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Filed Pursuant to Rule 424(B)(3)
Registration No. 333-40711
PROSPECTUS
SI DIAMOND TECHNOLOGY, INC.
<TABLE>
<S> <C>
8,935,358 Shares of 1,483,137 Shares of
Common Stock Common Stock
(par value $.001 per share) Issuable Upon
Conversion of Series E Preferred Stock
2,535,600 SHARES OF
Common Stock 995,456 Shares of
Underlying Warrants Common Stock Issuable Upon
Conversion of Series F Preferred Stock
1,853,617 Shares of
Common Stock Issuable Upon
Conversion of Series G Preferred Stock
</TABLE>
This Prospectus relates to 15,803,168 shares (the "Shares") of Common
Stock, par value $.001 per share (the "Common Stock"), of SI Diamond Technology,
Inc., a Texas corporation (the "Company"), which may be offered for sale by
certain shareholders of the Company (the "Selling Shareholders") from time to
time. The Shares offered for sale are: (1) presently outstanding, (2) underlie
certain existing warrants to purchase Common Stock (the "Warrants")
(Descriptions of all Warrants which are subject to this Prospectus, including
each Warrant's exercise price and expiration date, are contained in "Plan of
Distribution and Selling Shareholders".), (3) are issuable upon conversion of
outstanding shares of the Company's Series E Preferred Stock, (4) are issuable
upon conversion of outstanding shares of the Company's Series F Preferred Stock
or (5) are issuable upon conversion of outstanding shares of the Company's
Series G Preferred Stock. As of June 16, 1998, there were 8,935,358 outstanding
Shares of Common Stock, 2,535,600 Shares underlying the Warrants, 1,483,137
Shares issuable upon conversion of the Series E Preferred Stock, 995,456 Shares
issuable upon conversion of the Series F Preferred Stock and 1,853,617 Shares
issuable upon conversion of the Series G Preferred Stock, which Shares are all
subject to this Prospectus. See "Plan of Distribution and Selling Shareholders."
The Company's principal executive offices are located at 3006 Longhorn
Boulevard, Suite 107 Austin, Texas 78758 and its telephone number is (512)
339-5020.
This offering is not being underwritten. The Selling Shareholders
directly, through agents designated by them from time to time or through dealers
or underwriters also to be designated, may sell the Shares from time to time, in
or through privately negotiated transactions, or in one or more transactions,
including block transactions, on the OTC Bulletin Board or on any stock exchange
on which the Shares may be listed in the future pursuant to and in accordance
with the applicable rules of such exchanges or otherwise. The selling price of
the Shares may be at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. To the extent
required, the specific Shares to be sold, the names of the Selling Shareholders,
the respective purchase prices and public offering prices, the names of any such
agent, dealer or underwriter and any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying Prospectus.
See "Plan of Distribution and Selling Shareholders."
The Company will receive the proceeds from the exercise of the
Warrants, but will not receive any proceeds from the sale of the Shares by the
Selling Shareholders. The Company has agreed to pay substantially all of the
expenses of this offering (other than commissions and discounts of underwriters,
dealers or agents), which are estimated at $44,615. The Company has agreed to
indemnify certain of the Selling Shareholders against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Plan of Distribution and Selling Shareholders."
The Selling Shareholders and any broker-dealers, agents or underwriters
that participate with the Selling Shareholders in the distribution of any of the
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Plan of Distribution and Selling
Shareholders."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
The Common Stock is traded and quoted on the OTC Bulletin Board under
the symbol "SIDT". On June 16, 1998, the closing price of the Common Stock as
reported on the OTC Bulletin Board was $ 0.37 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is June 18, 1998.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
SHAREHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SHARES OFFERED HEREBY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Materials filed with the Commission by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549;
and at the Regional Offices of the Commission at the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60606-2511; and Seven
World Trade Center, New York, New York 10048. Copies of such material can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Commission also maintains a Web site that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
The Common Stock is included in the OTC Bulletin Board under the symbol
"SIDT." Reports, proxy and information statements and other information
concerning the Company can be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., 3rd Floor, Washington, D.C. 20006
or obtained by calling the Nasdaq Public Reference Room Disclosure Group at
(800) 638-8241.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 1-11602), are incorporated by
reference in this Prospectus and shall be deemed to be a part hereof:
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(1) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
(2) The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1998.
(3) The Company's Current Report on Form 8-K, dated January 20,
1998.
(4) The Company's Current Report on Form 8-K, dated February 11,
1998.
(5) The Company's Current Report on Form 8-K, dated May 8, 1998.
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of the offering made by this Prospectus shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon written or oral
request of any such person, a copy of any or all of the documents referred to
above that have been incorporated by reference in this Prospectus (not including
exhibits to the documents that are incorporated by reference unless such
exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be directed in writing or by telephone to SI
Diamond Technology, Inc., 3006 Longhorn Boulevard, Suite 107, Austin, Texas
78758, Attention: Corporate Secretary (Telephone: (512) 339-5020).
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RECENT DEVELOPMENTS
On May 8, 1998, the Company closed a transaction to sell the majority
of the operating assets of its Diamond Tech One, Inc. ("DTO") subsidiary for a
total purchase price of $2.2 million, of which $1.8 million was payable at the
closing and the remaining $400,000 was deposited into escrow. A portion of the
escrowed amount will be released upon the settlement, by the Company, of certain
litigation between DTO and Alpine Microsystems, Inc. The balance will be
released in 120 days. The litigation involves a breach of contract claim by
Alpine Microsystems, Inc. The Company believes settlement negotiations will be
completed within the next two or three months. The purchaser of these assets
will also assume the building lease on the DTO facility. The Company will retain
the remaining assets, including all cash, accounts receivable, certain equipment
identified as excess, certain intangibles, and all liabilities. The Company
expects to record a gain on the sale of these assets of approximately $700,000
in the quarter ended June 30, 1998. The remaining assets of DTO that have been
retained by the Company are insignificant, with the exception of the intangible
assets. While these intangible assets have no book value, they may have
significant market value. The Company intends to seek buyers or licensees for
these intangible assets.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and notes thereto incorporated by reference in this prospectus. Unless the
context otherwise requires, as used herein, the term "SI Diamond" or the
"Company" refers to SI Diamond Technology, Inc. and its subsidiaries.
THE OFFERING
This prospectus relates to 15,803,168 shares (the "Shares") of Common
Stock, par value $.001 per share (the "Common Stock"), of SI Diamond Technology,
Inc., a Texas corporation (the "Company"), which may be offered for sale by
certain shareholders of the Company (the "Selling Shareholders") from time to
time. The Shares offered for sale are: (1) presently outstanding, (2) underlie
certain existing warrants to purchase Common Stock (the "Warrants"), (3) are
issuable upon conversion of outstanding shares of the Company's Series E
Preferred Stock, (4) are issuable upon conversion of outstanding shares of the
Company's Series F Preferred Stock or (5) are issuable upon conversion of
outstanding shares of the Company's Series G Preferred Stock. As of June 16,
1998, there were 8,935,358 outstanding Shares of the Company's Common Stock ,
2,535,600 Shares underlying the Warrants 1,483,137 Shares issuable upon
conversion of the Series E Preferred Stock, 995,456 Shares issuable upon
conversion of Series F Preferred Stock and 1,853,617 Shares issuable upon
conversion of the Series G Preferred Stock, which Shares are all subject to this
Prospectus. See "Plan of Distribution and Selling Shareholders."
PLAN OF DISTRIBUTION
This offering is not being underwritten. The Selling Shareholders
directly, through agents designated by them from time to time or through
dealers or underwriters also to be designated, may sell the Shares from time to
time, in or through privately negotiated transactions, or in one or more
transactions, including block transactions, on the OTC Bulletin Board or on any
stock exchange on which the Shares may be listed in the future pursuant to and
in accordance with the applicable rules of such exchanges or otherwise. The
selling price of the Shares may be at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. To the extent required, the specific Shares to be sold, the names of the
Selling Shareholders, the respective purchase prices and public offering prices,
the names of any such agent, dealer or underwriter and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying Prospectus. In addition, any securities covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus. See "Plan of Distribution and
Selling Shareholders."
The Company will receive the proceeds from the exercise of the
Warrants, but will not receive any proceeds from the sale of the Shares by the
Selling Shareholders. The Company has agreed to pay substantially all of the
expenses of this offering (other than commissions and discounts of underwriters,
dealers or agents), which are estimated at $44,615. The Company has agreed to
indemnify certain of the Selling Shareholders against certain civil liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See "Plan
of Distribution and Selling Shareholders."
SHARES CONVERTED AT DISCOUNT
Shares of the Company's Series E Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock are convertible into the Company's Common
Stock at prices which are at a discount to prevailing market prices at the time
of conversion into the Company's Common Stock as described in the appropriate
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subsections of "Plan of Distribution and Selling Shareholders." Sales or offers
to sell shares of Common Stock converted from these series of the Company's
Preferred Stock could adversely affect the price of and market for the Common
Stock.
SELLING SHAREHOLDERS AS UNDERWRITERS
The Selling Shareholders and any broker-dealers, agents or underwriters
that participate with the Selling Shareholders in the distribution of any of the
Shares may be deemed to be "Underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
Shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Plan of Distribution and Selling
Shareholders."
RISK FACTORS
See "Risk Factors" beginning on page 7 of this Prospectus for a
discussion of certain factors related to the Company and the Common Stock
offered hereby.
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RISK FACTORS
The Common Stock being offered hereby involves a high degree of risk.
Prospective investors should carefully consider the following risk factors in
addition to other information contained in this Prospectus in evaluating an
investment in the shares of Common Stock offered hereby.
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. These costs are
currently unquantifiable but are expected to be in excess of $5,000,000. Prior
to incurring these costs the Company intends to locate a strategic partner to
fund the majority of these costs. There is no guarantee, however, that these
estimates will reflect the actual costs incurred. 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 DFED will be
successfully developed, be capable of being produced in commercial quantities on
a cost-effective basis or be successfully marketed. Failure of the DFE and
related products to generate significant revenue for the Company would
constitute a material adverse effect on the Company's future financial viability
and existence.
HISTORY OF OPERATING LOSSES; GOING CONCERN
For the year ended December 31, 1997, the Company incurred a net loss
of $6,320,901. For the years ended December 31, 1992, 1993, 1994, 1995, and
1996, the Company incurred 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. The Company's independent auditors have included an
explanatory paragraph in their report on the Company's financial statements
stating that 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 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.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
The Company expects to incur substantial expenses for R&D, product
testing, product marketing and administrative overhead. The Company expects
these expenses to exceed $2.4 million annually. There is no guarantee, however,
that these estimates will reflect the actual costs incurred. The majority of R&D
expenditures are for development of the Company's DFE technology. Further, the
Company believes that
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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 other 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, joint venture
financing, or any combination thereof at any time.
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. 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 1999. 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
the terms acceptable to the Company.
The Company has developed a plan to allow it to maintain operations
until the Company is able to sustain itself on its own revenue. In order to have
time to implement this plan, the Company is dependent upon the continued
cooperation of its creditors. Upon completion of the DTO transaction, the
Company will have existing resources to enable it to maintain its planned
operations for a period of approximately 30 to 45 days from the date of this
filing. The Company expects to be able to obtain additional resources during
this time period to enable it to complete the implementation of its plan.
The Company's plan is primarily dependent on raising funds through
strategic partners and debt offerings as well as raising revenues and reducing
expenses. The Company expects to sell certain of DTO's intangible assets that
are not being sold in the present transaction as well as to possibly sell some
of the excess equipment not included in the present transaction. As a result of
the reduction in operating activity related to the disposition of the DTO
operating assets, the Company plans to significantly reduce other costs
including selling, general, administrative, and interest cost. This reduction in
costs would mean that the Company would require significantly reduced amounts of
capital to fund its ongoing operations.
On May 8, 1998, the Company closed a transaction to sell the majority
of the operating assets of DTO for a total purchase price of $2.2 million, of
which $1.8 million was payable at closing and the remaining $400,000 was
deposited into escrow. The purchaser of the assets will also assume the building
lease on the DTO facility. The Company will retain all cash, accounts
receivable, certain equipment identified as excess, certain intangibles and all
liabilities. See "Recent Developments."
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In addition, the Company is seeking additional strategic partners to
invest in both its Electronic Billboard Technology, ("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 remain a majority interest of at least 80% in
each of these subdidiaries. 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 R&D, testing and production of its products or obtain
funds through arrangements with other entities that may require the Company to
relinquish rights to certain of its technologies or products. Such results would
materially and adversely affect the Company.
DEPENDENCE ON PRINCIPAL PRODUCTS
The Company's DFE technology is an emerging technology. The financial
condition and prospects of the Company are dependent upon market acceptance and
sales of the Company's DFE products and its Electronic Billboard. Additional R&D
needs to be conducted with respect to the DFE products and the Electronic
Billboard before marketing and sales efforts can be commenced. Market acceptance
of the Company's products will be dependent upon the perception within the
electronics and instrumentation industries of the quality, reliability,
performance, efficiency, breadth of application and cost-effectiveness of the
products. There can be no assurance that the Company will be able to gain
commercial market acceptance for its products or develop other products for
commercial use.
COMPETITION; POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The display industry is highly competitive and is characterized by
rapid technological change. The Company's existing and proposed products will
compete with other existing products and may compete against other developing
technologies. Development by others of new or improved products, processes or
technologies may reduce the size of potential markets for the Company's
products. There can be no assurance that such products, processes or
technologies will not render the Company's proposed products obsolete or less
competitive. Many of the Company's competitors have greater financial,
managerial and technical resources than the Company. The Company will be
required to devote substantial financial resources and effort to further R&D.
There can be no assurance that the Company will successfully differentiate its
products from its competitors' products or that the Company will be able to
adapt to evolving markets and technologies, develop new products or achieve and
maintain technological advantages.
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TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies, the Company has various
license agreements with Microelectronics and Computer Technology Corporation
("MCC") and Diagascrown, Inc., wherein the Company has acquired rights to
develop and commercialize certain research technologies. In certain cases,
agreements require the Company to pay royalties on sale of products developed
from the licensed technologies and fees on revenues from sublicensees, where
applicable, and to pay for the costs of filing and prosecuting patent
applications. The Company's principal license agreement with MCC requires the
Company to pay exclusivity fees under certain circumstances in order to maintain
the Company's exclusive rights under the MCC Agreement. Each agreement is
subject to termination by either party, upon notice, in the event of certain
defaults by the other party. The payment of such royalties may adversely affect
the future profitability of the Company.
NO ASSURANCE OF MARKET ACCEPTANCE
Since its inception, the Company has focused its product development
efforts on R&D of technologies that the Company believes will be a significant
advance over currently available technologies. The Company has limited
experience in manufacturing and marketing. The new management team that was put
in place in 1996 has experience in manufacturing and marketing; however, with
any new technology there is a risk that the market may not appreciate the
benefits or recognize the potential applications of the technology. Market
acceptance of the Company's products will depend, in part, on the Company's
ability to convince potential customers of the advantages of such products as
compared to competitive products, and will also depend upon the Company's
ability to train manufacturers and others to use the Company's products. There
can be no assurance that the Company will be able to successfully market its
proposed products even if such products perform as anticipated.
LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
The Company has no established commercial manufacturing facilities in
the areas in which it is conducting its principal research. Its existing
manufacturing, while related, would not directly support manufacturing of the
proposed new products. The new management team that was put in place has
commercial manufacturing and marketing experience; however, the Company will be
required to either employ additional qualified personnel to establish
manufacturing facilities or enter into appropriate manufacturing agreements with
others. There is no assurance that the Company will be successful in attracting
experienced personnel or financing the cost of establishing commercial
manufacturing facilities, if required, or be capable of producing a high quality
product in quantity for sale at competitive prices.
MARKETING AND SALES UNCERTAINTIES
There can be no assurance that the DFE related products or the
Electronic Billboard will be successfully developed or that such products will
be commercially successful. The Company intends to establish a sales
organization to promote, market, and sell its products. To develop a sales
organization will require significant additional expenditures, management
resources and training time. There can be no assurance that the Company will be
able to establish such a sales organization.
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UNPROVEN TECHNOLOGY; NEED FOR SYSTEM INTEGRATION
In order to prove that the Company's technologies work and can 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 has 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. The Company currently, however, 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 R&D on its existing and proposed products.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technology. Although the Company has been awarded, has filed
applications for or has been licensed technology under numerous patents, there
can be no assurance as to the degree of protection offered by these patents or
as to the likelihood that pending patents will be issued. There can be no
assurance that competitors in both the United States and foreign countries, many
of which have substantially greater resources and have made substantial
investments in competing technologies, have not 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 or unintentionally 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
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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. Other than the executive officers of the Company these key
personnel include Drs. Richard Fink, Ronald Robinder and Zhidan Tolt.
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 Company does not maintain key man insurance on any
of its executive officers or other key technical personnel. The loss of the
services of key scientific, technical and managerial personnel could have a
material adverse effect on the Company.
CONCENTRATION OF OWNERSHIP
Officers, directors and principal shareholders of the Company own, or
have the power to vote, in the aggregate, approximately 22% of the voting stock
of the Company on an "as converted" basis. Due to the relatively large number of
shares owned by these shareholders and certain provisions of the Company's
Amended and Restated Articles of Incorporation ("the Restated Articles") and
Bylaws, it may be difficult for other shareholders to cause a change in control
of the Company or effect other fundamental corporate transactions if officers,
directors and principal shareholders were to act as a group.
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VOLATILITY OF MARKET FOR SHARES
The market price of the Shares, like that of the common stock of many
emerging technology companies has fluctuated significantly in recent years and
will likely continue to fluctuate in the future. The price of such securities
currently rises and is expected to continue to rise rapidly in response to
certain events, such as announcements concerning product developments, licenses
and patents, although the outcome of such events may not be fully determined.
Similarly, prices of such securities may fall rapidly if unfavorable results are
encountered in product development or market acceptance. In the event that the
Company achieves earnings from the sale of products, securities analysts may
begin predicting quarterly earnings. The failure of the Company's earnings to
meet analysts' expectations could result in a significant rapid decline in the
market price of the Company's Common Stock. In addition, the stock market has
experienced and continues to experience extreme price and volume fluctuations
which have affected the market price of the equity securities of many technology
companies and which have often been unrelated to the operating performance of
those companies. Such broad market fluctuations, as well as general economic and
political conditions, may adversely affect the market price of the Common Stock.
SHARES CONVERTED AT DISCOUNT
Shares of the Company's Series E Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock are convertible into the Company's Common
Stock at prices which are at a discount to prevailing market prices at the time
of conversion into the Company's Common Stock as described in the appropriate
subsections of "Plan of Distribution and Selling Shareholders." Sales or offers
to sell shares of Common Stock converted from these Series of the Company's
Preferred Stock could adversely affect the price of and market for the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 16, 1998, there were 38,660,657 shares of Common Stock
outstanding, of which 27,982,498 shares of Common Stock were freely tradeable
without restriction or further registration under the Securities Act by persons
other than "affiliates" of the Company. As of that date, the remaining shares of
Common Stock were deemed "restricted securities," as defined in Rule 144 under
the Securities Act, and may not be resold in the absence of registration under
the Securities Act or pursuant to an exemption from such registration, including
exemptions provided by Rule 144 under the Securities Act. Under Rule 144,
persons who have held securities for a period of at least one year may sell a
limited amount of such securities without registration under the Act. Rule 144
also permits, under certain circumstances, persons who are not affiliates of the
Company, to sell their restricted securities without quantity limitations once
they have completed a two-year holding period.
The Registration Statement, of which this Prospectus is a part,
pertains to 8,935,358 shares of Common Stock which are currently "restricted
securities"; 2,535,600 shares of Common Stock which underlie existing Warrants;
1,483,137 shares of Common Stock which are issuable upon conversion of the
Series E Preferred Stock; 995,456 shares of Common Stock which are issuable
upon conversion of the Series F Preferred Stock; and, 1,853,617 shares of Common
Stock which are issuable upon conversion of the Series G Preferred Stock. The
Company is obligated to maintain the effectiveness of the Registration Statement
for varying periods of time, pursuant to separate agreements with certain groups
of the Selling Shareholders. As of June 16, 1998, the Company is additionally
obligated to register an additional 1,230,130 shares of its Common Stock which
are currently "restricted securities" in certain circumstances.
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In addition to the shares of Common Stock which are outstanding as of
June 16, 1998, 3,500,000 shares of Common Stock have been reserved for issuance
pursuant to the Company's stock option plans. Approximately 3,000,000 shares of
Common Stock have also been reserved for issuance upon the exercise of Warrants
that have been issued by the Company (2,535,600 of such shares have been
registered in the Registration Statement). Additionally, 125,275 shares of
Common Stock have been reserved for issuance upon conversion of the Company's
Series A Preferred Stock, 1,483,137 shares of Common Stock have been reserved
for issuance upon conversion of the Company's Series E Preferred Stock (the
"Series E Shares"), 995,456 shares of Common Stock have been reserved for
issuance upon conversion of the Company's Series F Preferred Stock (the "Series
F Shares") and 1,853,617 shares of Common Stock have been reserved for issuance
upon conversion of the Company's Series G Preferred Stock (the "Series G
Shares").
No prediction can be made as to the effect, if any, that future sales,
or the availability of shares of Common Stock for future sales, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock by the Company or by shareholders who hold "restricted securities,"
or the perception that such sales may occur, could adversely affect prevailing
market prices for the Common Stock.
POSSIBLE ADVERSE EFFECT OF SALES BY SELLING SHAREHOLDERS ON THE MARKET FOR AND
THE PRICE OF THE COMMON STOCK
Upon registration in accordance with its obligations, the Selling
Shareholders will be permitted to sell up to 15,803,168 shares of Common Stock
(of which 2,535,600 are shares of Common Stock subject to issuance upon the
exercise of certain Warrants; 1,483,137 are shares of Common Stock issuable upon
conversion of the Series E Shares; 995,456 are shares of Common Stock issuable
upon conversion of the Series F Shares and 1,853,617 are Shares of Common Stock
issuable upon conversion of the Series G Shares). The shares (assuming the
exercise of all Warrants and conversion of all the Series E Shares, Series F
Shares and Series G Shares subject to the Registration Statement) represent
approximately 34% of the shares of Common Stock outstanding on the date hereof.
The Company will not receive any proceeds from sales of Shares held by such
Selling Shareholders. The Company will receive the proceeds from the exercise of
any Warrants to purchase Shares of Common Stock. Assuming the exercise of all
Warrants which are subject to the Registration Statement of which this
Prospectus is a part, the Company would receive approximately $5,560,000 from
such exercises. The exercise prices of the Warrants range from $0.15 to $7.89
per share of the Company's Common Stock. It is unlikely that the Warrants will
be exercised until the trading price of the Common Stock exceeds the exercise
price of the Warrants, if at all.
Sales of or offers to sell substantial blocks of Common Stock currently
held by certain shareholders, or the perception by investors, investment
professionals or securities analysts of the possibility that such sales may
occur could adversely affect the price of and market for the Common Stock.
PRIOR AND SUPERIOR RIGHTS OF OTHER CLASSES OF CAPITAL STOCK
The rights of holders of the Common Stock to receive dividends or other
payments with respect thereto are subject to any prior and superior rights of
holders of the Company's Preferred Stock. As of June 4, 1998, the Company had
issued and outstanding 100 shares of its Series A Preferred Stock, 47 shares of
its Series E Preferred Stock, 365 shares of its Series F Preferred Stock and
1700 shares of its
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Series G Preferred Stock. Additionally, the Company has authorized 75,000 shares
of Series C Preferred Stock and 90,000 shares of Series D Preferred Stock. No
shares of Series C Preferred Stock or Series D Preferred Stock are currently
outstanding. No current series of the Company's Preferred Stock has rights that
are prior and superior to the Common Stock with respect to dividends.
Additionally, only the holders of the Series A Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock are
entitled to a liquidation preference over the holders of the Common Stock. The
Board of Directors, however, has the authority to provide for the issuance of
additional shares of Preferred Stock in one or more additional series and such
shares may, in the Board's discretion, have prior and superior rights to receive
dividends or other payments with respect thereto. In light of its future capital
requirements, the Company could issue shares of Preferred Stock at any time
having such prior and superior rights. See "Description of Capital Stock".
LACK OF DIVIDENDS
The Company has never paid cash dividends on its equity securities and
does not intend to pay cash dividends in the foreseeable future. To the extent
the Company has earnings in the future, the Company intends to reinvest such
earnings in the business operations of the Company.
ANTITAKEOVER EFFECTS
The Company's Restated Articles and Bylaws contain a number of
provisions which could make the acquisition of the Company, by means of an
unsolicited tender offer, a proxy contest or otherwise, more difficult. Among
other things, (i) the Board is authorized to issue series of Preferred Stock
that could, depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt; (ii) the Board of Directors is
divided into three classes of directors, with the result that approximately
one-third of the Board of Directors are elected each year; (iii) except in
limited circumstances, no shares of the Company's Preferred Stock may be issued
or sold to any officer or director of the Company or any shareholder owning more
than five percent (5%) of the Company's Common Stock without the affirmative
vote of a majority of the disinterested shareholders of the Company; and (iv)
holders of Series C and Series D Preferred Stock have the right to acquire
additional shares in certain circumstances where the voting power of such
holders would be diluted. See "Description of Capital Stock--Certain Provisions
of the Articles of Incorporation, Bylaws and Texas Law."
LIMITATION OF REMEDIES; INDEMNIFICATION
The Company's Restated Articles provide that a director of the Company
will only be liable to the Company for (i) breaches of his duty of loyalty to
the Company and its shareholders, (ii) acts or omissions not in good faith or
which constitute a breach of duty of a director of the Company or involves
intentional misconduct or a knowing violation of law, (iii) transactions from
which a director receives an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv)
acts or omissions for which liability is specifically provided by statute, and
(v) acts relating to unlawful stock purchases or payments of dividends. Thus,
the Company may be prevented from recovering damages for certain alleged errors
or omissions by its directors. The Bylaws also provide that, under certain
circumstances, the Company will indemnify its officers and directors for
liabilities incurred in connection with their good faith acts for the Company.
Such an indemnification payment might deplete the Company's assets. While Texas
law permits a shareholder to bring a derivative action on behalf of a
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corporation, the law relating to the remedies available to corporate
shareholders is constantly changing. Shareholders who have questions concerning
the fiduciary obligations of the officers and directors of the Company should
consult with independent legal counsel. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Securities Act") may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act , and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
uncertainty of additional funding, the development of other technologies, the
ability of the Company to acquire manufacturing facilities and marketing and
sales expertise, the ability of the Company to attract and retain highly
qualified personnel, as well as general market conditions and the degree and
nature of competition. 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.
COMPUTER SYSTEMS/SOFTWARE -- YEAR 2000 ISSUES
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 miscalculation 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 or
contingencies related to the Year 2000 Issue for the products it has sold.
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USE OF PROCEEDS
The Selling Shareholders will receive all of the net proceeds from the
sale of the Shares. The Company will not receive any of the proceeds from the
sale of the Shares by the Selling Shareholders. The Company will receive the
proceeds from the exercise of the Warrants and such proceeds, if any, will be
used for working capital. See "Plan of Distribution and Selling Shareholders."
Assuming the exercise of all Warrants which are subject to the Registration
Statement, of which this Prospectus is a part, the Company shall receive
approximately $5,560,000 upon such exercise. The exercise prices of the Warrants
range from $0.15 to $7.89 per share of the Company's Common Stock. It is
unlikely that the Warrants will be exercised until the trading price of the
Common Stock exceeds the exercise price of the Warrants, if at all.
PLAN OF DISTRIBUTION AND
SELLING SHAREHOLDERS
GENERAL
The Company is filing the Registration Statement, of which this
Prospectus is a part, to permit transactions with respect to certain shares of
the Company's Common Stock, which are (1) currently "restricted securities" held
by the Selling Shareholders, (2) issuable upon exercise of certain outstanding
Warrants to purchase shares of the Company's Common Stock, or (3) issuable upon
conversion of outstanding shares of the Company's Series E Preferred Stock,
Series F Preferred Stock or Series G Preferred Stock. This offering is not being
underwritten. The Selling Shareholders directly, through agents designated from
time to time, or through dealers or underwriters also to be designated, may sell
the shares from time to time, in or through privately negotiated transactions,
or in one or more transactions, including block transactions, on the OTC
Bulletin Board or on any stock exchanges on which the shares may be listed in
the future pursuant to and in accordance with the applicable rules of such
exchanges. The selling price of the shares may be at market prices prevailing at
the time of sale, at prices relating to such prevailing market prices or at
negotiated prices. Further, the Selling Shareholders are not restricted as to
the number of shares which may be sold at any one time, and it is possible that
a significant number of shares could be sold at the same time, which may have a
depressive effect on the market price of the Company's Common Stock.
To the extent required by applicable law, the specific shares to be
sold, the names of the Selling Shareholders, the respective purchase prices and
public offering prices, the names of any such agent, dealer or underwriters, and
any applicable commissions or discounts with respect to a particular offer will
be set forth in an accompanying Prospectus. Resales or reoffers of the shares by
the Selling Shareholders must be accompanied by the delivery of a copy of this
Prospectus. Copies of this Prospectus shall be delivered to each Selling
Shareholder after the Registration Statement, of which this Prospectus is a
part, is declared effective. Each Selling Shareholder shall be subject to the
anti-manipulative rules under Regulation M, promulgated pursuant to the Exchange
Act.
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The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of the shares may be deemed to be underwriters,
and any profit on the sale of the shares by them and any discounts, commissions
or concessions received by any such underwriters, dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Shareholders may also sell such shares pursuant to Rule 144
promulgated under the Securities Act, or may pledge shares as collateral for
margin accounts, and such shares could be resold pursuant to the terms of such
accounts.
There can be no assurance that the Selling Shareholders will sell any
or all of the shares offered by them hereunder. The Company has filed the
Registration Statement of which this Prospectus forms a part to comply with the
exercise by the BEG Selling Shareholders, the Series E Selling Shareholders, the
December 1995 Selling Shareholders, the GH Selling Shareholders, the Series F
Selling Shareholders and the Series G Selling Shareholders (each as defined
below) of demand registration rights granted to such Selling Shareholders, and
to comply with certain "piggyback" registration rights granted to other Selling
Shareholders.
AUGUST 1993 SELLING SHAREHOLDERS
In August 1993, the Company issued 104,000 shares of its Common Stock
in an exempt offering under Regulation D of the Securities Act to those
shareholders identified in the Selling Shareholders Table as the August 1993
Selling Shareholders (the "August 1993 Selling Shareholders"). Each August 1993
Selling Shareholder was also issued one (1) Warrant for every two (2) shares of
Common Stock that were purchased in this transaction. Warrants to purchase
52,000 shares of Common Stock were issued to the August 1993 Selling
Shareholders. These Warrants are exercisable at $5.65 per share of Common Stock
until June 30, 1998. The holders of these Shares and Warrants were granted
"piggyback" registration rights in which the Company agreed to have the Common
Stock held by the August 1993 Selling Shareholders, as well as the Common Stock
underlying their Warrants, included in the Registration Statement and to cause
such Registration Statement to become effective as soon as practicable.
EAST/WEST SELLING SHAREHOLDERS
In February 1995, the shareholders identified in the Selling
Shareholders Table as the East/West Selling Shareholders (the "East/West Selling
Shareholders") acquired 1,500,150 shares of Common Stock. The Company granted
"piggyback" registration rights to the East/West Selling Shareholders with
respect to such Shares in the event of the registration of any of the Company's
equity securities, except in certain circumstances, and agreed to keep any such
registration with respect to the East/West Selling Shareholders effective for a
period of at least six months. Additionally, the Company agreed to pay all of
the expenses incident to the preparation and filing of the Registration
Statement (other than commissions and discounts of any underwriters, dealers or
agents). The Company also agreed to indemnify the East/West Selling Shareholders
and any underwriters they may utilize against certain civil liabilities,
including liabilities arising under the Securities Act. In addition, each
East/West Selling Shareholder agreed to indemnify the Company against certain
civil liabilities, including liabilities under the Securities Act, with respect
to written information furnished by the East/West Selling Shareholders to the
Company.
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BEG SELLING SHAREHOLDERS
Effective June 20, 1995, the shareholders identified in the Selling
Shareholders Table as the BEG Selling Shareholders (the "BEG Selling
Shareholders") acquired 1,097,908 shares of the Company's Common Stock in an
exempt transaction under Regulation D. Pursuant to the Subscription Agreement
and Purchaser Questionnaires with respect to such transactions, the Company was
required to file the Registration Statement with respect to the Common Stock
acquired by the BEG Selling Shareholders and keep such Registration Statement
effective for a period of three (3) years. The Company agreed to pay all of the
expenses in the preparation of the Registration Statement (other than
commissions and discounts of any underwriters, dealers or agents). The Company
also agreed to indemnify the BEG Selling Shareholders and any underwriters they
utilize against certain civil liabilities, including liabilities arising under
the Securities Act. In addition, each BEG Selling Shareholder agreed to
indemnify the Company against certain civil liabilities, including liabilities
under the Securities Act, with respect to written information furnished by the
BEG Selling Shareholders to the Company.
Marc W. Eller became a director of the Company on November 15, 1995,
and the Company's Chairman of the Board and Chief Executive Officer on July 26,
1996. Mr. Eller was also the vice president and chairman of the board of BEG
Enterprises, Inc., a former BEG Selling Shareholder which has assisted the
Company within the past three years in its capital raising activities. Ronald J.
Berman, the president of BEG Enterprises, Inc. is also a director of the
Company.
THE DECEMBER 1995 SELLING SHAREHOLDERS
Effective December 1995, the shareholders identified in the Selling
Shareholders Table as the December 1995 Selling Shareholders (the "December 1995
Selling Shareholders") acquired 287,919 shares of the Company's Common Stock in
an exempt transaction. Upon demand by the December 1995 Selling Shareholders,
the Company was required to file the Registration Statement with respect to the
Shares acquired by such Selling Shareholders and keep such Registration
Statement effective for a period of three (3) years. 28,792 shares of Common
Stock underlying certain Warrants issued to the December 1995 Selling
Shareholders are also included in the Registration Statement, of which this
Prospectus is a part. These Warrants are exercisable at a price of $6.30 per
share until April 19, 1999. The Company agreed to pay all of the expenses in the
preparation of the Registration Statement (other than commissions and discounts
of any underwriters, dealers or agents). The Company also agreed to indemnify
the December 1995 Selling Shareholders and any underwriters they utilize against
certain civil liabilities, including liabilities arising under the Securities
Act.
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SERIES E SELLING SHAREHOLDERS
Effective in January 1996, the shareholders listed in the Selling
Shareholders Table as the Series E Selling Shareholders (the "Series E Selling
Shareholders") acquired 1190 shares of the Company's Series E Preferred Stock in
an exempt transaction pursuant to Regulation D of the Securities Act. Swartz
Investments, Inc., assisted the Company as placement agent for the Series E
Preferred Stock. As part of this transaction, Swartz received Warrants to
purchase 144,792 shares of the Company's Common Stock at $7.89 per share. These
warrants expire on January 7, 2002. Swartz allocated these warrants among
certain of its principals and employees. These include Messrs. Swartz,
Kendricks, Hathorn, Bury, Bronnum, Hopkins, Krusen, Peteler and Bradford and
Enigma Investments Limited.
Subject to adjustment in certain circumstances (discussed below), each
share of Series E Preferred Stock is convertible into that number of shares of
Common Stock determined by dividing (i) the original issue price (10,000) of the
Series E Preferred Stock (the "Series E Issue Price") plus an amount equal to 8%
of the Series E 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) $1.50. Any shares of Series E Preferred Stock
outstanding on January 15, 1999, shall be automatically converted into the
Company's Common Stock on such date.
Notwithstanding the preceding paragraph, beginning with April 1997,
where the average of the closing bid prices of the Company's Common Stock for
all trading days for such calendar month is less than $1.00, the Company shall,
upon notice by the Series E Selling Shareholders, redeem shares of the Series E
Preferred Stock held by each holder in an amount equal to the lesser of (i) 7%
of the aggregate shares of Series E Preferred Stock held by such holder as of
April 21, 1997 or (ii) all shares of Series E Preferred Stock then held by such
holder.
Except pursuant to the automatic conversion of the Series E Preferred
Stock on January 15, 1999, in no event shall any Holder be entitled to convert
shares of Series E Preferred Stock which, upon conversion, would cause the
aggregate number of shares of Common Stock beneficially owned by such Holder and
its affiliates to exceed 4.9% of the outstanding shares of the Company's Common
Stock following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by a Holder and
its affiliates shall include the shares of Common Stock issuable upon conversion
of the shares of Series E Preferred Stock with respect to which the
determination of such proviso is being made, but shall exclude the shares of
Common Stock which would be issuable upon conversion of the remaining
unconverted portion of the Series E Preferred Stock beneficially owned by such
Holder and its affiliates. Except as set forth in the preceding sentence, for
purposes of this paragraph, "beneficial ownership" shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.
The Company agreed at the time of sale of the Series E Preferred Stock
to register pursuant to the Registration Statement the shares of Common Stock
(i) issuable upon conversion of the Series E Preferred Stock as determined at
the time of such registration and (ii) upon exercise of the Swartz Warrants, and
to keep such Registration Statement effective until sixty (60) days after all
shares of Series E Preferred Stock shall have been converted. Additionally, the
Company agreed to pay all of the expenses incident to the preparation and filing
of the Registration Statement (other than commissions and discounts of any
underwriters, dealers or agents). The Company also agreed to indemnify the
Series E Selling Shareholders and any underwriters they may utilize against
certain civil liabilities, including liabilities arising under the
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Securities Act. In addition, each Series E Selling Shareholder agreed to
indemnify the Company against certain civil liabilities, including liabilities
under the Securities Act, with respect to written information furnished by the
Series E Selling Shareholders to the Company.
GH SELLING SHAREHOLDERS
GH Securities, Ltd. ("GH") was issued 219,149 Warrants for its services
as placement agent in connection with the Company's offerings under Regulation S
of the Securities Act in August, September, October and November 1993. In
February 1996, these 219,149 Warrants were repriced and reissued to GH 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 49,395
Warrants expire in 1999. Also in February 1996, the Company issued GH 150,000
Warrants in connection with a Regulation S offering by the Company in September
1994, which Warrants are exercisable at $3.90 per share until February 21, 1999,
and an additional 60,000 Warrants for the termination of certain contractual
obligations arising out of the Company's initial public offering in early 1993,
which Warrants are exercisable at $6.50 per share until February 21, 1999. The
Company also issued 55,000 Warrants in February 1996 to a former advisor of the
Company, which Warrants are exercisable at $5.50 per share until February 21,
1999. In connection with these transactions of the Company in February 1996, the
Shareholders identified in the Selling Shareholders Table as the GH Selling
Shareholders (the "GH Selling Shareholders") entered into a Rights Agreement in
which the Company gave demand registration rights to the GH Selling
Shareholders. The Company agreed to use its best efforts to file the
Registration Statement, of which this Prospectus is a part, with respect to the
Shares and the Shares underlying certain Warrants held by the GH Selling
Shareholders and to cause such Registration Statement to become effective and
remain effective for a period of three (3) years. The Company agreed to pay all
of the expenses in the preparation for the Registration Statement (other than
commissions and discounts of any underwriters, dealers or agents). The Company
also agreed to indemnify the GH Selling Shareholders and any underwriters they
utilized against certain civil liabilities, including liabilities arising under
the Securities Act. In addition, each GH Selling Shareholder agreed to indemnify
the Company against certain civil liabilities, including liabilities under the
Securities Act, with respect to written information furnished by the GH Selling
Shareholders to the Company.
GH and David M. Klausmeyer, a former Director and advisor to the Board
of Directors of the Company, have assisted the Company within the past three
years with its capital raising activities.
NOTE WARRANT SELLING SHAREHOLDERS
As of October 31, 1996, Diamond Tech One, Inc. ("DTO"), a wholly-owned
subsidiary of the Company, borrowed a total of $1,000,000 from the persons or
entities identified in the Selling Shareholder Table as the Note Warrant Selling
Shareholders (the "Note Warrant Selling Shareholders"). In addition, the Company
granted Warrants to each Note Warrant Selling Shareholder to purchase 50,000
shares of the Company's Common Stock at $1.00 per share at any time until June
1, 1998. These Warrants were issued in an exempt transaction under Regulation D
of the Securities Act. 100,000 of these Warrants have been exercised for Shares
of the Company's Common Stock. Under the terms of the agreement with the Note
Warrant Selling Shareholders, the Company granted each of these shareholders
additional warrants to purchase up to 50,000 shares of the Company's Common
Stock on the same terms as those of the original grant of Warrants to the Note
Warrant Selling Shareholders.
21
<PAGE> 22
The Company also agreed that within 15 days of the issuance date of the
Warrants to the Note Warrant Selling Shareholders it would file a Registration
Statement, of which this Prospectus is a part, to include the shares of Common
Stock underlying these Warrants.
SERIES F SELLING SHAREHOLDERS
Effective in March 1997, the shareholders listed in the Selling
Shareholders Table as the Series F Selling Shareholders (the "Series F Selling
Shareholders") acquired 1700 shares of the Company's Series F Preferred Stock in
an exempt transaction pursuant to Regulation D of the Securities Act.
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 (the "Series F Issue Price") plus an amount equal
to 4% of the Series F Issue Price per annum from the date the Series F Preferred
Stock was issued to the conversion date by (ii) the Series F Conversion Price
(the "Series F Conversion Price").
The Company and the Series F Preferred Stock shareholders reached a new
agreement in March 1998 ("The Series F March 1998 Agreement") whereby the Series
F Preferred Stock shareholders are allowed to convert one-sixth of the number of
Series F Preferred Stock held as of March 17, 1998, in each of the months from
March 1998 through August 1998. The Series F 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 Series F Conversion Price for March 1998 shall
be $0.15. The Company has the right to redeem the Series F Preferred Stock for
107.5% of the original purchase price. If a holder of Series F Preferred Stock
does not exercise his right to convert any one-sixth portion of the Series F
Preferred Stock held by such holder in any month between March 17 and August 31,
1998, such holder may, in addition to the one-sixth portion for such month, at
any time prior to August 31, 1998, submit a conversion notice for such prior
months' portion or portions which haven ot been converted at the same price as
would have applied should such one-sixth portion or portions been converted
pursuant to the terms of the Series F Preferred Stock. However, after August 31,
1998, the Holder of any left over one-sixth portions of Series F Preferred Stock
which were not converted prior to August 31, 1998, may convert any such
one-sixth portion or portions (with a maximum of one-sixth of the share
originally held being converted per month) at the Series F Conversion Price that
is equal to the average of the closing bid price for the calendar month prior to
the date of receipt of the conversion notice relating to such portion converted
after August 31, 1998.
The Company agreed in the Series F March 1998 Agreement to register
pursuant to the Registration Statement the shares of Common Stock issuable upon
conversion of the Series F Preferred Stock as determined at the time of such
registration, to keep such Registration Statement effective for two (2) years
and to register not less than 150% of the number of shares into which the Series
F Preferred Stock is convertible on the date of filing of the Registration
Statement of which this Prospectus is a part. Additionally, the Company agreed
to pay all of the expenses incident to the preparation and filing of the
Registration Statement (other than commissions and discounts of any
underwriters, dealers or agents). The Company also agreed to indemnify the
Series F Selling Shareholders and any underwriters they may utilize against
certain civil liabilities, including liabilities arising under the Securities
Act. In addition, each Series F Selling Shareholder agreed to indemnify the
Company against civil liabilities, including liabilities under
22
<PAGE> 23
the Securities Act, with respect to written information furnished by the Series
F Selling Shareholders to the Company.
SERIES G SELLING SHAREHOLDERS
Effective in June 1997, the shareholders listed in the Selling
Shareholders Table as the Series G Selling Shareholders (the "Series G Selling
Shareholders") acquired 1700 shares of the Company's Series G Preferred Stock in
an exempt transaction pursuant to Regulation D of the Securities Act.
Subject to adjustment in certain circumstances, each share of Series G
Preferred Stock is conver tible into that number of shares of Common Stock
determined by dividing (i) the original issue price of the Series G Preferred
Stock (the "Series G Issue Price") plus an amount equal to 10% of the Series G
Issue Price per annum from the date the Series G Preferred Stock was issued to
the conversion date by (ii) $1.00.
In addition to the shares of Series G Preferred Stock issued in this
offering, the Series G Selling Shareholders also received Warrants to purchase
an aggregate of 850,000 shares of the Company's Com mon Stock at $1.00 per share
which expire in August 2002.
The Company agreed at the time of sale of the Series G Preferred Stock
to register pursuant to the Registration Statement the shares of Common Stock
issuable upon conversion of the Series G Preferred Stock as determined at the
time of such registration and to keep such Registration Statement effective for
one (1) year. Additionally, the Company agreed to pay all of the expenses
incident to the preparation and filing of the Registration Statement (other than
commissions and discounts of any underwriters, dealers or agents). The Company
also agreed to indemnify the Series G Selling Shareholders and any underwriters
they may utilize against certain civil liabilities, including liabilities
arising under the Securities Act. In addition, each Series G Selling Shareholder
agreed to indemnify the Company against civil liabilities, including liabilities
under the Securities Act, with respect to written information furnished by the
Series G Selling Shareholders to the Company.
OTHER SELLING SHAREHOLDERS
The Company has agreed to give the shareholders listed herein as the
Other Selling Shareholders (the "Other Selling Shareholders") "piggyback"
registration rights regarding shares underlying certain Warrants and Shares held
by these holders. These Warrants and Shares were acquired in transactions exempt
from the Securities Act. Pursuant to these "piggyback" rights, the Company
agreed to use its best efforts to have the Common Stock and the Common Stock
issuable upon the exercise of these Warrants included in the Registration
Statement, of which this Prospectus is a part. Mr. Kravetz, Columbus Asset
Management, Inc. and BEG Enterprises, Inc. have each assisted the Company with
its capital raising activities. Lawrence I. Kravitz has 105,587 Warrants at
prices ranging from $3.90 to $6.78 per share, which Warrants all expire on
February 1, 1999. BEG Enterprises, Inc. has 65,034 Warrants, of which 50,000 are
exercisable at $6.30 per share and 15,034 are exercisable at $7.89 per share and
all of which expire on January 7, 2000. Columbus Asset Management, Inc. has
20,000 Warrants at $5.45 per share which expire on August 7, 1998. Katherine D.
Banks has 95,000 Warrants, 35,000 of which are exercisable at $2.000 per share
and expire on October 23, 2006 and 60,000 which are exercisable at $1.00 per
share and expire on July 2, 2002. Market Pathways has 205,000 Warrants, 125,000
of which are exercisable at $0.68750 per
23
<PAGE> 24
share and which expire on October 1, 1998, 40,000 of which are exercisable at
$1.03125 per share and which expire on April 1, 1999, and 40,000 of which are
exercisable at $1.375 per share and which expire on October 1, 1999. John Palmer
and H. Marcia Smolen have 7,500 Warrants each at $1.00 per share which expire on
July 2, 2002. Valassis Enterprises, Inc. has 600,000 Warrants at $0.15 per share
which expire in May 2003.
SELLING SHAREHOLDERS
This Prospectus covers offers from time to time of the shares of Common
Stock owned by the Selling Shareholders. Set forth below are the names of the
Selling Shareholders as well as (i) the number of shares of Common Stock, (ii)
the number of shares of Common Stock underlying existing Warrants, (iii) the
number of shares of Common Stock issuable on conversion of the Company's Series
E Preferred Stock, (iv) the number of shares of Common Stock issuable upon
conversion of the Company's Series F Preferred Stock and (v) the number of
shares of Common Stock issuable upon conversion of the Company's Series G
Preferred Stock held as of the date of this Prospectus by the Selling
Shareholders, which are also the numbers of Shares which may be offered for sale
by each Selling Shareholder from time to time pursuant to this Prospectus.
Because the Company does not know how many Shares may be sold by the Selling
Shareholders pursuant to this Prospectus, no estimate can be given as to the
number of the Shares that will be held by the Selling Shareholders upon
termination of this offering.
SELLING SHAREHOLDERS TABLE
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
ISSUABLE UPON
CONVERSION OF
SERIES E
PREFERRED STOCK,
SERIES F
NUMBER OF SHARES NUMBER OF SHARES PREFERRED STOCK
OF COMMON OF COMMON AND SERIES G
STOCK HELD AND STOCK UNDERLYING PREFERRED STOCK PERCENTAGE OF INTERESTS
OFFERED PURSUANT WARRANTS OFFERED OFFERED PURSUANT PRIOR TO ANY SALES
TO THIS PURSUANT TO THIS TO THIS MADE PURSUANT TO THIS
SHAREHOLDER PROSPECTUS PROSPECTUS PROSPECTUS(1) PROSPECTUS(2)
----------- ---------------- ----------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
AUGUST 1993 SELLING SHAREHOLDERS
How & Co................................ 7,500 *
Barry Kitt.............................. 4,000 *
Gilbert Kitt............................ 4,000 *
Barney Cacioppo......................... 6,000 3,000 *
Peter and Ruth Medding.................. 2,500 *
Richard and Susan Goebel................ 2,000 *
Richard and Mary Pulciani............... 2,000 *
Albert Vivo............................. 2,000 *
Rocky and Genevieve Dazzo............... 2,000 *
Ben Chilcutt............................ 2,000 *
Claus Fichte............................ 4,000 2,000 *
Ronald Cacioppo......................... 1,000 *
James Cacioppo.......................... 1,000 *
John Church............................. 1,000 *
Argon Electric.......................... 2,000 1,000 *
Robert Watt............................. 1,000 *
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
ISSUABLE UPON
CONVERSION OF
SERIES E
PREFERRED STOCK,
SERIES F
NUMBER OF SHARES NUMBER OF SHARES PREFERRED STOCK
OF COMMON OF COMMON AND SERIES G
STOCK HELD AND STOCK UNDERLYING PREFERRED STOCK PERCENTAGE OF INTERESTS
OFFERED PURSUANT WARRANTS OFFERED OFFERED PURSUANT PRIOR TO ANY SALES
TO THIS PURSUANT TO THIS TO THIS MADE PURSUANT TO THIS
SHAREHOLDER PROSPECTUS PROSPECTUS PROSPECTUS(1) PROSPECTUS(2)
----------- ---------------- ----------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Sheldon Solomon Trust................... 2,000 1,000 *
Susan Oelsen............................ 2,000 *
Suzanne Kibort.......................... 2,000 1,000 *
George and Emma Kienberger.............. 2,000 1,000 *
Steven Tsengas.......................... 1,000 *
Malcolm Thomas.......................... 1,000 *
Bruce Sabel............................. 2,000 1,000 *
Gary Wright............................. 1,000 *
Richard Browning Trust.................. 2,000 1,000 *
Richard Hutter.......................... 1,000 *
L.P. David Orosz........................ 2,000 1,000 *
Ansford Party Ltd....................... 1,000 *
Ranleigh Party Ltd...................... 1,000 *
EAST/WEST SELLING SHAREHOLDERS
BDM Federal, Inc........................ 111,140 *
BEG SELLING SHAREHOLDERS
Bernice Berman.......................... 41,841 *
David Honigman.......................... 104,602 *
Norine H. Kielson Trust................. 20,920 *
RSP 3, L.P.............................. 3,000 *
Kaye Honigman Singer.................... 83,682 *
Robert A. Sprotte Money Purchase
Plan................................ 11,920 *
Robert A. Sprotte IRA................... 4,500 *
Sherry L. Sprotte IRA................... 4,500 *
DECEMBER 1995 SELLING SHAREHOLDERS
Dr. Hal & Margaret Bozof................ 4,000 400 *
Gloria D. Freer......................... 5,000 500 *
Gary and Cheryl Kaplan.................. 3,000 300 *
Dr. Alan P. Lightman.................... 4,000 400 *
Dr. David Lightman...................... 4,000 400 *
Combined Turner Children's Trust........ 3,000 300 *
RSP 3, L.P.............................. 7,920 *
Pinnacle Fund, L.P...................... 10,000 *
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
ISSUABLE UPON
CONVERSION OF
SERIES E
PREFERRED STOCK,
SERIES F
NUMBER OF SHARES NUMBER OF SHARES PREFERRED STOCK
OF COMMON OF COMMON AND SERIES G
STOCK HELD AND STOCK UNDERLYING PREFERRED STOCK PERCENTAGE OF INTERESTS
OFFERED PURSUANT WARRANTS OFFERED OFFERED PURSUANT PRIOR TO ANY SALES
TO THIS PURSUANT TO THIS TO THIS MADE PURSUANT TO THIS
SHAREHOLDER PROSPECTUS PROSPECTUS PROSPECTUS(1) PROSPECTUS(2)
----------- ---------------- ----------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Michael S. Blechman Family Trust........ 38,100 3,810 *
Rock Financial Corporation.............. 4,762 *
SERIES E SELLING SHAREHOLDERS
Leonardo, L.P........................... 755,245 189,010 2.43%
Nelson Partners......................... 315,480 *
Olympus Securities, Ltd................. 315,480 *
Raphael, L.P............................ 287,623 379,757 1.71%
AG Super Fund Int'l Partners............ 188,952 94,505 *
GAM L.P................................. 98,007 94,505 *
LaRocque Trading Group LLC.............. 94,400 *
Eric S. Swartz.......................... 55,702 *
Michael C. Kendrick..................... 55,702 *
P. Bradford Hathorn..................... 5,000 *
Lance T. Bury........................... 5,000 *
Dwight B. Bronnum....................... 1,500 *
Robert L. Hopkins....................... 1,500 *
Charles Krusen.......................... 4,867 *
Enigma Investments Limited.............. 1,521 *
David K. Peteler........................ 3,000 *
S. Edward Bradford...................... 11,000 *
GH SELLING SHAREHOLDERS
GH Securities, Ltd...................... 259,395 *
David M. Klausmeyer..................... 55,000 *
NOTE WARRANT SELLING SHAREHOLDERS
Michael S. Blechman Family Trust........ 50,000 40,000 *
N. Martin Co............................ 50,000 *
SERIES F SELLING SHAREHOLDERS
Thomas Kernaghan & Co. Limited.......... 1,556,179 823,638 6.03%
Stanley B. Dickson...................... 313,324 171,818 1.25%
SERIES G SELLING SHAREHOLDERS
William W. Gow.......................... 50,000 109,644 *
John Green Company...................... 50,000 109,589 *
SCG Cellular, Inc....................... 25,000 54,726 *
James G. Petcoff........................ 25,000 54,712 *
Mark S. Wagner.......................... 25,000 54,685 *
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
ISSUABLE UPON
CONVERSION OF
SERIES E
PREFERRED STOCK,
SERIES F
NUMBER OF SHARES NUMBER OF SHARES PREFERRED STOCK
OF COMMON OF COMMON AND SERIES G
STOCK HELD AND STOCK UNDERLYING PREFERRED STOCK PERCENTAGE OF INTERESTS
OFFERED PURSUANT WARRANTS OFFERED OFFERED PURSUANT PRIOR TO ANY SALES
TO THIS PURSUANT TO THIS TO THIS MADE PURSUANT TO THIS
SHAREHOLDER PROSPECTUS PROSPECTUS PROSPECTUS(1) PROSPECTUS(2)
----------- ---------------- ----------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Chris S. Lawson......................... 25,000 54,685 *
Steve Aiello............................ 25,000 54,685 *
Pinnacle Fund, L.P...................... 100,000 218,575 *
Daniel E. Cafolla....................... 12,500 27,315 *
Dan Cafolla & Associates, Inc.
Profit Sharing Plan................. 12,500 27,315 *
J. Brad Carter, M.D..................... 75,000 163,548 *
J. Brad Carter, M.D. IRA Account........ 25,000 54,301 *
Klaich Animal Hospital, Ltd.
Amended Profit Sharing Plan......... 50,000 109,014 *
George F. Valassis...................... 100,000 217,589 *
Peerless Distributing Company........... 25,000 53,863 *
ARA ................................. 25,000 53,863 *
Nicholas Marvin Living Trust............ 100,000 218,576 *
Michael Scott Bleckman
Family Trust........................ 100,000 216,932 *
OTHER SELLING SHAREHOLDERS
Lawrence I. Kravetz..................... 105,587 *
BEG Enterprises, Inc.................... 65,034 *
Columbus Asset Management, Ltd.......... 20,000 *
Katherine D. Banks...................... 95,000 *
Peter Moon.............................. 20,625 *
The Investor Relations Company.......... 3,000 *
Market Pathways......................... 205,000 *
John E. Palmer.......................... 7,500 *
H. Marcia Smolens....................... 7,500 *
Mary Ellery Calloway.................... 250,000 *
Barry Kitt.............................. 125,000 *
Gilbert Kitts........................... 125,000 *
Dr. Hal Bozof........................... 220,000 *
Felsenthal Investment Partnership....... 190,000 *
Pinnacle Fund, L.P...................... 2,531,198 6.55%
Valassis Enterprises.................... 600,000 1.53%
Marshall Coles.......................... 80,000 *
Frank Gyetvan........................... 100,000 *
Larry Bloch............................. 40,000 *
Sam Chawkin............................. 160,000 *
Cynthia Howard.......................... 60,000 *
Edward Kaplan Insurance Trust........... 120,000 *
Dhevi Kumar............................. 60,000 *
Dr. Alan P. Lightman.................... 200,000 *
Clayton Lightman........................ 120,000 *
Dr. Linda Porterfield................... 60,000 *
Combined Turner Children's Trust........ 40,000 *
Trust under the will of Virgil C.
Vaughan............................. 60,000 *
Delta Traders........................... 200,000 *
Robert Berman Enterprises, Inc.......... 400,000 *
---------- ----------- ---------- -------
TOTAL............................... 8,935,358 2,535,600 4,332,210 34.38%
</TABLE>
- --------------------
* Less than 1%
(1) The number of Shares of Common Stock issuable upon conversion of the
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock is subject to adjustment (upward or downward) based on fluctuations
in the market price of the Common Stock. See "Description of Capital
Stock--Preferred Stock--
27
<PAGE> 28
Series E Preferred Stock; --Series F Preferred Stock; --Series G
Preferred Stock." The number of such shares included in this Prospectus
and in the table is the number of shares into which the Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
were convertible as of June 16, 1998.
(2) This percentage was calculated including shares issuable upon the
exercise of Warrants and conversion of Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock, as applicable, into shares
of the Company's Common Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 120,000,000
shares of Common Stock, par value $.001 per share (the "Common Stock"), and
2,000,000 shares of Preferred Stock, par value $1 per share (the "Preferred
Stock"). The Preferred Stock may be issued in series and currently consists of
(i) Series A Convertible Preferred Stock, (ii) Series C Preferred Stock, (iii)
Series D Preferred Stock, (iv) Series E Preferred Stock, (v) Series F Preferred
Stock and (vi) Series G Preferred Stock. At June 16, 1998, 38,660,657 shares of
Common Stock, 100 shares of Series A Preferred Stock, 47 shares of Series E
Preferred Stock, 365 shares of Series F Preferred Stock and 1,700 shares of
Series G Preferred Stock were issued and outstanding. No shares of Series C
Preferred Stock, or Series D Preferred Stock are currently outstanding. After
giving effect to the conversion of the Series A Preferred Stock into 125,275
shares of Common Stock, the conversion of the Series E Preferred Stock into
1,483,137 shares of Common Stock, the conversion of the Series F Preferred Stock
into 995,456 shares of Common Stock, and the conversion of the Series G
Preferred Stock into 1,853,617 shares of Common Stock, there would be 43,118,142
shares of Common Stock issued and outstanding. Additionally, approximately
3,000,000 shares of Common Stock are reserved for issuance upon exercise of
Warrants (including 2,535,600 Shares of Common Stock underlying certain Warrants
included in this Prospectus) that have been issued by the Company, and 3,500,000
shares are reserved for issuance under the Company's stock option plans.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share, voting
with the holders of any other class of stock entitled to vote, without regard to
class, on all matters to be voted on by the share holders, including the
election of directors. All issued and outstanding shares of Common Stock are
fully paid and nonassessable. The Common Stock is currently listed on the OTC
Bulletin Board.
Subject to any prior and superior rights of the Preferred Stock, the
holders of Common Stock are entitled to receive dividends when, and if, declared
by the Board of Directors from funds legally available therefor. Currently, no
series of Preferred Stock has rights that are prior and superior to the Common
Stock with respect to dividends.
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Common Stock are entitled to receive,
pro rata, any assets of the Company remaining after payment has been made in
full to the holders of any series of Preferred Stock with a liquidation
preference. Currently, only the holders of the Series A Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock and the Series G
Preferred Stock are entitled to a liquidation preference, while the holders of
Series C Preferred Stock and Series D Preferred Stock have no priority over the
holders of Common Stock with respect to liquidation distributions.
28
<PAGE> 29
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more
series as may be established and designated from time to time by the Board of
Directors by resolution. The voting powers, preferences and relative,
participating, optional and other special rights and the qualifications,
limitations or restrictions of any series of Preferred Stock shall be as is
stated in the resolution or resolutions of the Board of Directors that provides
for the designation of such series. With the exception of shares issued pursuant
to any duly adopted stock option plan of the Company, no shares of Preferred
Stock may be issued to any officer or director of the Company or any shareholder
who directly or indirectly owns greater than five percent (5%) of the issued and
outstanding voting stock of the Company or any affiliate of such persons,
without the affirmative vote of a majority in interest of the disinterested
shareholders of the Company. Under the Texas Business Corporation Act, each
series of Preferred Stock is entitled to vote as a class with respect to a
proposed amendment to the Company's Restated Articles of Incorporation (the
"Restated Articles") in certain circumstances.
Series A Preferred Stock
There are currently issued and outstanding 100 shares of the Series A
Preferred Stock, which is the total number currently authorized for issuance.
Each outstanding share of the Series A Preferred Stock is currently convertible
into 1252.75 shares of Common Stock, subject to adjustment in certain circum
stances. Except as otherwise required by law, the holders of the Series A
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 A Preferred Stock is convertible. The holders of
Series A 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 A Preferred Stock are
convertible. In the event of voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Series A Preferred Stock are
entitled to receive the liquida tion price of $1,000 per share before any
distribution is made to the holders of Common Stock or any other series of
Preferred Stock ranking junior as to liquidation rights as to the Series A
Preferred Stock. Holders of Series A Preferred Stock also are entitled to share
equally in any liquidation distributions to the holders of Common Stock based on
the number of shares of Common Stock into which the shares of Series A Preferred
Stock are convertible. The Company has no redemption rights or obligations with
respect to the Series A Preferred Stock. Without the consent of all holders of
Series A Preferred Stock, the Company may not alter any provision of (i) the
Bylaws of the Company or (ii) the Restated Articles so as to adversely affect
the rights of the holders thereof.
Series C Preferred Stock
There are currently no outstanding shares of the Series C Preferred
Stock. Each share of Series C Preferred Stock is convertible into ten (10)
shares of Common Stock, subject to adjustment in certain circumstances. Except
as otherwise required by law, the holders of the Series C Preferred Stock are
entitled to vote on all matters with the holders of the Common Stock and are
entitled to one vote for every share of Common Stock into which the holders'
Series C Preferred Stock is convertible. In order to maintain the voting power
of the shares of Series C Preferred Stock, the holders thereof are entitled to
purchase additional shares of the Company's voting securities upon the Company's
issuance of additional shares of voting securities in certain circumstances. See
"--Certain Provisions of the Articles of Incorporation, Bylaws and Texas Law."
The holders of Series C Preferred Stock have no preferential
29
<PAGE> 30
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. Holders of Series C Preferred Stock
have no preference with respect to any distributions in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Company, but are
entitled to share equally with the holders of the Common Stock based on the
number of shares of Common Stock into which the shares of Series C Preferred
Stock are convertible. The Company has no redemption rights or obligations with
respect to the Series C Preferred Stock. Without the mutual consent of the Board
of Directors of the Company and holders of not less than a majority of all
outstanding shares of Series C Preferred Stock, none of the rights of the
holders of Series C Preferred Stock may be altered.
Series D Preferred Stock
There are currently no outstanding shares of the Series D Preferred
Stock; however, 90,000 shares are authorized for issuance. Each share of Series
D Preferred Stock is convertible into ten (10) shares of Common Stock, subject
to adjustment in certain circumstances. Except as otherwise required by law, the
holders of the Series D 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 D Preferred Stock is convertible. In
order to maintain the voting power of the shares of Series D 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. See "--Certain Provisions of the Articles
of Incorporation, Bylaws and Texas Law." The holders of Series D 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 D Preferred Stock are convertible. Holders of Series
D Preferred Stock have no preference with respect to any distributions in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Company, but are entitled to share equally with the holders of 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 D 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 D Preferred Stock, none of the
rights of the holders of Series D Preferred Stock may be altered.
Series E Preferred Stock
There are 1,500 shares of the Series E Preferred Stock currently
authorized for issuance, of which 47 shares are issued and outstanding. Subject
to adjustment in certain circumstances, each share of Series E Preferred Stock
is convertible into that number of shares of Common Stock determined by dividing
(i) the original issue price of the Series E Preferred Stock (the "Issue Price")
plus an amount equal to 8% of the Issue Price per annum from the date the escrow
agent first had in its possession the funds representing payment of the Series E
Preferred Stock to the conversion date by (ii) $1.50. Any shares of Series E
Preferred Stock outstanding on January 15, 1999, shall be automatically
converted into Common Stock on such date. In the event any shares of the Series
E Preferred Stock are converted or redeemed pursuant to their terms, the shares
of Series E Preferred Stock so converted or redeemed shall be canceled, shall
return to the status of authorized but unissued Preferred Stock of no designated
series, and shall not be issuable by the Company as Series E Preferred Stock.
30
<PAGE> 31
Notwithstanding the preceding paragraph, for each calendar month,
beginning with April 1997, where the average of the closing bid prices of the
Company's Common Stock for all trading days for such calendar month is less than
$1.00, the Company shall, upon notice by the Series E Selling Shareholders,
redeem shares of the Series E Preferred Stock held by each holder in an amount
equal to the lesser of (i) 7% of the aggregate shares of Series E Preferred
Stock held by such holder as of April 21, 1997, or (ii) all shares of Series E
Preferred Stock then held by such holder.
Except pursuant to the automatic conversion of the Series E Preferred
Stock on January 15, 1997, in no event shall any Holder be entitled to convert
shares of Series E Preferred Stock which, upon conversion, would cause the
aggregate number of shares of Common Stock beneficially owned by such Holder and
its affiliates to exceed 4.9% of the outstanding shares of the Company's Common
Stock following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by a Holder and
its affiliates shall include the shares of Common Stock issuable upon conversion
of the shares of Series E Preferred Stock with respect to which the
determination of such proviso is being made, but shall exclude the shares of
Common Stock which would be issuable upon conversion of the remaining
unconverted portion of the Series E Preferred Stock beneficially owned by such
Holder and its affiliates. Except as set forth in the preceding sentence, for
purposes of this paragraph, "beneficial ownership" shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.
Except as otherwise required by law, the holders of the Series E
Preferred Stock are entitled to vote on all matters with the holders of Common
Stock and are entitled to one vote for every share of Common Stock into which
the holders' Series E Preferred Stock is convertible. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Series E Preferred Stock are entitled to receive the
liquidation price of $10,000 plus 8% per annum from the date of issuance, before
any distribution is made to the holders of Common Stock or any other series of
Preferred Stock ranking junior as to liquidation rights of the Series E
Preferred Stock. The holders of Series E Preferred Stock are not entitled to
receive dividends.
In the event that at the time of a requested conversion by a holder of
Series E Preferred Stock, the conversion price is $3 or less per share, the
Company has the right to redeem all or part of the shares at a redemption price
per share equal to (i) the number of shares of Common Stock into which each
share is convertible times (ii) the closing bid price per share of the Common
Stock. The Company additionally has the right to redeem all or part of the
Series E Preferred Stock at any time, but in no event may redeem less than
$5,000,000 per redemption. In the event that the Company elects to effect such a
redemption, the redemption price per share of Series E Preferred Stock shall be
as follows:
<TABLE>
<CAPTION>
Redemption Value Elapsed Time Since Last Closing
---------------- -------------------------------
<S> <C>
130% of Stated Value 90 days--6 months
125% of Stated Value 6 months and 1 day--12 months
120% of Stated Value 12 months and 1 day--18 months
115% of Stated Value 18 months and 1 day--24 months
110% of Stated Value 24 months and 1 day--30 months
105% of Stated Value 30 months and 1 day--36 months
</TABLE>
31
<PAGE> 32
"Stated Value" is defined as the Issue Price of the Series E Preferred
Stock plus an amount equal to 8% of such price from the date of issuance.
Without the consent of the holders of not less than a majority of all
outstanding shares of Series E Preferred Stock, the Company may not (i) alter
the rights of the holders of Series E Preferred Stock, (ii) create any new class
or series of Preferred Stock with prior rights with respect to distributions or
(iii) do any act not authorized by the Company's Restated Articles which would
result in the taxation of the holders of Series E Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended.
Series F Preferred Stock
There are 2,500 shares of the Series F Preferred Stock currently
authorized for issuance, of which 365 shares are issued and outstanding. Subject
to adjustment in certain circumstances, 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 (the "Series F
Issue Price") plus an amount equal to four percent (4%) of the Series F Issue
Price from the issue date of the Series F Preferred Stock being converted to the
conversion date by (ii) the Series F Conversion Price.
The holders of Series F Preferred Stock are allowed to convert
one-sixth of the number of Series F Preferred stock held as of March 17, 1998,
in each of the months from March 1998 through August 1998. The Series F
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 Series F
Conversion Price for March 1998 shall be $0.15. The Company has the right to
redeem the Series F Preferred Stock for 107.5% of the original purchase price.
If a holder of Series F Preferred Stock does not exercise his right to convert
any one-sixth portion of the Series F Preferred Stock held by such holder in any
month between March 17 and August 31, 1998, such holder may, in addition to the
one-sixth portion for such month, at any time prior to August 31, 1998, submit a
conversion notice for such prior months' portion or portions which have not been
converted at the same price as would have applied should such one-sixth portion
or portions been converted pursuant to the terms of the Series F Preferred
Stock. However, after August 31, 1998, the Holder of any left over one-sixth
portions of Series F Preferred Stock which were not converted prior to August
31, 1998, may convert any such one-sixth portion or portions (with a maximum
one-sixth of the shares originally held being converted per month) at the Series
F Conversion Price that is equal to the average of the closing bid price for the
calendar month prior to the date of receipt of the conversion notice relating to
such portion converted after August 31, 1998.
Except as otherwise required by law, the holders of the Series F
Preferred Stock shall have no voting power. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Series F Preferred Stock are entitled to receive the liquidation price of
$1,000 per share plus four percent (4%) per annum from the date of issuance,
before any distribution is made to the holders of Common Stock or any other
series of Preferred Stock ranking junior as to liquidation rights of the Series
F Preferred Stock. The Series F Preferred Stock shall be subordinate to the
Series A Preferred Stock and Series E Preferred Stock for liquidation purposes.
The holders of the Series F Preferred Stock are not entitled to receive
dividends.
Without the consent of the holders of not less than seventy five
percent (75%) of all outstanding shares of Series F Preferred Stock, the Company
may not (i) alter rights, preferences or privileges of the Series F Preferred
Stock so as to adversely affect the Series F Preferred Stock, (ii) create any
new class of Preferred Stock senior to or having a preference over the Series F
Preferred Stock with respect to
32
<PAGE> 33
payments upon liquidation or (iii) do any act or thing not authorized by the
Company's Restated Articles which would result in taxation of the holders of
Series F Preferred Stock under ss. 305 of the Internal Revenue Code, as amended.
Series G Preferred Stock
There are 3,000 shares of Series G Preferred Stock currently authorized
for issuance, of which 1,700 shares are issued and outstanding. Subject to
adjustment in certain circumstances, each share of Series G 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 (the "Series G
Issue Price") plus an amount equal to ten percent (10%) of the Series G Issue
Price from the date of the Series G Preferred Stock being converted to the
conversion date by (ii) $1.00.
Except as provided by law, the holders of Series G Preferred Stock
shall be entitled to a number of votes equal to the number of shares of Common
Stock into which their respective shares of Series G Preferred Stock are then
convertible using the record date for the taking of such vote of shareholders as
the date as of which the Conversion Price is calculated. Holders of Series G
Preferred Stock shall be entitled to notice of all shareholders meetings or
written consents with respect to which they would be entitled to vote.
In the event of any liquidation, dissolution or winding-up of the
Company, either voluntary or involuntary (a "Liquidation"), the holders of
shares of the Series G Preferred Stock then issued and outstanding shall be
entitled to be paid out of the assets of the Company available for distribution
to its shareholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of shares of the Common Stock or upon any
other series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preference of the Series A or Series E or Series
F Preferred Stock, an amount per share equal to the sum of (i) the Stated Value
and (ii) an amount equal to ten percent (10%) of the Stated Value multiplied by
the fraction N/365, where N equals the number of days elapsed since the issue
date of the Series G Preferred Stock. If, upon any Liquidation of the Company,
the assets of the Company available for distribution to its shareholders shall
be insufficient to pay the holders of shares of the Series G Preferred Stock and
the holders of any other series of Preferred Stock with a liquidation preference
equal to the liquidation preference of the Series G Preferred Stock the full
amounts to which they shall respectively be entitled, the holders of shares of
the Series G Preferred Stock and the holders of any other series of Preferred
Stock with liquidation preference equal to the liquidation preference of the
Series G Preferred Stock shall receive all of the assets of the Company
available for distribution and each such holder of shares of the Series G
Preferred Stock and the holders of any other series of Preferred Stock with a
liquidation preference equal to the liquidation preference of the Series G
Preferred Stock shall share ratably in any distribution in accordance with the
amounts due such shareholders. In the event of Liquidation, the Series G
Preferred Stock shall be subordinate to Series A, Series E and Series F
Preferred Stock. After payment shall have been made to the holders of shares of
the Series G Preferred Stock of the full amount to which they shall be entitled,
as aforesaid, the holders of shares of the Series G Preferred Stock shall be
entitled to no further distributions thereon and the holders of shares of the
Common Stock and of shares of any other series of stock of the Company shall be
entitled to share, according to their respective rights and preferences, in all
remaining assets of the Company available for distribution to its shareholders.
33
<PAGE> 34
SHARES ELIGIBLE FOR FUTURE SALE
As of June 16, 1998, there were 38,660,657 shares of Common Stock
outstanding, of which 27,982,498 shares of Common Stock were freely tradeable
without restriction or further registration under the Securities Act by persons
other than "affiliates" of the Company. As of that date, the remaining shares of
Common Stock were deemed "restricted securities," as defined in Rule 144 under
the Securities Act, and may not be resold in the absence of registration under
the Securities Act or pursuant to an exemption from such registration, including
exemptions provided by Rule 144 under the Securities Act. Under Rule 144,
persons who have held securities for a period of at least one year may sell a
limited amount of such securities without registration under the Securities Act.
Rule 144 also permits, under certain circumstances, persons who are not
affiliates of the Company, to sell their restricted securities without quantity
limitations once they have completed a two-year holding period.
The Registration Statement, of which this Prospectus is a part,
pertains to 8,935,358 shares of Common Stock which are currently "restricted
securities"; 2,535,600 shares of Common Stock which underlie existing Warrants;
1,483,137 shares of Common Stock which are issuable upon conversion of the
Series E Preferred Stock, 995,456 shares of Common Stock which are issuable upon
conversion of the Series F Preferred Stock and 1,853,617 shares of Common Stock
which are issuable upon conversion of the Series G Preferred Stock. The Company
is obligated to maintain the effectiveness of the Registration Statement for
varying periods of time, pursuant to separate agreements with certain groups of
the Selling Shareholders. As of June 16, 1998, the Company is additionally
obligated to register an additional 1,230,130 shares of its Common Stock which
are currently "restricted securities," in certain circumstances.
In addition to the shares of Common Stock which are outstanding as of
June 16, 1998, 3,500,000 shares of Common Stock have been reserved for issuance
pursuant to the Company's stock option plans. Approximately 3,000,000 shares of
Common Stock have also been reserved for issuance upon exercise of Warrants that
have been issued by the Company (2,535,600 of such shares have been registered
in the Registration Statement). Additionally, 125,725 shares of Common Stock
have been reserved for issuance upon conversion of the Company's Series A
Preferred Stock, 1,483,137 shares of Common Stock have been reserved for
issuance upon conversion of the Series E Preferred Stock, 995,456 shares of
Common Stock have been reserved for issuance upon conversion of the Series F
Preferred Stock and 1,853,617 shares of Common Stock have been reserved for
issuance upon conversion of the Series G Preferred Stock.
No prediction can be made as to the effect, if any, that future sales,
or the availability of shares of Common Stock for future sales, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock by the Company or by shareholders who hold "restricted securities,"
or the perception that such sales may occur, could adversely affect prevailing
market prices for the Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Securities Transfer, Incorporated, 938 Quail Street, Suite 101, Lakewood,
Colorado 80215.
34
<PAGE> 35
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND TEXAS LAW
The Company's Restated Articles currently contain provisions which
could be considered to have anti-takeover effects. First of all, the authorized
and unissued shares of the Company's Preferred Stock (the "Unissued Preferred
Stock") and Common Stock (the "Unissued Common Stocks") could be used by
incumbent management to make more difficult and thereby discourage an attempt to
acquire control of the Company, even though some shareholders may deem such an
acquisition desirable. For example, the shares of Unissued Preferred Stock and
Unissued Common Stock could be privately placed with purchasers who might
support the Board of Directors in opposing a hostile takeover bid. The issuance
of the Unissued Preferred Stock with voting rights and/or the Unissued Common
Stock could also be used to dilute the stock ownership and voting power of a
third party seeking to remove directors, replace incumbent directors, accomplish
certain business combinations, or alter, amend, or replace provisions in the
Company's Restated Articles. To the extent that it impedes any such attempt, the
Unissued Preferred Stock and Unissued Common Stock may serve to perpetuate
current management. From time to time, the Company evaluates potential
transactions and acquisitions, which if consummated, may require the issuance of
the Unissued Preferred Stock or Unissued Common Stock.
The Company's Restated Articles require a classified Board of Directors
pursuant to which only one-third (1/3) of the Board of Directors is elected each
year for a term of three years. Therefore, even when a shareholder, or a group
of shareholders, has sufficient voting power to elect all of the directors to be
elected every year, the Company's classified Board could have the effect of
requiring two successive annual meetings to replace a majority of the Board of
Directors and three annual meetings to replace the entire Board of Directors.
There is no cumulative voting with respect to the election of directors.
The Company's Restated Articles also contain a provision which states
that with the sole exception of shares issued pursuant to the duly adopted stock
option plans of the Company, no shares of the Com pany's Preferred Stock shall
be issued or sold to any officer or director of the Company, or any share holder
who directly or indirectly owns more than five percent (5%) of the issued and
outstanding voting stock of the Company, or any affiliate of such a person,
without the affirmative vote of a majority in interest of the disinterested
shareholders of the Company.
The Company's Restated Articles also contain provisions for the Series
C Preferred and the Series D Preferred Stock concerning certain anti-dilution
rights. (None of the Series C Preferred or Series D Preferred is outstanding at
this time). These provisions state that if the aggregate percentage interest of
the holder of the Series C Preferred or the Series D Preferred of the Total
Voting Power of the Company (defined in the Restated Articles to mean the total
voting power of all voting stock of the Company entitled to vote at any meeting
of the shareholders of the Company) is or would be reduced as a result of an
issuance by the Company of such voting stock (including any issuance following
conversion of any security convertible into or exchangeable for voting stock or
upon the exercise of any option, warrant, or other right to acquire any voting
stock), the Company shall notify the holders of the Series C Preferred and
Series D Preferred promptly after establishing the material terms of such
proposed issuance. In such notices, the Company shall offer to sell to the
holders of the Series C Preferred and the Series D Preferred that number of
shares of voting stock which, if so purchased, would result in the retention by
the holders of the Series C Preferred and Series D Preferred of each of its
aggregate percentage interest in the Total Voting Power in effect immediately
prior to such proposed reduction of its aggregate interest. If such offer is
accepted by the Series C Preferred holders or the Series D Preferred holders
within thirty (30) days following receipt of such notice, the Company shall sell
such shares to the holders of the Series C Preferred
35
<PAGE> 36
or the Series D Preferred at a purchase price determined as provided in the
appropriate provisions of the Series C Preferred and the Series D Preferred in
the Restated Articles.
The Company shall not be obligated to deliver notices or offer voting
stock for sale pursuant to these provisions in respect of the following
issuances of voting stock: (a) pursuant to employee, director or consultant
stock option, purchase, bonus, exchange or other such plans or upon the exercise
of options or other rights granted thereunder, and (b) in connection with
transactions in which shares of voting stock are issued to securityholders of a
company being acquired by the Company or to a company some or all of whose
assets are being acquired by the Company.
The Restated Articles limit the liability of directors of the Company
in their capacity as directors, Specifically, the directors of the Company will
not be liable to the Company or its shareholders for monetary damages for an act
or omission in a director's capacity as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its shareholders,
(ii) for any act or omission not in good faith which constitutes a breach of
duty of the director to the Company or acts or omissions which involve
intentional misconduct or a knowing violation of the law, (iii) for transactions
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv)
for an act or omission for which the liability of a director is expressly
provided for by an applicable statute, or (v) for acts related to an unlawful
stock repurchase or payment of a dividend.
The overall effect of the provisions in the Company's current Restated
Articles described above would be to make more difficult or discourage a merger,
tender, offer or proxy contest, even if such trans action or occurrence
generally is favorable to the interests of the shareholders, or they may delay
or frustrate the assumption of control by a holder of a large block of the
Company's securities and the removal of incumbent management, even if such
removal may be beneficial to the shareholders.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and
the consolidated statements of operations, shareholders' equity <deficit> and
cash flows for the years then ended, incorporated by reference in this
prospectus, have been incorporated herein in reliance on the report, which
includes an explanatory paragraph regarding the Company's ability to continue as
a going concern, of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered
hereby have been passed upon for the Company by Haskell Slaughter & Young,
L.L.C.
36
<PAGE> 37
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS IS NOT AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES OFFERED HEREBY IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information........................................................................................... 2
Incorporation of Certain Documents by
Reference.............................................................................................. 2
Recent Developments............................................................................................. 4
Prospectus Summary.............................................................................................. 5
Risk Factors.................................................................................................... 7
Use of Proceeds................................................................................................. 17
Plan of Distribution and Selling
Shareholders........................................................................................... 17
Selling Shareholders Table...................................................................................... 24
Description of Capital Stock.................................................................................... 28
Experts......................................................................................................... 36
Legal Opinions.................................................................................................. 36
</TABLE>
SI DIAMOND
TECHNOLOGY,
INC.
[LOGO APPEARS HERE]
8,935,358 SHARES OF
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
2,535,600 SHARES OF
COMMON STOCK
UNDERLYING WARRANTS
1,483,137 SHARES OF
COMMON STOCK
ISSUABLE UPON
CONVERSION OF SERIES E
PREFERRED STOCK
995,456 SHARES OF
COMMON STOCK
ISSUABLE UPON
CONVERSION OF SERIES F
PREFERRED STOCK
1,853,617 SHARES OF
COMMON STOCK
ISSUABLE UPON
CONVERSION OF SERIES G
PREFERRED STOCK
----------
PROSPECTUS
----------
JUNE 18, 1998
================================================================================
