<PAGE> 1
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, 1999; 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: $6,752,104
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 14, 2000, was approximately $183,578,814.
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 14, 2000, the registrant had 55,055,688 shares of Common
Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one).
Yes [ ] No [X]
===============================================================================
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I ....................................................................................................Page 1
Item 1. Business...................................................................................Page 1
Item 2. Properties.................................................................................Page 8
Item 3. Legal Proceedings..........................................................................Page 9
Item 4. Submission of Matters to a Vote of Security Holders........................................Page 9
PART II ...................................................................................................Page 10
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters .....................Page 10
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................Page 11
Item 7. Financial Statements......................................................................Page 17
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................Page 48
PART III ...................................................................................................Page 49
Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance with Section
16 (a) of the Exchange Act................................................................Page 49
Item 10. Executive Compensation....................................................................Page 50
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. 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 -
are 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-QSB, 8-K, and 10-KSB 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 us. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
OUR CFE PRODUCT DEVELOPMENT IS IN ITS EARLY STAGES AND THE OUTCOME IS UNCERTAIN
Our Carbon Field Emission ("CFE") technology, and products that use
this technology, will require significant additional development, engineering,
testing and investment prior to commercialization. We have two leading
potential CFE products. The first is a Picture Element Tube, or PET, intended
for use initially in large indoor displays. If the PET is successful, we expect
to enhance it to allow it to be used in outdoor displays. The PET or displays
may not be successfully developed. We are also working on a product called the
HyFED, which combines what we believe to be the best properties of a cathode
ray tube ("CRT") and field emission display ("FED"). It is our intention to
license this technology to be used in the production of flat-screen TV
applications that are cost competitive with CRTs. If either of these products
are developed, it may not be possible for potential licensees to produce these
products in significant quantities at a price that is competitive with other
similar products.
WE HAVE NO CURRENT ROYALTY AGREEMENTS
Our future strategy is dependent on licensing our technology to other
companies and obtaining royalties based on products that these licensees
develop and sell. We have no plans to manufacture and sell any CFE products
ourselves, and as such, we have no CFE product revenues. We signed a license
agreement in 1999, for a payment of approximately $5.6 million. We have no
other license agreements at the present time that will provide any future
revenues. It is our intention that all future license agreements will include a
provision that requires the payment of ongoing royalties.
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OUR SUCCESS IS DEPENDENT ON OUR PRINCIPAL PRODUCTS AND TECHNOLOGY
Our CFE technology is an emerging technology. Our financial condition
and prospects are dependent upon our licensing the technology to others and
upon market acceptance of our Electronic Billboard and other electronic display
products. Additional R&D needs to be conducted on the CFE technology before
others can produce products using this technology. Market acceptance of our
products and products using our technology 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.
WE HAVE A HISTORY OF OPERATING LOSSES
We have a history of operating losses. Our first profitable year was
1999, based on the strength of a license agreement of approximately $5.6
million signed in March 1999. We have incurred operating losses as shown below:
<TABLE>
<CAPTION>
Net Income
Year Ended December 31 (Loss)
---------------------- -------------
<S> <C>
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)
1999 $1,118,134
</TABLE>
Although we expect to be profitable in the future, we may not be. Our
profitability in 2000 is dependent on the signing of additional license
agreements. We may, however, continue to incur additional operating losses for
an extended period of time as we continue to develop products. We do, however,
expect the magnitude of those losses, if they continue, to decrease. Wallace
Sanders & Company, independent auditors of the Company, have expressed
uncertainty as to our ability to continue as a going concern based on our
accumulated losses from operations in prior years. 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 ARE EXPOSED TO LITIGATION LIABILITY
We were sued in 1996 by a former customer of Plasmatron for damages
that the former customer claimed that it incurred as a result of the alleged
failure of the machine provided by Plasmatron to perform as intended. That suit
was settled in January 2000. The majority of that settlement was paid by a
bonding company that had provided a bond on the original contract. Other
guarantors on the original bond that may now be subject to liability as a
result of the bonding company's payment have sued us for indemnification. We
consider these claims to be without merit and expect to have no liability in
these suits; however, they are still pending.
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 would have a material impact on our
financial condition and could affect our ability to continue in existence.
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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 CFE
technology and our electronic billboard product. Our business model is based on
our installing electronic billboards at customer sites at our cost and then
deriving advertising revenues from the signs. This will require a significant
capital investment on our part. Our electronic billboard product is available
now and we are in the process of installing our first units. Some of our other
proposed products may not be available for commercial sale or routine use for a
period of up to two years. Commercialization of our existing and proposed
products will require additional capital in excess of our current capital. 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. However, we only have the
existing resources, including commitments, to allow us to survive for a period
of approximately six months from the date of this report at our current
spending levels. We have been operating in this manner for an extended period
of time and 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, revenue generated from the installation of our
electronic billboard product, and through debt and equity offerings.
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,
licensing our technology, and raising additional funds through additional debt
and equity 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
us.
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. Many of our competitors
have greater financial, managerial, distribution, and technical resources than
we do. 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.
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WE HAVE TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies through license and
assignment agreements with Microelectronics and Computer Technology
Corporation, we have acquired rights to develop and commercialize certain
research technologies. In certain cases, we are required 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. The agreement is subject to termination by
either party, upon notice, in the event of certain defaults by the other party.
We expect any royalty payments to be insignificant.
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 advancement 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 and products
using our technology 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 HAVE LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
We have no established commercial manufacturing facilities in the area
of CFE technology in which we are conducting our principal research . At the
present time, we have no intention of establishing a manufacturing facility
related to our CFE technology. We are focusing our efforts on licensing our
technology to others for use in their manufacturing processes. 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 CFE products.
In August 1999, we acquired the assets of Sign Builders of America,
Inc. ("SBOA"). SBOA is a manufacturer of high quality signage and provided
significant assistance in the development of our electronic billboard product.
To the extent that any of our other products require manufacturing facilities,
we intend to contract with a qualified manufacturer.
WE ARE DEPENDENT ON THE AVAILABILITY OF MATERIALS AND SUPPLIERS
The materials used in producing our current and future products are
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 developed by us will be readily
available. However, there is no assurance that the current availability of
these materials will continue in the future, or if available, will be
procurable at favorable prices.
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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 patents, have filed applications for patents, or have
licensed technology under patents that we do not own, 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 us. 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. 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.
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 employees, 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.
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 some of
our proposed products or ultimately develop any market for those products.
THE 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 us reside in our key scientific and
technical personnel. The loss of the services of key scientific, technical and
managerial personnel could have a material adverse effect on us.
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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%
1999 $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.
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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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, acting through its
subsidiaries, is engaged in the development of products and services based
principally on novel applications of thin films and the application of display
technologies. We believe that microelectronic and other applications of carbon
based thin film technology will play an important role in the electronics
industry. Our research is focused on identifying key applications of this
technology. Based on our research, we are currently engaged in the development
of products based on Carbon Field Emission ("CFE") technology and the
development of an electronic billboard and related electronic display products
based on existing technology. Electronic billboards and other electronic
display products would provide a market for the Company's Picture Element Tube
("PET") product when completed. During 1999, we introduced our electronic
billboard product. We also acquired the assets of Sign Builders of America,
Inc., a manufacturer of various types of high-quality signage. We believe that
our greatest growth opportunity lies in CFE products and the development of an
electronic billboard and other electronic display products.
We were incorporated in Texas in 1987. Our 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
Sign Builders of America, Inc. ("SBOA") Delaware Active
Field Emission Picture Element Technology, Inc. ("FEPET") Delaware Active
Diamond Tech One, Inc. ("DTO") Delaware Inactive
Plasmatron Coatings and Systems, Inc. ("Plasmatron") Pennsylvania Inactive
SDI Acquisition Corp. ("SDI") Delaware Inactive
</TABLE>
Our business includes the development and commercialization of
electronic billboards and related electronic display products, the manufacture
and sale of all types of signage, and the development and commercialization of
CFE products. From time to time, we also conduct contract research and
development, primarily for United States governmental agencies. The business
efforts of SI Diamond have arisen out of the its interest in thin film
materials, notably thin carbon film, diamond film, and diamond-like carbon film
("DLC"). These interests have led us into microelectronics-related processes,
thin film based CFE products, and electronic billboards and related electronic
display products.
We conduct our operations through our 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. EBT will install its first electronic billboard on a customer's
premises in March 2000. SBOA manufactures and sells all types of signage. FEPET
is conducting research on the CFE technology. Where appropriate, we enter into
collaborations with third parties as discussed in greater detail under the
heading "Technology Agreements" later in this section.
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We incurred research and development expense of $1,475,655 in 1999 and
$1,167,673 in 1998. Some of our 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 up to two years. There is no
assurance that all products currently under development will be successfully
developed, produced in commercial quantities on a cost-effective basis, or
marketed successfully.
BUSINESS GROUPS
FIELD EMISSION PICTURE ELEMENT TECHNOLOGY, INC. FEPET is developing our
proprietary CFE technology. In the past, our research has concentrated on the
emission properties of diamond like substances. Diamond is a subset of carbon
and over the past year, our research has indicated that carbon is actually a
better emitter. Accordingly, our research is now focused in the broader area of
CFE Technology.
One intended use for the technology is in a PET. The PET is a
unique, high brightness, multi-color display component intended for use
initially in outdoor billboards, indoor video walls, and alphanumeric displays.
This technology, when fully developed, would be a natural step in the
improvement of the Company's electronic billboard and other electronic
products. We are also developing a new display technology, the HyFED, which
combines what we believe to be the best properties of cathode ray tubes
("CRTs") and Field Emission Displays ("FEDs"). Our plans for this technology
are discussed in greater detail in the section entitled "Business Development
Strategies" later in this report.
ELECTRONIC BILLBOARD TECHNOLOGY, INC. EBT was incorporated in January
1997 to focus on developing sun-readable display products for outdoor use. Its
primary product is an electronic billboard which will enable the outdoor
advertising industry to exploit the Internet and information revolution by
placing ads at different locations at different times. We completed development
of the electronic billboard in 1999. The product was met with great enthusiasm
by potential customers. In January 2000, we signed an agreement with Eckerd
Corporation, a subsidiary of JCPenney to install electronic billboards at two
Eckerd stores as part of a pilot program. We are also developing indoor
displays for indoor use that could be used as part of an overall point of
purchase advertising program in conjunction with the outdoor electronic
billboards. Our plans for the billboard and related products are discussed in
greater detail in the section entitled "Business Development Strategies" later
in this report.
SIGN BUILDERS OF AMERICA, INC. SBOA was incorporated in August 1999 to
acquire the assets (including the right to use the name) and certain
liabilities of a company operating under the same name. SBOA is a manufacturer
of high quality signage with a broad customer base throughout the United
States. Prior to our acquisition of SBOA, they were a vendor of EBT's. SBOA
assisted in the development of the electronic billboard and now assembles and
installs the electronic billboard product.
BUSINESS DEVELOPMENT STRATEGIES
OVERALL. We are primarily a technology company. We are focusing our
efforts on research, product development, and licensing our technology to
others. FEPET is focused on developing world class technologies using carbon
films for electron field emission applications. EBT is focused on the
introduction of its electronic billboard products. We currently have a
manufacturing facility that we acquired through our acquisition of SBOA to make
our electronic billboard product. We have no plans to establish any other
manufacturing facilities in the immediate future. To the extent that we need to
develop additional manufacturing capabilities, we intend to use manufacturing
partnerships, joint ventures, or arrange to have products manufactured through
contract manufacturers.
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LICENSING AGREEMENTS. We have an extensive patent portfolio that we
have developed and acquired over the years. Licensing of this technology to
major companies in the display industry is a critical part of our overall
strategic plan and critical to achieving profitability in the short run. In
March 1999, we signed our first significant license agreement with Canon, Inc.
In exchange for a one-time, up-front payment of approximately $5.6 million,
Canon was granted a non-exclusive right to use a portion of our technology.
While we have had numerous discussions with other potential licensees, we have
no licensing agreements generating ongoing revenue at the present time. We
expect to sign multiple license agreements within the next year and we expect
that such license agreements will include an up-front payment and a continuing
royalty stream based on the products sold by the licensee. We have made
significant progress on our CFE technology since the time of the Canon license
agreement and believe our patent portfolio to be much more valuable than it was
at the time of the Canon license agreement.
CFE PRODUCTS. The major short run focus of FEPET is the continued
development and commercialization of its CFE products. Our current research and
development efforts are focused on two main products - the PET and the HyFED.
The PET is a basic display device which could be used in many display
applications, including the Company's electronic billboard. The PET that the
Company has under development contains 64 pixels, which are the basic unit or
picture element that makes up the image displayed on a video screen. The CFE
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. As soon as the product is commercially viable, we
plan to introduce it in our electronic billboard product. We would also target
other large display manufacturers that manufacture displays for such uses as
sports arenas, video walls, alphanumeric signs, etc. We have completed our
collaborative efforts with Diamond Pro-Shop Nomura Co., Ltd. ("DPN") that
commenced in September 1997 to develop a PET using the Company's CFE
technology. We have demonstrated that the PET works and are now working to
solve some remaining packaging issues related to the product. We expect to
solve these issues in the next few months and expect that the product will move
into the manufacturing stage at that point. We do not intend to manufacture
these PETs ourselves, but rather license other manufacturers to produce them.
We have also developed a new display technology, the HyFED. HyFED
combines what we believe to be the best properties of cathode ray tubes and
Field Emission Displays using our proprietary diamond/carbon thin films. We
anticipate 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 existing CRTs. In January 1999, we formed
an International Development Team to develop the first HyFED display. The
International Development Team is composed of six organizations - four from
Japan, one from Europe, and ourselves. The International Development Team
completed a working four inch monochrome prototype of the HyFED in January
2000. The team is now working to improve the prototype so that it is capable of
displaying a uniform full motion color video image on the screen. Each member
of the team is focusing on the development of a specific portion of the
prototype and each member is funding their own portion of the work. Upon
completion of the final prototype, these team members will be given the first
opportunity to license the HyFED technology. We expect to license our HyFED
technology in 2000.
ELECTRONIC BILLBOARDS. We are focusing our marketing efforts for our
electronic billboard product on major national retailers for their use in
conjunction with their existing on-site signage. These billboards are smaller
in size than the full size billboards we are also developing. We are focusing
on these retailers because we expect them to generate higher advertising
revenue per square foot of signage than roadside billboards and accordingly be
more profitable to us. We intend to lease or operate the billboards through
joint venture arrangements with these retailers. To facilitate our entry into
this market, we signed a marketing agreement in 1998 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. In January 2000, we signed an
agreement with Eckerd Corporation, a subsidiary of JCPenney and one of Vision
Mark's protected customers, to install two billboards as part of a pilot
program.
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We also have a contract to install an electronic billboard at a test
site for a major national billboard company. We have delayed work on this
contract to focus our efforts on marketing activities related to retailers. The
market potential for roadside billboards 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 our 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, we
intend 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. We
estimate 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.
Our billboard is based on a proprietary version of a mature existing
technology. This technology is Vacuum Fluorescent Display ("VFD"). The VFD
technology is widely used in a variety of applications and is readily available
from many component suppliers. This product offers many advantages over
existing technologies used in the outdoor advertising industry. These include
full video capability, full color, wide viewing angle with excellent outdoor
readability, relatively low cost compared with competing technologies, and high
reliability.
We are installing our first electronic billboard at a customer site in
March 2000. We are also developing an electronic billboard using Liquid Crystal
Display ("LCD") technology . The LCD billboard, when fully developed using our
patented technology, is expected to provide similar quality at a lower cost. As
we continue to develop our CFE technology, we expect to integrate the CFE
technology into our electronic billboard because of the advantages that it is
expected to provide related to cost and quality. Our CFE PET has 64 pixels
compared to 16 pixels in the similar sized VFD PET we are using in our existing
billboard. This should allow billboards using our CFE PETs to display a higher
quality picture. We expect our electronic billboard product to be successful
regardless of the timing of the availability of our CFE technology.
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 at the drive through window of fast food
restaurants. We received a royalty on all units sold by TDS through December
31, 1999, when the agreement was terminated. We have also developed similar
sized display units for indoor usage. We intend to market these smaller size
display units for both indoor and outdoor usage to national retail chains to be
used as part of a coordinated advertising program in conjunction with the
larger outdoor electronic billboard.
COMPETITION
ELECTRONIC BILLBOARDS. We believe that the proprietary version of the
VFD technology that we have developed 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,
do not allow certain colors to be viewed in direct sunlight,
and have a high initial cost
- Incandescent bulbs that are high maintenance and result in
poor graphics
- Electromechanical systems that have poor image qualities and
limited colors
- Liquid Crystal Displays ("LCD")
We have also acquired a patent related to LCD technology and are
currently researching the feasibility of using a version of the LCD technology
in a large screen display. LCDs are attractive because they have a long
lifetime and an existing manufacturing base.
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We are unaware of any other organizations developing an electronic
billboard using a technology similar to ours. However, this is an existing
technology used in many applications. Competition from other manufacturers
could develop at any time. There are several other companies either producing
or developing electronic billboards using other technologies.
CFE PRODUCTS. One short term focus in this area is the development of
the PET to be used as a component in a large display. This component, which
provides the light source is the most vital and costly part of a large display,
accounting for approximately 25 - 30 % of its cost. Since the PET directly
equates to the visual quality and reliability of the display, the
characteristics of the PET are critical to a purchase decision. Competition for
the Company's PET will come from the technologies previously described in
connection with the Company's electronic billboard. It is expected that the
Company's PET will provide wider viewing angles, a wider range of operating
temperatures and a higher degree of brightness than existing technologies.
There are other companies attempting to develop non-carbon based field
emission display technologies. It is our opinion that these technologies will
not be as cost efficient or demonstrate as high a level of brightness as the
CFE technology. In addition, these companies are attempting to develop these
technologies for use in computer screens rather than large display
applications.
TECHNOLOGY AGREEMENTS
MCC. In 1998, we simplified our technology agreements with MCC, the
Austin-based consortium of North American Electronics leaders. We 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
CFE technology directly to the Company and return the remaining patents and
patent applications to MCC. We are obligated to pay MCC a royalty of 2% of
revenues related to the transferred patents. We can, however, offset certain
pre-defined expenses against these royalty payments. It is not expected that we
will be obligated to pay any royalties in the near future.
DIAGASCROWN. In February 1995, we entered into a series of agreements
with DGC. Under these agreements, we agreed to collaborate with DGC on the
further development of CFE-related technology. We have the right to use the DGC
technology on a royalty-free basis. We jointly own with DGC all technology
developed under this, although DGC has agreed to assign its interest to us.
Consequently, we will have the sole authority to sublicense the technology
obtained under the collaboration, should we elect to do so. (See Note 12 to the
Consolidated Financial Statements). Under the terms of the original agreement,
we committed to perform $2.5 million of development in Russia. There is
disagreement as to the actual amount spent, but it is our position that we have
no remaining obligation under the agreement. The internal results that we have
achieved are far superior to those achieved through the collaborative efforts
in Russia and at present we are not using the technology developed under this
joint venture agreement in any manner.
ADDVENT. In May 1995, we 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 us from 1995 through 1997. These
expenditures were to be funded 49% by NIST. Under the ATP, we will own the
rights to the technology, subject to the license rights of the United States
government and the rights of our partner to own the high-voltage driver which
it will develop under the ATP and which it will supply to us. Our right to our
partner's driver shall be exclusive for a period of two years following our
acceptance of the design. We manage this project and have made the majority of
the expenditures under this program. As of December 31, 1999, we have completed
our 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. Our
joint venture participant has not yet completed the driver development.
PATENTS AND PROPRIETARY RIGHTS
An important part of our product development strategy is to seek, when
appropriate, protection for our products and proprietary technology through the
use of various United States and foreign patents and contractual arrangements.
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We own 44 issued patents, three allowed patents, and have 64 patent
applications pending before the United States Patent and Trademark Office. We
also have several unsubmitted patent applications in process. The patents,
allowances and applications relate to the CFE technology and other
technologies. In addition, there are foreign counterparts to certain United
States patents and applications. We consider our patent portfolio to be our
most valuable asset.
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 our 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 our
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 we fail to obtain patents for our technology,
and are required to rely on unpatented proprietary technology, there is no
assurance that we can protect our rights in such unpatented proprietary
technology, or that others will not independently develop substantially
equivalent proprietary products and techniques, or otherwise gain access to our
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,
our patents. The scope and validity of these patents, the extent to which we
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 our ability to license our technology. Litigation concerning these or
other patents could be protracted and expensive. If suit were brought against
us for patent infringement, a challenge in the suit by us as 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 us 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 our interest in the
affected products. We do, however, consider our patents to be very strong and
easily defendable in any action that may be brought against us.
We also rely 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 our trade secrets or
disclose such technology or that we can meaningfully protect our rights to our
unpatented trade secrets.
We require our 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 us. 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 our exclusive
property. There is no assurance, however, that these agreements will provide
meaningful protection for our trade secrets in the event of unauthorized use or
disclosure of such information.
GOVERNMENT REGULATION
Our products will be subject to extensive government regulation in the
United States and in other countries. In order to produce and market our
existing and proposed products, we 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. We 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. We do not believe that our CFE products
will present any significant occupational risks to the operators of such
equipment. In addition, the CFE 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 us and our products.
Additionally, our arrangements with our customers and affiliates may subject
our products to export and import control regulations of the U.S. and other
countries.
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In the past, a portion of our revenues have consisted of earnings
under U.S. government contracts, although we received no such revenue in 1998
or 1999 and currently have only one minor grant. 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. We are, and in the future expect to be, audited by the
government. Our ATP program is required to be audited in accordance with NIST
standards. We expect the results of these audits to have no material impact on
us.
EMPLOYEES
As of March 14, 1999, we had 50 full-time employees, including four
executive officers. Within the next twelve months, if business conditions
support it, we expect to hire additional employees. We are not subject to any
collective bargaining agreements and we consider our relations with our
employees to be good.
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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 44 Chairman and Chief Executive Officer
Zvi Yaniv 53 President and Chief Operating Officer
Tracy Vaught 43 Vice President and Chief Financial Officer
W. Michael Murray 52 Vice President, General Counsel, and Secretary
</TABLE>
Marc W. Eller has served as the Company's Chief Executive Officer
since July 29, 1996. Mr. Eller is Chairman of the Board of Directors and has
been a Director since November 1995. Mr. Eller co-founded BEG Enterprises, Inc.
in 1989 and has been its Vice President since that date. Prior to becoming CEO,
Mr. Eller was 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.
Tracy Vaught has been Vice President and Chief Financial Officer since
March 10, 2000. Ms. Vaught received a B.A. from the University of Texas at
Austin. Prior to becoming CFO of the Company, Ms. Vaught served as controller
of Sign Builders of America since 1994. She also has public accounting
experience at both a local CPA firm in Austin, Texas and Coopers & Lybrand in
Houston, Texas.
W. Michael Murray has been Vice President, General Counsel and
Corporate Secretary since November 1, 1999. From August 1998 until he joined
the Company, Mr. Murray was engaged in the private practice of law. From April
1990 until August 1998, Mr. Murray was Senior Assistant General Counsel and
Assistant Corporate Secretary for Tracor, Inc.
ITEM 2. PROPERTIES
We lease a 10,000 square foot facility in Austin that is used for our
corporate headquarters and research and development activities under a lease
expiring in June 2004. The monthly rental is approximately $7,000. Our SBOA
subsidiary also leases a 10,000 square foot facility in Austin that it uses for
its manufacturing operations under a lease expiring in August 2000. The monthly
rent on this facility is approximately $5,000. We also lease offsite storage
space totaling approximately 2,200 square feet on a month to month basis.
We believe that these facilities will be adequate for our anticipated
research, development, and manufacturing activities until additional products
or alternative applications are developed. If and when such additional products
or alternative applications are developed, we may be required to establish
additional facilities or enter into manufacturing agreements with others.
We do not currently invest in real estate or interests in real estate,
real estate mortgages, or securities of or interests in persons primarily
engaged in real estate activities. However, the Company has no policy, either
for or against, making such investments.
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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, SI Diamond, 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 our 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. In January 2000, we agreed
to participate in a settlement agreement between the plaintiff and the other
defendant; notwithstanding our denial of any liability to the plaintiffs. We
agreed to pay a total of $450,000, of which $225,000 was due at signing. We
signed three notes payable for the balance of the settlement. These notes, in
the amount of $25,000, $100,000, and $100,000, are due in three months, nine
months, and eighteen months, respectively. In exchange for this settlement, and
upon payment of the notes, we received a complete release from further
liability from both the plaintiff and the co-defendant. The entire amount of
this settlement is included in accrued liabilities at December 31, 1999.
On April 30, 1998, Universal Bonding Company, managing general agent
for Westchester Fire Insurance Company filed a complaint with the Superior
Court of New Jersey, Atlantic county. The Complaint named Richland Glass
Company, Inc., Robert Williams, Joan Williams, Bawa Singh, Narinder Singh,
Gaylord Evey and Doris Evey, all guarantors under the bond, as defendants. All
defendants were former owners, or associated with former owners, of Plasmatron.
Defendant Gaylord Evey filed an answer with the court naming Plasmatron, SI
Diamond, Nicholas Rettino, and the Rettino Insurance agency as third party
defendants and asking for indemnification by the third party defendants. A
separate indemnification claim filed by Richland Glass against the same third
party defendants was consolidated with this case. The amount of this claim is
to be determined at trial; however, any potential amounts due by the us are
dependent upon Westchester collecting from other guarantors on the bond, and
those guarantors succeeding in obtaining a judgement against us. Westchester
has released its claims against us. We consider this case to be without merit
and expect to have the case ultimately resolved in our favor.
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 us
for debts of our subsidiary, Plasmatron. We were 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 our consolidated financial statements. We
believe that the ultimate resolution of this matter will not have a material
impact on our consolidated financial statements.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor of
DTO, filed a complaint in the United States District Court for the Southern
District of New York against us for unpaid debts of our subsidiary, Diamond
Tech One, Inc. We were served with notice of this suit on October 14, 1998. We
settled this lawsuit for less than the full amount due in 1999.
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. We
contend that Aetna failed in its duty to mitigate damages and behaved in a
reckless manner, which resulted in damages to us and our property. We intend to
vigorously defend ourselves in this action. We believe that the ultimate
resolution of this matter will not have a material impact on our consolidated
financial statements.
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 us.
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 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our 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". We were delisted by both
exchanges and the NASDAQ Small Cap Market in 1998 for failure to comply with
continued listing requirements, primarily related to the minimum share price
required to maintain our listing. Our 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>
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 ................................................ $1.18 $0.37
Second Quarter................................................ $1.59 $0.65
Third Quarter ................................................ $3.06 $1.22
Fourth Quarter................................................ $2.06 $1.31
2000
First Quarter (through March 14, 2000)........................ $4.28 $1.67
</TABLE>
On March 14, 2000, the closing sale price for our common stock as
reported on the NASDAQ OTC Bulletin Board system was $3.46875. As of March 14,
2000, there were approximately 315 shareholders of record for our common stock.
We have never paid cash dividends on our common stock, nor do we have
any plans to pay dividends. Our board of directors currently intends to invest
future earnings, if any, to finance expansion of our business. Any payment of
cash dividends in the future will be dependent upon our earnings, financial
condition, capital requirements, and other factors deemed relevant by our 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 our Annual Report on Form
10-KSB concerning information as to all equity securities issued by us 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 8 to the Notes to the Consolidated Financial Statements contained in this
Annual Report on Form 10-KSB.
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<PAGE> 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should assist in understanding our financial
position and results of operations for the years ended December 31, 1999 and
1998. The Notes to our Consolidated Financial Statements included later in this
report contain detailed information that should also be read in conjunction
with this discussion.
OVERVIEW
Throughout 1999 and 1998, we continued our efforts to move from a
contract research and development organization toward commercial viability. We
made the decision to sell the operating assets of our DTO subsidiary in May
1998 to focus on our remaining higher potential subsidiaries. In 1999, we
accomplished significant milestones in each of our active subsidiaries. Our
FEPET subsidiary licensed a portion of its patents to Canon, Inc. in exchange
for a one-time, up-front payment of approximately $5.6 million. EBT introduced
its electronic billboard product in July 1999 and continued to refine it for
the remainder of the year. EBT also acquired substantially all of the assets of
Sign Builders of America, Inc. as of August 31, 1999. SBOA is a high quality
manufacturer of all types of signage and played a significant role in the
development of our electronic billboard, both before and after the acquisition.
We expect to continue our concentrated research and development of FEPET's
technology in 2000. We expect to begin installing our electronic billboards
beginning in March 2000.
RESULTS OF OPERATIONS
1999 Compared to 1998. The Company had $6,752,104 in revenues during
1999, as compared with $721,841 during 1998. The main reason for the increase
was the $5,555,556 license fee received in 1999 from Canon, Inc. Commercial
(non-governmental) sales accounted for all revenues in both years. Our revenue
in 1999 came from FEPET, EBT, and SBOA in the amounts of $5,794,269, $300,282,
and $657,553, respectively. In 1998, we received revenues from DTO of $385,364,
EBT of $192,246, and FEPET of $144,231. The 1999 FEPET revenues were composed
of license fees of $5,555,556 and $238,713 of research revenues. 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 EBT revenue in both years was primarily the result of royalty payments from
TDS. The 1998 revenues for DTO are for the period from January 1, 1998 through
the date of the DTO sale on May 8, 1998. The SBOA revenue in 1999 was for the
period from September 1, 1999 through December 31, 1999. We had no revenue from
government funded projects in either 1999 or 1998. We did receive approval for
a minor grant near the end of 1999, that will result in approximately $67,000
of revenue in 2000. We may seek additional research grants in the future if
such grants are directly related to projects that we are already working on in
conjunction with its strategic objectives.
We had a revenue backlog of approximately $278,000 at December 31,
1999. This is composed of approximately $211,000 from our SBOA subsidiary and
approximately $67,000 under a NASA grant that we received in late 1999. We had
no revenue backlog at December 31, 1998.
For 1999, our costs of sales were $674,380, resulting in a margin of
90%, as compared with $1,592,225 and a negative margin of 121% during 1998.
This increase in margin resulted because our 1999 revenues were primarily from
royalties and license fees that have only nominal costs associated with them.
The negative margin in 1998 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. We had negative margins because our DTO subsidiary operated
significantly below its facility capacity in the 1998 period. We expect to
maintain positive margins in the future as we continue to pursue license and
royalty agreements and begin to generate advertising revenue from electronic
billboards that we install.
Our selling, general and administrative expenses increased from
$2,149,018 in 1998 to $3,356,675 in 1999. This increase results from a
combination of factors including increased overhead associated with our SBOA
subsidiary, professional fees associated with the SBOA and other potential
acquisitions, a $500,000 commission paid to an unrelated party in connection
with the Canon license agreement, and expenses associated with the introduction
of our electronic billboard.
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<PAGE> 20
Company sponsored research and development expenses increased in 1999
to $1,475,655 from $1,167,673 in 1998. Development expense related to our
electronic billboard product is the primary reason for the increase. We expect
to incur substantial expenses in support of additional research and development
activities related to the commercial development of our CFE and electronic
display technologies. We have one small government grant at the present time.
We may apply for others, but will only do so if 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 gain on disposal of assets in 1999 was the
result of the sale of our previous domain name, diamond.com, for $250,000 and
minor other equipment disposals. The Company had no marketable securities
portfolio in 1998 and therefore no gains or losses related to marketable
securities in that year. Taxes in 1999 are foreign taxes related to the Canon
license agreement. There were no foreign taxes in 1998.
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 income (loss)
approximates the net income (loss) reported.
FINANCIAL CONDITION
Our cash position increased from $2,636 at December 31, 1998 to
$348,832 at December 31, 1999. Net cash provided by operating activities was
$868,226 as opposed to cash used in operating activities of $3,536,784 in 1998.
The increase in cash provided by operations was primarily the result of the
license agreement signed with Canon, Inc. in 1999.
Cash used in investing activities was $1,736,134 in 1999 as compared
with cash provided by investing activities in 1998 of $2,028,948. The cash used
in investing activities in 1999 was related to the construction of our
electronic billboard product, our purchase of the assets of SBOA, and our
investment of a portion of our operating funds in marketable securities. The
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.
No material commitments exist as of December 31, 1999 for future purchases of
capital assets.
In 1998 and in early 1999, we continued to raise additional funds
through equity and debt funding to finance our operating losses. The net cash
provided by financing activities decreased from $1,509,472 in 1998 to
$1,214,104 in 1999. As a result of the license payment from Canon, Inc. we had
less of a need for additional financing. Also, a significant portion of the
proceeds from the issuance of common stock was the result of the exercise of
warrants and stock options in 1999, that had been issued in prior years.
Based on the developmental stages of our technology, additional
financing will be necessary in the future. If all of the our warrants that were
outstanding as of December 31, 1999, and have not yet expired in 2000, were
exercised, we would collect proceeds of approximately $800,000. (See Note 10 to
the Consolidated Financial Statements.) Proceeds from the exercise of warrants
totaled approximately $650,000 in 1999 and $90,000 in 1998. Given that the
current price of our common stock is significantly above the exercise price of
our outstanding warrants, it is likely that a significant portion of the
outstanding warrants will be exercised in the near future. We 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 14, 2000 were exercised, the Company would receive proceeds of
approximately $1.9 million.
Following is a summary of debt and equity proceeds that the Company
has received from January 1, 1997 through the date of this filing:
Page 12
<PAGE> 21
8% Convertible Debenture
In February 1997, we closed an offering of an 8% convertible debenture
under Regulation S of the Securities Act of 1933. On March 7, 1997 we 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 our
common stock in December 1997. The conversion price was 75% of the average of
the closing bid price of our common 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 our common stock. The conversion price
was equal to the average closing bid price of our 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 our common stock. The conversion price was
based on 95% of the average of the closing bid price of our stock for the 10
trading days preceding the notice of conversion. As of December 31, 1999, we
have no remaining obligation to the former holder of the debenture.
Series F Preferred Stock
In March 1997, we closed an exempt offering under Regulation D of the
Securities Act of 1933 for 1,700 shares of our Series F convertible preferred
stock. We 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, we revised our 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 our common
stock. The conversion price for each month was the average closing bid price of
our common stock for the preceding month, except that the conversion price for
March 1998 was $0.15. Upon submission for conversion, we 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, we issued 1,700 shares of our
Series G preferred stock. The offering provided us with proceeds of $1,700,000.
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.
Page 13
<PAGE> 22
In connection with the issuance of the Series G preferred shares, each
Series G shareholder also received warrants to purchase our 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 our 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
and updated by amendment on June 23, 1999 and November 23, 1999.
During 1999, a total of 500 shares of Series G preferred were
converted into 604,383 shares of common stock and in 1998, a total of 100
shares of Series G Preferred stock were converted into 110,000 shares of common
stock.
October 1997 Offering
In October 1997, we 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 our 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 our 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 our 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 our 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.
We received cash proceeds of $1,000,000 in 1997 and issued 2,829,334
shares of our common stock in connection with the installments due under the
October 1997 Offering in October and November. We also issued 1,118,868 shares
of our common stock in connection with the installment due December 1, 1997;
however payment was not received for those shares. We 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, we agreed to terminate the subscription agreement with the
investors. As a result of this agreement, the investors agreed to return
318,868 of the shares received in December, to pay cash of $250,000, and return
all warrants received under the agreement. After termination of the
subscription agreement in January 1998, we 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.
December 1997 Notes
In December 1997, we 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 our common stock at the option of the lender. The conversion
price of our common stock for determining the number of shares to be issued
equal to 75% of the average closing bid price of our common stock for the five
trading days preceding the date of notification. $300,000 of these notes were
converted into shares of our common stock at the time of the sale of the DTO
assets. The remaining $185,000, which was payable to our Chief Executive
Officer, was repaid at the time of the sale of the DTO assets.
Other 1997 Shares
During 1997, we issued 30,000 shares of the our 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, we issued 239,275 shares of our 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.
Page 14
<PAGE> 23
MCC Settlement
During 1998, we issued 500,000 shares of our 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 12 to the Consolidated Financial
Statements. Based on the market price of our stock at the time, these shares
were valued at $100,000. In 1997 we also issued 340,717 shares of our 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.
1998 Private Placements
In 1998, we issued 3,915,895 shares of restricted common stock, and
received cash proceeds of $713,236, in connection with private placements of
our 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 and updated on June 23, 1999 and
November 23, 1999.
1998 Notes
During 1998, we issued a total of $1,005,000 of notes payable to
investors that were convertible into shares of our 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 our common stock in 1998 and the remaining
$805,000 were converted into shares of our common stock in February 1999. We
also issued notes payable totaling $260,000 which were not convertible into our
common stock. These notes were short-term notes bearing interest at a rate of
15% and secured by all of our assets. In addition, we issued $100,000 of 90 day
notes payable bearing interest at a rate of 15%, secured by all of our assets,
and were accompanied by warrants enabling the holders to purchase a total of
400,000 shares of our common stock at $0.25 per share, which approximated
market at the time of the loans.
1999 Notes
In January and February 1999, we 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 our common stock at rates ranging from $0.30 to $0.40 per share. These
conversion rates approximated the market price of our 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.
2000 Private Placements
In December 1999, the board of directors authorized the issuance of up
to 800,000 shares of the of our common stock to an investor in an exempt
offering under Regulation D of the Securities Act of 1933 at a price of $1.25
per share. The agreement called for investments in increments of $250,000 at
the option of the Company. Through March 14, 2000, we have received a total of
$750,000. The shares for the first two increments, totaling $500,000, were
priced at $1.25 per share, as called for in the agreement. As a result of the
increase in our stock price since the time of the original agreement, the
shares issued as a result of the third increment of $250,000 were priced at
$2.50 per share. We are obligated to register these shares by August 2000.
SBOA Acquisition
In September 1999, we acquired substantially all of the assets
(including the right to use the name) and assumed certain liabilities of Sign
Builders of America, Inc. In connection with this transaction we issued 423,132
shares of our common stock, which were valued at $900,000 at the time of
issuance to the former owner of SBOA. We also issued a total of $250,000 of
notes payable to the same individual. These notes are convertible into our
common stock at his option at a rate of $2.127 per share. In February 2000,
$125,000 of principal and the related accrued interest were converted into
62,284 shares of our common stock.
Page 15
<PAGE> 24
The principal source of our liquidity has been funds received from
exempt offerings of common and preferred stock. We may receive additional funds
from the exercise of warrants, although there is no assurance that such
warrants will be exercised. In the event that we need additional funds, we may
seek to sell additional debt or equity securities. We may seek to increase our
liquidity through bank borrowings or other financings. While we expect to be
able to easily obtain any funds needed for operations, there can be no
assurance that any of these financing alternatives can be arranged on
commercially acceptable terms. We believe that our success in reaching
profitability will be dependent upon the viability of our products and their
acceptance in the marketplace, and our ability to obtain additional debt or
equity financings in the future. Our independent auditors, Wallace Sanders &
Co., expressed uncertainty as to the ability of the Company to continue as a
going concern based on accumulated past losses from operations. See
"Independent Auditors' Report."
OUTLOOK
We anticipate that losses will continue in early 2000 as we continue
to fund the development of our CFE technology and begin installations of our
electronic billboard and related electronic display products. We expect the
magnitude of the losses, if they continue, to decrease. We expect to reach
break-even on a monthly operating basis by the end of 2000. There can be no
assurance that we will be profitable in the future. Full commercial development
of our technology and electronic billboard and related electronic display will
require additional funds that may not be available at terms acceptable to us.
We developed a plan to allow ourselves to maintain operations until we
are able to sustain ourselves on our own revenue. However, at current spending
levels, existing resources (including commitments) are only available to allow
us to operate for a period of approximately six months from the date of this
report. Our plan is primarily dependent on raising funds through the licensing
of our technology and through additional debt and equity offerings. We are also
concentrating on raising revenue by seeking customers for our electronic
billboard product, which is currently under development. 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.
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. Our plan is primarily dependent on increasing revenues
and raising funds through additional debt and equity offerings. Although we do
not expect funding our operations to be a problem, 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 its products, or obtain funds through arrangements
with other entities that may require us to relinquish rights to certain of its
technologies or products. Such results would materially and adversely affect
us.
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> 25
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF SI DIAMOND TECHNOLOGY, INC.
<TABLE>
CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Independent Auditors' Report.............................................................................. 18
Consolidated Balance Sheets - December 31, 1999 and 1998.................................................. 19
Consolidated Statements of Operations - Years Ended December 31, 1999 and 1998............................ 20
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended December 31,
1999 and 1998........................................................................................ 21
Consolidated Statements of Cash Flows - Years Ended December 31, 1999 and 1998............................ 23
Notes to Consolidated Financial Statements................................................................ 24
</TABLE>
Page 17
<PAGE> 26
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 (collectively, the "Company") as of December
31, 1999 and 1998, 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, 1999 and 1998, 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 stock, preferred stock, and convertible debt
securities to fund its operations, and had sustained only operating losses
prior to 1999. As a result, there is substantial uncertainty regarding 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.
WallaceSanders & Company
Dallas, Texas
February 12, 2000
Page 18
<PAGE> 27
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 348,832 $ 2,636
Marketable securities ..................................................... 719,376 --
Accounts receivable, trade ................................................ 314,518 184,020
Notes receivable .......................................................... 60,000 --
Inventories ............................................................... 167,775 65,529
Prepaid expenses and other current assets ................................. 52,312 101,508
------------ ------------
Total current assets ................................................ 1,662,813 353,693
Property, plant and equipment, net ............................................. 1,437,246 160,670
Intangible assets, net ......................................................... 836,021 9,000
Other assets ................................................................... 7,250 14,500
------------ ------------
Total assets ........................................................ $ 3,943,330 $ 537,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 751,225 $ 1,419,604
Current portion of long-term debt ......................................... 5,473 --
Obligations under capital lease ........................................... 31,432 --
Notes payable - related parties ........................................... 250,000 1,165,000
Accrued liabilities ....................................................... 723,842 584,987
Customer deposits and other current liabilities ........................... 256,947 4,770
------------ ------------
Total current liabilities ........................................... 2,018,919 3,174,361
------------ ------------
Note payable, long-term ........................................................ 21,623 --
------------ ------------
Commitments and contingencies
Minority interest in subsidiary ................................................ 22,547 --
------------ ------------
Shareholders' equity (deficit):
Preferred stock, $1.00 par value, 2,000,000 shares authorized;
1,100 and 1,700 shares issued and outstanding, respectively ............. 1,100 1,700
Common stock, 120,000,000 shares authorized, $.001 par value,
53,906,719 and 45,986,617 shares issued and outstanding, respectively ... 53,906 45,987
Additional paid-in capital ................................................ 55,410,993 52,019,707
Accumulated deficit ....................................................... (53,585,758) (54,703,892)
------------ ------------
Total shareholders' equity (deficit) ................................ 1,880,241 (2,636,498)
------------ ------------
Total liabilities and shareholders' equity (deficit) ................ $ 3,943,330 $ 537,863
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
Page 19
<PAGE> 28
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues
License fees and royalties ....................................... $ 5,842,756 $ 131,150
Other ............................................................ 909,348 590,691
------------ ------------
Total Revenues.......................................... 6,752,104 721,841
Cost of sales ............................................................. 674,380 1,592,225
Selling, general and administrative expenses .............................. 3,356,675 2,149,018
Research and development .................................................. 1,475,655 1,167,673
------------ ------------
Operating costs and expenses .............................................. 5,506,710 4,908,916
------------ ------------
Income (loss) from operations ........................... 1,245,394 (4,187,075)
------------ ------------
Other income (expense):
Gain on disposal of assets ....................................... 265,688 771,515
Net realized and unrealized gains on marketable securities ....... 309,172 --
Other income (expense), net ...................................... (124,017) (141,988)
------------ ------------
Income (loss) before minority interest in subsidiary earnings ............. 1,696,237 (3,557,548)
Minority interest in subsidiary earnings .................................. 22,547 --
------------ ------------
Income (loss) before taxes ................................................ 1,673,690 (3,557,548)
Provision for taxes ....................................................... 555,556 --
------------ ------------
Net income (loss) ......................................................... 1,118,134 (3,557,548)
Less preferred stock dividend ............................................. (140,163) (254,957)
------------ ------------
Net income (loss) applicable to common shareholders ....................... $ 977,971 $ (3,812,505)
============ ============
Earnings (loss) per share
Basic............................................................. $ 0.02 $ (0.10)
============ ============
Diluted........................................................... $ 0.02 $ (0.10)
============ ============
Weighted average common shares outstanding
Basic ............................................................ 51,188,385 37,207,122
============ ============
Diluted .......................................................... 57,401,654 37,207,122
============ ============
</TABLE>
See accompanying summary of accounting policies and notes
to consolidated financial statements.
Page 20
<PAGE> 29
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED COMMON
------------------- ---------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
--------- --------- ---------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,700 $ 1,700 45,986,617 $ 45,987 $52,019,707 $(54,703,892) $ (2,636,498)
Warrants exercised -- -- 970,000 970 646,097 -- 647,067
Issuance of common stock
as a result of the exercise
of employee stock options -- -- 1,557,037 1,557 623,729 -- 625,286
Conversion of Series A and G
preferred stock into common stock (600) (600) 729,658 729 (129) -- --
Issuance of common shares for cash -- -- 200,000 200 109,800 -- 110,000
Issuance of common stock
shares in payment of short
term notes and interest -- -- 4,040,275 4,040 1,045,812 -- 1,049,852
Issuance of common stock
warrants for services -- -- -- -- 66,400 -- 66,400
Issuance of common stock
for subsidiary acquisition -- -- 423,132 423 899,577 -- 900,000
Net income -- -- -- -- -- 1,118,134 1,118,134
------ -------- ---------- -------- ---------- ------------ ------------
Balance, December 31, 1999 1,100 $ 1,100 53,906,719 $ 53,906 $55,410,993 $(53,585,758) $ 1,880,241
====== ======== ========== ======== ========== ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
Page 21
<PAGE> 30
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED COMMON
------------------- ---------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
--------- --------- ----------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 3,077 $ 3,077 24,238,893 $ 24,239 $50,386,816 $(51,094,333) $ (680,201)
Warrants exercised -- -- 600,000 600 89,400 -- 90,000
Issuance of common stock
as a result of the exercise
of employee stock options -- -- 26,487 26 9,907 -- 9,933
Conversion of Series E, F and G
preferred stock into common stock (1,349) (1,349) 12,575,029 12,575 (11,226) -- --
Conversion of Reg. S debenture
into common shares -- -- 2,411,163 2,411 531,402 -- 533,813
Redemption of Series E
preferred stock for cash (28) (28) -- -- (279,972) (52,011) (332,011)
Issuance of common stock
shares in payment of short
term notes and interest -- -- 2,038,018 2,038 372,242 -- 374,280
Issuance of common stock
in payment of other liabilities -- -- 500,000 500 99,500 -- 100,000
Issuance of common stock
warrants in connection with debt -- -- -- -- 112,000 -- 112,000
Cancellation of previously
issued common shares -- -- (318,868) (318) 318 -- --
Issuance of common stock for cash -- -- 3,915,895 3,916 709,320 -- 713,236
Net Loss -- -- -- -- -- (3,557,548) (3,557,548)
------ -------- ----------- -------- ----------- ------------- ------------
Balance, December 31, 1998 1,700 $ 1,700 45,986,617 $ 45,987 $52,019,707 $(54,703,892) $ (2,636,498)
====== ======== =========== ======== =========== ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
Page 22
<PAGE> 31
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................................. $ 1,118,134 $(3,557,548)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Interest paid in common stock.................................................. 44,852 115,871
Minority interest in subsidiary earnings....................................... 22,547 --
Warrants issued for debt and services.......................................... 66,400 112,000
Depreciation and amortization expense.......................................... 171,035 449,445
Gain on disposal of fixed assets............................................... (23,688) (771,515)
Net realized and unrealized gains on marketable securities..................... (309,172) --
Changes in assets and liabilities:
Accounts receivable, trade................................................... 174,428 264,022
Notes receivable............................................................. (60,000) --
Inventory.................................................................... 58,511 (65,529)
Prepaid expenses and other assets............................................ 49,196 (21,380)
Accounts payable............................................................. (721,310) 146,646
Accrued expenses............................................................. 104,667 (207,566)
Customer deposits and other current liabilities.............................. 172,626 (1,230)
------------- ------------
Total adjustments.......................................................... (249,908) 20,764
------------- -----------
Net cash provided by (used in) operating activities.......................... 868,226 (3,536,784)
------------- ------------
Cash flows from investing activities:
Decrease (increase) in deposits................................................ 7,250 (14,500)
Purchase of marketable securities.............................................. (1,943,522) --
Sale of marketable securities.................................................. 1,533,318 --
Capital expenditures........................................................... (914,683) (62,727)
Cash paid for acquisition of Sign Builders of America, Inc. ................... (427,741) --
Proceeds from sale of equipment ............................................... 9,244 2,106,175
------------- -----------
Net cash provided by (used in) investing activities.......................... (1,736,134) 2,028,948
------------- -----------
Cash flows from financing activities:
Book overdraft................................................................. -- (156,686)
Proceeds from notes payable - related parties.................................. 250,000 2,135,000
Repayment of notes payable - related parties................................... (400,000) (1,200,000)
Redemption of preferred stock.................................................. -- (332,011)
Proceeds from issuance of common stock......................................... 1,382,353 1,063,169
Repayment of notes payable and capital lease obligations....................... (18,249) --
------------- -----------
Net cash provided by financing activities......................................... 1,214,104 1,509,472
------------- -----------
Net increase in cash and cash equivalents......................................... 346,196 1,636
Cash and cash equivalents, beginning of year...................................... 2,636 1,000
------------- -----------
Cash and cash equivalents, end of year............................................ $ 348,832 $ 2,636
============= ===========
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
Page 23
<PAGE> 32
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, commercialization of electronic digitized sign technology, and the
construction and sale of all types of outdoor signage. 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 Carbon-Based Field Emission ("CFE") technology.
The Company completed its initial public offering in 1993. Through
February 2000, in a series of offerings, the Company has raised proceeds of
approximately $57.3 million, net of issuance costs (See Note 8). As indicated
in the accompanying consolidated statements of operations, the Company was
profitable in 1999. This was the Company's first year of profitable operations
since its initial public offering. Through December 31, 1998, the Company had
incurred cumulative losses of approximately $54.7 million. The increase in
revenue and corresponding profit increase in 1999 was primarily the result of a
$5.6 million license agreement signed with Canon, Inc. (Japan). As of the date
of this filing, the Company has the resources available to fund operations for
a period of approximately six months. The Company is seeking additional
licensees for its technology to fund ongoing operations.
In addition, the Company is launching its electronic billboard product and
expects to begin receiving revenues from this product in March 2000. To the
extent that it is unable to raise sufficient funds through license agreements,
the Company may seek additional funds through the equity markets, or raise
funds through debt instruments to allow it to maintain operations until it is
able to sustain itself on its own revenue. There is no assurance that license
agreements will be signed, that funds will be available in the equity or debt
markets, or that commercialization will result in income from operations.
Management believes it will be able to secure additional short term funding, if
need be, to allow the Company to continue operations until an agreement can be
finalized to license its technology or additional debt or equity can be raised.
Full commercial development of the Company's CFE 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 stock, preferred stock, and
convertible debt securities. 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 and
technology, 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 only one minor funded research project from the U.S. Government
and will only seek additional grants to the extent they directly relate to the
Company's core technology. Under the present circumstances, the majority of
research and development performed is being internally funded by the Company.
Page 24
<PAGE> 33
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Field Emission Picture Element Technology,
Inc. ("FEPET"), Electronic Billboard Technology, Inc. ("EBT"), Sign Builders of
America, Inc. ("SBOA"), Diamond Tech One, Inc. ("DTO"), SDI Acquisition Corp.
("SDI"), and Plasmatron Coatings and Systems, Inc. ("Plasmatron"), after the
elimination of all significant intercompany accounts and transactions. FEPET is
primarily involved in developing products for applications using the Company's
proprietary CFE technology. EBT is primarily involved in the commercialization
of electronic digitized sign technology. SBOA is a manufacturer of custom
signage. The Companies remaining subsidiaries (SDI, DTO, and Plasmatron,) are
currently inactive.
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.
Revenue recognition
The Company recognizes revenue from the construction and sale of custom
signage when the sign is installed on the customer's premises. The Company
recognizes royalty revenue at the time the underlying product upon which the
royalty is based is shipped by the entity paying the royalty. License revenue
from licensing the Company's product is recognized as revenue when received.
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.
Marketable securities
The Company invests in equity securities of publicly traded corporations
on a temporary, or short term, basis. These securities are purchased with the
intent of selling them for a profit in the near term and to achieve higher
returns on capital available for temporary investment than are otherwise
available in the debt market. These securities are carried on the consolidated
balance sheet at fair market value.
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. The Company's SBOA subsidiary frequently sells
to smaller companies, but requires deposits and prepayments. It is the
Company's policy to record reserves for potential credit losses. Since
inception, the Company has experienced minimal losses. The Company had a
reserve for potential credit losses of approximately $6,000 at December 31,
1999 and no reserve at December 31, 1998.
Page 25
<PAGE> 34
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or
market. Inventories consist of purchased components and work-in-process at
December 31, 1999 and 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 are being 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 1999 or 1998. The
majority of patent costs are expensed as incurred.
In connection with the acquisition of the assets of SBOA in August 1999,
the former owner of SBOA entered into a covenant not to compete with the
Company, whereby this individual agreed not to compete with the Company for a
period of three years from the date of the acquisition. This covenant not to
compete is being amortized over the three year period covered by the agreement.
The Company also recorded goodwill in connection with the SBOA transaction.
This goodwill is being amortized over a 15 year period.
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.
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.
Page 26
<PAGE> 35
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Minority Interest in Subsidiary
The minority interest in subsidiary represents the 5% of FEPET owned by
Diamond Pro-Shop Nomura, Company, Ltd. and is equal to 5% of the book value of
FEPET.
Preferred stock dividends
The Series E and F preferred stocks contained a provision (See Note 8)
that allowed 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 was treated as a dividend to the preferred shareholders. In addition,
the Series E preferred stock included an 8% accretion payable in common stock
and the Series F preferred stock included 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 had been converted as of
December 31, 1999 and 1998, respectively, have been treated as preferred
dividends. The amount treated as a dividend in 1999 related to the accretion
was $140,163, all related to the Series G preferred stock. 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.
Income (loss) per common share
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which
requires the Company to present its basic income (loss) per share and diluted
income (loss) per share, and certain other income (loss) per share disclosures
for each year presented. Basic income (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted-average number
of common shares outstanding. The computation of diluted income (loss) per
share is similar to the computation of basic income (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 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, the Company had 1,700 preferred shares
outstanding, 4,227,397 options outstanding, and 2,695,379 warrants outstanding.
Reclassifications
Certain reclassifications were made to previously reported amounts in the
accompanying consolidated financial statements and notes to make them
consistent with the current year presentation format.
Management's estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
Page 27
<PAGE> 36
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Fair value of financial instruments
The Company's financial instruments as defined by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," include cash and cash
equivalents, marketable securities, accounts receivable, notes receivable,
accounts payable, accrued liabilities, notes payable, and capital lease
obligations. All financial instruments, except for marketable securities, are
accounted for on an historical cost basis, which approximates fair value at
December 31, 1999 and 1998.
Comprehensive Income
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 income (loss)
approximates the net income (loss) reported for both years.
3. MARKETABLE SECURITIES
The Company invested a portion of its working capital in marketable equity
securities. All such equity securities were classified as trading securities.
At December 31, 1999, the Company had securities with a cost basis of $540,646,
unrealized gains of $178,730, and a fair market value of $719,376. During 1999,
the Company realized proceeds from the sale of securities of $1,533,318 and
recognized gains of $210,197, losses of $79,755, and a net gain of $130,442. In
total, the Company recognized $309,172 of net realized and unrealized gains in
the income statement for the year ended December 31, 1999. The Company had no
marketable equity securities at December 31, 1998 and no activity with
marketable equity securities in 1998.
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Property, plant and equipment, at cost:
Plant and equipment.......................................................... $ 830,431 $ 903,620
Electronic display units under construction.................................. 858,509 --
Furniture and office equipment............................................... 182,057 37,328
Leasehold improvements....................................................... 131,079 14,833
----------- ----------
Total cost................................................................. 2,002,076 955,781
Less accumulated depreciation................................................ (564,830) (795,111)
----------- ----------
$ 1,437,246 $ 160,670
=========== ==========
Intangible assets:
Patents ..................................................................... $ 30,000 $ 30,000
Covenant not to compete...................................................... 500,000 --
Goodwill and other........................................................... 398,607 --
----------- ----------
Total cost................................................................. 928,607 30,000
Less accumulated amortization................................................ (92,586) (21,000)
----------- ----------
$ 836,021 $ 9,000
=========== ==========
</TABLE>
Page 28
<PAGE> 37
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS (CONT.):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C> <C>
Accrued liabilities:
Payroll and related accruals................................................. $ 11,373 $ 66,913
Accounting and legal fees.................................................... 42,500 15,000
Lawsuit settlement........................................................... 450,000 250,000
Other........................................................................ 219,969 253,074
---------- ----------
Total .................................................................... $ 723,842 $ 584,987
========== ==========
</TABLE>
The cost of electronic billboards under construction at December 31, 1999
is included in property plant and equipment. The amount represents costs related
to three billboards. One of these billboards was substantially complete at
December 31, 1999. Costs related to the other two billboards consisted of
deposits related to parts on order at that date. The remaining total cost to
complete all three units at December 31, 1999 was approximately $350,000.
5. LEASE OBLIGATIONS:
The Company leases various facilities and equipment under operating lease
agreements having terms expiring at various dates through 2003. Rental expense
was $160,554 and $252,829 for the years ended December 31, 1999 and 1998,
respectively.
Future minimum lease payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1999,
were as follows:
<TABLE>
<S> <C>
2000 $ 143,213
2001 114,431
2002 93,418
2003 39,582
2004 --
----------
Total future minimum lease payments $ 390,644
==========
</TABLE>
At December 31, 1999, the Company has a capital lease obligation of
$31,432 related to a construction vehicle. Payments of $1,629 per month are due
under the capital lease agreement through August 2000. A balloon payment of
$17,818 is due in September 2000. The cost of the vehicle is included in
vehicles and the related amortization is included in accumulated depreciation.
Ownership of the vehicle will transfer to the Company after the balloon payment
is made.
Page 29
<PAGE> 38
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. NOTES PAYABLE :
Notes payable at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable to shareholder, due in two
equal installments in March and September
2000, bearing interest at a rate of 6%. The
note arose in connection with the purchase of
the assets of Sign Builders of America, Inc. and
is convertible into common stock at a rate of
$2.127 per share at the option of the note holder. $250,000 $ --
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 were converted into
common stock as described in Note 8. -- 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% and due on demand
As described in greater detail in Note 8, this
note was converted into common stock in 1999. -- 100,000
Note payable due in 60 monthly installments of
$615 through April 2004, bearing interest at a
rate of 7.75% and secured by a vehicle. 27,096 --
-------- -----------
Total 277,096 1,165,000
Less current portion 255,473 (1,165,000)
-------- -----------
Notes payable, long-term $ 21,623 $ --
======== ===========
</TABLE>
Total interest expense for all debt was approximately $43,000 and
$327,000 for 1999 and 1998, respectively.
Page 30
<PAGE> 39
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. INCOME TAXES:
The components of deferred tax assets (liabilities) at December 31, 1999 and
1998, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses....................................................... $ 17,427,000 $ 17,511,000
Research and experimentation credits....................................... 478,000 478,000
Foreign tax credit credits................................................. 556,000 --
Capitalized intangible assets.............................................. 328,000 340,000
Depreciation assets........................................................ 37,000 --
Accrued expenses not deductible until paid................................. 176,000 7,000
------------- -------------
Total deferred tax assets.................................................. 19,002,000 18,336,000
------------- -------------
Deferred tax liabilities:
Unrealized gains on securities............................................. 61,000 --
------------- -------------
Total deferred tax liabilities............................................. 61,000 --
------------- -------------
Net deferred tax assets before valuation allowance.............................. 18,941,000 18,336,000
Valuation allowance............................................................. (18,941,000) (18,336,000)
------------- -------------
Net deferred tax asset.......................................................... $ -- $ --
============= =============
</TABLE>
The following is a reconciliation of the amount of the income tax expense
(benefit) that would result from applying the statutory federal income tax
rates to pretax income (loss) and the reported amount of income tax expense
(benefit) for the periods ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Tax provision (benefit) at statutory rate of 34%............................... $ 569,000 $ (1,209,000)
Net increase in valuation allowance............................................. 605,000 1,203,000
Foreign taxes paid.............................................................. 555,556 --
Foreign tax rates............................................................... (133,000) --
Foreign tax credits............................................................. (556,000) --
Deductible expenses not charged against book income............................. (450,000) --
Nondeductible expenses.......................................................... 4,000 6,000
Other........................................................................... (39,000) --
------------- -------------
Total Tax.................................................................. $ 555,556 $ --
============= =============
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards
of approximately $51 million that expire from 2006 through 2018, 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 and foreign tax credits of
approximately $556,000 that expire in 2004.
The Company's IPO, completed in 1993, and subsequent issuances of stock
have effected ownership changes 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 changes in ownership.
Page 31
<PAGE> 40
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. CAPITAL STOCK:
Preferred Stock
The Company has authorization for the issuance of 2,000,000 shares of
$1.00 par value preferred stock. The following table summarizes the preferred
shares issued and outstanding at December 31:
<TABLE>
<CAPTION>
1999 1998
1999 Preferred Preferred
Liquidation --------- ---------
Preference Shares Amount Shares Amount
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Series A $ -- -- $ -- 100 $ 100
Series G 1,372,192 1,100 1,100 1,600 1,600
------------ ----- ------- ----- -------
Total $ 1,372,192 1,100 $ 1,100 1,700 $ 1,700
============ ===== ======= ===== =======
</TABLE>
Series A
The Company had 100 shares of its Series A convertible preferred stock
issued and outstanding as of December 31, 1998. The Series A preferred shares
were converted into 125,275 shares of the Company's common stock during 1999.
While it was outstanding, the Series A preferred stock was noncumulative. It
had a liquidation preference of $1,000 per share, was convertible into 1,252.75
shares of common stock per share and was entitled to vote on all matters
submitted to a vote of the shareholders on an "as if converted" basis. In
December 1999, the Company amended its articles of incorporation to eliminate
the Series A preferred stock.
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. In December 1999, the Company amended its articles of
incorporation to eliminate the 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
offering 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 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 32
<PAGE> 41
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. 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. 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. In December 1999, the Company amended its articles of incorporation to
eliminate 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 offering 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 bore no dividends and holders of
the Series F preferred stock had 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.
Cumulatively, 1,536 shares of the Series F preferred stock were converted into
6,286,249 shares of common stock and 164 shares of Series F preferred stock
were redeemed for cash of $183,195. In December 1999, the Company amended its
articles of incorporation to eliminate the Series F preferred stock.
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 33
<PAGE> 42
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. 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 1999, 500 shares of Series G preferred stock were converted into
604,383 shares of the Company's commons stock. 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. In January 2000, DPN transferred its ownership of these
shares to Nomura Holding Company, an affiliate of DPN. In February 2000, the
Company agreed to exchange Nomura's FEPET shares for 200,000 shares of the
Company's common stock.
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 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. 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 34
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. CAPITAL STOCK (CONTINUED):
During 1999, $1,005,000 of the convertible notes, including accrued
interest, were converted into 4,040,275 shares of the Company's common stock.
Of the notes converted, $805,000 of these notes were outstanding at December
31, 1998 and $200,000 of the notes were issued in 1999. The notes were
converted at rates ranging from $0.25 to $0.40 per share and were based on the
price of a common share at the time the notes were issued. Of the notes
outstanding at December 31, 1998 that were converted in 1999, $100,000 were
payable to the Company's Chief Executive Officer. These notes resulted from the
CEO's personal guarantee of a loan made by an investor. The loan was made to
the CEO, who in turn loaned the money to the Company under the same terms. In
April 1999, these notes payable were assigned by the CEO to the holder of the
underlying note payable. A registration statement covering all shares issued as
a result of convertible notes was declared effective June 23, 1999.
In 1999, the Company issued 200,000 shares of restricted common stock and
received cash proceeds of $100,000 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 23, 1999.
As described in greater detail in Note 16, the Company issued a total of
423,132 shares of common stock in connection with its acquisition of the assets
of Sign Builders of America, Inc. A registration statement covering theses
shares was filed and declared effective by post-effective amendment on November
29, 1999.
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 1998, the Company issued 500,000 shares of common stock to MCC in
connection with the minimum royalty payment also described in Note 12.
9. 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
Company's Board of Directors amended the plan in January 1999 to increase the
number of shares authorized under the plan to 3,500,000 and further amended the
plan in December 1999 to increase the number of shares authorized under the
plan to 6,500,000.
Page 35
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS (CONTINUED):
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 date of 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, 1999, 3,180,940 shares remained available
for grant under the 1992 Employees Plan.
In March 1998 and May 1998, the Company's Board of Directors passed
resolutions that 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.
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> <C>
Options outstanding at January 1, 1998....................................... 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
---------
Granted............................................................. 682,186 $ 1.44
Exercised........................................................... (714,555) $ 0.38
Canceled............................................................ (191,292) $ 2.36
---------
Options outstanding at December 31, 1999..................................... 2,418,833 $ 0.67
=========
</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 and 1999. A total of
1,000,000 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, 1999, 556,697 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.
Page 36
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. 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> <C>
Options outstanding at January 1, 1998....................................... 292,629 $ 2.29
Granted............................................................. 100,000 $ 0.25
Canceled............................................................ (7,726) $1.125
-------------
Options outstanding at December 31, 1998..................................... 384,903 $ 2.29
-------------
Granted............................................................. 60,000 $ 2.27
Exercised........................................................... (168,920) $ 0.33
Canceled............................................................ (1,600) $0.375
-------------
Options outstanding at December 31, 1999..................................... 274,383 $ 0.77
=============
</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. The plan was amended in January 1999 by the
Board of Directors of the company to increase the shares reserved for issuance
under the plan to 2,500,000. Options under this plan are granted at the
discretion of the Board of Directors. No additional shares are currently
available under the plan.
The following is a summary of stock option activity under the 1998 Officers and
Directors Plan:
<TABLE>
<CAPTION>
Wgtd. Avg.
Number of Exercise
Shares Price
------------ ----------
<S> <C> <C> <C>
Options outstanding at January 1, 1998....................................... 0 --
Granted............................................................. 1,200,000 $0.375
Canceled............................................................ -- --
-----------
Options outstanding at December 31, 1998..................................... 1,200,000 $0.375
-----------
Granted............................................................. 1,300,000 $ 0.50
Exercised........................................................... (635,180) $ 0.42
Canceled............................................................ -- --
-----------
Options outstanding at December 31, 1999..................................... 1,864,820 $ 0.45
===========
</TABLE>
The fair value of each stock option granted in 1999 and 1998 is estimated
on the date of grant using the Black-Scholes option pricing-model with the
following weighted-average assumptions: no dividend yield for 1999 and 1996;
risk-free interest rate of 5.50% and 5.00% for 1999 and 1998, respectively; the
expected lives of the options are five years for 1999 and 1998; and volatility
of approximately 100% for both 1999 and 1998.
Page 37
<PAGE> 46
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS (CONTINUED):
The following table summarizes information about stock options outstanding and
exercisable under all three plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/99 Contr. Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.00 - $0.49 2,794,116 7.5 Years $0.37 2,531,853 $0.37
$0.50 - $1.00 1,243,920 8.2 Years $0.50 1,236,420 $0.50
$1.01 - $1.99 425,000 9.8 Years $1.83 44,584 $1.73
$2.00 - $4.00 95,000 9.2 Years $2.27 95,000 $2.27
---------- ----------
Total 4,558,036 7.9 Years $0.58 3,907,857 $0.48
---------- ----------
</TABLE>
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 8.5 Years $0.37 3,501,415 $0.37
$0.56 - $2.99 20,000 1.1 Years $1.12 20,000 $1.12
$3.00 - $3.99 5,000 3.5 Years $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 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Discounted options $0.00 $0.00
At-the-money options $0.67 $0.00
Premium options $0.00 $0.23
Repriced options $0.00 $0.20
</TABLE>
Page 38
<PAGE> 47
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. STOCK OPTIONS (CONTINUED):
During 1999 and 1998, the Company did not incur any compensation cost for
the Plans 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 1999 and 1998 would approximate the
pro forma amounts as shown below:
<TABLE>
<CAPTION>
As Reported Pro Forma As Reported Pro Forma
1999 1999 1998 1998
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
SFAS No. 123 Charge -- $ 643,535 -- $ 804,194
APB No. 25 Charge -- -- -- --
Net income (loss) $1,118,134 $ 474,599 $(3,557,548) $(4,361,742)
Net income (loss)
per common share $ 0.02 $ 0.01 $ (0.10) $ ($0.12)
</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.
10. 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 could 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. All of these 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 could 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. All of these 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 were exercisable at a price of $3.90 per share,
expired in 1997 and the remaining 49,345 warrants expired at various dates
through April 1999. All of these warrants expired unexercised.
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.
Page 39
<PAGE> 48
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK WARRANTS (CONTINUED):
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 were
exercisable at a price of $6.30 per share and expired 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. These
warrants expired unexercised.
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. A total of
350,000 of these warrants were exercised in 1999 and an additional 175,000 of
these warrants were exercised in February 2000.
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 2000. 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. All of these warrants were exercised in 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.
Page 40
<PAGE> 49
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. STOCK WARRANTS (CONTINUED):
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. These
warrants were exercised in 1999.
In 1999, the Company issued a total of 60,000 warrants to three separate
individuals in connection with services rendered to the Company. The exercise
price of these warrants is based on the fair market value of the Company's
common stock at the time of issuance and range from $0.88 to $2.15 per share.
These warrants are exercisable for a period of 5 years from the date 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.
<TABLE>
<CAPTION>
Summary
NUMBER OF
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C> <C>
Warrants outstanding at January 1, 1998...................................... 6,733,581 $0.625-7.89
Granted............................................................. 1,000,000 $ 0.15-0.25
Exercised........................................................... (600,000) $ 0.15
Expired............................................................. (4,938,202) $0.625-6.00
-----------
Warrants outstanding at December 31, 1998.................................... 2,195,379 $0.625-7.89
Granted............................................................. 60,000 $ 0.88-2.15
Exercised........................................................... (970,000) $0.25-1.375
Expired or canceled................................................. (385,587) $ 3.90-6.78
-----------
Warrants outstanding at December 31, 1999 899,792 $ 0.88-7.89
===========
</TABLE>
The preceding summary of stock warrant activity excludes the C&A warrants
described in Note 12 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:
Page 41
<PAGE> 50
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $20,022 and $44,540 for 1999 and 1998,
respectively. Cash paid for foreign taxes was $555,556 in 1999. No foreign
taxes were paid in 1998. The following non-cash transactions have been excluded
from the accompanying consolidated statement of cash flows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
Non-cash financing activities:
Receivable from shareholders for stock issued................................ $ -- $ 250,000
Conversion of accounts payable and accrued liabilities into common shares.... $ 100,000 $ 100,000
Conversion of notes payable and interest into common shares.................. $ 1,049,852 $ 792,222
Non-cash investing activities
Acquisition of SBOA.......................................................... $ 900,000 $ --
</TABLE>
12. COMMITMENTS AND CONTINGENCIES:
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. 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. There is
disagreement as to the amount actually spent, however it is our position that
there are no further amounts due under this agreement and there will be no
further spending in Russia. The internal results that we have achieved are far
superior to those achieved through the collaborative efforts in Russia and at
present we are not using the technology developed under this joint venture
agreement in any manner.
Page 42
<PAGE> 51
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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. In January 2000, the Company
agreed to participate in a settlement agreement between the plaintiff and the
other defendant; notwithstanding our denial of any liability to the plaintiff.
The Company agreed to pay a total of $450,000, of which $225,000 was due at
signing. The Company signed three notes payable for the balance of the
settlement. These notes, in the amount of $25,000, $100,000, and $100,000, are
due in three months, nine months, and eighteen months, respectively and bear
interest at a rate of 10% per annum. In exchange for this settlement, and upon
payment of the notes, the Company will receive a complete release from further
liability from both the plaintiff and the co-defendant. The entire amount of
this settlement is included in accrued liabilities at December 31, 1999.
On April 30, 1998, Universal Bonding Company, managing general agent for
Westchester Fire Insurance Company filed a complaint with the Superior Court of
New Jersey, Atlantic county. The Complaint named Richland Glass Company, Inc.,
Robert Williams, Joan Williams, Bawa Singh, Narinder Singh, Gaylord Evey and
Doris Evey, all guarantors under the bond, as defendants. All defendants were
former owners, or associated with former owners, of Plasmatron. Defendant
Gaylord Evey filed an answer with the court naming Plasmatron, the Company,
Nicholas Rettino, and the Rettino Insurance agency as third party defendants and
asking for indemnification by the third party defendants. A separate
indemnification claim filed by Richland Glass against the same third party
defendants was consolidated with this case. The amount of this claim is to be
determined at trial; however, any potential amounts due by the Company are
dependent upon Westchester collecting from other guarantors on the bond, and
those guarantors succeeding in obtaining a judgement against the Company.
Westchester has released its claims against the Company. The Company considers
this case to be without merit and expects to have the case ultimately resolved
in its favor.
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 January 28, 1999, Aetna Life Insurance Company, a former landlord of
DTO, filed a complaint in the 126th 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 vigorously defend itself in this action. 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 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.
Page 43
<PAGE> 52
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 January 2000, the Company signed an
agreement with Eckerd Corporation, a subsidiary of JCPenney, Inc., one of the
protected customers. Accordingly, 300,000 shares of common stock were issued to
C&A as a result of this agreement. 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:
1. At such time as the Company receives total revenue of $10 million from any
or all of C&A's protected customers, C&A has the right to purchase 250,000
shares of common stock of the Company at a discounted price per share equal
to 50% of the market price of the stock at the time the $10 million
milestone is achieved.
2. Thereafter, for each increment of $10 million of revenue received from
protected customers, C&A has the right to purchase another 250,000 shares
at a discounted price per share equal to 50% of the market price of the
stock at the time each $10 million increment is achieved.
3. In addition, when the total revenue received from any or all of C&A's
protected customers reaches $100 million, C&A has the right to acquire an
additional 2.3 million shares of the common stock of the Company at a
discounted price per share equal to 50% of the market price of the stock at
the time $100 million in revenue is achieved.
4. An additional 2.3 million shares of the Company's common stock will be made
available to C&A at a discounted price equal to 50% of the market price of
the stock at the time cumulative revenues from protected customers reaches
$200 million.
5. Finally, at the end of each twelve month period (ending on the anniversary
date of the agreement) in which the revenue from protected customers
exceeds $10 million during that period, C&A has the right to acquire up to
200,000 shares of common stock of the Company under the following terms and
conditions;
a. If the revenue received from protected customers equals or exceeds 25% of
the total Company revenue for that twelve month period, then C&A may
purchase 100,000 shares of the Company's common stock at a discounted price
which is equal to 75% of the market price of the common stock at the end of
the period.
b. C&A may acquire the remaining 100,000 shares at a reduced price where the
discount from the market price is equal to the ratio (expressed as a
percentage) that the revenue from C&A protected customers bears to the
total Company revenue received during that period. The maximum discount can
not exceed 50%.
6. The maximum number of shares that can be acquired pursuant to these
warrants is 9.7 million and all warrants issued under this agreement expire
December 31, 2006.
Government contracts
Governmental contractors are subject to many levels of audit and
investigation. Among United States agencies that oversee contract performance
are: the Defense Contract Audit Agency, the Inspector General, the Defense
Criminal Investigative Service, the General Accounting Office, the Department of
Commerce, the Department of Justice and Congressional Committees. The Company's
management believes that an audit or investigation, if any, as a result of such
oversight would not have any material adverse effect upon the Company's
financial condition or results of operations.
Page 44
<PAGE> 53
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. 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, 1999 and 1998, 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's SBOA subsidiary also provides services for small and
medium size companies, but requires deposits and progress payments for work
performed. The Company has not incurred any material losses on these
receivables.
14. SEGMENT INFORMATION:
The Company had no revenues from government contracts in 1999 or 1998 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, 1999, the Company had a
commitment for future government funding of approximately $67,000.
15. RELATED PARTY TRANSACTIONS:
As described in Notes 6 and 8, the Company had notes payable to its Chief
Executive Officer at December 31, 1998.
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. This date was extended until April 15, 1999.
In April 1999, the agreement was amended to allow additional extensions, in
three month increments, for a period of up to one year from April 15, 1999. In
exchange for each three month extension, the Company was obligated to pay ATI
$12,500. The $200,000 initial payment required for the actual assignment of the
Patent under the agreement will be reduced for any amounts paid for the
extension periods. The Company elected to exercise each of its extension options
and paid ATI a total of $50,000 through January 2000. In April 2000, unless the
contract is renegotiated, the Company must pay $150,000 to complete the
assignment of the patent, or allow its option to acquire the patent to lapse.
Page 45
<PAGE> 54
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. ACQUISITION OF SIGN BUILDERS OF AMERICA, INC.:
Effective August 31, 1999, the Company purchased substantially all of the
assets and assumed certain liabilities of Sign Builders. The assets acquired and
liabilities assumed were recorded at fair values as a purchase acquisition and
have been accounted for as a non-cash transaction in the consolidated statement
of cash flows. The Company used cash of $450,000, executed a note payable
bearing interest at an annual rate of 6% in the amount of $250,000, and issued
common stock valued at $900,000 to finance the transaction. The assets acquired
and liabilities assumed are as follows:
<TABLE>
<S> <C>
Cash $ 24,089
Accounts receivable 304,926
Inventory 160,757
Property and equipment 446,898
Goodwill and covenant not to compete 896,777
Accounts payable (52,931)
Accrued expenses (34,188)
Customer deposits (79,551)
Notes payable (28,829)
Capital leases payable (37,948)
----------
Total Purchase Price $1,600,000
==========
</TABLE>
The cash paid of $450,000 is reflected in the consolidated statement of cash
flows net of the $24,089 of cash received in connection with the acquisition of
the assets. The purchase agreement contained certain contingencies related to
the sales of the acquired business during the time period from September 1, 1999
through December 31, 1999 which resulted in downward adjustments to the purchase
price. As a result of these adjustments, the original purchase price of
$1,800,000 was adjusted downward to the $1,600,000 reflected above. The notes
payable described above were adjusted down to their final amount of $250,000
from their initial amount of $450,000 as a result of the same purchase price
adjustments.
The following unaudited pro forma data summarize the results of operations for
the Company for the periods indicated as if the Sign Builders acquisition had
been completed as of the beginning of the periods presented. The pro forma data
give effect to actual operating results prior to the acquisition and adjustments
to interest expense, goodwill amortization and income taxes. No effect has been
given to cost reductions or synergies in this presentation. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisition had occurred as of the beginning of the periods
presented or that may be obtained in the future.
<TABLE>
<CAPTION>
Year ended
December 31
1999 1998
---------- -----------
<S> <C> <C>
Revenues 8,627,104 3,524,721
Net Income (loss) 1,198,305 (3,607,143)
Earnings (loss) per common share
Basic $ 0.02 $ (0.10)
Diluted $ 0.02 $ (0.10)
</TABLE>
Page 46
<PAGE> 55
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. SUBSEQUENT EVENTS:
Through March 14, 2000, in an exempt offering under Regulation D of the
Securities act of 1933, the Company issued a total of 500,000 shares of its
common stock for a total of $750,000. The Company also received $175,000 in
proceeds and issued 175,000 shares of common stock in connection with the
exercise of the Series G warrants described in Note 8.
In January 2000, the Company signed an agreement with Eckerd Corporation, a
subsidiary of JCPenney, Inc. to install two electronic billboards on a pilot
basis at two Eckerd retail locations in Tampa, Florida. As described in greater
detail in Note 11, the Company issued 300,000 shares of its common stock to the
marketing group that represented the Company in this transaction.
In, January 2000, Diamond Pro-Shop Nomura Company, Ltd., transferred its
5% ownership in FEPET to Nomura Trading, Co., Ltd. In February 2000, the Company
agreed to issue 200,000 shares of its common stock to Nomura Trading Co., Ltd.
in exchange for Nomura's 5% interest in the Company's FEPET subsidiary.
Page 47
<PAGE> 56
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 48
<PAGE> 57
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 SI Diamond. Additional information on Marc W. Eller
and Dr. Zvi Yaniv and all information concerning executive officers may be found
under the caption "EXECUTIVE OFFICERS" on page 8 of this Annual Report on Form
10-KSB.
<TABLE>
<CAPTION>
Name Age Class Position Director Since Term Expires
---- --- ----- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Charles C. Bailey 51 I Director November 1999 2000
David R. Sincox 61 I Director October 1994 2000
Dr. Zvi Yaniv 53 I Director, President, July 1996 2000
Chief Operating Officer
Philip C. Shaffer 63 II Director March 1992 2001
Nicholas Martin 76 II Director July 1999 2001
Marc W. Eller 44 III Director, Chairman, November 1995 2002
Chief Executive Officer
Ronald J. Berman 43 III Director May 1996 2002
</TABLE>
- ----------------------
Mr. Bailey has been an attorney in private practice since 1995. Prior
to that Mr. Bailey had a 20 year career in government. Positions held include
Assistant Criminal District Attorney and Chief Prosecutor in Lubbock County,
Texas; General Counsel for the Texas Department of Public Safety; Assistant
General Counsel for Governor Bill Clements; and Director of Legal Services and
Franchise Taxes for the Texas State Comptroller's Office. His last position with
the state of Texas, from 1993 to 1995, was Executive Assistant and General
Counsel to Lt. Governor Bob Bullock.
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. Martin was President and owner of a North American lumber wholesale
and manufacturing company for approximately twenty years. Mr. Martin has also
owned companies manufacturing PVC pipe and vinyl siding during the past thirty
years. Mr. Martin currently is active in real estate development in Kansas City,
Detroit, and Dallas/Ft. Worth.
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 49
<PAGE> 58
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities of Exchange Act of 1934 requires SI
Diamond's officers, and Directors, and persons who beneficially own more than 10
% of a registered class of SI Diamond'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 SI
Diamond's common stock are required by the Securities and Exchange Commission
regulations to furnish SI Diamond with copies of all Section 16(a) forms that
they file.
Based solely on review of the copies of such reports furnished to us, or written
representations that no reports were required, we believe that for the period
from January 1, 1999 through December 31, 1999, 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, Charles C.
Bailey. Mr. Bailey filed his initial Form 3, which reported ownership as of the
date Mr. Bailey became a director, after the due date of the form.
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, 1999, 1998 and 1997 by the
Chief Executive Officer and all executive officers whose total annual salary and
bonus exceeded $100,000 for the fiscal year ended December 31, 1999 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------- ------------
Other Securities
Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Options(#)(2)
- --------------------------- ---- --------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Marc W. Eller, 1999 $ 168,750 111,250 -0- 250,000
Chief Executive Officer 1998 $ 150,000 -0- -0- 780,000
1997 $ 150,000 -0- -0- 47,500
Zvi Yaniv, President and 1999 $ 175,000 125,000 $ 3,205 150,000
Chief Operating Officer 1998 $ 150,000 -0- $ 6,839 1,170,000
1997 $ 150,000 -0- $24,170 270,000
Doug Baker, Vice President 1999 $ 130,000 50,000 -0- 150,000
and former Chief Financial 1998 $ 115,000 -0- -0- 520,000
Officer (3) 1997 $ 115,000 -0- -0- 45,000
</TABLE>
- ----------------------
(1) 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. He was also provided use of a Company owned automobile
valued at $ 3,205 in 1999, $1,882 in 1998, and $4,100 in 1997. In 1998,
Dr. Yaniv was reimbursed $4,957 in connection with the transportation
of his household belongings in connection with the relocation of his
primary residence to Austin, Texas.
Page 50
<PAGE> 59
(2) 1997 options include options issued in 1996 but repriced in 1997 in the
following amounts: Mr. Eller - 27,500, Dr. Yaniv - 250,000, and Mr.
Baker - 25,000. 1998 options include options issued in 1996 and 1997,
but repriced in 1998 in the following amounts: Mr. Eller - 130,000, Dr.
Yaniv - 1,020,000, and Mr. Baker - 120,000. More information on this
repricing is identified in the "Options Repricing Table" below.
(3) SI Diamond hired a new Chief Financial Officer at the end of 1999. Mr.
Baker ceased being an executive officer as of December 31, 1999, but is
included here because he was an executive officer in 1999.
STOCK OPTION GRANTS IN 1999
SI Diamond has an Amended and Restated 1992 Employee Stock Option Plan,
which may be used to grant employees, including officers of SI Diamond,
incentive stock options designed to qualify under Section 422 of the Internal
Code of 1986, or non-qualified stock options. SI Diamond also established the
1998 Directors and Officers Stock Option Plan, which may be used to grant
non-qualified stock options to officers and directors of SI Diamond. The
following table sets forth information concerning stock-options grants to the
Named Executive Officers in 1999.
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Underlying Options Granted to
Options Employees in Exercise
Name Granted(#)(1)(2) in Fiscal Year 1999 or Base Price ($/sh) Expiration Date
---- --------------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Marc W. Eller 250,000 (3) 20.29% $0.50 1/11/2009
Dr. Zvi Yaniv 150,000 (3) 12.17% $0.50 1/11/2009
Douglas P. Baker 150,000 (3) 12.17% $0.50 1/11/2009
</TABLE>
- ------------------
(1) Under the terms of SI Diamond's Amended and Restated 1992 Stock Option
Plan and the 1998 Directors and Officers Stock Option Plan, the
Compensation Committee of the SI Diamond Board of Directors 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
1999.
Page 51
<PAGE> 60
AGGREGATED OPTION EXERCISES IN 1999
AND OPTION VALUES AT DECEMBER 31, 1999
The following table sets forth certain information concerning the
number and intrinsic value of the options held by the named executives at
December 31, 1999. Year-end values are based on the closing price of $1.66 per
share of the common stock on December 31, 1999, 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 Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, 1999 December 31, 1999
Shares ----------------- ------------------
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Marc W. Eller 0 0 753,500 / 26,500 $936,998 / $34,053
Dr. Zvi Yaniv 0 0 1,120,000 / 200,000 1,420,450 / 257,000
Douglas P. Baker 70,000 $64,050 600,000 / 0 752,250 / 0
</TABLE>
DIRECTOR COMPENSATION FOR 1999
<TABLE>
<CAPTION>
Director Compensation Security Grants in 1999
Name(1) Meeting Fees ($)(2) Number of Securities Underlying Options (#)(3)
------- --------------------- ----------------------------------------------
<S> <C> <C>
Lee B. Arberg 550 150,000
David R. Sincox 950 170,000
Philip C. Shaffer 900 170,000
Igor Leontiev 250 150,000
Ronald J. Berman 950 170,000
Nicholas Martin Jr. 400 0
Charles C. Bailey 250 0
</TABLE>
- -----------------
(1) Directors who are also executives of SI Diamond 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. Mr. Arberg
resigned as a director on May 3, 1999. Mr. Leontiev's term expired on July 26,
1999 and was not reelected as a Director.
(2) All Directors receive $150 per board meeting or committee meeting attended
in person, and $50 per telephonic meeting. Reasonable expenses incurred by each
Director in connection with his duties as a Director are also reimbursed by SI
Diamond. This amount is not reflected in the above table.
(3) All of SI Diamond's outside Directors participate in the Amended and
Restated 1992 Outside Directors Stock Option Plan, under which the SI Diamond
may grant stock options to any Director who is not a full time salaried employee
of the Company. On January 26, 1999, each Director at that time was granted
20,000 options under this plan at a price of $2.27 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 who was a Director on January 11, 1999 was granted 150,000
fully vested options under this plan on that date. These options are exercisable
at a price of $0.50 per share.
Page 52
<PAGE> 61
All of Directors have retained the right to pursue additional
business activities that are not competitive with the business of SI Diamond,
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 SI Diamond or the shareholders
by virtue of their participation in such additional business activities.
EMPLOYMENT AGREEMENTS
SI Diamond 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
$175,000 per year effective January 1, 1999. All contingent compensation related
to bonuses or performance goals were eliminated.
SI Diamond also provides Dr. Yaniv with the use of an automobile. 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 53
<PAGE> 62
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of shares of each class of the SI Diamond's voting stock as
of March 14, 2000, by each person known to be the beneficial owner of 5% or more
of the outstanding voting stock of each such class. For the purposes of this
Annual Report on Form 10-KSB, beneficial ownership of securities is defined in
accordance with the rules of the SEC to mean generally the power to vote or
dispose of securities, regardless of any economic interest therein.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Shares Owned Percent of
Beneficially Class
Title of Class Name and Address of Beneficial Owner
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock None - -
- -------------------------------------------------------------------------------------------------------------------------
Series G Preferred William W. Gow 100 9.09%
Stock 4747 Sunset Blvd.
Los Angeles, CA 90027
--------------------------------------------------------------------------------------------
Pinnacle Fund L.P. 200 18.18%
4965 Preston Park Blvd., Ste 240
Plano, TX 75093
--------------------------------------------------------------------------------------------
Klaich Animal Hospital, Ltd. 100 9.09%
Amended Profit Sharing Retirement Plan & Trust
1990 South Virginia Street
Reno, NV 89502
--------------------------------------------------------------------------------------------
Nicholas Martin Living Trust 200 18.18%
3113 South University Dr., #600
Ft. Worth, TX 76109
--------------------------------------------------------------------------------------------
Michael Scott Blechman Family Trust 200 18.18%
295 Shadowood Lane
Northfield, IL 60093
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 54
<PAGE> 63
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is certain information with respect to beneficial
ownership of SI Diamond's common stock as of March 14, 2000, 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 582,702 1.05%
David R. Sincox 387,213 *
Charles C. Bailey 30,000 *
Marc W. Eller 369,296 *
Ronald J. Berman 1,239,345 2.24%
Nicholas Martin, Jr. 932,505 1.69%
Dr. Zvi Yaniv 1,186,000 2.11%
Douglas P. Baker (2) 627,000 1.13%
All Executive Officers and Directors
as a group (10 persons) 5,390,709 9.26%
</TABLE>
- -------------------------
* Less than 1%
(1) Included in the amounts indicated are shares that are subject to
options exercisable within sixty (60)-days of March 14, 2000 pursuant
to Rule 13d-3(d)(1) of the Exchange Act. The number of such shares are
470,000 for Mr. Shaffer; 266,000 for Mr. Sincox; 393,506 for Mr.
Berman; 1,150,000 for Mr. Yaniv; 530,000 for Mr. Baker; 30,000 for Mr.
Bailey and 2,904,506 for the Directors and executive officers as a
group. The amount for Mr. Martin includes 254,137 shares obtainable by
Mr. Martin upon conversion of his Series G preferred stock.
(2) Mr. Baker ceased being an executive officer as of December 31, 1999,
but is included here because he was a named executive officer in 1999.
Page 55
<PAGE> 64
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, SI Diamond had notes payable to its chief
executive officer. These notes resulted from the CEO's personal guarantee of a
loan made by an investor. The loan was made to the CEO, who in turn loaned the
money to SI Diamond under the same terms. In April 1999, these notes payable
were assigned by the CEO to the holder of the underlying note payable. The
holder of the underlying note payable converted this loan into shares of the
Company's common stock.
In October 1998, Electronic Billboard Technology, Inc., a subsidiary of SI
Diamond 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, SI Diamond'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. This date was extended until April 15, 1999.
In April 1999, the agreement was amended to allow additional extensions, in
three month increments, for a period of up to one year from April 15, 1999. In
exchange for each three month extension, EBT was obligated to pay ATI $12,500.
The $200,000 initial payment required for the actual assignment of the Patent
under the agreement will be reduced for any amounts paid for the extension
periods. EBT elected to exercise each of its extension options and paid ATI a
total of $50,000 through January 2000. In April 2000, unless the contract is
renegotiated, EBT must pay $150,000 to complete the assignment of the patent, or
allow its option to acquire the patent to lapse.
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
September 30, 1999
(2) Current Report on Form 8-K (Item 2) dated as of
October 21, 1999
(3) Amended Current Report on Form 8-K (Item 2) dated as
of November 19, 1999
(4) Current Report on Form 8-K (Item 2) dated as of
November 24, 1999
Page 56
<PAGE> 65
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 22, 2000
---------------------------------------
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 22, 2000
- ------------------------ Officer (Principal Executive Officer and
Marc W. Eller Director)
/s/ Tracy Vaught Vice President and March 22, 2000
- ------------------------ Chief Financial Officer
Tracy Vaught (Principal Financial Officer and Principal
Accounting Officer)
/s/ Douglas P. Baker Vice President and March 22, 2000
- ------------------------ Former Chief Financial Officer
Douglas P. Baker
Philip C. Shaffer*
David R. Sincox*
Nicholas Martin, Jr.* Directors March 22, 2000
Ronald J. Berman*
Charles G. Bailey*
Dr. Zvi Yaniv*
</TABLE>
*By: /s/ Tracy Vaught
-----------------------
(Tracy Vaught,
Attorney-in-Fact)
Page 57
<PAGE> 66
INDEX TO EXHIBITS
The exhibits indicated by an asterisk (*) have been previously
filed with the Securities and Exchange Commission and are
incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------- ---------------------- -------------
<S> <C> <C>
2.1* Asset Purchase Agreement, dated as of August 31, 1999, by and among
the Company, SIDT, Inc., Sign Builders of America, Inc., Sign
Builders, Inc. and Lance Adams. (Exhibit 2.1 to the Company's
Current Report on Form 8-K dated as of September 3, 1999).
3(I).1 Restated Articles of Incorporation of Company, as filed December 9,
1999 with the Secretary of State for the State of Texas.
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).
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* Secured Promissory Note, dated as of September 3, 1999, by SIDT,
Inc. as maker and Sign Builders of America, Inc. and Sign Builders,
Inc., as Payee. (Exhibit 4.1 to the Company's Current Report on Form
8-K dated as of September 3, 1999).
10.1* 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).
10.2* Joint Development Agreement dated May 25, 1995 between the Company
and Supertex, Inc. (Exhibit 10.34 for the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995).
10.3* Employment Agreement between the Company and Dr. Zvi Yaniv dated as
of May 31, 1996 (Exhibit 10.1 to the Company's report on Form 10-QSB
for the fiscal quarter ended September 30, 1996).
10.4* 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).
</TABLE>
Page 58
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------- ---------------------- -------------
<S> <C> <C>
10.5* 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).
10.6* 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).
10.7* 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)
10.8* 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).
10.9* 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).
10.10* Marketing Agent Agreement by and between Electronic Billboard
Technology, Inc. and Vision Mark, L.L.C. dated as of November 11,
1998. (Exhibit 10.2 to the Company's Current Report on Form 8-K
dated as of December 7, 1998).
10.11* Patent Assignment and Royalty Agreement between Electronic Billboard
Technology, Inc. and Advanced Technology, Incubator, Inc. dated as
of October 6, 1998. (Exhibit 10.18 to the Company's Current Report
on Form 10-KSB dated as of March 31, 1999).
10.12* Agreement on Phase 2 between Field Emission Picture Element
Technology, Inc., and Diamond Pro-Shop Nomura dated as of January
21, 1999. (Exhibit 10.20 to the Company's Current Report on Form
10-KSB dated as of March 31, 1999).
10.13* Lease agreement between the Company and Industrial Properties
Corporation date as of June 2, 1998. (Exhibit 10.2 to the Company's
Current Report on Form 8-K dated as of December 7, 1998).
10.14* Patent License Agreement, dated as of March 26, 1999, by and between
the Company and Canon, Inc. (Exhibit 10.1 to the Company's amended
Current Report on Form 8-K/A dated as of April 16, 1999).
10.15* Asset Purchase Agreement, dated as of October 21, 1999, by and
between the Company and Diamond.com, LLC. (Exhibit 10.1 to the
Company's Current Report on Form 8-K dated as of October 21, 1999).
10.16* Electronic Billboard Sales Agreement, dated as of September 30,
1999, by and between the Company and Zigmond Levy. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated as of September 30,
1999).
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. (for SEC use only)
</TABLE>
Page 59
<PAGE> 1
EXHIBIT 3(I).1
RESTATED ARTICLES OF INCORPORATION
OF
SI DIAMOND TECHNOLOGY, INC.
Pursuant to the provisions of Article 4.07 (B) of the Texas Business
Corporation Act (the "TBCA"), SI Diamond Technology, Inc. (the "Corporation")
adopts the following Restated Articles of Incorporation (the "Restated
Articles"). The Restated Articles accurately copy the Amended and Restated
Articles of Incorporation of the Corporation currently in effect, and all
amendments thereto that are in effect to date, and contain no change in any
provision thereof.
ARTICLE ONE
The name of the corporation is SI Diamond Technology, Inc.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The objects and purposes for which the Corporation is organized, the
nature of the business to be conducted by the Corporation, and the powers which
may be exercised by the Corporation are stated and declared to be as follows:
(a) To enter into and engage in any business activities that lawfully may
be conducted by a Corporation organized and existing under the Texas
Business Corporation Act (the "TBCA") either directly, or through
affiliated or subsidiary companies which may be formed under the laws
of any State or foreign nation where the conduct of such activities is
lawful;
(b) To enter into and engage in business activities either for its own
account, or for the account of others, as agent, and either as agent
or principal, to enter upon or engage in any kind of business of any
nature whatsoever, in which corporations organized under the TBCA may
engage; and to the extent not prohibited thereby to enter upon and
engage in any kind of business of any nature whatsoever in any other
state of the United States of America, any foreign nation, and any
territory of any country to the extent permitted by the laws of such
other state, nation or territory;
(c) To acquire, organize and create subsidiary and affiliated companies
under the laws of any state or foreign nation;
<PAGE> 2
(d) To engage in any other lawful act or activity for which a Corporation
may be organized under the TBCA; and
(e) Nothing in this Article shall be construed as authorizing the
Corporation to transact any business in the State of Texas prohibited
by any law of the State of Texas, or to engage in any activity in the
State of Texas which lawfully cannot be engaged in without first
obtaining a license under the laws of the State of Texas and such
license cannot be granted to a corporation, or to transact any of the
business referred to in Section (B)(3)(a) or Section (B)(4) of Article
2.01 of the TBCA.
ARTICLE FOUR
The Corporation is hereby authorized to issue a total of 122,000,000
shares of capital stock which shall be subdivided into classes as follows:
DIVISION A - COMMON STOCK
One Hundred Twenty Million (120,000,000) shares of the Corporation's capital
stock shall be denominated as Common Stock, have a par value of $0.001 per
share, and have the rights, powers and preferences set forth in this paragraph.
(i) The holders of Common Stock shall share ratably, with all other
classes of common equity, in any dividends that may, from time to
time, be declared by the Board of Directors;
(ii) No dividends may be paid with respect to the Corporation's Common
Stock, however, until dividend distributions to the holders of
Preferred Stock, if any, have been paid in accordance with the
certificate or certificates of designation relating to such Preferred
Stock;
(iii) The holders of Common Stock shall share ratably, with all other
classes of common equity, in any assets of the Corporation that are
available for distribution to the holders of common equity securities
of the Corporation upon the dissolution or liquidation of the
Corporation;
(iv) The holders of Common Stock shall be entitled to cast one vote per
share on all matters that are submitted for a vote of the
shareholders;
(v) There are no redemption or sinking fund provisions that are applicable
to the Common Stock of the Corporation; and
(vi) Subject only to the requirements of the TBCA and the foregoing
limitations, the Board of Directors is expressly authorized to issue
shares of Common Stock without stockholder approval, at any time and
from time to time, to such persons and for such consideration as the
Board of Directors shall deem appropriate under the circumstances.
2
<PAGE> 3
DIVISION B - PREFERRED STOCK
Two Million (2,000,000) shares of the Corporation's authorized capital stock
shall be denominated as Preferred Stock, par value of $1.00 per share. Shares
of Preferred Stock may be issued from time to time in one or more series as the
Board of Directors, by resolution or resolutions, may from time to time
determine, each of said series to be distinctively designated. The voting
powers, preferences and relative, participating, optional and other special
rights, and the qualifications, limitations or restrictions thereof, if any, of
each such series of Preferred Stock may differ from those of any and all other
series of Preferred Stock at any time outstanding, and the Board of Directors
is hereby expressly granted authority to fix or alter, by resolution or
resolutions, the designation, number, voting powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, of each such series of Preferred Stock,
including, but without limiting the generality of the foregoing, the following:
(i) The distinctive designation of, and the number of shares of Preferred
Stock that shall constitute, each series of Preferred Stock, which
number (except as otherwise provided by the Board of Directors in the
resolution establishing such series) may be increased or decreased
(but not below the number of shares of such series then outstanding)
from time to time by the Board of Directors without prior approval of
the holders of such series;
(ii) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of
such dividends to the dividends payable on any other class or classes
or any other series of the same or other class or classes of capital
stock of the Corporation, and whether such dividends shall be
cumulative or noncumulative;
(iii) The right, if any, of the holders of such series of Preferred Stock to
convert the same into, or exchange the same for, shares of any other
class or classes or of any other series of the same or any other class
or classes of capital stock of the Corporation and the terms and
conditions of such conversion or exchange, including, without
limitation, whether or not the number of shares of such other class or
series into which shares of such series may be converted or exchanged
shall be adjusted in the event of any stock split, stock dividend,
subdivision, combination, reclassification or other transaction or
series of transactions affecting the class or series into which such
series of Preferred Stock may be converted or exchanged;
(iv) Whether or not shares of such series of Preferred Stock shall be
subject to redemption, and the redemption price or prices and the time
or times at which, and the terms and conditions on which, shares of
such series of Preferred Stock may be redeemed;
(v) The rights, if any, of the holder of such series of Preferred Stock
upon the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation or in the event of any merger or consolidation
of or sale of assets by the Corporation;
3
<PAGE> 4
(vi) The terms of any sinking fund or redemption or repurchase amount, if
any, to be provided for shares of such series of Preferred Stock;
(vii) The voting owners, if any, of the holders of any series of Preferred
Stock generally or with respect to any particular matter, which may be
less than, equal to or greater than one vote per share, and which may,
without limiting the generality of the foregoing, include the right,
voting as a series by itself or together with the holders of any other
series of Preferred Stock or all series of Preferred Stock as a class,
to elect one or more Directors of the Corporation (which, without
limiting the generality of the foregoing, may include a specified
number or portion of the then-existing number of authorized
Directorships of the Corporation, or a specified number or portion of
Directorships in addition to the then existing number of authorized
Directorships of the Corporation), generally or under such specific
circumstances and on such conditions, as shall be provided in the
resolution or resolutions of the Board of Directors adopted pursuant
hereto; and
(viii) Such other powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and
restrictions thereof, as the Board of Directors shall determine.
Notwithstanding the foregoing, and with the sole exception of shares issued
pursuant to the duly adopted stock option plans of the Corporation, no shares
of Preferred Stock shall be issued or sold to any officer or director of the
Corporation, or any shareholder who directly or indirectly owns more than 5 %
of the issued and outstanding voting stock of the Corporation, or any affiliate
of such person, without the affirmative vote of a majority in interest of the
disinterested shareholders of the Corporation. Upon the creation of any new
class or series of Preferred Stock of the Corporation, the Board of Directors
shall prepare and file with the records of the Corporation a certificate
setting forth the rights and preferences of such class or series of Preferred
Stock, which certificate shall be deemed an amendment to these Restated
Articles and shall not require the consent of any shareholder.
DIVISION C - SERIES OF PREFERRED STOCK
SERIES G PREFERRED STOCK
The designations, preferences, limitations and relative rights of the
three thousand (3,000) authorized shares of Series G Preferred Stock of the
Corporation, are as follows:
A. Par Value, Stated Value, Accretion Rate, Purchase Price
and Certificates.
1. Each share of Series G Preferred Stock
shall have a par value of $1.00, and a stated value (face amount) of One
Thousand Dollars ($1,000) (the "Stated Value"), with an accretion rate of ten
percent (10%) per annum on the Stated Value as set forth herein.
4
<PAGE> 5
2. The Series G Preferred Stock shall be
offered at a purchase price of One Thousand Dollars ($1,000) per share.
3. Certificates representing the shares of
Series G Preferred Stock purchased shall be issued by the Corporation to the
purchasers immediately upon acceptance of the subscriptions to purchase such
shares.
B. Dividends.
The Series G Preferred Stock will bear no dividends,
and the holders of the Series G Preferred Stock shall not be entitled to the
receipt of dividends on the Series G Preferred Stock.
C. Liquidation Preference.
1. In the event of any liquidation,
dissolution or winding-up of the Corporation, either voluntary or involuntary
(a "Liquidation"), the holders of shares of the Series G Preferred Stock then
issued and outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, before any payment shall be made to the holders
of shares of the Common Stock an amount per share equal to the sum of (i) the
Stated Value and (ii) an amount equal to ten percent (10%) of the Stated Value
multiplied by the fraction N/365, where N equals the number of days elapsed
since the issue date of the Series G Preferred Stock. If, upon any Liquidation
of the Corporation, the assets of the Corporation available for distribution to
its shareholders shall be insufficient to pay the holders of shares of the
Series G Preferred Stock and the holders of any other series of Preferred Stock
with a liquidation preference equal to the liquidation preference of the Series
G Preferred Stock the full amounts to which they shall respectively be
entitled, the holders of shares of the Series G Preferred Stock and the holders
of any other series of Preferred Stock with liquidation preference equal to the
liquidation preference of the Series G Preferred Stock shall receive all of the
assets of the Corporation available for distribution and each such holder of
shares of the Series G Preferred Stock and the holders of any other series of
Preferred Stock with a liquidation preference equal to the liquidation
preference of the Series G Preferred Stock shall share ratably in any
distribution in accordance with the amounts due such shareholders. After
payment shall have been made to the holders of shares of the Series G Preferred
Stock of the full amount to which they shall be entitled, as aforesaid, the
holders of shares of the Series G Preferred Stock shall be entitled to no
further distributions thereon and the holders of shares of the Common Stock and
of shares of any other series of stock of the Corporation shall be entitled to
share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its shareholders.
2. A merger or consolidation of the
Corporation with or into any other corporation, or a sale, lease, exchange, or
transfer of all or any part of the assets of the Corporation
5
<PAGE> 6
which shall not in fact result in the Liquidation (in whole or in part) of the
Corporation and the distribution of its assets to its shareholders shall not be
deemed to be a voluntary or involuntary Liquidation (in whole or in part) of
the Corporation.
D. Conversion of Series G Preferred Stock.
The holders of Series G Preferred Stock shall have the following conversion
rights:
1. Right to Convert. Each share of Series G
Preferred Stock shall be convertible, on the Conversion Dates and at the
Conversion Prices set forth below, into fully paid and nonassessable shares of
Common Stock (sometimes referred to herein as "Conversion Shares").
2. Mechanics of Conversion. Each holder of
Series G Preferred Stock who desires to convert the same into shares of Common
Stock shall provide notice ("Conversion Notice") via telecopy (facsimile) on a
business day, during business hours in Austin, Texas, to the Corporation, and a
facsimile of the Conversion Notice shall be transmitted to the Corporation's
Transfer Agent at the same time as transmission is made to the Corporation. On
the same day the original Conversion Notice shall be delivered to the
Corporation the certificate or certificates representing the Series G Preferred
Stock for which conversion is elected, shall be delivered to the Transfer Agent
by international courier, duly endorsed. The later of the date upon which the
Corporation receives the original Conversion Notice or the date the Transfer
Agent receives the Certificates representing the Series G Preferred Stock for
which conversion is elected, shall be a "Notice Date."
Upon receipt by the Corporation of a Conversion Notice, as
provided above, the Corporation shall immediately send to the holder, via
telecopy (facsimile), a confirmation of receipt of the Conversion Notice which
shall specify that the Conversion Notice has been received and the name and
telephone number of a contact person at the Corporation whom the holder should
contact regarding information related to the conversion. The Corporation shall
use all reasonable efforts to issue and deliver within three (3) business days
after the Notice Date, to such holder of Series G Preferred Stock at the
address of the holder on the stock books of the Corporation, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid; provided that the original shares of Series G
Preferred Stock to be converted are received by the transfer agent or the
Corporation within three (3) business days after the receipt of the original
Conversion Notice and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Notice Date.
If the original certificate(s) representing the shares of Series G Preferred
Stock to be converted are not received by the transfer agent or the Corporation
within three (3) business days after the receipt of the original Conversion
Notice, the Conversion Notice shall become null and void.
6
<PAGE> 7
3. Lost or Stolen Certificates. Upon receipt
by the Corporation of evidence reasonably satisfactory to it of the loss,
destruction, theft or mutilation of any Series G Preferred Stock certificates
(the "Certificates") and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Corporation, and upon
surrender and cancellation of the Certificates, if mutilated, the Corporation
shall execute and deliver new Series G Preferred Stock Certificates of like
tenor and date. However, the Corporation shall not be obligated to re-issue
such lost or stolen Series G Preferred Stock Certificates if the holder thereof
contemporaneously requests the Corporation to convert such Series G Preferred
Stock into Common Stock, in which event the Corporation shall be entitled to
rely on an affidavit of loss, destruction or theft of the Series G Preferred
Stock Certificate (and the receipt of indemnity or security reasonably
satisfactory to the Corporation) or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. Conversion Dates. The shares of Series G
Preferred Stock shall become convertible into shares of Common Stock at any
time commencing after the earlier of (i) the effective date of a registration
statement covering the Conversion Shares; or (ii) thirty (30) days after the
date of issuance of the shares of Preferred Stock. The date on which a
Conversion Notice is transmitted by facsimile to the Corporation shall be
referred to as a "Conversion Date".
5. Conversion Formula/Conversion Price. Each
share of Series G Preferred Stock shall be convertible into the number of
shares of Common Stock in accordance with the following formula (the
"Conversion Formula"):
[(.10) x (N/365) x ($1,000)] + $1,000
-------------------------------------
Conversion Price
where,
N = the number of days between (i) the issue date of
the Series G Preferred Stock being converted , and
(ii) the Notice Date; and
Conversion Price = $1.00
6. Automatic Conversion. Each share of Series
G Preferred Stock outstanding on June 10, 2002 automatically shall be converted
into Common Stock on such date in accordance with the Conversion Formula and
the Conversion Price then in effect, and June 10, 2002 shall be deemed to be
the Notice Date and Conversion Date with respect to such conversion.
7. No Fractional Shares. If any conversion of
the Series G Preferred Stock would create a fractional share of Common Stock or
a right to acquire a fractional share of Common Stock, no fractional shares
shall be issued and an equivalent of the fractional share shall
7
<PAGE> 8
be paid in cash.
8. Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series G Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all then outstanding shares of the Series G
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series G Preferred Stock, the Corporation will
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
9. Adjustment to Conversion Price.
(a) If, prior to the conversion of all
shares of Series G Preferred Stock, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar event,
the Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Conversion Price shall
be proportionately increased.
(b) If, prior to the conversion of all
shares of Series G Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Corporation shall be changed
into the same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity, then the
holders of Series G Preferred Stock shall thereafter have the right to purchase
and receive upon conversion of shares of Series G Preferred Stock, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
shares of stock and/or securities as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of shares of Series G Preferred
Stock held by such holders had such merger, consolidation, exchange of shares,
recapitalization or reorganization not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of the holders of the Series G Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series G Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection unless the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation to deliver to the holders of the Series G Preferred Stock such
shares of stock and/or securities as, in accordance with the foregoing
provisions, the holders of the Series G
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<PAGE> 9
Preferred Stock may be entitled to purchase.
(c) If any adjustment under this
subsection would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, no fractional shares shall be
issued upon conversion and an equivalent of the fractional share shall be paid
in cash.
E. Voting. Except as otherwise provided by the TBCA,
the holders of the Series G Preferred Stock shall be entitled to a number of
votes equal to the number of shares of Common Stock into which their respective
shares of Series G Preferred Stock are then convertible using the record date
for the taking of such vote of shareholders as the date as of which the
Conversion Price is calculated. Holders of the Series G Preferred Stock shall
be entitled to notice of all shareholder meetings or written consents with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Company's by-laws and applicable statutes.
F. Protective Provisions. So long as shares of Series G
Preferred Stock are outstanding, the Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares
of Series G Preferred Stock:
(a) alter or change the rights, preferences or
privileges of the Series G Preferred Stock so as to affect adversely the Series
G Preferred Stock;
(b) create any new class or series of stock or
issue any capital stock senior to or having a preference over or parity with
the Series G Preferred Stock with respect to payments upon Liquidation or
increase the number of authorized shares of Series G Preferred Stock or change
the Stated Value thereof; or
(c) do any act or thing not authorized or
contemplated by this Resolution which would result in taxation of the holders
of shares of the Series G Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended).
G. Status of Converted Stock. In the event any shares
of Series G Preferred Stock shall be converted as contemplated by this
Statement, the shares so converted shall be canceled, shall return to the
status of authorized but unissued Preferred Stock of no designated class or
series, and shall not be issuable by the Corporation as Series G Preferred
Stock.
H. Taxes. All shares of Common Stock issued upon
conversion of Series G Preferred Stock will be validly issued, fully paid and
nonassessable. The Corporation shall pay any and all documentary stamp or
similar issue or transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Series G Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay any tax
which may be
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<PAGE> 10
payable in respect of any transfer involved in the issue and delivery of shares
of Common Stock in a name other than that in which the Series G Preferred Stock
so converted were registered, and no such issue or delivery shall be made
unless and until the person requesting such transfer has paid to the
Corporation the amount of any such tax or has established to the satisfaction
of the Corporation that such tax has been paid or that no such tax is payable.
SERIES H JUNIOR PARTICIPATING PREFERRED STOCK
The designations, preferences, limitations and relative rights of the
Series H Junior Participating Preferred Stock of the Corporation are as
follows:
1. Designation and Amount. There shall be a series of shares of
preferred stock that shall be designated as "Series H Junior Participating
Preferred Stock," 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 Stock with respect to
dividends, the holders of shares of Series H Junior Participating Preferred
Stock, in preference to the holders of shares of any class or series of shares
of the Corporation ranking prior to the Series H Junior Participating Preferred
Stock, 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 Stock, 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 Stock") 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 Stock. 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 Stock payable in
Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the
outstanding Common Stock 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
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<PAGE> 11
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on
the Series H Junior Participating Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
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 Stock 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 Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such Series H Junior
Participating Preferred Stock, 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 Stock 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 Participating Preferred Stock 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
Stock 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 Stock shall have the following voting rights:
(A) Each share of Series H Junior Participating Preferred Stock
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 Stock and the holders of the Common
Stock 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
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<PAGE> 12
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 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 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
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<PAGE> 13
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
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 Stock 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 Stock 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 Stock 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
Stock;
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<PAGE> 14
(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 Stock, except dividends paid ratably on the Series H Junior
Participating Preferred Stockand 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 Stock, 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
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series H Junior Participating Preferred Stock, or any shares ranking
on a parity with the Series H Junior Participating Preferred Stock, 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.
(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 Stock 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 Stock, unless, prior
thereto, the holders of Series H Junior Participating Preferred Stock 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
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<PAGE> 15
unless, prior thereto, the holders of Common Stock 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 Stock and the Common Stock, respectively,
holders of Series H Junior Participating Preferred Stock and holders of the
Common Stock 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 Stock and the Common Stock, 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
Stock, 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
Stock.
7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, or other transaction in which the Common
Stock 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 Stock shall at the same time be similarly exchanged or changed in an
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 Stocks shall
not be redeemable. Notwithstanding the foregoing sentence of this Section, the
Corporation may acquire Series H Junior Participating Preferred Stock in any
other manner permitted by law.
9. Ranking. The Series H Junior Participating Preferred Stock
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 Stock are outstanding, these Restated Articles 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 Stock 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 Stock,
voting separately as a class.
11. Fractional Shares. Series H Junior Participating Preferred
Stock may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to
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<PAGE> 16
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 Stock.
DIVISION D - PROVISIONS APPLICABLE TO ALL CLASSES OF STOCK
(a) No holder of any stock of the Corporation shall be entitled as of
right to purchase or subscribe for any part of any unissued or
treasury stock of the Corporation, or of any additional stock of any
class, to be issued by reason of any increase of the authorized
capital stock of the Corporation, or to be issued from any unissued or
additionally authorized stock, or of bonds, certificates of
indebtedness, debentures or other securities convertible into stock of
the Corporation, but any such unissued or treasury stock, or any such
additional authorized issue of new stock or securities convertible
into stock, may be issued and disposed of by the Board of Directors to
such persons, firms, corporations or associations, and upon such terms
as the Board of Directors may, in its discretion, determine, without
offering to the shareholders then of record, or any class of
shareholders, any thereof, on the same terms or any terms.
ARTICLE FIVE
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of not less than $1000.00
consisting of money paid, labor done, or property actually received.
ARTICLE SIX
The address of the registered office and the name of its registered
agent is as follows:
C T Corporation
811 Dallas Avenue
Houston, Texas 77002
ARTICLE SEVEN
(a) The business and affairs of the Corporation shall be conducted and
managed by, or under the direction of, the Board of Directors. Except
as otherwise provided for or fixed pursuant to the provisions of
Article 4 of these Restated Articles relating to the rights of the
holders of any series of Preferred Stock to elect additional
directors, the total number of directors constituting the entire Board
of Directors shall be not less than three (3) nor more than nine (9),
with the then-authorized number of directors being fixed from time to
time solely by or
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<PAGE> 17
pursuant to a resolution passed by the Board of Directors.
(b) The Board of Directors shall have the power to make, adopt, alter,
amend and repeal from time to time the By-Laws of this Corporation,
subject to the right of the shareholders entitled to vote with respect
thereto to adopt, alter, amend and repeal the By-Laws; provided,
however, that By-Laws shall not be adopted, altered, amended or
repealed by the stockholders of the Corporation except by the vote of
the holders of not less than sixty percent (60%) of the outstanding
shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, considered for this purpose as
one class.
(c) No director of the Corporation shall be liable to the Corporation or
its shareholders for monetary damages for an act or omission (or an
alleged act or omission) in a director's capacity as director, except
that this Article Seven (c) does not eliminate or limit the liability
of a director to the extent the director is found liable for:
(1) a breach of a director's duty of loyalty to the Corporation
or its shareholders;
(2) an act or omission not in good faith which constitutes a
breach of duty of the director to the Corporation, or an act or
omission which involves intentional misconduct or a knowing violation
of-the law;
(3) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office;
(4) an act or omission for which the liability of a director is
expressly provided for by an applicable statute; or
(5) an act related to an unlawful stock repurchase or payment of
a dividend.
If the Texas Miscellaneous Corporation Laws Act or the TBCA or any other
applicable law is amended or adopted to authorize action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by such law(s), as so amended or adopted. Any repeal or modification
of the foregoing paragraph shall not adversely affect any right of protection
of a director of the Corporation existing at the time of such repeal or
modification.
(d) The Board of Directors shall be divided into three classes, designated
as Class I, Class II, and Class III. Each class shall consist, as
nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. Initially, Class
I directors shall be elected for a one-year term, Class II directors
for a two year term and Class III directors for a three-year term. At
the annual meeting of shareholders beginning in 1993, successors to
the class of directors whose term expires at that annual meeting shall
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<PAGE> 18
be elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as
nearly as possible, and any additional director of that class elected
to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that
class, but in no case shall a decrease in the number of directors
shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires
and until his successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or
removal from office. Any vacancy on the Board of Directors that
results from an increase in the number of directors may be filled only
by action of majority of the Board of Directors then in office,
provided that a quorum is present; any other vacancy occurring in the
Board of Directors may be filled only by action of a majority of the
directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall have the
same remaining term as that of his predecessor.
(e) Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article 4 of these Restated Articles, the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a
series or together with holders of other such series, to elect
directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of
such directorships shall be governed by the terms of these Restated
Articles and such directors so elected shall not be divided into
classes pursuant to this Article 7 (e) unless expressly provided by
such terms.
(f) Directors must be at least 21 years of age and need not be
shareholders. There shall be no qualifications for directors of the
Corporation other than as set forth in these Amended and Restated
Articles.
(g) The number of directors presently constituting the Board of Directors
of the Corporation is seven (7), and the names, addresses and class of
the persons now serving as directors are are as follows:
<TABLE>
<CAPTION>
Name Address Class
<S> <C> <C>
Ronald J. Berman Jupiter, Florida III
Marc W. Eller Fort Worth, Texas III
Nicholas Martin Detroit, Michigan II
Philip C. Shaffer Houston, Texas II
David R. Sincox Houston, Texas I
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C> <C>
Dr. Zvi Yaniv Austin, Texas I
Charles C. Bailey Austin, Texas I
</TABLE>
ARTICLE EIGHT
[Deleted pursuant to Article 4.07 (B) of the TBCA, as amended.]
ARTICLE NINE
(a) At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be
otherwise properly brought before the meeting by a shareholder (i)
specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (ii) otherwise
properly brought before the meeting by or at the direction of the
Board of Directors, or (iii) otherwise properly brought before the
meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or
prior to public disclosure of the date of the meeting is given or made
to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A shareholder's
notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (iii)
the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (iv) any material interest
of the shareholder in such business. The Chairman of the annual
meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting in
accordance with the provisions of this Article 9(a), and if he should
so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures set
forth in this Article 9(b) shall be eligible for elections as
Directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders
by or at the direction of the Board of Directors or by any shareholder
of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures
19
<PAGE> 20
set forth in this Article 9(b). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a shareholder's notice shall be delivered
to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 70 days'
notice or prior public disclosure of the date of the meeting is given
or made to shareholders, notice by the shareholder to be timely must
be so received not later than the close of business on the 10th day
following the date on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such shareholder's notice
shall set forth (i) as to each person whom the shareholder proposes to
nominate for election or re-election as a Director, (A) the name, age,
business address and residence address of such person, (B) the
principal occupation or employment of such person, (C) the class and
number of shares of the Corporation which are beneficially owned by
such person, and (D) any other information relating to such person
that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as
amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a
Director if elected); and (ii) as to the shareholder giving the
notice, (1) the name and address, as they appear on the Corporation's
books, of such shareholder and (2) the class and number of shares of
the Corporation which are beneficially owned by such shareholder. No
person shall be eligible for election as a Director of the Corporation
unless nominated in accordance with the procedures set forth in this
Article 9(b). The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed herein, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
ARTICLE TEN
No shareholder of the corporation shall have the right of cumulative
voting at any election of directors or upon any other matter.
ARTICLE ELEVEN
(a) With respect to any matter for which the affirmative vote of the
holders of a specified portion of the shares entitled to vote is
required by the TBCA, including, but not limited to, the amendment of
these Restated Articles pursuant to Article 4.02 of the TBCA, the
approval of any action or plan of merger or exchange pursuant to
Article 5.03 of the TBCA or the disposition of assets requiring
special authorization of shareholders pursuant to Article 5.10 of the
TBCA, the approval of those matters shall be the affirmative vote of
the majority of the shares entitled to vote on those matters, rather
than the affirmative vote otherwise required by the TBCA.
20
<PAGE> 21
(b) With respect to any matter for which the affirmative vote of the
holders of a specified portion of the shares of any class or series is
required by the TBCA, including, but not limited to, those matters
identified in paragraph (a) of this Article Eleven, the approval of
those matters shall be the affirmative vote of the holders of a
majority of the shares of that class or series, rather than the
affirmative vote of that class or series otherwise required by the
TBCA.
(c) If the TBCA or any other applicable law is amended or adopted with
respect to a matter requiring the affirmative vote of the holders of a
specified portion of the shares entitled to vote on that matter, then
this Article Eleven shall also require a vote of a majority of the
holders of the shares entitled to vote on that matter, rather than the
affirmative vote otherwise required.
IN WITNESS WHEREOF, the undersigned has executed these Restated
Articles as of November___, 1999.
SI DIAMOND TECHNOLOGY, INC.
/s/ Douglas P. Baker
---------------------------
Douglas P. Baker
Vice President and Chief Financial Officer
21
<PAGE> 22
THE STATE OF TEXAS
COUNTY OF TRAVIS
BEFORE ME, the undersigned authority, on this day personally appeared
Douglas P. Baker, the Vice President and Chief Financial Officer of SI Diamond
Technology, Inc., known to me to be the person whose name is subscribed to in
the foregoing instrument, and acknowledges to me that he executed the same for
the purposes and consideration therein expressed, as the act and deed of said
corporation and in the capacity therein expresses.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the ____day of November,
1999
-------------------------------------
Notary Public in and for the State of Texas
22
<PAGE> 1
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Year ended
December 31, December 31,
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Computation of income ( loss ) per common share:
Net income (loss) applicable to common
shareholders $ (670,481) $ (670,611) $ 977,971 $ (3,812,505)
Weighted average number of common shares 53,651,504 44,796,030 51,188,385 37,207,122
Net income (loss) per common share $ (0.01) $ (0.01) $ 0.02 $ (0.10)
Computation of income ( loss ) per common
share assuming full dilution:
Net income (loss) applicable to common
stockholders 977,971
Plus: Income impact of assumed conversions
Series G 140,163
Interest 21,832
Income available to common stockholders 1,139,966
Weighted average number of common
shares outstanding 51,188,385
Plus incremental shares from dilutive securities
Convertible preferred stock 1,625,116
Convertible notes payable 635,168
Warrants 391,647
Options 3,561,388
Adjusted weighted average number of
common shares outstanding 57,401,654
Net income (loss) per common share 0.02
</TABLE>
No computation of diluted loss per common share is included for the 1998 periods
or for the three months ended December 31, 1999 because such computation results
in an antidilutive loss per common share.
Page 60
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Company
<TABLE>
<CAPTION>
Doing Business
Subsidiary State of Incorporation under the Following Names
- ---------- ---------------------- -------------------------
<S> <C> <C>
Sign Builders of
America, Inc. Delaware Sign Builders of America, Inc.
Diamond Tech One, Inc. Delaware Diamond Tech One, Inc
SDI Acquisition Corp. Texas SDI Acquisition Corp.
Plasmatron Coatings and Plasmatron Coatings and
Systems, Inc. Pennsylvania Systems, Inc.
Field Emission Picture
Element Technology, Inc. Delaware FEPET, Inc.
Electronic Billboard Electronic Billboard
Technology, Inc. Delaware Technology, Inc.
</TABLE>
Page 61
<PAGE> 1
EXHIBIT 24.1
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ Phillip C. Shaffer
----------------------
Philip C. Shaffer
<PAGE> 2
EXHIBIT 24.2
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ David R. Sincox
-------------------
David R. Sincox
<PAGE> 3
EXHIBIT 24.3
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ Nicholas Martin, Jr.
------------------------
Nicholas Martin, Jr.
<PAGE> 4
EXHIBIT 24.4
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ Ronald J. Berman
--------------------
Ronald J. Berman
<PAGE> 5
EXHIBIT 24.5
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ Charles G. Bailey
---------------------
Charles G. Bailey
<PAGE> 6
EXHIBIT 24.6
SI DIAMOND TECHNOLOGY, INC.
POWER OF ATTORNEY
SI DIAMOND TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-KSB
The undersigned, in his capacity as a director of SI Diamond Technology,
Inc. (the "Company"), after reviewing the Company's Form 10-KSB, does hereby
appoint Tracy Vaught, his true and lawful attorney to execute in his name, place
and stead, in his capacity as a Director of said Company, the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and all
instruments necessary or incidental in connection therewith, including all
amendments, and to file the same with the Securities and Exchange Commission.
Said attorney shall have the full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorney.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
21st day of March, 2000.
/s/ Dr. Zvi Yaniv
-----------------
Dr. Zvi Yaniv
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY, INC. FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 348,832 2,636
<SECURITIES> 719,376 0
<RECEIVABLES> 320,518 184,020
<ALLOWANCES> 6,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,662,813 779,170
<PP&E> 2,002,076 955,781
<DEPRECIATION> 564,830 795,111
<TOTAL-ASSETS> 3,943,330 537,863
<CURRENT-LIABILITIES> 2,018,919 3,174,361
<BONDS> 0 0
0 0
1,100 1,700
<COMMON> 53,906 45,987
<OTHER-SE> 1,825,235 (2,684,185)
<TOTAL-LIABILITY-AND-EQUITY> 3,943,330 537,863
<SALES> 6,752,104 721,841
<TOTAL-REVENUES> 6,752,104 721,841
<CGS> 674,380 1,592,225
<TOTAL-COSTS> 5,506,710 4,908,916
<OTHER-EXPENSES> 84,260 (185,012)
<LOSS-PROVISION> 0 (771,515)
<INTEREST-EXPENSE> 43,000 327,000
<INCOME-PRETAX> 1,673,690 (3,557,548)
<INCOME-TAX> 555,556 0
<INCOME-CONTINUING> 1,118,134 (3,557,548)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,118,134 (3,557,548)
<EPS-BASIC> 0.02 (0.10)
<EPS-DILUTED> 0.02 (0.10)
</TABLE>
