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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, 1997; or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
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 OTC Bulletin Board
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: $ 3,568,164
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/OTC Bulletin Board on March 17, 1998, was approximately $5,930,453.
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 17, 1998, the registrant had 26,873,333 shares of Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one).
Yes No X
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I ....................................................................................................Page 1
Item 1. Business...................................................................................Page 1
Item 2. Properties.................................................................................Page 9
Item 3. Legal Proceedings..........................................................................Page 9
Item 4. Submission of Matters to a Vote of Security Holders........................................Page 9
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 18
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................Page 47
PART III ...................................................................................................Page 48
Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance with Section
16(a) of the Exchange Act.................................................................Page 48
Item 10. Executive Compensation....................................................................Page 49
Item 11. Security Ownership of Certain Beneficial Owners and Management............................Page 55
Item 12. Certain Relationships and Related Transactions............................................Page 58
Item 13. Exhibits and Reports on Form 8-K..........................................................Page 58
</TABLE>
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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.
When used in this document, the words "anticipate", "believe", "expect",
"estimate", "project", and similar expressions are intended to identify
forward-looking statements.
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, 1997, the Company suffered a net loss
of $6,320,901. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996,
the Company suffered net losses of $1,630,978, $7,527,677, $7,255,420,
$14,389,856 and $13,709,006, 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, although it expects the magnitude of
those losses to decrease. There can be no assurance that the Company will be
profitable in the future. Coopers & Lybrand L.L.P., independent auditors of the
Company, expressed substantial doubt as to the ability of the Company to
continue as a going concern based on accumulated losses from operations. See
"Report of Independent Accountants." The Company's operations to date have been
primarily financed by the proceeds from 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 allow it to maintain operations
until the Company is able to sustain itself on its own revenue. However,
existing resources at current spending levels are only available to allow the
Company to survive on a day to day basis. The Company's plan is primarily
dependent on raising funds through strategic partners and debt offerings as well
as raising revenues. The major component of the plan is to seek a strategic
partner to inject significant capital into the Company's Diamond Tech One, Inc.
("DTO") subsidiary. In September 1997, the Company retained an investment banker
to assist in that process and substantive discussions have been held with
several interested parties. It is likely that the result of this process will
require the Company to give up majority control and may result in a complete
sale of the subsidiary. It is anticipated that the proceeds to the Company from
this transaction would allow the Company to stabilize its financial condition by
allowing it to pay down debt and provide cash to fund future operations.
Furthermore, completion of such a transaction would allow the Company to
substantially decrease the cost of its remaining operations by allowing it to
reduce costs in numerous areas including facility, selling, general, and
administrative costs. This reduction in costs would mean that the Company would
require significantly reduced amounts of capital to fund its ongoing operations.
Management believes that it has the ability to raise short term funding, if
necessary, to enable it to continue operations until such a transaction can be
completed.
In addition, the Company is seeking additional strategic partners to
invest in both its Electronic Billboard Technology, Inc. ("EBT"), and Field
Emission Picture Element Technology, Inc. ("FEPET") subsidiaries to allow these
subsidiaries to continue development of commercial products. It is anticipated
that any such strategic partners would receive a minority interest in the
subsidiaries of not more than 20% as a result of their investment. It is
anticipated that the Company would retain a majority interest of at least 80% in
each of these subsidiaries. It is the Company's plan that these investments
would allow each of these subsidiaries to continue to develop their products and
bring them to the level whereby each subsidiary is operating at break-even or
better.
This plan 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 which would cause certain assumptions on which this plan is based to
be no longer valid. The Company's plan is primarily dependent on increasing
revenues and raising additional funds through strategic partners and additional
debt 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.
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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 and related
electronic display products. 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 and semiconductor 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.
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. 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.
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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 management team 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 and related electronic display products will be
successfully developed or that such products will be commercially successful.
The Company intends to establish and develop a sales organization to promote,
market, and sell its products. This will require significant additional
expenditures, management resources and training time. There can be no assurance
that the Company will be able to establish such a sales organization.
UNPROVEN TECHNOLOGY; NEED FOR SYSTEM INTEGRATION
In order to prove that the Company's technologies work and will produce
a complete product, the Company must ordinarily integrate a number of highly
technical and complicated subsystems into a fully-integrated prototype. There
can be no assurance that the Company will be able to successfully complete the
development work on any of its proposed products or ultimately develop any
marketable products.
DEPENDENCE UPON GOVERNMENT CONTRACTS
A significant 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, 1996, and 1997, such contracts accounted
for approximately $930,000, $1,147,000, $820,000, $1,009,000, $2,869,000, and
$854,000, respectively, or approximately 99%, 89%, 41%, 33%, 50%, and 24% 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. The Company currently has no significant
commitment for any government funding beyond December 31, 1997 and intends to
seek only government funding that directly relates to projects associated with
achievement of its strategic objectives. To the extent that the Company is
unable to obtain funding from alternate sources, this will adversely affect the
Company's ability to continue to perform research and development on its
existing and proposed products.
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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.
AVAILABILITY OF MATERIALS AND DEPENDENCE ON SUPPLIERS
It is anticipated that materials to be used by the Company in producing
its future products will be purchased by the Company from outside vendors and,
in certain circumstances, the Company may be required to bear the risk of
material price fluctuations. It is anticipated by the Company's management that
the majority of raw materials to be used in products to be manufactured by the
Company will be readily available. However, there can be no assurance that such
materials will be available in the future, or if available, will be procurable
at prices which will be favorable to the Company.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company will depend in large part on its
ability to attract and retain highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to attract and retain all personnel
necessary for the development of its business. In addition, much of the know-how
and processes developed by the Company reside in its key scientific and
technical personnel and such know-how and processes are not readily transferable
to other scientific and technical personnel. The loss of the services of key
scientific, technical and managerial personnel could have a material adverse
effect on the Company.
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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 and is currently engaged in the development of
products based on Diamond Field Emission ("DFE") technology and the development
of an electronic billboard and related electronic display products based on
existing technology. Electronic billboards and related electronic display
products would provide a market for the Company's Diamond Field Emission Lamp
("DFEL") product when completed. Management believes that the Company's greatest
growth opportunity lies in DFE products and the development of an electronic
billboard and related electronic display products. 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 Research and Development. 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 and related electronic display products; the
development and commercialization of DFE products; 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, thin film based DFE products, and electronic
billboards and related electronic display products.
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. EBT is
engaged in the development of an electronic billboard and related electronic
display products such as outdoor display devices for use in the fast food or
other industries. FEPET is conducting research and developing the DFEL.
Plasmatron, 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. This agreement was further amended in 1997 whereby MCC
directly assigned 62 patents specifically related to the Company's DFE
technology to the Company. 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. All work related to this teaming agreement was suspended in
1996.
The DFE related products will require significant additional
development, engineering, testing and investment prior to commercialization.
There can be no assurance that the DFE products will be successfully developed,
produced in commercial quantities on a cost-effective basis or
successfully-marketed. The electronic billboard and related electronic display
products, while much further along than the DFE products, will also require
additional development, engineering, testing and investment prior to
commercialization. There can be no assurance that the electronic display
products will be successfully produced in commercial quantities on a
cost-effective basis or successfully-marketed.
During 1997 and 1996, the Company incurred $605,105 and $6,185,943,
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 constructing a
prototype under a contract with a leading billboard company. EBT would also
provide a market for the Company's DFEL, if successfully developed.
In connection with its development work on the electronic billboard,
EBT also developed a smaller version for use in the fast food industry. These
units, primarily in 10.4" to 17" size, are readable outdoors in direct sunlight
and intended for use in the drive through process. The Company has signed a
contract with a distributor to the fast food industry and supplied units to be
installed on a test basis at three locations of a major fast food customer of
the distributor. The results of these preliminary tests have been favorable and
the distributor's customers have ordered an additional 60 units for testing. EBT
will receive a royalty on all units sold by the distributor and the distributor
has agreed to purchase 1,500 units during the next twelve months or forfeit its
exclusive rights to this product for the fast food industry.
The Company is currently in the process of seeking a strategic partner
to aid in the development, funding, commercialization, and marketing of the
electronic billboard and related electronic display products.
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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 and other
related electronic products.
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.
During 1997, DTO successfully completed its transition from primarily a
research facility to a facility engaged in ongoing repetitive manufacturing. DTO
achieved ISO 9001 certification during 1997 and customer demand now far exceeds
available capacity. Future growth at DTO is dependent upon new capital
investment in the form of facility upgrades and additional equipment. In order
to achieve this, the Company is seeking a strategic partner to inject the
necessary capital to enable DTO to capitalize on the significant growth
prospects currently available. It is likely that any such strategic partnership
will result in the Company giving up majority control of DTO and may result in
an outright sale of DTO.
PLASMATRON COATINGS AND SYSTEMS, INC. Plasmatron manufactured and sold
high vacuum process systems for coatings used in the microelectronics industry.
Plasmatron's products were typically custom designed, fabricated in-house and
then installed at the customer's facility. During 1997, the Company made the
decision to dispose of its Plasmatron subsidiary. At the time, Plasmatron was
marginally profitable and was providing slightly positive cash flow to the
Company, however its near term outlook was one of negative cash flow. The remote
location and nature of the business required an inordinately high amount of
management attention relative to more promising areas of the business. Given the
size of the Company and the litigation described in Item 3, no purchaser for the
business as an ongoing entity could be found and the Company was liquidated in
an orderly manner.
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.
Page 3
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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 Small Business Innovation Research ("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 1998 although the Company has spent virtually all funds available
under this grant as of December 31, 1997.
As of December 31, 1997, the Company has virtually no backlog of
existing research contracts and is not currently in the process of seeking any
additional contracts. In the future, the Company only intends to seek funding
for research that is specifically related to the strategic objectives that the
Company is pursuing. All ongoing research and development activities are
currently performed by one of the Company's subsidiaries.
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 completion of its first billboard at a
test site in connection with its existing contract with a leading billboard
company, 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 6 months
of installing its test sign under its existing contract and obtaining a
strategic partner to fund ongoing development and commercialization. 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 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.
OTHER ELECTRONIC DISPLAY PRODUCTS. The primary product in this category
is the outdoor display developed for use in the fast food industry. This product
is in the final stages of testing and is expected to begin generating ongoing
royalties within the next three months. The Company is currently evaluating this
product for use in other markets and has hired a marketing manager to develop
these opportunities.
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. In 1997,
DTO completed its transition to ongoing repetitive manufacturing. It achieved
ISO 9001 certification during the year and customer demand now far exceeds
available capacity. The Company is currently seeking a strategic partner to
enable DTO to capitalize on the significant growth opportunities available to
it.
COATING SYSTEMS. The Company shut down Plasmatron during 1997 and is no
longer involved in the manufacture or sale of coating systems.
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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 1998, however the Company has spent virtually
all funds available to it under the contract as of December 31, 1997. The
Company has no other government contract revenues available to it at the present
time.
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 Light
Emitting Devices ("LED") 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 Displays (`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.
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 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 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. Liquid Crystal Displays ("LCD") 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 field
emission display 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. The Company is not actively seeking research contracts at the present
time and does not anticipate doing so in the near future unless a contract is
available specifically relating to areas of research that the Company is already
pursuing as a result of its strategic objectives.
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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. The agreement was further amended in 1997 to
directly transfer 62 patents to the Company. MCC also has the right to bring
bonafide sublicensing candidates to the Company. Additionally, the Company will
owe MCC a royalty equal to 2% of sales of DFED-related products to third
parties. The Company can offset one half of the costs of maintaining these
patents against any royalty payments due under the agreement.
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 also has the right to offset the costs of maintaining these patents
against the minimum royalties due. As of December 31, 1997, the Company has paid
$145,000 in royalties and costs of maintaining the patents and accrued $355,000
as additional amounts due under the minimum royalty agreement. MCC and the
Company have agreed to renegotiate the terms of this agreement, including
deferral of the payment due. No new agreement has been reached at this time.
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, 1997. Further spending in Russia has been halted
since 1996, 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.
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.
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The Company owns twenty eight issued patents, three allowed patents,
and has forty nine patent applications pending in the United States. The Company
also has 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.
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 patents 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 be 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 be 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.
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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.
A 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 17, 1998, the Company had 58 full-time employees, including
three 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.
EXECUTIVE OFFICERS
The names of executive officers of the Company and certain information
with respect to each of them are set forth below.
<TABLE>
<CAPTION>
Name Age Position
----------------------------------------------------------------------------
<S> <C> <C>
Marc W. Eller 42 Chairman and Chief Executive Officer
Zvi Yaniv 49 President and Chief Operating Officer
Douglas P. Baker 41 Vice President and Chief Financial Officer
Trey Fecteau 45 Senior Vice President and Secretary
----------------------------------------------------------------------------
</TABLE>
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.
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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. since 1991. 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. Mr. Fecteau
resigned from the Company effective January 16, 1998.
ITEM 2. PROPERTIES
The Company currently occupies a portion of the space leased by its DTO
subsidiary in a facility in Austin, Texas. DTO leases a 28,000 square foot
fabrication and clean room facility in Austin for a monthly rental of
approximately $25,000. (See Note 11 to the Consolidated Financial Statements).
The Company believes that this facility 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 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. At
this time the outcome can not be predicted with any certainty and the potential
liability, if any, is unknown. The Company believes it has meritorious defenses
and intend to continue to vigorously defend this action.
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 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.001 par value was traded on the Boston
and Pacific Stock Exchanges under the symbol "SDI", and was also traded via the
National Association of Securities Dealers Automated Quotation (NASDAQ) system
in the Small Cap Market under the symbol "SIDT". The Company was delisted by
both exchanges and the NASDAQ Small Cap Market in 1998 for failure to comply
with continued listing requirements. The Company's common stock now trades via
the NASDAQ OTC Bulletin Board. 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>
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................................................. $2.38 $1.00
Second Quarter................................................ $1.12 $0.47
Third Quarter................................................. $0.50 $0.34
Fourth Quarter................................................ $0.72 $0.28
1998
First Quarter (through March 17, 1998)........................ $0.50 $0.14
</TABLE>
On March 17, 1998, the closing sale price for the common stock as
reported on the NASDAQ system was $0.23. As of March 17, 1998, there were
approximately 301 record holders of common stock.
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, it is unlikely that any dividends
on the common stock will be paid in the foreseeable future.
Information required in this Item 5 of the Company's Annual Report on
Form 10-KSB concerning information as to all equity securities issued by the
Company during fiscal year 1997 that were not registered under the Securities
Act of 1933 is contained in Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition, and in Note
7 to the Notes to the Consolidated Financial Statements contained in this Annual
Report on Form 10-KSB.
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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, 1997 and 1996. The Notes to the Consolidated Financial Statements
of the Company included elsewhere herein contain detailed information that
should be referred to in conjunction with this discussion.
OVERVIEW
Throughout 1997 and 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 and the manufacture and assembly of high
density electronics at 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
1997 and 1996 for the development of its DFE technology. Overall R&D
expenditures declined in both 1997 and 1996 as the Company focused its research
on those areas with the highest probability of yielding commercially viable
products in the near future. This research was concentrated in the Company's
FEPET and EBT subsidiaries. Company sponsored research and development expenses
in these areas should continue (See Note 1 to the Consolidated Financial
Statements). During 1997, the Company made the decision to dispose of its
Plasmatron subsidiary and liquidated the subsidiary in an orderly manner. In
1997, DTO completed its transition from primarily a research oriented facility
to an ongoing repetitive manufacturing facility.
RESULTS OF OPERATIONS
1997 Compared to 1996. The Company earned $3,568,164 in revenues during
1997, as compared with $5,772,620 during 1996. Commercial sales were $2,714,086
for 1997 compared to $2,903,835 for 1996. The majority of the Company's
commercial revenues were from the manufacture and assembly of high density
electronic products by DTO and from the production of equipment under contracts
through the Company's subsidiary, Plasmatron. DTO's revenues are recognized when
the product is shipped or services completed and totaled approximately
$1,390,000 and $1,488,000 in 1997 and 1996, respectively. DTO's commercial
backlog was approximately $344,000 and $360,000 at December 31, 1997 and 1996,
respectively. Plasmatron was shut down during 1997. When it was in operation,
its revenues were being recognized on a percentage of completion basis and
totaled approximately $850,000 and $1,400,000 in 1997 and 1996, respectively.
Plasmatron had no commercial backlog at December 31, 1997 and a backlog of
approximately $289,000 at December 31, 1996. The Company's FEPET subsidiary
generated approximately $416,000 in commercial revenue in 1997, primarily as the
result of revenue related to future licensing granted in connection with a joint
venture agreement. The Company's EBT subsidiary had commercial revenues of
approximately $58,000 in 1997 as the result of the sale of certain developmental
products. Neither EBT or FEPET had any commercial backlog at December 31, 1997.
Contract research revenues for 1997 were $854,078 compared to $2,868,785 for
1996. At December 31, 1996, the Company had no research backlog of anticipated
future revenues from existing contracts, as compared with a backlog of
$1,050,000 at December 31, 1996. The reduced backlog amount resulted from
spending in 1997 under the $3,500,000 National Institute of Science and
Technology ("NIST") contract. The reduced contract research revenue resulted
from the completion of all other grants except for the NIST grant in 1996, thus
eliminating those grants as a revenue source. In addition, the Company's revenue
under the NIST grant declined in 1997 as the Company spent the remaining amount
available to it during the year. The Company has not applied for any additional
research grants, and expects contract research revenues to decline further in
1998 as the focus shifts to commercialization of the Company's products. The
Company may seek additional research grants in 1998 if such grants are directly
related to projects that the Company is already working on in conjunction with
its strategic objectives.
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For 1997, the Company's costs of sales were $4,388,747, resulting in a
negative margin of 23% as compared with $5,317,186 and a positive margin of 8%
during 1996. This decrease in margin resulted primarily from the decrease in
revenues in 1997. Given the relatively high level of fixed costs associated with
the operation of the Company's subsidiaries, the Company was not able to reduce
the fixed costs included in its cost of sales in conjunction with the lower
revenues. The Company's DTO subsidiary operated significantly below the capacity
of its facility for the majority of the year. In addition, margins were
negatively impacted at DTO by its transition to a repetitive manufacturer.
Variable margins associated with this type of business are lower than variable
margins associated with R&D work. The Company was not able to generate
sufficient additional volume during the year to offset these lower margins.
DTO's activity level in terms of volumes of wafers process increased
substantially during the year and there were costs associated with this increase
including increased levels of employment, training costs, and other costs
associated with this increase in volume. The Company expects DTO's margins to
increase significantly in 1998, and given adequate capital, expects DTO to be
operating at break-even by the third quarter of 1998. The margins at Plasmatron
also decreased from 1996 to 1997, primarily as a result of the increased costs
associated with completing the remaining contracts after the shut-down was
announced. Another factor contributing to the overall low margins at the Company
as a whole is the significant amount of revenue derived by the Company from
government contracts which generally have little or no margin.
The Company's selling, general and administrative expenses decreased
from $6,924,068 in 1996 to $3,790,072 in 1997. This decrease is primarily the
result of the Company's May 1996 reorganization which resulted in a significant
reduction of personnel, fixed costs, and other general and administrative
expenses. In addition 1996 had 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 selling, general, and administrative costs to be
further reduced in 1998. Company sponsored research and development expenses
declined in 1997 to $605,105 from $6,185,943 in 1996. The decrease is a result
of the Company's curtailment of research expenditures that were unrelated to the
Company's primary business strategies and reduced spending under the Company's
NIST grant as the activity became more focused. The Company expects to incur
substantial expenses in support of additional research and development
activities related to the commercial development of its DFE and electronic
display technologies. The Company has not applied for additional government
grants at the present time and will not do so unless those grants are
specifically related to activities the Company is already pursuing as a result
of its strategic objectives. The Company is seeking strategic partners to help
fund its continued research. If such partners are found, it is anticipated that
research spending will increase in 1998. If such partners are not found, the
Company may have to further curtail its reasearch.
In 1997, the Company recorded a loss on impairment of assets of
$480,164 as a result of its decision to liquidate Plasmatron. This loss was the
result of writing off certain inventory and the costs in excess of the fair
value of assets acquired related to the original acquisition of Plasmatron. The
loss on impairment of assets in 1996 resulted from a reduction in the carrying
value of certain equipment and intangible assets of DTO. The loss on disposal of
assets of $517,144 and $350,000 in 1997 and 1996, respectively, resulted
primarily from the sale of excess equipment. The 1997 loss on disposal of assets
also includes a loss of $110,845 as a result of the abandonment of certain
leasehold improvements when the Company combined its operations in Austin, Texas
into one facility.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
Management believes that the implementation of these standards will not
have a material impact on the Company's financial condition or results of
operations.
Page 12
<PAGE> 20
FINANCIAL CONDITION
At December 31, 1997, the Company had cash and cash equivalents in the
amount of $1,000 as compared with cash and cash equivalents of $53,516 at
December 31, 1996. This decrease in cash is primarily a result of the
significant operating losses incurred by the Company, offset by substantial
equity funding. Throughout 1996 and 1997, the Company has continued to raise
additional funds through equity and debt funding. Based on the developmental
stages of the Company's technology, additional financing will be necessary in
the future. If all of the Company's warrants outstanding as of December 31,
1997, were exercised, the Company would collect proceeds in excess of
$12,000,000. (See Note 9 to the Consolidated Financial Statements.) Proceeds
from the exercise of warrants totaling $100,000 were received in 1997, however,
given the current price of the Company's common stock, it is unlikely that any
warrants will be exercised in the near future.
In December 1995, the Company closed an exempt offering under
Regulation D of the Securities Act of 1933. 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 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 offering. The warrants are
exerciseable for three years from the date of issuance at a price of $6.30 per
share of common stock.
In December 1995, through an exempt offering under Regulation D of the
Securities Act of 1933, the Company received subscriptions for 1,040 shares of
its Series E convertible preferred stock . As of December 31, 1995,
approximately $9,568,000 was recorded as stock subscriptions receivable from
issuance of the Series E preferred stock. 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 stock 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 to the Consolidated Financial Statements. The Series E preferred stock 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 was originally convertible into that number of
shares of common stock determined by dividing (i) the original issue price of
the Series E preferred stock plus an accretion 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 $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.
On September 27, 1996, the Company revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series E
preferred stock 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 stock 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 stock 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 averaged $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 Series E preferred shares.
Page 13
<PAGE> 21
On May 1, 1997, the Company further revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series E
preferred stock shareholders. In exchange for a further limitation on
conversions, the Company agreed to lower the upper limit on the conversion price
of $1.50 on the remaining Series E preferred shares. The Series E preferred
stock shareholders agreed to limit their conversions as follows: 12% of the
shares held at April 14, 1997 could be converted at any time. For any calendar
month, beginning with May 1997, in which the average closing bid price of the
Company's common stock was less than $1.00, an additional 7% of the position
held at April 14, 1997 could be converted at that average bid price. The Company
also had the right to redeem each monthly 7% block for cash at its option with
the redemption price equal to the original issue price plus accretion. The
Series E preferred stock shareholders have the right to convert all of their
shares at any time without limit at a conversion price of $1.50 per share.
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 were exercised in 1997. The notes are collateralized by the
assets of DTO and guaranteed by the Company.
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 issue two Debentures, each with a face amount of $555,555.
On March 7, 1997 the Company received gross proceeds of $555,555, less expenses
and discount of $55,755, for the issuance of the first debenture. The second
debenture was to be issued within 60 days of issuance of the first debenture;
however, the lender defaulted on its obligation to fund the second debenture. As
a result of this default, the Company and the lender have renegotiated the terms
of the first debenture to place restrictions on the lender's ability to convert
the debenture to common stock. The entire unpaid principal and accumulated
interest on the Debenture shall be due and payable on the second anniversary of
the date on which the Debenture was issued. The Debenture is convertible into
common stock as described below.
At the option of the lender and at any time until April 20, 1998, up to
$83,334 of the outstanding principal (including accrued interest at the option
of the Company) could be converted into shares of the Company's common stock at
a price equal to 75% of the average of the closing bid price of the Company's
stock for the 10 trading days preceding the notice of conversion. The lender
converted this amount of principal into 196,439 shares of the Company's common
stock in December, 1997. The lender also has the option at any time until April
20, 1998 to convert an additional $83,334 of the outstanding principal
(including accrued interest at the option of the Company) into shares of the
Company's common stock at a price equal to the average closing bid price of the
Company's common stock for the calendar month preceding the date of conversion.
After April 20, 1998 the lender can convert any or all of the remaining
outstanding principal (including accrued interest at the option of the Company)
into shares of the Company's common stock at a price equal to the average
closing bid price of the Company's common stock for the calendar month preceding
the date of conversion. In addition, the lender may convert any or all of the
outstanding principal at any time at a conversion rate of $1.50 per share of the
Company's common stock.
In March 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 for 1,700 shares of its Series F convertible
preferred stock. 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 stock is convertible into that number
of shares of common stock determined by dividing (i) the original issue price of
the Series F preferred stock 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 stock bears no dividends and holders of the Series
F preferred stock have no voting power except in certain circumstances pursuant
to Texas state law.
On August 4, 1997, the Company revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series F
preferred stock shareholders. Under the terms of this agreement, the Series F
preferred stock shareholders were allowed to convert 25% of the number of Series
F preferred shares held as of July 14, 1997 under the terms described in the
preceding paragraph. For any calendar month, beginning with July 1997, in which
the average closing bid price of the Company's common stock was less than $1.00,
an additional 7% of the position held at July 14, 1997 could be converted at
that average bid price. The Company also had the right to
Page 14
<PAGE> 22
redeem each monthly 7% block for cash at its option. The cash redemption price
is equal to 115% of the original issue price plus accretion. The Series F
preferred stock shareholders have the right to convert all of their shares at
any time without limit at a conversion price of $1.50 per share.
The agreement also contained a provision that obligated the Company to
renegotiate this agreement if the Company's stock price did not exceed $1.50 per
share by October 12, 1997. The share price did not exceed the specified level by
that date and as a result, the Company and the Series F preferred stock
shareholders reached a new agreement in March 1998 whereby the Series F
preferred stock shareholders are allowed to convert one-sixth of the number of
Series F preferred shares held as of March 17, 1998 in each of the months from
March 1998 through August 1998. The conversion price for each month shall be the
average closing bid price of the Company's common stock for the preceding month,
except that the conversion price for March 1998 shall be $0.15. The Company has
the right to redeem the preferred shares for 107.5% of the original purchase
price.
From June 1997 through August 1997, through an exempt offering under
Regulation D of the Securities Act of 1933, the Company issued 1,700 shares of
its Series G convertible preferred stock. The Series G preferred stock has a par
value of $1 and a stated value of $1,000. The offering provided gross proceeds
of $1,700,000 to the Company. There were no material expenses associated with
this offering. Each share has a liquidation preference of $1,000 plus 10% per
annum from the date of issuance. Each share of Series G preferred is convertible
into that number of shares of common stock determined by dividing (i) the
original issue price of the Series G preferred stock (the "Issue Price") plus an
accretion amount equal to 10 % of the issue price per annum from the issued date
of the Series G preferred stock until the conversion date by (ii) the conversion
price. The conversion price is fixed at a rate of $1.00 per share. The Series G
preferred stock bears no dividends and holders of the Series G preferred stock
are entitled to vote on all matters submitted to a vote of the stockholders on
an "as if converted" basis.
In connection with the issuance of the Series G preferred shares, each
Series G preferred stock shareholder also received warrants to purchase the
Company's common stock. The number of warrants received by each shareholder was
equal to 50% of the dollar value of Series G preferred stock received. A total
of 850,000 warrants were issued in connection with this transaction. These
warrants allow the holder to purchase shares of the Company's common stock at a
price of $1.00 per share for a period of 10 years. The registration statement
covering shares of common stock into which the Series G preferred stock is
convertible and the common stock issuable upon exercise of the warrants was
filed on November 20, 1997, but has not yet been declared effective. No shares
of the Series G preferred stock were converted in 1997.
In October 1997, the Company closed an exempt offering under Regulation
D of the Securities act of 1933. Under the terms of the offering, the investors
committed to purchase $3.5 million dollars of the Company's common stock in
seven installments of $500,000 each. The first installment was payable at
closing and the next six installments were due on the first business day of each
month from November 1997 through April 1998. The purchase price for the shares
was 65% of the average closing bid price of the Company's common stock for the
five trading days immediately preceding the due date of the installment. In
addition, the subscription agreement stipulated that the investors were to
receive one warrant for each share of the Company's common stock purchased.
These warrants were exerciseable for a period of five years at an exercise price
equal to 115% of the average closing bid price of the Company's common stock for
the five trading days immediately preceding the issuance date of the warrants,
with the warrants to be issued on the same date as the previously described
installment due dates.
The Company received cash proceeds of $1,000,000 in 1997 and issued
2,829,334 shares of its common stock in connection with the installments due
under the October 1997 Offering in October and November. The Company also issued
1,118,868 shares of its common stock in connection with the installment due
December 1, 1997, however payment was not received for those shares. The Company
also issued 2,829,334 warrants at a price of $0.625 and 1,118,868 warrants at a
price of $0.791. In January 1998, the Company and the investors agreed to
terminate the subscription agreement. As a result of this agreement, the
investors agreed to return 318,868 of the shares received in December, pay cash
of $250,000, and return all warrants received under the agreement. After
termination of the subscription agreement in January 1998, the Company had
received a total of approximately $1,250,000 in proceeds. There were no material
expenses associated with this offering.
In 1997 the Company issued 340,717 shares of the Company's common stock
to MCC to pay the remaining balance due on the services agreement entered into
in the April 1995 amendment to the MCC agreement described in Note 11 to the
Consolidated Financial Statements. The remaining principal and interest due
under the agreement at the time of issuance of the shares was $201,810. In
addition, the Company issued 239,275 shares of the Company's
Page 15
<PAGE> 23
common stock in 1997 to various trade creditors as payment for amounts due
totaling $235,644.
During 1997, the Company issued 30,000 shares of the Company's common
stock to an advisor as payment for services rendered. Based on the market value
of the stock at the time of issuance, $39,375 was charged to expense in
connection with this transaction.
In December 1997, the Company issued notes payable to shareholders of
the Company in the amount of $485,000. These notes are six month notes bearing
interest at a rate of 15% and secured by the assets of DTO. These notes are also
convertible into the Company's common stock at the option of the lender. If the
lender elects to accept payment in common stock, the conversion price of the
Company's common stock for determining the number of shares to be issued shall
be equal to 75% of the average closing bid price of the Company's common stock
for the five trading days preceding the date of notification. $185,000 of these
notes are payable to the Company's Chief Executive Officer.
Net cash used by operating activities was $4,249,556 for 1997 compared
to $11,883,368 for 1996. The decrease in the requirement for cash was primarily
the result of the substantially reduced net loss from 1997 to 1996.
Cash provided by investing activities for 1997 was $220,845 as compared
to $60,980 for 1996. The cash provided by investing activities in 1997 was the
result of proceeds from the sale of excess equipment offset by minor capital
expenditures. While the proceeds from the sale of excess equipment were larger
in 1996, these proceeds were offset by larger amounts of capital expenditures.
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, 1997 for future purchases of capital
assets.
A substantial portion of the Company's past research and development
has been funded through U.S. Government agency sponsorship. As of December 31,
1997, virtually all grants available to the Company have been exhausted. As a
result, the Company is searching for strategic partners to enable it to continue
its research. If the Company is unable to find a strategic partner, it will be
forced to further curtail its research and development expenditures. 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 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.
Coopers & Lybrand L.L.P., independent auditors of the Company, expressed
substantial doubt as to the ability of the Company to continue as a going
concern based on accumulated losses from operations. See "Report of Independent
Accountants."
OUTLOOK
It is anticipated that losses will continue throughout 1998 as the
Company continues to fund the development of its DFE technology and its
electronic billboard and related electronic display products. Increased
commercial revenues are anticipated in the Company's DTO subsidiary; however,
they will not be sufficient to offset the planned research and development
efforts and selling, general and administrative expenses. Significant sales from
the DFE products are not anticipated in 1998. The Company expects revenue from
its electronic billboard in the fourth quarter of 1998 and revenues from other
display products in the second quarter of 1998. Full commercial development of
the Company's DFE technology and electronic billboard and related electronic
display will require additional funds that may not be available at terms
acceptable to the Company.
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<PAGE> 24
The Company has developed a plan to allow it to maintain operations
until the Company is able to sustain itself on its own revenue. However,
existing resources at current spending levels are only available to allow the
Company to survive on a day to day basis. The Company's plan is primarily
dependent on raising funds through strategic partners and debt offerings as well
as raising revenues. The major component of the plan is to seek a strategic
partner to inject significant capital into the Company's DTO subsidiary. In
September 1997, the Company retained an investment banker to assist in that
process and substantive discussions have been held with several interested
parties. It is likely that the result of this process will require the Company
to give up majority control and may result in a complete sale of the subsidiary.
It is anticipated that the proceeds to the Company from this transaction would
allow the Company to stabilize its financial condition by allowing it to pay
down debt and provide cash to fund future operations. Furthermore, completion of
such a transaction would allow the Company to substantially decrease the cost of
its remaining operations by allowing it to reduce costs in numerous areas
including facility, selling, general, and administrative costs. This reduction
in costs would mean that the Company would require significantly reduced amounts
of capital to fund its ongoing operations. Management believes that it has the
ability to raise short term funding, if necessary, to enable it to continue
operations until such a transaction can be completed.
In addition, the Company is seeking additional strategic partners to
invest in both its Electronic Billboard Technology, Inc. ("EBT"), and Field
Emission Picture Element Technology, Inc. ("FEPET") subsidiaries to allow these
subsidiaries to continue development of commercial products. It is anticipated
that any such strategic partners would receive a minority interest in the
subsidiaries of not more than 20% as a result of their investment. It is
anticipated that the Company would retain a majority interest of at least 80% in
each of these subsidiaries. It is the Company's plan that these investments
would allow each of these subsidiaries to continue to develop their products and
bring them to the level whereby each subsidiary is operating at break-even or
better.
This plan 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 which would cause certain assumptions on which this plan is based to
be no longer valid. The Company's plan is primarily dependent on increasing
revenues and raising additional funds through strategic partners and additional
debt 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.
The Company has determined that the year 2000 issue will have an
immaterial effect on the Company. The year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including , among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. All of this
software is prepackaged software that was purchased from outside vendors. These
vendors all have upgrades available which correct the Year 2000 issue. It is the
Company's plan to purchase the upgraded software, where required, prior to
December 31, 1998 to insure adequate time for implementation. The cost of these
upgrades will be negligible and is not expected to have a material effect on the
operations of the Company. If such upgrades were not installed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company has determined that it is not vulnerable to a third party's
failure to remediate its own Year 2000 Issues at either significant suppliers or
large customers. The Company has also determined that it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
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.
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ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF SI DIAMOND TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Report of Independent Accountants............................................................ 19
Consolidated Balance Sheets - December 31, 1997 and 1996..................................... 20
Consolidated Statements of Operations - Years Ended December 31, 1997 and 1996............... 21
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31,
1997 and 1996........................................................................... 22
Consolidated Statements of Cash Flows - Years Ended December 31, 1997 and 1996............... 24
Notes to Consolidated Financial Statements................................................... 25
</TABLE>
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<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of SI Diamond Technology, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of SI Diamond
Technology, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended. 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, 1997 and 1996, 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 primarily 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 3, 1998, the Company has not yet
achieved profitability, has a working capital deficit and must obtain additional
financing 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 3, 1998
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<PAGE> 27
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 1,000 $ 16,290
Restricted cash ............................................................ -- 37,226
Accounts receivable, trade ................................................. 448,042 934,564
Receivable from shareholders ............................................... 250,000 --
Notes receivable ........................................................... -- 15,000
Inventories ................................................................ -- 329,643
Costs and estimated earnings in excess of billings
on uncompleted contracts ................................................. -- 584,770
Prepaid expenses and other current assets .................................. 80,128 136,693
------------ ------------
Total current assets ................................................. 779,170 2,054,186
Property, plant and equipment, net .............................................. 1,841,419 3,143,510
Intangible assets, net .......................................................... 15,000 423,563
------------ ------------
Total assets ......................................................... $ 2,635,589 $ 5,621,259
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft ............................................................. $ 156,686 $ --
Accounts payable ........................................................... 1,272,958 2,647,487
Bank line of credit ........................................................ -- 30,000
Notes payable .............................................................. 550,000 961,222
Capital lease obligations .................................................. -- 71,061
Accrued liabilities ........................................................ 892,553 1,210,427
Billings in excess of costs and estimated earnings
on uncompleted contracts ................................................. 6,000 9,875
------------ ------------
Total current liabilities ............................................ 2,878,197 4,930,072
------------ ------------
Notes payable, long-term ........................................................ 437,593 --
------------ ------------
Commitments and contingencies Shareholders' equity (deficit):
Preferred stock, $1.00 par value, 2,000,000 shares authorized;
3,077 and 746 shares issued and outstanding, respectively ................ 3,077 746
Common stock, 120,000,000 shares authorized, $.001 par value,
24,238,893 and 13,126,083 shares issued and outstanding, respectively .... 24,239 13,126
Additional paid-in capital ................................................. 50,386,816 45,412,283
Accumulated deficit ............................................................. (51,094,333) (44,705,442)
Unearned compensation ........................................................... -- (29,526)
------------ ------------
Total shareholders' equity (deficit) ................................. (680,201) 691,187
------------ ------------
Total liabilities and shareholders' equity (deficit) ................. $ 2,635,589 $ 5,621,259
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 20
<PAGE> 28
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues ............................................... $ 3,568,164 $ 5,772,620
Cost of sales .......................................... 4,388,747 5,317,186
Selling, general and administrative expenses ........... 3,790,072 6,924,068
Research and development ............................... 605,105 6,185,943
Loss on impairment of assets ........................... 480,164 850,000
------------ ------------
Operating costs and expenses .................. 9,264,088 19,277,197
------------ ------------
Loss from operations ................. (5,695,924) (13,504,577)
------------ ------------
Other income (expense):
Loss on disposal of assets .................... (517,144) (350,000)
Other income (expense), net ................... (107,833) 145,571
------------ ------------
Net loss ............................. $ (6,320,901) $(13,709,006)
============ ============
Less preferred stock dividend .......................... (714,064) (1,700,709)
------------ ------------
Net loss applicable to common shareholders ............. $ (7,034,965) $(15,409,715)
============ ============
Basic and diluted net loss per common share ... $ (0.41) $ (1.30)
============ ============
Average common shares outstanding ...................... 17,018,775 11,864,672
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 21
<PAGE> 29
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED
STOCK
PREFERRED COMMON ADDITIONAL SUBSCRIBED
--------------- ------------------ PAID-IN BUT ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL UNISSUED DEFICIT COMPENSATION TOTAL
------ ------ ---------- ------- ----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 746 $ 746 13,126,083 $13,126 $45,412,283 $ -- $(44,705,442) $ (29,526) $ 691,187
Warrants exercised -- -- 100,000 100 99,900 -- -- 100,000
Issuance of Series F preferred
stock for cash 1,700 1,700 -- -- 1,525,800 -- -- -- 1,527,500
Conversion of Series E and F
preferred stock into
common stock (873) (873) 6,258,177 6,258 (5,385) -- -- -- --
Conversion of Reg. S debenture
into common shares -- -- 196,439 197 83,137 -- -- -- 83,334
Redemption of Series E and F
preferred stock for cash (196) (196) -- -- (483,804) -- (67,990) -- (551,990)
Issuance of common stock
and warrants in connection
with debt and services -- -- 30,000 30 294,595 -- -- -- 294,625
Issuance of common stock
in exchange for release of
debt -- -- 579,992 580 436,874 -- -- -- 437,454
Issuance of Series G preferred
stock for cash 1,700 1,700 -- -- 1,698,300 -- -- -- 1,700,000
Recognition of unearned
compensation -- -- -- -- (20,896) -- -- 29,526 8,630
Issuance of subsidiary
preferred stock for cash -- -- -- -- 100,000 -- -- -- 100,000
Issuance of common stock
for cash -- -- 3,948,202 3,948 1,246,012 -- -- -- 1,249,960
Net Loss -- -- -- -- -- -- (6,320,901) -- (6,320,901)
------ ------ ---------- ------- ----------- ---- ------------ --------- ----------
Balance, December 31, 1997 3,077 $3,077 24,238,893 $24,239 $50,386,816 $ -- $(51,094,333) $ -- $ (680,201)
====== ====== ========== ======= =========== ==== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 22
<PAGE> 30
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED
STOCK
PREFERRED COMMON ADDITIONAL SUBSCRIBED
--------------- ------------------ PAID-IN BUT ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL UNISSUED DEFICIT COMPENSATION TOTAL
------ ------ ---------- ------- ----------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 100 $ 100 10,858,889 $10,859 $34,681,872 $8,905,072 $(30,991,571) $(143,829) $12,462,503
Stock options exercised -- -- 27,600 28 16,368 -- -- -- 16,396
Issuance of Series E
preferred stock for cash 1,190 1,190 -- -- 10,316,532 (8,905,072) -- -- 1,412,650
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) -- (4,865) -- (24,867)
Issuance of warrants in
connection with debt -- -- -- -- 200,000 -- -- -- 200,000
Repricing of warrants -- -- -- -- 450,000 -- -- -- 450,000
Recognition of unearned
compensation -- -- -- -- (87,866) -- -- 114,303 26,437
Payment of contingent costs
related to prior equity
offerings -- -- -- -- (142,926) -- -- -- (142,926)
Net loss -- -- -- -- -- -- (13,709,006) -- (13,709,006)
------ ------ ---------- ------- ----------- ---------- ------------ --------- -----------
Balance, December 31, 1996 746 $ 746 13,126,083 $13,126 $45,412,283 $ -- $(44,705,442) $ (29,526) $ 691,187
====== ====== ========== ======= =========== ========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 23
<PAGE> 31
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(6,320,901) $(13,709,006)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash compensation of employees and consultants
upon issuance and forfeiture of stock options ............ 8,630 26,437
Revaluation of stock warrants .............................. -- 450,000
Loss on impairment of assets ............................... 480,164 850,000
Loss on settlement of note receivable ...................... -- 400,000
Warrants issued for debt and services ...................... 294,625 --
Depreciation and amortization expense ...................... 759,939 1,062,192
Loss on disposal of fixed assets ........................... 517,144 101,905
Services provided for payment of MCC notes ................. (29,382) (482,092)
Changes in assets and liabilities:
Accounts receivable, trade ............................... 486,522 (650,950)
Notes receivable ......................................... 15,000 (15,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................. 584,770 (284,285)
Inventory ................................................ 73,394 (273,681)
Prepaid expenses and other assets ........................ 56,565 (8,423)
Accounts payable ......................................... (1,288,885) 1,784,439
Accrued expenses ......................................... 116,734 (1,094,888)
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................. (3,875) (40,016)
----------- ------------
Total adjustments ...................................... 2,071,345 1,825,638
----------- ------------
Net cash used in operating activities .................... (4,249,556) (11,883,368)
----------- ------------
Cash flows from investing activities:
Capital expenditures ....................................... (44,664) (579,873)
Proceeds from sale of equipment ............................ 265,509 640,853
----------- ------------
Net cash provided by investing activities ............... 220,845 60,980
----------- ------------
Cash flows from financing activities:
Book overdraft ............................................. 156,686 --
Proceeds from notes payable ................................ 985,000 1,041,500
Repayment of notes payable ................................. (1,040,961) (564,072)
Redemption of preferred stock .............................. (551,990) (24,867)
Proceeds from issuance of preferred and common stock ....... 4,427,460 10,869,870
Restricted cash ............................................ 37,226 222,654
----------- ------------
Net cash provided by financing activities ..................... 4,013,421 11,545,085
----------- ------------
Net decrease in cash and cash equivalents ..................... (15,290) (277,303)
Cash and cash equivalents, beginning of year .................. 16,290 293,593
----------- ------------
Cash and cash equivalents, end of year ........................ $ 1,000 $ 16,290
=========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 24
<PAGE> 32
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 development, manufacture, and 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 1997 and 1996. During 1993 through
March 1998, the Company completed its initial public offering and a series of
offerings, raising proceeds of approximately $50.4 million, net of issuance
costs (See Note 7). The Company currently only has the resources available to
fund operations on a day to day basis. The Company is seeking strategic partners
to inject capital 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 strategic partners will be available or that
commercialization will result in income from operations. The main focus of the
Company's current efforts is to find a strategic partner for its Diamond Tech
One, Inc. ("DTO") subsidiary to enable DTO to take advantage of the growth
opportunities currently available to it. The Company has also hired an
investment banker to assist in this process. It is likely that the result of
this process will be a transaction in which the Company gives up majority
control of DTO and may possibly result in a complete sale of DTO. The Company
has had substantial discussions with several potential partners and is working
to consummate a transaction as soon as possible. Management believes it will be
able to secure additional short term funding, if need be, to allow the Company
to continue operations until an agreement can be finalized with a strategic
partner. Full commercial development of the Company's DFEL technology may
require additional funds that may not be available at terms acceptable to 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 it is unlikely
that any such warrants will be exercised in the near future. As previously
mentioned, the Company is currently seeking joint venture partners to fund a
portion of the ongoing operating and research and development costs. 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.
A 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 1998, however the Company has spent virtually all funds
available under this grant as of December 31, 1997. Under the present
circumstances, all future research and development performed will have to be
internally funded by the Company. The Company has substantially reduced the
amount being spent on research and development until such time as new grants are
obtained or additional funding becomes available.
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, DTO, Electronic Billboard
Technology, Inc. ("EBT"), SDI Acquisition Corp., Plasmatron Coatings and
Systems, Inc. ("Plasmatron"), SIDT Coatings, Inc. ("Coatings"), and Northlight
Displays, Inc. ("Northlight"), and its majority owned subsidiary, Field Emission
Picture Element Technology, Inc. ("FEPET"), after the elimination of all
significant intercompany accounts and transactions.
Page 25
<PAGE> 33
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Contract revenues and technology rights
A 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 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 and governmental agencies. These customers are geographically
dispersed throughout the United States. The Company generally does not require
collateral. It is the Company's policy to record reserves for potential credit
losses. Since inception, the Company has experienced minimal losses. The Company
has no reserve for potential credit losses at either December 31, 1997 or 1996
and does not consider any such reserve necessary.
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 operations 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. The Company wrote
off the costs associated with certain patents no longer expected to have value
to the Company as well as related liabilities. This write off had no material
impact on expense in 1997.
Page 26
<PAGE> 34
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
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 cash flows 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 cash flows for the next 10 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 in 1996 to write off the remaining net organization costs
associated with the establishment of DTO.
In connection with the shut-down of the Plasmatron operations in the
third quarter of 1997, the Company wrote off the costs in excess of fair value
of assets acquired related to the purchase of Plasmatron. These costs had a net
book value of approximately $224,000 at the time they were written off.
Income taxes
The Company accounts for income taxes using the liability method
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 and F preferred stocks contain a provision (See Note 7)
that allows the preferred shareholder 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 shareholders. In addition, the Series E preferred stock bears an 8%
accretion payable in common stock and the Series F preferred stock bears a 4%
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, 1997
and 1996, respectively, have been treated as preferred dividends. The amount
treated as a dividend in 1997 related to the accretion and the discount was
$287,941 and $247,817, respectively for the Series E preferred stock and $46,910
and $131,396, respectively, for the Series F preferred stock. The amount treated
as a dividend in 1996 related to the accretion and the discount was $709,581 and
$991,128, respectively, for the Series E preferred stock.
Loss per common share
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which
requires the Company to present its basic loss per share and diluted loss per
share, and certain other loss per share disclosures for each year presented.
Basic loss per share is computed by dividing income available to common
shareholders by the weighted-average
Page 27
<PAGE> 35
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
number of common shares outstanding. The computation of diluted loss per share
is similar to the computation of basic loss per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. In addition, the numerator is adjusted for any changes in income or loss
that would result from the assumed conversions of those potential shares.
In 1997 and 1996, the Company had various amounts of preferred shares, common
stock options and warrants outstanding during the years which were not included
in the diluted loss per share calculation because they would have been
antidilutive. As of December 31, 1997 and 1996, the Company had 3,077 and 746
preferred shares outstanding, respectively, 2,834,703 and 2,904,644 options
outstanding, respectively, and 6,733,581 and 2,017,249 warrants outstanding,
respectively.
Reclassifications
Certain reclassifications were made to previously reported amounts in
the accompanying consolidated financial statements and notes to make them
consistent with the current year presentation format.
Management's estimates
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
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, accounts receivable, 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, 1997 and 1996.
New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
Management believes that the implementation of these standards will not have a
material impact on the Company's financial position or results of operations.
Page 28
<PAGE> 36
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted contracts:
Costs incurred ........................................................ $ -- $ 1,351,302
Estimated earnings .................................................... -- 526,584
Related billings and amounts allocated as revenue ..................... (6,000) (1,302,991)
----------- -----------
$ (6,000) $ 574,895
=========== ===========
Included in the accompanying consolidated balance sheets:
Costs and estimated earnings in excess of billings on uncompleted
contracts ........................................................... $ -- $ 584,770
Billings in excess of costs and estimated earnings on uncompleted
contracts ........................................................... (6,000) (9,875)
----------- -----------
$ (6,000) $ 574,895
=========== ===========
Property, plant and equipment, at cost:
Plant and equipment ................................................... $ 3,343,890 $ 4,289,666
Furniture and office equipment ........................................ 645,505 634,320
Leasehold improvements ................................................ 59,258 402,452
----------- -----------
Total cost .......................................................... 4,048,653 5,326,438
Less accumulated depreciation ......................................... (2,207,234) (2,182,928)
----------- -----------
$ 1,841,419 $ 3,143,510
=========== ===========
Intangible assets:
Cost in excess of fair value related to the purchase of subsidiary .... $ -- $ 471,496
Patents ............................................................... 30,000 268,200
----------- -----------
Total cost .......................................................... 30,000 739,696
Less accumulated amortization ......................................... (15,000) (316,133)
----------- -----------
$ 15,000 $ 423,563
=========== ===========
Accrued liabilities:
Payroll and related accruals .......................................... $ 71,981 $ 51,162
Accounting and legal fees ............................................. 269,000 480,639
Exclusivity fee payable to MCC ........................................ 355,000 313,154
Other ................................................................. 196,572 365,472
----------- -----------
$ 892,553 $ 1,210,427
=========== ===========
</TABLE>
4. LEASE OBLIGATIONS:
The Company leases various facilities and equipment under operating
lease agreements having terms expiring at various dates through 2001. Rental
expense was $477,636 and $793,453 for the years ended December 31, 1997 and
1996, respectively.
Page 29
<PAGE> 37
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. LEASE OBLIGATIONS (CONTINUED):
Future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year, excluding
contingent rentals at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $313,164
1999 25,044
2000 25,044
2001 16,696
--------
Total future minimum lease payments $379,948
========
</TABLE>
At December 31, 1997 and 1996, assets acquired under a capital lease
agreement of $733,688 are included in plant and equipment. Accumulated
amortization of $415,757 and $269,019 at December 31, 1997 and 1996,
respectively, is also included in accumulated depreciation. Payments under the
capital lease agreement were completed in 1997 and all equipment under this
lease was transferred to the Company.
5. BANK LINE OF CREDIT AND NOTES PAYABLE:
At December 31, 1996 the Company had a bank line of credit which
allowed for borrowings up to $500,000. Borrowings under the line of credit, when
used, bore interest at the bank's floating rate, which approximated 10 % as of
December 31, 1996. The line of credit was secured by the assets of DTO and
guaranteed by the parent Company. The line of credit expired in 1997 and was not
renewed.
Total interest expense for all debt was approximately $357,000 and
$98,000 for 1997 and 1996, respectively.
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 issue two Debentures, each with a face amount of $555,555.
On March 7, 1997 the Company received gross proceeds of $555,555, less expenses
and discount of $55,755, for the issuance of the first debenture. The second
debenture was to be issued within 60 days of issuance of the first debenture;
however, the lender defaulted on its obligation to fund the second debenture. As
a result of this default, the Company and the lender have renegotiated the terms
of the first debenture to place restrictions on the lender's ability to convert
the debenture to common stock. The entire unpaid principal and accumulated
interest on the Debenture shall be due and payable on the second anniversary of
the date on which the Debenture was issued. The Debenture is convertible into
common stock as described below.
At the option of the lender and at any time until April 20, 1998, up to
$83,334 of the outstanding principal (including accrued interest at the option
of the Company) could be converted into shares of the Company's common stock at
a price equal to 75% of the average of the closing bid price of the Company's
stock for the 10 trading days preceding the notice of conversion. The lender
converted this amount of principal into 196,439 shares of the Company's common
stock in December, 1997. The lender also has the option at any time until April
20, 1998 to convert an additional $83,334 of the outstanding principal
(including accrued interest at the option of the Company) into shares of the
Company's common stock at a price equal to the average closing bid price of the
Company's common stock for the calendar month preceding the date of conversion.
After April 20, 1998 the lender can convert any or all of the remaining
outstanding principal (including accrued interest at the option of the Company)
into shares of the Company's common stock at a price equal to the average
closing bid price of the Company's common stock for the calendar month preceding
the date of conversion. In addition, the lender may convert any or all of the
outstanding principal at any time at a conversion rate of $1.50 per share of the
Company's common stock.
Page 30
<PAGE> 38
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BANK LINE OF CREDIT AND NOTES PAYABLE (CONTINUED) :
Notes payable at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Convertible debenture, net of unamortized
discount of $34,629 with a stated interest
rate of 8% and an effective interest rate of 8.9%.
Principal and interest due in March, 1999.
The note is also subject to prepayment
in common stock as described below. $ 437,593 $ --
Notes payable to shareholders, due June, 1998
including interest at a rate of 15%. The
notes are collateralized by the assets of DTO.
The notes are payable in cash or common
stock as described below. 485,000 --
Notes payable to investors due June 1,1997,
net of unamortized discount of $150,000 at
December 31, 1996, with an effective interest
rate of 50%. A portion of the note was extended
and is now due on demand. Interest at a rate of
15% through June 1, 1997 and 20%
thereafter is due quarterly. 65,000 850,000
Note payable to a corporation, interest
at 12%, payable through performance
of services, due in April 1997. -- 106,322
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
--------- ---------
987,593 (961,222)
Less current portion (550,000) (961,222)
--------- ---------
Notes payable, long-term $ 437,593 $ --
========= =========
</TABLE>
The notes payable to shareholders in the amount of $485,000 are also
convertible into the Company's common stock at the option of the lender. If the
lender elects to accept payment in common stock, the conversion price of the
Company's common stock for determining the number of shares to be issued shall
be equal to 75% of the average closing bid price of the Company's common stock
for the five trading days preceding the date of notification. $185,000 of these
notes are payable to the Company's Chief Executive Officer.
Page 31
<PAGE> 39
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, 1997 and
1996, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating losses ........................ $ 16,272,000 $ 14,100,000
Research and experimentation credits ........ 478,000 407,000
Capitalized intangible assets ............... 408,000 476,000
Accrued expenses not deductible until paid .. 14,000 18,000
------------ ------------
Total deferred tax assets ................... 17,172,000 15,001,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization ............... 39,000 82,000
------------ ------------
Total deferred tax liabilities .............. 39,000 82,000
------------ ------------
Net deferred tax assets before valuation allowance 17,133,000 14,919,000
Valuation allowance .............................. (17,133,000) (14,919,000)
------------ ------------
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, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate of 34%..................... $ 2,149,000 $ 4,660,000
Net increase in valuation allowance...................... (2,214,000) (4,834,000)
Research and experimentation credits..................... -- 94,000
Nondeductible expenses................................... (14,000) (95,000)
Other.................................................... 79,000 175,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $48 million which expire from 2006 through 2012
and are available to offset future taxable income. Additionally, the Company has
tax credit carryforwards related to research and development expenditures of
approximately $478,000 expiring through 2011. The Company completed its IPO in
1993 which effected certain ownership changes under the Internal Revenue Code
Section 382, and may limit the Company's ability to utilize its net operating
loss carryforwards and research and experimentation credits generated before the
change in ownership.
Page 32
<PAGE> 40
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. The following table summarizes the
preferred shares currently outstanding at December 31.:
<TABLE>
<CAPTION>
1997 1996
1997 Preferred Preferred
Liquidation --------- ---------
Preference Shares Amount Shares Amount
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Series A $ 100,000 100 $ 100 100 $100
Series C -- -- -- -- --
Series E 2,272,537 196 196 646 646
Series F 1,116,184 1,081 1,081 -- --
Series G 1,777,917 1,700 1,700 -- --
---------- ----- ------ ---- ----
Total $5,282,221 3,077 $3,077 746 $746
========== ===== ====== ==== ====
</TABLE>
Series A
The Company has issued and outstanding, 100 shares of its Series A
convertible preferred stock. The Series A preferred stock is noncumulative. It
has a liquidation preference of $1,000 per share, is convertible into 1,252.75
shares of common stock per share and is entitled to vote on all matters
submitted to a vote of the shareholders on an "as if converted" basis. The
Series A preferred stock shall also share equally and simultaneously in any
distribution to common shareholders after the 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 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. The warrants to purchase the 75,000 shares of Series C preferred stock
expired on February 9, 1998.
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. As of December 31, 1995, approximately
$9,568,000 was recorded as stock subscriptions receivable from issuance of the
Series E preferred stock. 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 stock 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
Page 33
<PAGE> 41
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
as described in Note 9. The Series E preferred stock 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
shareholders on an "as if converted" basis. Each share of Series E preferred
stock was originally convertible into that number of shares of common stock
determined by dividing (i) the original issue price of the Series E preferred
stock plus an accretion 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 $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.
On September 27, 1996, the Company revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series E
preferred stock shareholders to reduce the upper limit of the conversion price
from $6.575 to $3.00. In exchange for this reduction, the Series E preferred
stock 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 stock
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 Series
E preferred shares.
On May 1, 1997, the Company further revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series E
preferred stock shareholders. In exchange for a further limitation on
conversions, the Company agreed to lower the upper limit on the conversion price
to $1.50 on the remaining Series E preferred shares. The Series E preferred
stock shareholders agreed to limit their conversions as follows: 12% of the
shares held at April 14, 1997 could be converted at any time. For any calendar
month, beginning with May 1997, in which the average closing bid price of the
Company's common stock was less than $1.00, an additional 7% of the position
held at April 14, 1997 could be converted at that average bid price. The Company
also had the right to redeem each monthly 7% block for cash at its option with
the redemption price equal to the original issue price plus accretion. The
Series E preferred stock shareholders have the right to convert all of their
shares at any time without limit at a conversion price of $1.50 per share.
During 1997, 418 shares of the Series E preferred stock were converted
into 5,542,941 shares of common stock and 32 shares of the Series E preferred
stock were redeemed for cash of $368,795. During 1996, 542 shares of the Series
E preferred stock were converted into 2,239,594 shares of common stock and two
shares of the Series E preferred stock were redeemed for cash of $24,867.
The registration statement covering shares of common stock into which
the Series E preferred stock is convertible was declared effective on April 18,
1996 and amended on November 7, 1996 by post-effective amendment, June 9, 1997
by amendment, and October 28, 1997 by post-effective amendment. An additional
amendment dated November 20, 1997 has been filed, but not yet declared
effective.
Series F
In March 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 for 1,700 shares of its Series F convertible
preferred stock. 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 plus an accretion amount equal to 4 % of the issue
price per annum from the issued date of the Series F preferred stock until
Page 34
<PAGE> 42
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
Series F (continued)
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 stock bears no dividends and holders of
the Series F preferred stock have no voting power except in certain
circumstances pursuant to Texas state law.
On August 4, 1997, the Company revised its Amended and Restated
Articles of Incorporation pursuant to an agreement with the remaining Series F
preferred stock shareholders. Under the terms of this agreement, the Series F
preferred stock shareholders were allowed to convert 25% of the number of Series
F preferred shares held as of July 14, 1997 under the terms described in the
preceding paragraph. For any calendar month, beginning with July 1997, in which
the average closing bid price of the Company's common stock was less than $1.00,
an additional 7% of the position held at July 14, 1997 could be converted at
that average bid price. The Company also had the right to redeem each monthly 7%
block for cash at its option. The cash redemption price is equal to 115% of the
original issue price plus accretion. The Series F preferred stock shareholders
have the right to convert all of their shares at any time without limit at a
conversion price of $1.50 per share.
The agreement also contained a provision that obligated the Company to
renegotiate this agreement if the Company's stock price did not exceed $1.50 per
share by October 12, 1997. The share price did not exceed the specified level by
that date and as a result, the Company and the Series F preferred stock
shareholders reached a new agreement in March 1998 whereby the Series F
preferred stock shareholders are allowed to convert one-sixth of the number of
Series F preferred shares held as of March 17, 1998 in each of the months from
March 1998 through August 1998. The conversion price for each month shall be the
average closing bid price of the Company's common stock for the preceding month,
except that the conversion price for March 1998 shall be $0.15. The Company has
the right to redeem the preferred shares for 107.5% of the original purchase
price.
The registration statement covering shares of Common Stock into which
the Series F preferred stock is convertible was declared effective on June 9,
1997 and was amended October 28, 1997 by post-effective amendment. An additional
amendment dated November 20, 1997 has been filed, but not yet declared
effective.
During 1997 the Series F preferred stock shareholders converted 455 shares of
Series F Preferred stock into 714,746 shares of common stock and 164 shares of
Series F preferred stock were redeemed for cash of $183,195.
Series G
From June 1997 through August 1997, through an exempt offering under
Regulation D of the Securities Act of 1933, the Company issued 1,700 shares of
its Series G preferred stock. The offering provided gross proceeds of $1,700,000
to the Company. There were no material expenses associated with this offering.
Each share has a liquidation preference of $1,000 plus 10% per annum from the
date of issuance. Each share of Series F preferred stock is convertible into
that number of shares of common stock determined by dividing (i) the original
issue price of the Series G preferred stock plus an accretion amount equal to 10
% of the issue price per annum from the issued date of the Series G preferred
stock until the conversion date by (ii) the conversion price. The conversion
price is fixed at a rate of $1.00 per share. The Series G preferred stock bears
no dividends and holders of the Series G preferred stock are entitled to vote on
all matters submitted to a vote of the stockholders on an "as if converted"
basis.
In connection with the issuance of the Series G preferred shares, each
Series G preferred stock shareholder also received warrants to purchase the
Company's common stock. The number of warrants received by each shareholder was
equal to 50% of the dollar value of Series G preferred stock received. A total
of 850,000 warrants were issued in connection with this transaction. These
warrants allow the holder to purchase shares of the Company's common stock of at
a price of $1.00 per share for a period of 10 years. The registration statement
covering shares of common stock into which the Series G preferred stock is
convertible and the common stock issuable upon exercise of the warrants was
filed on November 20, 1997, but has not yet been declared effective.
Page 35
<PAGE> 43
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
Preferred Stock (continued)
Subsidiary Preferred Stock
In September 1997, the Company completed an agreement with Diamond
Pro-shop Nomura Co., Ltd. ("DPN"), an affiliate of Noritake. Both DPN and
Noritake are corporations organized under the laws of Japan. Under the terms of
the agreement, DPN acquired 50 shares of convertible preferred stock and
acquired certain licensing and marketing rights for products developed by FEPET
in exchange for a payment of $500,000. $400,000 of this payment was allocated to
the licensing and marketing rights and $100,000 was allocated to the preferred
stock based on its estimated fair market value at that date. These preferred
shares convert FEPET common shares equivalent to a 5% ownership interest in
FEPET
Common Stock
In December 1995, the Company closed an exempt offering under
Regulation D of the Securities Act of 1933 (the "December 1995 Offering"). The
Company collected cash proceeds of $1,511,575, for the issuance of 287,919
shares of common stock. 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 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 exerciseable for
three years from the date of issuance at a price of $6.30 per share of common
stock as described in Note 9.
In October 1997, the Company closed an exempt offering under Regulation
D of the Securities act of 1933 (the "October 1997 Offering"). Under the terms
of the offering, the investors committed to purchase $3.5 million dollars of the
Company's common stock in seven installments of $500,000 each. The first
installment was payable at closing and the next six installments were due on the
first business day of each month from November 1997 through April 1998. The
purchase price for the shares was 65% of the average closing bid price of the
Company's common stock for the five trading days immediately preceding the due
date of the installment. In addition, the subscription agreement stipulated that
the investors were to receive one warrant for each share of the Company's common
stock purchased. These warrants were exerciseable for a period of five years at
an exercise price equal to 115% of the average closing bid price of the
Company's common stock for the five trading days immediately preceding the
issuance date of the warrants, with the warrants to be issued on the same date
as the previously described installment due dates.
The Company received cash proceeds of $1,000,000 in 1997 and issued
2,829,334 shares of its common stock in connection with the installments due
under the October 1997 Offering in October and November. The Company also issued
1,118,868 shares of its common stock in connection with the installment due
December 1, 1997, however payment was not received for those shares. The Company
also issued 2,829,334 warrants at a price of $0.625 and 1,118,868 warrants at a
price of $0.791. In January 1998, the Company and the investors agreed to
terminate the subscription agreement. As a result of this agreement, the
investors agreed to return 318,868 of the shares received in December, pay cash
of $250,000, and return all warrants received under the agreement. After
termination of the subscription agreement in January 1998, the Company had
received a total of $1,250,000 in proceeds. There were no material expenses
associated with this offering. A registration statement covering the shares
issued in connection with the October 1997 Offering was filed and declared
effective by post-effective amendment on October 28, 1997.
In 1997 the Company issued 340,717 shares of the Company's common stock
to MCC to pay the remaining balance due on the services agreement entered into
in the April 1995 amendment to the MCC agreement described in Note 11. The
remaining principal and interest due under the agreement at the time of issuance
of the shares was $201,810. In addition, the Company issued 239,275 shares of
the Company's common stock in 1997 to various trade creditors as payment for
amounts due totaling $235,644.
Page 36
<PAGE> 44
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
During 1997, the Company issued 30,000 shares of the Company's common
stock to an advisor as payment for services rendered. Based on the market value
of the stock at the time of issuance, $39,375 was charged to expense in
connection with this transaction.
8. STOCK OPTIONS:
The Company sponsors two stock-based incentive compensation plans (the
"Plans"). The Company applies Accounting Principles Board ("APB") Opinion No. 25
and related Interpretations in accounting for the Plans. In 1995, the FASB
issued SFAS No. 123 "Accounting for Stock-Based Compensation" which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. 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 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 exerciseable 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 exerciseable for up to ten years from date of
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 year period.
An additional 318,741 shares were available for grant at December 31, 1997.
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 of repricing was $1.50 per share.
In July 1997, 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 418,688 options were repriced. The Company reduced the
exercise price to $2.00 for 25% of all options priced above $2.00 for all
persons employed by the Company at the time of the repricing. The original
exercise price of these options ranged from $3.00 to $4.00. The market price of
the Company's common stock at the time of repricing was $1.125 per share
In 1995, the Company awarded 153,000 non-qualified options to purchase
its common stock under the 1992 Employees Plan to 26 employees, including one
former officer of the Company. The options vest over a period of four years and
when granted were exerciseable at a price of $4.94 per share which was below the
market price of the Company's common stock at the time of the grant. Unearned
compensation was recorded 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. Compensation expense of $8,630 and $26,437
has been recognized in 1997 and 1996, respectively, related to these issuances.
Unearned compensation of $20,896 and $87,866 related to options canceled during
1997 and 1996, respectively, was reversed to additional paid in capital. As of
December 31, 1997, no unearned compensation remained.
Page 37
<PAGE> 45
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED):
The following is a summary of stock option activity under the 1992 Employees
Plan:
<TABLE>
<CAPTION>
Wgtd. Avg.
Number of Exercise
Shares Price
--------- ----------
<S> <C> <C>
Options outstanding at January 1, 1996....................... 879,765 $5.23
Granted............................................. 2,436,200 $4.16
Exercised........................................... (27,600) $0.59
Canceled............................................ (560,104) $6.51
---------
Options outstanding at December 31, 1996..................... 2,728,261 $4.07
---------
Granted............................................. 338,125 $0.97
Exercised........................................... -- --
Canceled............................................ (524,312) $3.44
---------
Options outstanding at December 31, 1997..................... 2,542,074 $3.45
=========
</TABLE>
In March 1992, the Board of Directors adopted the 1992 Outside
Directors' Stock Option Plan (the "1992 Directors Plan"), for purposes of
granting incentive stock options. The 1992 Directors Plan reserved up to 50,000
shares of common stock for issuance to certain non-employee directors. The stock
options granted under the 1992 Directors Plan are exerciseable for up to 10
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. In July 1996, the Company's 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 July 1997, the Board of Directors approved an amendment to apply
that formula on a standard date each year. An additional 207,371 shares were
available for grant at December 31, 1997.
In July 1997, 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 42,096 options were repriced. The Company reduced the
exercise price to $2.00 for 25% of all options priced above $2.00 for all
persons who were Directors of the Company at the time of the repricing. The
original exercise price of these options ranged from $2.31 to $5.50. The market
price of the Company's common stock at the time of repricing was $1.125 per
share.
The following is a summary of stock option activity under the 1992 Director's
Plan:
<TABLE>
<CAPTION>
Wgtd. Avg.
Number of Exercise
Shares Price
--------- ----------
<S> <C> <C>
Options outstanding at January 1, 1996...................... 90,000 $5.01
Granted............................................ 138,383 $2.31
Canceled........................................... (52,000) $2.73
---------
Options outstanding at December 31, 1996.................... 176,383 $3.57
---------
Granted............................................ 124,246 $1.13
Canceled........................................... (8,000) $4.13
---------
Options outstanding at December 31, 1997.................... 292,629 $2.29
=========
</TABLE>
Page 38
<PAGE> 46
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 1996 and 1997 is estimated on the
date of grant using the Black-Scholes option pricing-model with the following
weighted-average assumptions: no dividend yield for 1997 and 1996; risk-free
interest rate of 6.50% and 7.68% for 1997 and 1996, respectively; the expected
lives of the options are five years for 1997 and 1996; and volatility of
approximately 56% for 1997 and 1996.
The following table summarizes information about stock options outstanding and
exerciseable under both plans 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 - $2.99 193,633 9yr, 3mo $2.04 103,547 $1.83
$3.00 - $3.91 555,950 9yr, 10mo $3.02 18,850 $3.63
$4.00 - $5.49 1,745,400 9yr, 1mo $4.01 465,725 $4.03
$5.50 - $8.50 409,661 7yr, 10mo $6.47 348,361 $6.28
--------- -------
Total 2,904,644 9yr, 1mo $4.04 936,483 $4.62
--------- -------
</TABLE>
The following table summarizes information about stock options outstanding and
exerciseable under both plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
------------------- --------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/97 Contr. Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .56 - $2.99 1,065,837 8yr, 7mo $1.57 629,131 $1.57
$3.00 - $3.91 253,448 8yr, 10mo $3.05 81,167 $3.15
$4.00 - $5.49 1,168,057 8yr, 1mo $4.02 601,981 $4.03
$5.50 - $8.50 347,361 6yr, 10mo $6.64 347,361 $6.64
--------- ---------
Total 2,834,703 9yr, 1mo $3.33 1,659,640 $3.60
--------- ---------
</TABLE>
The weighted-average fair values of options under the plans granted during 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Discounted options $0.00 $3.53
At-the-money options $0.46 $2.93
Premium options $0.36 $0.70
Repriced options $0.07 $0.09
</TABLE>
Page 39
<PAGE> 47
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS (CONTINUED):
During 1997 and 1996, the Company incurred any compensation cost for
the Plans under APB No. 25 as shown below. 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 1997 and 1996 would
approximate the pro forma amounts as shown below:
<TABLE>
<CAPTION>
As Reported Pro Forma As Reported Pro Forma
1997 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SFAS No. 123 Charge -- $ 985,331 -- $ 874,500
APB No. 25 Charge $ 8,630 -- $ 26,437 --
Net loss $ (6,320,901) $ (7,297,602) $(13,709,006) $(14,557,069)
Net loss per common share $ (0.41) $ (0.47) $ (1.30) $ (1.37)
</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.
9. STOCK WARRANTS:
Common Stock Warrants
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 exerciseable at $6.00 per share and may be exercised until February
17, 1998. The exercise period was extended to February 1, 1999 for 30,000 of
these warrants in connection with a consulting agreement signed in 1997.
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. The exercise
period was extended to February 1, 1999 for 12,400 of these warrants in
connection with a consulting agreement signed in 1997.
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. In February 1996, these
warrants were repriced and reissued at an exercise price of $3.90 per share and
the exercise period was extended by one year. 169,754 of these warrants expired
in 1997 and the remaining 49,345 warrants expire in 1999. 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. 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.
Page 40
<PAGE> 48
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK WARRANTS (CONTINUED):
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 stock. 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.
In June 1995, the Company closed an exempt offering of the Company's
common stock aggregating approximately $5,800,000. In connection with the
offering, the Company agreed that if the shares in the 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 at $5.736 per share. These warrants expired on June 1,
1997.
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 per share
through August 15, 1997. These warrants expired in August 1997.
In connection with the December 1995 Offering, the Company agreed that
in the event a registration statement was not effective concerning the shares
issued in the December 1995 Offering within 90 days following the receipt of the
written request of such shareholders, then those shareholders would 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 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
stock 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.
In 1996, 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 2006. In 1997, the Company issued an additional 75,000 warrants to this
advisor in connection with services related to a joint venture agreement. These
warrants enable the holder to purchase shares of the Company's Common Stock at a
price of $1.00 per share through 2007.
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 with a value of
approximately $200,000. 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. In connection
with an extension of a portion of this debt, an additional 40,000 warrants with
a value of approximately $40,000 were issued entitling the holder to purchase
shares of the Company's common stock at a price of $0.703 per share through June
1998.
In October 1997, the Company issued 205,000 warrants to an advisor in
connection with an agreement to provide public relations services. The warrants
entitle the holder to purchase shares of the Company's common stock as follows:
125,000 shares at a price of $0.6875 through September 1998, 40,000 shares at a
price of $1.0313 through March 1999, and 40,000 shares at a price of $1.375
through September 1999. These warrants were valued at $150,000.
Page 41
<PAGE> 49
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK WARRANTS (CONTINUED):
In connection with the issuance of the Company's Series G preferred
stock in 1997, the Company issued 850,000 warrants to holders of the Series G
Preferred. These warrants enable the holders to purchase shares of the Company's
common stock at a price of $1.00 through August 2002.
In connection with the Company's October 1997 Offering, the Company
issued 3,948,202 warrants to investors involved in the transaction. The warrants
entitled the holders to purchase 2,829,334 shares of the Company's common stock
at a price of $0.625 through November 2002 and 1,118,868 shares at a price of
$0.791 through December 2002. In connection with the termination of this
agreement in January 1998, the investors agreed to return all 3,948,202 warrants
to the Company to be canceled, as described in Note 14.
Preferred Stock Warrants
In February 1995, the Company issued 75,000 warrants to purchase shares
of its Series C preferred stock. These warrants are exerciseable at $50.00 per
share until February 9, 1998. Each share of Series C preferred stock is further
convertible into 10 shares of the Company's common stock. These warrants expired
unexercised in February 1998.
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, 1996......................... 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 $ 1.67-7.89
Granted........................ 5,118,202 $0.625-1.375
Exercised...................... (100,000) $ 1.00
Expired........................ (301,870) $ 3.90-5.736
----------
Warrants outstanding at
December 31, 1997....................... 6,733,581 $ 0.625-7.89
==========
</TABLE>
Page 42
<PAGE> 50
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $129,109 and $22,730 for 1997 and 1996,
respectively. The following non-cash transactions have been excluded from the
accompanying consolidated statement of cash flows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Non-cash financing activities:
Issuance of warrants in connection with debt................................. 40,000 200,000
Issuance of warrants and common shares for services provided................. 254,595 --
Recognition of the forfeiture of shares related to stock compensation
increasing additional paid-in capital........................................ 20,896 87,866
Financing costs in connection with stock issuance deducted from proceeds..... 172,540 1,030,130
Receivable from shareholders................................................. 250,000 --
Conversion of accounts payable and accrued liabilities into common shares.... 365,415 --
Conversion of notes payable into common shares............................... 155,373 --
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Original Agreement with MCC
During 1994 and 1995, management elected to increase the Company's
efforts to develop its proprietary DFE technology. While these efforts were
scaled back in 1996 and 1997, 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 entered into an agreement in 1994
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 with MCC
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
extended 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 0.9% of sales of DFED-related products to third
parties. The exclusivity and royalty agreements were modified by the December
1997 agreement described below.
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
Page 43
<PAGE> 51
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
and development under previous agreements between MCC and the Company. Under the
agreement, DTO signed a three year lease on the 28,000 square facility for a
monthly rental of approximately $25,000. Additionally, the Company assumed lease
commitments of approximately $750,000 over the next two years on equipment
currently leased by MCC. The Company placed $730,000 in cash related to these
lease commitments on deposit with the lender to pay down the remaining lease
commitments. These lease commitments were paid in full during 1997. 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
was 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 related technology. 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.
December 1997 Amendment with MCC
In December 1997, the Company further amended its agreements with MCC
whereby MCC transferred and assigned its rights in 62 DFE related patents to the
Company. In exchange for the transfer, the Company agreed to pay a royalty fee
of 2% of commercial revenues related to products using these patents. The
Company has the right to offset one half of the costs of maintaining these
patents against any royalty fees due. The Company and MCC also agreed to
renegotiate the terms of the remaining agreements with MCC, to alter the royalty
terms and to restructure the amount and timing of the minimum payments due
described in the preceding paragraph. No agreement has yet been reached,
however, the remaining balance due in connection with the minimum royalty
payment described in the preceding paragraph has been deferred. As of December
31, 1997, the Company has paid $145,000 in royalties and costs of maintaining
the patents and accrued $355,000 as additional amounts due under the minimum
royalty agreement.
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, 1997. Further
spending in Russia has been halted since 1996 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.
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 or results of operations.
Page 44
<PAGE> 52
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Impact of the Year 2000 Issue
The year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations, including
, among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. All of this
software is prepackaged software that was purchased from outside vendors. These
vendors all have upgrades available which correct the Year 2000 issue. It is the
Company's plan to purchase the upgraded software, where required, prior to
December 31, 1998 to insure adequate time for implementation. The cost of these
upgrades will be negligible and is not expected to have a material effect on the
operations of the Company. If such upgrades were not installed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company has determined that it is not vulnerable to a third party's
failure to remediate its own Year 2000 Issues at either significant suppliers or
large customers. The Company has also determined that it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
Legal Proceedings
On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer
of Plasmatron, filed a complaint with the Supreme Court of the State of New
York, County of Westchester. The complaint names Plasmatron, the Company and
Westchester Fire Insurance Company as defendants. Plaintiff claims a breach of
contract related to $1 million of coating equipment that Plasmatron delivered in
1993, 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. At
this time the outcome can not be predicted with any certainty and the potential
liability, if any, is unknown. The Company believes it has meritorious defenses
and intend to continue to vigorously defend this action.
In September 1997, the Company filed suit against a former employee to
protect certain technology rights that it licensed from the former employee. The
ex-employee filed a countersuit seeking unspecified damages related to alleged
violations of agreements in 1994 and 1995. The Company considers this
countersuit to be without merit and believes that the ultimate resolution of
this matter will not have a material adverse effect on its financial position,
results of operations, or cashflows.
Employment agreement
The Company has an 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 was to be paid a base salary of
$125,000 per year. Quarterly performance goals were to be 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 were reached, his salary was to be
retroactively adjusted to $200,000 per year, effective as of June 1, 1996. His
salary was adjusted to $150,000 per year as of November 1, 1996. The agreement
is cancelable upon 30 days notice by either party.
Page 45
<PAGE> 53
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. CONCENTRATIONS OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations
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, 1997 and 1996, the Company had no amounts on
deposit in excess of the Federal Deposit Insurance Corporation insurance limit;
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 and services performed for large U.S. corporations. The
Company has not incurred any material losses on these receivables.
13. SEGMENT INFORMATION:
The Company had revenues from government contracts of approximately
$854,000 and $2,869,000 in 1997 and 1996, 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. 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. As of December 31, 1997, the Company had no material commitment for
government funding beyond that date.
14. RELATED PARTY 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.
As described in Note 5, the Company has notes payable to its Chief
Executive Officer.
15. SUBSEQUENT EVENTS:
In January 1998, the Company agreed to terminate the stock subscription
agreements related to its October 1997 Offering. As described in Note 7, in
exchange for the Company's agreement to terminate the agreement, the investors
returned 318,868 shares of the Company's common stock, paid $250,000 in cash,
and agreed to return 3,948,202 warrants to purchase the Company's common stock.
In March 1998, the Company borrowed $250,000 from a shareholder for
working capital purposes. The note is a 90 day note secured by the assets of DTO
and bearing interest at a rate of 15%. In connection with this loan, the
shareholder also received warrants enabling the holder to purchase 400,000
shares of the Company's common stock at $0.15 per share, which approximated the
market price of the common stock on the date the note was issued.
Page 46
<PAGE> 54
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Page 47
<PAGE> 55
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
and Dr. Zvi Yaniv and all information concerning executive officers may be found
under the caption "EXECUTIVE OFFICERS" on page 8 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 30 I Director May 1996 1998
Marc W. Eller 42 I Director, Chairman, November 1995 1998
Chief Executive Officer
David R. Sincox 59 I Director October 1994 1998
Dr. Zvi Yaniv 49 III Director, President, July 1996
Chief Operating Officer 1998
Philip C. Shaffer 62 II Director March 1992 1998
Igor Leontiev 54 II Director April 1997 1998
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 Hemisphere,
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.
Igor. Leontiev, Ph.D., has been a Director since April, 1997. Dr.
Leontiev previously served as a Director from March 1995 through September 1996.
Since 1964, Dr. Leontiev has worked with Gazprom, the national gas company of
Russia. He currently serves as the president of DiaGasCrown, a subsidiary of
Gazcomplektimpex and Gaxprom.
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 48
<PAGE> 56
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, 1997 through December 31,
1997, 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, 1997, 1996 and 1995 by the
Chief Executive Officer and all executive officers whose total annual salary and
bonus exceeded $100,000 for the fiscal year ended December 31, 1997 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------------- ------------
Other Securities
Annual Underlying
Name and Position Year Salary($) Bonus($) Compensation($)(5) Options(#)(6)
----------------- ---- --------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Marc W. Eller, 1997 $150,000 -0- -0- 42,500
Chief Executive Officer(1) 1996 $ 51,932 $15,000 $ 9,005 90,000
Zvi Yaniv, President and 1997 $150,000 -0- 24,170 270,000
Chief Operating Officer(2) 1996 82,131 -0- 32,338 1,000,000
Trey Fecteau, 1997 106,375 $10,000 -0- 42,500
Senior Vice President 1996 107,061 -0- 9,529 90,000
and Secretary(3)
Doug Baker, Vice President 1997 115,000 -0- -0- 45,000
and Chief Financial Officer(4) 1996 76,326 $ 5,000 -0- 100,000
</TABLE>
- ----------------------
(1) Mr. Eller commenced employment with the Company on July 25, 1996.
Salary in 1997 includes $138,750 paid during the year and $11,250
voluntarily deferred by Mr. Eller to assist the Company's cashflow.
(2) Dr. Yaniv commenced employment with the Company on May 8, 1996. Salary
in 1997 includes $141,250 paid during the year and $8,750 voluntarily
deferred by Dr. Yaniv to assist the Company's cashflow.
(3) Mr. Fecteau commenced employment with the Company on January 1, 1996.
Prior to that date, Mr. Fecteau performed consulting services for the
Company. Mr. Fecteau resigned as Senior Vice President and Secretary
effective January 16, 1998.
(4) Mr. Baker commenced employment with the Company on June 17, 1996.
Salary in 1997 includes $106,375 paid during the year and $8,625
voluntarily deferred by Mr. Baker to assist the Company's cashflow.
Page 49
<PAGE> 57
(5) 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 and Mr. Eller. Dr. Yaniv received
reimbursement of living expenses totaling $20,070 and $29,541 in 1997
and 1996, respectively, and was provided use of a Company owned
automobile valued at $4,100 and $2,797 in 1997 and 1996, respectively.
Mr. Eller received reimbursement of moving expenses totaling $9,005 in
1996.
(6) 1997 options include options issued in 1996 but repriced in 1997 in the
following amounts. Mr. Eller - 22,500, Dr. Yaniv - 250,000, Mr. Fecteau
- 22,500, and Mr. Baker - 25,000.
STOCK OPTION GRANTS IN 1997
The Company has an Amended and Restated 1992 Stock Option Plan which
may be used to grant employees, including officers of the Company, incentive
stock options designed to qualify under Section 422 of the Internal Revenue Code
of 1986, as amended, or non-qualified stock options. The following table sets
forth information concerning stock-option grants to the Named Executive Officers
in 1997.
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Underlying Options Granted to
Options Employees in Exercise
Name Granted(#)(1)(2) in Fiscal Year 1997 or Base Price ($/sh) Expiration Date
---- ---------------- ------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Marc W. Eller 20,000(3) 2.64% $1.125 7/28/2007
22,500(4) 2.97% $ 2.00 11/1/2006
Dr. Zvi Yaniv 20,000(3) 2.64% $1.125 7/28/2007
250,000(4) 33.03% $ 2.00 5/31/2006
Trey Fecteau 20,000(3) 2.64% $1.125 7/28/2007
22,500(4) 2.97% $ 2.00 11/1/2006
Douglas P. Baker 20,000(3) 2.64% $1.125 7/28/2007
25,000(4) 3.30% $ 2.00 6/17/2006
</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 became exerciseable in full on the date of the grant,
July 28, 1997.
(4) These options were issued in 1996, but as described in the option
repricing table, were repriced in 1997. The market price of the Company's common
stock was $1.125 at the time the options were repriced to $2.00. More
information on this repricing is identified in the "Options Repricing Table"
below.
Page 50
<PAGE> 58
AGGREGATED OPTION EXERCISES IN 1997
AND OPTION VALUES AT DECEMBER 31, 1997
The following table sets forth certain information concerning the
number and value of the options held by the named executives at December 31,
1997. There were no options exercised by the named executive officers during the
fiscal year ended December 31, 1997 and accordingly no value realized. Based
upon the closing price of $0.375 per share of the Common Stock on December 31,
1997, on the NASDAQ Small Cap Market, these options were not in-the-money
options at that date.
<TABLE>
<CAPTION>
Number of Unexercised Options at December 31, 1997
--------------------------------------------------
Name Exercisable/Unexercisable
- ---- -------------------------
<S> <C>
Marc W. Eller 42,500 / 67,500
Dr. Zvi Yaniv 420,000 / 600,000
Trey Fecteau 68,125 / 41,875
Douglas P. Baker 120,000 / 120,000
</TABLE>
DIRECTOR COMPENSATION FOR 1997
<TABLE>
<CAPTION>
Cash Compensation Security Grants
----------------- ---------------
Name(1) Meeting Fees ($)(2) Number of Securities Underlying Options(#)(3)
------- ------------------- ---------------------------------------------
<S> <C> <C>
Lee B. Arberg 650 20,000
David R. Sincox 800 20,000
Philip C. Shaffer 1,050 50,000
Igor Leontiev 150 6,520
Ronald J. Berman 1,000 20,000
Dr. Robert Johnson(4) 700 5,589
Walter Cunningham(5) 400 2,137
</TABLE>
(1) Directors who are also executives of the Company are not listed in the
above table. They do not receive compensation as Directors. Refer to the Summary
Compensation Table for information concerning their compensation.
(2) All Directors receive the standard fees: $150 per board meeting or
committee meeting attended in person, 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 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 28, 1997 at a price of $1.125. These
option grants became exerciseable in full on that date.
(4) Dr. Johnson became a Director in April 1997 and resigned as a Director
in January 1998.
(5) Mr. Cunningham became a Director in June 1997 and resigned as a
Director in December 1997.
Page 51
<PAGE> 59
In July 1997, the Company's Board of Directors passed a resolution that
changed the option exercise price of certain options previously granted to
Directors under the Outside Directors Option Plan. A total of 42,096 options
were repriced. The Company reduced the exercise price to $2.00 for 25% of all
options priced above $2.00 for all persons who were Directors of the Company at
the time of the repricing. The original exercise price of these options ranged
from $2.31 to $5.50. The market price of the Company's common stock at the time
the exercise price of these options was reduced was $1.125 per share.
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 was to be paid
a base salary of $125,000 per year. Quarterly performance goals were to be
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 were reached, his
salary was to be retroactively adjusted to $200,000 per year, effective as of
June 1, 1996. It was determined that those goals were not reached. Dr. Yaniv's
salary was adjusted to $150,000 per year effective as of November 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,
an additional 200,000 options vested at December 31, 1997, and the remainder of
these options vest at the rate of 200,000 per year on each of December 31, 1998,
1999, and 2000. These options are exerciseable at a price of $4.00 per share of
the Company's Common Stock for 75% of each block and $2.00 per share for 25% of
each block. See the "Options Repricing Table" below for additional information.
The Company also provides Dr. Yaniv with the use of an automobile owned
by the Company and paid for his reasonable living expenses in Austin, Texas
until June 1, 1997. This employment agreement may be terminated by either party,
with or without cause, by giving 30 days notice of termination to the other
party.
Page 52
<PAGE> 60
OPTION REPRICINGS TABLE
The Named Executive Officers listed in the table below had the
identified stock option grants repriced during the Company's fiscal years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Length
Number of of Original
Securities Market Price Exercise Option term
Underlying of Stock Price Remaining
Options at Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended(#) Amendment($) Amendment($) Price($) Amendment(1)
- ---- ---- ---------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marc Eller,
Chief Executive
Officer 7/28/97 22,500 $1.125 $ 3.00 $2.00 9 yr., 3 mnths
Dr. Zvi Yaniv,
President and
Chief Operating 7/28/97 250,000 $1.125 $ 4.00 $2.00 8 yr., 9 mnths
Officer 10/17/96 1,000,000 $ 1.50 (2) $4.00 9 yr., 7 mnths
Trey Fecteau, 7/28/97 9,375 $1.125 $ 3.00 $2.00 9 yr., 3 mnths
Senior Vice 7/28/97 8,750 $1.125 $ 4.00 $2.00 8 yr., 5 mnths
President and 7/28/97 4,375 $1.125 $ 4.00 $2.00 8 yr., 6 mnths
Secretary 10/17/96 35,000 $ 1.50 $ 6.625 $4.00 9 yr., 2 mnths
10/17/96 17,500 $ 1.50 $7.4375 $4.00 9 yr., 3 mnths
Doug Baker,
Vice President
and Chief Financial
Officer 7/28/97 25,000 $1.125 $ 4.00 $2.00 8yr., 9 mnths
</TABLE>
(1) The original 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 date of the options granted. The 100,000 options
of this grant that had vested at 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.
The options that were repriced in 1997 for the above referenced Named
Executive Officers were repriced as part of a plan approved by the Board of
Directors on July 28, 1997. On that date, 25% of all options held by employees
employed by the Company on that date that had an exercise price in excess of
$2.00 per share were changed to reduce the exercise price to $2.00. As of that
date the Company's Common Stock was trading at $1.125 per share. For the
majority of employees, the options were granted prior to the issuance of the
Company's Series E and F Convertible Preferred Stock. The ultimate conversion of
the Series E and F 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.
Page 53
<PAGE> 61
The options that were repriced in 1997 for the above referenced Named
Executive Officers were repriced as part of a plan approved by the Board of
Directors on July 28, 1997. On that date, 25% of all options held by employees
employed by the Company on that date that had an exercise price in excess of
$2.00 per share were changed to reduce the exercise price to $2.00. As of that
date the Company's Common Stock was trading at $1.125 per share.
Marc W. Eller
Philip C. Shaffer
David R. Sincox Directors March 30, 1998
Ronald J. Berman
Igor Leontiev
Dr. Zvi Yaniv
Page 54
<PAGE> 62
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 17, 1998, 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>
- ----------------------------------------------------------------------------------------------------------
Shares Owned Percent of
Title of Class Name and Address Beneficially Class
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock None
- ----------------------------------------------------------------------------------------------------------
Series A Preferred Evan Street 100 100%
Stock 12100 Technology Blvd.
Austin, TX 78727
- ----------------------------------------------------------------------------------------------------------
Series E Preferred Leonardo, L.P. 30 22.06%
Stock c/o Trident Trust Co., Ltd.
Elizabeth Square
P.O. Box 84
Grand Cayman, Cayman Islands BWI
-----------------------------------------------------------------------------
Nelson Partners 31 22.79%
c/o Leeds Management Services, Ltd.
129 Front Street
Hamilton, Bermuda HM 12
-----------------------------------------------------------------------------
Olympus Securities Ltd. 31 22.79%
c/o Leeds Management Services, Ltd.
129 Front Street
Hamilton, Bermuda HM 12
-----------------------------------------------------------------------------
Raphael L.P. 18 13.24%
245 Park Ave, 2nd floor
New York, NY 10167
-----------------------------------------------------------------------------
GAM L.P. 9 6.62%
1080 Holcomb Bridge Rd., Ste 285
Roswell, GA 30076
-----------------------------------------------------------------------------
AG Superfund 9 6.62%
1080 Holcomb Bridge Rd., Ste 285
Roswell, GA 30076
-----------------------------------------------------------------------------
Series F Preferred Thomas Kernaghan & Co. Limited 898 83.07%
Stock 356 Bay Street Tenth Floor
Toronto, Ontario Canada M5H 2V2
-----------------------------------------------------------------------------
Stanley B. Dickson, Jr. 183 16.93%
15621 Winding Pointe Drive
Grosse Pointe Park, Mi 48230
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Page 55
<PAGE> 63
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Series G Preferred William W. Gow 100 5.88%
Stock 4747 Sunset Blvd.
Los Angeles, CA 90027
-----------------------------------------------------------------------------
John Green Company 100 5.88%
220 Victor
Highland Park, MI 48203
-----------------------------------------------------------------------------
Pinnacle Fund L.P. 200 11.76%
4965 Preston Park Blvd., Ste 240
Plano, TX 75093
-----------------------------------------------------------------------------
J. Brad Carter, M.D. 200(1) 11.76%
9330 Park Crest Blvd. #300
Knoxville, TN 37923
-----------------------------------------------------------------------------
George F. Valassis 200 11.76%
Franklin Enterprises
520 Lake Cook Rd., Suite 380
Deerfield, IL 60015
-----------------------------------------------------------------------------
Nicholas Martin Living Trust 200 11.76%
3113 South University Dr., #600
Ft. Worth, TX 76109
-----------------------------------------------------------------------------
Michael Scott Bleckman Family Trust 200 11.76%
295 Shadowood Lane
Northfield, IL 60093
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Includes 50 shares issued in the name of J. Brad Carter, M.D., IRA.
Page 56
<PAGE> 64
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information with respect to beneficial
ownership of the Company's Common Stock as of March 10, 1998, 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.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIAL PERCENTAGE
NAME OWNERSHIP(1) OF CLASS
---- ------------ --------
<S> <C> <C>
Philip C. Shaffer 185,202 *
David R. Sincox 101,213 *
Igor Leontiev(2) 6,520 *
Marc W. Eller 373,813 1.39%
Ronald J. Berman 661,660 2.46%
Lee B. Arberg 21,000 *
Dr. Zvi Yaniv 431,000 1.60%
Trey Fecteau 20,000 *
Douglas P. Baker 142,000 *
All Executive Officers and Directors
as a group (9 persons) 1,942,408 7.23%
</TABLE>
- -------------------------
* Less than 1%
(1) Included in the amounts indicated are shares which are subject to
options exerciseable within sixty(60)-days of March 17, 1998 pursuant
to Rule 13-3(d)(1) of the Securities Exchange Act of 1934, as amended.
The number of such shares are 112,500 for Mr. Shaffer; 40,000 for Mr.
Sincox; 27,500 for Mr. Eller; 21,095 for Mr. Berman; 21,000 for Mr.
Arberg; 420,000 for Mr. Yaniv; 20,000 for Mr. Fecteau; 120,000 for Mr.
Baker; 6,520 for Mr. Leontiev and 788,615 for the Directors and
executive officers as a group. Also included in this amount are shares
which are subject to warrants that are exerciseable within sixty (60)
days of March 17, 1998. The number of such shares are 32,517 shares for
each of Mr. Eller and Mr. Berman.
(2) Igor Leontiev serves as the President of DiaGasCrown, a subsidiary of
Gazcomplektimpex. Gazcomplektimpex owns 1,230,130 shares of Common
Stock. Mr. Leontiev disclaims any beneficial ownership of these shares.
Page 57
<PAGE> 65
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 and
warrants to purchase a total of 65,034 shares of the Company's Common Stock.
15,034 of these warrants were priced at $7.89 per share, payable to the Company
upon exercise, and 50,000 of these warrants were priced at $6.30 per share,
payable to the Company upon exercise. 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 60 for a descriptive
response to this item.
(b) Reports on Form 8-K:
(1) Current report on Form 8-K dated October 28, 1997 (Item 5
- Other Events)
Page 58
<PAGE> 66
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
March 30, 1998
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 30, 1998
- ------------------------------ Officer (Principal Executive Officer and
Marc W. Eller Director)
/s/ Douglas P. Baker Vice President and March 30, 1998
- ------------------------------ Chief Financial Officer
Douglas P. Baker (Principal Financial Officer)
Philip C. Shaffer*
David R. Sincox*
Igor Leontiev* Directors March 30, 1998
Ronald J. Berman*
Lee B. Arberg*
Dr. Zvi Yaniv*
</TABLE>
*By: /s/ Douglas P. Baker
--------------------------------
(Douglas P. Baker,
Attorney-in-Fact)
Page 59
<PAGE> 67
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>
- -------------------------------------------------------------------------------------------------
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED 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(I).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 Current Report on Form 8-K
dated as of February 14, 1997).
- -------------------------------------------------------------------------------------------------
3(I).2* Statement of Resolutions Establishing and Designating the Company's
Series F Preferred Stock, as filed with the Secretary of State of
the State of Texas on March 10, 1997. (Exhibit 3.1 to the Company's
Report on Form 8-K dated as of March 7, 1997).
- -------------------------------------------------------------------------------------------------
3(I).3* Amendment to Amended and Restated Articles of Incorporation of the
Company amending the Company's Series E Preferred Stock, as filed
with the Secretary of State of the State of Texas on May 1, 1997
(Exhibit 3(I).1 to the Company's Current Report on Form 8-K dated
as of August 4, 1997).
- -------------------------------------------------------------------------------------------------
3(I).4* Statement of Resolution Establishing and Designating the Company's
Series G Preferred Stock, as filed with the Secretary of State of
the State of Texas on June 11, 1997 (Exhibit 3.1 to the Company's
Current Report on Form 8-K dated as of July 25, 1997).
- -------------------------------------------------------------------------------------------------
3(I).5* Amendment to Amended and Restated Articles of Incorporation of the
Company amending the Company's Series F Preferred Stock, as filed
with the Secretary of State of the State of Texas on August 4, 1997
(Exhibit 3(I).2 to the Company's Current Report on Form 8-K dated
as of August 4, 1997).
- -------------------------------------------------------------------------------------------------
3(II).1* 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* 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).
- -------------------------------------------------------------------------------------------------
4.8* 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).
- -------------------------------------------------------------------------------------------------
</TABLE>
Page 60
<PAGE> 68
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
4.9* 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).
- -------------------------------------------------------------------------------------------------
4.10* 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).
- -------------------------------------------------------------------------------------------------
4.11* 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).
- -------------------------------------------------------------------------------------------------
4.12* Warrant to Purchase 150,000 shares of Common Stock at $3.90 per
share issued to GH Securities, Ltd. exerciseable 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).
- -------------------------------------------------------------------------------------------------
4.13* 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).
- -------------------------------------------------------------------------------------------------
4.14* Warrant to Purchase 60,000 shares of Common Stock at $6.50 per
share issued to G.H. Securities, Ltd. exerciseable 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).
- -------------------------------------------------------------------------------------------------
4.15* Warrant to Purchase 55,000 shares of Common Stock at $5.50 per
share issued to David M. Klausmeyer exerciseable 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).
- -------------------------------------------------------------------------------------------------
4.16* 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 Current Report on Form 8-K dated as
of October 30, 1996).
- -------------------------------------------------------------------------------------------------
4.17* 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 Current Report on Form 8-K dated as
of March 7, 1997).
- -------------------------------------------------------------------------------------------------
4.18* 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 Current Report on Form 8-K dated as of March 7,
1997).
- -------------------------------------------------------------------------------------------------
4.19* 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 Current Report on Form 8-K dated as of March 7,
1997).
- -------------------------------------------------------------------------------------------------
4.20* Form of the Company's 8% Convertible Debenture (Exhibit 4.2 to the
Company's Current Report on Form 8-K dated as of March 7, 1997).
- -------------------------------------------------------------------------------------------------
4.21* Form of Regulation D Subscription Agreement by and between the
Company and the Holders of the Company's Series G Preferred Stock
(Exhibit 4.1 to the Company's Current Report on Form 8-K dated as
of July 25, 1997).
- -------------------------------------------------------------------------------------------------
4.22* Form of Registration Rights Agreement by and between the Company
and the Holders of the Company's Series G Preferred Stock (Exhibit
4.2 to the Company's Current Report on Form 8-K dated as of July
25, 1997).
- -------------------------------------------------------------------------------------------------
4.23* Form of Warrant by and between the Company and the Holders of the
Company's Series G Preferred Stock (Exhibit 4.3 to the Company's
Current Report on Form 8-K dated as of July 25, 1997).
- -------------------------------------------------------------------------------------------------
4.24* Form of Regulation D Subscription Agreement by and between the
Company and the October 1997 Selling Shareholders dated as of
October 27, 1997 (Exhibit 4.38 to the Company's Registration
Statement on Form S-3 (No. 333-38941) dated as of October 28,
1997).
- -------------------------------------------------------------------------------------------------
4.25* Form of Registration Rights Agreement by and between the Company
and the October 1997 Selling Shareholders (Exhibit 4.39 to the
Company's Registration Statement on Form S-3 (No. 333-38941) dated
as of October 28, 1997).
- -------------------------------------------------------------------------------------------------
</TABLE>
Page 61
<PAGE> 69
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
4.26* Form of Warrant by and between the Company and the October 1997
Selling Shareholders (Exhibit 4.40 to the Company's Registration
Statement on Form S-3 (No. 333-38941) dated as of October 28,
1997).
- -------------------------------------------------------------------------------------------------
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* Revised License Agreement between the Company and the University of
Texas (Dallas) relating to worldwide exclusive rights to the
commercialization of Amorphic Diamond(TM) coatings (Exhibit 10.19
to the Company's Registration Statement on Form SB-2 (No.
33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------
10.7* 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.33-51466-FW) dated January 7, 1993).
- -------------------------------------------------------------------------------------------------
10.8* 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).
- -------------------------------------------------------------------------------------------------
10.9* 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).
- -------------------------------------------------------------------------------------------------
10.10* 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).
- -------------------------------------------------------------------------------------------------
10.11* 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).
- -------------------------------------------------------------------------------------------------
10.12* 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 62
<PAGE> 70
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
10.13* 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).
- -------------------------------------------------------------------------------------------------
10.14* 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).
- -------------------------------------------------------------------------------------------------
10.15* 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).
- -------------------------------------------------------------------------------------------------
10.16* 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).
- -------------------------------------------------------------------------------------------------
10.17* 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).
- -------------------------------------------------------------------------------------------------
10.18* 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).
- -------------------------------------------------------------------------------------------------
10.19* 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).
- -------------------------------------------------------------------------------------------------
10.20* 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).
- -------------------------------------------------------------------------------------------------
10.21* 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).
- -------------------------------------------------------------------------------------------------
10.22* 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
26, 1996).
- -------------------------------------------------------------------------------------------------
10.23* 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).
- -------------------------------------------------------------------------------------------------
10.24* 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).
- -------------------------------------------------------------------------------------------------
10.25* 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 63
<PAGE> 71
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
10.26* 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).
- -------------------------------------------------------------------------------------------------
10.27* 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).
- -------------------------------------------------------------------------------------------------
10.28* 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).
- -------------------------------------------------------------------------------------------------
10.29* 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).
- -------------------------------------------------------------------------------------------------
10.30* 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 Current
Report on Form 8-K dated as of September 25, 1996).
- -------------------------------------------------------------------------------------------------
10.31* 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).
- -------------------------------------------------------------------------------------------------
10.32* 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).
- -------------------------------------------------------------------------------------------------
10.33* 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).
- -------------------------------------------------------------------------------------------------
10.34* 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
Current Report on Form 8-K dated as of October 30, 1996).
- -------------------------------------------------------------------------------------------------
10.35* 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
Current 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
- -------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule (for SEC use only)
- -------------------------------------------------------------------------------------------------
27.2 Restated Financial Data Schedule (for SEC use only)
- -------------------------------------------------------------------------------------------------
</TABLE>
Page 64
<PAGE> 1
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Twelve Months Ended
December 31, December 31,
----------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of (loss) per common share:
Net loss applicable to common shareholders .......... $ (1,974,765) $(2,169,154) $(7,034,965) $(15,409,715)
------------ ----------- ----------- ------------
Weighted average number of common shares outstanding ..... 21,949,193 13,030,035 17,018,775 11,864,672
Net loss per common share ........................... $ (0.09) $ (0.17) $ (0.41) $ (1.30)
============ =========== =========== ===========
Computation of (loss) per common share
assuming full dilution (A):
No calculation of loss per common share assuming full dilution is submitted because such
computation results in an antidilutive loss per common share.
</TABLE>
Page 65
<PAGE> 1
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 Plasmatron Coatings and
Systems, Inc. Pennsylvania Systems, Inc.
FEPET, Inc. Delaware FEPET, Inc.
Electronic Billboard Electronic Billboard
Technology, Inc. Delaware Technology, Inc.
</TABLE>
Page 66
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Marc W. Eller
------------------------------------
Marc W. Eller
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Dr. Zvi Yaniv
------------------------------------
Dr. Zvi Yaniv
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Dr. Igor Leontiev
------------------------------------
Dr. Igor Leontiev
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Philip C. Shaffer
------------------------------------
Philip C. Shaffer
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Lee B. Arberg
------------------------------------
Lee B. Arberg
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ David R. Sincox
------------------------------------
David R. Sincox
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director of SI
Diamond Technology, Inc. (the "Company") hereby constitutes and appoints Douglas
P. Baker or Marc W. Eller the true and lawful agents and attorneys-in-fact of
the undersigned with full power and authority in each of said agents and
attorneys-in-fact, acting singly, to sign for the undersigned in the
undersigned's capacity as a Director of the Company, the Company's 1997 Annual
Report on Form 10-K to be filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Exchange Act of 1934, and to sign any
amendment or amendments to such Annual Report, hereby ratifying and confirming
all acts taken by such agents and attorneys-in-fact as herein authorized.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed of of this 30th day of March, 1998.
/s/ Ronald J. Berman
------------------------------------
Ronald J. Berman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY, INC. FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 448,042
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 779,170
<PP&E> 4,048,653
<DEPRECIATION> 2,207,234
<TOTAL-ASSETS> 2,635,589
<CURRENT-LIABILITIES> 2,878,197
<BONDS> 987,593
0
3,077
<COMMON> 24,239
<OTHER-SE> (707,517)
<TOTAL-LIABILITY-AND-EQUITY> 2,635,589
<SALES> 3,568,164
<TOTAL-REVENUES> 3,568,164
<CGS> 4,388,747
<TOTAL-COSTS> 9,264,088
<OTHER-EXPENSES> (249,167)
<LOSS-PROVISION> 517,144
<INTEREST-EXPENSE> 357,000
<INCOME-PRETAX> (6,320,901)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,320,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,320,901)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY, INC. FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,290
<SECURITIES> 0
<RECEIVABLES> 934,564
<ALLOWANCES> 0
<INVENTORY> 329,643
<CURRENT-ASSETS> 2,054,186
<PP&E> 5,326,438
<DEPRECIATION> 2,182,928
<TOTAL-ASSETS> 5,621,259
<CURRENT-LIABILITIES> 4,930,072
<BONDS> 850,000
0
746
<COMMON> 13,126
<OTHER-SE> 677,315
<TOTAL-LIABILITY-AND-EQUITY> 5,621,259
<SALES> 5,772,620
<TOTAL-REVENUES> 5,772,620
<CGS> 5,317,186
<TOTAL-COSTS> 19,277,197
<OTHER-EXPENSES> (243,571)
<LOSS-PROVISION> 350,000
<INTEREST-EXPENSE> 98,000
<INCOME-PRETAX> (15,409,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,409,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,409,715)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
