by operating activities was $11,883,368 for 1996
compared to $10,404,408 for 1995. The increase in the requirement of cash flows
was primarily a result of a the need for increased working capital to support
the Company's operating subsidiaries including a higher level of accounts
receivable, inventories, and billings in excess of costs and estimated earnings
in 1996 than in 1995. In addition, the 1995 loss, while similar in total
included a higher level of noncash charges than in 1995.
Cash provided by investing activities for 1996 was $60,980 as
compared to cash required of $3,054,393 for 1995. The requirement in 1995 was
primarily a result of capital expenditures in connection with the April 1995
acquisition of machinery and equipment associated with MCC's display and
electronics fabrication facility, capital expenditures related to increasing
capacity and production scale-up at Coatings, and the purchase of the building
and land used by the Company's corporate and research departments. The cash
provided in 1996 came from the sale of the building and land formerly used as
the Company's corporate headquarters and the sale of equipment formerly used by
the coatings group. Only equipment with general alternative uses has been
capitalized. Certain other specialized equipment has been expensed as research
and development. No material commitments exist as of December 31, 1996 for
future purchases of Capital assets.
A substantial portion of the Company's research and development is
funded through U.S. Government agency sponsorship. Should this sponsorship be
delayed or terminated, the Company has the ability to suspend research and
development projects until it can obtain the necessary financing. Any such delay
or termination would have a material impact on the amount of funded research and
development performed by the Company.
Page 14
<PAGE>
The principal source of the Company's liquidity has been the funds
received from exempt offerings of common and preferred stock. The Company may
receive additional funds from the exercise of warrants, although there can be no
assurance that such warrants will be exercised. In the event that the Company
needs additional funds, the Company may seek to sell additional debt or equity
securities. The Company may seek to increase its liquidity through bank
borrowings or other financings. 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 financings in the future.
OUTLOOK
It is anticipated that losses will continue throughout 1997 as the
Company continues to fund the development of its DFE technology and its
electronic billboard. Increased commercial revenues are anticipated in the
Company's DTO and Plasmatron subsidiaries; however, they will not be sufficient
to offset the planned research and development efforts and selling, general and
administrative expenses. Sales from the DFE products or the electronic
billboard are not anticipated in 1997. Full commercial development of the
Company's DFE technology and electronic billboard will require additional funds
that may not be available at terms acceptable to the Company. Should the
Company be unable to obtain acceptable additional debt or equity financings,
management intends to reduce the level of internally funded research and
development. Management believes that the capital raised to date will be
adequate to fund the Company's operations and current developmental funding
plans for approximately 2-3 months. Management is in the process of seeking
additional funding and has developed a plan to reduce expenses to enable it to
continue operations at the planned level for a period of 12-18 months. This plan
is primarily dependent on increasing revenues and raising additional funding
through a strategic partner, debt offerings, or equity offerings.
SEASONALITY AND INFLATION
SI Diamond's business is not seasonal in nature. Management believes
that SI Diamond's operations have not been affected by inflation.
Page 15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF SI DIAMOND TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants............................................... 17
Consolidated Balance Sheets - December 31, 1996 and 1995........................ 18
Consolidated Statements of Operations - Years Ended December 31, 1996 and 1995.. 19
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1996 and 1995................................................................ 20
Consolidated Statements of Cash Flows - Years Ended December 31, 1996 and 1995.. 24
Notes to Consolidated Financial Statements...................................... 25
</TABLE>
Page 16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SI Diamond Technology, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of SI Diamond
Technology, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SI
Diamond Technology, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, the Company has relied on capital raised
through offerings of common and preferred stock to fund its operations and has
experienced operating losses. 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 financings in the future. As of March 27, 1997, the Company has not yet
achieved profitability, has a working capital deficit and must obtain additional
capital to fund its ongoing operations. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Austin, Texas
March 27, 1997
Page 17
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 16,290 $ 293,593
Restricted cash..................................................... 37,226 259,880
Accounts receivable, trade.......................................... 934,564 283,614
Stock subscriptions receivable...................................... --- 9,583,750
Notes receivable.................................................... 15,000 400,000
Inventory........................................................... 329,643 55,962
Costs and estimated earnings in excess of billings
on uncompleted contracts........................................... 584,770 300,485
Prepaid expenses and other assets................................... 136,693 91,504
------------ ------------
Total current assets............................................. 2,054,186 11,268,788
Property, plant and equipment, net..................................... 3,143,510 4,803,621
Intangible assets, net................................................. 423,563 788,530
Other assets, net...................................................... --- 36,766
------------ ------------
Total assets..................................................... $ 5,621,259 $ 16,897,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 2,647,487 $ 863,048
Bank Line of Credit................................................. 30,000 ---
Notes payable....................................................... 961,222 862,513
Capital lease obligations........................................... 71,061 190,326
Accrued Liabilities................................................. 1,210,427 2,305,315
Billings in excess of costs and estimated earnings
on uncompleted contracts........................................... 9,875 49,891
------------ ------------
Total current liabilities........................................ 4,930,072 4,271,093
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 out-
standing at December 31, 1996 and 1995
($100,000 aggregate liquidation preference)....................... 100 100
Series E Convertible Preferred, 646 shares issued and outstanding
at December 31, 1996 ($6,973,241 aggregate liquidation
preference)....................................................... 646 ---
Common Stock, 120,000,000 shares authorized, $.001 par value,
13,126,083 shares issued and outstanding at December 31, 1996;
10,858,889 shares issued and outstanding at December 31, 1995...... 13,126 10,859
Additional paid-in capital.......................................... 45,412,283 34,681,872
Preferred stock subscribed but unissued at December 31, 1995........... -- 8,905,072
Accumulated deficit.................................................... (44,705,442) (30,991,571)
Unearned compensation.................................................. (29,526) (143,829)
------------ ------------
Total stockholders' equity....................................... 691,187 12,462,503
------------ ------------
Total liabilities and stockholders' equity....................... $ 5,621,259 $ 16,897,705
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 18
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
-----------------------------
1996 1995
------------- --------------
Revenues...................................... $ 5,772,620 $ 3,042,942
Cost of sales................................. 5,317,186 3,413,623
Selling, general and administrative expenses.. 6,924,068 5,328,310
Research and development...................... 6,185,943 8,726,355
------------ ------------
Operating costs and expenses........ 18,427,197 17,468,288
Loss from operations................ (12,654,577) (14,425,346)
Other income (expense):
Loss on impairment of assets............. (850,000) ---
Loss on disposal of assets............... (350,000) ---
Other income, net........................ 145,571 35,490
------------ ------------
Net loss............................ $(13,709,006) $(14,389,856)
============ ============
Less preferred stock dividend................. (1,700,709) ---
------------ ------------
Net loss applicable to common stockholders.... $(15,409,715) $(14,389,856)
============ ============
Net loss per common share $ (1.30) $ (1.52)
============ ============
Average common shares outstanding 11,864,672 9,479,610
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 19
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED PREFERRED
STOCK STOCK COMMON STOCK COMMON STOCK ADDITIONAL
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL
---------- ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 100 $ 100 10,858,889 $10,859 $34,681,872
Stock options exercised --- --- 27,600 28 16,368
Issuance of Series E
preferred stock for cash 1,190 1,190 --- --- 10,316,532
Conversion of Series E
preferred stock into
common stock (542) (542) 2,239,594 2,239 (1,697)
Redemption of Series E
preferred stock for cash (2) (2) --- --- (20,000)
Issuance of warrants in
connection with debt --- --- --- --- 200,000
Repricing of warrants --- --- --- --- 450,000
Recognition of unearned
compensation --- --- --- --- (87,866)
Payment of contingent
costs related to prior
equity offerings --- --- --- --- (142,926)
Net Loss --- --- --- --- ---
----- ------ ---------- ------- -----------
Balance, December 31, 1996 746 $ 746 13,126,083 $13,126 $45,412,283
===== ====== ========== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 20
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED
STOCK
SUBSCRIBED BUT ACCUMULATED UNEARNED
UNISSUED DEFICIT COMPENSATION TOTAL
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 8,905,072 $(30,991,571) $(143,829) $ 12,462,503
Stock options exercised --- --- --- 16,396
Issuance of Series E
preferred stock for cash (8,905,072) --- --- 1,412,650
Conversion of Series E
preferred stock into
common stock --- --- --- ---
Redemption of Series E
preferred stock for cash --- (4,865) --- (24,867)
Issuance of warrants in
connection with debt --- --- --- 200,000
Repricing of warrants --- --- --- 450,000
Recognition of unearned
compensation --- --- 114,303 26,437
Payment of contingent
costs related to prior
equity offerings --- --- --- (142,926)
Net Loss --- (13,709,006) --- (13,709,006)
--- ------------ --------- ------------
Balance, December 31, 1996 $ --- $(44,705,442) $ (29,526) $ 691,187
=============== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 21
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED PREFERRED
STOCK STOCK COMMON STOCK COMMON STOCK ADDITIONAL
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL
---------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 100 $ 100 7,368,295 $ 7,368 $ 19,914,440
Stock warrants exercised --- --- 81,500 82 103,798
Stock options exercised --- --- 86,085 86 174,725
Issuance of common
and Series C preferred
stock for cash 90,000 90,000 600,150 600 5,692,681
Conversion of Series C
preferred stock into
common stock (90,000) (90,000) 900,000 900 89,100
Issuance of common
stock for cash --- --- 1,585,786 1,586 7,372,952
Issuance of common stock
to maintain exclusive
rights to technology
under MCC agreement --- --- 223,256 223 996,284
Issuance of common stock
in partial payment
of building purchase --- --- 13,817 14 69,524
Recognition of unearned
compensation --- --- --- --- 268,368
Subscription received on
Series E preferred stock --- --- --- --- ---
Net Loss --- --- --- --- ---
------- -------- ---------- ------- -----------
Balance, December 31, 1995 100 $ 100 10,858,889 $10,859 $34,681,872
======= ======== ========== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 22
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
Preferred
Stock
Subscribed But Accumulated Unearned
Unissued Deficit Compensation Total
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ --- $(16,601,715) $ (42,356) $ 3,277,837
Stock warrants exercised --- --- --- 103,880
Stock options exercised --- --- --- 174,811
Issuance of common
and Series C preferred
stock for cash --- --- ---- 5,783,281
Conversion of Series C
preferred stock into
common stock --- --- --- ---
Issuance of common
stock for cash --- --- --- 7,374,538
Issuance of common stock
to maintain exclusive
rights to technology
under MCC agreement --- --- --- 996,507
Issuance of common stock
in partial payment
of building purchase --- --- --- 69,538
Recognition of unearned
compensation --- --- (101,473) 166,895
Subscriptions received on
Series E preferred stock 8,905,072 --- --- 8,905,072
Net Loss --- (14,389,856) (14,389,856)
---------- ----------- ----------- ------------
Balance, December 31, 1995 $ 8,905,072 $(30,991,571) $ (143,829) $ 12,462,503
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 23
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss................................................. $(13,709,006) $( 14,389,856)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash compensation of employees and consultants
upon issuance and forfeiture of common stock........... 26,436 166,895
Revaluation of stock warrants............................ 450,000 ---
Loss on impairment of assets............................. 850,000 ---
Loss on settlement of note receivable.................... 400,000 ---
Non-cash research and development........................ --- 900,000
Depreciation and amortization expense.................... 1,062,192 955,911
Loss on disposal of fixed assets......................... 101,906 ---
Services provided for payment of MCC notes............... (482,092) (336,585)
Contract payment through issuance of stock............... --- 1,000,000
Changes in assets and liabilities:
Accounts receivable, trade............................. (650,950) 631,361
Notes receivable....................................... (15,000) (400,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (284,285) (99,152)
Inventory.............................................. (273,681) ---
Prepaid expenses and other assets...................... (8,423) (8,645)
Accounts payable....................................... 1,784,439 (77,531)
Accrued expenses....................................... (1,094,888) 1,508,998
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (40,016) (255,804)
------------ -------------
Total adjustments..................................... 1,825,638 3,985,448
------------ -------------
Net cash used in operating activities.................. (11,883,368) (10,404,408)
------------ -------------
Cash flows from investing activities:
Capital expenditures..................................... (579,873) (2,765,942)
Proceeds from sale of equipment.......................... 640,853 ---
Expenditures for intangible and other assets............. --- (288,451)
------------ -------------
Net cash provided by (used in) investing activities... 60,980 (3,054,393)
------------ -------------
Cash flows from financing activities:
Proceeds from notes payable.............................. 1,041,500 391,605
Repayment of notes payable............................... (564,072) (496,762)
Redemption of Series E preferred shares.................. (24,867) ---
Proceeds from issuance of preferred and common stock..... 10,869,870 12,791,102
Financing costs related to stock issuance................ --- (360,775)
Restricted cash.......................................... 222,654 (259,880)
------------ -------------
Net cash provided by financing activities................ 11,545,085 12,065,290
------------ -------------
Net decrease in cash and cash equivalents................ (277,303) (1,393,511)
Cash and cash equivalents, beginning of year............. 293,593 1,687,104
------------ -------------
Cash and cash equivalents, end of year.................... $ 16,290 $ 293,593
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 24
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
SI Diamond Technology, Inc. and Subsidiaries (the "Company" and "SIDT") are
engaged in the manufacture of coating equipment and the assembly of high density
electronics. Additionally, the Company performs contract research and
development of advanced scientific applications for governmental customers and
is in the early stages of commercialization of several products to utilize its
proprietary man-made diamond technologies. The Company is performing
significant research and development related to its Diamond-based Field
Emission Lamp ("DFEL").
As indicated in the accompanying consolidated statements of operations, the
Company experienced operating losses in 1996 and 1995. During 1993 through
March 1997, the Company completed its initial public offering and a series of
offerings, raising proceeds of approximately $42.6 million, net of issuance
costs (See Note 7). Management believes that the capital raised will be
adequate to fund the Company's operations and current developmental funding
plans for approximately three to four months. The Company is currently seeking
joint venture partners to enable the commercialization of several of its
technologies and fund a portion of the ongoing operations and development cost.
There is no assurance that such joint venture partners will be available or
that commercialization will result in income from operations. Furthermore,
full commercial development of the Company's DFEL technology may require
additional funds that may not be available at terms acceptable to the Company.
A substantial portion of the Company's research and development is funded
through U.S. Government agency sponsorship. Funding under the Company's major
government grant expires in May 1997. The Company has applied for an extension
to this grant and additional grants. Should this extension be denied or no new
grants received, the Company has the ability to suspend research and development
projects until it can obtain the necessary financing. Any such delay or
termination would have a material impact on the amount of funded research and
development performed by the Company.
The principal source of the Company's liquidity has been from the funds
received from exempt offerings of common and preferred stock. The Company may
receive additional funds from the exercise of warrants, although there can be
no assurance that such warrants will be exercised. As previously mentioned,
the Company is currently seeking joint venture partners to fund a portion of the
ongoing operating and research and development cost. In the event that the
Company is unsuccessful in finding a joint venture partner, the Company may
seek to sell additional debt or equity securities. The Company may also seek
to increase its liquidity through additional bank borrowings or other
financings. 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 financings in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, SDI Acquisition Corp.,
Plasmatron Coatings and Systems, Inc. ("Plasmatron"), SIDT Coatings, Inc.
("Coatings"), Diamond Tech One, Inc. ("DTO") and Northlight Displays, Inc.
("Northlight"), after the elimination of all significant intercompany accounts
and transactions. In January 1997, the Company incorporated two new
subsidiaries, each designed to focus on commercialization of a specific segment
of the Company's ongoing research and development.
Contract revenues and technology rights
A significant portion of the Company's revenues consists of earnings under
agreements to perform research and development for others, primarily U.S.
federal government agencies. The agreements with federal government
Page 25
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
agencies generally provide that, upon completion of a technology development
program, the funding agency is granted a royalty-free license to use the newly
developed technology for its own purposes. The Company retains all other
rights to use, further develop and commercialize the technology.
Revenues under long-term research and development agreements and contracts to
manufacture coating equipment are recorded under the percentage of completion
method, wherein costs and estimated gross margin are recorded as the work is
performed. Costs include direct engineering and manufacturing costs,
applicable overheads and special tooling and test equipment. Estimated gross
margin provides for the recovery of allocable research, development (including
bid and proposal), marketing and administration costs and for accrued income.
Accrued income is based on the percentage of estimated total income that
incurred direct labor costs to date bear to estimated total direct labor costs
after giving effect to the most recent estimates of cost and funding at
completion. Since many contracts extend over a long period of time, revisions
in cost and funding estimates during the progress of work have the effect of
adjusting in the current period earnings applicable to performance in prior
periods. When the current contract estimate indicates a loss, provision is made
for the total anticipated loss. In accordance with these practices, contracts
in process are stated at cost plus estimated profit but not in excess of
realizable value.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts receivable
The Company sells products and services and grants credit primarily to large
corporations, governmental agencies and other institutions involved in
scientific research. These customers are geographically dispersed throughout
the United States. The Company generally does not require collateral.
Furthermore, it is the Company's policy to record reserves for potential credit
losses. Since inception, the Company has experienced minimal losses.
Property, plant and equipment
Property, plant and equipment are recorded at cost, net of accumulated
depreciation and amortization. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, which range from two to
seven years, or the lease term for leasehold improvements, if less.
Expenditures for major renewals and betterments that extend the original
estimated economic useful lives of the applicable assets are capitalized.
Expenditures for normal repairs and maintenance are charged to expense as
incurred. The cost and related accumulated depreciation or amortization of
assets sold or otherwise disposed of are removed from the accounts, and any
gain or loss is included in operations.
Intangible assets
The Company has applied to obtain certain United States patents, which are
currently pending. Certain patent costs, which consist primarily of legal fees,
have been capitalized and will be amortized using the straight-line method over
the useful lives of the patents (5 years), if approved. If such patents are
rejected, the costs will be expensed at the date of rejection. Costs in excess
of fair value of assets acquired, stated at cost, are being amortized using the
straight-line method over 7.5 years. Organization costs, stated at cost,
representing the costs of establishing DTO, are amortized using the straight-
line method over five years.
Page 26
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
At each balance sheet date, the Company evaluates the propriety of the
carrying amount of its intangible assets, as well as the amortization period for
each intangible. If an indicator of impairment is present, the Company compares
the projected undiscounted operating income for the related business with the
unamortized balance of the related intangible asset. If an imminent loss exists,
management estimates the fair value of the intangible asset based on future
operating income for the next ten years, discounted at the Company's primary
borrowing rate. The excess of the unamortized balance of the intangible asset
of the fair value, as determined, is charged to impairment loss. In connection
with this policy, the Company charged to impairment loss, approximately $269,000
to write off the remaining net organization costs associated with the
establishment of DTO. At this time, the Company believes that no other
impairment of its intangible assets has occurred and that no reduction of the
carrying amounts or estimated useful lives is warranted.
Income Taxes
The Company has adopted the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109. Under
this method, deferred income taxes are recorded to reflect the tax consequences
on future years of temporary differences between the tax basis of the assets
and liabilities and their financial amounts at year-end. The Company provides
a valuation allowance to reduce deferred tax assets to their net realizable
value.
Research and development expenses
Costs of research and development for Company-sponsored projects are expensed
as incurred.
Preferred Stock Dividends
The Series E Convertible Preferred Stock contains a provision (See Note 7)
that allows the preferred stockholder to convert at a discount to the market
value of the stock. The amount of this discount is treated as a dividend to the
preferred stockholders. In addition, the Series E Preferred stock bears an 8 %
accretion payable in common stock, payable at the date of conversion at the same
price as the common shares being received. All accretions paid in common stock
or payable in common stock if the shares were converted as of December 31, 1996,
have been treated as preferred dividends. The amount treated as a dividend in
1996 related to the accretion and the discount was $709,581 and $991,128,
respectively.
Loss per common share
Loss per common share is computed on the basis of the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period. For the years ended December 31, 1996 and 1995, all common stock
equivalents were anti-dilutive.
Reclassifications
Certain reclassifications were made to previously reported amounts in the
accompanying consolidated financial statements and notes to make them consistent
with the current presentation format.
Management's Estimate
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Page 27
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Fair Value of Financial Instruments
The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash and cash equivalents,
restricted cash, receivables, notes receivable, accounts payable, accrued
liabilities, notes payable, and capital lease obligations. All financial
instruments are accounted for on an historical cost basis which approximates
fair value at December 31, 1996 and 1995.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings per Share" and No. 129 "Disclosure of Information About
Capital Structure." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is designed to improve
earnings per share information by simplifying the existing computational
guidelines and revising previous disclosure requirements. SFAS No. 129
consolidates the existing disclosure requirements to disclose certain
information about an entity's capital structure. Both statements are effective
for periods ending after December 15, 1997. Management has not yet determined
the impact that SFAS No. 128 will have on earnings per share, and there are no
changes in disclosures associated with adoption of SFAS No. 129.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted contracts:
Costs incurred............................................................. $ 1,351,302 $ 1,370,862
Estimated earnings......................................................... 526,584 563,682
Related billings........................................................... (1,302,991) (1,683,950)
----------- -----------
$ 574,895 $ 250,594
=========== ===========
Included in the accompanying consolidated balance sheets:
Costs and estimated earnings in excess of billings on uncompleted
contracts................................................................. $ 584,770 $ 300,485
Billings in excess of costs and estimated earnings on uncompleted
contracts................................................................. (9,875) (49,891)
----------- -----------
$ 574,895 $ 250,594
=========== ===========
Property, plant and equipment, at cost:
Plant and equipment........................................................ $ 4,289,666 $ 5,355,299
Furniture and office equipment............................................. 634,320 345,923
Building................................................................... --- 173,336
Land....................................................................... --- 100,000
Leasehold improvements..................................................... 402,452 85,114
----------- -----------
5,326,438 6,059,672
Less accumulated depreciation.............................................. (2,182,928) (1,256,051)
----------- -----------
$ 3,143,510 $ 4,803,621
=========== ===========
</TABLE>
Page 28
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED):
<TABLE>
<CAPTION>
Intangible assets:
<S> <C> <C>
Costs in excess of fair value related to the purchase of subsidiary.. $ 471,496 $ 471,496
Patents.............................................................. 268,200 273,201
Organization costs................................................... --- 327,828
---------- ----------
739,696 1,072,525
Less amortization.................................................... (316,133) (283,995)
---------- ----------
$ 423,563 $ 788,530
========== ==========
Accrued liabilities:
Payroll and related accruals......................................... $ 51,162 $ 515,432
Accounting and legal fees............................................ 480,639 413,700
Exclusivity fee payable to MCC....................................... 313,154 250,000
Accrued offering and related costs................................... --- 549,950
Other................................................................ 365,472 576,233
---------- ----------
$1,210,427 $2,305,315
========== ==========
</TABLE>
4. LEASE OBLIGATIONS :
The Company leases various facilities and equipment having terms expiring at
various dates through 2001. Rental expense was $793,453 and $303,485 for the
periods ended December 31, 1996 and 1995, respectively.
In April, 1995, the Company assumed a lease for certain equipment under a
capital lease agreement having a three year term. At December 31, 1996 and 1995,
assets acquired under a capital lease agreement of $733,688 are included in
plant and equipment. Accumulated amortization of $269,019 and $122,281 at
December 31, 1996 and 1995, respectively, is also included in plant and
equipment.
Future minimum lease payments, excluding contingent rentals at December 31,
1996, were as follows:
CAPITAL OPERATING
------- -----------
1997 $72,931 $ 671,686
1998 --- 429,567
1999 --- 76,140
2000 --- 76,140
2001 --- 37,966
------- ----------
Total future minimum lease payments $72,931 $1,291,499
==========
Less amount representing interest 1,870
-------
Present value of future minimum
lease payments 71,061
Less current portion 71,061
-------
Capital lease obligations, long-term $ ---
=======
Page 29
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BANK LINE OF CREDIT AND NOTES PAYABLE :
The bank line of credit is a revolving $500,000 line of credit of a
subsidiary with a financial institution. Borrowings under the line of credit,
when used, bear interest at the bank's floating rate, which approximated 10% as
of December 31, 1996. The line of credit is secured by the assets of the
subsidiary and guaranteed by the parent Company.
Total interest expense for all debt for 1996 was $97,730.
Notes payable at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----- ----
<S> <C> <C>
Note payable to a corporation, unsecured,
interest at 12%, payable through performance
of services, due in April, 1997 $ 106,322 $ 588,415
Note payable to bank, principal and interest
at prime (8.75% at December 31, 1995) plus
2%. Weighted average interest rate for fiscal
year 1995 was 10%. The note was extinguished
in February, 1996 --- 239,800
Various notes payable to financial institutions,
principal and interest at rates from 6.5% to 12%.
All notes were extinguished during 1996. --- 120,985
Note payable to bank, principal and interest
at 10% due in monthly installments of
$1,012 through May, 1997. The note is
collateralized by a vehicle. 4,900 ---
Notes payable to investors due June 1,
1997. Interest at a rate of 15 % due quarterly.
The notes are subordinated to the bank line of
credit and are collateralized by the assets of the
subsidiary. The face amount of the notes totals
$1,000,000. The value of warrants issued
at the time of issuance of the notes ($200,000)
is being amortized over the life of the notes. 850,000 ---
------- ---------
961,222 949,200
Less current portion (961,222) (862,513)
------- -------
Notes payable, long-term $ --- $ 86,687
======= =======
</TABLE>
Page 30
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The components of deferred tax assets (liabilities) at December 31, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................. $ 6,444,000 $ 4,556,000
Research and development credits................. 407,000 313,000
Capitalized intangible assets.................... 210,000 ---
Accrued expenses not deductible until paid....... 8,000 45,000
----------- -----------
Total deferred tax assets........................... 7,069,000 4,914,000
Deferred tax liabilities:
Depreciation and amortization.................... 36,000 66,000
Other............................................ --- ---
----------- -----------
Total deferred tax liabilities................... 36,000 66,000
----------- -----------
Net deferred tax assets before valuation allowance.. 7,033,000 4,848,000
Valuation allowance................................. (7,033,000) (4,848,000)
----------- -----------
Net deferred tax asset.............................. $ --- $ ---
=========== ===========
</TABLE>
The following is a reconciliation of the amount of the income tax benefit
that would result from applying the statutory federal income tax rates to
pretax loss and the reported amount of income tax benefit for the periods ended
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
Tax benefit at statutory rate of 15%.. $ 2,056,000 $ 2,158,000
Net increase in valuation allowance... (2,185,000) (2,225,000)
Research and development credits...... 94,000 113,000
Nondeductible expenses................ (42,000) (35,000)
Other................................. 77,000 (11,000)
----------- -----------
$ --- $ ---
=========== ===========
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $43 million expiring through 2011 available to offset future
taxable income. Additionally, the Company has tax credit carryforwards related
to research and development expenditures of approximately $407,000 expiring
through 2010. The Company completed its IPO in 1993 and elected certain
ownership changes. These events effected an ownership change, which, under the
Internal Revenue Code Section 382, will limit the Company's ability to utilize
its net operating loss carryforwards and research and development credits
generated before the change in ownership. The Company has used the lowest
marginal U.S. corporate tax rate of 15% to determine deferred tax amounts and
related valuation allowances because it had not had any taxable earnings through
December 31, 1996.
Page 31
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
7. CAPITAL STOCK:
Preferred Stock
The Company currently has authorization for the issuance of 2,000,000 shares
of $1.00 par value preferred stock.
Series A
The Company has issued and outstanding, 100 shares of its Series A
Convertible Preferred Stock ("Series A Preferred"). The Series A Preferred is
noncumulative. It has a liquidation preference of $1,000 per share, is
convertible into 1,002.75 shares of common stock per share and is entitled to
vote on all matters submitted to a vote of the stockholders on an "as if
converted" basis. The Series A Preferred shall also share equally and
simultaneously in any distribution to common shareholders after liquidation
preference has been paid.
Series C
There are currently no outstanding shares of the Series C Preferred Stock;
however, 75,000 shares are authorized for issuance pursuant to outstanding
Series C Warrants. Each share of Series C Preferred Stock is currently
convertible into ten (10) shares of Common Stock, subject to adjustment in
certain circumstances. Except as otherwise required by law, the holders of the
Series C Preferred Stock are entitled to vote on all matters with the holders of
the Common Stock and are entitled to one vote for every share of Common Stock
into which the holders' Series C Preferred Stock is convertible. In order to
maintain the voting power of the shares of Series C Preferred Stock, the holders
thereof are entitled to purchase additional shares of the Company's voting
securities upon the Company's issuance of additional shares of voting securities
in certain circumstances. The holders of Series C Preferred Stock have no
preferential dividend rights and are entitled to share in any dividends declared
on the Common Stock based on the number of shares of Common Stock into which the
shares of Series C Preferred Stock are convertible. The Company has no
redemption rights or obligations with respect to the Series C Preferred Stock.
Without the mutual consent of the Board of Directors of the Company and holders
of not less than a majority of all outstanding shares of Series C Preferred
Stock, none of the rights of the holders of Series C Preferred Stock may be
altered.
Series E
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, approximately $9,568,000 was recorded as stock subscriptions
receivable from issuance of the Series E Preferred. In January 1996, the
Company received subscriptions for an additional 150 shares. 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 approximately
$11,900,000 to the Company less expenses of approximately $1,631,000.
Additionally, the Company issued warrants to purchase 144,792 shares of common
stock as described in Note 9. The Series E Preferred is noncumulative. It has a
liquidation preference of $10,000 per share plus 8% per annum from the date of
issuance, and is entitled to vote on all matters submitted to a vote of the
stockholders on an "as if converted" basis. Each share of Series E Preferred
was originally 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 accretion amount equal to 8% of the issue price per annum from the
date the escrow
Page 32
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
7. CAPITAL STOCK (CONTINUED):
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 is 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. The preferred shares can be redeemed for cash at the option of the
Company upon presentation of the shares for conversion. During 1996, 542 shares
of the Series E Preferred Stock were converted into 2,239,594 shares of Common
Stock and 2 shares of the Series E Preferred Stock were redeemed for cash of
$24,867.
On September 27, 1996, the Company revised its Amended and Restated Articles
of Incorporation pursuant to an agreement with the remaining Series E Preferred
shareholders to replace the upper limit of $ 6.575 on the conversion price with
an upper limit of $3.00 on the conversion price. In exchange for this
reduction, the Series E Preferred shareholders agreed to defer conversion of
their remaining shares. On February 14, 1997, the Company further revised its
Amended and Restated Articles of Incorporation pursuant to an agreement with the
Series E Preferred shareholders. In exchange for an additional time period of
deferral on the conversion, the Company agreed to lower the upper limit of $3.00
on the conversion price to $ 1.875 on 1/3 of the remaining Series E Preferred
shares and $2.75 on the balance of the shares. If the closing bid price of the
Company's Common Stock averages $3.00 for the last 5 trading days of March,
1997, then the conversion price would remain at $3.00 per share for the last
2/3 of the shares.
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 post-effective amendment.
Common Stock
In February 1995, the Company closed an exempt offering under Regulation D of
the Securities Act of 1933. The Company collected cash proceeds of $5,000,000.
Related to this offering, the Company issued 600,150 shares of common stock and
90,000 shares of Series C Preferred Stock which were converted into 900,000
shares of common stock. Additionally, the Company issued warrants to purchase an
additional 75,000 shares of Series C Preferred Stock, which is further
convertible into 750,000 shares of the Company's Common Stock. The Company paid
approximately $117,000 in expenses on these offerings. The common stock issued
in these transactions has certain restrictions and holding period requirements
in accordance with Regulation D and pursuant to other rules promulgated under
the Securities Act of 1933. See DiaGasCrown Venture - Note 11.
In June 1995, the Company closed an exempt offering of the Company's common
stock aggregating approximately $5,800,000 (the "June 1995 Offering"). Under the
terms of the equity sale agreement, the Company issued approximately 1,100,000
shares of its Common Stock to a venture group and other individual investors.
The Company paid approximately $753,000 in expenses on this offering. The Common
Stock issued in this transaction has certain restrictions and holding period
requirements in accordance with Regulation D and pursuant to other rules
promulgated under the Securities Act of 1933. The holders of these shares had
demand registration rights which were exercised and resulted in the shares
becoming freely tradeable during the second quarter of 1996. Additionally, since
the registration statement subject to such demand registration was not declared
effective within 120 days of such demand, each of the holders under this
offering was granted warrants to purchase additional shares of the Company's
Common Stock. See Note 9.
Page 33
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
7. CAPITAL STOCK (CONTINUED):
In August 1995, the Company closed a Regulation D exempt offering of the
Company's common stock aggregating approximately $990,000 (the "August 1995
Offering"). Under the terms of the placement agreement for the August 1995
Offering, the Company issued 200,000 shares of its common stock. The common
stock issued in this transaction has certain restrictions and holding period
requirements in accordance with Regulation D and pursuant to other rules
promulgated under the Securities Act of 1933. The holders of these shares had
demand registration rights which were exercised and resulted in the shares
becoming freely tradeable during the second quarter of 1996.
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.
The Company recorded a subscription receivable for $15,750 of these proceeds as
they were received in January of 1996. Additionally, since the registration
statement which was demanded by the written request of such shareholders was not
declared effective within ninety (90) days following such demand, each of those
shareholders were issued warrants to purchase additional shares of the Company's
Common Stock in an amount equivalent to 10% of the number of shares purchased
(28,792 shares in the aggregate) by each shareholder in the December 1995
offering. The warrants are exercisable for three years from the date of issuance
at a price of $6.30 per share of common stock. See Note 9.
In September 1994, the Company closed a foreign offering under Regulation S
of the Securities Act of 1933. The Company collected proceeds of approximately
$3,591,000. Related to this offering, the Company issued 1,000,000 shares of its
common stock and subsequently issued warrants to purchase 150,000 shares of
common stock at $3.90 per share. The warrants expire in 1999. The Company paid
approximately $489,000 in sales commissions and other expenses on these
offerings.
8. STOCK OPTIONS :
The Company sponsors a stock-based incentive compensation plan. The Company
applies Accounting Principles Board ("APB") Opinion 25 and related
Interpretations in accounting for the Plan. In 1995, the FASB issued FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123")
which, if fully adopted by the Company, would change the methods the Company
applies in recognizing the cost of the Plan. Adoption of the cost recognition
provisions of SFAS No. 123 is optional and the Company has decided not to elect
these provisions of SFAS No. 123. However, pro forma disclosures as if the
Company adopted the cost recognition provisions of SFAS No. 123 in 1995 are
required by SFAS No. 123 and are presented below.
In March 1992, the shareholders of the Company approved the 1992 Employees
Stock Option Plan (the "1992 Employees Plan") for purposes of granting incentive
or non-qualified stock options. The 1992 Employees Plan was amended in July 1996
by the shareholders of the Company to reserve up to 3,000,000 shares of common
stock for issuance to certain officers and key employees. The incentive stock
options are exercisable for up to ten years, at an option price per share not
less than the fair market value on the date the option is granted. The incentive
stock options shall be limited to persons who have been regular full-time
employees of the Company or its present and future subsidiaries for more than
one (1) year and at the grant of any option are in the employ of the Company or
its present and future subsidiaries. Non-qualified options may be granted to any
person, including, but not limited to, employees, independent agents,
consultants and attorneys, who the Company's compensation committee believes
have contributed, or will contribute, to the success of the Company. Non-
qualified options may be issued at option prices of less than fair market value
on the date of grant and are exercisable for up to ten (10) years from date of
grant. At December 31, 1996, 864,186 shares were exercisable under the plan,
and an additional 131,054 shares were available for grant. The option vesting
schedule can be modified by the Compensation Committee of the Board of
Directors, but most options vest evenly over a four (4) year period.
Page 34
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
8. STOCK OPTIONS (CONTINUED):
In October 1996, the Company's Board of Directors passed a resolution that
changed the option exercise price of certain options previously granted under
the plan. A total of 1,594,300 options were repriced. The Company reduced the
exercise price to $4.00 for all options priced above $4.00 for all persons
employed by the Company at the time of the repricing. The original exercise
price of these options ranged from $4.94 to $9.00. The market price of the
Company's common stock at the time the exercise price of these options was
reduced was $1.50 per share. The following is a summary of stock option
activity:
WGTD.
AVG.
NUMBER OF EXERCISE
SHARES PRICE
---------- ----------
Options outstanding at January 1, 1995.... 552,750 $4.45
---------
Granted.............................. 451,500 $5.84
Exercised............................ (86,085) $2.03
Canceled............................. (38,400) $5.58
---------
Options outstanding at December 31, 1995.. 879,765 $5.23
---------
Granted.............................. 2,436,200 $4.16
Exercised............................ (27,600) $.59
Canceled............................. (560,104) $6.51
---------
Options outstanding at December 31, 1996.. 2,728,261 $4.07
=========
In March 1992, the Board of Directors adopted the 1992 Outside Directors'
Stock Option Plan (the "1992 Directors Plan"), which reserved up to 50,000
shares of common stock for issuance to certain non employee directors. Under
this plan, the Board may grant incentive stock options. The stock options
granted under the 1992 Directors Plan are exercisable for up to ten years at an
option price not less than the fair market value on the date the option is
granted.
In December 1994, the Board of Directors approved an amendment to the 1992
Directors Plan that would increase the shares reserved from 50,000 to 500,000.
Additionally, the Board awarded 90,000 options at the then market price to three
directors of the Company.
In July 1996 the Company shareholders approved an amendment to the 1992
Directors Plan increasing the shares reserved to 500,000. This amendment
included a formula to govern issuance of shares under this plan to Outside
Directors. In accordance with this amendment, 138,383 options were granted at
the then market price of the Company. The following is a summary of option
activity under this plan:
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
---------- ----------
Options outstanding at January 1, 1995.... 90,000 $5.01
-------
Granted.............................. ---
Canceled............................. ---
-------
Options outstanding at December 31, 1995.. 90,000 $5.01
-------
Granted.............................. 138,383 $2.31
Canceled............................. (52,000) $2.73
-------
Options outstanding at December 31, 1996.. 176,383 $3.57
=======
Page 35
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
8. STOCK OPTIONS (CONTINUED):
The fair value of each stock option granted in 1995 and 1996 when the Company
was public is estimated on the date of grant using the Black-Scholes option
pricing-model with the following weighted-average assumptions: no dividend
yield; risk-free interest rate of 7.68%; the expected lives of the options are
five years; and volatility of 56.44%.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ----------------------------
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE WGTD. AVG.
EXERCISE PRICES AT 12/31/96 CONTR. LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.56 - $2.99 207,133 9 yr, 3 mo $2.03 103,547 $1.83
$3.00 - $3.91 555,950 9 yr, 10 mo $3.02 18,850 $3.63
$4.00 - $5.49 1,745,400 9 yr, 1 mo $4.01 465,725 $4.03
$5,50 - $8.50 409,661 7 yr, 10 mo $6.47 348,361 $6.28
Total 2,918,144 9 yr, 1 mo $4.03 936,483 $4.62
</TABLE>
During 1996 and 1995, the Company did not incur any compensation cost
for the plans under APB No. 125. Had the compensation cost for the Company's
compensation plans been determined consistent with SFAS No. 123, the
Company's net loss and net loss per common share for 1996 and 1995 would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
12/31/96 12/31/96 12/31/95 12/31/95
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
SFAS 123 Charge $0 $874,500 $0 $167,570
APB25 Charge $0 $0 $0 $0
Net Loss $(13,709,006) $(14,583,506) $(14,389,856) $(14,557,426)
Net Loss Per Common Share $(1.30) $1.37 $(1.52) $(1.54)
</TABLE>
The effects of applying SFAS No.123 in this pro forma disclosure are
not indicative of future amounts. SFAS No.123 does not apply to awards prior to
1995 and the Company anticipates making awards in the future under its
compensation plans.
Page 36
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
8. STOCK OPTIONS (CONTINUED):
In 1995, the Company awarded 153,000 non-qualified options to purchase its
common stock under the 1992 Employees Stock Option Plan to 26 employees,
including one officer of the Company. The options vest over a period of four
years and when granted were exercisable at a price of $4.94 per share. The
exercise price of a portion of these options were reduced to $4.00 as previously
described. Compensation expense of $26,437 and $124,539 has been recognized in
1996 and 1995, respectively, related to these issuances. Unearned compensation
of $29,526 and $143,829 was recorded December 31, 1996 and 1995, respectively
and is shown as a separate component of stockholder's equity. The unearned
compensation is being amortized over the remaining term of the vesting periods
of the options. Unearned compensation of $87,866 related to options canceled
during 1996 was reversed to additional paid in capital.
9. STOCK WARRANTS :
Common Stock Warrants
In connection with 1992 debt offerings, the Company issued warrants to
purchase 195,500 shares of its common stock at $1.67 per share. These warrants
were exercised in 1994 and 1995.
In the Company's initial public offering completed in February 1993 (the
"IPO"), the Company issued a total of 100,000 warrants to purchase shares of the
Company's common stock as part of the underwriter's compensation. These warrants
are exercisable at $6.00 per share and may be exercised until February 17, 1998.
In August 1993, in connection with an exempt offering under Regulation D of the
Securities Act of 1933, the Company issued one warrant for every two shares of
common stock that were purchased in this transaction. A total of 62,400 warrants
were issued in this transaction, which may be exercised at prices ranging from
$5.65 to $6.78 per share until June 30, 1998.
In connection with the Company's offerings under Regulation S of the
Securities Act of 1933 that were closed in August, September, October and
November 1993 (the "1993 Reg. S Offerings"), the Company issued 219,149
warrants to purchase shares of the Company's common stock until 1997. In
February 1996 these warrants were repriced and reissued at an exercise price of
$3.90 per share. Contemporaneously with the repricing of the warrants, the
Company granted the holder registration rights in consideration of the holder's
agreement to sell no more than 1/12 of the underlying shares, upon exercise, in
any month for the next year. The Company estimates that the warrants as
repriced have a value of approximately $550,000. Prior to repricing, the
Company estimates that the warrants had a value of approximately $100,000.
In September 1994, the Company closed a foreign offering under Regulation S
of the Securities Act of 1933 (the "1994 Reg. S Offering"). In connection with
this offering, the Company subsequently issued warrants to purchase 150,000
shares of its common stock at an exercise price of $3.90 per share. These
warrants expire on February 21, 1999.
In connection with the termination of existing contractual obligations to an
underwriter arising out of the IPO and the 1993 Reg. S Offerings, in February
1996, the Company issued warrants to purchase 60,000 shares of its common stock
at an exercise price of $6.50 per share and paid $150,000 to settle an
outstanding disputed claim and $350,000 to terminate future rights of the
underwriter under such agreements, which have been reflected in additional
paid-in capital as a cost of the Series E Preferred. These warrants expire on
February 21, 1999.
The Company issued to a former adviser in February 1996 warrants to purchase
55,000 shares of the Company's common stock at an exercise price of $5.50 per
share. These warrants expire on February 21, 1999.
Page 37
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
9. STOCK WARRANTS (CONTINUED):
In connection with the amendment to the April 1995 agreement with MCC
described in note 11, the Company issued warrants that allow MCC to purchase
22,326 shares of the Company's Common stock at a price of $5.375 through August
15, 1997.
In connection with the June 1995 Offering, the Company agreed that if the
shares in the June 1995 Offering were not registered in a registration statement
within 120 days of demand by such shareholders, each of the holders under the
June 1995 Offering would be granted warrants to purchase additional shares of
the Company's common stock equivalent to ten percent (10%) of the number of
shares of common stock they acquired in this offering. The Company did not have
such registration effective before the 120-day deadline and therefore issued
109,790 warrants to purchase shares of the Company's common stock. These
warrants may be exercised at a purchase of $5.736 per share and expire on June
1, 1997.
In December 1995 the Company closed an exempt offering of common stock under
Regulation D of the Securities Act of 1933 (the "December 1995 Offering"). The
Company agreed that in the event the Company was not able to have a registration
statement effective concerning the shares issued in the December 1995 Offering
within ninety (90) days following the receipt of the written request of such
shareholders, then those shareholders were to be issued warrants to purchase
additional shares of the Company's common stock in an amount equal to ten
percent (10%) of the number of shares purchased by the shareholder in the
December 1995 Offering. The Company did not have such registration statement
effective before the 90 day deadline and therefore issued 28,792 warrants to
purchase shares of the Company's Common Stock. These warrants may be exercised
at a price of $6.30 per share and expire April 10, 1999.
In connection with the issuance of the Company's Series E Preferred in
February 1996, the Company issued 144,792 warrants to advisors involved in the
transaction. These warrants enable the holders to purchase shares of the
Company's Common Stock at a price of $7.89 through January 7, 2000.
The Company issued 35,000 warrants to an advisor in connection with the
Company's fundraising activities. These warrants enable the holder to purchase
shares of the Company's Common Stock at a price of $2.00 per share through
October 23, 2006.
In October 1996, the Company completed a transaction whereby it borrowed a
total of $ 1,000,000 in secured loans from a group of individuals. In connection
with these loans, the Company issued 200,000 warrants to these individuals. The
warrants enable the holder to purchase shares of the Company's Common Stock at a
price of $1.00 through June 1998. A total of 100,000 of these warrants were
exercised in January and February, 1997.
Preferred Stock Warrants
In February 1995, the Company issued 75,000 warrants (the "Series C
Warrants") to purchase shares of its Series C Preferred. These Series C
Warrants are exercisable at $50.00 per share until February 9, 1998. Each share
of Series C Preferred is further convertible into ten (10) shares of the
Company's Common Stock.
Page 38
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK WARRANTS (CONTINUED):
Summary
The following is a summary of stock warrant activity (Preferred stock
warrants are accounted for as common stock on an "as if converted" basis):
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Warrants outstanding at
January 1, 1995............................................................... 613,049 $1.67-6.00
----------
Granted.................................................................. 974,790 $5.00-6.50
Exercised................................................................ (81,500) $ 1.67
Expired.................................................................. --- ---
----------
Warrants outstanding at
December 31, 1995............................................................. 1,506,339 $1.67-6.00
----------
Granted.................................................................. 510,910 $1.00-7.89
Exercised................................................................ ---
Expired.................................................................. ---
-----------
Warrants outstanding at
December 31, 1996............................................................. 2,017,249 $1.00-7.89
==========
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $22,730 and $37,023 for 1996 and 1995,
respectively. The following non-cash transactions have been excluded from the
accompanying consolidated statement of cash flows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Non-cash investing activities:
Purchase of fixed assets through the issuance of a note payable for services.. $ --- $ 925,000
Stock issued in partial payment of building purchase.......................... --- 75,000
Assets acquired under capital lease arrangement............................... --- 733,689
Non-cash financing activities:
Issuance of warrants in connection with debt.................................. 200,000 ---
Recognition of the forfeiture of shares related to stock compensation
increasing additional paid-in capital......................................... 87,866 ---
Accrued offering and related costs............................................ --- 579,950
Financing costs in connection with stock issuance deducted from proceeds...... 1,030,130 677,411
Accrued preferred stock subscriptions receivable.............................. --- 9,583,750
</TABLE>
Page 39
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Original Agreement with MCC to cross-license and pool technologies
During 1994 and continuing during 1996, management elected to increase the
Company's efforts to develop its proprietary DFE technology. Significant
management effort and resources continue to be applied to the DFE technology
which utilizes one of the Company's proprietary diamond technologies. The
Company is in an agreement with Microelectronics and Computer Technology
Corporation ("MCC") to cross-license and pool technologies. The agreement gives
the Company exclusive world-wide license to manufacture flat panel displays
using the joint technology as well as rights to royalties on sales of the
technology.
January 1995 Amendment
In January 1995, the MCC agreement was modified to make the Company solely
responsible for licensing the technology and gave the Company the ability to
maintain its exclusive rights to the technology. In exchange for this
modification, the Company agreed to pay MCC $500,000 in cash and to deliver
223,256 shares of its Common stock and warrants to purchase 22,326 shares of the
Company's Common Stock at a price of $5.375. The initial term of the exclusivity
extends to 1996. Should MCC locate a qualified sublicensing candidate after
that time, the Company can maintain its exclusive rights to the technology by
paying an exclusivity fee to MCC of $41,666 per month. Additionally, the
Company will pay MCC a royalty equal to .9% of sales of DFED-related products
to third parties.
April 1995 Agreements with MCC
In April 1995, the Company entered into further agreements with MCC to
acquire substantially all of the leasehold improvements and equipment
associated with MCC's electronics packaging and display fabrication facility in
Austin, Texas. The facility was previously being used by MCC for consortium
research and DFED fabrication and development under previous agreements between
MCC and the Company. Under the agreement, DTO signed a three year lease on the
28,000 square foot fabrication and clean room facility for monthly rental of
approximately $24,000. The Company also leases 22,000 square feet in an
adjacent building for a monthly rental of approximately $17,000. Additionally,
the Company assumed lease commitments of approximately $750,000 over the next
two years on certain equipment currently leased by MCC. Related to these
assumed lease commitments, the Company placed $730,000 in cash on deposit with
the lender to pay down the remaining lease commitments ($37,226 remains on
deposit as of December 31, 1996). The Company paid cash of $925,000 in the
transaction and committed to provide MCC $925,000 in services or common stock
over the next two years. In addition, the Company is relieved of approximately
$1,800,000 in rental commitments associated with its previous services and
facilities arrangement with MCC.
In connection with the Company's acquisition of MCC's electronics packaging
and display fabrication assets, the Company acquired non-exclusive licenses to
144 MCC patents and other technology related to the acquired assets. Under the
licenses, the Company must pay MCC a royalty of up to 3%, subject to a maximum
cumulative royalty of $2,000,000. Additionally, the Company is required to have
paid a cumulative minimum royalty of $500,000 on or before December 31, 1997 and
a cumulative minimum royalty of $1,000,000 on or before December 31, 2000.
Page 40
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
DiaGasCrown Venture
In February 1995, the Company entered into an agreement with Diagascrown,
Inc. ("DGC"), a Russian joint stock Company controlled by Gazcomplektimpex, a
subsidiary of Gazprom, the Russian national natural gas Company. In return for
an equity position in the Company, DGC paid the Company $5,000,000 and granted
the Company an exclusive license to DGC display and related diamond technology
and license rights to all related background patents. The Company has committed
to perform $2.5 million in research and development in Russia through February
1997. This research can be in the form of travel and service performed by the
Company's employees in Russia, government funded research performed in Russia
and through direct funding of Russian efforts related to displays. According to
its internal records, the Company has spent approximately $2,000,000 on this
research through December 31, 1996. Further spending in Russia has been
temporarily halted pending agreement as to the nature and amount of the services
to be performed in Russia for the remaining balance to be spent under the
original agreement. The Company realized net proceeds of approximately $4.8
million in this transaction. During the fourth quarter of 1995, the Company
completed its financial evaluation of the licenses and other rights acquired,
and established a $900,000 minimum value for the Russian technology acquired in
the transaction.. The Company determined that the technology acquired was in-
process research and development and charged the $900,000 to research and
development expense for 1995.
Philips Venture
In July 1995, the Company and Philips Components B.V. ("Philips") announced
the signing of a technology cooperation agreement under which Philips will
provide $10 million of development support over the next two years to accelerate
commercialization of the Company's DFED. Under the terms of the agreement,
Philips and SIDT have committed at least $5,000,000 per year for two years to
the joint effort. The commitment may include in-kind contributions or cash. At
the point in development that mass manufacturing of DFEDs is anticipated, non-
exclusive licenses may be granted to an anticipated production venture to enable
the manufacture of DFEDs. The agreement includes a broad based ongoing program
of technical collaboration and any joint inventions resulting from the
collaboration can be used by either Company. In October, 1996 the Company
entered into an agreement that amended the previous agreement. The parties
mutually agreed to terminate their technology cooperation agreement as of that
date. Neither party has any ongoing commitment after the date of the
termination.
Government contracts
Governmental contractors are subject to many levels of audit and
investigation. Among United States agencies that oversee contract performance
are: the Defense Contract Audit Agency, the Inspector General, the Defense
Criminal Investigative Service, the General Accounting Office, the Department of
Commerce, the Department of Justice and Congressional Committees. The Company's
management believes that an audit or investigation, if any, as a result of such
oversight would not have any material adverse effect upon the Company's
financial condition.
Legal Proceedings
On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer of
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, prior to the Company's
ownership of Plasmatron. 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. Although there is
uncertainty associated with any litigation, 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 cashflows.
Page 41
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of
credit risk consist of cash and cash equivalents and receivables. The Company
places its cash and cash equivalents with high credit quality financial
institutions. At December 31, 1996 and 1995, the Company had no amounts on
deposit in excess of the Federal Deposit Insurance Corporation limitations;
however, for limited periods of time during the year, bank balances may exceed
such limits.
The Company's receivables are uncollateralized and result primarily from its
research and development projects performed primarily for U.S. Federal
Government Agencies.
13. SEGMENT INFORMATION
The Company had revenues from government contracts of approximately
$2,869,000 and $1,009,000 in 1996 and 1995, respectively. The majority of the
government contracts are cost reimbursement contracts. As a result, the Company
realizes little or no gain or loss in the performance of these contracts.
14. SUBSEQUENT EVENTS
In February 1997, the Company closed an offering of 8% Convertible
Debentures (the "Debentures") under Regulation S of the Securities Act of 1933.
The Company agreed to issued two Debentures, each with a face amount of
$555,555. The second debenture is to be issued within 60 days of issuance of the
first debenture. On March 7, 1997 the Company received gross proceeds of
$555,555, less expenses of $55,755, for the issuance of the first debenture. The
Debentures bear interest at a rate of 8%. The entire unpaid principal and
accumulated interest on the Debentures shall be due and payable on the second
anniversary of the date on which the Debentures were issued. The Company may
elect to pay interest payments in either cash or Common Stock as described
below.
At the option of the holder, the outstanding principal amount of the
Debentures (including accrued interest payments at the election of the Company)
shall be convertible, in whole or in part, into the Common Stock of the Company
("Conversion Shares") at any time after 60 days from the date the Debentures
were issued until such time as the Debentures are paid or converted into the
Company's Common Stock. For purposes of determining the number of Conversion
Shares to be issued to the holder upon any such conversion, the price of each of
the Conversion Shares shall conclusively be deemed to be 75% of the average of
the closing bid price of a share of the Company's Stock on the NASDAQ Small Cap
Market for the 10 consecutive trading days immediately prior to the conversion
date. The Company will treat any discount to market at the time of conversion,
if applicable, as interest expense.
Series F
In March, 1997 the Company closed an exempt offering under Regulation D of
the Securities Act of 1933 (the "March 1997 Offering") for 1,700 shares of its
Series F Convertible Preferred Stock ("Series F Preferred"). The Series F
Preferred has a par value of $1 and a stated value of $1,000. The Company
received net proceeds of $1,527,500 which represented gross proceeds of
$1,700,000 less expenses of $172,500. Each share has a liquidation preference of
$1,000 plus 4% per annum from the date of issuance. Each share of Series F
Preferred is convertible into that number of shares of Common Stock determined
by dividing (i) the original issue price of the Series F Preferred Stock (the
"Issue Price") plus an accretion amount equal to 4% of the issue price per
annum from the issued date of the Series F Preferred Stock until the conversion
date by (ii) the conversion price. The conversion price is the lesser of $1.75
or 80% of the 10 day average closing bid price prior to the conversion date. The
Series F Preferred bears no dividends and holders of the Series F Preferred have
no voting power except in certain circumstances pursuant to Texas state law.
Pursuant to the terms of the March 1997 Offering, the Company shall use its
best efforts to have a registration statement declared effective no later than
June 9, 1997 covering all shares of common stock issuable or issued upon
conversion of the Series F Preferred Stock to such shareholders. If the
registration statement is not declared effective by the due date as a result of
the Company's failure to file such registration timely or failure to diligently
strive to have such registration statement declared effective by the due date,
the Company shall pay to the holders of the Series F Preferred an amount equal
to one and one-half percent (1.5%) per month of the aggregate amount of Series F
Preferred sold in the March 1997 Offering. Such payment would accrue daily and
compound monthly until such time as the registration statement is declared
effective
Page 42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Page 43
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following sets forth the names, ages and certain information
concerning the Directors of the Company. Additional information on Marc W.
Eller, Dr. Zvi Yaniv, and Dr. Howard K. Schmidt and all information concerning
executive officers may be found under the caption "EXECUTIVE OFFICERS" on page 9
of this Annual Report on Form 10-KSB.
<TABLE>
<CAPTION>
Name Age Class Position Director Since Term Expires
----- --- ----- -------------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Lee B. Arberg 29 I Director May 1996 1997
Marc W. Eller 41 I Director, Chairman, November 1995 1997
Chief Executive Officer
David R. Sincox 58 I Director October 1994 1997
Dr. Zvi Yaniv 48 II Director, President, July, 1996
Chief Operating Officer 1997
Philip C. Shaffer 61 II Director March 1992 1998
Howard K. Schmidt 38 III Director March 1989 1999
Ronald J. Berman 40 III Director May 1996 1999
</TABLE>
______________________
Mr. Arberg has been a Director since May, 1996. Mr. Arberg founded
Hemisphere Trading Company ("Hemisphere"), a registered investment advising
firm, in June 1992. Mr. Arberg manages the overall operations of Hemisphere and
serves as its Chief Investment Officer. Prior to the formation of Hemipshere,
Mr. Arberg was a financial analyst with Cummins Engine Company, specializing in
the strategic acquisitions of private companies with revenues of $75-$250
million.
Mr. Sincox has been a Director of the Company since October 1994.
Since 1987, Mr. Sincox has served as the Vice President of Administration of
Ref-Chem Construction Corporation, an engineering and construction firm.
Mr. Shaffer has been a Director of the Company since March 1992. Since
1977, Mr. Shaffer has worked as a self employed consultant in the field of
aerospace technology and management, with an emphasis in business acquisition.
Mr. Shaffer also serves as the General Partner of an oil and gas development
partnership with a total capitalization of approximately $1.2 million. Prior to
1977, Mr. Shaffer worked for 13 years in the National Aeronautics and Space
Administration in a series of positions including Flight Dynamics Officer,
Apollo and Skylab Flight Director, Special Assistant to the Director of the
Johnson Space Center, and Manager of Space Shuttle Operations.
Mr. Berman has been a Director since May, 1996. Mr. Berman co-founded
BEG Enterprises, Inc. with Marc W, Eller and has been its President since 1989.
Mr. Berman earned a Juris Doctor degree in 1980 from the University of Detroit.
Prior to 1989, Mr. Berman was an attorney in private practice.
Page 44
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities of Exchange Act of 1934 requires the
Company's Officers and Directors, and persons who beneficially own more than
10% of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Officers, Directors, and beneficial owners of more than 10 % of the
Company's Common Stock are required by the Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms that
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no reports on Form 5 were required, the
Company believes that for the period from January 1, 1996 through December 31,
1996, all its Officers, Directors , and greater than 10% beneficial owners
complied with all Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total cash compensation paid or to
be paid, as well as certain other compensation paid or accrued, for services
rendered during the fiscal years ended December 31, 1996, 1995 and 1994 by the
Chief Executive Officer and all executive officers whose total annual salary and
bonus exceeded $100,000 for the fiscal year ended December 31, 1996 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------------- ------------
Other Securities
Annual Underlying
Name and Position Year Salary($) Bonus($) Compensation($)(6) Options(#)
- ----------------------------------------- ---------- -------- -------- --------------------- ----------
<S> <C> <C> <C> <C> <C>
Marc W. Eller, 1996 $ 51,932 $15,000 $ 9,005 90,000
Chief Executive Officer (1)
Howard K. Schmidt, 1996 145,372 -0- -0- -0-
President and CEO (2) 1995 106,952 -0- -0- -0-
1994 84,000 -0- -0- -0-
Zvi Yaniv, President and 1996 82,131 -0- 32,338 1,000,000
Chief Operating Officer (3)
Trey Fecteau, 1996 107,061 -0- 9,529 90,000
Senior Vice President
and Secretary (4)
Aris K. Silzars, President 1996 118,427 -0- 22,574 -0-
Northlight Displays, Inc. (5) 1995 27,500 -0- -0- 65,000
</TABLE>
- ----------------------
(1) Mr. Eller commenced employment with the Company on July 25, 1996.
(2) Dr. Schmidt resigned as President and Chief Operating Officer on July 29,
1996.
(3) Dr. Yaniv commenced employment with the Company on May 8, 1996.
(4) Mr. Fecteau commenced employment with the Company on January 1, 1996. Prior
to that date, Mr. Fecteau performed consulting services for the Company.
(5) Mr. Silzars commenced employment with the Company on October 1, 1995 and
terminated employment September 30, 1996. Mr. Silzars' options expired
since they were not exercised within 30 days of termination of employment.
Page 45
<PAGE>
(6) None of the Named Executive Officers received perquisites which exceed in
value the lesser of $50,000 or 10% of such officers' salary and bonus
with the exception of Dr. Yaniv, Mr. Eller, and Mr. Silzars. Dr. Yaniv
received reimbursement of living expenses totaling $29,541 and was
provided use of a Company owned automobile valued at $2,797. Mr. Silzars
received reimbursement of moving expenses totaling $22,574. Mr. Eller
received reimbursement of moving expenses totaling $9,005.
STOCK OPTION GRANTS IN 1996
The Company has an Amended and Restated 1992 Stock Option Plan which may be used
to grant employees, including officers of the Company, incentive stock options
designed to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended, or non-qualified stock options. The following table sets forth
information concerning stock-option grants to the Named Executive Officers in
1996.
<TABLE>
<CAPTION>
Number of Percent of
Securities Underlying Options Granted to
Options Employees in Exercise
Name Granted(#)(1)(2) in Fiscal Year 1996 or Base Price ($/sh) Expiration Date
- ------------------- ------------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Marc W. Eller 90,000 (3) 3.69% $3.00 10/17/06
Dr. Zvi Yaniv 1,000,000 (4)(5) 41.05% $4.00 6/1/06
Howard K. Schmidt -0- N/A N/A N/A
Trey Fecteau 35,000 (5)(6) $4.00 1/1/06
17,500 (5)(7) $4.00 1/31/06
37,500 (3) 3.69% $3.00 10/17/06
Aris K. Silzars -0- N/A N/A N/A
</TABLE>
- ------------------
(1) Under the terms of the Company's Amended and Restated 1992 Stock Option
Plan, the Company's Compensation Committee retains discretion, subject to
plan limits, to modify the terms of outstanding options and to reprice the
options.
(2) The options were granted for a term of ten (10) years, subject to earlier
termination in certain events related to termination of employment.
(3) These options first become exercisable on June 1, 1997, with 25% of the
underlying shares becoming exercisable at that time. An additional 25 % of
the options become exercisable each successive June 1, with full vesting
on June 1, 2000.
(4) 100,000 of these options became exercisable upon the execution of Dr.
Yaniv's employment agreement with the Company on June 1, 1996. The
remainder of this grant of options vests as follows: (a) 100,000 on
December 31, 1996, and (b) 200,000 on each of December 31, 1997, 1998,
1999, and 2000
(5) This grant of options was repriced by the Company during the last fiscal
year. More information on this repricing is identified in the "Option
Repricings Table" below.
(6) These options first became exerciseable on April 1, 1996 with 5% of the
underlying shares becoming exerciseable at that time. An additional 5% of
this grant became exerciseable on each of 7/1/96, 10/1/96, and 1/1/97. An
additional 20% of these option shares become exercisable on each of January
1, 1997, 1998, 1999, and 2000.
(7) These options became exercisable in full on the date of the grant.
Page 46
<PAGE>
AGGREGATED OPTION EXERCISES IN 1996
AND OPTION VALUES AT DECEMBER 31, 1996
The following table sets forth certain information concerning options
exercised by the Named Executive Officers during the fiscal year ended December
31, 1996, and the number and value of the options held at the end of the fiscal
year 1996 based upon the closing price of $1.4375 per share of the Common Stock
on December 31, 1996, on the NASDAQ Small Cap Market.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1996(#) at December 31, 1996($)
----------------------- ------------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ----------------------- ----------------------- ---------------- --------------- --------------------
<S> <C> <C> <C> <C>
Marc W. Eller -0- N/A 0 / 90,000 $0 /$ 0
Dr. Zvi Yaniv -0- N/A 200,000/800,000 0 / 0
Howard K. Schmidt -0- N/A 0 / 0 0 / 0
Trey Fecteau -0- N/A 22,750/67,250 0 / 0
Aris Silzars -0- N/A 0 / 0 0 / 0
</TABLE>
DIRECTOR COMPENSATION FOR 1996
<TABLE>
<CAPTION>
Cash Compensation Security Grants
--------------------- ----------------------------------------------
Name(1) Meeting Fees ($)(2) Number of Securities Underlying Options (#)(3)
- --------------------------------- --------------------- ----------------------------------------------
<S> <C> <C>
Marc W. Eller $1,500 20,000
Thomas J. Smith(4) 2,350 20,000
Lee B. Arberg 1,000 4,000
David R. Sincox 2,550 20,000
Philip C. Shaffer 3,050 50,000
Igor Leontiev (4) 1,350 20,000
Ronald J. Berman 950 4,383
</TABLE>
(1) With the exception of Marc W. Eller, Directors who are also executives of
the Company are not listed in the above table. They do not receive
compensation as a Director. Refer to the summary compensation table for
information concerning their compensation. Mr. Eller was an outside
Director of the Company until July 29, 1996 when he was named Chief
Executive Officer or the Company. Since becoming Chief Executive Officer,
Mr. Eller has not received meeting fees or stock option grants under the
Company's Amended and Restated 1992 Outside Directors' Stock Option Plan
("Outside Directors Plan").
(2) All Directors receive the standard fees: $150 per board meeting and $50 per
telephonic meeting. The reasonable expenses incurred by each Director in
connection with his duties as a Director are also reimbursed by the
Company; this amount is not reflected in the above table.
(3) All outside Directors of the Company may participate in the Company's
Outside Directors Plan, under which the Company may grant stock options to
any Director who is not a full time salaried employee of the Company. All
of these options in this table were granted on July 29, 1996 at a price of
$2.3125. These option grants first became exercisable at a rate of 6.25%
for each three month period from the date of grant until the first
anniversary. An additional 25% of the option shares of each grant become
exercisable on each successive anniversary date, with full vesting on the
fourth anniversary date.
(4) Mr. Smith resigned as a Director effective October 1, 1996. Mr. Leontiev
resigned on September 17, 1996.
Page 47
<PAGE>
All of the Company's Directors have retained the right to pursue additional
business activities that (1) are not competitive with the business of the
Company, and (2) do not adversely affect their performance as Directors. If, as
and when conflicts of interest arise, the nature of the conflict must be fully
disclosed to the Board of Directors, and the person who is subject to the
conflict must abstain from participating in any decision that may impact on his
conflict of interest. Except for this disclosure and abstention policy, the
Directors will not be in breach of any fiduciary duties owed to the Company or
the shareholders by virtue of their participation in such additional business
activities.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement (the "Employment Agreement") with
Dr. Zvi Yaniv, its President and Chief Operating Officer, which was entered into
on June 1, 1996. Under the terms of this agreement Dr. Yaniv is paid a base
salary of $125,000 per year. Quarterly performance goals are mutually agreed to
by the Company and Dr. Yaniv at the beginning of each quarter during the first
year of the Employment Agreement; thereafter, such goals are determined at the
beginning of each year of the Employment Agreement. If Dr. Yaniv's goals for the
four quarters ending June 30, 1997 are reached, his salary shall be
retroactively adjusted to $200,000 per year, effective as of June 1, 1996. If
Dr. Yaniv's goals for the annual period ended June 30, 1998 are reached, the
Company shall pay Dr. Yaniv a one-time bonus of $100,000.
In addition, Dr. Yaniv was granted options to acquire 1,000,000 shares of
the Company's Common Stock under the Company's Amended and Restated 1992 Stock
Option Plan. 100,000 of these options vested upon execution of the Employment
agreement. An additional 100,000 options vested on December 31, 1996 and the
remainder of these options granted vest at the rate of 200,000 per year on each
of December 31, 1997, 1998, 1999, and 2000. All of these options are exercisable
at a price of $4.00 per share of the Company's Common Stock.
The Company also provides Dr. Yaniv with the use of an automobile owned by
the Company and will pay for his reasonable living expenses in Austin, Texas
until June 1, 1997. This employment agreement may be terminated by either party,
with or without cause, by giving 30 days notice of termination to the other
party.
OPTION REPRICINGS TABLE
The Named Executive Officers listed in the table below had the identified
stock option grants repriced during the Company's fiscal year ended December 31,
1996.
<TABLE>
<CAPTION>
Length
Number of of Original
Securities Market Price Exercise Option term
Underlying of Stock Price Remaining
Options at Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended(#) Amendment($) Amendment($) Price ($) Amendment(1)
- ----------------- -------- ------------ ------------ -------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Zvi Yaniv,
President and
Chief Operating
Officer 10/17/96 1,000,000 $1.50 (2) $4.00 9 yr., 7 mnths
Trey Fecteau
Senior Vice
President and 10/17/96 35,000 $1.50 $ 6.625 $4.00 9 yr., 2 mnths
Secretary 10/17/96 17,500 $1.50 $7.4375 $4.00 9 yr., 3 mnths
</TABLE>
(1) The ten year terms and the vesting schedules of each grant repriced were
not changed with the repricing of the options listed in this table.
(2) Prior to repricing, the options in this grant were to be priced at the
market price on the vesting dates of the options granted. The 100,000
options of this grant that had vested as of June 1, 1996 were priced at
$5.00 per share of Common Stock. No other options pursuant to this grant
had vested as of the repricing date.
Page 48
<PAGE>
The options for the above referenced Named Executive Officers were
repriced as part of a plan approved by the Board of Directors on October 17,
1996. On that date, all options held by employees employed by the Company on
that date that had an exercise price in excess of $4.00 per share were changed
to reduce the exercise price to $4.00. As of that date the Company's Common
Stock was trading at $1.50 per share. For the majority of employees, the options
were granted prior to issuance of the Company's Series E Convertible Preferred
Stock. The ultimate conversion of the Series E Convertible Preferred Stock has
caused a significant increase in the number of shares of the Company's Common
Stock outstanding and decreased the value of the options granted under the
Company's Amended and Restated 1992 Stock Option Plan. To adjust for this, the
Board reduced the exercise prices as indicated.
Marc W. Eller
Philip C. Shaffer
David R. Sincox
Howard K. Schmidt Directors March 27, 1997
Ronald J. Berman
Lee B. Arberg
Dr. Zvi Yaniv
Page 49
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of shares of each class of the Company's voting stock as of
March 21, 1997, by each person known to be the beneficial owner of 5% or more of
the outstanding voting stock of each such class of the Company. For the purposes
of this Annual Report on Form 10-KSB, beneficial ownership of securities is
defined in accordance with the rules of the SEC to mean generally the power to
vote or dispose of securities, regardless of any economic interest therein.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Percent
Shares Owned of
Title of Class Name and Address Beneficially Class
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Howard K. Schmidt 1,084,400(1) 7.78%
1200 Technology Boulevard
Austin, Texas 78727
- ------------------------------------------------------------------------------------------------------
Gazcomplektimpex 1,845,130(2) 12.67%
5 Parkovaya Street, 46
Moscow, Russia 10526
- ------------------------------------------------------------------------------------------------------
Leonardo, L.P. 1,175,697(3) 7.86%
c/o Trident Trust Co., Ltd
Elizabeth Square, P.O. Box 84
Grand Cayman, Cayman Islands BWI
- ------------------------------------------------------------------------------------------------------
Nelson Partners 1,144,120(3) 7.81%
c/o Leeds Management Services, Ltd
129 Front Street
Hamilton, Bermuda HM12
- ------------------------------------------------------------------------------------------------------
Olympus Securities Ltd 1,071,549(3) 7.31%
c/o Leeds Management Services, Ltd
129 Front Street
Hamilton, Bermuda HM12
- ------------------------------------------------------------------------------------------------------
BEG Enterprises, Inc. 755,387(4) 5.37%
33493 West Fourteen Mile Road, Suite 100
Farmington Hills, Mi. 48331
- ------------------------------------------------------------------------------------------------------
Series A Preferred Evan Street 100 100%
Stock 12100 Technology Blvd
Austin, TX 78727
- ------------------------------------------------------------------------------------------------------
Series E Preferred Leonardo, L.P. 140 24.31%
Stock c/o Trident Trust Co., Ltd.
Elizabeth Square
P.O. Box 84
Grand Cayman, Cayman Islands BWI
- ------------------------------------------------------------------------------------------------------
Nelson Partners 106 18.40%
c/o Leeds Management Services, Ltd.
129 Front Street
Hamilton, Bermuda HM 12
- ------------------------------------------------------------------------------------------------------
Olympus Securities Ltd. 106 18.40%
c/o Leeds Management Services, Ltd.
129 Front Street
Hamilton, Bermuda HM 12
- ------------------------------------------------------------------------------------------------------
Gracechurch & Co. 62 10.76%
c/o IFM Asset Management Ltd.
159 New Bond Street
London WIY ORR England
- ------------------------------------------------------------------------------------------------------
</TABLE>
Page 50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Series E Preferred Raphael L.P. 40 6.94%
Stock (continued) 245 Park Ave, 2nd floor
New York, NY 10167
- ------------------------------------------------------------------------------------------------------
West Merchant Bank Nominees Limited 50 8.68%
1080 Holcomb Bridge Rd., Ste 285
Roswell, GA 30076
- ------------------------------------------------------------------------------------------------------
GAM L.P. 37 6.42%
1080 Holcomb Bridge Rd., Ste 285
Roswell, GA 30076
- ------------------------------------------------------------------------------------------------------
AG Superfund 30 5.21%
1080 Holcomb Bridge Rd., Ste 285
Roswell, GA 30076
- ------------------------------------------------------------------------------------------------------
Series F Preferred Stock Thomas Kernaghan & Co. Limited 1,250 73.53%
356 Bay Street Tenth Floor
Toronto, Ontario Canada M5H 2V2
- ------------------------------------------------------------------------------------------------------
Stanley B. Dickson, Jr. 250 14.71%
15621 Winding Pointe Drive
Grosse Pointe Park, Mi 48230
- ------------------------------------------------------------------------------------------------------
FT Trading Co. 200 11.76%
78 Cannon Street
London EC4N 6HH England
- ------------------------------------------------------------------------------------------------------
</TABLE>
__________________
(1) Includes 1,500 shares of Common Stock issued in the name of Dr. Schmidt's
minor daughter.
(2) Included in this amount are warrants to purchase 61,500 shares of the
Company's Series C Preferred Stock, which are convertible into 615,000
shares of the Company's Common Stock.
(3) Included in the amounts indicated are shares of the Company's Common Stock
which can be issued pursuant to the conversion of shares of the Company's
Series E Preferred Stock within sixty (60) days of March 21, 1996. The
number of such shares are 1,023,509 for Leonardo, L.P. and 712,778 for each
of Nelson Partners and Olympus Securities Ltd.
(4) Included in this amount are warrants to purchase 127,794 shares of the
Company's Common Stock. Marc W. Eller, the Chief Executive Officer and
Chairman of the Board of the Company, and Ronald J. Berman, a Director of
the Company each own 50% of the common stock of BEG Enterprises, Inc.
("BEG").
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information with respect to beneficial ownership of
the Company's Common Stock as of March 21, 1997, by each Director, each Named
Executive Officer and by the directors and executive officers as a group. Unless
otherwise indicated, each person or member of the group listed has sole voting
and investment power with respect to the shares of Common Stock listed.
Page 51
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIAL PERCENTAGE
NAME OWNERSHIP (1) OF CLASS
------- ---------------- -----------
<S> <C> <C>
Howard K. Schmidt 1,084,400(2) 7.78%
Philip C. Shaffer 112,077 *
David R. Sincox 26,963 *
Thomas J. Smith (3) -0- *
Igor Leontiev (4) -0- *
Marc W. Eller (5) 381,444 2.72%
Ronald J. Berman (6) 472,765 3.37%
Lee B. Arberg 750 *
Dr. Zvi Yaniv 211,000 1.49%
Trey Fecteau 31,500 *
Douglas P. Baker 125,000 *
All Executive Officers and Directors
as a group (11 persons) 2,445,899 16.90%
</TABLE>
_________________________
* Less than 1%
(1) Included in the amounts indicated are shares which are subject to options
exercisable within-sixty(60)-days of March 21, 1997. The number of such
shares are 49,375 for Mr. Shaffer; 15,750 for Mr. Sincox; 3,750 for Mr.
Eller; 822 for Mr. Berman; 750 for Mr. Arberg; 200,000 for Mr. Yaniv;
31,500 for Mr. Fecteau; 100,000 for Mr. Baker; and 401,947 for the
Directors and executive officers as a group.
(2) Includes 1,500 shares of Common Stock issued in the name of Dr. Schmidt's
minor daughter.
(3) Mr. Smith resigned as a Director of the Company effective October 1, 1996.
(4) Igor Leontiev serves as the President of DiaGasCrown, a subsidiary of
Gazcomplektimpex. Gazcomplektimpex owns 1,230,130 shares of Common Stock
and warrants convertible into another 615,000 shares of the Company's
Common Stock. Mr. Leontiev disclaims any beneficial ownership of these
shares. Mr. Leontiev resigned as a Director in September, 1996.
(5) BEG Enterprises, Inc. ("BEG") owns 627,593 shares of the Company's Common
Stock. Mr. Eller owns 50% of BEG. 313,797 of these shares have been
attributed to Mr. Eller. BEG also holds 127,794 warrants that are
exercisable within sixty (60) days of March 21, 1997. Mr. Eller's total
also includes 63,897 shares subject to these warrants.
(6) BEG Enterprises, Inc. ("BEG") owns 627,593 shares of the Company's Common
Stock. Mr. Berman owns 50% of BEG. 313,796 of these shares have been
attributed to Mr. Berman. BEG also holds 127,794 warrants that are
exercisable within sixty (60) days of March 21, 1997. Mr. Berman's total
also includes 63,897 shares subject to these warrants.
Page 52
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with its capital raising activities, the Company has utilized
the services of BEG Enterprises, Inc. ("BEG"). Marc W. Eller and Ronald J.
Berman, Directors of the Company, each own 50% of the common stock of BEG. In
connection with these services, BEG received $16,000 per month from November
1995 through April 1996 for a total of $96,000. BEG also received $78,295 in
February 1996 in connection with these services provided to the Company. The
Company believes that such payments are comparable to those that would have been
made to other non-affiliated firms for comparable services.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits on page 55 for a descriptive response
to this item.
(b) Reports on Form 8-K:
(1) Current report on Form 8-K dated October 30, 1996 (Item 5 - Other
events)
Page 53
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SI DIAMOND TECHNOLOGY, INC.
By: //s// Marc W. Eller
--------------------
Marc W. Eller,
Chief Executive Officer
In accordance with the Exchange Act this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------ -------------------------- ------------
<S> <C> <C>
//s// Marc W. Eller Chairman, Chief Executive March 27, 1997
- ------------------------ Officer (Principal Executive Officer and
Marc W. Eller Director)
//s// Douglas P. Baker Vice President and March 27, 1997
- ------------------------ Chief Financial Officer
Douglas P. Baker (Principal Financial Officer)
Philip C. Shaffer*
David R. Sincox*
Howard K. Schmidt* Directors March 27, 1997
Ronald J. Berman*
Lee B. Arberg*
Dr. Zvi Yaniv*
*By: //s// Douglas P. Baker
---------------------------------
(Douglas P. Baker,
Attorney-in-Fact)
</TABLE>
Page 54
<PAGE>
INDEX TO EXHIBITS
The exhibits indicated by an asterisk (*) have been previously filed
with the Securities and Exchange Commission and are incorporated
herein by reference.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1 * Stock Purchase Agreement by and among SI Diamond Technology,
Inc., SDI Acquisition Corp., Plasmatron Coatings and Systems,
Inc., Bawa Singh, Robert Williams, and Gaylord Evey, dated as
of May 28,1993 Exhibit 2.1 to the Company's Current Report on
Form 8-K dated May 28, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
3.1 * Amended and Restated Articles of Incorporation of Company, as
filed February 14, 1997 with the Secretary of State for the State
of Texas (Exhibit 3.1 to the Company's Report on Form 8-K dated as
of February 14, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
3.2* Statement of Resolutions Establishing and Designating the Company's
Series F Preferred Stock (Exhibit 3.1 to the Company's Report on
Form 8-K dated as of March 7, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
3.3* Amended and Restated Bylaws of the Company (Exhibit 3(ii) to the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
4.1 * Form of Certificate for shares of the Company's common stock
(Exhibit 4.1 to the Company's Registration Statement on Form SB-2
(No.33-51446-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
4.2* Form of Certificate for Shares of the Company's Series C Preferred
Stock (Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
4.3* Form of Subscription Agreement and Purchaser Questionnaire by and
between SI Diamond Technology, Inc. and BEG Enterprises and related
purchasers, effective as of June 20,1995, concerning the sale and
issuance of Common Stock (Exhibit 4.1 to the Company's Quarterly Report
on Form l0-QSB for the fiscal quarter ended June 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
4.4* Underwriting Agreement dated as of August 27, 1993, and effective as of
September 7, 1993, between the Company and GH Securities, Ltd. Exhibit 4.1
to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
4.5* Form of Placement Agreement dated as of July 19, 1995, by and between the
Company and Columbus Asset Management Limited (Exhibit 4.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
4.6* Form of Warrant in connection with Placement Agreement dated as of July 19, 1995,
by and between the Company and Columbus Asset Management Limited Exhibit 4.3 to
the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
4.7* Statement of Designations, Preferences and Rights of Series E Preferred Stock
of the Company as filed with the Secretary of State of the State of Texas on
January 4, 1996 Exhibit 4.4 to the Company's Current Report on Form 8-K dated
as of January 19, 1996)).
- -------------------------------------------------------------------------------------------------------------------------------
4.8* Form of Convertible Subordinated Debenture Agreement (Exhibit 10.18 to the
Company's Registration Statement on Form SB-2 (No.33-S 1466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
4.9* Form of Subordinated Debenture Agreement with Attached Warrants Exhibit 10.17
to the Company's Registration Statement on Form SB-2 (No. 33-51466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
4.10* Form of Underwriter's Warrant (Exhibit 1.4 to the Company's Registration
Statement on Form SB-2 (No. 33-51466-FW) dated January 7, 1993.)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 55
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.11* Form of Subscription Agreement for the sale of Units, each consisting of
two shares of the Company's Common Stock and one Warrant (June 1993) to
purchase one share of Common Stock (Exhibit 4.7 to the Company's
Registration Statement on Form S-3 dated January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.12* Form of Warrant (June 1993) to purchase shares of the Company's Common
Stock (Exhibit 4.8 to the Company's Registration Statement on Form S-3
dated January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.13* Form of Warrant (BEG) to purchase shares of the Company's Common Stock
in connection with the Form of Subscription Agreement and Purchase
Questionnaire by and between the Company and the purchasers of the
Company's Common Stock dated as of June 20, 1995 (Exhibit 4.12 to the
Company's Registration Statement on Form S-3 dated January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.14* Form of Subscription Agreement and Purchaser Questionnaire in connection
with the Company's $1.5 million private placement of its Common Stock
(Exhibit 4.1 to the Company's Current Report on Form 8-K dated as of
January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.15* Form of Regulation D Subscription Agreement in connection with the private
placement of the Company's Series E Preferred Stock (Exhibit 4.2 to the
Company's Current Report on Form 8-K dated as of January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.16* Form of Registration Rights Agreement in connection with the private placement
of the Company's Series E Preferred Stock Exhibit 4.3 to the Company's Current
Report on Form 8-K dated as of January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.17* Form of Warrant issued to Swartz Investments, Inc. Exhibit 4.5 to the Company's
Current Report on Form 8-K dated as of January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
4.18* Warrant to Purchase 150,000 shares of Common Stock at $3.90 per share issued to
GH Securities, Ltd. exercisable any time on or before February 21, 1999.
(Exhibit 4.18 to the Company's Annual Report on form 10-KSB for the fiscal year
ended December 31, 1995)
- -------------------------------------------------------------------------------------------------------------------------------
4.19* Rights Agreement dated February 21, 1996, among the Company, GH Securities, Ltd.
and David M. Klausmeyer. (Exhibit 4.19 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995)
- -------------------------------------------------------------------------------------------------------------------------------
4.20* Warrant to Purchase 60,000 shares of Common Stock at $6.50 per share issued to
G.H. Securities, Ltd. exercisable any time on or before February 21, 1999.
(Exhibit 4.20 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995)
- -------------------------------------------------------------------------------------------------------------------------------
4.21* Warrant to Purchase 55,000 shares of Common Stock at $5.50 per share issued to
David M. Klausmeyer exercisable any time on or before February 21, 1999.
(Exhibit 4.21 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995)
- -------------------------------------------------------------------------------------------------------------------------------
4.22* Form of Warrant to purchase Common Stock of the Company issued in connection
with the loan of $ 1,000,000 to Diamond Tech One, Inc. (Exhibit 4.1 to the
Company's Report on Form 8-K dated as of October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
4.23* Form of Regulation D Subscription Agreement by and between the Company and the
Holders of the Company's Series F Preferred Stock (Exhibit 4.3 to the Company's
Report on From 8-K dated as of March7, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
4.24* Form of Registration Rights Agreement by and between the Company and Holders of
the Company's Series F Preferred Stock (Exhibit 4.4 to the Company's Report on
Form 8-K dated as of March 7, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
4.25* Form of Subscription Agreement by and between the Company and Holders of the
Company's 8% Convertible Debentures (Exhibit 4.1 to the Company's Report on
Form 8-K dated as of March 7, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
4.26* Form of the Company's 8% Convertible Debenture (Exhibit 4.2 to the Company's
Report on Form 8-K dated as of March 7, 1997)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 56
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1* License Agreement between the Company and the University of Texas
(Dallas) relating to the commercialization of Amorphic Diamond coatings
(Exhibit 10.8 to the Company's Registration Statement on Form SB-2
(No. 33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.2* SBIR Phase II Research Agreement between the Company and The United States
Army Strategic Defense Command relating to the N-Type Doping of Diamond
(Exhibit 10.9 to the Company's Registration Statement on Form SB-2
(No.33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.3* SBIR Phase II Research Agreement between the Company and The Office of Naval
Research relating to Atomic layer Epitaxial Grown of Diamond (Exhibit 10.10
to the Company's Registration Statement on Form SB-2 (No. 33-51466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.4* SBIR Phase I Research Agreement between the Company and NASA Johnson Space
Center relating to Amorphous Diamond Protective Coatings for Exposed Surfaces
in low Earth Orbit. Representative of the ten Phase I contracts currently
active between the Company and several government agencies Exhibit 10.11 to the
Company's Registration Statement on Form SB-2 (No. 33-51466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.5* Agreement between the Company and Microelectronics and Computer Technology
Corporation relating to flat panel diamond display screen project Exhibit 10.12
to the Company's Registration Statement on Form SB-2 (No. 33-51466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.6* Form Subordinated Debenture Agreement with Attached Warrants Exhibit 10.17 to
the Company's Registration Statement on Form SB-2 (No. 33-51466-FW) dated
January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.7* Form Convertible Subordinated Debenture Agreement Exhibit 10.18 to the Company's
Registration Statement on Form SB-2 (No. 33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.8* Revised License Agreement between the Company and the University of Texas
(Dallas) relating to worldwide exclusive rights to the commercialization of
Amorphic Diamond coatings (Exhibit 10.19 to the Company's Registration
Statement on Form SB-2 (No. 33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.9* License Agreement between the Company and McDonnell Douglas Corporation relating
to a new method of producing high temperature CVD diamond (Exhibit 10.20 to the
Company's Registration Statement on Form SB-2 (No.33-5 1466-FW) dated January 7,
1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.10* Master Agreement between Microelectronics and Computer Technology Corporation
and the Company dated September 7, 1993, to cross license and pool technologies
related to diamond-based field emitter displays and diamond-based cold cathodes
(Exhibit 10.20 to the Company's Quarterly Report on Form l0-QSB/A for the fiscal
quarter ended September 30, 1993).
- -------------------------------------------------------------------------------------------------------------------------------
10.11* Memorandum of Terms between the Company and Microelectronics and Computer
Technology Corporation dated August 16, 1994 (Exhibit 10.19 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994).
- -------------------------------------------------------------------------------------------------------------------------------
10.12* Amendment No.1 to the Patent and Know-How Cross-License Agreement between
Microelectronics and Computer Technology Corporation and the Company dated
June 7, 1994 (Exhibit 10.20 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994).
- -------------------------------------------------------------------------------------------------------------------------------
10.13* Option, Share and Warrant purchase Agreement dated February 9, 1995, by and
between the Company and DiaGasCrown, Inc. (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.14* Warrant granted to Gazcomplektimpex to purchase 61,500 shares of the Company's
Series C Preferred Stock (Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 57
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.15* Warrant granted to East/West Technology Partners, Ltd. to purchase
13,500 shares of the Company's Series C Preferred Stock (Exhibit 10.3
to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.16* Teaming Agreement dated February 9, 1995 between the Company and Diagascrown,
Inc. (Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.17* Amendment No. 2 to the Patent and Know-How Cross License Agreement dated
January 19, 1995, which is Attachment 1 to the Master Agreement between
Microelectronics and Computer Technology Corporation and the Company
Exhibit 10.8 to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.18* Packaging and Interconnect Technology Patent and Know-How License Agreement
by and between Microelectronics and Computer Technology Corporation and SI
Diamond Technology, Inc. dated April 21, 1995 (Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.19* Rapid Prototyping/Laser Customization Technology Patent and Know-How License
Agreement by and between Microelectronics and Computer Technology Corporation
and SI Diamond Technology, Inc. dated April 21, 1995 (Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30,
1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.20* Lease Agreement between Crow-Gottesman-Hill #6, as Landlord, and Diamond Tech
One, Inc., as Tenant, concerning premises located at 12100-A Technology
Boulevard, Austin, Texas 77827 (Exhibit 10.4 to the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended June 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.21* Form of Lease Agreement between Aetna Life Insurance Company, as Landlord, and
Diamond Tech One, Inc., as Tenant, concerning premises located at 12112
Technology Boulevard, Austin, Texas 77827 (Exhibit 10.5 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.22* Patent and Technology License effective as of February 11, 1993, by and between
Company and the Board of Regents of the University of Texas System (Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.23* Asset Purchase Agreement by and among Microelectronics and Computer Technology
Corporation, SI Diamond Technology, Inc. and Diamond Tech One, Inc. dated April
21, 1995 (Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 1995).
- -------------------------------------------------------------------------------------------------------------------------------
10.24* Amendment No.3 to the Patent and Know-How Cross-License Agreement executed n
October 17, 1995, between the Company and Microelectronics and Computer
Technology Corporation (Exhibit 4.15 to the Company's Registration Statement on
Form S-3 dated January 19, 1996).
- -------------------------------------------------------------------------------------------------------------------------------
10.25* Joint Development Agreement dated May 25, 1995 between the Company and
Supertex, Inc. (Confidential Treatment has been requested for portions of this
Exhibit 10.34).
- -------------------------------------------------------------------------------------------------------------------------------
10.26* Consulting Agreement between the Company and BEG Enterprises, Inc (Exhibit 10.01
to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
March 31, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.27* Contract #01-96/01C between the Company and Microelectronics Systems dated
February 16, 1996 (Exhibit 10.02 to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 58
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.28* Contract no. 27 in 02/96 between the Company and High Technologies
dated February 25, 1996 (Exhibit 10.03 to the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended March 31, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.29* Contract no. 26 in 02/96 between the Company and High Technologies dated
February 25, 1996 (Exhibit 10.04 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.30* Consulting Agreement between the Company and C. Robert Kline dated as of
March 31, 1996 (Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended June 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.31* Amended and Restated 1992 Stock Option Plan of the Company (Exhibit 10.2 to the
Company's Quarterly Report for the fiscal Quarter ended June 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.32* Amended and Restated 1992 Outside Directors' Stock Option Plan (Exhibit 10.3 to
the Company's Quarterly Report for the fiscal quarter ended June 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.33* Form of agreement by and among the Holders of the Company's Series E Preferred
Stock and the Company concerning agreements relating to the Series E Preferred
Stock (Exhibit 10.1 to the Company's Report on Form 8-K dated as of September
25, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.34* Employment Agreement between the Company and Dr. Zvi Yaniv dated as of May 31,
1996 (Exhibit 10.1 to the Company's report on Form 10-QSB for the fiscal quarter
ended September 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.35* Termination of Technology Cooperation Agreement between the Company and Philips
Components B.V. dated as of October 4, 1996 (Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.36* Form of Promissory Note payable by Diamond Tech One, Inc. for $ 250,000 in
connection with the loan of $1,000,000 to Diamond Tech One, Inc. (Exhibit 10.1
to the Company's Report on Form 8-K dated as of October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.37* Form of Guaranty by the Company in Connection with loan of $1,000,000 to Diamond
Tech One, Inc. (Exhibit 10.2 to the Company's Report on Form 8-K dated as of
October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.38* Form of Loan and Security Agreement in connection with loan of $1,000,000 to
Diamond Tech One, Inc. (Exhibit 10.3 to the Company's Report on form 8-K dated
as of October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.39* Promissory Note dated as of October 30, 1996 made payable to Austin National
Bank by Diamond Tech One, Inc. (Exhibit 10.5 to the Company's Report on Form 8-K
dated as of October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.40* Commercial Guaranty by SI Diamond Technology, Inc. of Promissory Note made
payable to Austin National Bank by Diamond Tech One and dated as of October 30,
1996 (Exhibit 10.6 to the Company's Report on Form 8-K dated as of October 30,
1996)
- -------------------------------------------------------------------------------------------------------------------------------
10.41* Commercial Security Agreement dated as of October 30, 1996 by and between Austin
National Bank and Diamond Tech One, Inc. (Exhibit 10.7 to the Company's Report
on Form 8-K dated as of October 30, 1996)
- -------------------------------------------------------------------------------------------------------------------------------
11 Computation of (Loss) per Common Share
- -------------------------------------------------------------------------------------------------------------------------------
21 Subsidiaries of the Company.
- -------------------------------------------------------------------------------------------------------------------------------
24 Powers of Attorney
- -------------------------------------------------------------------------------------------------------------------------------
27 Financial Data Schedule
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 59
<PAGE>
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
Year ended December 31,
-----------------------------
1996 1995
---------- -----------
Computation of (loss) per common share:
Net loss applicable to common stockholders $(15,409,715) $(14,389,856)
Weighted average number of common shares
outstanding 11,864,672 9,479,610
Net Loss per common share $ (1.30) $ (1.52)
Computation of (loss) per common share
assuming full dilution:
No calculation of loss per common share assuming full dilution is submitted
because such computation results in an antidilutive loss per common share.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
DOING BUSINESS
SUBSIDIARY STATE OF INCORPORATION UNDER THE FOLLOWING NAMES
- ---------- ---------------------- -------------------------
<S> <C> <C>
Northlight Displays, Inc. Delaware Northlight Displays, Inc.
Diamond Tech One, Inc. Delaware Diamond Tech One, Inc.
SIDT Coatings, Inc. Delaware SIDT Coatings, Inc.
SDI Acquisition Corp. Texas SDI Acquisition Corp.
Plasmatron Coatings and Pennsylvania Plasmatron Coatings and
Systems, Inc. Systems, Inc.
FEPET, Inc. Delaware FEPET, Inc.
Electronic Billboard Delaware Electronic Billboard
Technology, Inc. Technology, Inc.
</TABLE>
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
_____ day of March, 1997.
/s/ HOWARD K. SCHMIDT
-----------------------------------------
Howard K. Schmidt
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
_____ day of March, 1997.
/s/ LEE B. ARBERG
-----------------------------------------
Lee B. Arberg
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
______ day of March, 1997.
/s/ HOWARD K. SCHMIDT
-----------------------------------------
Howard K. Schmidt
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
______ day of March, 1997.
/s/ DAVID R. SINCOX
-----------------------------------------
David R. Sincox
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
day of March, 1997.
______
/s/ DR. ZVI YANIV
-----------------------------------------
Dr. Zvi Yaniv
<PAGE>
EXHIBIT 24
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), does hereby appoint Marc W. Eller and Douglas P. Baker,
and each of them, severally, his true and lawful attorneys, or attorney, to
execute in his name, place and stead, in his capacity as a Director of said
Company, the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission.
Each of said attorneys shall have the power to act hereunder with or without the
other of said attorneys and shall have full power and authority to do and
perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
_____ day of March, 1997.
/s/ RONALD J. BERMAN
-----------------------------------------
Ronald J. Berman
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 53,516 553,473
<SECURITIES> 0 0
<RECEIVABLES> 949,564 683,614
<ALLOWANCES> 0 0
<INVENTORY> 329,643 55,962
<CURRENT-ASSETS> 2,054,186 11,268,788
<PP&E> 5,326,438 6,059,672
<DEPRECIATION> 2,182,928 1,256,051
<TOTAL-ASSETS> 5,621,259 16,897,705
<CURRENT-LIABILITIES> 4,930,072 4,271,093
<BONDS> 0 0
0 0
746 100
<COMMON> 13,126 10,859
<OTHER-SE> 677,315 12,451,544
<TOTAL-LIABILITY-AND-EQUITY> 5,621,259 16,897,705
<SALES> 5,772,620 3,042,942
<TOTAL-REVENUES> 5,772,620 3,042,942
<CGS> 5,317,186 3,413,623
<TOTAL-COSTS> 18,427,197 17,468,288
<OTHER-EXPENSES> (243,301) (35,490)
<LOSS-PROVISION> 1,200,000 0
<INTEREST-EXPENSE> 97,730 0
<INCOME-PRETAX> (13,709,006) (14,389,856)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,709,006) (14,389,856)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,709,006) (14,389,856)
<EPS-PRIMARY> (1.30) (1.52)
<EPS-DILUTED> (1.30) (1.52)
</TABLE>
