<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998; or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NO. 1-11602
SI DIAMOND TECHNOLOGY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0273345
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758
(Address of principal executive office, including Zip Code)
Registrant's telephone number, including area code: (512) 339-5020
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $0.001 par value OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $721,841
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on the
NASDAQ/OTC Bulletin Board on March 18, 1999, was approximately $34,017,364.
Shares of Common Stock held by each officer and director and by each person who
may be deemed to be an affiliate have been excluded.
As of March 18, 1999, the registrant had 50,106,783 shares of Common Stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one).
Yes No X
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TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
PART I .......................................................................................Page 1
Item 1. BUSINESS......................................................................Page 1
Item 2. PROPERTIES....................................................................Page 8
Item 3. LEGAL PROCEEDINGS.............................................................Page 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................Page 8
PART II .......................................................................................Page 9
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..........Page 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................Page 10
Item 7. FINANCIAL STATEMENTS.........................................................Page 17
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................Page 45
PART III ......................................................................................Page 46
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..........................Page 46
Item 10. EXECUTIVE COMPENSATION.......................................................Page 47
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............Page 54
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................Page 56
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.............................................Page 56
</TABLE>
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FORWARD - LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
Our disclosure and analysis in this report contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate", "believe", "expect", "estimate", "project",
"intend", "plan", and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include statements relating to future actions, prospective products or
product approvals, future performance or results of current and anticipated
products, sales efforts, expenses, the outcome of contingencies such as legal
proceedings, and financial results. From time to time, we also may provide oral
or written forward-looking statements in other materials we release to the
public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks or
uncertainties. Many factors mentioned in the following discussion - for example,
product development, competition, and the availability of funding - will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as the result of new information, future events, or
otherwise. You are advised, however, to consult any further disclosures we make
on related subjects in our 10-Q, 8-K, and 10-K reports to the SEC. Also note
that we provide the following cautionary discussion of risks, uncertainties, and
possibly inaccurate assumptions relevant to our business. These are factors that
we think could cause our actual results to differ materially from expected and
historical results. Other factors besides those listed here could also adversely
affect the Company. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
DFE PRODUCT DEVELOPMENT IS IN ITS EARLY STAGES AND THE OUTCOME IS UNCERTAIN
Our Diamond Field Emission ("DFE") technology, and any products that
use this technology, will require significant additional development,
engineering, testing and investment prior to commercialization. Our leading
potential DFE product is a cathode, or light source, intended for use in a
display. If the cathode is successful, a display using this cathode is also a
possibility. The cathode or display may not be successfully developed. If either
of these products is developed, it may not be possible to produce these products
in significant quantities at a price that is competitive with other similar
products.
THERE ARE NO CURRENT DFE PRODUCT REVENUES
We currently receive no revenue from any products related to our DFE
technology. The only revenues that we receive related to our DFE technology are
revenues for continued research on the technology. We may never receive product
revenues from the DFE technology.
OUR SUCCESS IS DEPENDENT ON OUR PRINCIPAL PRODUCTS
Our DFE technology is an emerging technology. Our financial condition
and prospects are dependent upon market acceptance and sales of our DFE products
and our Electronic Billboard and related electronic display products. Additional
R&D needs to be conducted on the DFE products before marketing and sales efforts
can be commenced. Market acceptance of our 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 we will be
able to gain commercial market acceptance for our products or develop other
products for commercial use.
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WE HAVE A HISTORY OF OPERATING LOSSES
We have a history of operating losses and have never had a profitable
quarter or year. We have incurred operating losses as shown below:
YEAR ENDED DECEMBER 31 NET LOSS
---------------------- -------------
1992 ($1,630,978)
1993 ($7,527,677)
1994 ($7,255,420)
1995 ($14,389,856)
1996 ($13,709,006)
1997 ($6,320,901)
1998 ($3,557,548)
We may continue to incur additional operating losses for an extended
period of time as we continue to develop products. We do, however, expect to be
profitable in 1999. We may not be profitable beyond 1999. Wallace Sanders &
Company, independent auditors of the Company, have expressed substantial doubt
as to our ability to continue as a going concern based on these accumulated
losses from operations. See "Independent Auditors' Report." We have funded our
operations to date primarily through the proceeds from the sale of our equity
securities. In order to continue our transition from a contract research and
development organization to an organization with ongoing operations, we
anticipate that substantial product development expenditures will continue to be
incurred.
WE HAVE FUTURE CAPITAL NEEDS AND THE SOURCE OF THAT FUNDING IS UNCERTAIN
We expect to continue to incur substantial expenses for R&D, product
testing, production, manufacturing, product marketing, and administrative
overhead. The majority of R&D expenditures are for the development of our DFE
technology and our electronic billboard product. Some of our proposed products
may not be available for commercial sale or routine use for a period of one to
two years. Commercialization of our existing and proposed products will require
additional capital in excess of our current sources of funding. A shortage of
capital may prevent us 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 our 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, we may be
required to curtail our expansion and/or seek additional financing from other
sources. We may seek additional financing through the offer of debt or equity or
any combination of the two at any time.
We have developed a plan to allow us to maintain operations until we
are able to sustain ourselves on our own revenue. At the present time we have
existing resources, including royalties receivable, to sustain ourselves for a
period of approximately 18 months from the date of this report at current
spending levels. We believe that we have the ability to continue to raise short
term funding, if necessary, to enable us to continue operations until our plan
can be completed. Our plan is primarily dependent on raising funds through the
licensing of our technology and through strategic partners and debt offerings.
We are also concentrating on raising revenue by seeking customers for our
electronic billboard product, which is currently under development.
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Our 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. Our 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, we may have to eliminate, or reduce substantially,
expenditures for research and development, testing and production of our
products. We may have to obtain funds through arrangements with other entities
that may require us to relinquish rights to certain of our technologies or
products. These actions could materially and adversely affect the Company.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE AND WE MAY NOT
REMAIN COMPETITIVE
The display industry is highly competitive and is characterized by
rapid technological change. Our 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 our products. There is no assurance
that other products, processes or technologies will not render our proposed
products obsolete or less competitive. Most of our competitors have greater
financial, managerial, distribution, and technical resources than us. We will be
required to devote substantial financial resources and effort to further R&D.
There can be no assurance that we will successfully differentiate our products
from our competitors' products, or that we will adapt to evolving markets and
technologies, develop new products, or achieve and maintain technological
advantages.
WE HAVE TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies through various license
and assignment agreements with Microelectronics and Computer Technology
Corporation and DiaGasCrown, Inc., we have acquired rights to develop and
commercialize certain research technologies. In certain cases, agreements
require us to pay royalties on the sale of products developed from the licensed
technologies and fees on revenues from sublicensees. We also have to pay for the
costs of filing and prosecuting patent applications. Each agreement is subject
to termination by either party, upon notice, in the event of certain defaults by
the other party. The payment of such royalties may adversely affect the future
profitability of the Company.
OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET
Since our inception, we have focused our product development and R&D
efforts on technologies that we believe will be a significant advance over
currently available technologies. 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 our products will depend,
in part, on our ability to convince potential customers of the advantages of
such products as compared to competitive products. It will also depend upon our
ability to train manufacturers and others to use our products. We currently have
a limited marketing organization and there is no assurance that we will be able
to successfully market our proposed products even if such products perform as
anticipated.
WE HAVE LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
We have no established commercial manufacturing facilities in the areas
in which we are conducting our principal research. The management team has
commercial manufacturing and marketing experience in other industries and with
other products in the display industry; however, we have no experience in
manufacturing our proposed products. At the present time, we have no intention
of establishing a manufacturing facility. We are focusing our efforts on
licensing our technology to others for use in their manufacturing processes. We
intend to contract with a qualified manufacturer for assembly services related
to our electronic billboard product, which is currently under development. To
the extent that any of our other products require manufacturing facilities, we
intend to contract with a strategic partner or other qualified manufacturer.
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WE MAY NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS
We intend to establish and develop a sales organization to promote,
market, and sell our products. This may require significant additional
expenditures, management resources, and training time. There can be no assurance
that we will be able to establish a successful sales organization.
WE ARE DEPENDENT ON THE AVAILABILITY OF MATERIALS AND SUPPLIERS
We anticipate that the materials to be used in producing our future
products will be purchased from outside vendors. In certain circumstances, we
may be required to bear the risk of material price fluctuations. We anticipate
that the majority of raw materials used in products to be manufactured by the
Company or its strategic partners will be readily available. However, there is
no assurance that these materials will be available in the future, or if
available, will be procurable at prices favorable to the Company or its
strategic partners.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our future success will depend on our ability to attract and retain
highly qualified scientific, technical and managerial personnel. Competition for
such personnel is intense. We may not be able to attract and retain all
personnel necessary for the development of our business. In addition, much of
the know-how and processes developed by the Company reside in our key scientific
and technical personnel. This know-how and these processes are not readily
transferable to other scientific and technical personnel. The loss of the
services of key scientific, technical and managerial personnel could have a
material adverse effect on us.
WE MAY NOT BE ABLE TO PROVIDE SYSTEM INTEGRATION
In order to prove that our technologies work and will produce a
complete product, we must ordinarily integrate a number of highly technical and
complicated subsystems into a fully-integrated prototype. There is no assurance
that we will be able to successfully complete the development work on any of our
proposed products or ultimately develop any marketable products.
WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY
Our ability to compete effectively with other companies will depend on
our ability to maintain the proprietary nature of our technology. Although we
have been awarded, have filed applications for, or have been licensed technology
under numerous patents, the degree of protection offered by these patents or the
likelihood that pending patents will be issued is uncertain. Competitors in both
the United States and foreign countries, many of which have substantially
greater resources and have made substantial investment in competing
technologies, may already have, or may apply for and obtain patents that will
prevent, limit or interfere with our ability to make and sell our products.
Competitors may also intentionally infringe on our patents. The defense and
prosecution of patent suits is 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 us
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require us to cease selling our products.
Although third parties have not asserted infringement claims against us, there
is no assurance that third parties will not assert such claims in the future.
Claims that our products infringe on the proprietary rights of others are more
likely to be asserted after commencement of commercial sales incorporating our
technology.
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We also rely on unpatented proprietary technology, and there is no
assurance that others will not independently develop the same or similar
technology, or otherwise obtain access to our proprietary technology. To protect
our rights in these areas, we require all employees and most consultants,
advisors and collaborators to enter into confidentiality agreements. These
agreements may not provide meaningful protection for our 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 we have attempted to protect proprietary
technology that we develop or acquire and will continue to attempt to protect
future proprietary technology through patents, copyrights and trade secrets, we
believe that our success will depend upon further innovation and technological
expertise.
OUR REVENUES HAVE BEEN DEPENDENT ON GOVERNMENT CONTRACTS IN THE PAST
In previous years, a significant part of our revenues were derived from
contracts with agencies of the United States government. Following is a summary
of those revenues in recent years:
<TABLE>
<CAPTION>
Revenues from Percentage of
Year Ended December 31 Gov. Contracts Total Revenue
---------------------- --------------- -------------
<S> <C> <C>
1992 $ 930,000 99%
1993 $1,147,000 89%
1994 $ 820,000 41%
1995 $1,009,000 33%
1996 $2,869,000 50%
1997 $ 854,000 24%
1998 $ 0 0%
</TABLE>
We currently have no significant commitment for any future government
funding and do not intend to seek any government funding unless it directly
relates to achievement of our strategic objectives. To the extent that we are
unable to obtain funding from alternate sources, this could adversely affect our
ability to continue to perform research and development on our proposed
products.
Contracts involving the United States government are, or may be,
subject to various risks including, but not limited to, the following:
- 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
- Potential disclosure of our confidential information to third parties
- The failure or inability of the prime contractor to perform its prime
contract in circumstances where we are a subcontractor
- The failure of the government to exercise options provided for in the
contracts
- The right of the government to obtain a non-exclusive, royalty free,
irrevocable world-wide license to technology developed under
contracts funded by the government if we fail to continue to develop
the technology
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YEAR 2000 ISSUES MAY EXPOSE US TO LIABILITY
Some computers, software, and other equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of the systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900 rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Year 2000 Problem."
The Year 2000 Problem presents us potential risks including, but not limited to,
the following:
- Products sold to customers - We have had very limited product sales to
customers and believe that all products sold to customers are Year 2000
complaint. Our risk in this area is extremely limited.
- Internal Infrastructure - We have completed an internal evaluation and
have determined that all of our internal systems will be Year 2000
compliant well prior to the end of 1999. Our risk in this area is
extremely limited.
- Suppliers/third party relationships - There is no assurance that our
suppliers or other third parties that we rely on will resolve any or
all Year 2000 problems with their systems on a timely basis. Since we
have no significant suppliers of product, we believe our risk is
limited in this area.
- External Infrastructure - We are dependent on other entities such as
governmental units, utilities, banks, etc. that maintain an external
infrastructure necessary for us to operate. Although we expect that
such entities are addressing and solving their Year 2000 problems,
there is no assurance that these problems will be addressed and solved
on a timely basis.
WE ARE EXPOSED TO MATERIAL LITIGATION
We have been sued by a former customer of Plasmatron for damages that
the former customer claims that it incurred as a result of the alleged failure
of the machine provided by Plasmatron to perform as intended. Various trade
creditors have also filed suit to collect unpaid trade amounts due. We expect
these items to be resolved with no material impact on our financial statements.
If we were to become subject to a judgment that exceeds our ability to pay, that
judgment could have a material impact on our financial condition and could
affect our ability to continue in existence.
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PART I.
When used in this document, the words "anticipate", "believe",
"expect", "estimate", "project", "intend", "plan", and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties, and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, projected, intended, or planned. For additional discussion of such
risks, uncertainties, and assumptions, see "Forward-Looking Statements and
Important Factors Affecting Future Results" included at the beginning of this
report.
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
GENERAL
SI Diamond Technology, Inc., a Texas corporation (the "Company"), is
engaged in the development of products and services based principally on novel
applications of thin films and the application of display technologies. The
Company believes that microelectronic and other applications of diamond thin
film technology will play an important role in the electronics industry. The
Company's research is focused on identifying key applications of this
technology. Based on its research, the Company is currently engaged in the
development of products based on Diamond Field Emission ("DFE") technology and
the development of an electronic billboard and related electronic display
products based on existing technology. Electronic billboards and related
electronic display products would provide a market for the Company's Diamond
Field Emission Lamp product when completed. Management believes that the
Company's greatest growth opportunity lies in DFE products and the development
of an electronic billboard and related electronic display products.
The Company was incorporated in Texas in 1987. The Company's directly
and indirectly owned subsidiaries are as follows:
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION STATUS
- --------------------------------------------------------- ---------------------- ------
<S> <C> <C>
Electronic Billboard Technology, Inc. ("EBT") Delaware Active
Field Emission Picture Element Technology, Inc. ("FEPET") Delaware Active
Northlight Displays, Inc. ("Northlight") Delaware Inactive
Diamond Tech One, Inc. ("DTO") Delaware Inactive
Plasmatron Coatings and Systems, Inc. ("Plasmatron") Pennsylvania Inactive
SIDT Coatings, Inc. Delaware Inactive
SDI Acquisition Corp. ("SDI") Delaware Inactive
</TABLE>
SI Diamond's business includes the development and commercialization of
electronic billboards and related electronic display products and the
development and commercialization of DFE products. The Company has also
conducted contract research and development primarily for United States
governmental agencies. The business efforts of the Company have arisen out of
the Company's interest in thin film materials, notably thin film diamond and
diamond-like carbon ("DLC"). These interests have led the Company into
microelectronics-related processes, thin film based DFE products, and electronic
billboards and related electronic display products.
SI Diamond conducts its operations through its subsidiaries. EBT is
engaged in the development of an electronic billboard and related electronic
display products such as outdoor display devices for use in the fast food or
other industries. FEPET is conducting research on the DFE technology. Where
appropriate, the Company enters into collaborations with third parties as
discussed in greater detail under the heading "Technology Agreements" later in
this section.
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The Company incurred $1,167,673 in 1998 and $605,105 in 1997 in
research and development expenses. The Company's proposed products will
require significant additional development, engineering, testing and
investment prior to commercialization and certain of these proposed products
may not be available for commercial sale or routine use for a period of one
to two years. There is no assurance that the products will be successfully
developed, produced in commercial quantities on a cost-effective basis, or
marketed successfully.
BUSINESS GROUPS
ELECTRONIC BILLBOARD TECHNOLOGY, INC. EBT was incorporated in January
1997 to focus on developing sun-readable display products for outdoor use. The
Company's primary product under development is an electronic billboard which
will enable the outdoor advertising industry to fully exploit the Internet and
information revolution by placing ads at any location at any time. The Company's
plans for the billboard and related products are discussed in greater detail in
the section entitled "Business Development Strategies" later in this report.
FIELD EMISSION PICTURE ELEMENT TECHNOLOGY, INC. FEPET is developing the
Company's proprietary DFE technology for use in a Diamond Field Emission Lamp
("DFEL"). The DFEL is a unique, high brightness, multi-color light source
intended for use initially in outdoor billboards, indoor video walls, and
alphanumeric displays. The DFEL is a pixel, which is the basic unit or picture
element that makes up the image displayed on a video screen. The DFE technology
provides several advantages over the existing technologies used in these areas.
It generally has a higher image quality, better sunlight readability, lower
cost, lower energy usage, improved viewing angle and excellent video
capabilities. This technology when fully developed would be a natural step in
the improvement progression in the Company's electronic billboard and other
related electronic products. The Company's plans for this technology are
discussed in greater detail in the section entitled "Business Development
Strategies" later in this report.
DIAMOND TECH ONE, INC. The Company sold the operating assets of DTO in
May 1998 for a total sales price of approximately $2.2 million. DTO provided
manufacturing and engineering services for the microelectronics and display
industries, and was engaged in the design and fabrication of high performance
copper-polyimide substrates, bonded and packaged high density assemblies, and
the highest quality gold, solder or compliant "bumped" wafers.
During 1997, DTO successfully completed its transition from a research
facility to a repetitive manufacturing facility. DTO achieved ISO 9001
certification during 1997 and customer demand exceeded available capacity. Sales
growth was required for DTO to achieve break-even. This growth was dependent
upon substantial new capital investment in the form of facility upgrades and
additional equipment. The Company concluded that it would be better to sell DTO
and invest its limited resources in its remaining higher potential subsidiaries.
BUSINESS DEVELOPMENT STRATEGIES
OVERALL. The Company is a technology company. The Company plans to
focus its efforts on research, product development, and the licensing of its
technology to others. The Company has no plans to establish any manufacturing
facilities in the immediate future. To the extent that the Company needs to
develop manufacturing capabilities, it intends to use manufacturing
partnerships, joint ventures, or arrange to have its products manufactured
through contract manufacturers.
ELECTRONIC BILLBOARDS. The Company intends to market its electronic
billboard product to major national retailers for their use in conjunction with
their existing on-site signage. These billboards are expected to be smaller in
size than the full size billboards the Company is also developing. The Company
intends to sell, lease, or operate its billboards through joint venture
arrangements with these retailers. To facilitate its entry into this market, the
Company signed a marketing agreement with Vision Mark, LLC ("Vision Mark"), a
Texas limited liability company, and a related consulting and advisory services
agreement with C&A Services LLC ("C&A"), a Texas limited liability company
affiliated with Vision Mark. Vision Mark and C&A agreed to represent the Company
with several major high profile retailers defined as "protected" customers by
the agreements.
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The Company also has a contract to install an electronic billboard at a
test site for a major national billboard company. The Company has delayed work
on this contract to focus its efforts on marketing activities related to
retailers. The market potential for this product is substantial. The Outdoor
Advertising Association of America has indicated that over 275,000 large
roadside billboards exist in the United States. The advantages of the Company's
product are expected to be significant. Billboard companies could benefit by
increasing revenues at each site by being able to sell the same space to
different advertisers at different times during the day. Advertisers could
benefit substantially because they will be able to reach their target audience
with greater precision. After the completion of a billboard at a test site, the
Company intends to attack the billboard market in phases.
The target market for the first phase will be premium billboard sites -
those sites that generate monthly advertising revenues of approximately $25,000
or more. It is estimated that there are approximately 700 of these sites in the
United States and another 1,500 outside of the United States. It is estimated
that EBT could begin supplying billboards to meet the initial demand for these
sites within 6 months of installing its test sign under its existing contract
and obtaining funding for ongoing development and commercialization. Once demand
in the premium market has been met and increased manufacturing volumes have
lowered the unit manufacturing costs, EBT will target the remaining billboard
market.
The Company's billboard is based on a proprietary version of a mature
existing technology. The base technology is widely used in a variety of
applications and is readily available from many component suppliers. This
product offers many advantages over existing technologies used in the outdoor
advertising industry. These include full video capability, full color, wide
viewing angle with excellent outdoor readability, relative low cost compared
with competing technologies, and high reliability. The Company has built a proof
of concept, which clearly demonstrates high contrast, sunlight readability, and
video range speeds. As the Company's FEPET subsidiary continues to develop its
DFE technology, EBT expects to integrate the DFE technology in its electronic
billboard because of the advantages that it is expected to provide related to
cost and quality. EBT expects its electronic billboard product to be successful
regardless of the timing of the availability of the DFE technology provided by
FEPET.
OTHER ELECTRONIC DISPLAY PRODUCTS. EBT, in conjunction with Texas
Digital Systems, Inc. ("TDS"), a distributor to the fast food industry,
developed an outdoor electronic display for use in the fast food industry. These
units, primarily in 10.4" to 17" sizes, are readable outdoors in direct sunlight
and intended for use in the drive through process. The Company receives a
royalty on all units sold by TDS. In 1998, TDS shipped 518 of these units to a
major fast food chain. After extensive testing, the fast food chain ordered a
unit for the drive through lane of each of its corporate stores (approximately
500 locations), and made the product available to its franchisees, which
represent approximately 7,000 additional locations. TDS is also marketing the
product to other fast food chains.
DFE PRODUCTS. The major short run focus of FEPET is the continued
development and commercialization of its DFE product. As soon as the product is
commercially viable, the Company plans to introduce it in its electronic
billboard product. In addition the Company would then target other large display
manufacturers that manufacture displays for such uses as sports arenas, video
walls, alphanumeric signs, etc. FEPET has completed Phase I of its collaborative
efforts with Diamond Pro-Shop Nomura Co., Ltd. ("DPN") that commenced in
September 1997 to develop a cathode using the Company's DFE technology. In
January 1999, DPN agreed to fund the Phase II development program. It is
anticipated that upon completion of the Phase II development program in early
2000, the product will move into the manufacturing stage. It is anticipated that
the product will be used in large screen display applications, video walls, and
the Company's electronic billboard products.
Page 3
<PAGE>
The Company is also developing a new display technology, the HyFED. HyFED
combines the best properties of cathode ray tubes ("CRTs") and Field Emission
Displays ("FEDs") using the Company's proprietary diamond/carbon thin films. The
HyFED that the Company is developing is a hybrid of CRTs and FEDs. It is
anticipated that the HyFED will achieve a high-quality thin display using the
existing manufacturing base of CRTs. The HyFED display has the potential to be
larger, brighter, and have higher resolution than conventional CRTs, while still
remaining cost-competitive with CRTs. In January 1999, the Company formed an
International Development Team to develop the first HyFED display. The
International Development Team is initially composed of six organizations - four
from Japan, one from Europe, and the Company. The International Development Team
expects to have a working four inch prototype of the HyFED by the last quarter
of 1999. Each member of the team is focusing on the development of a specific
portion of the first prototype and each member is funding their own portion of
the work. Upon completion of the first prototype, these team members will be
given the first opportunity to license the HyFED technology.
LICENSING AGREEMENTS. The Company has an extensive patent portfolio
that it has developed and acquired over the years. Licensing of this
technology to major companies in the display industry is a critical part of
the Company's overall strategic plan. In March 1999, the Company signed a
license agreement with a large manufacturer of information and office
products. Under the terms of this agreement, the Company will receive gross
royalties of $5,555,556 no later than April 12, 1999 for a paid up worldwide
non-exclusive license to certain of the Company's patents and patent
applications. After foreign taxes associated with this payment, the Company
will net $5,000,000. The Company expects to enter into other licensing
agreements with other manufacturers in the future.
COMPETITION
ELECTRONIC BILLBOARDS. The Company believes that the proprietary
version of the technology that the Company is planning to develop is superior to
existing technology when combining the issues of brightness, cost, and image
quality required for electronic billboards. Competing technologies include:
- Light Emitting Devices ("LED") which have a grainy picture and do not
allow certain colors to be viewed in direct sunlight
- Incandescent bulbs that are high maintenance and result in poor
graphics
- Electromechanical systems that have poor image qualities
- Vacuum Fluorescent Displays ("VFD") which are used currently in
large stadium displays, but are not considered cost effective for
this application at the present time.
The Company is unaware of any other organizations developing an
electronic billboard using a version of this technology. However, this is an
existing technology used in many applications. Competition from other
manufacturers could develop at any time.
DFE PRODUCTS. The short term focus in DFE products is the development
of the DFEL to be used as the pixel light source in a large display. The light
source is the most vital and costly part of a large display, accounting for
approximately 25 - 30% of its cost. Since the pixel light source directly
equates to the visual quality and reliability of the display, the
characteristics of the pixel light source are critical to a purchase decision.
Competition for the Company's DFEL will come from other technologies. Following
is a summary of some of those technologies and key differences.
LEDs have long lifetimes and low operating costs. However, they are high priced
initially and produce a grainy picture, which cannot be viewed in direct
sunlight. VFDs offer excellent picture quality and color, but they are extremely
expensive to install and operate. Electromechanical displays have poor image
quality and limited colors. Incandescent bulbs have high maintenance costs and
poor graphics. Liquid Crystal Displays ("LCD") are attractive because they have
a long lifetime and an existing manufacturing base. It is expected however that
the DFEL will provide wider viewing angles, a wider range of operating
temperatures and higher brightness.
There are other companies attempting to develop non-diamond based field emission
display technologies. It is the Company's opinion that these technologies will
not be as cost efficient or demonstrate as high a level of brightness as the DFE
technology. In addition, these companies are attempting to develop these
technologies for use in computer screens rather than large display applications.
Page 4
<PAGE>
TECHNOLOGY AGREEMENTS
MCC. In 1998, the Company simplified its technology agreements with
MCC, the Austin-based consortium of North American Electronics leaders. The
Company previously licensed 144 patents and patent applications from MCC
under an exclusive arrangement. This licensing agreement was amended in 1997
and again in 1998 to directly transfer 62 of these patents and patent
applications related to the DFE technology directly to the Company and return
the remaining patents and patent applications to MCC. The Company is
obligated to pay MCC a royalty of 2% of revenues related to transferred
patents. The Company can offset certain pre-defined expenses against these
royalty payments.
DIAGASCROWN. In February 1995, the Company entered into a series of
agreements with DGC. Under these agreements, the Company and DGC agreed to
collaborate on the further development of DFE-related technology. The Company
has the right to use the DGC technology on a royalty-free basis. All
technology developed under the DGC collaboration is jointly owned by the
Company and DGC, although DGC has agreed to assign its interest to the
Company. Consequently, the Company will have the sole authority to sublicense
the technology obtained under the collaboration, should it elect to do so.
(See Note 11 to the Consolidated Financial Statements). The Company committed
to perform $2.5 million in research and development in Russia through
February 1997. According to its internal records, the Company spent
approximately $2,000,000 on this research through December 31, 1998. Further
spending in Russia has been halted since 1996, pending agreement as to the
nature and amount of services to be performed in Russia for the remaining
balance to be spent under the original agreement. It is not anticipated that
any further research will be performed in Russia in the near future. The
internal results achieved by the Company are far superior to those achieved
through the collaborative efforts. The Company has not received a significant
benefit for the money that has been spent in connection with this agreement.
The Company has informed DGC that no further research will be performed in
connection with this agreement unless payment is tied to the achievement of
certain pre-defined milestones and goals.
ADDVENT. In May 1995, the Company entered into the ADDVent joint
venture agreement with another electronics manufacturer to develop a 10-inch
field emission display under the Advanced Technology Program ("ATP")
administered by the National Institute of Science and Technology ("NIST").
The ATP contract provided for expenditures of $7.0 million by the Company
from 1995 through 1997. These expenditures were to be funded 49% by NIST.
Under the ATP, the Company will own the rights to the technology, subject to
the license rights of the United States government and the rights of its
partner to own the high-voltage driver which it develops under the ATP and
which its partner has agreed to supply the Company. The Company's right to
its partner's driver shall be exclusive for a period of two years following
acceptance by the Company of its partner's driver design. The Company manages
this project and has made the majority of the expenditures under this
program. As of December 31, 1998, the Company had completed its portion of
the program, which resulted in the development of useable carbon films for
use in display applications. These carbon films achieved certain
specifications required in the display industry and are addressable,
patternable, and have achieved the minimum emission site density required.
The Company's joint venture participant has not yet completed the driver
development.
PATENTS AND PROPRIETARY RIGHTS
An important part of the Company's product development strategy is
to seek, when appropriate, protection for its products and proprietary
technology through the use of various United States and foreign patents and
contractual arrangements.
The Company owns 42 issued patents, three allowed patents, and has
45 patent applications pending in the United States. The Company also has
several patent applications in process. The patents, allowances and
applications relate to the DFE technology and other technologies. In
addition, there are foreign counterparts to certain United States patents and
applications.
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<PAGE>
The patenting of technology-related products and processes involves
uncertain and complex legal and factual questions. To date, no consistent
policy has emerged regarding the breadth of claims of such technology
patents. Therefore, there is no assurance that the Company's pending United
States and foreign applications will issue, or what scope of protection any
issued patents will provide, or whether any such patents ultimately will be
upheld as valid by a court of competent jurisdiction in the event of a legal
challenge. Interference proceedings, to determine priority of invention, also
could arise in any of the Company's pending patent applications. The costs of
such proceedings would be significant and an unfavorable outcome could result
in the loss of rights to the invention at issue in the proceedings. If the
Company fails to obtain patents for its technology, and is required to rely
on unpatented proprietary technology, there is no assurance that the Company
can protect its rights in such unpatented proprietary technology, or that
others will not independently develop substantially equivalent proprietary
products and techniques, or otherwise gain access to the Company's
proprietary technology.
Competitors have filed applications for or have been issued patents
and may obtain additional patents and proprietary rights relating to products
or processes used in, necessary to, competitive with, or otherwise related
to, those of the Company. The scope and validity of these patents, the extent
to which the Company may be required to obtain licenses under these patents
or under other proprietary rights and the cost and availability of licenses
are unknown. This may limit the Company's ability to market its products.
Litigation concerning these or other patents could be protracted and
expensive. If suit were brought against the Company for patent infringement,
a challenge in the suit by the Company to the validity of the other patent
would have to overcome a legal presumption of validity. There can be no
assurance that the validity of the patent would not be upheld by the court or
that, in such event, a license of the patent to the Company would be
available. Moreover, even if a license were available, the payments that
would be required are unknown and could materially reduce the value of the
Company's interest in the affected products. Should the Company elect to
manufacture or market these products without a license or a favorable
determination as to the invalidity of these patents, damages could result
which could be materially adverse to the Company. Further, failure to obtain
a license could result in an injunction prohibiting the Company from
manufacturing or selling the affected lines of products.
The Company also relies upon unpatented trade secrets. No assurance
can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology or that the Company
can meaningfully protect its rights to its unpatented trade secrets.
The Company requires its employees, directors, consultants, outside
scientific collaborators and sponsored researchers and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the relationship is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual shall be
the exclusive property of the Company. There is no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The Company's products will be subject to extensive government
regulation in the United States and in other countries. In order to produce
and market its existing and proposed products, the Company must satisfy
mandatory safety standards established by the U.S. Occupational Safety and
Health Administration ("OSHA"), pollution control standards established by
the U.S. Environmental Protection Agency ("EPA") and comparable state and
foreign regulatory agencies. The Company may also be subject to regulation
under the Radiation Control for Health and Safety Act administered by the
Center for Devices and Radiological Health ("CDRH") of the U.S. Food and Drug
Administration. The Company does not believe that its DFE products will
present any significant occupational risks to the operators of such
equipment. In addition, the DFE products are not expected to produce
significant hazardous or toxic waste that would require extraordinary
disposal procedures. Nevertheless, OSHA, the EPA, the CDRH and other
governmental agencies, both in the United States and in foreign countries,
may adopt additional rules and regulations that may affect the Company and
its products. Additionally, the Company's arrangements with its customers and
affiliates may subject its products to export and import control regulations
of the U.S. and other countries.
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<PAGE>
A portion of the Company's revenues have consisted of earnings under
U.S. government contracts, although the Company received no such revenue in
1998 and currently has no active grants. Government contracts are subject to
delays and risk of cancellation. Also, government contractors generally are
subject to various kinds of audits and investigations by government agencies.
These audits and investigations involve review of a contractor's performance
on its contracts, as well as its pricing practices, the costs it incurs and
its compliance with all applicable laws, regulations and standards. The
Company is, and in the future expects to be, audited by the government. The
Company's ATP program is required to be audited in accordance with NIST
standards. The Company expects the results of these audits to have no
material impact on the Company.
EMPLOYEES
As of March 15, 1999, the Company had 20 full-time employees,
including three executive officers. Within the next twelve months, if
business conditions support it, the Company expects to hire additional
employees. The Company is not subject to any collective bargaining agreements
and it considers its relations with its employees to be good.
EXECUTIVE OFFICERS
The names of executive officers of the Company and certain
information with respect to each of them are set forth below.
<TABLE>
<CAPTION>
- ---------------------------- ---------- ---------------------------------------------------
Name Age Position
- ---------------------------- ---------- ---------------------------------------------------
<S> <C> <C>
Marc W. Eller 43 Chairman and Chief Executive Officer
Zvi Yaniv 52 President and Chief Operating Officer
Douglas P. Baker 42 Vice President and Chief Financial Officer
- ---------------------------- ---------- ---------------------------------------------------
</TABLE>
Marc W. Eller has served as the Company's Chief Executive Officer
since July 29, 1996. Mr. Eller is Chairman of the Board of Directors and has
been a Director since November 1995. Mr. Eller co-founded BEG Enterprises,
Inc. in 1989 and has been its Vice President since that date. For the past
five years, Mr. Eller has been involved in commercial real estate investment
and in investment banking activities for publicly traded companies. Mr. Eller
has a B.A. degree in Economics.
Dr. Zvi Yaniv has served as the Company's President and Chief
Operating Officer since July 29, 1996. Dr. Yaniv has degrees in physics,
mathematics, and electro-optics as well as a Ph.D. in Physics. Prior to
joining the Company, in May 1996, Dr. Yaniv operated a consulting practice
and previously was President and CEO of OIS Optical Imaging Systems Inc., a
supplier of flat panel color liquid crystal displays to the avionics and
defense industries.
Douglas P. Baker has been Vice President and Chief Financial Officer
since June 17, 1996. Mr. Baker is a C.P.A and has both a B.B.A and a M.B.A.
Immediately prior to joining SI Diamond Technology, Inc., Mr. Baker was a
divisional controller for MascoTech, Inc. since 1991. Mr. Baker also has
experience in public accounting and as CFO of a privately held company.
Page 7
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ITEM 2. PROPERTIES
The Company leases a 10,000 square foot facility in Austin for a
monthly rental of approximately $7,000. The Company believes that this
facility will be adequate for its anticipated research and development
activities until additional products or alternative applications are
developed. If and when such additional products or alternative applications
are developed, the Company may be required to establish additional facilities
or enter into manufacturing agreements with others.
ITEM 3. LEGAL PROCEEDINGS
On May 20, 1996, Semi-Alloys Company, a former customer of
Plasmatron, filed a complaint with the Supreme Court of the State of New
York, County of Westchester. The complaint names Plasmatron, the Company and
Westchester Fire Insurance Company as defendants. Semi-Alloys claims a breach
of contract related to $1 million of coating equipment that Plasmatron
delivered in 1993, prior to the Company's ownership of Plasmatron.
Semi-Alloys claims the equipment does not perform as required under the
contract. Semi-Alloys seeks to recover compensatory, consequential and
incidental damages. The amount of this claim is to be determined at trial. A
trial date has been set for August 1999. At this time the outcome cannot be
predicted with any certainty and the potential liability, if any, is unknown.
The Company believes it has meritorious defenses and intends to continue to
vigorously defend this action.
On July 20, 1998, TFI Telemark, Inc., a former vendor of Plasmatron,
filed a complaint in the County Court at Law No. 2 of Travis County, Texas
against the Company for debts of its subsidiary, Plasmatron. The Company was
served with notice of this suit on August 5, 1998. All amounts claimed as
owing by TFI are recorded as liabilities of Plasmatron in the consolidated
financial statements of the Company. The Company believes the ultimate
resolution of this matter will not have a material impact on the consolidated
financial statements of the Company.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor
of DTO, filed a complaint in the United Sates District Court for the Southern
District of New York against the Company for unpaid debts of its subsidiary,
Diamond Tech One, Inc. The Company was served with notice of this suit on
October 14, 1998. All known amounts owed by DTO to KDF are recorded as
liabilities of DTO in the consolidated financial statements of the Company.
The amounts recorded as liabilities by DTO make up substantially all of the
amounts claimed as due by KDF. No trial date has been set in this matter. The
Company believes the ultimate resolution of this matter will not have a
material impact on the consolidated financial statements of the Company.
On January 28, 1999, Aetna Life Insurance Company, a former landlord
of DTO, filed a complaint in the 12th Judicial District Court, Travis County,
Texas against DTO as lessee, and the Company as guarantor, for unspecified
alleged damages occurring as a result of DTO's early termination of a lease.
DTO moved out of this facility with approximately nine months remaining on
the lease which called for monthly rental payments of approximately $17,000.
The Company contends that Aetna failed in its duty to mitigate damages and
behaved in a reckless manner, which resulted in damages to the Company and
its property. The Company intends to file a counterclaim against Aetna and
its property manager for damages and the return of its security deposit. The
Company believes that the ultimate resolution of this matter will not have a
material impact on the consolidated financial statements of the Company.
The Company and its subsidiaries are also defendants in various
other lawsuits of a non-material nature related to the non-payment of
invoices when due. It is expected that all such lawsuits will be settled for
an amount no greater than the liability recorded in the financial statements
for such matters and that settlement of such suits will not have a material
financial impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.001 par value was traded on the
Boston and Pacific Stock Exchanges under the symbol "SDI", and was also
traded via the National Association of Securities Dealers Automated Quotation
(NASDAQ) system in the Small Cap Market under the symbol "SIDT". The Company
was delisted by both exchanges and the NASDAQ Small Cap Market in 1998 for
failure to comply with continued listing requirements. The Company's common
stock now trades via the NASDAQ OTC Bulletin Board. The following table sets
forth, on a per share basis for the periods indicated, the high and low sale
prices for the common stock as reported by the NASDAQ system. These NASDAQ
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C> <C>
1997 First Quarter ................................................ $2.38 $1.00
Second Quarter................................................ $1.12 $0.47
Third Quarter................................................. $0.50 $0.34
Fourth Quarter................................................ $0.72 $0.28
1998 First Quarter ................................................ $0.38 $0.13
Second Quarter................................................ $0.89 $0.10
Third Quarter................................................. $0.36 $0.13
Fourth Quarter................................................ $0.51 $0.17
1999
First Quarter (through March 18, 1999)........................ $0.96 $0.38
</TABLE>
On March 18, 1999, the closing sale price for the common stock as
reported on the NASDAQ system was $0.80. As of March 18, 1999, there were
approximately 350 shareholders of record for the Company's common stock.
The Company has never paid cash dividends on its common stock, nor
does it have any plans to pay dividends. Its board of directors currently
intends to invest future earnings, if any, to finance expansion of its
business. Any payment of cash dividends in the future will be dependent upon
the Company's earnings, financial condition, capital requirements, and other
factors deemed relevant by its board of directors. It is unlikely that any
dividends on the common stock will be paid in the foreseeable future.
Information required in this Item 5 of the Company's Annual Report
on Form 10-KSB concerning information as to all equity securities issued by
the Company during the last three fiscal years that were not registered under
the Securities Act of 1933 is contained in "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Financial
Condition," and in Note 7 to the Notes to the Consolidated Financial
Statements contained in this Annual Report on Form 10-KSB.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should assist in understanding the
Company's financial position and results of operations for the years ended
December 31, 1998 and 1997. The Notes to the Consolidated Financial
Statements of the Company included elsewhere in this report contain detailed
information that should be referred to in conjunction with this discussion.
OVERVIEW
Throughout 1998 and 1997, the Company continued its efforts to move
from a contract research and development organization toward commercial
viability. The Company made the decision to sell the operating assets of its
DTO subsidiary in May 1998 to focus on its remaining higher potential
subsidiaries. DTO, while having excellent business prospects, required a
substantial investment in facilities, equipment, and new employees to
capitalize on these opportunities and achieve break-even status. The Company
decided that it would be better to sell the DTO assets, use the proceeds to
reduce debt, cut overhead, and focus on the development of its DFE and
electronic display products. The Company had previously made the decision to
close its Plasmatron facility in 1997. After the sale of the DTO assets the
Company was able to focus on the development efforts at its remaining
subsidiaries. The Company expects to continue these concentrated research and
development efforts in 1999.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997. The Company earned $721,841 in revenues
during 1998, as compared with $3,568,164 during 1997. Commercial sales, which
accounted for all of 1998 revenues, were $2,714,086 in 1997. In 1998, the
Company received revenues from DTO of $385,364, EBT of $192,246, and FEPET of
$144,231. In 1997, the majority of the Company's revenues resulted from the
manufacture and assembly of high-density electronic products by DTO and the
production of equipment under contracts through the Company's Plasmatron
subsidiary. DTO had revenues of approximately $1,390,000 in 1997 and
Plasmatron had revenues of approximately $850,000 in 1997. The Company's
FEPET subsidiary generated net commercial revenues of approximately $144,000
in 1998 and $416,000 in 1997. The 1998 revenues were primarily the result of
the sale of research services and of selected equipment designed and
constructed by FEPET in the research process. The 1997 FEPET revenues were
primarily the result of revenue related to future licensing granted in
connection with a joint venture agreement. The Company's EBT subsidiary had
commercial revenues of approximately $192,000 in 1998 and $58,000 in 1997.
Approximately $131,000 of EBT's 1998 revenues resulted from its royalty
agreement with TDS. The balance of 1998 revenues and all 1997 revenues were
the result of the sale of certain developmental products. The Company had no
contract research revenues for 1998 as compared to $854,078 for 1997. The
reduced contract research revenue resulted from the completion of the
Company's portion of the National Institute of Science and Technology
("NIST") contract in 1997. The Company has not applied for any additional
research grants, and expects no contract research revenues in the immediate
future. The Company may seek additional research grants in the future if such
grants are directly related to projects that the Company is already working
on in conjunction with its strategic objectives.
The Company had no revenue backlog at December 31, 1998. For
purposes of calculating its backlog, the Company includes only those
verifiable commitments that exist as of the backlog date. Under the Company's
agreement with TDS, the Company receives a royalty when TDS ships a product.
No amounts related to this agreement are included in the Company's backlog at
December 31, 1998. During the period from June 1998, when TDS began shipments
under the agreement, through December 31, 1998, the Company received revenues
of approximately $131,000 under the agreement. During that time period TDS
received an order from a major fast food chain for 500 units to enable the
chain to install a unit at each of its corporate-owned stores. Substantially
all of those units were shipped in 1998. The chain is also making the unit
available to all of its franchisees, which number approximately 7,000 in the
U.S. alone. TDS shipped approximately 50 units to franchisees in 1998. If all
franchisees ordered one unit for each additional U.S location, it would
result in the Company receiving between $1,750,000 and $2,100,000 in future
royalty payments. In January 1999, the Company received funding of $225,000
from a joint venture partner for a development project. This will be
recognized as revenue over the term of the project, which the Company expects
to be completed in 1999. At December 31, 1997, the Company had a commercial
backlog of approximately $344,000, consisting entirely of customer orders at
DTO.
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<PAGE>
For 1998, the Company's costs of sales were $1,592,225, resulting in
a negative margin of 121% as compared with $4,388,747 and a negative margin
of 23% during 1997. This decrease in margin resulted primarily from the
Company's DTO subsidiary. DTO's average monthly revenue decreased in the
months preceding the sale in 1998, while its cost structure was kept in place
to keep the organization intact and its capacity at its previous level for
prospective buyers. The Company had negative margins because its DTO
subsidiary operated significantly below its facility capacity for both
periods. The Company expects margins to improve in 1999 as a result of the
sale of its DTO operations. The Company expects all products introduced in
the future to have positive margins since it operates no manufacturing
facility and therefore does not have the fixed overhead associated with such
a facility.
The Company's selling, general and administrative expenses decreased
from $3,790,072 in 1997 to $2,149,018 in 1998. This decrease is primarily the
result of the Company's efforts to minimize overhead and the elimination of
the selling, general, and administrative expense associated with the
operation of the DTO facility. Company sponsored research and development
expenses increased in 1998 to $1,167,673 from $605,105 in 1997. The level of
research activity was similar in the two years; however a portion of the
Company's research activity in 1997 was reimbursed under the Company's NIST
grant. The Company expects to incur substantial expenses in support of
additional research and development activities related to the commercial
development of its DFE and electronic display technologies. The Company has
not applied for additional government grants at the present time and will not
do so unless those grants are specifically related to activities the Company
is already pursuing to accomplish strategic objectives.
The gain on disposal of assets of $771,515 in 1998 resulted
primarily from the sale of the operating assets of DTO in May 1998 for a
total sale price of approximately $2.2 million. The loss on disposal of
assets of $517,144 in 1997 resulted primarily from the sale of excess
equipment. The 1997 loss on disposal of assets also includes a loss of
$110,845 as a result of the abandonment of certain leasehold improvements
when the Company combined its operations in Austin, Texas into one facility.
In 1997, the Company recorded a loss on impairment of assets of $480,164 as a
result of its decision to liquidate Plasmatron. This loss was the result of
writing off certain inventory and the costs in excess of the fair market
value of assets acquired related to the original acquisition of Plasmatron.
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income", which establishes
standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive loss approximates the net loss reported.
FINANCIAL CONDITION
The Company's cash position remained virtually unchanged between
December 31, 1998 and 1997. At December 31, 1998, the Company had cash and
cash equivalents in the amount of $2,636 as compared with cash and cash
equivalents of $1,000 at December 31, 1997. Net cash used by operating
activities was $3,536,784 for 1998 compared to $4,249,556 for 1997. The
decrease in the requirement for cash was primarily the result of the reduced
net loss from 1998 to 1997.
Cash provided by investing activities for 1998 was $2,028,948 as
compared to $220,845 for 1997. The increased cash provided by investing
activities in 1998 was the result of proceeds from the sale of the operating
assets of DTO, offset by minor capital expenditures. Only equipment with
general alternative uses has been capitalized. Certain other specialized
equipment has been expensed as research and development. No material
commitments exist as of December 31, 1998 for future purchases of capital
assets.
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<PAGE>
Throughout 1997 and 1998, the Company has continued to raise
additional funds through equity and debt funding to finance its operating
losses. The net cash provided by financing activities decreased from
$4,013,421 in 1997 to $1,509,472 in 1998. As a result of its reduced
operating loss and the proceeds from the sale of DTO, the Company had less of
a need for additional financing. Based on the developmental stages of the
Company's technology, additional financing will be necessary in the future.
If all of the Company's warrants that were outstanding as of December 31,
1998, and have not yet expired in 1999, were exercised, the Company would
collect proceeds of approximately $2.3 million. (See Note 9 to the
Consolidated Financial Statements.) Proceeds from the exercise of warrants
totaled $90,000 in 1998 and $100,000 in 1997. Given the current price of the
Company's common stock, it is unlikely that all warrants would be exercised
in the near future. Approximately one half of the potential proceeds from
warrants involve warrants priced significantly above the current market
price. The Company may also receive proceeds from the exercise of stock
options. If all currently vested options that have an exercise price below
the market price of the Company's stock as of March 18, 1999 were exercised,
the Company would receive proceeds of approximately $1.3 million.
Following is a summary of debt and equity proceeds that the Company
has received from January 1, 1996 through the date of this filing:
Series E Preferred Stock
In December 1995 and January 1996 through an exempt offering under
Regulation D of the Securities Act of 1933, the Company received
subscriptions for and issued 1,190 shares of its Series E convertible
preferred stock. The offering provided proceeds of approximately $11,900,000
to the Company, less expenses of approximately $1,631,000. The Series E
preferred stock was noncumulative and had a liquidation preference of $10,000
per share plus 8% per annum from the date of issuance, and was entitled to
vote on all matters submitted to a vote of the shareholders on an "as if
converted" basis.
Each share of Series E preferred stock was convertible into that
number of shares of common stock determined by dividing the original issue
price of the Series E preferred stock, plus an accretion amount equal to 8%
of the issue price per annum, by the conversion price. The conversion price
was the lesser of $1.50 or the average closing bid price for the Company's
common stock for the calendar month immediately preceding the conversion
date. The amount convertible in any calendar month at a price equal to the
average closing bid price for the Company's common stock for the calendar
month immediately preceding the conversion date was limited to 7% of the
shares held by each Series E shareholder as of April 14, 1997. The preferred
shares were redeemable for cash, at the option of the Company, upon
presentation of the shares for conversion.
During 1998, 168 shares of the Series E preferred stock were
converted into 6,893,526 shares of common stock and 28 shares of the Series E
preferred stock were redeemed for cash of $332,011. During 1997, 418 shares
of the Series E preferred stock were converted into 5,542,941 shares of
common stock and 32 shares of the Series E preferred stock were redeemed for
cash of $368,795. As of December 31, 1998, all shares of the Series E
preferred stock had been converted to common stock or redeemed for cash.
Cumulatively, 14,676,061 shares of the Company's common stock were issued
upon conversion of 1,128 shares of the Series E preferred stock.
DTO Notes
In October 1996, DTO, a subsidiary of the Company, issued notes
payable totaling $1,000,000. These notes bore interest at a rate of 15%,
payable quarterly. The principal balance was due June 1, 1997. In connection
with these notes, the Company also issued 200,000 warrants enabling the
holder to purchase shares of the Company's common stock at a price of $1.00
per share. 100,000 of these warrants were exercised in 1997. The notes were
collateralized by the assets of DTO and guaranteed by the Company.
8% Convertible Debenture
In February 1997, the Company closed an offering of an 8% convertible
debenture under Regulation S of the Securities Act of 1933. On March 7, 1997
the Company received gross proceeds of $555,555, less expenses and discount
of $55,755, for the issuance of the debenture. The entire unpaid principal
and accumulated interest on the debenture was due and payable on the second
anniversary of the date on which the debenture was issued. The debenture was
converted into common stock in accordance with the terms of the agreement as
described below.
Page 12
<PAGE>
The lender converted $83,334 of principal into 196,439 shares of the
Company's common stock in December 1997. The conversion price was 75% of the
average of the closing bid price of the Company's stock for the 10 trading
days preceding the notice of conversion. In May 1998 the lender converted an
additional $200,000 of principal into 1,469,119 shares of the Company's
common stock. The conversion price was equal to the average closing bid price
of the Company's common stock for the calendar month preceding the date of
conversion (April 1998). In December 1998, the lender converted the remaining
$272,221 of principal and $61,592 of accrued interest into 942,044 shares of
the Company's common stock. The conversion price was based on 95% of the
average of the closing bid price of the Company's stock for the 10 trading
days preceding the notice of conversion. As of December 31, 1998, the Company
has no remaining obligation to the former holder of the debenture.
Series F Preferred Stock
In March 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 for 1,700 shares of its Series F convertible
preferred stock. The Company received net proceeds of $1,527,500, which
represented gross proceeds of $1,700,000, less expenses of $172,500. Each
share had a liquidation preference of $1,000 plus 4% per annum from the date
of issuance. Each share of Series F preferred was convertible into that
number of shares of common stock determined by dividing the original issue
price of the Series F preferred stock, plus an accretion amount equal to 4%
of the issue price per annum, by the conversion price. The conversion price
was the lesser of $1.75 or 80% of the 10 day average closing bid price prior
to the conversion date. The Series F preferred stock bears no dividends and
holders of the Series F preferred stock have no voting power except in
certain circumstances pursuant to Texas state law.
On March 17, 1998, the Company revised its Amended and Restated Articles
of Incorporation pursuant to an agreement with the Series F shareholders.
Under the terms of this agreement, the Series F shareholders were allowed to
convert one-sixth of the number of Series F preferred shares held as of March
17, 1998 in each of the months from March 1998 through August 1998 into the
Company's common stock. The conversion price for each month was the average
closing bid price of the Company's common stock for the preceding month,
except that the conversion price for March 1998 was $0.15. Upon submission
for conversion, the Company had the right to redeem the preferred shares for
107.5% of the original purchase price. All remaining shares of the Series F
preferred stock were converted in 1998.
During 1998, the Series F shareholders converted 1,081 shares of Series
F preferred stock into 5,571,503 shares of common stock. During 1997 the
Series F preferred stock shareholders converted 455 shares of Series F
Preferred stock into 714,746 shares of common stock and 164 shares of Series
F preferred stock were redeemed for $183,195 in cash.
Series G Preferred Stock
From June 1997 through August 1997, through an exempt offering under
Regulation D of the Securities Act of 1933, the Company issued 1,700 shares
of its Series G preferred stock. The offering provided proceeds of $1,700,000
to the Company. There were no material expenses associated with this
offering. Each share has a liquidation preference of $1,000 plus 10% per
annum from the date of issuance. Each share of Series G preferred stock is
convertible into shares of common stock as determined by dividing the
original issue price of the Series G preferred stock, plus an accretion
amount equal to 10% of the issue price per annum, by the conversion price.
The conversion price is fixed at a rate of $1.00 per share. The Series G
preferred stock bears no dividends and holders of the Series G preferred
stock are entitled to vote on all matters submitted to a vote of the
stockholders on an "as if converted" basis.
In connection with the issuance of the Series G preferred shares, each
Series G shareholder also received warrants to purchase the Company's common
stock. The number of warrants received by each shareholder was equal to 50%
of the dollar value of Series G preferred stock received. A total of 850,000
warrants were issued in connection with this transaction. These warrants
allow the holder to purchase shares of the Company's common stock of at a
price of $1.00 per share for a period of 10 years. The registration statement
covering shares of common stock into which the Series G preferred stock is
convertible and the common stock issuable upon exercise of the warrants was
declared effective on June 18, 1998.
During 1998, 100 shares of Series G Preferred stock were converted into
110,000 shares of common stock.
Page 13
<PAGE>
October 1997 Offering
In October 1997, the Company closed an exempt offering under Regulation
D of the Securities Act of 1933. Under the terms of the offering, the
investors committed to purchase $3.5 million dollars of the Company's common
stock in seven installments of $500,000 each. The first installment was
payable at closing and the next six installments were due on the first
business day of each month from November 1997 through April 1998. The
purchase price for the shares was 65% of the average closing bid price of the
Company's common stock for the five trading days immediately preceding the
due date of the installment. In addition, the subscription agreement
stipulated that the investors were to receive one warrant for each share of
the Company's common stock purchased. These warrants were exercisable for a
period of five years at an exercise price equal to 115% of the average
closing bid price of the Company's common stock for the five trading days
immediately preceding the issuance date of the warrants. The warrants were to
be issued on the same date as the previously described installment due dates.
The Company received cash proceeds of $1,000,000 in 1997 and issued
2,829,334 shares of its common stock in connection with the installments due
under the October 1997 Offering in October and November. The Company also
issued 1,118,868 shares of its common stock in connection with the
installment due December 1, 1997; however payment was not received for those
shares. The Company also issued 2,829,334 warrants at a price of $0.625 and
1,118,868 warrants at a price of $0.791. In January 1998, the Company and the
investors agreed to terminate the subscription agreement. As a result of this
agreement, the investors agreed to return 318,868 of the shares received in
December, pay cash of $250,000, and return all warrants received under the
agreement. After termination of the subscription agreement in January 1998,
the Company had received a total of $1,249,960 in proceeds. There were no
material expenses associated with this offering. A registration statement
covering the shares issued in connection with this offering was filed and
declared effective by post-effective amendment on October 28, 1997.
1998 Private Placements
In 1998, the Company issued 3,915,895 shares of restricted common
stock, and received cash proceeds of $713,236, in connection with private
placements of the Company's common stock in exempt offerings under Regulation
D of the Securities act of 1933. The shares were issued at prices
approximating the market price of the stock at the time of the offerings. A
registration statement covering these shares was declared effective June 18,
1998.
MCC Settlement
During 1998, the Company issued 500,000 shares of the Company's
common stock to MCC as part of an agreement to settle and pay the remaining
amount due under the minimum royalty agreement described in Note 11 to the
Consolidated Financial Statements. Based on the market price of the Company's
stock at the time, these shares were valued at $100,000. In 1997 the Company
also issued 340,717 shares of the Company's common stock to MCC to pay the
remaining balance due on a services agreement entered into in the April 1995
amendment to the MCC agreement. The remaining principal and interest due
under the agreement at the time of issuance of the shares was $201,810.
December 1997 Notes
In December 1997, the Company issued notes payable to shareholders
of the Company in the amount of $485,000. These notes were six-month notes
bearing interest at a rate of 15% and secured by the assets of DTO. These
notes were convertible into the Company's common stock at the option of the
lender. The conversion price of the Company's common stock for determining
the number of shares to be issued was equal to 75% of the average closing bid
price of the Company's common stock for the five trading days preceding the
date of notification. $300,000 of these notes were converted into shares of
the Company's common stock at the time of the sale of the DTO assets. The
remaining $185,000 which was payable to the Company's Chief Executive
Officer, was repaid at the time of the sale of the DTO assets.
Page 14
<PAGE>
Other 1997 Shares
During 1997, the Company issued 30,000 shares of the Company's
common stock to an advisor as payment for services rendered. Based on the
market value of the stock at the time of issuance, $39,375 was charged to
expense in connection with this transaction. In addition, the Company issued
239,275 shares of the Company's common stock in 1997 to various trade
creditors as payment for amounts due totaling $235,644. Theses shares were
registered on a registration statement declared effective on June 9, 1997.
1998 Notes
During 1998, the Company issued a total of $1,005,000 of notes
payable to investors that were convertible into shares of the Company's
common stock at the option of the lender, primarily at a rate of $0.25 per
share, which approximated the market price at the time the loans were made. A
total of $200,000 of these notes were converted into shares of the Company's
common stock in 1998 and $705,000 were converted into shares of the Company's
common stock in February 1999. The remaining $100,000 of these notes are
payable to the Company's CEO and have not been converted to common stock. The
Company also issued notes payable totaling $260,000 which are not convertible
into the Company's common stock. These notes were short-term notes bearing
interest at a rate of 15% and secured by all assets of the Company. The
Company also issued $100,000 of 90 day notes payable bearing interest at a
rate of 15%, and secured by all assets of the Company, that were accompanied
by warrants enabling the holders to purchase a total of 400,000 shares of the
Company's common stock at $0.25 per share, which approximated market at the
time of the loans.
1999 Notes
In January and February 1999, the Company borrowed a total of
$200,000 from a shareholder for working capital purposes. These short-term
loans bear interest at a rate of 15%, are secured by all assets of the
Company, and are convertible into the common stock of the Company at rates
ranging from $0.30 to $0.40 per share. These conversion rates approximated
the market price of the Company's common stock at the times the loans were
arranged. These notes were converted into shares of Company's common stock in
February 1999. The Company also issued a total of 200,000 shares of its
common stock, in an exempt offering under Regulation D of the Securities act
of 1933, for a total of $110,000 in February 1999.
The principal source of the Company's liquidity has been funds
received from exempt offerings of common and preferred stock. The Company may
receive additional funds from the exercise of warrants, although there is no
assurance that such warrants will be exercised. In the event that the Company
needs additional funds, the Company may seek to sell additional debt or
equity securities. The Company may seek to increase its liquidity through
bank borrowings or other financings. There can be no assurance that any of
these financing alternatives can be arranged on commercially acceptable
terms. The Company believes that its success in reaching profitability will
be dependent upon the viability of its products and their acceptance in the
marketplace, and its ability to obtain additional debt or equity financings
in the future. Wallace Sanders & Co., independent auditors of the Company,
expressed substantial doubt as to the ability of the Company to continue as a
going concern based on accumulated losses from operations. See "Independent
Auditors' Report."
OUTLOOK
As a result of the royalty agreement signed in March 1999, it is
anticipated that the Company will be profitable in 1999 as it continues to
fund the development of its DFE technology and its electronic billboard and
related electronic display products. There can be no assurance that the
Company will be profitable in the future. Full commercial development of the
Company's DFE technology and electronic billboard and related electronic
display products may require additional funds that may not be available at
terms acceptable to the Company.
Page 15
<PAGE>
The Company has developed a plan to allow it to maintain operations
until the Company is able to sustain itself on its own revenue. At the
present time the Company has the existing resources, including royalties
receivable to sustain it for a period of approximately 18 months from the
date of this report at current spending levels. The plan is primarily
dependent on raising funds through the licensing of its technology and
through strategic partners and debt offerings. The Company is also
concentrating on raising revenue by seeking customers for its electronic
billboard product, which is currently under development. Management believes
that it has the ability to continue to raise additional funding, if
necessary, to enable it to continue operations until its plan can be
completed.
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
eliminate, or reduce substantially, expenditures for research and
development, testing and production of its products, or obtain funds through
arrangements with other entities that may require the Company to relinquish
rights to certain of its technologies or products. Such results would
materially and adversely affect the Company.
The Company has determined that the Year 2000 Issue will have an
immaterial effect on the Company. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, 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.
The Company plans to purchase the upgraded software, where required, in early
1999 to insure adequate time for implementation. The cost of these upgrades
is expected to be no greater than $20,000 and it is not expected to have a
material effect on the operations of the Company. If such upgrades are 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 since it has no significant
suppliers or large customers. The Company has also determined that it has no
exposure to contingencies related to the Year 2000 Issue for the products it
has sold. The Company is ensuring that all products currently under
development by the Company will be Year 2000 compliant prior to the sale of
such products.
This assessment is based on the present circumstances of the Company in
which the Company has virtually no customers and no significant suppliers. In
this scenario, the Company's Year 2000 risk is virtually non-existent. If the
Company's business plan is successful and it is able to develop and sell
products, the Company may become subject to Year 2000 risk related to third
parties. The Company intends to assess the risk associated with third party
remediation of the Year 2000 Issues at the time that it enters into any
significant contracts or relationships with third parties and to develop a
contingency plan at that time if necessary.
SEASONALITY AND INFLATION
SI Diamond's business is not seasonal in nature. Management believes
that SI Diamond's operations have not been affected by inflation.
Page 16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF SI DIAMOND TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Independent Auditors' Report.................................................................... 18
Consolidated Balance Sheets - December 31, 1998 and 1997........................................ 19
Consolidated Statements of Operations - Years Ended December 31, 1998 and 1997.................. 20
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31,
1998 and 1997.............................................................................. 21
Consolidated Statements of Cash Flows - Years Ended December 31, 1998 and 1997.................. 23
Notes to Consolidated Financial Statements...................................................... 24
</TABLE>
Page 17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of SI Diamond Technology, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of SI Diamond
Technology, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and the
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SI Diamond Technology, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations, and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As described in Note 1
to the consolidated financial statements, the Company has relied primarily on
capital raised through offerings of common and preferred stock to fund its
operations and has experienced operating losses. The Company believes that
its success in reaching profitability will be dependent upon the viability of
its products and their acceptance in the marketplace, and its ability to
obtain additional debt or equity financings in the future. As of February 15,
1999, the Company has not yet achieved profitability, has a working capital
deficit and must obtain additional financing to fund its ongoing operations.
As a result, there is substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Wallace Sanders & Company
Dallas, Texas
February 15, 1999, except for Note 15,
as to which the date is March 25, 1999
Page 18
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 2,636 $ 1,000
Accounts receivable, trade.............................................. 184,020 448,042
Receivable from shareholders............................................ -- 250,000
Inventories............................................................. 65,529 --
Prepaid expenses and other current assets............................... 101,508 80,128
--------------- ----------------
Total current assets.............................................. 353,693 779,170
Property, plant and equipment, net........................................... 160,670 1,841,419
Intangible assets, net....................................................... 9,000 15,000
Other assets................................................................. 14,500 --
--------------- ----------------
Total assets...................................................... $ 537,863 $ 2,635,589
--------------- ----------------
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft.......................................................... $ -- $ 156,686
Accounts payable........................................................ 1,419,604 1,272,958
Notes payable - related parties......................................... 1,165,000 550,000
Accrued liabilities..................................................... 584,987 892,553
Billings in excess of costs and estimated earnings
on uncompleted contracts.............................................. 4,770 6,000
--------------- ----------------
Total current liabilities......................................... 3,174,361 2,878,197
--------------- ----------------
Notes payable, long-term..................................................... -- 437,593
--------------- ----------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $1.00 par value, 2,000,000 shares authorized;
1,700 and 3,077 shares issued and outstanding, respectively........... 1,700 3,077
Common stock, 120,000,000 shares authorized, $.001 par value,
45,986,617 and 24,238,893 shares issued and outstanding, respectively. 45,987 24,239
Additional paid-in capital.............................................. 52,019,707 50,386,816
Accumulated deficit..................................................... (54,703,892) (51,094,333)
--------------- ----------------
Total shareholders' equity (deficit).............................. (2,636,498) (680,201)
--------------- ----------------
Total liabilities and shareholders' equity (deficit).............. $ 537,863 $ 2,635,589
--------------- ----------------
--------------- ----------------
</TABLE>
The accompanying note are an integral part of
the consolidated financial statement.
Page 19
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Revenues.................................................................... $ 721,841 $ 3,568,164
Cost of sales................................................................ 1,592,225 4,388,747
Selling, general and administrative expenses................................. 2,149,018 3,790,072
Research and development..................................................... 1,167,673 605,105
Loss on impairment of assets................................................. -- 480,164
--------------- ---------------
Operating costs and expenses................................................. 4,908,916 9,264,088
--------------- ---------------
Loss from operations....................................... (4,187,075) (5,695,924)
--------------- ---------------
Other income (expense):
Gain (Loss) on disposal of assets................................... 771,515 (517,144)
Other income (expense), net......................................... (141,988) (107,833)
--------------- ---------------
Net loss................................................... (3,557,548) (6,320,901)
Less preferred stock dividend................................................ (254,957) (795,489)
--------------- ---------------
Net loss applicable to common shareholders................................... $ (3,812,505) $ (7,116,390)
--------------- ---------------
--------------- ---------------
Basic and diluted net loss per common share......................... $ (0.10) $ (0.42)
--------------- ---------------
--------------- ---------------
Weighted average common shares outstanding................................... 37,207,122 17,018,775
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
Page 20
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED COMMON
----------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 3,077 $ 3,077 24,238,893 $ 24,239
Warrants exercised -- -- 600,000 600
Issuance of common stock
as a result of the exercise
of employee stock options -- -- 26,487 26
Conversion of Series E, F and G
preferred stock into common
stock (1,349) (1,349) 12,575,029 12,575
Conversion of Reg. S debenture
into common shares -- -- 2,411,163 2,411
Redemption of Series E
preferred stock for cash (28) (28) -- --
Issuance of common stock
shares in payment of short
term notes and interest -- -- 2,038,018 2,038
Issuance of common stock
in payment of other liabilities -- -- 500,000 500
Issuance of common stock
warrants in connection with debt -- -- -- --
Cancellation of previously
issued common shares -- -- (318,868) (318)
Issuance of common stock for cash -- -- 3,915,895 3,916
Net Loss -- -- -- --
------- --------- ---------- -----------
Balance, December 31, 1998 1,700 $ 1,700 45,986,617 $ 45,987
------- --------- ---------- -----------
------- --------- ---------- -----------
<CAPTION>
ADDITIONAL ACCUMULATED UNEARNED
PAID-IN CAPITAL DEFICIT COMPENSATION TOTAL
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $50,386,816 $ (51,094,333) $ -- $ (680,201)
Warrants exercised 89,400 -- -- 90,000
Issuance of common stock
as a result of the exercise
of employee stock options 9,907 -- -- 9,933
Conversion of Series E, F and G
preferred stock into common
stock (11,226) -- -- --
Conversion of Reg. S debenture
into common shares 531,402 -- -- 533,813
Redemption of Series E
preferred stock for cash (279,972) (52,011) -- (332,011)
Issuance of common stock
shares in payment of short
term notes and interest 372,242 -- -- 374,280
Issuance of common stock
in payment of other liabilities 99,500 -- -- 100,000
Issuance of common stock
warrants in connection with debt 112,000 -- -- 112,000
Cancellation of previously
issued common shares 318 -- -- --
Issuance of common stock for cash 709,320 -- -- 713,236
Net Loss -- (3,557,548) -- (3,557,548)
----------- ------------- ---------- ------------
Balance, December 31, 1998 $52,019,707 $ (54,703,892) $ -- $ (2,636,498)
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 21
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED COMMON
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 746 $ 746 13,126,083 $ 13,126
Warrants exercised -- -- 100,000 100
Issuance of Series F preferred
stock for cash 1,700 1,700 -- --
Conversion of Series E and F preferred
stock into common stock (873) (873) 6,258,177 6,258
Conversion of Reg. S debenture
into common shares -- -- 196,439 197
Redemption of Series E and F
preferred stock for cash (196) (196) -- --
Issuance of common stock
and warrants in connection
with debt and services -- -- 30,000 30
Issuance of common stock
in exchange for release of
debt -- -- 579,992 580
Issuance of Series G preferred
stock for cash 1,700 1,700 -- --
Recognition of unearned compensation -- -- -- --
Issuance of subsidiary preferred
stock for cash -- -- -- --
Issuance of common stock for cash -- -- 3,948,202 3,948
Net Loss -- -- -- --
------- --------- ---------- -----------
Balance, December 31, 1997 3,077 $ 3,077 24,238,893 $ 24,239
------- --------- ---------- -----------
------- --------- ---------- -----------
<CAPTION>
ADDITIONAL ACCUMULATED UNEARNED
PAID-IN CAPITAL DEFICIT COMPENSATION TOTAL
--------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 45,412,283 $ (44,705,442) $ (29,526) $ 691,187
Warrants exercised 99,900 -- -- 100,000
Issuance of Series F preferred
stock for cash 1,525,800 -- -- 1,527,500
Conversion of Series E and F preferred
stock into common stock (5,385) -- -- --
Conversion of Reg. S debenture
into common shares 83,137 -- -- 83,334
Redemption of Series E and F
preferred stock for cash (483,804) (67,990) -- (551,990)
Issuance of common stock
and warrants in connection
with debt and services 294,595 -- -- 294,625
Issuance of common stock
in exchange for release of
debt 436,874 -- -- 437,454
Issuance of Series G preferred
stock for cash 1,698,300 -- -- 1,700,000
Recognition of unearned compensation (20,896) -- 29,526 8,630
Issuance of subsidiary preferred
stock for cash 100,000 -- -- 100,000
Issuance of common stock for cash 1,246,012 -- -- 1,249,960
Net Loss -- (6,320,901) -- (6,320,901)
----------- ------------ ---------- ------------
Balance, December 31, 1997 $50,386,816 $(51,094,333) $ -- $ (680,201)
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 22
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (3,557,548) $(6,320,901)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash compensation of employees and consultants
upon issuance and forfeiture of stock options............. -- 8,630
Interest paid in common stock............................... 115,871 --
Loss on impairment of assets................................ -- 480,164
Warrants issued for debt and services....................... 112,000 294,625
Depreciation and amortization expense....................... 449,445 759,939
(Gain) loss on disposal of fixed assets..................... (771,515) 517,144
Services provided for payment of MCC notes.................. -- (29,382)
Changes in assets and liabilities:
Accounts receivable, trade................................ 264,022 486,522
Notes receivable.......................................... -- 15,000
Costs and estimated earnings in excess of billings
on uncompleted contracts................................ -- 584,770
Inventory................................................. (65,529) 73,394
Prepaid expenses and other assets......................... (21,380) 56,565
Accounts payable.......................................... 146,646 (1,288,885)
Accrued expenses.......................................... (207,566) 116,734
Billings in excess of costs and estimated earnings
on uncompleted contracts................................ (1,230) (3,875)
------------- -----------
Total adjustments....................................... 20,764 2,071,345
------------- -----------
Net cash used in operating activities..................... (3,536,784) (4,249,556)
------------- -----------
Cash flows from investing activities:
Increase in deposits........................................ (14,500) --
Capital expenditures........................................ (62,727) (44,664)
Proceeds from sale of equipment ............................ 2,106,175 265,509
------------- -----------
Net cash provided by investing activities................. 2,028,948 220,845
------------- -----------
Cash flows from financing activities:
Book overdraft.............................................. (156,686) 156,686
Proceeds from notes payable - related parties............... 2,135,000 985,000
Repayment of notes payable.................................. (1,200,000) (1,040,961)
Redemption of preferred stock............................... (332,011) (551,990)
Proceeds from issuance of preferred and common stock........ 1,063,169 4,427,460
Restricted cash............................................. -- 37,226
------------- -----------
Net cash provided by financing activities...................... 1,509,472 4,013,421
------------- -----------
Net decrease in cash and cash equivalents...................... 1,636 (15,290)
Cash and cash equivalents, beginning of year................... 1,000 16,290
------------- -----------
Cash and cash equivalents, end of year......................... $ 2,636 $ 1,000
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
Page 23
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
SI Diamond Technology, Inc. and its subsidiaries are engaged in the
development of products for applications using its proprietary field emission
technology and the commercialization of electronic digitized sign technology.
The Company has performed contract research and development of advanced
scientific applications for governmental customers. The Company is performing
significant research and development related to its Diamond-Based Field
Emission ("DFE") technology.
As indicated in the accompanying consolidated statements of operations,
the Company experienced operating losses in 1998 and 1997. The Company
completed its initial public offering in 1993. Through February 1999, in a
series of offerings, the Company has raised proceeds of approximately $52.1
million, net of issuance costs (See Note 7). The Company is seeking strategic
partners to inject capital to enable the commercialization of several of its
technologies and fund a portion of the ongoing operations and development
cost. To the extent that it is unable to raise sufficient funds through
strategic partners, the Company may seek additional funds through the equity
markets. There is no assurance that such strategic partners will be
available, that funds will be available in the equity markets, or that
commercialization will result in income from operations. Management believes
it will be able to secure additional funding, if need be, to allow the
Company to continue operations until an agreement can be finalized with a
strategic partner or additional equity can be raised. Full commercial
development of the Company's DFE technology may require additional funds that
may not be available at terms acceptable to the Company.
The principal source of the Company's liquidity has been from the funds
received from exempt offerings of common and preferred stock. The Company may
receive additional funds from the exercise of warrants or options, although
there is no assurance that significant funds will be received from the
exercise of any such warrants or options in the near future. The Company may
also seek to increase its liquidity through additional bank borrowings or
other financings. There can be no assurance that any of these financing
alternatives can be arranged on commercially acceptable terms. The Company
believes that its success in reaching profitability will depend on the
viability of its products, their acceptance in the marketplace, and its
ability to obtain additional debt or equity financings in the future.
A portion of the Company's research and development has been funded
through the sponsorship of agencies of the U.S. Government. The Company
currently has no funded research projects from the U.S. Government and is
currently not seeking any such grants. Under the present circumstances, all
research and development performed is being internally funded by the Company
or through joint venture partners. The Company has substantially reduced the
amount being spent on research and development until such time as new grants
are obtained or additional funding becomes available.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Diamond Tech One, Inc.
("DTO"), Electronic Billboard Technology, Inc. ("EBT"), SDI Acquisition Corp.
("SDI"), Plasmatron Coatings and Systems, Inc. ("Plasmatron"), SIDT Coatings,
Inc. ("Coatings"), and Northlight Displays, Inc. ("Northlight"), and its
majority owned subsidiary, Field Emission Picture Element Technology, Inc.
("FEPET"), after the elimination of all significant intercompany accounts and
transactions. FEPET is primarily involved in developing products for
applications using the Company's proprietary DFE technology. EBT is primarily
involved in the commercialization of electronic digitized sign technology.
The Companies remaining subsidiaries (SDI, DTO, Plasmatron, Coatings, and
Northlight) are currently inactive.
Page 24
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Contract revenues and technology rights
A portion of the Company's revenues have consisted of earnings under
agreements to perform research and development for others, primarily U.S.
federal government agencies. The agreements with federal government agencies
generally provide that, upon completion of a technology development program,
the funding agency is granted a royalty-free license to use the newly
developed technology for its own purposes. The Company retains all other
rights to use, develop, and commercialize the technology.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts receivable
The Company sells products and services on credit primarily to large
U.S. based corporations and governmental agencies, although in some instances
it may ship products to Asia or Europe. It is the Company's policy to record
reserves for potential credit losses. Since inception, the Company has
experienced minimal losses. The Company has no reserve for potential credit
losses at either December 31, 1998 or 1997 and does not consider any such
reserve necessary.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or
market and consist entirely of purchased components at December 31, 1998.
Property, plant and equipment
Property, plant and equipment are recorded at cost, net of accumulated
depreciation and amortization. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, which range from two to
seven years, or the lease term for leasehold improvements, if less.
Expenditures for major renewals and betterments that extend the original
estimated economic useful lives of the applicable assets are capitalized.
Expenditures for normal repairs and maintenance are charged to operations as
incurred. The cost and related accumulated depreciation or amortization of
assets sold or otherwise disposed of are removed from the accounts, and any
gain or loss is included in income.
Intangible assets
The Company has applied to obtain certain United States patents, which
are currently pending. Certain patent costs, which consist primarily of legal
fees, have been capitalized and will be amortized using the straight-line
method over the useful lives of the patents (5 years), if approved. If such
patents are rejected, the costs will be charged to expense at the date of
rejection. The Company wrote off the costs associated with certain patents no
longer expected to have value to the Company as well as related liabilities.
This write off had no material impact on expense in either 1998 or 1997. The
majority of patent costs are expensed as incurred.
At each balance sheet date, the Company evaluates the carrying amount
and the amortization period for its intangible assets. If an indicator of
impairment is present, the Company compares the projected undiscounted
operating cash flows for the related business with the unamortized balance of
the related intangible asset. If an imminent loss exists, management
estimates the fair value of the intangible asset based on future operating
cash flows for the next ten years, discounted at the Company's borrowing
rate. The excess of the unamortized balance of the intangible asset over the
fair value is charged to impairment loss.
Page 25
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In connection with this policy, and as the result of the shut-down of
the Plasmatron operations in the third quarter of 1997, the Company wrote off
the costs in excess of fair value of assets acquired related to the purchase
of Plasmatron. These costs were being amortized using the straight-line
method over an estimated life of 7.5 years and had a net book value of
approximately $224,000 at the time they were written off.
Income taxes
The Company accounts for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis
of the assets and liabilities and their financial amounts at year-end. The
Company provides a valuation allowance to reduce deferred tax assets to their
net realizable value.
Research and development expenses
Costs of research and development for Company-sponsored projects are
expensed as incurred.
Preferred stock dividends
The Series E and F preferred stocks contain a provision (See Note 7)
that allows the preferred shareholder to convert their preferred shares to
common stock at a discount to the market value of the stock. The amount of
this discount is treated as a dividend to the preferred shareholders. In
addition, the Series E preferred stock bears an 8% accretion payable in
common stock and the Series F preferred stock bears a 4% accretion payable in
common stock, payable at the date of conversion at the same price as the
common shares being received. The Company's Series G Preferred stock bears a
10% accretion payable in common stock at the date of conversion. All
accretions paid in common stock or payable in common stock if the shares were
converted as of December 31, 1998 and 1997, respectively, have been treated
as preferred dividends. The amount treated as a dividend in 1998 related to
the accretion and the discount was $36,142, $53,815, and $165,000,
respectively for the Series E, Series F, and Series G preferred stocks. The
amount treated as a dividend in 1997 related to the accretion and the
discount was $535,758, $178,306, and $81,425, respectively for the Series E,
Series F, and Series G preferred stocks.
Loss per common share
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which
requires the Company to present its basic loss per share and diluted loss per
share, and certain other loss per share disclosures for each year presented.
Basic loss per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding. The
computation of diluted loss per share is similar to the computation of basic
loss per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. In addition, the numerator is
adjusted for any changes in income or loss that would result from the assumed
conversions of those potential shares.
In 1998 and 1997, the Company had various amounts of preferred shares, common
stock options and warrants outstanding during the years which were not
included in the diluted loss per share calculation because they would have
been antidilutive. As of December 31, 1998 and 1997, the Company had 1,700
and 3,077 preferred shares outstanding, respectively, 4,227,397 and 2,834,703
options outstanding, respectively, and 2,695,379 and 6,733,581 warrants
outstanding, respectively.
Reclassifications
Certain reclassifications were made to previously reported amounts in
the accompanying consolidated financial statements and notes to make them
consistent with the current year presentation format.
Page 26
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Management's estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses, as well as the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
Fair value of financial instruments
The Company's financial instruments as defined by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," include cash and
cash equivalents, restricted cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities, notes payable, and capital lease
obligations. All financial instruments are accounted for on an historical
cost basis, which approximates fair value at December 31, 1998 and 1997.
New accounting standards
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive loss approximates
the net loss reported.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Property, plant and equipment, at cost:
Plant and equipment.......................................................... $ 918,453 $ 3,343,890
Furniture and office equipment............................................... 37,328 645,505
Leasehold improvements....................................................... -- 59,258
------------- -------------
Total cost................................................................. 955,781 4,048,653
Less accumulated depreciation................................................ (795,111) (2,207,234)
------------- -------------
$ 160,670 $ 1,841,419
------------- -------------
------------- -------------
Intangible assets:
Patents ..................................................................... $ 30,000 $ 30,000
Less accumulated amortization................................................ (21,000) (15,000)
------------- -------------
$ 9,000 $ 15,000
------------- -------------
------------- -------------
Accrued liabilities:
Payroll and related accruals................................................. $ 66,913 $ 71,981
Accounting and legal fees.................................................... 265,000 269,000
Exclusivity fee payable to MCC............................................... -- 355,000
Other........................................................................ 253,074 196,572
------------- -------------
$ 584,987 $ 892,553
------------- -------------
------------- -------------
</TABLE>
Page 27
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. LEASE OBLIGATIONS:
The Company leases various facilities and equipment under operating
lease agreements having terms expiring at various dates through 2003. Rental
expense was $252,829 and $477,636 for the years ended December 31, 1998 and
1997, respectively.
Future minimum lease payments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year at December 31,
1998, were as follows:
<TABLE>
<S> <C>
1999 $ 114,236
2000 114,236
2001 107,854
2002 89,681
2003 38,616
----------
Total future minimum lease payments $ 464,623
----------
----------
</TABLE>
At December 31, 1997 assets acquired under a capital lease agreement of
$733,688 were included in plant and equipment and accumulated amortization of
$415,757 was also included in accumulated depreciation. Payments under the
capital lease agreement were completed in 1997 and all equipment under this
lease was transferred to the Company. This equipment was sold as part of the
sale of the assets of DTO in 1998. Also in 1998, the lease on the property
previously occupied by the Company was transferred to the purchaser of the
assets of DTO at the time of the sale of DTO's assets.
5. BANK LINE OF CREDIT AND NOTES PAYABLE :
During 1997, the Company had a bank line of credit that allowed for
borrowings up to $500,000. Borrowings under the line of credit bore interest
at the bank's floating rate, which approximated 10% at that time. The line
of credit was secured by the assets of DTO and guaranteed by the parent
Company. The line of credit expired in 1997 and was not renewed.
Total interest expense for all debt was approximately $327,000 and
$357,000 for 1998 and 1997, respectively.
In February 1997, the Company closed an offering of an 8% convertible
debenture under Regulation S of the Securities Act of 1933. On March 7, 1997
the Company received gross proceeds of $555,555, less expenses and discount
of $55,755, for the issuance of the debenture. The entire unpaid principal
and accumulated interest on the debenture, was due and payable on the second
anniversary of the date on which the debenture was issued. The debenture was
converted into common stock in accordance with the terms of the agreement as
described below.
The lender converted $83,334 of principal into 196,439 shares of the
Company's common stock in December 1997. This conversion price was 75% of the
average of the closing bid price of the Company's stock for the 10 trading
days preceding the notice of conversion. In May 1998 the lender converted an
additional $200,000 of principal into 1,469,119 shares of the Company's
common stock. The conversion price was equal to the average closing bid price
of the Company's common stock for the calendar month preceding the date of
conversion (April 1998). In December 1998, the lender converted the remaining
$272,221 of principal and $61,592 of accrued interest into 942,044 shares of
the Company's common stock. The conversion price was 95% of the average of
the closing bid price of the Company's stock for the 10 trading days
preceding the notice of conversion. As of December 31, 1998, the Company has
no remaining obligation to the former holder of the debenture.
Page 28
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BANK LINE OF CREDIT AND NOTES PAYABLE (CONTINUED):
Notes payable at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Convertible debenture, net of unamortized discount of $34,629 at
December 31, 1997 with a stated interest rate of 8% and an
effective interest rate of 8.9%. Principal and interest due in
March, 1999. The note was prepaid
in common stock as described above. $ -- $ 437,593
Notes payable to investors, due February 1999. These notes are 90
day notes, bearing interest at a rate of 15%, and secured by all
assets of the Company. A portion of these notes are convertible
into common stock as described below. 965,000 --
Note payable to investors, due February 1999. These notes are 90
day notes, bearing interest at a stated rate of 15%, with effective
rate of 31%, and secured by all assets of the Company. The
investors also received warrants enabling them to purchase 400,000
shares of the Company's common stock at a
price of $0.25 per share through November 1999. 100,000 --
Note payable to the Company's CEO, bearing
interest at a rate of 15%, due on demand, and
convertible into common stock as described below. 100,000 185,000
Note payable to a shareholder, due June 1998
including interest at a rate of 15%. The note is
collateralized by the assets of DTO. This note was
converted to the Company's common stock in May 1998. -- 300,000
Demand note payable to a shareholder bearing
interest at a rate of 15% and secured by all assets
of DTO. -- 65,000
------------ ---------
1,165,000 987,593
Less current portion (1,165,000) (550,000)
------------ ---------
Notes payable, long-term $ -- $ 437,593
------------ ---------
------------ ---------
</TABLE>
Included in the notes payable to investors are notes totaling $705,000
which are convertible into the Company's common stock at the option of the
lender. Of the notes that are convertible into the Company's common stock,
$650,000 are convertible at a price of $0.25 per share and $55,000 are
convertible at price of $0.20 per share, which approximated the market price
of the stock at the time that the loans were made. These investors are also
shareholders of the Company, although none would be classified as affiliates
either by virtue of the number of shares owned or other relationships with
the Company. In February 1999, these notes were converted to shares of the
Company's common stock (see Note 15). The notes payable to the Company's CEO
are also convertible into the Company's common stock at a rate of $0.25 per
share.
Page 29
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The components of deferred tax assets (liabilities) at December 31, 1998 and
1997, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating losses....................................................... $ 17,511,000 $ 16,272,000
Research and experimentation credits....................................... 478,000 478,000
Capitalized intangible assets.............................................. 340,000 408,000
Accrued expenses not deductible until paid................................. 7,000 14,000
------------- -------------
Total deferred tax assets.................................................. 18,336,000 17,172,000
------------- -------------
Deferred tax liabilities:
Depreciation and amortization.............................................. -- 39,000
------------- -------------
Total deferred tax liabilities............................................. -- 39,000
------------- -------------
Net deferred tax assets before valuation allowance.............................. 18,336,000 17,133,000
Valuation allowance............................................................. (18,336,000) (17,133,000)
------------- -------------
Net deferred tax asset.......................................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The following is a reconciliation of the amount of the income tax
benefit that would result from applying the statutory federal income tax
rates to pretax loss and the reported amount of income tax benefit for the
periods ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Tax benefit at statutory rate of 34%............................................ $ 1,209,000 $ 2,149,000
Net increase in valuation allowance............................................. (1,203,000) (2,214,000)
Research and experimentation credits............................................ -- --
Nondeductible expenses.......................................................... (6,000) (14,000)
Other........................................................................... -- 79,000
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1998, the Company had net operating loss
carryforwards of approximately $51 million that expire from 2006 through
2013, and are available to offset future taxable income. Additionally, the
Company has tax credit carryforwards related to research and development
expenditures of approximately $478,000 that expire through 2011. The Company
completed its IPO in 1993, which effected an ownership change under Internal
Revenue Code Section 382. The IPO and subsequent stock issuances may limit
the Company's ability to utilize its net operating loss carryforwards and
research and experimentation credits generated before the change in ownership.
Page 30
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK:
Preferred Stock
The Company currently has authorization for the issuance of 2,000,000
shares of $1.00 par value preferred stock. The following table summarizes the
preferred shares currently outstanding at December 31.:
<TABLE>
<CAPTION>
1998 1997
1998 PREFERRED PREFERRED
LIQUIDATION -------------------- --------------------
PREFERENCE SHARES AMOUNT SHARES AMOUNT
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Series A $ 100,000 100 $ 100 100 $ 100
Series C -- -- -- -- --
Series E -- -- -- 196 196
Series F -- -- -- 1,081 1,081
Series G 1,836,466 1,600 1,600 1,700 1,700
-------------- ----- ------- ----- -------
Total $ 1,936,466 1,700 $ 1,700 3,077 $ 3,077
-------------- ----- ------- ----- -------
-------------- ----- ------- ----- -------
</TABLE>
Series A
The Company had 100 shares of its Series A convertible preferred stock
issued and outstanding as of December 31, 1998 and 1997. The Series A
preferred stock is noncumulative. It has a liquidation preference of $1,000
per share, is convertible into 1,252.75 shares of common stock per share and
is entitled to vote on all matters submitted to a vote of the shareholders on
an "as if converted" basis. The Series A preferred stock shall also share
equally and simultaneously in any distribution to common shareholders after
the liquidation preference has been paid.
Series C
There are currently no outstanding shares of the Series C preferred
stock; however, 75,000 shares were authorized for issuance pursuant to
outstanding Series C warrants. These warrants to purchase Series C preferred
stock expired on February 9, 1998. The Company has no plans to issue any
Series C Preferred stock.
Series E
In December 1995 and January 1996 through an exempt offering under
Regulation D of the Securities Act of 1933, the Company received
subscriptions for and issued 1,190 shares of its Series E convertible
preferred stock. The offering provided proceeds of approximately $11,900,000
to the Company, less expenses of approximately $1,631,000. The Series E
preferred stock is noncumulative and has a liquidation preference of $10,000
per share plus 8% per annum from the date of issuance, and is entitled to
vote on all matters submitted to a vote of the shareholders on an "as if
converted" basis.
Each share of Series E preferred stock was convertible into that number
of shares of common stock determined by dividing the original issue price of
the Series E preferred stock, plus an accretion amount equal to 8% of the
issue price per annum, by the conversion price. The conversion price is the
lesser of $1.50 or the average closing bid price for the Company's common
stock for the calendar month immediately preceding the conversion date. The
amount convertible in any calendar month at a price equal to the average
closing bid price for the Company's common stock for the calendar month
immediately preceding the conversion date was limited to 7% of the shares
held by the Series E shareholder as of April 14, 1997. The preferred shares
could be redeemed for cash, at the option of the Company, upon presentation
of the shares for conversion.
Page 31
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
During 1998, 168 shares of the Series E preferred stock were converted
into 6,893,526 shares of common stock and 28 shares of the Series E preferred
stock were redeemed for cash of $332,011. During 1997, 418 shares of the
Series E preferred stock were converted into 5,542,941 shares of common stock
and 32 shares of the Series E preferred stock were redeemed for cash of
$368,795. As of December 31, 1998, all shares of the Series E Preferred stock
had been converted to common stock or redeemed for cash. Cumulatively,
14,676,061 shares of the Company's common stock were issued as a result of
the conversion of 1,128 shares of the Series E Preferred Stock.
Series F
In March 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933 for 1,700 shares of its Series F convertible
preferred stock. The Company received net proceeds of $1,527,500, which
represented gross proceeds of $1,700,000 less expenses of $172,500. Each
share has a liquidation preference of $1,000 plus 4% per annum from the date
of issuance. Each share of Series F preferred was convertible into that
number of shares of common stock determined by dividing the original issue
price of the Series F preferred stock, plus an accretion amount equal to 4 %
of the issue price per annum, by the conversion price. The conversion price
was the lesser of $1.75 or 80% of the 10 day average closing bid price prior
to the conversion date. The Series F preferred stock bears no dividends and
holders of the Series F preferred stock have no voting power except in
certain circumstances pursuant to Texas state law.
On March 17, 1998, the Company revised its Amended and Restated Articles
of Incorporation pursuant to an agreement with the Series F preferred stock
shareholders. Under the terms of this agreement, the Series F preferred stock
shareholders were allowed to convert one-sixth of the number of Series F
preferred shares held as of March 17, 1998 in each of the months from March
1998 through August 1998 into the Company's common stock. The conversion
price for each month was the average closing bid price of the Company's
common stock for the preceding month, except that the conversion price for
March 1998 was $0.15. Upon submission for conversion, the Company had the
right to redeem the preferred shares for 107.5% of the original purchase
price. All remaining shares of the Series F preferred stock were converted in
1998.
During 1998, the Series F preferred stock shareholders converted 1,081
shares of Series F preferred stock into 5,571,503 shares of common stock.
During 1997 the Series F preferred stock shareholders converted 455 shares of
Series F Preferred stock into 714,746 shares of common stock and 164 shares
of Series F preferred stock were redeemed for cash of $183,195.
Series G
From June 1997 through August 1997, through an exempt offering under
Regulation D of the Securities Act of 1933, the Company issued 1,700 shares
of its Series G preferred stock. The offering provided gross proceeds of
$1,700,000 to the Company. There were no material expenses associated with
this offering. Each share has a liquidation preference of $1,000 plus 10% per
annum from the date of issuance. The Series G preferred stock bears no
dividends and holders of the Series G preferred stock are entitled to vote on
all matters submitted to a vote of the stockholders on an "as if converted"
basis.
Page 32
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
7. CAPITAL STOCK (CONTINUED):
Each share of Series G preferred stock is convertible into that number
of shares of common stock determined by dividing the original issue price of
the Series G preferred stock, plus an accretion amount equal to 10% of the
issue price per annum, by the conversion price. The conversion price is fixed
at a rate of $1.00 per share.
In connection with the issuance of the Series G preferred shares, each
Series G shareholder also received warrants to purchase the Company's common
stock. The number of warrants received by each shareholder was equal to 50%
of the dollar value of Series G preferred stock received. A total of 850,000
warrants were issued in connection with this transaction. These warrants
allow the holder to purchase shares of the Company's common stock of at a
price of $1.00 per share for a period of 10 years. The registration statement
covering shares of common stock into which the Series G preferred stock is
convertible and the common stock issuable upon exercise of the warrants was
declared effective on June 18, 1998.
During 1998, 100 shares of Series G Preferred stock were converted into
110,000 shares of common stock.
Subsidiary Preferred Stock
In September 1997, the Company completed an agreement with Diamond
Pro-shop Nomura Co., Ltd. ("DPN"), an affiliate of Noritake. Both DPN and
Noritake are corporations organized under the laws of Japan. Under the terms
of the agreement, DPN acquired 50 shares of convertible preferred stock and
acquired certain licensing and marketing rights for products developed by
FEPET in exchange for a payment of $500,000. Of this payment, $400,000 was
allocated to the licensing and marketing rights and $100,000 was allocated to
the preferred stock based on its estimated fair market value at that date.
These preferred shares convert FEPET common shares equivalent to a 5%
ownership interest in FEPET.
Common Stock
In October 1997, the Company closed an exempt offering under Regulation
D of the Securities act of 1933 (the "October 1997 Offering"). Under the
terms of the offering, the investors committed to purchase $3.5 million
dollars of the Company's common stock in seven installments of $500,000 each.
The first installment was payable at closing and the next six installments
were due on the first business day of each month from November 1997 through
April 1998. The purchase price for the shares was 65% of the average closing
bid price of the Company's common stock for the five trading days immediately
preceding the due date of the installment. In addition, the subscription
agreement stipulated that the investors were to receive one warrant for each
share of the Company's common stock purchased. These warrants were
exercisable for a period of five years at an exercise price equal to 115% of
the average closing bid price of the Company's common stock for the five
trading days immediately preceding the issuance date of the warrants, with
the warrants to be issued on the same date as the previously described
installment due dates.
The Company received cash proceeds of $1,000,000 in 1997 and issued
2,829,334 shares of its common stock in connection with the installments due
under the October 1997 Offering in October and November. The Company also
issued 1,118,868 shares of its common stock in connection with the
installment due December 1, 1997; however payment was not received for those
shares. The Company also issued 2,829,334 warrants at a price of $0.625 and
1,118,868 warrants at a price of $0.791. In January 1998, the Company and the
investors agreed to terminate the subscription agreement. As a result of this
agreement, the investors agreed to return 318,868 of the shares received in
December, pay cash of $250,000, and return all warrants received under the
agreement. After termination of the subscription agreement in January 1998,
the Company had received a total of $1,250,000 in proceeds. There were no
material expenses associated with this offering. A registration statement
covering the shares issued in connection with the October 1997 Offering was
filed and declared effective by post-effective amendment on October 28, 1997.
Page 33
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. CAPITAL STOCK (CONTINUED):
In 1998, the Company issued 3,916,296 shares of restricted common stock
and received cash proceeds of $713,236 in connection with private placements
of the Company's common stock in exempt offerings under Regulation D of the
Securities act of 1933. The shares were issued at prices approximating the
market price of the stock at the time of the offerings. A registration
statement covering these shares was declared effective June 18, 1998.
In 1997 the Company issued 340,717 shares of the Company's common stock
to MCC to pay the remaining balance due on a services agreement entered into
in April 1995. The remaining principal and interest due under the agreement
at the time of issuance of the shares was $201,810. The Company issued
500,000 additional shares of common stock to MCC in connection with the
minimum royalty payment also described in Note 11. In addition, the Company
issued 239,275 shares of the Company's common stock in 1997 to various trade
creditors as payment for amounts due totaling $235,644.
During 1997, the Company issued 30,000 shares of the Company's common
stock to an advisor as payment for services rendered. Based on the market
value of the stock at the time of issuance, $39,375 was charged to expense in
connection with this transaction.
8. STOCK OPTIONS:
The Company sponsors three stock-based incentive compensation plans (the
"Plans"). The Company applies Accounting Principles Board ("APB") Opinion No.
25 and related interpretations in accounting for the Plans. In 1995, the FASB
issued SFAS No. 123 "Accounting for Stock-Based Compensation" which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition
provisions of SFAS No. 123 is optional and the Company has decided not to
elect these provisions of SFAS No. 123. However, pro forma disclosures as if
the Company adopted the cost recognition provisions of SFAS No. 123 are
required by SFAS No. 123 and are presented below.
In March 1992, the shareholders of the Company approved the 1992
Employees Stock Option Plan (the "1992 Employees Plan") for purposes of
granting incentive or non-qualified stock options. The 1992 Employees Plan
was amended in July 1996 by the shareholders of the Company to reserve up to
3,000,000 shares of common stock for issuance to certain officers and key
employees. The incentive stock options are exercisable for up to ten years,
at an option price per share not less than the fair market value on the date
the option is granted. The incentive stock options are limited to persons who
have been regular full-time employees of the Company or its present and
future subsidiaries for more than one (1) year and at the grant of any option
are in the employ of the Company or its present and future subsidiaries.
Non-qualified options may be granted to any person, including, but not
limited to, employees, independent agents, consultants and attorneys, who the
Company's Compensation Committee believes have contributed, or will
contribute, to the success of the Company. Non-qualified options may be
issued at option prices of less than fair market value on the date of grant
and are exercisable for up to ten years from date of grant. The option
vesting schedule for options granted is determined by the Compensation
Committee of the Board of Directors at the time of the grant. At December 31,
1998, 191,834 shares remained available for grant under the 1992 Employees
Plan.
In July 1997, the Company's Board of Directors passed a resolution that
changed the option exercise price of certain options previously granted under
the 1992 Employees Plan. A total of 418,688 options were repriced. The
Company reduced the exercise price to $2.00 for 25% of all options priced
above $2.00 for all persons employed by the Company at the time of the
repricing. The original exercise price of these options ranged from $3.00 to
$4.00. The market price of the Company's common stock at the time of
repricing was $1.125 per share, or approximately 44% below the new exercise
price of the stock.
Page 34
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTIONS (CONTINUED):
In March 1998 and May 1998, the Company's Board of Directors passed
resolutions that further reduced the option exercise price of certain options
previously granted under the 1992 Employees Plan. A total of 1,727,750
options were repriced. The Company reduced the exercise price to $0.375 for
all options priced above that level for all persons employed by the Company
at the time of the repricing. The original exercise price of these options
ranged from $1.125 to $4.00. The market price of the Company's common stock
at the time of the March and May repricings was $0.14 and $0.25 per share, or
approximately 63% and 33%, respectively, below the new exercise price.
In 1995, the Company awarded 153,000 non-qualified options to purchase
its common stock under the 1992 Employees Plan to 26 employees. The options
vested over a period of four years and when granted were exercisable at a
price of $4.94 per share which was below the market price of the Company's
common stock at the time of the grant. Unearned compensation was recorded and
was shown as a separate component of stockholder's equity. The unearned
compensation was amortized over the remaining term of the vesting periods of
the options. Compensation expense of $8,630 was recognized in 1997 related to
these issuances. Unearned compensation of $20,896 related to options canceled
during 1997 was reversed to additional paid in capital in 1997. As of
December 31, 1998 and 1997, no unearned compensation remained.
The following is a summary of stock option activity under the 1992 Employees
Plan:
<TABLE>
<CAPTION>
Wgtd. Avg.
Number of Exercise
Shares Price
--------- ----------
<S> <C> <C>
Options outstanding at January 1, 1997....................................... 2,728,261 $4.07
Granted............................................................. 338,125 $0.97
Exercised........................................................... -- --
Canceled............................................................ (524,312) $3.44
---------
Options outstanding at December 31, 1997..................................... 2,542,074 $3.45
---------
Granted............................................................. 969,179 $0.375
Exercised........................................................... (26,487) $0.375
Canceled............................................................ (842,272) $3.35
---------
Options outstanding at December 31, 1998..................................... 2,642,494 $0.51
---------
---------
</TABLE>
In March 1992, the Board of Directors adopted the 1992 Outside
Directors' Stock Option Plan (the "1992 Directors Plan"), for purposes of
granting non-qualified options to non-employee directors of the Company. The
1992 Directors Plan was amended in 1994, 1996 and 1997. A total of 500,000
shares are reserved for issuance under the plan and are issued each year
based on a formula defined by the plan. The stock options granted under the
1992 Directors Plan are exercisable for up to 10 years at an option price
equal to the fair market value on the date the option is granted. At December
31, 1998, 115,097 shares remained available for grant.
In May 1998, the Company's Board of Directors passed a resolution that
reduced the option exercise price of certain options previously granted under
the 1992 Directors Plan. A total of 284,903 options were repriced. The
Company reduced the exercise price to $0.375 for all options priced above
that level for all current directors of the Company at the time of the
repricing. The exercise price of these options prior to repricing ranged from
$1.125 to $4.00. The market price of the Company's common stock at the time
of repricing was $0.25 per share, or approximately 33% below the new exercise
price. The Board of Directors had previously reduced the exercise price of
42,096 of these options to a price of $2.00 per share in July 1997. At the
time of the July 1997 repricing, the market price of the Company's stock was
$1.125 per share, or approximately 44% below the new exercise price.
Page 38
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED):
The following is a summary of stock option activity under the 1992 Director's
Plan:
<TABLE>
<CAPTION>
Wgtd. Avg.
Number of Exercise
Shares Price
--------- ----------
<S> <C> <C>
Options outstanding at January 1, 1997....................................... 176,383 $3.57
Granted............................................................. 124,246 $1.13
Canceled............................................................ (8,000) $4.13
-------
Options outstanding at December 31, 1997..................................... 292,629 $2.29
-------
Granted............................................................. 100,000 $0.25
Canceled............................................................ (7,726) $1.125
-------
Options outstanding at December 31, 1998..................................... 384,903 $0.34
-------
-------
</TABLE>
In May 1998, the Board of Directors of the Company established the 1998
Officers and Directors' Stock Option Plan and reserved a total of 1,200,000
shares for issuance under the Plan. A total of 750,000 options, 150,000 for
each outside director, were granted in May 1998 and an additional 450,000
options, 150,000 for each executive officer, were granted in July 1998. All
1,200,000 options are exercisable at a price of $0.375 per share. At the time
of both grants, the market price of the Company's common stock was
approximately $0.25 per share, or approximately 33% below the exercise price.
The fair value of each stock option granted in 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option pricing-model
with the following weighted-average assumptions: no dividend yield for 1998
and 1997; risk-free interest rate of 5.0% and 6.50% for 1998 and 1997,
respectively; the expected lives of the options are five years for 1998 and
1997; and volatility of approximately 100% for 1998 and 56% for 1997.
The following table summarizes information about stock options outstanding
and exercisable under all three plans at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/97 Contr. Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.56 - $2.99 1,065,837 8yr, 7mo $1.57 629,131 $1.57
$3.00 - $3.99 253,448 8yr, 10mo $3.05 81,167 $3.15
$4.00 - $5.49 1,168,057 8yr, 1mo $4.02 601,981 $4.03
$5.50 - $8.50 347,361 6yr, 10mo $6.64 347,361 $6.64
--------- ---------
Total 2,834,703 9yr, 1mo $3.33 1,659,640 $3.60
--------- ---------
</TABLE>
Page 36
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
8. STOCK OPTIONS (CONTINUED):
The following table summarizes information about stock options outstanding
and exercisable under all three plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/98 Contr. Life Exercise Price at 12/31/98 Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.00 - $0.55 4,110,397 8yr, 6mo $0.37 3,501,415 $0.37
$0.56 - $2.99 20,000 1yr, 1mo $1.12 20,000 $1.12
$3.00 - $3.99 5,000 3yr, 6mo $3.88 5,000 $3.88
$4.00 - $5.49 92,000 5 months $4.00 92,000 $4.00
--------- ---------
Total 4,227,397 8yr, 7mo $0.46 3,618,415 $0.47
--------- ---------
</TABLE>
The weighted-average fair values of options under the plans granted during
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Discounted options $0.00 $0.00
At-the-money options $0.00 $0.46
Premium options $0.23 $0.36
Repriced options $0.20 $0.07
</TABLE>
During 1998, the Company did not incur any compensation cost for the
Plans under APB No. 25. During, 1997, the Company incurred compensation
expense of $8,630 under APB No. 25. Had the compensation cost for the
Company's compensation plans been determined consistent with SFAS No. 123,
the Company's net loss and net loss per common share for 1998 and 1997 would
approximate the pro forma amounts as shown below:
<TABLE>
<CAPTION>
As Reported Pro Forma As Reported Pro Forma
1998 1998 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SFAS No. 123 Charge -- $804,194 -- $985,331
APB No. 25 Charge -- -- $8,630 --
Net loss $(3,557,548) $(4,361,742) $(6,320,901) $(7,297,602)
Net loss per common share $(0.10) ($0.12) $(0.42) $($0.47)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1995 and the Company anticipates making awards in the future under its
compensation plans.
Page 37
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
9. STOCK WARRANTS:
Common Stock Warrants
In the Company's initial public offering completed in February 1993 (the
"IPO"), the Company issued a total of 100,000 warrants to purchase shares of
the Company's common stock as part of the underwriter's compensation. These
warrants are exercisable at $6.00 per share and may be exercised until
February 17, 1998. The exercise period was extended to February 1, 1999 for
30,000 of these warrants in connection with a consulting agreement signed in
1997. These remaining warrants expired unexercised.
In August 1993, in connection with an exempt offering under Regulation D
of the Securities Act of 1933, the Company issued one warrant for every two
shares of common stock purchased in this transaction. A total of 62,400
warrants were issued in this transaction, which may be exercised at prices
ranging from $5.65 to $6.78 per share until June 30, 1998. The exercise
period was extended to February 1, 1999 for 12,400 of these warrants in
connection with a consulting agreement signed in 1997. These remaining
warrants expired unexercised.
In connection with the Company's offerings under Regulation S of the
Securities Act of 1933 that were closed in August, September, October and
November 1993 (the "1993 Reg. S Offerings"), the Company issued 219,149
warrants to purchase shares of the Company's common stock. A total of 169,754
of these warrants, which are exercisable at a price of $3.90 per share,
expired in 1997 and the remaining 49,345 warrants expire at various dates
through April 1999.
In September 1994, the Company closed a foreign offering under
Regulation S of the Securities Act of 1933. In connection with this offering,
the Company subsequently issued warrants to purchase 150,000 shares of its
common stock at an exercise price of $3.90 per share. These warrants expired
unexercised on February 21, 1999.
In connection with the termination of contractual obligations in
February 1996, the Company issued warrants to purchase 60,000 shares of its
common stock at an exercise price of $6.50 per share. These warrants expired
unexercised on February 21, 1999.
The Company issued warrants to purchase 55,000 shares of the Company's
common stock, at an exercise price of $5.50 per share, to a former advisor in
February 1996. These warrants expired unexercised on February 21, 1999.
In connection with the December 1995 Offering, the Company issued 28,792
warrants to purchase shares of the Company's Common Stock. These warrants may
be exercised at a price of $6.30 per share and expire April 10, 1999.
In connection with the issuance of the Company's Series E preferred
stock in February 1996, the Company issued 144,792 warrants to advisors
involved in the transaction. These warrants enable the holders to purchase
shares of the Company's common stock at a price of $7.89 through January 7,
2000.
In 1996, the Company issued 35,000 warrants to an advisor in connection
with the Company's fundraising activities. These warrants enable the holder
to purchase shares of the Company's common stock at a price of $2.00 per
share through 2006. In 1997, the Company issued 75,000 additional warrants to
this advisor in connection with services related to a joint venture
agreement. These warrants enable the holder to purchase shares of the
Company's Common Stock at a price of $1.00 per share through 2007.
In connection with the issuance of the Company's Series G preferred
stock in 1997, the Company issued 850,000 warrants to holders of the Series G
Preferred. These warrants enable the holders to purchase shares of the
Company's common stock at a price of $1.00 through August 2002.
Page 38
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
9. STOCK WARRANTS (CONTINUED):
In October 1996, the Company completed a transaction whereby it borrowed
a total of $1,000,000 in secured loans from a group of individuals. In
connection with these loans, the Company issued 200,000 warrants with a value
of approximately $200,000. The warrants enabled the holder to purchase shares
of the Company's common stock at a price of $1.00 through June 1998. A total
of 100,000 of these warrants were exercised in 1997. In connection with an
extension of a portion of this debt, 40,000 additional warrants with a value
of approximately $40,000 were issued entitling the holder to purchase shares
of the Company's common stock, at a price of $0.703 per share, through June
1998. These warrants expired unexercised.
In October 1997, the Company issued 205,000 warrants to an advisor in
connection with an agreement to provide public relations services. The
warrants entitled the holder to purchase shares of the Company's common stock
as follows: 125,000 shares at a price of $0.6875 through September 1998,
40,000 shares at a price of $1.0313 through March 1999, and 40,000 shares at
a price of $1.375 through September 1999. These warrants were valued at
$150,000. The exercise period for each of these warrants was extended by a
period of one year in 1998 and now expire in September 1999, March 2000, and
September 2000, respectively. The warrant holder exercised 25,000 of the
lowest priced warrants in February 1999.
In connection with the Company's October 1997 Offering, the Company
issued 3,948,202 warrants to investors involved in the transaction. The
warrants entitled the holders to purchase shares of the Company's common
stock at prices ranging from $0.625 to $0.791 through December 2002. In
connection with the termination of this agreement in January 1998, the
investors returned the warrants to the Company and the warrants were canceled.
The Company issued 1,000,000 warrants to purchase its common stock in
connection with loans made to the Company in 1998. A total of 600,000
warrants were issued in March 1998 in connection with a series of loans
totaling $500,000 in March and April of 1998. These warrants were exercisable
at a price of $0.15 per share, which approximated the market price of the
Company's common stock at the time of issuance. These warrants were exercised
in 1998. The remaining 400,000 warrants were issued in connection with loans
totaling $100,000 made to the Company in November 1998. These warrants are
exercisable for a period of one year, at a price of $0.25 per share, which
approximated the market price of the Company's common stock at the time of
issuance.
Preferred Stock Warrants
In February 1995, the Company issued 75,000 warrants to purchase shares
of its Series C preferred stock. These warrants were exercisable at $50.00
per share until February 9, 1998. Each share of Series C preferred stock was
further convertible into 10 shares of the Company's common stock. These
warrants expired unexercised in February 1998.
Summary
<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Warrants outstanding at January 1, 1997..................... 2,017,249 $1.67-7.89
Granted............................................ 5,118,202 $0.625-1.375
Exercised.......................................... (100,000) $1.00
Expired............................................ (301,870) $3.90-5.736
----------
Warrants outstanding at December 31, 1997................... 6,733,581 $0.625-7.89
Granted............................................ 1,000,000 $0.15-0.25
Exercised.......................................... -- --
Expired or canceled................................ (5,038,202) $0.625-6.00
----------
Warrants outstanding at December 31, 1998................... 2,695,379 $0.25-7.89
----------
----------
</TABLE>
Page 39
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK WARRANTS (CONTINUED):
The preceding summary of stock warrant activity excludes the C&A
warrants described in Note 11 which only become exercisable upon the
occurrence of future contingent events. Preferred stock warrants are
accounted for as common stock on an "as if converted" basis:
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $44,540 and $129,109 for 1998 and 1997,
respectively. The following non-cash transactions have been excluded from the
accompanying consolidated statement of cash flows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Non-cash financing activities:
Recognition of the forfeiture of shares related to stock compensation
increasing additional paid-in capital........................................ $ -- $ 20,896
Financing costs in connection with stock issuance deducted from proceeds..... $ -- $ 172,540
Receivable from shareholders for stock issued................................ $ 250,000 $ 250,000
Conversion of accounts payable and accrued liabilities into common shares.... $ 100,000 $ 365,415
Conversion of notes payable into common shares............................... $ 792,222 $ 155,373
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Vision Mark Agreement
In November 1998, the Company signed a marketing agreement with Vision
Mark, LLC ("Vision Mark"), a Texas limited liability company and a related
consulting and advisory services agreement with C&A Services LLC ("C&A"), a
Texas limited liability company affiliated with Vision Mark., whereby Vision
Mark and C&A agreed to represent the Company with several "protected"
customers, as defined by the agreements. Under the terms of the agreements,
the Company is obligated to provide C&A with 300,000 shares of its common
stock upon the signing of an agreement with any one of the protected
customers to provide an electronic billboard to such customer. In addition,
C&A received warrants to purchase up to 9,700,000 shares of the Company's
common stock.
The warrants granted to C&A become exercisable under the following
conditions. At such time as the Company has received cumulative revenue from
protected customers of $10 million and for each cumulative increment of
$10,000,000 thereafter, C&A has the right to purchase 250,000 shares of the
Company's common stock at a discount of 50% to the market price of the common
stock when each $10 million increment is reached. In addition, C&A has the
right to purchase an additional 2,300,000 shares of the Company's common
stock at a 50% discount to the current market price of the stock when
cumulative revenue from protected customers reaches $100 million and an
additional 2,300,000 shares under the same terms when cumulative revenue
reaches $200 million. Finally, if revenue in any annual period ending on each
anniversary date of the agreement exceeds $10 million, then C&A has the right
to purchase 200,000 additional shares under the following terms. If revenue
from protected customers is equal to or greater than 25% of consolidated SI
Diamond revenue, than C&A can purchase an additional 100,000 shares at a 25%
discount to the market price at that time and up to another 100,000 shares at
a discount to the current market price equal to the percentage of revenue
that protected customers represent of total revenue, to a maximum of 50%. The
maximum amount of shares that can be purchased under all warrants issued to
Vision Mark and C&A under the agreements is 9,700,000. All warrants expire
December 31, 2006.
Page 40
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Agreements with MCC
The Company entered into an agreement in 1994 with Microelectronics and
Computer Technology Corporation ("MCC") that was amended on several
subsequent occasions to cross license and pool technologies. As part of this
relationship with MCC, the Company acquired non-exclusive licenses to 144 MCC
patents and other related technology. Under the license, the Company was
obligated to pay MCC a cumulative minimum royalty of $500,000 by December 31,
1997 and $1,000,000 by December 31, 1998. As a result of amendments signed in
December 1997 and September 1998, 62 Diamond Field Emission patents were
assigned directly to the Company and 82 patents were returned to MCC. The
Company agreed to pay a royalty fee of 2% of future commercial revenues
related to the patents assigned to it. The Company has the right to offset
one half of the costs of maintaining these patents against any royalties due
under the agreement. MCC agreed to accept a cash payment of $5,000 and
500,000 shares of the Company's common stock in exchange for releasing the
Company from the minimum royalty agreement. As of December 31, 1997 the
Company had accrued $355,000 due under the minimum royalty agreement
representing the minimum royalty payment of $500,000 less $145,000 of costs
incurred in maintaining the patents. The stock issued in connection with this
agreement was valued at $100,000 based on the market price at the time. The
remaining $250,000 was taken into income 1998.
DiaGasCrown Venture
In February 1995, the Company entered into an agreement with
Diagascrown, Inc., a Russian joint stock company controlled by
Gazcomplektimpex, a subsidiary of Gazprom, the Russian national natural gas
company. In return for an equity position in the Company, DGC paid the
Company $5,000,000 and granted the Company an exclusive license to DGC
display and related diamond technology and license rights to all related
background patents. The Company has committed to perform $2.5 million in
research and development in Russia. According to its internal records, the
Company has spent approximately $2.0 million on this research through
December 31, 1998. Spending in Russia has been halted since 1996 pending
agreement as to the nature and amount of the services to be performed in
Russia for the remaining balance to be spent under the original agreement.
There have been no substantive discussions related to future spending in
Russia since the time that spending was halted.
Government contracts
Governmental contractors are subject to many levels of audit and
investigation. Among United States agencies that oversee contract performance
are: the Defense Contract Audit Agency, the Inspector General, the Defense
Criminal Investigative Service, the General Accounting Office, the Department
of Commerce, the Department of Justice and Congressional Committees. The
Company's management believes that an audit or investigation, if any, as a
result of such oversight would not have any material adverse effect upon the
Company's financial condition or results of operations.
Legal Proceedings
On May 20, 1996, Semi-Alloys Company, a former customer of Plasmatron,
filed a complaint with the Supreme Court of the State of New York, County of
Westchester. The complaint names Plasmatron, the Company and Westchester Fire
Insurance Company as defendants. Semi-Alloys claims a breach of contract
related to $1 million of coating equipment that Plasmatron delivered in 1993,
prior to the Company's ownership of Plasmatron. Semi-Alloys claims the
equipment does not perform as required under the contract. Semi-Alloys seeks
to recover compensatory, consequential and incidental damages. The amount of
this claim is to be determined at trial. A trial date has been set for August
1999. At this time the outcome can not be predicted with any certainty and
the potential liability, if any, is unknown. The Company believes it has
meritorious defenses and intends to continue to vigorously defend this action.
Page 41
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Legal Proceedings (continued)
On July 20, 1998, TFI Telemark, Inc., a former vendor of Plasmatron,
filed a complaint in the County Court at Law No. 2 of Travis County, Texas
against the Company for debts of its subsidiary, Plasmatron. The Company was
served with notice of this suit on August 5, 1998. All amounts claimed as
owing by TFI are recorded as liabilities of Plasmatron in the consolidated
financial statements of the Company. The Company believes the ultimate
resolution of this matter will not have a material impact on the consolidated
financial statements of the Company.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor of
DTO, filed a complaint in the United Sates District Court for the Southern
District of New York against the Company for unpaid debts of its subsidiary,
Diamond Tech One, Inc. The Company was served with notice of this suit on
October 14, 1998. All known amounts owed by DTO to the KDF are recorded as
liabilities of DTO in the consolidated financial statements of the Company.
The amounts recorded as liabilities by DTO make up substantially all of the
amounts claimed as due by KDF. No trial date has been set in this matter. The
Company believes the ultimate resolution of this matter will not have a
material impact on the consolidated financial statements of the Company.
On January 28, 1999, Aetna Life Insurance Company, a former landlord of
DTO, filed a complaint in the 12th Judicial District Court, Travis County,
Texas against DTO as lessee, and the Company as guarantor, for unspecified
alleged damages occurring as a result of DTO's early termination of a lease.
DTO moved out of this facility with approximately nine months remaining on
the lease which called for monthly rental payments of approximately $17,000.
The Company contends that Aetna failed in its duty to mitigate damages and
behaved in a reckless manner, which resulted in damages to the Company and
its property. The Company intends to file a counterclaim against Aetna and
its property manager for damages and the return of its security deposit. The
Company believes that the ultimate resolution of this matter will not have a
material impact on the consolidated financial statements of the Company.
The Company and its subsidiaries are also defendants in various other
lawsuits of a non-material nature related to the non-payment of invoices when
due. It is expected that all such lawsuits will be settled for an amount no
greater than the liability recorded in the financial statements for such
matters and that settlement of such suits will not have a material financial
impact on the Company.
Impact of the Year 2000 Issue
The Company has determined that the Year 2000 Issue will have an
immaterial effect on the Company. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. All of this
software is prepackaged software that was purchased from outside vendors.
These vendors all have upgrades available which correct the Year 2000 Issue.
It is the Company's plan to purchase the upgraded software, where required,
in early 1999 to insure adequate time for implementation. The cost of these
upgrades is expected to be no greater than $20,000 and it is not expected to
have a material effect on the operations of the Company. If such upgrades are
not installed on a timely basis, the Year 2000 Issue could have a material
impact on the operations of the Company.
Page 42
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Impact of the Year 2000 Issue (continued)
The Company has determined that it is not vulnerable to a third party's
failure to remediate its own Year 2000 Issues since it has no significant
suppliers or large customers. The Company has also determined that it has no
exposure to contingencies related to the Year 2000 Issue for the products it
has sold. The Company is ensuring that all products currently under
development by the Company will be Year 2000 compliant prior to the sale of
such products.
This assessment is based on the present circumstances of the Company in
which the Company has virtually no customers and no significant suppliers. In
this scenario, the Company's Year 2000 risk is virtually non-existent. If the
Company's business plan is successful and it is able to develop and sell
products, the Company may become subject to Year 2000 risk related to third
parties. The Company intends to assess the risk associated with third party
remediation of Year 2000 issues at the time that it enters into any
significant contracts or relationships with third parties and to develop a
contingency plan at that time if necessary.
12. CONCENTRATIONS OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations
of credit risk consist of cash and cash equivalents and receivables. The
Company places its cash and cash equivalents with high credit quality
financial institutions. At December 31, 1998 and 1997, the Company had no
amounts on deposit in excess of the Federal Deposit Insurance Corporation
insurance limit; however, for limited periods of time during the year, bank
balances may exceed such limits.
The Company's receivables are uncollateralized and result primarily from
its research and development projects performed primarily for U.S. Federal
Government Agencies and services performed for large U.S. and multinational
corporations. The Company has not incurred any material losses on these
receivables.
13. SEGMENT INFORMATION:
The Company had no revenues from government contracts in 1998 and had
approximately $854,000 in revenues from government contracts in 1997. The
majority of the government contracts are cost reimbursement contracts. As a
result, the Company realizes little or no gain or loss in the performance of
these contracts. The Company's contracts involving the United States
government are or may be subject to various risks, including unilateral
termination for the convenience of the government. As of December 31, 1998,
the Company had no material commitment for future government funding.
14. RELATED PARTY TRANSACTIONS:
As described in Note 5, the Company has notes payable to its Chief
Executive Officer. The $185,000 balance due at December 31, 1997 and secured
by all assets of DTO was repaid at the time of the DTO sale in May 1998.
Additional advances totaling $100,000 were made to the Company at subsequent
dates. These advances are convertible into shares of the Company's common
stock at a rate of $0.25 per share.
Page 43
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED):
In October 1998, Electronic Billboard Technology, Inc., a subsidiary of
the Company entered into a Patent Assignment and Royalty Agreement with
Advanced Technology Incubator, Inc., ("ATI") a corporation based in Austin,
Texas and owned by Dr. Zvi Yaniv, the Company's President and Chief Operating
Officer. Under the terms of the agreement, ATI agreed to assign U.S. Patent
No. 5,469,187 related to certain LCD technology to EBT in exchange for an
initial payment of $200,000. In addition, ATI is entitled to receive a
royalty of 5% of gross revenue related to products using this patent. EBT
intends to use this technology in the development of its next generation
electronic billboard product. EBT may terminate this assignment at any time
upon 30 days written notice to ATI. The assignment may be terminated by ATI
if, within two years of the first sale or lease of a billboard using this
technology, cumulative royalty payments under the agreement have not totaled
$500,000, or if payments do not equal $500,000 in any one year period
following this initial two year period. If the assignment is terminated by
ATI, EBT will be granted a non-exclusive worldwide license to use the
technology under terms similar to those contained in this agreement. ATI had
the right to terminate this agreement if the initial payment was not received
by February 15, 1999. The payment was not made by that date, however, the
parties have agreed to extend the initial payment deadline to April 15, 1999.
15. SUBSEQUENT EVENTS:
In January and February 1999, the Company borrowed a total of $200,000
from a shareholder for working capital purposes. These short term loans bear
interest at a rate of 15%, are secured by all assets of the Company and are
convertible into the common stock of the Company at rates ranging from $0.30
to $0.40 per share, which approximated the market price of the Company's
common stock at the times the loans were arranged. These notes, including
interest, were converted into 590,697 shares of the Company's common stock in
February 1999. The Company also issued a total of 200,000 shares of its
common stock, in an exempt offering under Regulation D of the Securities act
of 1933, for a total of $110,000 in February 1999.
In February 1999, holders of the notes payable described in greater
detail in Note 5 converted notes with a face amount totaling $705,000 and the
related accrued interest into 3,006,674 shares of the Company's common stock
pursuant to the terms of the notes.
In January 1999, the Company received $225,000 in contract research
revenues to fund phase II development of its DFE cathode. The funds were
received from DPN, the holder of FEPET's preferred stock (See Note 7). The
funds will be recognized as revenue over the term of the of the development
project, which is expected to be completed in 1999.
The Series A preferred shares were converted into 125,275 shares of SI
Diamond common stock in March 1999.
In March 1999, the Company signed a license agreement with a large
manufacturer of information and office products. Under the terms of this
agreement, the Company will receive gross royalties of $5,555,556 no later
than April 12, 1999 for a paid up worldwide non-exclusive license to certain
of the Company's patents and patent applications. After foreign taxes
associated with this payment, the Company will net $5,000,000.
Page 44
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No disclosure is being provided with respect to this Item 8 because
that information was previously reported on the Company's Current Reports on
Form 8-K dated as of June 18, 1998 and December 28, 1998.
Page 45
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth the names, ages and certain information
concerning the Directors of the Company. Additional information on Marc W.
Eller and Dr. Zvi Yaniv and all information concerning executive officers may
be found under the caption "EXECUTIVE OFFICERS" on page 7 of this Annual
Report on Form 10-KSB.
<TABLE>
<CAPTION>
NAME AGE CLASS POSITION DIRECTOR SINCE TERM EXPIRES
---- --- ----- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Lee B. Arberg 31 I Director May 1996 1999
Marc W. Eller 43 I Director, Chairman, November 1995 1999
Chief Executive Officer
David R. Sincox 60 I Director October 1994 1999
Dr. Zvi Yaniv 52 III Director, President, July 1996 1999
Chief Operating Officer
Philip C. Shaffer 63 II Director March 1992 1999
Igor Leontiev 59 II Director April 1997 1999
Ronald J. Berman 41 III Director May 1996 1999
</TABLE>
- ----------------------
Mr. Arberg has been a Director since May 1996. Mr. Arberg founded
Hemisphere Trading Company ("Hemisphere"), a registered investment advising
firm, in June 1992. From 1992 through 1998, Mr. Arberg managed the overall
operations of Hemisphere and served as its Chief Investment Officer. In 1998,
Mr. Arberg terminated his relationship with Hemisphere and is now a private
investor. Prior to the formation of Hemisphere, Mr. Arberg was a financial
analyst with Cummins Engine Company, specializing in the strategic
acquisitions of private companies with revenues of $75-$250 million.
Mr. Sincox has been a Director of the Company since October 1994.
Since 1987, Mr. Sincox has served as the Vice President of Administration of
Ref-Chem Construction Corporation, an engineering and construction firm.
Mr. Shaffer has been a Director of the Company since March 1992.
Since 1977, Mr. Shaffer has worked as a self-employed consultant in the field
of aerospace technology and management, with an emphasis in business
acquisition. Mr. Shaffer also serves as the General Partner of an oil and gas
development partnership with a total capitalization of approximately $1.2
million. Prior to 1977, Mr. Shaffer worked for 13 years in the National
Aeronautics and Space Administration in a series of positions including
Flight Dynamics Officer, Apollo and Skylab Flight Director, Special Assistant
to the Director of the Johnson Space Center, and Manager of Space Shuttle
Operations.
Mr. Leontiev has been a Director since April 1997. Dr. Leontiev
previously served as a Director from March 1995 through September 1996. Since
1964, Dr. Leontiev has worked with Gazprom, the national gas company of
Russia. He currently serves as the president of DiaGasCrown, a subsidiary of
Gazcomplektimpex.
Mr. Berman has been a Director since May 1996. Mr. Berman co-founded
BEG Enterprises, Inc. with Marc W. Eller and has been its President since
1989. Mr. Berman also is President of R.J. Berman Enterprises, Ltd., a real
estate development company. Mr. Berman earned a Juris Doctor degree in 1980
from the University of Detroit. Prior to 1989, Mr. Berman was an attorney in
private practice.
Page 46
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities of Exchange Act of 1934 requires the
Company's officers, and Directors, and persons who beneficially own more than
10% of a registered class of the Company's common stock, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission and NASDAQ. Officers, Directors, and beneficial owners of more
than 10% of the Company's common stock are required by the Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely on review of the copies of such reports furnished to
the Company, or written representations that no reports were required, the
Company believes that for the period from January 1, 1998 through December
31, 1998, all its officers, Directors, and greater than 10% beneficial owners
complied with all Section 16(a) filing requirements applicable to them, with
the exception of one Director, Igor Leontiev. Mr. Leontiev failed to file two
Form 4s for five stock transactions occurring in September and October 1998.
All such transactions were reported by Mr. Leontiev on his annual report on
Form 5.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total cash compensation paid or
to be paid, as well as certain other compensation paid or accrued, for
services rendered during the fiscal years ended December 31, 1998, 1997 and
1996 by the Chief Executive Officer and all executive officers whose total
annual salary and bonus exceeded $100,000 for the fiscal year ended December
31, 1998 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------------- -------------
Other Securities
Annual Underlying
Name and Position Year Salary($) Bonus($) Compensation($)(4) Options(#)(5)
----------------- ---- --------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Marc W. Eller, 1998 $150,000 -0- -0- 780,000
Chief Executive Officer (1) 1997 $150,000 -0- -0- 47,500
1996 $51,932 $15,000 $9,005 110,000 (6)
Zvi Yaniv, President and 1998 $150,000 -0- $6,839 1,170,000
Chief Operating Officer (2) 1997 $150,000 -0- $24,170 270,000
1996 $82,131 -0- $32,338 1,000,000
Doug Baker, Vice President 1998 $115,000 -0- -0- 520,000
and Chief Financial Officer (3) 1997 $115,000 -0- -0- 45,000
1996 $76,326 $5,000 -0- 100,000
</TABLE>
- ----------------------
(1) Mr. Eller commenced employment with the Company on July 25, 1996. Salary in
1998 includes $135,000 paid during the year and $15,000 voluntarily deferred
by Mr. Eller to assist the Company's cashflow. Salary in 1997 included
$138,750 paid during 1997 and $11,250 deferred until 1998.
(2) Dr. Yaniv commenced employment with the Company on May 8, 1996. Salary in
1997 includes $141,250 paid during the year and $8,750 voluntarily deferred
by Dr. Yaniv to assist the Company's cashflow.
(3) Mr. Baker commenced employment with the Company on June 17, 1996. Salary
in 1997 includes $106,375 paid during the year and $8,625 voluntarily
deferred by Mr. Baker to assist the Company's cashflow.
Page 47
<PAGE>
(4) The following Named Executive Officers received perquisites that exceeded
in value the lesser of $50,000 or 10% of such officers' salary and bonus.
Dr. Yaniv received reimbursement of living expenses totaling $20,070 in
1997 and $29,541 in 1996. He was also provided use of a Company owned
automobile valued at $1,882 in 1998, $4,100 in 1997, and $2,797 in 1996.
In 1998, Dr. Yaniv was reimbursed $4,957 in connection with the
transportation of his household belongings in connection with the
relocation of his primary residence to Austin, Texas. Mr. Eller received
reimbursement of moving expenses totaling $9,005 in 1996.
(5) 1997 options include options issued in 1996 but repriced in 1997 in the
following amounts: Mr. Eller - 27,500, Dr. Yaniv - 250,000, and
Mr. Baker - 25,000. 1998 options include options issued in 1996 and 1997,
but repriced in 1998 in the following amounts: Mr. Eller - 130,000,
Dr. Yaniv - 1,020,000, and Mr. Baker - 120,000. More information on this
repricing is identified in the "Options Repricing Table" below.
(6) 20,000 of these options were granted to Mr. Eller in 1996 under the Amended
and Restated 1992 Outside Directors Stock Option Plan prior to Mr. Eller
becoming an executive officer of the Company.
Page 48
<PAGE>
STOCK OPTION GRANTS IN 1998
The Company has an Amended and Restated 1992 Employee Stock Option
Plan, which may be used to grant employees, including officers of the
Company, incentive stock options designed to qualify under Section 422 of the
Internal Code of 1986, or non-qualified stock options. The Company also
established the 1998 Directors and Officers Stock Option Plan, which may be
used to grant non-qualified stock options to officers and directors of the
Company. The following table sets forth information concerning stock-options
grants to the Named Executive Officers in 1998.
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Underlying Options Granted to
Options Employees in Exercise
Name Granted(#)(1)(2) in Fiscal Year 1998 or Base Price ($/sh) Expiration Date
---- ----------------- ------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Marc W. Eller 500,000 (3) 15.89% $0.375 5/11/2008
150,000 (3) 4.77% $0.375 7/27/2008
20,000 (3)(4) 0.64% $0.375 7/28/2007
20,000 (4)(5)(6) 0.64% $0.375 7/29/2006
90,000 (4)(6) 2.86% $0.375 11/1/2006
Dr. Zvi Yaniv 150,000 (3) 4.77% $0.375 5/11/2008
20,000 (3)(4) 0.64% $0.375 7/28/2007
1,000,000 (4)(7) 31.78% $0.375 5/31/2006
Douglas P. Baker 250,000 (3) 7.94% $0.375 5/11/2008
150,000 (3) 4.77% $0.375 7/27/2008
20,000 (3)(4) 0.64% $0.375 7/28/2007
100,000 (4)(8) 3.18% $0.375 6/17/2006
</TABLE>
- ------------------
(1) Under the terms of the Company's Amended and Restated 1992 Employee Stock
Option Plan and the 1998 Directors and Officers Stock Option Plan, the
Company's Compensation Committee retains discretion, subject to plan
limits, to modify the terms of outstanding options and to reprice the
options.
(2) The options were granted for a term of ten (10) years, subject to earlier
termination in certain events related to termination of employment.
(3) These options became exercisable in full on the date of the grant in 1998.
(4) These options were issued in 1996 and 1997, but as described in the option
repricing table, were repriced in 1998. The market price of the Company's
common stock was $0.25 at the time the options were repriced to $0.375.
More information on this repricing is identified in the "Options Repricing
Table" below.
(5) These options were granted to Mr. Eller under the Company's Amended and
Restated 1992 Outside Directors Stock Option Plan prior to Mr. Eller
becoming an executive officer of the Company.
(6) One-fourth of these options vested on the date of the grant and an
additional one fourth on June 1, 1998, 1999, and 2000.
(7) One-tenth of these options vested on the date of grant, one-tenth on
December 31, 1996, and one-fifth vest on each of December 31, 1997, 1998,
1999, and 2000.
(8) One third of these options vested on the date of grant, one-third on
October 1, 1996, and one-third on January 1, 1997.
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<PAGE>
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth certain information concerning the
number and intrinsic value of the options held by the named executives at
December 31, 1998. There were no options exercised by Named Executive
Officers during the fiscal year ended December 31, 1998 and accordingly no
value was realized. Year-end values are based arbitrarily on the closing
price of $0.40 per share of the common stock on December 31, 1998, on the
NASDAQ OTC Bulletin Board System. They do not reflect the actual amounts, if
any, which may be realized upon the future exercise of remaining stock
options and should not be considered indicative of future stock performance.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at December 31, 1998 Options at December 31, 1998
---------------------------- ----------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Marc W. Eller 727,000/53,000 $18,175/$1,325
Dr. Zvi Yaniv 770,000/400,000 19,250/10,000
Douglas P. Baker 520,000/0 13,000/0
</TABLE>
DIRECTOR COMPENSATION FOR 1998
<TABLE>
DIRECTOR COMPENSATION SECURITY GRANTS IN 1998
NAME(1) MEETING FEES ($)(2) NUMBER OF SECURITIES UNDERLYING OPTIONS (#)(3)
------- ------------------- ----------------------------------------------
<S> <C> <C>
Lee B. Arberg 500 170,000
David R. Sincox 650 170,000
Philip C. Shaffer 500 170,000
Igor Leontiev 250 170,000
Ronald J. Berman 950 170,000
</TABLE>
- -----------------
(1) Directors who are also executives of the Company are not listed in the above
table. They do not receive compensation as Directors. Refer to the Summary
Compensation Table for information concerning their compensation.
(2) All Directors receive $150 per board meeting or committee meeting
attended in person, and $50 per telephonic meeting. No cash payments were
made to Directors in 1998. The amounts due, as reflected in this table, were
voluntarily deferred by the Directors to aid the Company's cash flow.
Reasonable expenses incurred by each Director in connection with his duties
as a Director are also reimbursed by the Company. This amount is not
reflected in the above table.
(3) All outside Directors of the Company participate in the Company's Amended
and Restated 1992 Outside Directors Stock Option Plan, under which the
Company may grant stock options to any Director who is not a full time
salaried employee of the Company. Each Director was granted 20,000 options
under this plan on July 27, 1998 at a price of $0.25 per share. These option
grants became exercisable in full on that date. The Board of Directors also
established the 1998 Directors and Officers Stock Option Plan in 1998. Each
outside Director was granted 150,000 fully vested options under this plan on
May 11, 1998. These options are exercisable at a price of $0.375 per share.
Page 50
<PAGE>
In May 1998, the Company's Board of Directors passed a resolution
that changed the option exercise price of certain options previously granted
under the Amended and Restated 1992 Outside Directors Stock Option Plan. A
total of 284,903 options were repriced. The Company reduced the exercise
price to $0.375 for all options for all persons who were Directors of the
Company at the time of the repricing. The original exercise price of these
options ranged from $1.125 to $5.50. The market price of the Company's common
stock at the time the exercise price of these options was reduced was
approximately $0.25 per share.
All of the Company's Directors have retained the right to pursue
additional business activities that are not competitive with the business of
the Company, and do not adversely affect their performance as Directors. If,
as and when conflicts of interest arise, the nature of the conflict must be
fully disclosed to the Board of Directors, and the person who is subject to
the conflict must abstain from participating in any decision that may impact
on his conflict of interest. Except for this disclosure and abstention
policy, the Directors will not be in breach of any fiduciary duties owed to
the Company or the shareholders by virtue of their participation in such
additional business activities.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Dr. Zvi Yaniv, its
President and Chief Operating Officer, which was entered into on June 1,
1996. Under the terms of this agreement Dr. Yaniv was to be paid a base
salary of $125,000 per year. The contract was amended to adjust Dr. Yaniv's
salary to $150,000 per year effective November 1, 1998. All contingent
compensation related to bonuses or performance goals were eliminated.
The Company also provides Dr. Yaniv with the use of an automobile
owned by the Company and paid for his reasonable living expenses in Austin,
Texas until June 1, 1997. In May 1998, the Company paid moving expenses for
the transportation of Dr. Yaniv's household goods in connection with the
relocation of Dr. Yaniv's primary residence to Austin, Texas. The employment
agreement may be terminated by either party, with or without cause, by giving
30 days notice of termination to the other party.
Page 51
<PAGE>
OPTION REPRICINGS TABLE
The Named Executive Officers listed in the table below had the
identified stock option grants repriced during the Company's fiscal years
ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Length
Number of of Original
Securities Market Price Exercise Option term
Underlying of Stock Price Remaining
Options at Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended(#) Amendment($) Amendment($) Price ($) Amendment(1)
- ---- ---- ---------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marc W. Eller,
Chief Executive
Officer 5/11/98 67,500 $0.25 $3.00 $0.375 8 yr., 6 mnths
5/11/98 22,500 $0.25 $2.00 $0.375 8 yr., 6 mnths
5/11/98 20,000 $0.25 $1.125 $0.375 9 yr., 3 mnths
7/28/97 22,500 $1.125 $3.00 $2.00 9 yr., 3 mnths
Dr. Zvi Yaniv,
President and
Chief Operating
Officer 5/11/98 750,000 $0.25 $4.00 $0.375 8 yr., 0 mnths
5/11/98 250,000 $0.25 $2.00 $0.375 8 yr., 0 mnths
5/11/98 20,000 $0.25 $1.125 $0.375 9 yr., 3 mnths
7/28/97 250,000 $1.125 $4.00 $2.00 8 yr., 9 mnths
10/17/96 1,000,000 $1.50 (2) $4.00 9 yr., 7 mnths
Douglas P. Baker,
Vice President
and Chief Financial
Officer 5/11/98 75,000 $0.25 $4.00 $0.375 8 yr., 1 mnths
5/11/98 25,000 $0.25 $2.00 $0.375 8 yr., 1 mnths
5/11/98 20,000 $0.25 $1.125 $0.375 9 yr., 3 mnths
7/28/97 25,000 $1.125 $4.00 $2.00 8 yr., 9 mnths
</TABLE>
(1) The original ten-year terms and the vesting schedules of each grant
repriced were not changed with the repricing of the options listed in this
table.
(2) Prior to repricing, the options in this grant were to be priced at the
market price on the vesting date of the options granted. The 100,000
options of this grant that had vested at June 1, 1996 were priced at $5.00
per share of common stock. No other options pursuant to this grant had
vested as of the repricing date.
The options for the above referenced Named Executive Officers that
were repriced in 1998 were part of a plan approved by the Board of Directors
on May 11, 1998. On that date all options held by the above referenced Named
Executive Officers were repriced to reduce the exercise price to $0.375 per
share. As of that date the Company's common stock was trading at $0.25 per
share. The Board of Directors, on March 27, 1998, had previously reduced the
exercise price to $0.375 for all other employees of the Company as of that
date. The market price of the Company's common stock was $0.135 per share on
March 27, 1998. The options were repriced to provide greater motivation to
the employees that had remained with the Company. The Board of Directors
believed that the substantial decline in the price of the Company's common
stock was the result of many factors that were not related to the performance
of the remaining employees.
Page 52
<PAGE>
The options that were repriced in 1997 for the above referenced
Named Executive Officers were repriced as part of a plan approved by the
Board of Directors on July 28, 1997. On that date, 25% of all options held by
employees employed by the Company on that date that had an exercise price in
excess of $2.00 per share were changed to reduce the exercise price to $2.00.
As of that date the Company's common stock was trading at $1.125 per share.
The options were repriced to provide greater motivation to the employees that
had remained with the Company. The Board of Directors believed that the
substantial decline in the price of the Company's common stock was the result
of many factors that were not related to the performance of the remaining
employees.
Lee B. Arberg
Marc W. Eller
Philip C. Shaffer
David R. Sincox Directors March 30, 1998
Ronald J. Berman
Igor Leontiev
Dr. Zvi Yaniv
Page 53
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to
the beneficial ownership of shares of each class of the Company's voting
stock as of March 18, 1999, by each person known to be the beneficial owner
of 5% or more of the outstanding voting stock of each such class of the
Company. For the purposes of this Annual Report on Form 10-KSB, beneficial
ownership of securities is defined in accordance with the rules of the SEC to
mean generally the power to vote or dispose of securities, regardless of any
economic interest therein.
<TABLE>
- ---------------------------- ------------------------------------------------------- --------------------- --------------
Shares Owned Percent of
Beneficially Class
Title of Class Name and Address
- ---------------------------- ------------------------------------------------------- --------------------- --------------
<S> <C> <C> <C>
Common Stock None - -
- ---------------------------- ------------------------------------------------------- --------------------- --------------
Series G Preferred William W. Gow 100 6.45%
Stock 4747 Sunset Blvd.
Los Angeles, CA 90027
------------------------------------------------------- --------------------- --------------
John Green Company 100 6.45%
220 Victor
Highland Park, MI 48203
------------------------------------------------------- --------------------- --------------
Pinnacle Fund L.P. 200 12.90%
4965 Preston Park Blvd., Ste 240
Plano, TX 75093
------------------------------------------------------- --------------------- --------------
J. Brad Carter, M.D. 100 (1) 6.45%
9330 Park Crest Blvd. #300
Knoxville, TN 37923
------------------------------------------------------- --------------------- --------------
George F. Valassis 200 12.90%
Franklin Enterprises
520 Lake Cook Rd., Suite 380
Deerfield, IL 60015
------------------------------------------------------- --------------------- --------------
Nicholas Martin Living Trust 200 12.90%
3113 South University Dr., #600
Ft. Worth, TX 76109
------------------------------------------------------- --------------------- --------------
Michael Scott Blechman Family Trust 200 12.50%
295 Shadowood Lane
Northfield, IL 60093
- ---------------------------- ------------------------------------------------------- --------------------- --------------
</TABLE>
(1) Includes 50 shares issued in the name of J. Brad Carter, M.D., IRA.
Page 54
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information with respect to beneficial
ownership of the Company's common stock as of March 18, 1999, by each
Director, each Named Executive Officer and by the directors and executive
officers as a group. Unless otherwise indicated, each person or member of the
group listed has sole voting and investment power with respect to the shares
of common stock listed.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIAL PERCENTAGE
NAME OWNERSHIP (1) OF CLASS
---- ------------- ----------
<S> <C> <C>
Philip C. Shaffer 522,702 1.03%
David R. Sincox 433,213 *
Igor Leontiev (2) 545,520 1.08%
Marc W. Eller 1,725,796 3.33%
Ronald J. Berman 1,153,468 2.25%
Lee B. Arberg 342,400 *
Dr. Zvi Yaniv 931,000 1.82%
Douglas P. Baker 692,000 1.36%
All Executive Officers and Directors
as a group (8 persons) 6,346,099 11.58%
</TABLE>
- -------------------------
* Less than 1%
(1) Included in the amounts indicated are shares that are subject to
options exercisable within 60 days of March 18, 1999 pursuant
to Rule 13d-3(d)(1) of the Exchange Act. The number of such shares are
450,000 for Mr. Shaffer; 372,000 for Mr. Sincox; 977,000 for Mr. Eller;
342,629 for Mr. Berman; 920,000 for Mr. Yaniv; 670,000 for Mr. Baker;
326,520 for Mr. Leontiev and 4,400,549 for the Directors and executive
officers as a group. The amount for Mr. Arberg includes 342,400 shares
subject to options exercisable within 60 days of March 18, 1999
pursuant to Rule 13d-3(d)(1) of the Exchange Act that are held by Mr.
Arberg's spouse. Included in the shares beneficially owned by Mr. Eller
are 435,000 shares which could be issued in connection with the
convertible notes payable owed by the Company to Mr. Eller.
(2) Igor Leontiev serves as the President of DiaGasCrown, a subsidiary of
Gazcomplektimpex. Gazcomplektimpex owns 1,000,130 shares of common
stock. Mr. Leontiev disclaims any beneficial ownership of these shares.
Page 55
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, Electronic Billboard Technology, Inc., a subsidiary
of the Company entered into a Patent Assignment and Royalty Agreement with
Advanced Technology Incubator, Inc., ("ATI") a corporation based in Austin,
Texas and owned by Dr. Zvi Yaniv, the Company's President and Chief Operating
Officer. Under the terms of the agreement, ATI agreed to assign U.S. Patent
No. 5,469,187 related to certain LCD technology to EBT in exchange for an
initial payment of $200,000. In addition, ATI is entitled to receive a
royalty of 5% of gross revenue related to products using this patent. EBT
intends to use this technology in the development of its next generation
electronic billboard product. EBT may terminate this assignment at any time
upon 30 days written notice to ATI. The assignment may be terminated by ATI
if, within two years of the first sale or lease of a billboard using this
technology, cumulative royalty payments under the agreement have not totaled
$500,000, or if payments do not equal $500,000 in any one year period
following this initial two year period. If the assignment is terminated by
ATI, EBT will be granted a non-exclusive worldwide license to use the
technology under terms similar to those contained in this agreement. ATI had
the right to terminate this agreement if the initial payment was not received
by February 15, 1999. The payment was not made by that date, however; the
parties have agreed to extend the initial payment deadline to April 15, 1999.
At various times, the Company has borrowed money from its Chief
Executive Officer. Mr. Eller made a $185,000 loan to the Company in 1997 that
was repaid at the time of the DTO sale in May 1998. Additional advances
totaling $100,000 were made to the Company at subsequent dates. These
advances are convertible into shares of the Company's common stock at a rate
of $0.25 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: See Index to Exhibits on page 60 for a descriptive
response to this item.
(b) REPORTS ON FORM 8-K:
(1) Current Report on Form 8-K (Item 5) dated as of December 7,
1998
(2) Current Report on Form 8-K (Item 4) dated as of December 28,
1998
Page 56
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SI DIAMOND TECHNOLOGY, INC.
By: //S// Marc W. Eller March 30, 1999
----------------------------------
Marc W. Eller,
Chief Executive Officer
In accordance with the Exchange Act this report has been signed by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
//S// MARC W. ELLER Chairman, Chief Executive March 30, 1999
- -------------------- Officer (Principal Executive Officer and
Marc W. Eller Director)
//S// DOUGLAS P. BAKER Vice President and March 30, 1999
- ---------------------- Chief Financial Officer
Douglas P. Baker (Principal Financial Officer and Principal
Accounting Officer)
Philip C. Shaffer*
David R. Sincox*
Igor Leontiev* Directors March 30, 1999
Ronald J. Berman*
Lee B. Arberg*
Dr. Zvi Yaniv*
*By: //S// DOUGLAS P. BAKER
--------------------------
(Douglas P. Baker,
Attorney-in-Fact)
</TABLE>
Page 57
<PAGE>
INDEX TO EXHIBITS
The exhibits indicated by an asterisk (*) have been previously
filed with the Securities and Exchange Commission and are
incorporated herein by reference.
<TABLE>
<CAPTION>
- ------------------ -------------------------------------------------------------------------------------------- -------------
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------ -------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
3(I).1 * Amended and Restated Articles of Incorporation of the Company, as filed February 14, 1997
with the Secretary of State for the State of Texas (Exhibit 3.1 to the Company's Current
Report on Form 8-K dated as of February 14, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).2* Statement of Resolutions Establishing and Designating the Company's Series F Preferred
Stock, as filed with the Secretary of State of the State of Texas on March 10, 1997.
(Exhibit 3.1 to the Company's Report on Form 8-K dated as of March 7, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).3* Amendment to Amended and Restated Articles of Incorporation of the Company amending the
Company's Series E Preferred Stock, as filed with the Secretary of State of the State of
Texas on May 1, 1997 (Exhibit 3(I).1 to the Company's Current Report on Form 8-K dated
as of August 4, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).4* Statement of Resolution Establishing and Designating the Company's Series G Preferred
Stock, as filed with the Secretary of State of the State of Texas on June 11, 1997
(Exhibit 3.1 to the Company's Current Report on Form 8-K dated as of July 25, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).5* Amendment to Amended and Restated Articles of Incorporation of the Company amending the
Company's Series F Preferred Stock, as filed with the Secretary of State of the State
of Texas on August 4, 1997 (Exhibit 3(I).2 to the Company's Current Report on Form 8-K
dated as of August 4, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).6* Amendment to Amended and Restated Articles of Incorporation of the Company amending the
Company's Series F Preferred Stock, as filed with the Secretary of State of the State
of Texas on March 25, 1998 (Exhibit 4.38 to the Company's Registration Statement on
Form S-3 [No. 333-40711] dated as of June 17, 1998).
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(I).7 Statement of Resolutions of Board of Directors of SI Diamond Technology, Inc.,
establishing and designating series of Preferred Stock as "Series H Junior
Participating Preferred Stock" and fixing and determining the relative rights and
preferences thereof, as filed with the Secretary of State of the State of Texas
on June 28, 1998.
- ------------------ -------------------------------------------------------------------------------------------- -------------
3(II).1* Amended and Restated Bylaws of the Company (Exhibit 3(II) to the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended March 31, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.1* Form of Certificate for shares of the Company's common stock (Exhibit 4.1 to the
Company's Registration Statement on Form SB-2[No.33-51446-FW] dated January 7, 1993).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.2* Form of Warrant issued to Swartz Investments, Inc. (Exhibit 4.5 to the Company's
Current Report on Form 8-K dated as of January 19, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.3* Form of Regulation D Subscription Agreement by and between the Company and the Holders
of the Company's Series G Preferred Stock (Exhibit 4.1 to the Company's Current Report
on Form 8-K dated as of July 25, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.4* Form of Registration Rights Agreement by and between the Company and the Holders of the
Company's Series G Preferred Stock (Exhibit 4.2 to the Company's Current Report on Form
8-K dated as of July 25, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.5* Form of Warrant by and between the Company and the Holders of the Company's Series G
Preferred Stock (Exhibit 4.3 to the Company's Current Report on Form 8-K dated as of
July 25, 1997).
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.6* Regulation D Subscription Agreement dated as of November 11, 1998, by and between the
Company and C&A Services, L.L.C. for the issuance of warrants to purchase shares of
Common Stock of the Company. (Exhibit 4.1 to the Company's Current Report on Form 8-K
dated as of December 7, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
Page 58
<PAGE>
<CAPTION>
- ------------------ -------------------------------------------------------------------------------------------- -------------
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------ -------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
4.7* Form of Rights Agreement dated as of June 18, 1998, between the Company and American
Securities Transfer, Incorporated, as Rights Agent, which includes as Exhibit A the
form of Statement of Resolution establishing and designating series of preferred stock
as "Series H Junior Participating Preferred Stock" and fixing and determining the
relative rights and preferences thereof, as Exhibit B the form of Rights Certificate,
and as Exhibit C the Summary of Rights to Purchase Preferred Shares. (Exhibit 4.1 to
the Company's Current Report on Form 8-K dated as of June 18, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.8 Warrant issued to Dale Kerner to purchase 100,000 shares of the Company's Common Stock
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.9 Warrant issued to Michael Doorey to purchase 100,000 shares of the Company's Common
Stock
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.10 Warrant issued to John C. Drake to purchase 100,000 shares of the Company's Common Stock
- ------------------ -------------------------------------------------------------------------------------------- -------------
4.11 Warrant issued to First London Securities Corporation to purchase 100,000 shares of the
Company's Common Stock
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.1* License Agreement between the Company and the University of Texas (Dallas) relating to
the commercialization of Amorphic Diamond coatings (Exhibit 10.8 to the Company's
Registration Statement on Form SB-2 [No. 33-51466-FW] dated January 7, 1993).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.2* Revised License Agreement between the Company and the University of Texas (Dallas)
relating to worldwide exclusive rights to the commercialization of Amorphic Diamond(TM)
coatings (Exhibit 10.19 to the Company's Registration Statement on Form SB-2
[No. 33-51466-FW] dated January 7, 1993).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.3* License Agreement between the Company and McDonnell Douglas Corporation relating to a new
method of producing high temperature CVD diamond (Exhibit 10.20 to the Company's
Registration Statement on Form SB-2 [No.33-5 1466-FW] dated January 7, 1993).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.4* Teaming Agreement dated February 9, 1995 between the Company and Diagascrown, Inc.
(Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended March 31, 1995).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.5* Form of Lease Agreement between Aetna Life Insurance Company, as Landlord, and
Diamond Tech One, Inc., as Tenant, concerning premises located at 12112 Technology
Boulevard, Austin, Texas 77827 (Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1995).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.6* Patent and Technology License effective as of February 11, 1993, by and between Company
and the Board of Regents of the University of Texas System (Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1995).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.7* Joint Development Agreement dated May 25, 1995 between the Company and Supertex, Inc.
(Exhibit 10.34 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.8* Contract #01-96/01C between the Company and Microelectronics Systems dated February 16,
1996 (Exhibit 10.02 to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.9* Contract no. 27 in 02/96 between the Company and High Technologies dated February 25,
1996 (Exhibit 10.03 to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.10* Contract no. 26 in 02/96 between the Company and High Technologies dated February 25,
1996 (Exhibit 10.04 to the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended March 31, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.11* Employment Agreement between the Company and Dr. Zvi Yaniv dated as of May 31, 1996
(Exhibit 10.1 to the Company's report on Form 10-QSB for the fiscal quarter ended
September 30, 1996).
- ------------------ -------------------------------------------------------------------------------------------- -------------
Page 59
<PAGE>
<CAPTION>
- ------------------ -------------------------------------------------------------------------------------------- -------------
SEQUENTIALLY
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------------ -------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10.12* Amended and Restated 1992 Stock Option Plan (Exhibit 4.1 to the Company's Registration
Statement on Form S-8 [No. 333-56457] dated June 9, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.13* Amended and Restated 1992 Outside Directors' Stock Option Plan (Exhibit 4.2 to the
Company's Registration Statement on Form S-8 [No. 333-56547] dated June 9, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.14* 1998 Directors and Officers Stock Option Plan (Exhibit 4.3 to the Company's
Registration Statement on Form S-8 [No. 333-56547] dated June 9, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.15* Asset Purchase Agreement dated May 8, 1998 between Focus Interconnect Technology
Corporation, Diamond Tech One, Inc., SI Diamond Technology, Inc. and Field Emission
Picture Element Technology, Inc. (Exhibit 10 to the Company's Current Report on Form
8-K dated as of May 8, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.16* Consulting and Advisory Services Agreement by and between the Company and C&A
Services, L.L.C. dated as of November 11, 1998. (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated as of December 7, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.17* Marketing Agent Agreement by and between Electronic Billboard Technology, Inc. and
Vision Mark, L.L.C. dated as of November 11, 1998. (Exhibit 110.2 to the Company's
Current Report on Form 8-K dated as of December 7, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.18 Patent Assignment and Royalty Agreement between Electronic Billboard Technology, Inc.
and Advanced Technology, Incubator, Inc. dated as of October 6, 1998.
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.19* Agreement on Phase 2 between Field Emission Picture Element Technology, Inc., and
Diamond Pro-Shop Nomura dated as of January 21, 1999. (Exhibit 10.1 to the Company's
Current Report on Form 8-K dated as of February 3, 1999)
- ------------------ -------------------------------------------------------------------------------------------- -------------
10.20 Lease agreement between the Company and Industrial Properties Corporation date as of
June 2, 1998.
- ------------------ -------------------------------------------------------------------------------------------- -------------
11 Computation of (Loss) per Common Share
- ------------------ -------------------------------------------------------------------------------------------- -------------
16.1* Letter concerning resignation of Coopers & Lybrand L.L.P. as certifying accountant.
(Exhibit 16.1 to the Company's Current Report on Form 8-K dated as of June 18, 1998)
- ------------------ -------------------------------------------------------------------------------------------- -------------
21 Subsidiaries of the Company.
- ------------------ -------------------------------------------------------------------------------------------- -------------
24 Powers of Attorney
- ------------------ -------------------------------------------------------------------------------------------- -------------
27 Financial Data Schedule
- ------------------ -------------------------------------------------------------------------------------------- -------------
</TABLE>
Page 60
<PAGE>
EXHIBIT 3(I).7
STATEMENT OF RESOLUTIONS OF BOARD OF DIRECTORS
OF SI DIAMOND TECHNOLOGY, INC.
ESTABLISHING AND DESIGNATING SERIES OF PREFERRED STOCK
AS "SERIES H JUNIOR PARTICIPATING PREFERRED STOCK" AND FIXING AND
DETERMINING THE RELATIVE RIGHTS AND PREFERENCES THEREOF
TO THE SECRETARY OF STATE OF THE STATE OF TEXAS:
SI Diamond Technology, Inc., a Texas corporation (the "Corporation")
pursuant to the provisions of Article 2.13 of the Texas Business Corporation
Act, submits the following statement for the purpose of establishing and
designating a series of shares and fixing and determining the preferences,
limitations and relative rights thereof:
1. The name of the corporation is SI DIAMOND TECHNOLOGY, INC.
2. The Amended and Restated Articles of Incorporation of the
Corporation authorizes the issuance of up to 2,000,000 shares of Preferred
Stock, $1.00 par value per share, and expressly vests in the Board of
Directors of the Corporation the authority provided therein to issue any or
all of said shares in one or more series and by resolution or resolutions to
establish the designation, number, full or limited voting powers, or the
denial of voting powers, preferences and relative, participating, optional,
and other special rights and the qualifications, limitations, restrictions,
and other distinguishing characteristics of each series to be issued.
3. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid, has adopted the following
resolutions creating a Series H Junior Participating Preferred Stock:
RESOLVED, that Six Hundred Thousand (600,000) of the 2,000,000
authorized shares of Preferred Stock of the Corporation shall be designated
Series H Junior Participating Preferred Stock (the "Series H Preferred
Stock") and shall possess the rights and privileges set forth below:
SERIES H JUNIOR PARTICIPATING PREFERRED SHARES.
1. DESIGNATION AND AMOUNT. There shall be a series of shares of
preferred stock that shall be designated as "Series H Junior Participating
Preferred Shares," and the number of shares constituting such series shall be
Six Hundred Thousand (600,000).
2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of shares of preferred stock ranking prior and superior
to the Series H Junior Participating Preferred Shares with respect to
dividends, the holders of shares of Series H Junior Participating Preferred
Shares, in preference to the holders of shares of any class or series of
shares of the Corpora-
<PAGE>
tion ranking prior to the Series H Junior Participating Preferred Shares,
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the 15th day of January, April, July and October in each
year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series H Junior
Participating Preferred Shares, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, the Adjustment Number (as
defined below) times the aggregate per share amount of all cash dividends,
and the Adjustment Number times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of common stock or a subdivision of the outstanding shares
of common stock (by reclassification or otherwise), declared on the shares of
common stock of the Corporation (the "Common Shares") since the immediately
preceding Quarterly Dividend Payment Date, or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series H Junior Participating Preferred Shares. The
"Adjustment Number" shall initially be 100. In the event the Corporation
shall at any time after June 18, 1998 (the "Rights Declaration Date") (i)
declare any dividend on Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares or (iii) combine the outstanding
Common Shares into a smaller number of shares, then in each such case the
Adjustment Number in effect immediately prior to such event shall be adjusted
by multiplying such Adjustment Number by a fraction the numerator of which is
the number of Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series H Junior Participating Preferred Shares as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Shares (other than a dividend payable in Common Shares); provided that, in
the event no dividend or distribution shall have been declared on the Common
Shares during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per
share on the Series H Junior Participating Preferred Shares shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
Series H Junior Participating Preferred Shares from the Quarterly Dividend
Payment Date next preceding the date of issue of such Series H Junior
Participating Preferred Shares, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of Series H Junior Participating Preferred Shares entitled to receive
a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the Series H Junior Par-
-2-
<PAGE>
ticipating Preferred Shares in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share by share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of Series H Junior Participating Preferred Shares
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 30 days prior to the date fixed for
the payment thereof.
3. VOTING RIGHTS. The holders of Series H Junior Participating
Preferred Shares shall have the following voting rights:
(A) Each Series H Junior Participating Preferred Share shall entitle
the holder thereof to a number of votes equal to the Adjustment Number on all
matters submitted to a vote of the shareholders of the Corporation.
(B) Except as otherwise provided herein or by law, the holders of
Series H Junior Participating Preferred Shares and the holders of the Common
Shares shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) (i) If at any time dividends on any Series H Junior
Participating Preferred Stock shall be in arrears in an amount equal to six
(6) quarterly dividends thereon, the occurrence of such contingency shall
mark the beginning of a period (herein called a "default period") which shall
extend until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on
all shares of Series H Junior Participating Preferred Stock then outstanding
shall have been declared and paid or set apart for payment. During each
default period, all holders of Preferred Stock (including holders of the
Series H Junior Participating Preferred Stock) with dividends in arrears in
an amount equal to six (6) quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders of
Series H Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or
at any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless
the holders of ten percent (10%) in number of shares of Preferred Stock
outstanding shall be present in person or by proxy. The absence of a quorum
of the holders of Common Stock shall not affect the exercise by the holders
of Preferred Stock of such voting right. At any meeting at which the holders
of Preferred Stock shall exercise such voting right initially during an
existing default period, they shall have the right, voting as a class, to
elect Directors to fill such vacancies, if any, in the Board of Directors as
may then exist up to two (2) Directors or, if such right is exercised at an
annual meeting, to elect two (2) Directors. If the number which may be so
elected at any special meeting does not amount to the required number, the
holders of Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them of
the required number. After the holders of the Preferred Stock shall have
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<PAGE>
exercised their right to elect Directors in any default period and during the
continuance of such period, the number of Directors in any default period and
during the continuance of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of the Preferred Stock
as herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series H Junior Participating Preferred
Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any stockholder or stockholders owning in
the aggregate not less than ten percent (10%) of the total number of shares
of Preferred Stock outstanding, irrespective of series, may request, the
calling of special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the President, a Vice President or the Secretary
of the Corporation. Notice of such meeting and of any annual meeting at
which holders of Preferred Stock are entitled to vote pursuant to this
Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock
by mailing a copy of such notice to him or her at his or her last address as
the same appears on the books of the Corporation. Such meeting shall be
called for a time not earlier than 10 days and not later than 50 days after
such order or request or in default of the calling of such meeting within 50
days after such order or request, such meeting may be called on similar
notice by any stockholder or stockholders owning in the aggregate not less
than ten percent (10%) of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no
such special meeting shall be called during the period within 50 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two (2) Directors
voting as a class, after the exercise of which right (x) the Directors so
elected by the holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be
filled by vote of a majority of the remaining Directors theretofore elected
by the holders of the class of stock which elected the Director whose office
shall have become vacant. References in this Paragraph (C) to Directors
elected by the holders of a particular class of stock shall include Directors
elected by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of Directors shall be
such number as may be provided for in the certificate of incorporation or
bylaws irrespective of any increase made pursuant to the provisions of
Paragraph (C)(ii) of this Section 3 (such number being subject, however, to
change thereafter in any manner provided by law or in the certificate of
incorporation or bylaws). Any vacancies in the Board of Directors effected
by the provisions
-4-
<PAGE>
of clauses (y) and (z) in the preceding sentence may be filled by a majority
of the remaining Directors.
(D) Except as set forth herein or as provided by law, holders of
Series H Junior Participating Preferred Shares shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of the Common Shares as set forth herein) for
taking any corporate action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series H Junior Participating Preferred Shares as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on Series H Junior
Participating Preferred Shares outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series H Junior Participating Preferred
Shares;
(ii) declare or pay dividends on or make any other distributions
on any shares ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series H Junior
Participating Preferred Shares, except dividends paid ratably on the Series
H Junior Participating Preferred Shares and all such parity shares on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
any shares ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series H Junior Participating Preferred
Shares, provided that the Corporation may at any time redeem, purchase or
otherwise acquire any such parity shares in exchange for any shares of the
Corporation ranking junior (both as to dividends and upon dissolution,
liquidation or winding up) to the Series H Junior Participating Preferred
Shares; or
(iv) purchase or otherwise acquire for consideration any shares
of Series H Junior Participating Preferred Shares, or any shares ranking on
a parity with the Series H Junior Participating Preferred Shares, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
-5-
<PAGE>
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
the Corporation unless the Corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in such
manner.
5. REACQUIRED SHARES. Any Series H Junior Participating Preferred
Shares purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of preferred stock and may be reissued as part of a new
series of shares of preferred stock.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of shares ranking junior (either as to dividends or upon liquidation or
winding up) to the Series H Junior Participating Preferred Shares, unless,
prior thereto, the holders of Series H Junior Participating Preferred Shares
shall have received $1.00 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment (the "Series H Liquidation Preference"). Following the
payment of the full amount of the Series H Liquidation Preference, no
additional distributions shall be made to the holders of Series H Junior
Participating Shares unless, prior thereto, the holders of Common Shares
shall have received an amount per share (the "Common Adjustment") equal to
the quotient obtained by dividing (i) the Series H Liquidation Preference by
(ii) the Adjustment Number. Following the payment of the full amount of the
Series H Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series H Junior Participating Preferred Shares and the
Common Shares, respectively, holders of Series H Junior Participating
Preferred Shares and holders of the Common Shares shall receive their ratable
and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Shares and
the Common Shares, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets to
permit payment in full of the Series H Liquidation Preference and the
liquidation preferences of all other series of shares of preferred stock, if
any, that rank on a parity with the Series H Junior Participating Preferred
Shares, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of the Common
Shares.
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, or other transaction in which the Common
Shares are exchanged for or changed into other shares or securities, cash
and/or other property, then in any such case, the Series H Junior
Participating Preferred Shares shall at the same time be similarly exchanged
or changed in an
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<PAGE>
amount per share equal to the Adjustment Number times the aggregate amount of
shares, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each Common Share is changed or
exchanged.
8. NO REDEMPTION. The Series H Junior Participating Shares shall
not be redeemable. Notwithstanding the foregoing sentence of this Section,
the Corporation may acquire Series H Junior Participating Preferred Shares in
any other manner permitted by law.
9. RANKING. The Series H Junior Participating Preferred Shares
shall rank junior to all other series of the Corporation's preferred stock as
to the payment of dividends and the distribution of assets, unless the terms
of any such series shall provide otherwise.
10. AMENDMENT. At any time that any Series H Junior Participating
Preferred Shares are outstanding, these Articles of Incorporation shall not
be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series H Junior Participating Preferred
Shares so as to affect them adversely without the affirmative vote of the
holders of a majority or more of the outstanding Series H Junior
Participating Preferred Shares, voting separately as a class.
11. FRACTIONAL SHARES. Series H Junior Participating Preferred
Shares may be issued in fractions of a share that shall entitle the holder,
in proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all other rights of holders of Series H Junior Participating Preferred Shares.
FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Series H Preferred Stock and
fixing the number, powers, preferences and relative, optional, participating,
and other special rights and the qualifications, limitations, restrictions,
and other distinguishing characteristics thereof shall, upon the effective
date of said series, be deemed to be included in and be a part of the Amended
and Restated Articles of Incorporation of the Corporation pursuant to the
provisions of the Texas Business Corporation Act.
Signed on June 24, 1998.
SI DIAMOND TECHNOLOGY, INC.
By: /s/ Douglas P. Baker
------------------------
Douglas P. Baker
Vice President
and
Chief Financial Officer
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<PAGE>
EXHIBIT 4.8
THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.
WARRANT
SI DIAMOND TECHNOLOGY, INC.
The Transferability of this Warrant is Restricted
as Provided in Article 3
FOR GOOD AND VALUABLE consideration, the receipt of which is hereby
acknowledged by SI DIAMOND TECHNOLOGY, INC., 3006 Longhorn Boulevard, Austin,
Texas 78758, a Texas corporation (the "Company"), Dale Kerner ("Holder"),
is hereby granted the right to purchase, at the initial exercise price of
$0.25 per share, 100,000 shares of the Company's common stock, $.001 par
value (the "Common Shares").
Subject to the further terms hereof, this Warrant shall be exercisable
in whole or in part at any time and from time to time prior to 11:59 p.m.
(Austin time) on October 29, 1999. This Warrant shall be exercisable only in
the event that the exercise is for, at a minimum, the lesser of (i) 10,000
Common Shares or (ii) the remaining number of Common Shares which the
registered holder of this Warrant has the right to purchase thereunder. Upon
the expiration of the applicable period for exercise of this Warrant, this
Warrant shall no longer entitle the holder thereof to acquire any shares of
Common Shares or any other security of the Company. For the purposes of this
Warrant, "Affiliates" or "Affiliate" of Holder shall mean any person or
entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with Holder.
"Control" in, of or by an Affiliate requires ownership of more than fifty
percent (50%) of (i) voting stock of a company which issued voting stock, or
(ii) ownership interest in any enterprise; an entity or person is an
Affiliate only as long as control exists.
This Warrant initially is exercisable in whole or part as provided above
at a price of $0.25 per Share payable by wire transfer of collected funds,
subject to adjustment as provided in Article 5 hereof. Upon surrender of
this Warrant, with the annexed Subscription Form duly executed, together with
payment of the Purchase Price (as hereinafter defined) for the Common Shares
purchased, at the offices of the Company, the registered holder of this
Warrant shall be entitled to receive a certificate or certificates for all
the Common Shares.
<PAGE>
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable at the
option of the Holder hereof, in whole Common Shares only (but not as to
fractional Common Shares underlying this Warrant), during any period in
which this Warrant may be exercised as set forth above.
If this Warrant is exercised in part only, the Company, upon surrender of
this Warrant for cancellation, shall execute and deliver a new Warrant of
like tenor evidencing the right of the holder to purchase the balance of
the Common Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES
Upon the exercise of this Warrant, the issuance of certificates for Common
Shares underlying this Warrant shall be made forthwith (and in any event
within five business days thereafter) without charge to the Holder hereof
including, without limitation, any tax which may be payable in respect of
the issuance thereof, and such certificates shall (subject to the
provisions of Article 3 hereof) be issued in the name of, or in such names
as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The certificates
representing the Common Shares underlying this Warrant shall be executed on
behalf of the Company by the manual or facsimile signature of one of the
present or any future Chairman or President of the Company and any present
or future Vice President or Secretary of the Company. Upon transfer of
this Warrant in whole or in part to an Affiliate of Holder, such transferee
shall be entitled to all the rights of a Holder hereof.
3. RESTRICTION ON TRANSFER OF WARRANT AND COMMON SHARES
The Holder of this Warrant, by its acceptance hereof, covenants and agrees
that this Warrant and the Common Shares are being acquired as an investment
and not with a view to the distribution thereof, and that the Warrant may
not be exercised, and neither the Warrant nor the Shares may be sold,
transferred, assigned, hypothecated or otherwise disposed of (other than to
an Affiliate of Holder), in whole or in part unless in the opinion of
counsel reasonably concurred in by the Company's counsel such transfer is
in compliance with all applicable securities laws, after which this Warrant
and the Common Shares shall again be subject to the restrictions contained
in this Article 3.
Page 2
<PAGE>
4. PRICE
4.1. INITIAL AND ADJUSTED PURCHASE PRICE. The initial purchase price shall
be $0.25 per Share. The adjusted purchase price shall be the price
which shall result from time to time from any and all adjustments of
the initial purchase price in accordance with the provisions of
Article 5 hereof.
4.2. PURCHASE PRICE. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon
the context.
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF COMMON SHARES
5.1. SUBDIVISION AND COMBINATION
In case the Company shall at any time subdivide or combine the
outstanding Common Shares, the Purchase Price shall forthwith be
proportionately decreased in the case of subdivision or increased
in the case of combination.
5.2. RECLASSIFICATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification or change of the outstanding Common
Shares (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or
combination), or in the case of any consolidation of the Company with,
or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or
change of the outstanding Common Shares, except a change as a result
of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to
another corporation of the property of the Company as an entirety, the
Holder of this Warrant shall thereafter have the right to purchase
upon the exercise of this Warrant the kind and number of shares of
stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance
as if the Holder were the owner of the Common Shares underlying this
Warrant immediately prior to any such events at the Purchase Price in
effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if such Holder
had exercised this Warrant.
6. EXCHANGE AND REPLACEMENT OF WARRANT
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company for
new Warrants of like tenor and date representing in the aggregate the right
to purchase the same number of Common Shares
Page 3
<PAGE>
as are purchasable hereunder in such denominations as shall be designated
by the Holder hereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case
of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
7. ELIMINATION OF FRACTIONAL INTERESTS
The Company shall not be required to issue certificates representing
fractions of Common Shares on the exercise of this Warrant, nor shall it
be required to issue scrip or pay cash in lieu of fractional interests,
it being the intent of the parties that all fractional interests shall be
eliminated.
8. RESERVATION AND LISTING OF SECURITIES
The Company shall at all times reserve and keep available out of its
authorized Common Shares, solely for the purpose of issuance upon the
exercise of this Warrant, such number of Common Shares as shall be issuable
upon the exercise hereof and thereof. The Company covenants and agrees
that, upon exercise of this Warrant and payment of the Purchase Price
therefor, all Shares issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable.
9. NOTICES
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly given when delivered,
or mailed by registered or certified mail, return receipt requested:
9.1. If to the registered Holder of this Warrant, to the address of such
Holder as shown on the books of the Company; or
9.2. If to the Company, to the address set forth on the first page of this
Warrant or to such other address as the Company may designate by
notice to the Holders.
10. SUCCESSORS
All the covenants, agreements, representations and warranties contained in
this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributors,
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<PAGE>
successors and assigns. Assignability of registration rights is limited
under the terms of this Warrant.
11. HEADINGS
The Article and Section headings in this Warrant are inserted for purposes
of convenience and shall have no substantive effect.
12. LAW GOVERNING
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas.
WITNESS the seal of the Company and the signature of its duly authorized
Officer.
SI DIAMOND TECHNOLOGY, INC.
By:
------------------------
Douglas P. Baker
Vice President and
Chief Financial Officer
Page 5
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
TO: SI DIAMOND TECHNOLOGY, INC.
The undersigned hereby irrevocably exercises the right to purchase
__________________ of the shares of Common Stock of SI Diamond Technology,
Inc., a Texas corporation, evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all
in accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of the such Common Stock, except in accordance with provisions of
Section 3 of the Warrant, and consents that the following legend may be
affixed to the certificates for the Common Stock hereby subscribed for, if
such legend is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be sold,
transferred, pledged, hypothecated or otherwise disposed of until
either (i) a registration statement under the Securities Act and
applicable state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable state securities laws is available in
connection with such offer, sale or transfer."
The undersigned requests that certificates for such shares be issued,
and a warrant representing any unexercised portion thereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered
to the undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature of Registered Holder
- --------------------------------------------------------------------------------
Name of Registered Holder (Print)
- --------------------------------------------------------------------------------
Address
Page 6
<PAGE>
EXHIBIT 4.9
THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.
WARRANT
SI DIAMOND TECHNOLOGY, INC.
The Transferability of this Warrant is Restricted
as Provided in Article 3
FOR GOOD AND VALUABLE consideration, the receipt of which is hereby
acknowledged by SI DIAMOND TECHNOLOGY, INC., 3006 Longhorn Boulevard, Austin,
Texas 78758, a Texas corporation (the "Company"), Michael Doorey
("Holder"), is hereby granted the right to purchase, at the initial exercise
price of $0.25 per share, 100,000 shares of the Company's common stock, $.001
par value (the "Common Shares").
Subject to the further terms hereof, this Warrant shall be exercisable
in whole or in part at any time and from time to time prior to 11:59 p.m.
(Austin time) on October 29, 1999. This Warrant shall be exercisable only in
the event that the exercise is for, at a minimum, the lesser of (i) 10,000
Common Shares or (ii) the remaining number of Common Shares which the
registered holder of this Warrant has the right to purchase thereunder. Upon
the expiration of the applicable period for exercise of this Warrant, this
Warrant shall no longer entitle the holder thereof to acquire any shares of
Common Shares or any other security of the Company. For the purposes of this
Warrant, "Affiliates" or "Affiliate" of Holder shall mean any person or
entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with Holder.
"Control" in, of or by an Affiliate requires ownership of more than fifty
percent (50%) of (i) voting stock of a company which issued voting stock, or
(ii) ownership interest in any enterprise; an entity or person is an
Affiliate only as long as control exists.
This Warrant initially is exercisable in whole or part as provided above
at a price of $0.25 per Share payable by wire transfer of collected funds,
subject to adjustment as provided in Article 5 hereof. Upon surrender of
this Warrant, with the annexed Subscription Form duly executed, together with
payment of the Purchase Price (as hereinafter defined) for the Common Shares
purchased, at the offices of the Company, the registered holder of this
Warrant shall be entitled to receive a certificate or certificates for all
the Common Shares.
<PAGE>
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable at the
option of the Holder hereof, in whole Common Shares only (but not as to
fractional Common Shares underlying this Warrant), during any period in
which this Warrant may be exercised as set forth above.
If this Warrant is exercised in part only, the Company, upon surrender of
this Warrant for cancellation, shall execute and deliver a new Warrant of
like tenor evidencing the right of the holder to purchase the balance of
the Common Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES
Upon the exercise of this Warrant, the issuance of certificates for Common
Shares underlying this Warrant shall be made forthwith (and in any event
within five business days thereafter) without charge to the Holder hereof
including, without limitation, any tax which may be payable in respect of
the issuance thereof, and such certificates shall (subject to the
provisions of Article 3 hereof) be issued in the name of, or in such names
as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The certificates
representing the Common Shares underlying this Warrant shall be executed on
behalf of the Company by the manual or facsimile signature of one of the
present or any future Chairman or President of the Company and any present
or future Vice President or Secretary of the Company. Upon transfer of
this Warrant in whole or in part to an Affiliate of Holder, such transferee
shall be entitled to all the rights of a Holder hereof.
3. RESTRICTION ON TRANSFER OF WARRANT AND COMMON SHARES
The Holder of this Warrant, by its acceptance hereof, covenants and agrees
that this Warrant and the Common Shares are being acquired as an investment
and not with a view to the distribution thereof, and that the Warrant may
not be exercised, and neither the Warrant nor the Shares may be sold,
transferred, assigned, hypothecated or otherwise disposed of (other than to
an Affiliate of Holder), in whole or in part unless in the opinion of
counsel reasonably concurred in by the Company's counsel such transfer is
in compliance with all applicable securities laws, after which this Warrant
and the Common Shares shall again be subject to the restrictions contained
in this Article 3.
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<PAGE>
4. PRICE
4.1. INITIAL AND ADJUSTED PURCHASE PRICE. The initial purchase price shall
be $0.25 per Share. The adjusted purchase price shall be the price
which shall result from time to time from any and all adjustments of
the initial purchase price in accordance with the provisions of
Article 5 hereof.
4.2. PURCHASE PRICE. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon
the context.
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF COMMON SHARES
5.1. SUBDIVISION AND COMBINATION
In case the Company shall at any time subdivide or combine the
outstanding Common Shares, the Purchase Price shall forthwith be
proportionately decreased in the case of subdivision or increased in
the case of combination.
5.2. RECLASSIFICATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification or change of the outstanding Common
Shares (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or
combination), or in the case of any consolidation of the Company with,
or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or
change of the outstanding Common Shares, except a change as a result
of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to
another corporation of the property of the Company as an entirety, the
Holder of this Warrant shall thereafter have the right to purchase
upon the exercise of this Warrant the kind and number of shares of
stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as
if the Holder were the owner of the Common Shares underlying this
Warrant immediately prior to any such events at the Purchase Price in
effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if such Holder
had exercised this Warrant.
6. EXCHANGE AND REPLACEMENT OF WARRANT
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company for
new Warrants of like tenor and date representing in the aggregate the right
to purchase the same number of Common Shares
Page 3
<PAGE>
as are purchasable hereunder in such denominations as shall be designated
by the Holder hereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case
of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
7. ELIMINATION OF FRACTIONAL INTERESTS
The Company shall not be required to issue certificates representing
fractions of Common Shares on the exercise of this Warrant, nor shall it
be required to issue scrip or pay cash in lieu of fractional interests,
it being the intent of the parties that all fractional interests shall be
eliminated.
8. RESERVATION AND LISTING OF SECURITIES
The Company shall at all times reserve and keep available out of its
authorized Common Shares, solely for the purpose of issuance upon the
exercise of this Warrant, such number of Common Shares as shall be issuable
upon the exercise hereof and thereof. The Company covenants and agrees
that, upon exercise of this Warrant and payment of the Purchase Price
therefor, all Shares issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable.
9. NOTICES
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly given when delivered,
or mailed by registered or certified mail, return receipt requested:
9.1. If to the registered Holder of this Warrant, to the address of such
Holder as shown on the books of the Company; or
9.2. If to the Company, to the address set forth on the first page of this
Warrant or to such other address as the Company may designate by
notice to the Holders.
10. SUCCESSORS
All the covenants, agreements, representations and warranties contained in
this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributors,
Page 4
<PAGE>
successors and assigns. Assignability of registration rights is limited
under the terms of this Warrant.
11. HEADINGS
The Article and Section headings in this Warrant are inserted for purposes
of convenience and shall have no substantive effect.
12. LAW GOVERNING
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas.
WITNESS the seal of the Company and the signature of its duly authorized
Officer.
SI DIAMOND TECHNOLOGY, INC.
By:
------------------------
Douglas P. Baker
Vice President and
Chief Financial Officer
Page 5
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
TO: SI DIAMOND TECHNOLOGY, INC.
The undersigned hereby irrevocably exercises the right to purchase
__________________ of the shares of Common Stock of SI Diamond Technology,
Inc., a Texas corporation, evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all
in accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of the such Common Stock, except in accordance with provisions of
Section 3 of the Warrant, and consents that the following legend may be
affixed to the certificates for the Common Stock hereby subscribed for, if
such legend is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be sold,
transferred, pledged, hypothecated or otherwise disposed of until
either (i) a registration statement under the Securities Act and
applicable state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable state securities laws is available in
connection with such offer, sale or transfer."
The undersigned requests that certificates for such shares be issued,
and a warrant representing any unexercised portion thereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered
to the undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature of Registered Holder
- --------------------------------------------------------------------------------
Name of Registered Holder (Print)
- --------------------------------------------------------------------------------
Address
Page 6
<PAGE>
EXHIBIT 4.10
THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.
WARRANT
SI DIAMOND TECHNOLOGY, INC.
The Transferability of this Warrant is Restricted
as Provided in Article 3
FOR GOOD AND VALUABLE consideration, the receipt of which is hereby
acknowledged by SI DIAMOND TECHNOLOGY, INC., 3006 Longhorn Boulevard, Austin,
Texas 78758, a Texas corporation (the "Company"), John C. Drake c/o First
London Securities Corporation ("Holder"), is hereby granted the right to
purchase, at the initial exercise price of $0.25 per share, 100,000 shares of
the Company's common stock, $.001 par value (the "Common Shares").
Subject to the further terms hereof, this Warrant shall be exercisable
in whole or in part at any time and from time to time prior to 11:59 p.m.
(Austin time) on October 29, 1999. This Warrant shall be exercisable only in
the event that the exercise is for, at a minimum, the lesser of (i) 10,000
Common Shares or (ii) the remaining number of Common Shares which the
registered holder of this Warrant has the right to purchase thereunder. Upon
the expiration of the applicable period for exercise of this Warrant, this
Warrant shall no longer entitle the holder thereof to acquire any shares of
Common Shares or any other security of the Company. For the purposes of this
Warrant, "Affiliates" or "Affiliate" of Holder shall mean any person or
entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with Holder.
"Control" in, of or by an Affiliate requires ownership of more than fifty
percent (50%) of (i) voting stock of a company which issued voting stock, or
(ii) ownership interest in any enterprise; an entity or person is an
Affiliate only as long as control exists.
This Warrant initially is exercisable in whole or part as provided above
at a price of $0.25 per Share payable by wire transfer of collected funds,
subject to adjustment as provided in Article 5 hereof. Upon surrender of
this Warrant, with the annexed Subscription Form duly executed, together with
payment of the Purchase Price (as hereinafter defined) for the Common Shares
purchased, at the offices of the Company, the registered holder of this
Warrant shall be entitled to receive a certificate or certificates for all
the Common Shares.
<PAGE>
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable at the
option of the Holder hereof, in whole Common Shares only (but not as to
fractional Common Shares underlying this Warrant), during any period in
which this Warrant may be exercised as set forth above.
If this Warrant is exercised in part only, the Company, upon surrender of
this Warrant for cancellation, shall execute and deliver a new Warrant of
like tenor evidencing the right of the holder to purchase the balance of
the Common Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES
Upon the exercise of this Warrant, the issuance of certificates for Common
Shares underlying this Warrant shall be made forthwith (and in any event
within five business days thereafter) without charge to the Holder hereof
including, without limitation, any tax which may be payable in respect of
the issuance thereof, and such certificates shall (subject to the
provisions of Article 3 hereof) be issued in the name of, or in such names
as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The certificates
representing the Common Shares underlying this Warrant shall be executed on
behalf of the Company by the manual or facsimile signature of one of the
present or any future Chairman or President of the Company and any present
or future Vice President or Secretary of the Company. Upon transfer of
this Warrant in whole or in part to an Affiliate of Holder, such transferee
shall be entitled to all the rights of a Holder hereof.
3. RESTRICTION ON TRANSFER OF WARRANT AND COMMON SHARES
The Holder of this Warrant, by its acceptance hereof, covenants and agrees
that this Warrant and the Common Shares are being acquired as an investment
and not with a view to the distribution thereof, and that the Warrant may
not be exercised, and neither the Warrant nor the Shares may be sold,
transferred, assigned, hypothecated or otherwise disposed of (other than to
an Affiliate of Holder), in whole or in part unless in the opinion of
counsel reasonably concurred in by the Company's counsel such transfer is
in compliance with all applicable securities laws, after which this Warrant
and the Common Shares shall again be subject to the restrictions contained
in this Article 3.
Page 2
<PAGE>
4. PRICE
4.1. INITIAL AND ADJUSTED PURCHASE PRICE. The initial purchase price shall
be $0.25 per Share. The adjusted purchase price shall be the price
which shall result from time to time from any and all adjustments of
the initial purchase price in accordance with the provisions of
Article 5 hereof.
4.2. PURCHASE PRICE. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon
the context.
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF COMMON SHARES
5.1. SUBDIVISION AND COMBINATION
In case the Company shall at any time subdivide or combine the
outstanding Common Shares, the Purchase Price shall forthwith be
proportionately decreased in the case of subdivision or increased
in the case of combination.
5.2. RECLASSIFICATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification or change of the outstanding Common
Shares (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or
combination), or in the case of any consolidation of the Company with,
or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or
change of the outstanding Common Shares, except a change as a result
of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to
another corporation of the property of the Company as an entirety, the
Holder of this Warrant shall thereafter have the right to purchase
upon the exercise of this Warrant the kind and number of shares of
stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as
if the Holder were the owner of the Common Shares underlying this
Warrant immediately prior to any such events at the Purchase Price in
effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if such Holder
had exercised this Warrant.
6. EXCHANGE AND REPLACEMENT OF WARRANT
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company for
new Warrants of like tenor and date representing in the aggregate the right
to purchase the same number of Common Shares
Page 3
<PAGE>
as are purchasable hereunder in such denominations as shall be designated
by the Holder hereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case
of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
7. ELIMINATION OF FRACTIONAL INTERESTS
The Company shall not be required to issue certificates representing
fractions of Common Shares on the exercise of this Warrant, nor shall it
be required to issue scrip or pay cash in lieu of fractional interests,
it being the intent of the parties that all fractional interests shall
be eliminated.
8. RESERVATION AND LISTING OF SECURITIES
The Company shall at all times reserve and keep available out of its
authorized Common Shares, solely for the purpose of issuance upon the
exercise of this Warrant, such number of Common Shares as shall be issuable
upon the exercise hereof and thereof. The Company covenants and agrees
that, upon exercise of this Warrant and payment of the Purchase Price
therefor, all Shares issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable.
9. NOTICES
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly given when delivered, or
mailed by registered or certified mail, return receipt requested:
9.1. If to the registered Holder of this Warrant, to the address of such
Holder as shown on the books of the Company; or
9.2. If to the Company, to the address set forth on the first page of this
Warrant or to such other address as the Company may designate by
notice to the Holders.
10. SUCCESSORS
All the covenants, agreements, representations and warranties contained in
this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributors,
Page 4
<PAGE>
successors and assigns. Assignability of registration rights is limited
under the terms of this Warrant.
11. HEADINGS
The Article and Section headings in this Warrant are inserted for purposes
of convenience and shall have no substantive effect.
12. LAW GOVERNING
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas.
WITNESS the seal of the Company and the signature of its duly authorized
Officer.
SI DIAMOND TECHNOLOGY, INC.
By:
-----------------------------
Douglas P. Baker
Vice President and
Chief Financial Officer
Page 5
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
TO: SI DIAMOND TECHNOLOGY, INC.
The undersigned hereby irrevocably exercises the right to purchase
__________________ of the shares of Common Stock of SI Diamond Technology,
Inc., a Texas corporation, evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all
in accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of the such Common Stock, except in accordance with provisions of
Section 3 of the Warrant, and consents that the following legend may be
affixed to the certificates for the Common Stock hereby subscribed for, if
such legend is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be sold,
transferred, pledged, hypothecated or otherwise disposed of until
either (i) a registration statement under the Securities Act and
applicable state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable state securities laws is available in
connection with such offer, sale or transfer."
The undersigned requests that certificates for such shares be issued, and a
warrant representing any unexercised portion thereof be issued, pursuant to the
Warrant in the name of the Registered Holder and delivered to the undersigned
at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature of Registered Holder
- --------------------------------------------------------------------------------
Name of Registered Holder (Print)
- --------------------------------------------------------------------------------
Address
Page 6
<PAGE>
EXHIBIT 4.11
THE SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.
WARRANT
SI DIAMOND TECHNOLOGY, INC.
The Transferability of this Warrant is Restricted
as Provided in Article 3
FOR GOOD AND VALUABLE consideration, the receipt of which is hereby
acknowledged by SI DIAMOND TECHNOLOGY, INC., 3006 Longhorn Boulevard, Austin,
Texas 78758, a Texas corporation (the "Company"), First London Securities
Corporation ("Holder"), is hereby granted the right to purchase, at the
initial exercise price of $0.25 per share, 100,000 shares of the Company's
common stock, $.001 par value (the "Common Shares").
Subject to the further terms hereof, this Warrant shall be exercisable
in whole or in part at any time and from time to time prior to 11:59 p.m.
(Austin time) on October 29, 1999. This Warrant shall be exercisable only in
the event that the exercise is for, at a minimum, the lesser of (i) 10,000
Common Shares or (ii) the remaining number of Common Shares which the
registered holder of this Warrant has the right to purchase thereunder. Upon
the expiration of the applicable period for exercise of this Warrant, this
Warrant shall no longer entitle the holder thereof to acquire any shares of
Common Shares or any other security of the Company. For the purposes of this
Warrant, "Affiliates" or "Affiliate" of Holder shall mean any person or
entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with Holder.
"Control" in, of or by an Affiliate requires ownership of more than fifty
percent (50%) of (i) voting stock of a company which issued voting stock, or
(ii) ownership interest in any enterprise; an entity or person is an
Affiliate only as long as control exists.
This Warrant initially is exercisable in whole or part as provided above
at a price of $0.25 per Share payable by wire transfer of collected funds,
subject to adjustment as provided in Article 5 hereof. Upon surrender of
this Warrant, with the annexed Subscription Form duly executed, together with
payment of the Purchase Price (as hereinafter defined) for the Common Shares
purchased, at the offices of the Company, the registered holder of this
Warrant shall be entitled to receive a certificate or certificates for all
the Common Shares.
<PAGE>
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable at the
option of the Holder hereof, in whole Common Shares only (but not as to
fractional Common Shares underlying this Warrant), during any period in
which this Warrant may be exercised as set forth above.
If this Warrant is exercised in part only, the Company, upon surrender of
this Warrant for cancellation, shall execute and deliver a new Warrant of
like tenor evidencing the right of the holder to purchase the balance of
the Common Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES
Upon the exercise of this Warrant, the issuance of certificates for Common
Shares underlying this Warrant shall be made forthwith (and in any event
within five business days thereafter) without charge to the Holder hereof
including, without limitation, any tax which may be payable in respect of
the issuance thereof, and such certificates shall (subject to the
provisions of Article 3 hereof) be issued in the name of, or in such names
as may be directed by, the Holder hereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The certificates
representing the Common Shares underlying this Warrant shall be executed on
behalf of the Company by the manual or facsimile signature of one of the
present or any future Chairman or President of the Company and any present
or future Vice President or Secretary of the Company. Upon transfer of
this Warrant in whole or in part to an Affiliate of Holder, such transferee
shall be entitled to all the rights of a Holder hereof.
3. RESTRICTION ON TRANSFER OF WARRANT AND COMMON SHARES
The Holder of this Warrant, by its acceptance hereof, covenants and agrees
that this Warrant and the Common Shares are being acquired as an investment
and not with a view to the distribution thereof, and that the Warrant may
not be exercised, and neither the Warrant nor the Shares may be sold,
transferred, assigned, hypothecated or otherwise disposed of (other than to
an Affiliate of Holder), in whole or in part unless in the opinion of
counsel reasonably concurred in by the Company's counsel such transfer is
in compliance with all applicable securities laws, after which this Warrant
and the Common Shares shall again be subject to the restrictions contained
in this Article 3.
Page 2
<PAGE>
4. PRICE
4.1. INITIAL AND ADJUSTED PURCHASE PRICE. The initial purchase price shall
be $0.25 per Share. The adjusted purchase price shall be the price
which shall result from time to time from any and all adjustments of
the initial purchase price in accordance with the provisions of
Article 5 hereof.
4.2. PURCHASE PRICE. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon
the context.
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF COMMON SHARES
5.1. SUBDIVISION AND COMBINATION
In case the Company shall at any time subdivide or combine the
outstanding Common Shares, the Purchase Price shall forthwith be
proportionately decreased in the case of subdivision or increased
in the case of combination.
5.2. RECLASSIFICATION, CONSOLIDATION, MERGER, ETC.
In case of any reclassification or change of the outstanding Common
Shares (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or
combination), or in the case of any consolidation of the Company with,
or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or
change of the outstanding Common Shares, except a change as a result
of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to
another corporation of the property of the Company as an entirety, the
Holder of this Warrant shall thereafter have the right to purchase
upon the exercise of this Warrant the kind and number of shares of
stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance
as if the Holder were the owner of the Common Shares underlying this
Warrant immediately prior to any such events at the Purchase Price in
effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if such Holder
had exercised this Warrant.
6. EXCHANGE AND REPLACEMENT OF WARRANT
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company for
new Warrants of like tenor and date representing in the aggregate the right
to purchase the same number of Common Shares
Page 3
<PAGE>
as are purchasable hereunder in such denominations as shall be designated
by the Holder hereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case
of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
7. ELIMINATION OF FRACTIONAL INTERESTS
The Company shall not be required to issue certificates representing
fractions of Common Shares on the exercise of this Warrant, nor shall it
be required to issue scrip or pay cash in lieu of fractional interests,
it being the intent of the parties that all fractional interests shall
be eliminated.
8. RESERVATION AND LISTING OF SECURITIES
The Company shall at all times reserve and keep available out of its
authorized Common Shares, solely for the purpose of issuance upon the
exercise of this Warrant, such number of Common Shares as shall be issuable
upon the exercise hereof and thereof. The Company covenants and agrees
that, upon exercise of this Warrant and payment of the Purchase Price
therefor, all Shares issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable.
9. NOTICES
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly given when delivered,
or mailed by registered or certified mail, return receipt requested:
9.1. If to the registered Holder of this Warrant, to the address of such
Holder as shown on the books of the Company; or
9.2. If to the Company, to the address set forth on the first page of this
Warrant or to such other address as the Company may designate by
notice to the Holders.
10. SUCCESSORS
All the covenants, agreements, representations and warranties contained in
this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributors,
Page 4
<PAGE>
successors and assigns. Assignability of registration rights is limited
under the terms of this Warrant.
11. HEADINGS
The Article and Section headings in this Warrant are inserted for purposes
of convenience and shall have no substantive effect.
12. LAW GOVERNING
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas.
WITNESS the seal of the Company and the signature of its duly authorized
Officer.
SI DIAMOND TECHNOLOGY, INC.
By:
----------------------------
Douglas P. Baker
Vice President and
Chief Financial Officer
Page 5
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
TO: SI DIAMOND TECHNOLOGY, INC.
The undersigned hereby irrevocably exercises the right to purchase
__________________ of the shares of Common Stock of SI Diamond Technology,
Inc., a Texas corporation, evidenced by the attached Warrant, and herewith
makes payment of the Exercise Price with respect to such shares in full, all
in accordance with the conditions and provisions of said Warrant.
The undersigned agrees not to offer, sell, transfer or otherwise dispose
of any of the such Common Stock, except in accordance with provisions of
Section 3 of the Warrant, and consents that the following legend may be
affixed to the certificates for the Common Stock hereby subscribed for, if
such legend is applicable:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities law, and may not be sold,
transferred, pledged, hypothecated or otherwise disposed of until
either (i) a registration statement under the Securities Act and
applicable state securities laws shall have become effective with
regard thereto, or (ii) an exemption from registration under the
Securities Act or applicable state securities laws is available in
connection with such offer, sale or transfer."
The undersigned requests that certificates for such shares be issued,
and a warrant representing any unexercised portion thereof be issued,
pursuant to the Warrant in the name of the Registered Holder and delivered
to the undersigned at the address set forth below:
Dated:
- --------------------------------------------------------------------------------
Signature of Registered Holder
- --------------------------------------------------------------------------------
Name of Registered Holder (Print)
- --------------------------------------------------------------------------------
Address
Page 6
<PAGE>
EXHIBIT 10.18
PATENT ASSIGNMENT AND ROYALTY AGREEMENT
THIS PATENT ASSIGNMENT AND ROYALTY AGREEMENT (the "Agreement") is
entered into by and among ADVANCED TECHNOLOGY INCUBATOR, INC., a corporation
of Michigan, having its principal place of business at 5810 Long Court,
Austin, Texas 78730 (hereinafter "ASSIGNOR"), and ELECTRONIC BILLBOARD
TECHNOLOGY, INC., a corporation of Delaware, having its principal place of
business at 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758
(hereinafter "ASSIGNEE") (collectively the "Parties" or "parties").
WHEREAS, ASSIGNOR desires to assign the TECHNOLOGY to ASSIGNEE, and
ASSIGNEE desires to receive the assignments of the TECHNOLOGY from ASSIGNOR
in exchange for a one-time payment and a series of royalty payments;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
I Definitions
As used herein, the following terms shall have the meanings set forth
below:
1.1 TECHNOLOGY means ASSIGNOR'S LCD Technology pertaining to the
structure, enhancing optics, driving schemes, and mechanical assembly for
bill board applications including but not limited to the inventions and other
ideas as set forth in the PATENT or PATENTS.
1.2 PATENT or PATENTS means the United States Patent No. 5,469,187, and
all divisions, continuations, continuation-in-parts, renewals, reissues,
substitutes, and extensions thereof, and any related foreign patents and
patent applications claiming any part or whole of the TECHNOLOGY.
1.3 PRODUCTS means any and all products which are based in whole or in
part on the PATENTS or on the TECHNOLOGY.
1.4 EFFECTIVE DATE shall be October 6, 1998.
1.5 GROSS REVENUES means revenues received by ASSIGNEE from third
parties as a direct result of the sale or lease of PRODUCTS, excluding any
taxes, levies, customs and duties, less any amounts refunded to such third
parties. Such revenues include any advertising revenues received by ASSIGNEE
from such third parties and generated directly through the use of a PRODUCT
to display the advertising. Subject to Section 9.1, GROSS REVENUES also
includes any fees, royalties, or other income received by ASSIGNEE from a
third party for a license or sublicense of the PATENTS or TECHNOLOGY.
<PAGE>
II Assignment
2.1 Upon payment by ASSIGNEE to ASSIGNOR of Two Hundred Thousand
Dollars ($200,000), ASSIGNOR will assign to ASSIGNEE the entire right, title
and interest in the PATENTS and TECHNOLOGY by executing the Assignment in
Exhibit A attached hereto.
III Royalty Payments
3.1 ASSIGNEE hereby agrees to pay ASSIGNOR a five percent (5%) royalty
on the GROSS REVENUES.
IV Patenting
4.1 Subsequent to execution of the Assignment in Exhibit A, ASSIGNEE or
its designee will pay all application, maintenance, attorney's and other fees
for the preparation, prosecution, and maintenance of the PATENTS
(collectively, the "PATENT FEES"). If, during this time period, ASSIGNEE
decides not to pay the PATENT FEES, then ASSIGNEE will promptly notify
ASSIGNOR, and ASSIGNOR may pay such PATENT FEES and received reimbursement of
such PATENT FEES from ASSIGNEE.
4.2 Subject to execution of the Assignment Back in either Exhibit B or
Exhibit C, ASSIGNOR will pay all PATENT FEES.
V Payments and Reports
5.1 Not later than the last day of each January, April, July and
October, ASSIGNEE shall furnish to ASSIGNOR a written statement of all
amounts due hereunder for the quarterly periods ended the last days of the
preceding December, March, June and September, respectively, and shall pay to
ASSIGNOR all amounts due to ASSIGNOR. If no amount is accrued during any
quarterly period, a written statement to that effect shall be furnished upon
the request of ASSIGNOR.
5.2 Payments hereunder will be made to either ASSIGNOR or directly to
Dr. Zvi Yaniv, as directed by Dr. Zvi Yaniv.
VI Technical Support
6.1 ASSIGNOR agrees to furnish to ASSIGNEE all information, including,
but not limited to copies of all engineering drawings, specifications,
prototype models, etc. in ASSIGNOR'S possession, relating to the TECHNOLOGY.
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VII Representations and Warrants
7.1 ASSIGNOR hereby represents and warrants the following to be true:
(a) That all maintenance fees due to date have been paid on the
PATENTS.
(b) That ASSIGNOR'S rights with respect to the TECHNOLOGY and the
PATENTS are free from any license, pledge, lien, security
interest, conditional sales agreement, encumbrance or any other
charge and/or third party right.
(c) That ASSIGNOR has no knowledge of any third party that may have
infringed or violated any of ASSIGNOR'S rights in or with
respect to the TECHNOLOGY or the PATENTS, and that no conflict
or adverse claim with respect to the TECHNOLOGY or the PATENTS
exist.
(d) That the use of the TECHNOLOGY and the PATENTS as contemplated
hereunder and the implementation of the Parties' rights
hereunder do not violate or infringe any third parties' rights
whatsoever.
(e) That ASSIGNOR has the corporate power and authority to enter
into this Agreement, to bind itself and comply with all of its
obligations hereunder, and furthermore, has the full right and
authority to make the assignment hereunder, and the execution,
delivery and performance by ASSIGNOR of this Agreement will not
conflict with, give rise to, or result in, any breach or default
of any terms under any provision of law, regulation or agreement,
commitment, judgment or order to which ASSIGNOR is a party or by
which ASSIGNOR is bound.
(f) That ASSIGNOR has no knowledge of pending or threatened
litigation concerning the validity of the PATENTS.
VIII Termination
8.1 This Agreement is perpetual unless sooner terminated herein.
8.2 ASSIGNEE may terminate this Agreement at any time upon thirty (30)
days' written notice to ASSIGNOR.
8.3 If either Party shall be in default of any obligation hereunder, or
shall be adjudged bankrupt, or become insolvent, or make an assignment for
the benefit of creditors, or be placed in the hands of a receiver or trustee
in bankruptcy, the other Party may terminate this Agreement by giving thirty
(30) days written notice to the other Party, specifying the basis for
termination.
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If within sixty (60) days after the receipt of such notice, the Party
receiving notice shall remedy the condition forming the basis for
termination, such notice shall cease to be operative, and this Agreement
shall continue in full force.
8.4 The word "termination" and cognate words, such as "term" and
"terminate", used in this Agreement are to be read, except where the contrary
is specifically indicated, as omitting from their effect licenses, releases,
and agreements of non-assertion running in favor of customers or transferred
by ASSIGNEE prior to any termination of all which survive any termination to
the degree necessary to permit their complete fulfillment or discharge.
8.5 Subject to Section 8.9, ASSIGNEE will assign the PATENT and
TECHNOLOGY back to ASSIGNOR if either (i) this Agreement is terminated under
Section 8.2, or (ii) this Agreement is terminated by ASSIGNOR under Section
8.3.
8.6 If any one of the following four (4) conditions occur, then
ASSIGNEE will assign the PATENTS and TECHNOLOGY back to ASSIGNOR by executing
one of the Assignments Back attached hereto as Exhibit B and Exhibit C; the
four (4) conditions are either (i) Dr. Zvi Yaniv has continually managed the
development of the billboard and ASSIGNEE has failed to sell or lease a
billboard within one (1) year of the completion of a bill board prototype, or
(ii) ASSIGNEE has failed to sell or lease a billboard within three (3) years
after Dr. Zvi Yaniv has discontinued managing the development of the
billboard, or (iii) ASSIGNEE has failed to pay at least Five Hundred Thousand
Dollars ($500,000) in royalties at the end of two (2) years after the date of
the first sale or lease of a billboard, or (iv) following this initial
two-year period, the total royalty paid by ASSIGNEE to ASSIGNOR during any
subsequent year is less than Five Hundred Thousand Dollars ($500,000).
Section 8.9 determines which form of the Assignment Back, Exhibit B or
Exhibit C, should be executed. Simultaneously with ASSIGNEE'S execution of
the Assignment Back to ASSIGNOR, ASSIGNOR will grant to ASSIGNEE a
non-exclusive world-wide license under the PATENTS and TECHNOLOGY to make,
have made, use, sell, lease, and import PRODUCTS, as well as the right to
sublicense the PATENTS and TECHNOLOGY to third parties, such license also to
include a five percent (5%) royalty on all GROSS REVENUE achieved by ASSIGNEE
under the licenses.
8.7 ASSIGNOR may terminate this Agreement if the payment due under
Section 2.1 is not received by ASSIGNOR on or before February 15, 1999.
8.8 If this Agreement is terminated at any time for any reason, then
ASSIGNEE will return to ASSIGNOR all materials, prototype, drawings, designs,
schematics, computer files, specifications, and all other items which include
or are based in whole or in part on the PATENTS or the TECHNOLOGY, except
that ASSIGNEE may retain possession of such materials, prototypes, drawings,
designs, schematics, computer files, specifications, and all other items
which include or are based in whole or in part on the PATENTS or the
TECHNOLOGY if ASSIGNEE retains a non-exclusive license to the PATENTS and
TECHNOLOGY in accordance with Section 8.6.
4
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8.9 If ASSIGNEE assigns back to ASSIGNOR the PATENTS and TECHNOLOGY
under Section 8.5 before the first sale or lease of a billboard by ASSIGNEE,
then ASSIGNEE will also assign any improvements in the PATENTS or TECHNOLOGY
made by ASSIGNEE by execution of the Assignment Back in Exhibit B attached
hereto; and ASSIGNOR will reimburse ASSIGNEE for any and all expenses
incurred by ASSIGNEE in developing the improvements, including, but not
limited to, expenses related to materials, man-hours expected, subcontracting
fees, and patent prosecution. If ASSIGNEE assigns back to ASSIGNOR, the
PATENTS and TECHNOLOGY under Section 8.5 after the first sale or lease of a
billboard by ASSIGNEE, then ASSIGNEE will solely assign to ASSIGNOR the
PATENTS and TECHNOLOGY by execution of the Assignment Back in Exhibit C
attached hereto.
IX Assignment of Agreement
9.1 ASSIGNEE may assign its rights under this Agreement to (1) an
affiliated company for the purpose of commercialization of the TECHNOLOGY, or
(2) EBT Acquisition Company. The royalty provisions of Sections 3.1 and 8.6
shall apply to the entity receiving the rights from ASSIGNEE, but ASSIGNEE
will not owe ASSIGNOR any further transaction fees, royalties, licensing or
sublicensing fees, or any other payments for such a transfer of rights.
9.2 All of the provisions of this Agreement apply fully to each
corporate affiliate of ASSIGNEE, and the terms and obligation of this
Agreement are fully enforceable against all successors and assigns of
ASSIGNEE, and ASSIGNOR has the right to directly enforce the rights and
obligations of this Agreement against any successors or assigns of ASSIGNEE.
X Severability
10.1 If any paragraph, provision, or claims thereof in this Agreement
shall be found or be held to be invalid or unenforceable in any jurisdiction
in which this Agreement is being performed, the remainder of this Agreement
shall be valid and enforceable and the parties shall negotiate, in good
faith, a substitute, valid and enforceable provision which most nearly
effects the Parties' intent in entering into this Agreement.
XI Waiver, Integration, Alteration
11.1 The failure of either party to enforce any provision of this
Agreement shall not be deemed a waiver of such provision.
11.2 This Agreement represents the entire understanding between the
Parties, and supersedes all other agreements, express or implied, between the
Parties concerning PATENTS and TECHNOLOGY.
11.3 A provision of this Agreement may be altered only by a writing
signed by both Parties.
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XII Applicable Law
12.1 This Agreement shall be construed in accordance with the
substantive laws of the State of Texas. Any and all litigation involving
either Party's rights and duties under this Agreement shall be brought
exclusively in a court of competent jurisdiction in the State of Texas.
IN WITNESS WHEREOF the Parties have entered this Agreement to be
executed by their duly authorized officers on the respective dates and at the
respective places hereinafter set forth.
ASSIGNEE:
ELECTRONIC BILLBOARD TECHNOLOGY, INC.
By /s/ MARC W. ELLER
----------------------------
Marc Eller, CEO
ASSIGNOR:
ADVANCED TECHNOLOGY INCUBATOR, INC.
By /s/ ZVI YANIV
----------------------------
Dr. Zvi Yaniv, CEO
6
<PAGE>
EXHIBIT A
ASSIGNMENT
THIS ASSIGNMENT, made and entered into as of the ____ Day of
___________, 1998, by and between ADVANCED TECHNOLOGY INCUBATOR, INC., a
corporation of Michigan, having is principal place of business at 5810 Long
Court, Austin, Texas 78730 (hereinafter "Assignor"), and ELECTRONIC BILLBOARD
TECHNOLOGY, INC., a corporation of Delaware, having its principal place of
business at 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758
(hereinafter "Assignee") (collectively the "Parties" or "parties").
NOW THEREFORE, for valuable consideration, the receipt of which is
hereby mutually acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1
TRANSFER AND ASSIGNMENT
1.1 Conveyance of Rights. Assignor hereby transfers, grants, conveys,
assigns, and relinquishes exclusively to the Assignee all of Assignor's
right, title, and interest (including to make, use, or sell under patent law;
to copy, adapt, distribute, display, and perform under copyright law; and to
use and disclose under trade secret law) in and to the PATENTS and TECHNOLOGY
as defined in the Patent Assignment and Royalty Agreement between the
parties, including, but not limited to U.S. Patent No. 5,469,187
(collectively, the "Intellectual Property Assets").
1.1.1 Assignor hereby transfers, grants, conveys, assigns, and
relinquishes exclusively to the Assignee all right, title and interest of
Assignor and all powers and privileges of Assignor, in, to, and under all
technical data, drawings, prototypes, engineering files, system
documentation, flow charts, and design specifications acquired or developed
by Assignor in connection with the development of the Intellectual Property
Assets.
1.2 Further Assurances. Assignor shall execute and deliver, from time
to time after the date hereof upon the request of the Assignee, such further
conveyance instruments, and take such further actions, as may be necessary or
desirable to evidence more fully the transfer of ownership of all the
Intellectual Property Assets to the Assignee, or the original ownership of
all the Intellectual Property Assets on the part of the Assignee, to the
fullest extent possible. Assignor therefore agrees to:
1. Execute, acknowledge, and deliver any affidavits or documents
of assignment and conveyance regarding the Intellectual Property
Assets;
2. Provide testimony in connection with any proceeding affecting
the right, title, or interest of the Assignee and to the
Intellectual Property Assets;
7
<PAGE>
3. Perform any other acts deemed necessary to carry out the intent
of this Assignment.
1.3 Acknowledgment of Rights. In furtherance of this Assignment,
Assignor hereby acknowledges that, from this date forward, the Assignee has
succeeded to all of Assignor's right, title, and standing to:
1. Receive all rights and benefits pertaining to the Intellectual
Property Assets, subject to the terms of this Assignment;
2. Institute and prosecute all suits and proceedings and take all
actions that the Assignee, in its sole discretion, may deem
necessary or proper to collect, assert, or enforce any claim,
right, or title of any kind in and to any and all of the
Intellectual Property Assets;
3. Defend and compromise any and all such actions, suits, or
proceedings relating to such transferred and assigned rights,
title, and interest, and do all other such acts and things in
relation thereto as the Assignee, in its sole discretion,
deems advisable.
1.4 Transfer of Materials. Assignor shall immediately surrender to the
Assignee all materials and work product in Assignor's possession or within
Assignor's control (including all copies thereof) directly related to the
Intellectual Property Assets.
SECTION 2
REPRESENTATIONS AND WARRANTIES
2.1 Each party represents and warrants to the other party that it has
obtained all necessary consents and has all necessary authority to carry out
the purposes and execute on behalf of their respective entities matters set
forth herein.
2.2 Subject to the terms of this Assignment, Assignor represents and
warrants that to the best of its knowledge and belief it has good and
marketable title to the Intellectual Property Assets, free and clear of any
and all licenses, liens, mortgages, encumbrances, pledges, security
interests, or changes of any nature whatsoever.
SECTION 3
CONFIDENTIAL INFORMATION
3.1 Assignor acknowledges that the Intellectual Property Assets may
contain confidential and proprietary information, and Assignor agrees to
maintain such information (including all portions or copies thereof)
confidential in the same manner as its own proprietary information is
maintained, not to disclose the information (or any portion or copy thereof)
to any
8
<PAGE>
third party, and not to use such information (or any portion or copy thereof)
for any purpose except as authorized under this Assignment.
SECTION 4
MISCELLANEOUS
4.1 This Assignment shall insure to the benefit of, and be binding
upon, the parties hereto together with their respective legal
representatives, successors, and assigns.
4.2 This Assignment shall be governed by, and construed in accordance
with Texas law.
4.3 This Assignment merges, supersedes, and replaces all prior and
contemporaneous agreements, assurances, representations, and communications
between or among the parties hereto concerning the matters set forth in
Section 1.1 above.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment the
day and year first above written.
ASSIGNOR:
ADVANCED TECHNOLOGY INCUBATOR, INC.
By
-----------------------------
Zvi Yaniv, President
ASSIGNEE:
ELECTRONIC BILLBOARD TECHNOLOGY,
INC.
By
-----------------------------
Marc Eller, CEO
9
<PAGE>
EXHIBIT B
ASSIGNMENT BACK
THIS ASSIGNMENT BACK, made and entered into as of the ____ Day of
___________, 1998, by and between ADVANCED TECHNOLOGY INCUBATOR, INC., a
corporation of Michigan, having is principal place of business at 5810 Long
Court, Austin, Texas 78730 (hereinafter "ATI"), and ELECTRONIC BILLBOARD
TECHNOLOGY, INC., a corporation of Delaware, having its principal place of
business at 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758
(hereinafter "EBT") (collectively the "Parties" or "parties").
NOW THEREFORE, for valuable consideration, the receipt of which is
hereby mutually acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1
TRANSFER AND ASSIGNMENT
1.1 Conveyance of Rights. EBT hereby transfers, grants, conveys,
assigns, and relinquishes exclusively to ATI all of EBT's right, title, and
interest (including to make, use, or sell under patent law; to copy, adapt,
distribute, display, and perform under copyright law; and to use and disclose
under trade secret law) in and to the PATENTS and TECHNOLOGY as defined in
the Patent Assignment and Royalty Agreement between the parties, including,
but not limited to U.S. Patent No. 5,469,187 and any improvements made
thereon by EBT (collectively, the "Intellectual Property Assets").
1.1.1 EBT hereby transfers, grants, conveys, assigns, and
relinquishes exclusively to ATI all right, title and interest of EBT and all
powers and privileges of EBT, in, to, and under all technical data, drawings,
prototypes, engineering files, system documentation, flow charts, and design
specifications acquired or developed by EBT in connection with the
development of the Intellectual Property Assets.
1.2 Further Assurances. EBT shall execute and deliver, from time to
time after the date hereof upon the request of ATI, such further conveyance
instruments, and take such further actions, as may be necessary or desirable
to evidence more fully the transfer of ownership of all the Intellectual
Property Assets to ATI, or the original ownership of all the Intellectual
Property Assets on the part of ATI, to the fullest extent possible. EBT
therefore agrees to:
1. Execute, acknowledge, and deliver any affidavits or documents
of assignment and conveyance regarding the Intellectual Property
Assets;
2. Provide testimony in connection with any proceeding affecting
the right, title, or interest of ATI and to the Intellectual
Property Assets;
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3. Perform any other acts deemed necessary to carry out the intent
of this Assignment Back.
1.3 Acknowledgment of Rights. In furtherance of this Assignment Back,
EBT hereby acknowledges that, from this date forward, ATI has succeeded to
all of EBT's right, title, and standing to:
1. Receive all rights and benefits pertaining to the Intellectual
Property Assets, subject to the terms of this Assignment Back;
2. Institute and prosecute all suits and proceedings and take all
actions that ATI, in its sole discretion, may deem necessary or
proper to collect, assert, or enforce any claim, right, or title
of any kind in and to any and all of the Intellectual Property
Assets;
3. Defend and compromise any and all such actions, suits, or
proceedings relating to such transferred and assigned rights,
title, and interest, and do all other such acts and things in
relation thereto as ATI, in its sole discretion, deems advisable.
1.4 Transfer of Materials. EBT shall immediately surrender to ATI all
materials and work product in EBT's possession or within EBT's control
(including all copies thereof) directly related to the Intellectual Property
Assets.
SECTION 2
REPRESENTATIONS AND WARRANTIES
2.1 Each party represents and warrants to the other party that it has
obtained all necessary consents and has all necessary authority to carry out
the purposes and execute on behalf of their respective entities matters set
forth herein.
2.2 Subject to the terms of this Assignment Back, EBT represents and
warrants that to the best of its knowledge and belief it has good and
marketable title to the Intellectual Property Assets, free and clear of any
and all licenses, liens, mortgages, encumbrances, pledges, security
interests, or changes of any nature whatsoever.
SECTION 3
CONFIDENTIAL INFORMATION
3.1 EBT acknowledges that the Intellectual Property Assets may contain
confidential and proprietary information, and EBT agrees to maintain such
information (including all portions or copies thereof) confidential in the
same manner as its own proprietary information is
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maintained, not to disclose the information (or any portion or copy thereof)
to any third party, and not to use such information (or any portion or copy
thereof) for any purpose except as authorized under this Assignment Back.
SECTION 4
MISCELLANEOUS
4.1 This Assignment Back shall insure to the benefit of, and be binding
upon, the parties hereto together with their respective legal
representatives, successors, and assigns.
4.2 This Assignment Back shall be governed by, and construed in
accordance with Texas law.
4.3 This Assignment Back merges, supersedes, and replaces all prior and
contemporaneous agreements, assurances, representations, and communications
between or among the parties hereto concerning the matters set forth in
Section 1.1 above.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Back the day and year first above written.
ATI:
ADVANCED TECHNOLOGY INCUBATOR, INC.
By
------------------------------
Zvi Yaniv, President
EBT:
ELECTRONIC BILLBOARD TECHNOLOGY, INC.
By
------------------------------
Marc Eller, CEO
12
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EXHIBIT C
ASSIGNMENT BACK
THIS ASSIGNMENT BACK, made and entered into as of the ____ Day of
___________, 1998, by and between ADVANCED TECHNOLOGY INCUBATOR, INC., a
corporation of Michigan, having is principal place of business at 5810 Long
Court, Austin, Texas 78730 (hereinafter "ATI"), and ELECTRONIC BILLBOARD
TECHNOLOGY, INC., a corporation of Delaware, having its principal place of
business at 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758
(hereinafter "EBT") (collectively the "Parties" or "parties").
NOW THEREFORE, for valuable consideration, the receipt of which is
hereby mutually acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1
TRANSFER AND ASSIGNMENT
1.1 Conveyance of Rights. EBT hereby transfers, grants, conveys,
assigns, and relinquishes exclusively to ATI all of EBT's right, title, and
interest (including to make, use, or sell under patent law; to copy, adapt,
distribute, display, and perform under copyright law; and to use and disclose
under trade secret law) in and to the PATENTS and TECHNOLOGY as defined in
the Patent Assignment and Royalty Agreement between the parties, including,
but not limited to U.S. Patent No. 5,469,187 (collectively, the "Intellectual
Property Assets").
1.1.1 EBT hereby transfers, grants, conveys, assigns, and
relinquishes exclusively to ATI all right, title and interest of EBT and all
powers and privileges of EBT, in, to, and under all technical data, drawings,
prototypes, engineering files, system documentation, flow charts, and design
specifications acquired or developed by EBT in connection with the
development of the Intellectual Property Assets.
1.2 Further Assurances. EBT shall execute and deliver, from time to
time after the date hereof upon the request of ATI, such further conveyance
instruments, and take such further actions, as may be necessary or desirable
to evidence more fully the transfer of ownership of all the Intellectual
Property Assets to ATI, or the original ownership of all the Intellectual
Property Assets on the part of ATI, to the fullest extent possible. EBT
therefore agrees to:
1. Execute, acknowledge, and deliver any affidavits or documents
of assignment and conveyance regarding the Intellectual
Property Assets;
2. Provide testimony in connection with any proceeding affecting
the right, title, or interest of ATI and to the Intellectual
Property Assets;
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3. Perform any other acts deemed necessary to carry out the intent
of this Assignment Back.
1.3 Acknowledgment of Rights. In furtherance of this Assignment Back,
EBT hereby acknowledges that, from this date forward, ATI has succeeded to
all of EBT's right, title, and standing to:
1. Receive all rights and benefits pertaining to the Intellectual
Property Assets, subject to the terms of this Assignment Back;
2. Institute and prosecute all suits and proceedings and take all
actions that ATI, in its sole discretion, may deem necessary
or proper to collect, assert, or enforce any claim, right, or
title of any kind in and to any and all of the Intellectual
Property Assets;
3. Defend and compromise any and all such actions, suits, or
proceedings relating to such transferred and assigned rights,
title, and interest, and do all other such acts and things in
relation thereto as ATI, in its sole discretion, deems advisable.
1.4 Transfer of Materials. EBT shall immediately surrender to ATI all
materials and work product in EBT's possession or within EBT's control
(including all copies thereof) directly related to the Intellectual Property
Assets.
SECTION 2
REPRESENTATIONS AND WARRANTIES
2.1 Each party represents and warrants to the other party that it has
obtained all necessary consents and has all necessary authority to carry out
the purposes and execute on behalf of their respective entities matters set
forth herein.
2.2 Subject to the terms of this Assignment Back, EBT represents and
warrants that to the best of its knowledge and belief it has good and
marketable title to the Intellectual Property Assets, free and clear of any
and all licenses, liens, mortgages, encumbrances, pledges, security
interests, or changes of any nature whatsoever.
SECTION 3
CONFIDENTIAL INFORMATION
3.1 EBT acknowledges that the Intellectual Property Assets may contain
confidential and proprietary information, and EBT agrees to maintain such
information (including all portions or copies thereof) confidential in the
same manner as its own proprietary information is
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maintained, not to disclose the information (or any portion or copy thereof)
to any third party, and not to use such information (or any portion or copy
thereof) for any purpose except as authorized under this Assignment Back.
SECTION 4
MISCELLANEOUS
4.1 This Assignment Back shall insure to the benefit of, and be binding
upon, the parties hereto together with their respective legal
representatives, successors, and assigns.
4.2 This Assignment Back shall be governed by, and construed in
accordance with Texas law.
4.3 This Assignment Back merges, supersedes, and replaces all prior and
contemporaneous agreements, assurances, representations, and communications
between or among the parties hereto concerning the matters set forth in
Section 1.1 above.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Back the day and year first above written.
ATI:
ADVANCED TECHNOLOGY INCUBATOR, INC.
By
-----------------------------
Zvi Yaniv, President
EBT:
ELECTRONIC BILLBOARD TECHNOLOGY, INC.
By
-----------------------------
Marc Eller, CEO
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EXHIBIT 10.20
LEASE AGREEMENT
Existing Building
(Multi-Tenant)
STATE OF TEXAS
COUNTY OF Travis
----------
This Lease Agreement ("this lease"), made and entered into by and between
Industrial Properties Corporation ("Landlord") and SI Diamond Technology, Inc.
("Tenant");
1. Premises and Terms. In consideration of the obligation of Tenant to
pay rent as provided in this lease, and in consideration of the other terms,
provisions, and covenants of this lease, Landlord hereby demises and leases to
Tenant, and Tenant hereby takes from landlord certain premises described and
delineated on the demising plan contained in Exhibit A attached hereto and
incorporated herein by this reference, situated within a building (the
"Building") located on certain real property (the "Land") within the above-named
County and State and more particularly described as follows:
Approximately 9,667 square feet of space located at 3006 Longhorn
Boulevard, Suites 107, 108 and 109, Austin, Travis County, Texas,
situated on lot 1, block B, resubdivision of Industrial Terrace,
section 3,
together with the other Improvements erected upon said premises (the said
premises and the Improvements located therein being hereinafter referred to as
the "Premises").
To Have and to Hold the Premises, subject to the other terms and provisions
of this lease, for a term commencing on June 1, 1998 and ending 60 months
thereafter. Tenant acknowledges that it has inspected the Premises and accepts
the Premises in their present condition as suitable for the purpose for which
the Premises are leased. Tenant further acknowledges that no representations as
to the repair of the Premises, nor promises to alter, remodel, or improve the
Premises, have been made by Landlord, except for those expressly set forth in
this lease.
2. Rent. Tenant agrees to pay to Landlord rent for the Premises, without
deduction, set off, or abatement, for the term, at the rate of Seven thousand
fifty-six dollars and 91/100 **** Dollars ($7,056.91) per month. One such
monthly installment shall be due and payable on the commencement date recited
above, and a like monthly installment shall be due and payable in advance
without demand on or before the same day of each succeeding month during the
hereby demised term. However, if such commencement date should be a date other
than the first day of a calendar month, there shall be due and payable on said
commencement date as rent for the balance of the calendar month during which
said commence date shall fall, a sum equal to that portion of the rent for a
full month as herein provided which the number of days from said commencement
date to the end of the calender month during which said commencement date shall
fall bears to the total number of days in such month, and all succeeding
installments of rent shall be payable in advance on or before the first day of
each succeeding calendar month during the term. In addition, Tenant agrees to
deposit with Landlord on the date hereof the sum of Seven thousand two hundred
fifty and 25/100 Dollars ($7,250.25), which sum shall be held by Landlord,
without obligation for interest, as security for the performance of Tenant's
covenants and obligations under this lease, it being expressly understood and
agreed that such deposit is not an advance rental deposit or a measure of
Landlord's damages in case of Tenant's default. Upon the occurrence of any
event of default by Tenant, Landlord may, from time to time, without prejudice
to any other remedy provided herein as provided by law, use such fund to the
extent necessary to make good any arrears of rent and any other damage, injury,
expense, or liability caused by such event of default; and Tenant shall pay to
Landlord on demand the amount so applied in order to restore the security
deposit to its original amount. If there be no event of default by Tenant in
existence, any remaining balance of such deposit shall be returned by Landlord
to Tenant upon expiration of this lease. Notwithstanding anything contained in
this lease to the contrary, all amounts payable by Tenant to or on behalf of
Landlord under this lease, whether or not expressly denominated
<PAGE>
as rent, shall constitute rent for the purposes of this lease and for
purposes of section 502(b)(6) (or comparable provision of any future
bankruptcy law) of the Federal Bankruptcy Code, 11 U.S.C. Sections 101 et
seq. (the "Bankruptcy Code").
3. Disclaimer of Warranties. BY EXECUTION OF THIS LEASE, TENANT
ACKNOWLEDGES AND AGREES THAT EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE,
NEITHER LANDLORD NOR ANY OFFICER, PARTNER, AGENT, EMPLOYEE, OR REPRESENTATIVE OF
LANDLORD MAKES OR HAS MADE ANY WARRANTIES OR REPRESENTATIONS OR ANY KIND OR
CHARACTER, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, OR ANY PORTION
THEREOF, ITS PHYSICAL CONDITION, INCOME TO BE DERIVED THEREFROM, OR EXPENSES TO
BE INCURRED WITH RESPECT THERETO, ITS FITNESS OR SUITABILITY FOR ANY PARTICULAR
USE, OR ANY OTHER MATTER OR THING RELATING TO OR AFFECTING THE SAME. THERE ARE
NO ORAL AGREEMENTS, WARRANTIES, OR REPRESENTATIONS COLLATERAL TO OR AFFECTING
THE PREMISES OR ANY PORTION THEREOF, EXCEPT AS MAY BE OTHERWISE EXPRESSLY SET
FORTH IN THIS LEASE. LANDLORD AND TENANT EACH HEREBY AGREE THAT THE PREMISES
ARE LEASED IN AN AS IS CONDITION WITH ANY AND ALL LATENT OR PATENT DEFECTS. IN
NO EVENT SHALL TENANT HAVE THE RIGHT TO RECOVER CONSEQUENTIAL DAMAGES. TENANT
BY EXECUTION OF THIS LEASE, EXPRESSLY AGREES THAT LANDLORD HAS NOT MADE AND DOES
NOT MAKE ANY WARRANTIES WITH RESPECT TO THE PREMISES UPON WHICH AN ACTION UNDER
THE TEXAS DECEPTIVE TRADE PRACTICES ACT COULD BE BASED.
4. Use.
A. The Premises shall be used, to the extent permitted by applicable law,
only for general office purposes and, to the extent applicable, for the purpose
of receiving, storing, shipping, and selling (other than retail) products,
materials, and merchandise made and/or distributed by Tenant and for such other
lawful purposes as may be incidental thereto. Tenant shall at its own cost and
expense obtain and at all times maintain any and all licenses and permits
necessary for any such use. Tenant shall comply with all governmental laws,
ordinances, and regulations applicable to the use of the Premises by tenant and
shall promptly comply with all governmental orders and directives for the
correction, prevention, and abatement of nuisances in, upon, or connected with
the use of the Premises by tenant all at Tenant's sole expense. Without
Landlord's prior written consent, Tenant shall not receive, store, or otherwise
handle any product, material, or merchandise which is explosive or highly
inflammable or any material which may be corrosive or otherwise damaging to the
Premises or any appurtenances thereto. Tenant will not, without Landlord's
approval, permit the Premises to be used for any purpose which would render the
insurance thereon void or the insurance risk more hazardous or the premiums
therefor more expensive. In the event any such use of the Premises, or any part
thereof, whether approved by Landlord or not, shall ever cause the insurance
rates for policies carried by Landlord to increase, Tenant shall pay on demand
from Landlord, as additional rent, the full amount by which such insurance rates
increased solely as a result of Tenant's use, without regard to whether such
policy covers areas other than the Premises so long as such other covered areas
are adjacent thereto or otherwise affected by Tenant's hazardous use. Further,
Tenant will not introduce into the Premises or use therein any equipment or
fixtures which might be reasonably expected, due to excess weight, vibration, or
any other characteristic, to cause damage to the Premises or undue interference
with the occupancies of adjacent premises. Additionally, Tenant shall not store
any products, materials, or merchandise outside the exterior walls or interior
demising walls of the Premises without Landlord's prior written consent.
B. Without limiting the generality of the provisions of Paragraph 4.A
above, Tenant expressly agrees that (I) no activity will be conducted on the
Premises that will use or produce any "Hazardous Substance" (as hereinafter
defined), except for such activities as are part of the ordinary course of
Tenant's business activities (the "Permitted Activities"), provided said
Permitted Activities are at all times conducted in accordance with all
Environmental Laws and further provided that the Permitted Activities have been
approved in advance in writing by Landlord which approval shall not be
unreasonably withheld or delayed after disclosure to Landlord by Tenant of the
Hazardous Substances involved; (II) the Premises will not be used in any manner
for the storage of any Hazardous Substances except for the temporary storage of
such materials as are used in the ordinary course of Tenant's business (the
"Permitted Materials"), provided such Permitted Materials are at all times
properly stored in a manner and
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location meeting all Environmental Laws and further provided that the storage
of such Hazardous Substances is approved which approval shall not be
unreasonably withheld or delayed in advance in writing by Landlord after
disclosure to Landlord by Tenant of the Hazardous Substances involved; (III)
no portion of the Premises will be used as a landfill or a dump; (IV) Tenant
will not install any underground tanks of any type on the Premises or the
Land; (V) Tenant will not permit any Hazardous Substances to be brought onto,
stored, processed, disposed of on, released, discharged from (including
ground water contamination) or otherwise handled on the Premises, except for
the Permitted Materials which are used and disposed of (at a location other
than on the Land or Premises) in accordance with Environmental Law, and if so
brought or found located thereon, the same shall be immediately removed by
Tenant, at Tenant's sole cost and expense, with proper disposal (at a
location other than on the Land or Premises), and all required cleanup
procedures shall be diligently undertaken by Tenant pursuant to all
Environmental Laws. Landlord may condition any approval of Permitted
Activities or of Permitted Materials on compliance with such terms and
conditions as Landlord may reasonably deem appropriate, and may refuse to
grant its approval if the purposed Permitted Activities or the proposed
Permitted Materials require a permit, license, registration, hazardous waste
generator identification number, or other filing or approval under any
Environmental Law, or if, in Landlord's reasonable judgment, the propose
Permitted Activities or the proposed Permitted Materials would pose any
material adverse risk [see addendum 1]. Tenant shall immediately notify
Landlord should Tenant become aware of any Hazardous Substance or other
environmental problem or liability with respect to the Premises. Reasonable
amounts of copy machine toners and other normal office supplies as reasonably
necessary for the conduct of Tenant's regular office functions within the
Premises shall be considered Permitted Materials, and the normal use of such
office supplies and materials in the conduct of normal office operations
shall be considered Permitted Activities. For purposes of this lease
"Hazardous Substances" means any substance (i) the presence of which requires
removal, remediation, or investigation under any Environmental Law, (ii) that
is defined or classified as a hazardous waste, hazardous material, pollutant,
contaminant, or toxic or hazardous substance under any Environmental Law,
including without limitation, any hazardous substance within the meaning of
Section 101(14) of the Comprehensive Environmental Response, Compensation,
and Liability Act, as amended, 42 U.S.C. Section 9601(14), or (iii) that
contains or consists of gasoline, diesel fuel, oil, fuel oil, or other
petroleum hydrocarbons. Tenant shall indemnify and hold Landlord (and any
mortgagee and trustee under any deed of trust or mortgage on the Premises)
harmless from all claims, demands, actions, liabilities, costs (including
attorney's fees), expenses, damages and obligations of any nature arising
from or as a result of the use of the Premises by Tenant, its invitees,
agents, contractors or employees in violation of the foregoing provision
relating to Hazardous Substances. The foregoing indemnification shall
survive the termination or expiration of this lease.
5. Taxes.
A. Subject to the provisions of Paragraph 5.B, Landlord agrees to pay
before they become delinquent all taxes, assessments (both general and special),
or governmental charges (hereinafter collectively referred to as "taxes")
lawfully levied or assessed against the Premises or any part thereof; provided,
however, Landlord may, at its sole cost and expense (in its own name or in the
name of both Landlord and Tenant as Landlord may deem appropriate) dispute and
contest the same, and in such case such disputed item need not be paid until
finally adjudged to be valid and any right to appeal has lapsed. At the
conclusion of such contest, Landlord shall pay the items contested to the extent
that they are held valid, together with all items, court costs, interest, and
penalties relating thereto.
B. The maximum amount of taxes levied or assessed against the Premises
during any one real estate tax year to be paid by Landlord shall be those taxes
levied or assessed during the 1997 real estate tax year (the "maximum tax
amount"). If in any real estate tax year during the term, or any renewal or
extension, the taxes levied or assessed against the Building and Land are in an
amount which causes the portion thereof allocable to the Premises to exceed the
maximum tax amount, Landlord shall notify Tenant of the amount of taxes actually
paid by Landlord for such tax year, and the amount of the excess which is
payable by Tenant which excess shall be prorated between Tenant and all other
tenants of the Building based on Tenant's Share (hereinafter defined). Tenant
shall pay to Landlord on or before the payment date set forth in such notice
(which date shall be not less than ten (10) days from
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the date of such notice), as additional rent, the amount of such excess; and
the failure to pay such excess when due shall be treated as a failure to make
payment of rent when due. Any payment to be made pursuant to this Paragraph
5.B with respect to the real estate tax year in which this lease commences or
terminates shall bear the same ratio to the payment which would be required
to be made for the full tax year as that part of such tax year covered by the
term of this lease bears to a full tax year. Landlord's real estate tax
statements with respect to the Premises shall be made available for
inspection by Tenant At Landlord's offices during Landlord's business hours.
6. Landlord's Repair and Common Area Obligations.
A. Landlord shall at its expense maintain only the roof, foundation, and
the structural soundness of the exterior walls of the Building in good repair,
reasonable wear and tear excepted. Tenant shall repair and pay for any damage
caused by the negligence or willful misconduct of Tenant, or Tenant's employees,
agents, or invitees, or caused by Tenant's default hereunder. The term "walls"
as used herein shall not include windows, glass or plate glass, doors, or
special store fronts. Tenant shall promptly give Landlord written notice of any
defect or need for repairs, after which Landlord shall have a reasonable
opportunity to repair same or cure such defect. Landlord's liability hereunder
shall be limited to the cost of such repairs or curing such defect. In the
event the Premises have air conditioning installed therein on the date of this
lease, then Landlord represents that on the commencement date of this lease such
air-conditioning system shall be in good operating condition; provided, however,
that during the term of this lease Tenant shall at its own cost and expense
maintain such system in good operating condition, shall make all necessary
repairs, and upon termination of this lease shall deliver such system to
Landlord in good operating condition, ordinary wear and tear excepted.
B. Subject to the provisions of Paragraph 6.C, Landlord shall take
reasonable care of the grounds around the Building including exterior lighting,
mowing of grass, care of shrubs and trees, and general landscaping and will keep
the parking areas, driveways, and alleys in a reasonably clean, usable, and
sanitary condition.
C. In addition to and separate from the rent payable under Paragraph 2,
Tenant shall pay to Landlord Tenant's Share (hereinafter defined) of Maintenance
and Use Charge (as hereinafter defined), as adjusted from time to time, pursuant
to the provisions hereinafter stated. For purposes of this lease, the following
terms shall have the hereinafter indicated meanings:
(a) The phrase "Maintenance and Use Charge" shall mean, for each
calendar year (or portion thereof) during the term of this lease, the
aggregate of all costs, expenses and liabilities of every kind or nature
paid or incurred by Landlord in connection with the performance of its
obligations under Paragraph 6.B. In no event shall the phrase "Maintenance
and Use Charge" include any expenditure of cost attributable to capital
improvements or capital maintenance items.
(b) The term "Tenant's Share" shall refer to a fraction, the
numerator of which is the floor area (in square feet) of the Premises and
the denomination of which is the aggregate leaseable floor area (in square
feet) in all buildings (including the Building) now or hereafter situated
on the Land as of the first day of January for the relevant calendar year;
Landlord and Tenant hereby stipulate that Tenant's Share is 19.3%.
D. Monthly during the first year of the term of this lease, Tenant will
pay Landlord the sum of $193.34 per month, monthly in advance, as an initial
estimate of the Maintenance and Use Charge payable at the same time and place as
the rent is payable; provided, however, if the lease term does not begin on the
first day of a calendar month, Tenant shall pay a pro rata portion of such sum
for such partial month; such applicable amount being herein referred to as the
"Estimated Charge." Landlord shall have the right to adjust such monthly
estimate on an annual basis pursuant to Paragraph 6.E hereof.
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E. At the end of each calendar year occurring during the term of this
lease (and subsequent to the expiration or other termination of this lease if
such occur on a date other than the last day of a calendar year), Landlord will
give Tenant notice of the total amount(s) paid by Tenant for the relevant
calendar year together with the actual amount of Tenant's Share of the
Maintenance and Use Charge for such calendar year. If the actual amount of
Tenant's Share of the Maintenance and Use Charge with respect to such period
exceeds the aggregate amount(s) previously paid by Tenant with respect thereto
during such period, Tenant shall pay to Landlord the deficiency within ten (10)
days following notice from Landlord. However, if the aggregate amount(s)
previously paid by Tenant with respect thereto exceeds Tenant's Share of the
Maintenance and Use Charge for such period, then, at Landlord's election, such
surplus (net of any amounts then owing by Tenant to Landlord) shall be credited
against the next ensuing installment of the Maintenance and Use Charge due
hereunder by Tenant, or Landlord may refund such net surplus to Tenant within
thirty (30) days following Landlord's calculation of Tenant's Share of the
Maintenance and Use Charges with respect to each calendar year. Landlord shall
be entitled to adjust, in its reasonable discretion, the Estimated Charge, such
adjusted Estimated Charge to be payable on the first day of the second calendar
month immediately following Landlord's notice of such adjustment and to remain
in effect until further notice from Landlord.
7. Tenant's Repairs. Tenant shall, at its own cost and expense, keep all
other parts of the Premises, including but not limited to, windows, glass and
plate glass, doors (including overhead doors), any special store front, interior
walls and finish work, floors and floor covering, heating, ventilating and
air-conditioning systems, gutters, downspouts and protective posts therefor,
curbs, dock boards, dock bumpers, dock levelers, steps and landings, plumbing
work and fixtures, and gas, electric, water, and other utility lines, in good
condition and repair, ordinary wear and tear excepted, and shall take good
care of the Premises and its fixtures and suffer no waste. Tenant shall keep
the Premises free of all pest infestation, including, but not limited to,
termites and rodents, and shall maintain a regular pest control prevention
program. Except as set forth in the last sentence of this Paragraph 7,
Tenant shall not be obligated to repair any damage caused by fire, tornado,
or other casualty covered by items set forth under the extended coverage
provisions of Landlord's fire insurance policy. In the event the Premises
are served by rail track or spur track, then Tenant, notwithstanding the
provisions of any rail track agreements to the contrary, shall be liable and
responsible for maintaining, or reimbursing the rail carrier for the
maintenance of, the portion of the track and related facilities adjacent to
the Premises. Tenant shall also be obligated to repair any damage to the
Premises or any part thereof caused by the negligent Act or willful
misconduct of Tenant, its agents, customers, employees, or invitees
regardless of whether Tenant would otherwise be obligated to make such repair
by the provisions hereof.
8. Alterations. Tenant shall not make any major alterations, additions,
or improvements to the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. Tenant may,
without the consent of Landlord, but at Tenant's own cost and expense and in a
good, workmanlike manner, make such minor alterations, additions, or
improvements or erect, remove, or alter such partitions, or erect such shelves,
bins, machinery, and trade fixtures as it may deem advisable, without altering
the basic character of the Building or improvements, without affecting the
structural or loadbearing elements of the Building or improvements, without
overloading or damaging such Building or improvements or any utility systems
servicing same, and without interference to the other occupants of the Building
or any other of Landlord's tenants, and in each case complying with all
applicable governmental laws, ordinances, regulations, and other requirements.
At the termination of this lease, Tenant shall, if Landlord so elects, and at
Tenant's sole cost and expense, remove all alterations, additions, improvements,
and partitions erected by Tenant and restore the Premises to their original
condition; otherwise, such improvements shall be delivered to Landlord with the
Premises. All shelves, bins, machinery, and trade fixtures installed by Tenant
may be removed by Tenant at the termination of this lease, if Tenant so elects,
so long as no event of default by Tenant is then in existence, and shall be
removed if required by Landlord. All such removals and restorations shall be
accomplished in a good, workmanlike manner so as not to damage the primary
structure or structural qualities of the Building and other improvements
situated on the Premises. Any fixtures installed in the Premises by Tenant
other than shelves, bins, machinery, and similar trade fixtures shall become the
property of Landlord when installed.
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9. Signs. Tenant shall have the right to install signs upon the exterior
of the Building and other improvements situated on the Premises only when first
approved in writing by Landlord, which approval shall not be unreasonably
withheld or delayed, and subject to any applicable governmental laws,
ordinances, regulations, and other requirements and subject to applicable
restrictive covenants, if any. Tenant shall remove all such signs at the
termination of this lease. Such installations and removals shall be made in
such manner as to avoid injury or defacements of the Building and other
improvements situated on the Premises.
10. Inspection. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the Premises at any time during reasonable
business hours for the purpose of ascertaining the condition of the Premises or
in order to make such repairs as may be required to be made by Landlord under
the terms of this lease and for the purpose of showing the Premises and the
Building to prospective purchasers. During the period that is six (6) months
prior to the end of the term hereof, Landlord and Landlord's agents and
representatives shall have the right to enter the Premises at any time during
reasonable business hours for the purpose of showing the Premises to prospective
tenants and shall have the right to erect on the Premises a suitable sign
indicating that the Premises are for sale or lease.
11. Utilities. Landlord agrees to provide such water, electricity,
telephone, and other utility service connections into the Premises as may be
presently in place. Tenant shall pay all charges incurred for any utility
services used on or from the Premises and any maintenance charges for utilities,
shall be responsible for any costs associated in any manner with any additional
utility connections to the Premises which Tenant may require, and shall furnish
all electric light bulbs and tubes. Such payments shall be made directly to the
supplier of any utility separately metered (or submetered) to the Premises, or
to Landlord, if any such utilities are not separately submetered or metered.
Landlord shall calculate the cost of Tenant's share of any such utilities on
such equitable basis as may be determined by Landlord with respect to any such
utilities. Landlord shall in no event be liable for any interruption or failure
of utility services on the Premises.
12. Assignment and Subletting.
A. Tenant shall not have the right to assign this lease or to sublet the
whole or any part of the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Notwithstanding any
assignment or subletting, Tenant shall at all times remain fully responsible and
liable for the payment of the rent herein specified and for compliance with all
of the other obligations imposed on Tenant under the terms, provisions, and
covenants of this lease. Upon the occurrence of an "event of default" as
hereinafter defined, if the Premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may at its option collect directly from such assignee or subtenant all
rents or payments becoming due to Tenant under such assignment or sublease and
apply such rent or payment against any sums due to Landlord by Tenant. No such
collection shall be construed to constitute a novation of a release of Tenant
from the further performance of its obligations under this lease. Landlord
shall have the right to assign any of its rights under this lease.
B. If Tenant is a corporation, then any transfer of this lease from
Tenant by merger, consolidation or dissolution or any change in ownership or
power to vote a majority of the voting stock in Tenant outstanding at the time
of execution of this instrument (or at any future time) shall constitute an
assignment for the purpose of this lease; provided, however, that acquisition of
all stock of a corporate Tenant by any corporation, the stock of which is listed
on either the New York or American Stock Exchange, or the merger of a corporate
Tenant into such a corporation, the stock of which is so listed, shall not
itself be deemed to be a violation of Paragraph 12 hereof. For purposes of this
Paragraph 12.B, the term "voting stock" shall refer to shares of stock regularly
entitled to vote for the election of directors of the corporation involved.
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C. If Tenant is a general partnership having one or more corporations as
partners or if Tenant is a limited partnership having one or more corporations
as general partners, the provision of the preceding Paragraph 12.B shall apply
to each of such corporations as if such corporation alone had been the Tenant
hereunder.
D. If Tenant is a general partnership, then the transfer of a majority of
the partnership interest of Tenant existing at the time of execution of this
instrument (or at any future time) shall constitute an assignment for the
purpose of this lease. If Tenant is a limited partnership, then the assignment
of all or any portion of the interest of a general partner of Tenant shall
constitute an assignment for the purpose of this lease.
13. Fire and Casualty Damage.
A. If the Premises should be damaged or destroyed by fire, tornado, or
other casualty, Tenant shall give immediate written notice thereof to Landlord.
B. If the Premises or the Building should be totally destroyed by fire,
tornado, or other casualty, or if the premises should be so damaged that
rebuilding or repairs cannot be completed within 200 days after the date upon
which Landlord is notified by Tenant of such damage, this lease shall terminate
and the rent shall be abated during the unexpired portion of this lease,
effective upon the date of the occurrence of such damage.
C. If the Premises or the Building should be damaged by fire, tornado, or
other casualty, but only to such extent that rebuilding or repairs can be
complete within 120 days after the date upon which Landlord is notified by
Tenant of such damage, this lease shall not terminate, but Landlord shall, at
its sole cost and expense, proceed with reasonable diligence to rebuild and
repair such Building to substantially the condition in which it existed prior to
such damage, except that (i) Landlord shall not be required to so rebuild or
repair if less than twelve (12) months remain in the term hereof after the
expiration of such 120 day period, (ii) Landlord shall not be required to
rebuild, repair, or replace any part of the partitions, fixtures, and other
improvements which may have been placed on the Premises by Tenant, and (iii) so
long as Landlord has complied with the provisions hereof relating to insurance
coverage. Landlord shall not be obligated to expend any funds in excess of
available insurance proceeds attributable to such damage in rebuilding the
Premises. If the Premises are untenantable in whole or in part following such
damage, the rent payable hereunder during the period the Premises are
untenantable shall be reduced to such extent as may be fair and reasonable under
all of the circumstances. In the event that Landlord should fail to complete
such repairs and rebuilding within 120 days after the date upon which Landlord
is notified by Tenant of such damages, Tenant may, at its option, terminate this
lease by delivering written notice of termination to Landlord within thirty (30)
days after the expiration of such 120-day period, as Tenant's exclusive remedy,
whereupon all rights and obligations hereunder shall cease and determine.
D. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Premises requires that the insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this lease by delivering written
notice of termination to Tenant, whereupon all rights and obligations hereunder
shall cease and determine.
E. Any insurance which may be carried by Landlord or Tenant against loss
or damage to the buildings and other improvements situated on the Premises shall
be for the sole benefit of the party carrying such insurance and under its sole
control.
F. Each of Landlord and Tenant hereby releases the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any of the extended coverage casualties covered by the
insurance maintained hereunder, even if such fire or other casualty shall have
been caused by the fault or negligence of the other party, or anyone for whom
such party may be responsible; provided, however, that this release shall be
applicable and in force and effect only with respect to loss or damage occurring
during such time as the releaser's policies contain a clause or
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endorsement to the effect that any release shall not adversely affect or
impair said policies or prejudice the right of the releaser to recover
thereunder. Each of Landlord and Tenant agrees that it will request its
insurance carriers to include in its policies such a clause of endorsement.
G. Landlord covenants and agrees to maintain standard fire and extended
coverage insurance covering the Building (exclusive of any of Tenant's fixtures,
furnishings, and equipment attached thereto or located thereon) in an amount not
less than eighty percent (80%) of the replacement cost thereof. If during the
second full lease year after the commencement date of this lease, or during any
subsequent year of the primary term or any renewal or extension, the insurance
premiums for the fire and extended insurance carried by Landlord shall exceed
the premiums for such insurance for the first full lease year of the term
hereof, Tenant shall pay to Landlord, within fifteen (15) days after receipt by
Tenant of notice of the amount thereof, as additional rent, Tenant's Share of
the amount of such excess; and the failure to pay Tenant's Share of such excess
upon demand shall be treated in the same manner as a failure to make payment of
rent when due.
14. Liability. Landlord shall not be liable to Tenant or Tenant's
employees, agents, patrons, or visitors, or to any other person whomsoever, for
any injury to person or damage in property on or about the Premises caused by
the negligence or misconduct of Tenant, its agents, servants, or employees, or
of any other person entering upon the Premises or caused by the Building and
improvements located on the Premises becoming out of repair, or caused by
leakage of gas, oil, water, or steam or by electricity emanating from the
Premises, or due to any cause whatsoever, and Tenant agrees to indemnify
Landlord and hold it harmless from any loss, expense, or claims, including
attorneys' fees, arising out of any such damage or injury; except that any
injury to person or damage to property caused by the gross negligence of
Landlord or by the failure of Landlord to repair and maintain that part of the
Premises which Landlord is obligated to repair and maintain within a reasonable
time after the receipt of written notice from Tenant of needed repairs or
defects shall be the liability of Landlord and not of Tenant. Tenant shall
procure and maintain throughout the terms of this lease a policy or policies of
insurance, at its sole cost and expense, insuring both Landlord and Tenant
against all claims, demands or actions arising out of or in connection with
Tenant's use or occupancy of the Premises, or by the condition of the Premises,
the limits of such policy or policies to be in an amount not less than
$1,000,000 in respect of any one occurrence and a General Aggregate limit of
$2,000,000, and to be written by insurance companies qualified to do business in
the state in which the Premises are located. Such policies or duly executed
certificates of insurance shall be promptly delivered to Landlord and renewals
thereof as required shall be delivered to Landlord at least ten (10) days prior
to the expiration of the respective policy terms. All such policies shall
contain provisions requiring that the insurer give Landlord not less than thirty
(30) days' prior written notice of the cancellation of such policies.
15. Condemnation.
A. If the whole or any substantial part of the Premises or the Building
or Land upon which the Premises are located should be taken for any public or
quasi-public use under governmental law, ordinance, or regulation, or by right
of eminent domain, or by private purchase in lieu thereof, this lease shall
terminate and the rent shall be abated during the unexpired portion of this
lease, effective when the physical taking of said Premises shall occur. For the
purposes hereof, "substantial part of the Premises" shall be deemed to mean such
portion of the Premises the loss of which would, in Landlord's reasonable
opinion, materially lessen the usefulness of the Premises to Tenant for the
purposes for which Tenant is then using the Premises.
B. If less than a substantial part of the Premises or the Building or
Land upon which the Premises are located shall be taken for any public or
quasi-public use under any governmental law, ordinance, or regulation, or by
right of eminent domain, or by private purchase in lieu thereof, this lease
shall terminate but the rent payable hereunder during the unexpired portion
of this lease shall be reduced to such extent as may be fair and reasonable
under all of the circumstances.
8
<PAGE>
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portion of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings.
16. Holding Over. Should Tenant, or any of its successors in interest,
hold over the Premises, or any part thereof, after the expiration of the term of
this lease, as may be renewed or extended, unless otherwise agreed in writing,
such holding over shall constitute and be construed as creating a month-to-month
tenancy only, cancellable at the will of Landlord, at a rental equal to the
greater of (a) the then fair market rental value of the Premises or (b) the
total rental payable for the last month of the term hereof plus fifty percent
(50%) of such amount, payable in full on the first day on which Tenant holds
over and on the first day of each month thereafter during such holdover period.
The inclusion of the preceding sentence shall not be construed as Landlord's
permission for Tenant to hold over.
17. Quiet Enjoyment. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the Premises, good title to the Premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances, and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this lease is a
sublease, then Tenant agrees to take the Premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full right and
authority to enter into this lease and that Tenant, upon paying the rental and
performing its other covenants and agreements under the terms of this lease,
shall peaceably and quietly have, hold, and enjoy the Premises for the term
hereof without hindrance or molestation from Landlord, or anyone claiming by,
through, or under Landlord, but not otherwise, subject to the terms and
provisions of this lease.
18. Events of Default. The following events shall be deemed to be events
of default by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the rent or
additional rent hereby reserved (including, without limitation, amounts
payable pursuant to Paragraphs 4, 5, 6, 11, and 13 hereof) or shall fail to
perform or discharge any other obligation or liability of Tenant under this
lease requiring the payment of money when any such payment is due.
(b) Tenant shall become insolvent, or shall make a transfer in fraud
of creditors, or shall make an assignment for the benefit of creditors.
(c) Tenant shall file a petition under any section or chapter of the
Bankruptcy Code or under any present or future bankruptcy, insolvency, or
similar law or statute of the United States or any state thereof heretofore
or hereinafter enacted; or Tenant shall have such a petition filed against
it involuntarily and such petition is not withdrawn or otherwise removed
within sixty (60) days of its being filed; or Tenant shall be adjudged
bankrupt or insolvent in proceedings filed against Tenant thereunder.
(d) A receiver, trustee, or custodian shall be appointed for, or
shall take possession of, all or substantially all of the assets of Tenant.
(e) Tenant shall abandon or vacate any substantial portion of the
Premises.
(f) Tenant shall fail to comply with any term, provision, or covenant
of this lease or shall fail to discharge any obligation or liability
hereunder not involving the payment of money, and shall not cure any such
failure within ten (10) days after written notice thereof to Tenant,
provided that if such default is not susceptible to cure within ten (10)
days, Tenant shall be deemed to have cured such default if Tenant has
9
<PAGE>
commenced efforts to cure such default within such ten (10) day period and
diligently pursues and completes such curative actions within a reasonably
prompt period of time thereafter.
19. Remedies. Upon the occurrence of any of such events of default
described herein, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever (Tenant hereby
expressly waiving any such notice or demand):
(a) Terminate this lease, in which event Tenant shall immediately
surrender the Premises to Landlord without any payment therefor, and if
Tenant fails so to do, Landlord may, without prejudice to any other remedy
which it may have for possession or arrearages in rent, enter upon and take
possession of the Premises and expel or remove Tenant and any other person
who may be occupying such Premises or any part thereof, by any lawful
means, whether through judicial process or otherwise, and including the
lawful use of force, if necessary, without being liable for prosecution or
any claim of damages thereof; and Tenant agrees to pay to Landlord on
demand the amount of all loss and damage which Landlord may suffer by
reason of such termination, whether through inability to relet the Premises
on satisfactory terms or otherwise.
(b) Enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying such Premises or
any part thereof, by any lawful means, whether through judicial process or
otherwise, and including the lawful use of force, if necessary, without
being liable for prosecution or any claim for damages therefor, and relet
the Premises, in the name of Landlord or otherwise, for such term or terms
(which may be greater or lesser than the period which would otherwise have
constituted the balance of the term of this lease) and on such conditions
(which may include concessions as Landlord, in its sole discretion, may
determine, and receive the rent therefor. In the event of any such
re-entry or dispossession, Tenant shall not thereby be relieved of its
liability and obligations under this lease, which shall survive any such
re-entry or dispossession, and in that event (i) the rent and other charges
required to be paid by Tenant up to the time of such re-entry or
dispossession shall become due and payable, together with such reasonable
expense as Landlord may incur for reasonable attorneys' fees, brokerage
commissions, and/or expenses of putting the Premises in such condition as
the Tenant under the provisions hereof is required to maintain, or for
preparing the same for reletting and (ii) Tenant or the legal
representatives of Tenant shall also pay Landlord, as liquidated damages
for the failure of Tenant to observe and perform Tenant's covenants herein
contained, an amount equal to the sum of (A) the base rental set forth in
Paragraph 2 hereof and (B) all additional rental payable by Tenant under
the provisions hereof, as if this lease were still in effect less the net
amount, if any, of the rents and all other amounts collected on account of
the lease or leases of the Premises for each month of the period which
would otherwise have constituted the balance of the term of this lease as
the same may theretofore have been extended. In computing the amount of
such liquidated damages there shall be included such expenses as Landlord
may incur in connection with reletting, including reasonable attorneys'
fees, brokerage commissions, expenses of keeping the Premises in the
condition Tenant is required to maintain under the provisions of this
lease, or expenses of preparing the same for reletting. Any such
liquidated damages shall be paid in monthly installments by Tenant on the
day specified hereunder, and any suit brought to collect the amount of the
deficiency of any month shall not prejudice in any way the right of
Landlord to collect the deficiency for any subsequent month by a similar
proceeding.
(c) Enter upon the Premises by any lawful means, whether through
judicial process or otherwise, and including the lawful use of force, if
necessary, without terminating this lease and without being liable for
prosecution or any claim for damages therefor, and do whatever Tenant is
obligated to do under the terms of this lease; and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in
thus effecting compliance with Tenant's obligations under this lease, and
Tenant further agrees that Landlord shall not be liable for any damages
resulting to Tenant from such action, whether caused by the negligence of
Landlord or otherwise.
10
<PAGE>
In the event Tenant fails to pay any installment of rent or additional rent
hereunder within five (5) days after such installment is due, Tenant shall pay
to Landlord on demand a late charge in an amount equal to ten percent (10%) of
such installment; and the failure to pay such amount within ten (10) days after
demand therefor shall be an event of default hereunder. The provision for such
late charge shall be in addition to all of Landlord's other rights and remedies
hereunder or at law and shall not be construed as liquidated damages or as
limiting Landlord's remedies in any manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions, and covenants herein
contained. No waiver by Landlord of any violation or breach of any of the
terms, provisions, and covenants herein contained shall be deemed or construed
to constitute a waiver of any other violation or breach of any of the terms,
provisions, and covenants herein contained. Landlord's acceptance of the
payment of rental or other payments hereunder after the occurrence of an event
of default shall not be construed as a waiver of such default, unless Landlord
so notifies Tenant in writing. Forbearance by Landlord to enforce one or more
of the remedies herein provided upon an event of default shall not be deemed or
construed to constitute a wavier of such default. If, on account of any breach
or default by Tenant in Tenant's obligations under the terms and conditions of
this lease, it shall become necessary or appropriate for Landlord to employ or
consult with an attorney concerning, or to enforce or defend, any of Landlord's
rights or remedies hereunder, Tenant agrees to pay any reasonable attorneys'
fees. No act or thing done by the Landlord or its agents during the term hereby
granted shall be deemed an acceptance of the surrender of the Premises and no
agreement to accept the surrender of said Premises shall be valid unless in
writing signed by Landlord. The receipt by Landlord of rent with knowledge of
the breach of any covenant or other provision contained in this lease shall not
be deemed or construed to constitute a waiver of any other violation or breach
of any of the terms, provisions, and covenants contained herein.
20. Mortgages. Tenant accepts this lease subject and subordinate to any
mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a
lien or charge upon the Premises or the improvements situated thereon or any
portion thereof. Tenant shall at any time hereafter on demand execute any
instruments, releases or other documents which may be required by any mortgagee
for the purpose of subjecting and subordinating this lease to the lien of any
such mortgage. With respect to any mortgage(s) and/or deed(s) of trust at any
time hereafter created which constitute a lien or charge upon the Premises or
the improvements situated thereon, Landlord agrees to request the holder of such
mortgage to enter into a non-disturbance and attornment agreement with Tenant
providing for such lender to honor this lease and Tenant's interest in the
Premises so long as Tenant is not in default hereunder. However, Landlord makes
no warranty that any such agreement is obtainable, and Tenant's obligation to
subordinate this lease to any such mortgage shall not be dependent upon the
execution of any such agreement.
21. Landlord's Default. In the event Landlord should become in default in
any payments due on any such mortgage described in the above Paragraph 20, or in
the payment of taxes or any other items which might become a lien upon the
Premises and which Tenant is not obligated to pay under the terms and provisions
of this lease, Tenant is authorized and empowered, after giving Landlord (and
the holder of any mortgage or deed of trust lien encumbering the Premises of
which it has received notice) five (5) days' prior written notice of such
default and if Landlord fails to cure such default, to pay any such items for
and on behalf of Landlord, and the amount of any item so paid by Tenant for or
on behalf of Landlord, together with any interest or penalty required to be paid
in connection therewith, shall be credited against the installments of rent next
payable by Tenant hereunder; provided, however, that Tenant shall not be
authorized and empowered to make any payment under the terms of this Paragraph
21, unless the items paid shall be superior to Tenant's interest hereunder.
22. Mechanic's Liens. Tenant shall have no authority, express or implied,
to create or place any lien or encumbrance of any kind or nature whatsoever
upon, or in any manner to bind, the interest of Landlord in the Premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs, and each such claim shall
11
<PAGE>
affect and each such lien shall attach, if at all, only to the leasehold
interest granted to Tenant by this instrument. Tenant covenants and agrees
that it will pay or cause to be paid all sums legally due and payable by it
on account of any labor performed or materials furnished in connection with
any work performed on the Premises on which any lien is or can be validly and
legally asserted against its leasehold interest in the Premises or the
improvements thereof and that it will same and hold Landlord harmless from
any and all loss, cost, or expense based on or arising out of asserted claims
or liens against the leasehold estate or against the rights, titles, and
interest of Landlord in the Premises or under the terms of this lease.
Further, Tenant agrees that it will immediately remove and have released any
mechanics' materialmen's or similar lien which may become attached to the
Premises or any interest therein during the term hereof.
23. Notices. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing, or delivery of any notice or the making of
any payment by Landlord to Tenant or with reference to the sending, mailing, or
delivery of any notice or the making of any payment by Tenant to Landlord shall
be deemed to be complied with when and if the following steps are taken.
A. All rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at the address hereinbelow set forth or
at such other address as Landlord may specify from time to time by written
notice delivered in accordance herewith.
B. All payments required to be made by Landlord to Tenant hereunder shall
be payable to Tenant at the address hereinbelow set forth, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
C. Any notice or document required or permitted to be delivered hereunder
(other than a payment, which shall be deemed received only when actually
received) shall be deemed to be delivered whether actually received or not when
deposited in the United States Mail, postage prepaid, certified or registered
mail, addressed to the appropriate party hereto at the address set out opposite
its name below, or at such other address as it has theretofore specified by
written notice delivered in accordance herewith:
LANDLORD: TENANT:
Industrial Properties Corporation SI Diamond Technology, Inc.
400 East Carpenter Freeway 3006 Longhorn Blvd., Suite 107
Irving, TX 75062-3955 Austin, TX 78758
If and when included within the term "Landlord," as used in this instrument,
there are more than one person, firm, or corporation, all shall jointly arrange
among themselves for their joint execution of a notice specifying an individual
at a specific address for the receipt of notices and payments to Landlord; if
and when included within the term "Tenant," as used in this instrument, there
are more than one person, firm, or corporation, all shall jointly arrange among
themselves for their joint execution of a notice specifying an individual at a
specific address within the continental United States for the receipt of notices
and payments to Tenant. All parties included within the terms "Landlord" and
"Tenant," respectively, shall be bound by notices given in accordance with the
provisions of this paragraph to the same effect as if each had received such
notice.
24. Miscellaneous.
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural and vice versa, unless the context otherwise requires.
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<PAGE>
B. The terms, provisions, and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors, and
permitted assigns, except as otherwise herein expressly provided.
C. The captions are inserted in this lease for convenience only and in no
way define, limit, or describe the scope or intent of this lease, or any
provision hereof, nor in any way affect the interpretation of this lease.
D. Tenant agrees, within ten (10) days after request of Landlord, to
deliver to Landlord, or Landlord's designee, an estoppel certificate stating
that this lease is in full force and effect, the date to which rent has been
paid, the unexpired term of this lease, and such other matters pertaining to
this lease as may be reasonably requested by Landlord.
E. This lease may not be altered, changed, or amended except by an
instrument in writing executed by Landlord and Tenant.
F. This instrument [including all Exhibits and Riders (signed or
initialled by Landlord and Tenant) which are attached hereto] constitutes the
entire agreement between Landlord and Tenant. No prior written or prior or
contemporaneous oral statements, promises, or representations shall be binding.
G. If any provision of this lease shall ever be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of the lease, but such other provisions shall continue in full force
and effect.
H. This lease shall be construed and enforced in accordance with the laws
and judicial decisions of the State of Texas.
I. Under no circumstances whatsoever shall Landlord ever be liable
hereunder for consequential damages or special damages; and all liability of
Landlord for damages for breach of any covenant, duty or obligation of Landlord
hereunder may be satisfied only out of the interest of Landlord in the Land and
Building existing at the time any such liability is finally adjudicated and all
rights to appeal have lapsed. The term "Landlord" means only the owner of the
Land, and in the event of the transfer by such owner of its interests in the
Land, such owner shall thereupon be released and discharged from all covenants
and obligations of Landlord thereafter accruing, but such covenants and
obligations shall be binding upon each new owner for the duration of such
owner's ownership.
J. In the event of any act or omission by Landlord which would give
Tenant the right to damages from Landlord or the right to terminate this lease
by reason of a constructive or actual eviction from all or part of the Premises
or otherwise, Tenant shall not sue for such damages or exercise any such right
to terminate until (a) it shall have given written notice of such act or
omission to Landlord and to the holder(s) of the indebtedness or other
obligations secured by any first mortgage or first deed of trust affecting the
Premises. If the name and address of such holder(s) shall have previously been
furnished to Tenant; and (b) a reasonable period of time for remedying such act
or omission shall have elapsed following the giving of such notice, not to
exceed thirty (30) days, during which time Landlord and such holder(s) or either
of them, their agents or employees, shall be entitled to enter upon the Premises
and do therein whatever may be necessary to remedy such act or omission. See
Addendum 2.
K. Whenever a period of time is hereby prescribed for action to be taken
by Landlord or Tenant, Landlord or Tenant shall not be liable or responsible
for, and there shall be excluded from the computation for any such period of
time, any delays due to strikes, riots, acts of God, shortages of labor or
materials, war, governmental law regulations or restrictions or any other causes
of any kind whatsoever which are beyond the reasonable control of Landlord or
Tenant. See Addendum 3.
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<PAGE>
L. Landlord and Tenant agree and intend that this lease shall supersede
Section 92 of the Texas Property Code (and any successor statute) to the extent
of any conflict; without limiting the foregoing, none of the obligations or
duties imposed by such section shall be binding upon Landlord unless expressly
provided for in this lease.
25. Return of Premises. At the end of the term covered by this lease, or
upon such earlier termination of this lease as provided herein, Tenant shall
surrender the Premises to Landlord in the same good order and condition as the
Premises were in prior to the beginning of the term hereof, reasonable wear and
tear excepted; provided, that in any case the Premises shall be surrendered to
Landlord reasonably clean and free of debris. At such time Tenant shall deliver
to Landlord all keys to the Premises. Any equipment, trade fixtures, or other
property of Tenant left in the Premises after the end of the lease shall be
conclusively deemed to have been abandoned by Tenant, and Landlord may thereupon
without notice to Tenant take possession of such property and, at Landlord's
option, either (i) declare same to be the property of Landlord, or (ii) at the
sole cost and expense of Tenant, dispose of such property in any manner and for
whatever consideration Landlord in its sole discretion shall deem most
advisable. Tenant agrees that it will, promptly upon Landlord's request,
execute at Tenant's sole cost and expense, such bills of sale or other evidences
of title in such property as Landlord may request.
26. Special Provisions. Additional Provisions, if any, set forth on
Exhibits and Riders attached hereto and made a part hereof for all purposes are
incorporated herein as if fully set forth in this Paragraph. The attached
Exhibits and Riders are Exhibit "A" (Demising Plan), Exhibit "B" (Option Rider),
Exhibit "C" (Addendum to Lease Agreement). Further, the following special
provisions are set forth below and made a part hereof for all purposes:
27. All rent and other payments required to be made by Tenant to Landlord
shall be payable to Landlord at the following address:
Industrial Properties Corporation
P.O. Box 844243
Dallas, TX 75284-4243
EXECUTED the 2nd day of June, 1998.
LANDLORD:
Industrial Properties Corporation
By: /s/
------------------------------------
Its: Executive Vice President
-----------------------------
TENANT:
SI Diamond Technology, Inc.
By: /s/ Zvi Yaniv
------------------------------------
Its: President
-----------------------------
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<PAGE>
EXHIBIT "B"
OPTION RIDER
ATTACHED TO LEASE BETWEEN
INDUSTRIAL PROPERTIES CORPORATION, LANDLORD
AND SI DIAMOND TECHNOLOGY, INC., TENANT
DATED JUNE 2, 1998
1. Provided that Tenant is not in default under the terms hereof at either the
time of its exercise of the option herein provided or at the end of term
provided in the lease (or the end of the then current option period, if
applicable), Tenant shall have 1 consecutive options to exceed this lease for a
period of 3 years, each at the end of the primary term of the lease. Each such
option must be exercised by Tenant giving Landlord written notice in accordance
with the notice provisions of the lease of its intention to exercise such option
not less than 180 nor more than 210 days prior to the end of the primary term,
or the previous option period, as the case may be.
2. For each option period exercised by Tenant in accordance herewith the lease
shall be deemed extended and shall be continued in full force and effect with
respect to every applicable term and condition contained therein, except that
the rent payable with respect to the Premises for such option period shall be as
follows:
Market Rental of Like Space -- Will reflect the current market rate,
but under no circumstances will be less than the rental paid in the
previous term. If the Landlord and Tenant cannot agree upon the
current market rate within thirty days following Tenant's exercise,
and Tenant does not withdraw its exercise within fifteen days
thereafter, then the Tenant and Landlord shall, within ten days, each
select an appraiser who shall complete their appraisals within ten
days after being selected. Should the two appraisals produced by
these appraisers not concur on the current market rate, then the two
appraisers shall pick a third appraiser and the results of the third
appraisal shall be the market rate (provided that such appraisal shall
state a rate that is not more than the higher and no less than the
lower rate determined by the two other appraisers). If the appraised
value is not determined prior to expiration of the Lease, Tenant shall
continue to pay rent at the former rate until such determination is
made, after which time the parties shall adjust the actual rent due
for the prior period within thirty days. The cost of the appraisal
shall be borne by the party employing the appraiser, and the parties
shall equally share the cost of the third appraiser, if any.
3. In the event Tenant fails to exercise any option within the time and in the
manner provided herein, such option, and all subsequent options, shall be deemed
waived by Tenant and shall not be exercisable thereafter.
4. The option provided herein is for the sole benefit of Tenant and may not be
exercised by any subtenant or assignee of Tenant, regardless of whether Landlord
has consented to or approved such subletting or assignment.
Initialed for Identification
Landlord /s/
--------------------------------
Tenant /s/ ZY
--------------------------------
<PAGE>
EXHIBIT "C"
ADDENDUM TO LEASE AGREEMENT
1. Landlord and Tenant acknowledge and agree that Tenant shall have no
responsibility whatsoever for or with respect to any Hazardous Substance or
other environmental problem or liability with respect to the Premises
caused by Landlord or Landlord's tenants, agents, employees, contractors,
subcontractors, guests or invitees.
2. provided, however, that if such remedy cannot be completed within thirty
(30) days, Landlord shall not be in default so long as Landlord has
commenced to remedy such act or omission, and diligently pursues the
completion of such remedy.
3. provided, however, that this provision shall not apply to any obligation or
liability under this lease providing the payment of money when any such
payment is due.
<PAGE>
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Twelve Months Ended
December 31, December 31,
------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of (loss) per common share:
Net loss applicable to common shareholders .......... $ (670,611) $(1,974,765) $(3,812,505) $(7,116,390)
----------- ----------- ----------- -----------
Weighted average number of common shares outstanding ..... 44,796,030 21,949,193 37,207,122 17,018,775
Net loss per common share ........................... $(0.01) $(0.09) $(0.10) $(0.42)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Computation of (loss) per common share assuming full dilution (A):
No calculation of loss per common share assuming full dilution is
submitted because such computation results in an antidilutive loss per
common share.
Page 61
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
<TABLE>
<CAPTION>
Doing Business
Subsidiary State of Incorporation Under the Following Names
- ---------- ---------------------- -------------------------
<S> <C> <C>
Northlight Displays, Inc. Delaware Northlight Displays, Inc
Diamond Tech One, Inc. Delaware Diamond Tech One, Inc
SIDT Coatings, Inc. Delaware SIDT Coatings, Inc.
SDI Acquisition Corp. Texas SDI Acquisition Corp.
Plasmatron Coatings and Plasmatron Coatings and
Systems, Inc. Pennsylvania Systems, Inc.
Field Emission Picture Element Field Emission Picture Element
Technology, Inc. Delaware Technology, Inc.
Electronic Billboard Electronic Billboard
Technology, Inc. Delaware Technology, Inc.
</TABLE>
Page 63
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ Philip C. Shaffer
------------------------------------
Philip C. Shaffer
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ David R. Sincox
------------------------------------
David R. Sincox
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ Igor Leontiev
------------------------------------
Igor Leontiev
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ Ronald J. Berman
------------------------------------
Ronald J. Berman
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ Lee B. Arberg
------------------------------------
Lee B. Arberg
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Know by all these presents, that the undersigned hereby constitutes and
appoints each of Marc W. Eller and Douglas P. Baker, and each of them, the
undersigned's true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned, in the
undersigned's capacity as an officer and/or director of SI Diamond
Technology, Inc. (the "Company"), the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, in accordance with the
Securities Exchange Act of 1934 and the rules thereunder;
(2) do and perform any and all acts for and on behalf of the
undersigned which may be necessary or desirable to complete and
execute the Form 10-KSB and timely file such form with the United
States Securities and Exchange Commission and any stock exchange or
similar authority; and
(3) to sign any amendments or other instruments he deems
necessary or appropriate and to file the same with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary, or proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that such attorney-in-fact, or such
attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be
done by virtue of this power of attorney and the rights and powers herein
granted.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 29th day of March, 1999.
/s/ Dr. Zvi Yaniv
------------------------------------
Dr. Zvi Yaniv
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
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<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,557,548) (6,320,901)
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<NET-INCOME> (3,557,548) (6,320,901)
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