-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GNUHsbanT4zZZV9bLA0GtHhjPEGDxT92wRMO0vIPFDJGAR7XokdXGOI62WSB7rm6 d/hsgji8CE0eJ3uRxJWQoQ== 0000950144-01-506421.txt : 20010828 0000950144-01-506421.hdr.sgml : 20010828 ACCESSION NUMBER: 0000950144-01-506421 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SI DIAMOND TECHNOLOGY INC CENTRAL INDEX KEY: 0000891417 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 760273345 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11602 FILM NUMBER: 1723562 BUSINESS ADDRESS: STREET 1: 3006 LONGHORN BOULEVARD STREET 2: SUITE 107 CITY: AUSTIN STATE: TX ZIP: 78758 BUSINESS PHONE: 5123315020 MAIL ADDRESS: STREET 1: 12100 TECHNOLOGY BOULEVARD CITY: AUSTIN STATE: TX ZIP: 78727 10KSB40/A 1 g71379e10ksb40a.txt SI DIAMOND TECHNOLOGY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000; 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 Common Stock, $0.001 par value 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/A or any amendment to this Form 10-KSB/A. [x] State issuer's revenues for its most recent fiscal year: $2,724,830 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 OTC Bulletin Board system on March 14, 2001, was approximately $38,650,441. 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, 2001, the registrant had 61,867,216 shares of Common Stock issued and outstanding. Transitional Small Business Disclosure Format (check one). Yes [ ] No [X] ================================================================================ 2 TABLE OF CONTENTS PART I ....................................................................................................Page 1 Item 1. Business...................................................................................Page 1 Item 2. Properties.................................................................................Page 9 Item 3. Legal Proceedings.........................................................................Page 10 Item 4. Submission of Matters to a Vote of Security Holders.......................................Page 11 PART II ...................................................................................................Page 12 Item 5. Market for Registrant's Common Stock and Related Stockholder Matters .....................Page 12 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................Page 15 Item 7. Financial Statements......................................................................Page 20 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................................Page 52 PART III ...................................................................................................Page 53 Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance with Section 16(a) of the Exchange Act.................................................................Page 53 Item 10. Executive Compensation....................................................................Page 54 Item 11. Security Ownership of Certain Beneficial Owners and Management............................Page 58 Item 12. Certain Relationships and Related Transactions............................................Page 60 Item 13. Exhibits and Reports on Form 8-K..........................................................Page 60
Page i 3 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. WE HAVE NO CURRENT ROYALTY AGREEMENTS PRODUCING REVENUE 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 one-time, up front, payment of approximately $5.6 million. This was a non exclusive license to Canon, Inc. that covered substantially all of our patents, including those related to the CFE technology. This license will produce no future revenue. We have no license agreements at the present time that will provide any future revenues. Upon completion of the development process, we expect to license our technology to be used in both the HYFED(TM) and PET products previously discussed in the risk factor "Our CFE product development is in its early stages and the outcome is uncertain". It is our intention that all future license agreements will include a provision that requires the payment of ongoing royalties. We would expect to license our technology for these products, if they are successfully developed to some or all of our development partners that were previously identified or to other third parties interested in manufacturing the products. OUR DEVELOPMENT PARTNERS HAVE CERTAIN RIGHTS TO JOINTLY DEVELOPED PROPERTY AND TO LICENSE OUR TECHNOLOGY We have committed to license our technology to our development partners upon completion of certain development projects that are in process. The terms of any such license have not yet been determined. One of our development partners, Futaba Corporation, has paid us $600,000 for research services and has the right to offset this payment against any future license fee payments due as a result of any license agreement. Our development partners also have rights to any jointly developed property, however any such jointly developed property would be based, at least in part, on our underlying technology and would require our partners to enter into an agreement with us. See also "Our CFE product development is in its early stages and the outcome is uncertain" for further discussion. Page ii 4 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 are exploring the use of our technology in several different types of products. We have two leading potential CFE products. We are developing these products jointly with others based on our technology. Upon successful completion of the development process, our development partners will be required to license our technology to produce and sell the products. Our development partners retain all rights to any intellectual property that they develop in the process. Consequently, it may not be possible for others to produce these products without obtaining licenses from both us and our development partners. The first product being developed is a Picture Element Tube ("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. We are jointly developing this product with Futaba Corporation (see Exhibit 10.1 to the registration of which this prospectus is a part). We are overseeing the project and incurring the majority of the costs. Futaba has provided us $600,000 to cover our portion of the cost. Futaba is also incurring internal costs related to the research; however the $600,000 that we are incurring represents the majority of the costs incurred on the project. Upon completion of the project, Futaba has the right to enter into a license agreement with us to allow them to manufacture the product. Terms of the license agreement have not been negotiated, however the $600,000 paid by Futaba can be applied to any license fees due from Futaba to us. We anticipate that any license agreement would involve both an initial up-front payment and ongoing royalties. Any jointly developed intellectual property will be jointly owned by the two parties; however any such intellectual property would be based on our underlying patented technology and therefore would still require Futaba to license our technology. The PET or displays may not be successfully developed. We are also working on a product called the HyFED(TM), which combines what we believe to be the best properties of a cathode ray tube ("CRT") and our CFE technology. It is our intention to license our HyFED(TM) technology to be used in the production of flat-screen TV applications that are cost competitive with CRTs. We are jointly developing this product with the aid of a consortium that includes Electrovac GESMBH, Imaging System Technology, Inc., Supertex, Inc., Schott Fiber Optics, Lead Sangyo Co., Ltd., Shanghai Novel Color Picture Tube Co., Ltd., and Shanghai Vacuum Electron Devices Co., Ltd. (see exhibits 10.2 through 10.8 to the registration statement of which this prospectus is a part). We are overseeing this consortium. Each member of the consortium is responsible for its own costs. We expect to incur approximately $600,000 in costs during the current phase of the project and we believe this represents greater than 50% of the total costs incurred by the consortium. Upon completion of the project, each consortium member has the first right to enter into agreements with us to license our technology. We expect any products that are developed to be manufactured by other members of the consortium. No terms have been negotiated for any potential license agreements. If either of these products using our CFE technology 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. At the present time, the only revenue that we receive related to our CFE technology is related to reimbursed research expenditures. These revenues are identified in our quarterly filings on form 10QSB and our annual filings on form 10KSB as revenues of our Field Emission Picture Element Technology, Inc. subsidiary in the related management discussion and analysis sections. 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 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. Page iii 5 WE HAVE A HISTORY OF NET LOSSES We have a history of net 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 net income and losses as shown below:
Net Income Year Ended December 31 (Loss) ---------------------- ------------ 1992 $ (1,630,978) 1993 $ (7,527,677) 1994 $ (7,255,420) 1995 $(14,389,856) 1996 $(13,709,006) 1997 $ (6,320,901) 1998 $ (3,557,548) 1999 $ 1,118,134 2000 $ (7,671,014)
Although we expect to be profitable in the future, we may not be. Our profitability in 2001 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. McGladrey & Pullen, LLP, independent auditors of the Company, have expressed uncertainty as to our ability to continue as a going concern based, in part, on our accumulated losses from operations in prior years. See "Independent Auditor's Report." We have funded our operations to date primarily through the proceeds from the sale of our equity securities and debt offerings. In the past, we were primarily a contract research and development organization, but are in the process of transitioning to an organization that is primarily dependent on products sales and other business operations. 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 and introduction 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. This lawsuit was settled in January 2000 for a total payment of $1,450,000 of which $1,000,000 was funded by a bonding company that had provided a bond on the original contract and $450,000 was funded by us. We were also named as a third party defendant in another suit by other guarantors under the bond. This related lawsuit was settled in January 2001 for a total payment of $800,000 to the bonding Company. The majority of that settlement was paid by other defendants in the case. We agreed to pay $150,000 of this settlement. We have no further liability in either of these matters, beyond the $200,000 of notes payable recorded on the balance sheet. We have other lawsuits that arise in the normal course of business, including lawsuits by various trade creditors related to payment of amounts due. We expect all lawsuits 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. Page iv 6 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, product introduction, product manufacturing at our subsidiary, Sign Builders of America, Inc. ("SBOA"), product marketing, and administrative overhead. The majority of R&D expenditures are for the development of our CFE technology and our electronic display products. Our business model is based on our installing electronic display products at customer sites at our cost and then deriving advertising revenues from the signs, or from the outright sale of these products. Installation of our products at customer sites will require a significant capital investment on our part. Our outdoor electronic billboard product is available now and we have installed three units at test sites, although only minor revenues have been generated. We also have a variety of smaller electronic display products available that are intended primarily for indoor use. 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 our current cash levels are not sufficient to fund operations until we reach that point. We have the existing resources to continue operations for approximately four to six weeks. 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 CHANGES 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. Page v 7 WE HAVE TECHNOLOGIES SUBJECT TO LICENSES As a licensee of certain research technologies through license and assignment agreements with Microelectronics and Computer Technology Corporation ("MCC"), 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 made to MCC to be insignificant based on the substantial amounts of revenues that would have to be generated to offset the costs of maintaining the patents over the years. We have also licensed certain patents related to carbon nanotube technology from Till Keesman. We are obligated to pay 50% of any royalties that we receive related to these patents to Mr. Keesman. If minimum royalties of $500,000 have not been paid by the end of May, 2002, the license will terminate at that time. If minimum royalties of $500,000 have been paid by the end of May 2002, but minimum royalties of $1,000,000 have not been paid by May, 2004, the license will terminate at that time. The effect of termination of this license could have a significant impact on us. At the present time, we have no product or revenue that is dependent on these patents. We are developing products that may depend, in part, on these patents, including both the HYFED(TM) and PET. If these products are successfully developed and they use the licensed technology, termination of this license agreement would have a significant negative impact. We expect to make the minimum payments due under the agreement if we have products or other licenses that are dependent on these patents. Certain of the products that we are developing may, in part, be based on some of the patents that we have licensed. Both of the main products that we are developing based on our CFE Technology may rely on certain of the patents. Successful completion of the development work and introduction of the HyFED(TM) and PET products may require us to pay royalties or license fees to either MCC or Till Keesman. 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. To the extent that any of our other products require manufacturing facilities, we intend to contract with a qualified manufacturer. Page vi 8 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. 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. Page vii 9 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:
Revenues from Government Percentage of Year Ended December 31 Contracts Total Revenue ---------------------- ------------- ------------- 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% 2000 $ 352,341 13%
We currently have one commitment for future government funding of approximately $580,000. We do not intend to seek any government funding unless it directly relates to achievement of our strategic objectives. A significant portion of the cost associated with the revenue recognized in 2000 were costs paid to a subcontractor on the project. 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 Page viii 10 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 and other industries. Our research is at FEPET is focused on identifying key applications of this technology. In addition to the electronics industry, we are also working on applications of our technology in the medical, x-ray, and wireless communication industries. Based on our research, we are currently engaged in the development of uses for our Carbon Field Emission ("CFE") technology. We are also developing 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. We believe that our greatest growth opportunity lies in CFE products and the development of our electronic display products for indoor and outdoor point of purchase advertising. We were incorporated in Texas in 1987. Our directly and indirectly owned subsidiaries are as follows:
Subsidiary State of Incorporation Status ---------- ---------------------- ------ 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
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 technology. 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 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 technology, electronic billboards, and related indoor and outdoor electronic display products. We conduct our operations through our subsidiaries. EBT is engaged in the development and introduction of electronic display products, such as billboards, outdoor display devices for use in the fast food or other industries, and indoor point of sale products. EBT installed three outdoor electronic billboards at test sites in 2000. SBOA manufactures and sells all types of signage. FEPET is conducting research on and developing uses for 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. Page 1 11 We incurred research and development expense of $2,620,623 in 2000 and $1,475,655 in 1999. 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 SEGMENTS FIELD EMISSION PICTURE ELEMENT TECHNOLOGY, INC. FEPET was incorporated in January 1997 and 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 our research has indicated that carbon is actually a better emitter. Accordingly, our research is now focused in the broader area of CFE technology and its application to the electronics, medical, x-ray, and wireless communication industries. We are developing a new display technology, the HyFED, which combines what we believe to be the best properties of cathode ray tubes ("CRTs") and our CFE technology. We are also extending our research to apply our technology in other non-display related fields. Our plans for this technology are discussed in greater detail in the section entitled "Business Development Strategies" later in this report. We successfully completed phase I of our HyFED development by demonstrating a 4" monochrome proof of concept. We have now started phase II to develop a 4" full color proof of concept as a precursor to development of a 60" display. Another 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, could be a natural step in the improvement of the Company's electronic billboard and other electronic products. ELECTRONIC BILLBOARD TECHNOLOGY, INC. EBT was incorporated in January 1997 to focus on developing sun-readable display products for outdoor use. Its initial primary product focus was an electronic billboard which would enable the outdoor advertising industry to exploit the Internet and information revolution by placing ads at different locations at different times. We installed three outdoor billboards at test locations in 2000. Two of the billboards were installed under a pilot program with Eckerd Corporation, a subsidiary of JCPenney. We also installed one outdoor billboard at a Cinemark location, which is currently not in use. We have also developed displays for indoor use that could be used as part of an overall point of purchase advertising program. 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 assists in the installation of the electronic billboard product. SBOA has two significant customers (see Note 16 to the consolidated financial statements). SBOA has no significant raw material suppliers. 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 display products. We currently have a manufacturing facility that we acquired through our acquisition of SBOA to assemble 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. Page 2 12 FEPET 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 over the next few years 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 TECHNOLOGY. The major short run focus of FEPET is the continued development and commercialization of its CFE technology. Our current research and development efforts are focused on developing our technology for use in the display, medical, x-ray, and wireless communication industries. We have two main potential product for the display industry, the HyFED and the PET. HYFED - We have developed a new display technology, the HyFED. HyFED combines what we believe to be the best properties of CRTs and our CFE technology using our proprietary diamond/carbon thin films. We expect the HyFED to compete with Plasma Displays in both cost and quality. 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 was 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 has been expanded and 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 within the next eighteen months. PET - The PET is a basic display device which could be used in many display applications, including electronic billboards. 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 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 within the next year 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 are currently working with a large Japanese display manufacture to complete development of the PET and have received $600,000 from this company to continue our development of the PET. OTHER CFE PRODUCTS - We are also concentrating on developing uses for our technology in industries other than the display industry. We have developed a carbon cold cathode electron source, which can be utilized for many non-display related applications such as x-ray tubes, medical devices, microelectronics, nanotechnologies, low-power thrusters, CRT electron guns, wireless communications, and polluted air scrubbing. We have signed a license agreement with Oxford Instruments to provide cathodes for use in their products in the field of X-ray technology. We have also received a grant of approximately $582,000 from NASA to develop low power thrusters using our technology. This grant was received as a follow up to an initial feasibility study funded by NASA in the amount of approximately $67,000. We are also researching the use of our technology in other industries and are encouraged by the preliminary results that we have achieved to date. Page 3 13 EBT ELECTRONIC DISPLAY PRODUCTS. EBT has developed and markets several electronic display products, including the E-Window, the E-Banner, the Digital Poster, and an electronic billboard. We are focusing our current marketing efforts on our indoor electronic display products. We are targeting major national retailers for the use of these displays in conjunction with existing on-site signage. We intend to lease or operate our display products through joint venture arrangements with these retailers. To facilitate our entry into this market, we have signed marketing agreements 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. We have also signed a marketing agreement with Kaleidoscope Communications, a global advertising and marketing agency. As a result of the Vision Mark agreement, we signed an agreement with Eckerd Corporation, a subsidiary of JCPenney to install two electronic billboards on a test basis in 2000. We installed these billboards at stores in Clearwater, Florida and Austin, Texas in 2000. As a result of the successful tests of the outdoor signs at these two sites, we signed an additional agreement with Eckerd Corporation in February 2001 to install indoor point of sale displays at ten Eckerd locations in four states. We expect these indoor displays to be installed by mid April 2001. As a result of our agreement with Kaleidoscope, we signed an agreement with a national quick service restaurant chain to install our E-Window and E-Banner products at several locations for a test that will run through June 2001. It is expected that these tests will result in an increase in the average check size and an increase in the unit sales of the items featured on the displays. We also intend to use Kaleidoscope to sell the advertising on displays that we own that are installed at customer locations, such as with the Eckerd agreement described above. Kaleidoscope, which is affiliated with DDB worldwide, one of the largest advertising agencies in the world, will bring us needed expertise in the sale of advertising. We are also targeting other national retail chains, banks, restaurants, and others for our display products. We previously signed an agreement with Cinemark, a national theatre chain, for installation of a billboard at a test site. Because of the difficult financial conditions currently being experienced by the theatre industry and because of the limitations on advertising at these locations, we are evaluating this agreement. We have the ability to terminate this contract with 30 days notice and will do so if we determine that our resources can be better deployed elsewhere. Our outdoor 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 also developing an outdoor electronic billboard using Liquid Crystal Display ("LCD") technology. This LCD billboard, when fully developed using our patented technology, is expected to provide similar quality at approximately one third the cost of existing outdoor electronic billboards. We have developed a demonstration model of our LCD billboard that was completed in January 2001. The model is modular in design and consists of four one foot by one foot modules. The Company expects to eventually install outdoor electronic billboards using this technology. As discussed above, we completed installation of our first electronic billboard at a customer site in 2000 and allowed the customer an extended test period. Our benchmark for success was to develop an operational outdoor billboard and we were successful. Since this is a new concept and we have no historical results available to us, we are unable to predict future revenues with sufficient certainty and accordingly, pursuant to the provisions of Financial Accounting Standards Board Pronouncement No. 121 ("FAS 121") we reduced the carrying value of these display units to the lower end of the range of estimated liquidation values. Notwithstanding the provisions of FAS 121, we expect our strategy (see MD&A) to be successful. Page 4 14 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 believe that TDS continued to use our patented technology after the termination of the agreement and as described in greater detail in Item 3, the matter is currently under litigation. We are seeking back royalties for all products shipped by TDS which involve our technology and for payment of future royalties related to all products sold which involve our technology. SBOA CUSTOM SIGN MANUFACTURING. SBOA is continuing to target customers in its home geographical area of Central Texas and selected national accounts using its own internal sales force. Page 5 15 COMPETITION EBT ELECTRONIC BILLBOARDS. We believe that the proprietary version of the VFD and LCD technologies 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 We are unaware of any other organizations developing an electronic billboard using technologies similar to ours. However, these are existing technologies 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. OTHER ELECTRONIC DISPLAY PRODUCTS. Our other electronic display products face competition from a variety of similar products and a variety of sources. Our E-window product is a unique product with a patent pending, which gives us an advantage in this area. Our success in this area is dependent on our ability to market our products. We believe our marketing efforts are enhanced by our ability to provide a complete product line, including the sun-readable outdoor displays, and the E-window product. FEPET CFE TECHNOLOGY. 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. Other competition for the CFE technology comes from the existing technologies used in the industries for which the Company is developing the technology. These technologies vary from industry to industry. SBOA CUSTOM SIGNS. SBOA faces competition from a variety of national, regional and local custom sign manufacturers. The custom sign business is an extremely competitive business. TECHNOLOGY AGREEMENTS MCC. We acquired 62 patents and patent applications related to the CFE technology from MCC in 1998. We are obligated to pay MCC a royalty of 2% of future commercial revenues related to these 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. TILL KEESMAN. We licensed 6 patents from Till Keesman in exchange for a payment of $250,000 payable in shares of our common stock. Under the terms of the agreement, we are obligated to pay license fees equal to 50% of any royalties received by the Company related to these patents. We are allowed to offset certain expenses, up to a maximum of $50,000 per year, against payments due under this agreement. The agreement also contains provisions related to minimum license fee payments. If we do not pay minimum additional license fees of $500,000 by May 2002, the license will terminate at that point. If we do not pay additional cumulative license fees of $1,000,000 (including any fees applied toward the previously described minimum due in May 2002) by May 2004, the license will terminate at that point. We are not obligated to make any additional payments, but the license may terminate if these payments are not made. Page 6 16 INTELLECTUAL PROPERTY 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. We own 57 issued patents, two allowed patents, and have 56 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. Page 7 17 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. The cost of compliance with these regulations has not been significant in the past and is not expected to be material in the future. In the past, a portion of our revenues have consisted of reimbursement of expenditures under U.S. government contracts, although we recognized no such revenue in 1999 and only $352,341 in 2000. These reimbursements represent a portion of the costs associated with such contracts. As of December 31, 2000, we have only one grant, however we received three additional small grants subsequent to that date. 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. EMPLOYEES As of March 14, 2001, we had 42 full-time employees, including three 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. Page 8 18 EXECUTIVE OFFICERS The names of executive officers of the Company and certain information with respect to each of them are set forth below.
Name Age Position ---- --- -------- Marc W. Eller 45 Chairman and Chief Executive Officer Zvi Yaniv 54 President and Chief Operating Officer Tracy Vaught 44 Vice President and Chief Financial Officer
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 SBOA since 1994. She also has public accounting experience at both a local CPA firm in Austin, Texas and Coopers & Lybrand in Houston, Texas. 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. SBOA also leases a 10,000 square foot facility in Austin that it uses for its manufacturing operations under a lease expiring in August 2001. 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. Page 9 19 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 named Plasmatron, SI Diamond, and Westchester Fire Insurance Company as defendants. Semi-Alloys claimed a breach of contract related to $1 million of coating equipment that Plasmatron delivered in 1993, prior to our ownership of Plasmatron. Semi-Alloys claimed the equipment did not perform as required under the contract. Semi-Alloys sought to recover compensatory, consequential and incidental damages. The plaintiff sought damages of approximately $8.0 million. 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. The plaintiff agreed to accept a total payment of $1,450,000 in exchange for a release of all claims. We agreed to pay a total of $450,000 of this settlement. A total of $225,000 was due at signing and 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 first two notes were paid in 2000. The remaining note of $100,000 is due in July 2001. 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 seeking to recover the $1,000,000 paid as a result of the Semi-Alloys settlement, plus legal costs. 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. This case was settled in January 2001. As part of the settlement, SI Diamond Technology, Inc. agreed to contribute $150,000 as part of an overall settlement package to which all defendants contributed a total of $800,000. The terms of the settlement call for us to pay $50,000 no later than June 1, 2001. The balance of $100,000 is in the form of a note due in July 2003. 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 Plasmatron. We were served with notice of this suit on August 5, 1998. The plaintiff seeks damages of approximately $25,000. All amounts claimed as owing by TFI are recorded as liabilities in the consolidated financial statements. We believe that the ultimate resolution of this matter will not have a material impact on our consolidated financial statements. 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 settled this suit in 2000 for a total payment of $28,000, which represented less than two months rent during the vacancy period. On November 16, 2000, Lance Adams, the former owner of Sign Builders of America, Inc. filed suit against SI Diamond Technology, Inc and Sign Builders of America, Inc. in the 20th Judicial District Court in Travis County, Austin Texas for alleged breech of the purchase agreement in which the Company purchased SBOA. Of the initial purchase price of $1,800,000, a total of $1,350,000 was paid in cash and stock in September 1999. The remainder of $450,000 was due in the form of a note due in two installments in March and September 2000. The agreement contained provisions that allowed for a downward adjustment of the sales price if certain sales levels were not achieved and allowed offsets for other claims against the note. In February 2000, an initial purchase price adjustment reduced the note to $250,000 and a payment $125,000 plus interest was made in March 2000. In September 2000, the Company notified Mr. Adams of additional purchase price adjustments and other offsets which eliminated the remaining balance due on the note. Mr. Adams disagreed with these offsets and filed suit for breech of the agreement, alleging damages of not less than $175,000. The Company has filed a counterclaim against Mr. Adams for amounts due back to the Company as a result of these offsets. The Company expects the ultimate resolution of this suit to have no material impact on the consolidated financial statements. Page 10 20 The Company previously had a royalty agreement with Texas Digital Systems, Inc. (TDS) which was terminated by TDS pursuant to the terms of the agreement as of December 31, 1999. Under the terms of the agreement, TDS was prohibited from using the Company's technology after the termination of the agreement. The Company believed that TDS was continuing to ship products using our technology and contacted TDS. TDS responded, in part, by filing suit against the Company and its subsidiary, Electronic Billboard Technology, Inc. for breach of contract in the 272nd Judicial District Court in Brazos County Texas on July 26, 2000. The Company was not served with notice of this suit until December 5, 2000. It is the Company's view that the TDS claim against the Company has little merit and that a significant reason that TDS filed suit was to obtain venue in its home venue of Brazos County rather than in the Company's home county of Travis County. TDS has alleged unspecified damages in excess of $500,000. The Company intends to vigorously pursue its claim against TDS and seek damages and an injunction against TDS for continuing to use the Company's technology in TDS products after the termination of the agreement. The Company and its subsidiaries are also defendants in various other lawsuits related to the non-payment of invoices when due, or minor employment matters. 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. If resolution of any of these suits results in a liability greater than that recorded, it could 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 2000. Page 11 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock, $0.001 par value trades via the OTC Bulletin Board system under the symbol "SIDT". The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the OTC Bulletin Board system. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
HIGH LOW 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 ................................... $4.28 $1.67 Second Quarter................................... $3.00 $1.03 Third Quarter.................................... $1.80 $0.94 Fourth Quarter................................... $1.09 $0.22 2001 First Quarter (through March 14, 2001)........... $0.86 $0.37
On March 14, 2001, the closing sale price for our common stock as reported on the OTC Bulletin Board system was $0.64. As of March 14, 2001, there were approximately 325 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. Our convertible preferred stock has a liquidation preference of $1,145,123 as of December 31, 2000. Information required in this Item 5 of our Annual Report on Form 10-KSB/A 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 and that is not contained in "Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition," or in Note 10 to the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-KSB/A is presented below: 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 14 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. Minority Interest in Subsidiary In February 2000, the Company issued 200,000 shares of its common stock to Nomura Holding Company to acquire the shares of stock in the Company's FEPET subsidiary held by Nomura Holding Company. These shares were included on a registration statement filed in June 2000. Page 12 22 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. Following is a list of the shares issued:
Common shares Shareholder issued ----------- ------------- Mary Ellery Calloway 50,000 Hal Bozoff 22,000 Gilbert Kitt 12,500 Barry M. Kitt 12,500 Delta Traders 50,000 Bob Berman 100,000 Hemisphere list 275,000 Pinnacle Fund 190,895
1998 Notes and Private Placements 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. Following is a listing of the shares issued:
Common shares Noteholder issued ---------- ------------- D. Craig Valassis 442,904 John Green Company 433,863 Dan Cafolla Associates 185,140 Dan Cafolla PS Plan 105,301 Gilbert Kitt 210,000 Nick Martin 207,808 N. Martin Company 207,808 MSB Family Trust 830,904 Tom Hickey 414,795 Barney Caccioppo 103,534 Bill Clement 102,507 Michael Denton, Jr. 205,014
Page 13 23 1999 Notes and Private Placements In January and February 1999, we borrowed a total of $200,000 from a shareholder, the Pinnacle Fund, L.P., 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, 100,000 each to Bill Clement and Michael Denton, Jr., 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 During 2000, in a series of private placements under Regulation D of the Securities Act of 1933, we issued a total of 3,992,242 shares of our common stock in exchange for $3,455,000. The shares were issued at a slight discount to the market price of our common stock at the time of issuance. The Company filed registration statements in June and November 2000 to register these shares and to update the registration of other previously registered shares. Following is a listing of those shares:
Common shares Shareholder issued ----------- ------------- MSB Family Trust 700,000 Pinnacle Fund 250,000 Michael Denton Jr. 250,000 Zachary Q. Carlile 100,000 Robert Berman 200,000 Bill Clement 250,000 Pacific Northern 250,000 Alpine Capital 312,500 Carlton Neel 150,000 Street Search Advisors 250,000 D. Craig Valassis 434,028 First London Securities 845,714
Page 14 24 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should assist in understanding our financial condition and results of operations for the years ended December 31, 2000 and 1999 and our liquidity and capital resources for 2001. 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. OUTLOOK We expect our cash needs for 2001 to be approximately $3.5 million. We intend to fund those needs through a combination of SBOA sales, reimbursements for research, license agreements, and issuance of debt and equity securities. Successful introduction of our electronic display products resulting in significant customer orders would cause our cash needs to exceed that, however, such customer orders would also result in increased availability of funding. We anticipate that losses will continue in 2001 as we continue to fund the development of our CFE technology and continue installations of our electronic display products. We expect to reach break-even on a monthly operating basis by the end of 2001. 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 expect to continue our concentrated research and development of FEPET's technology in 2001. EBT developed new electronic display products in 2000 intended primarily for indoor use as point of sale displays. In February 2001, we signed an agreement with a national quick service restaurant chain to install our indoor electronic displays on a test basis. We also signed an agreement with Eckerd Corporation, a subsidiary of JCPenney, to install indoor point of sale electronic displays at 10 test locations beginning in March 2001. We developed a plan to allow ourselves to maintain operations until we are able to sustain ourselves on our own revenue. 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 display products. 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 of our 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. Page 15 25 RESULTS OF OPERATIONS 2000 Compared to 1999. The Company had $2,724,830 in revenues during 2000, as compared with $6,752,104 during 1999. The main reason for the decrease was that the 1999 revenues included $5,555,556 in license fee received from Canon, Inc. Commercial (non-governmental) sales accounted for $2,372,489 of the 2000 revenue and all revenues in 1999. Our 2000 commercial revenue included $2,257,013 from SBOA, $2,632 from FEPET, and $112,844 from EBT. The 1999 commercial revenue came from FEPET, EBT, and SBOA in the amounts of $5,794,269, $300,282, and $657,553, respectively. The 1999 FEPET revenues were composed of license fees of $5,555,556 and $238,713 of research revenues. The 2000 revenues were primarily the result of the sale of research services. The EBT revenue in 1999 was primarily the result of royalty payments from TDS. The 2000 EBT revenue included $25,500 of royalty payments from TDS and the remainder was from the sale of advertising and miscellaneous display products. We recognized no revenue from government funded projects in 1999 and $352,341of revenue from government grants in 2000. We received approval for an additional grant near the end of 2000, that will result in approximately $580,000 of revenue in 2001. 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 our strategic objectives. We are unable to predict our 2001 revenues by segment with any degree of accuracy at the present time, however we had a revenue backlog of $1,186,858 at December 31, 2000. The 2000 backlog was composed of $604,525 from our SBOA subsidiary and $582,333 from a NASA grant. This represents an increase over the backlog at December 31, 1999 backlog, which was composed of approximately $211,000 from SBOA and approximately $67,000 from a NASA grant. In 2000, our cost of sales were $1,949,042, or a margin of 28%. For 1999, our costs of sales were $674,380, resulting in a margin of 90%. The reason for the large decrease in margin was the royalty payment received in 1999, which had only negligible costs associated with it. We expect future margins to improve from 2000 levels as we begin to receive increased advertising revenues from the installation of our display products at customer locations. We expect margins at SBOA, our main segment, to improve slightly from 2000 levels. Our selling, general and administrative expenses increased to $3,881,141 in 2000 from $3,356,675 in 1999. This increase results from a combination of factors including increased overhead associated with operating our SBOA subsidiary for the entire year and a $675,000 marketing expense related to the agreement signed with Eckerd Corporation. We expect selling, general and administrative expense in 2001 to be similar to 2000. Company sponsored research and development expenses increased in 2000 to $2,620,623 from $1,475,655 in 1999. Development expense related to our electronic billboard product is the primary reason for the increase. Research and development expense at EBT increased from $817,436 in 1999 to $1,732,690 in 2000. All of EBT's research and development was focused on its indoor and outdoor electronic display products. Research and Development expense at FEPET increased from $658,219 in 1999 to $887,933 in 2000 due to a general higher level of activity. 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, however we expect research and development expenditures to be substantially reduced from 2000 levels for two reasons. First, FEPET has a much higher level of commitment for external funding in 2001. In addition to the NASA grant in the amount of approximately $582,000, which existed at December 31, 2000, FEPET has signed a $600,000 contract with a large Japanese display manufacturer and three other small research grants from the US Government. Second, EBT's display products are market ready and will require much lower levels of ongoing research and development expenditures. We may apply for other government grants, but only if those grants are specifically related to activities we are already pursuing to accomplish our own strategic objectives. We spent $2,620,623 on unreimbursed research and development in 2000 and expect to spend at least $1,000,000 in 2001 on unreimbursed research and development. Taxes in 1999 are foreign taxes related to the Canon license agreement. There were no foreign taxes in 2000. Page 16 26 The largest single component of cost that we incur is payroll related expense. In 2000, we incurred approximately $3.1 million of payroll related expense, of which $0.6 million is included in costs of sales related to SBOA. The remaining amount is included in selling, general and administrative expense, and research and development. As a result of reductions that we have made, our annualized current cost of payroll is approximately $2.6 million, with approximately $0.6 million still related to SBOA cost of sales. We do not expect our payroll levels to increase in 2001 until such time as additional employees may be required because of increased revenues. As discussed in greater detail in Note 6 to the financial statements, our operating results for 2000 include $1,838,261 in FAS 121 impairment charges. We do not expect to have any impairment charges in the future. The entire gain on disposal of assets of $375,000 in 2000 and $250,000 of the gain in 1999 resulted from the sale of our previous domain name, diamond.com. The balance of the gain in 1999 resulted from minor equipment disposals. We incurred net realized and unrealized losses on marketable securities in 2000 of $449,504 as compared with net realized and unrealized gains on marketable securities in 1999 of $309,172. The marketable securities were invested primarily in NASDAQ stocks and the overall results are similar to the overall performance of the NASDAQ during those time periods. We have liquidated the majority of our marketable securities portfolio and do not expect gains or losses in 2001 to be significant. LIQUIDITY AND CAPITAL RESOURCES Our cash position decreased from $348,832 at December 31, 1999 to $8,818 at December 31, 2000. Net cash used in operating activities was $5,205,723 in 2000, as opposed to cash provided by operating activities of $868,226 in 1999. The cash used in operations was primarily the result of the net loss incurred in 2000. Our operating results in 2000 included non cash charges of $1,838,261 related to impairment charges, $679,646 related to warrants and stock issued for services, and $544,794 related to depreciation. The major reason that we were profitable in 1999 was the royalty revenue received from Canon, Inc. in that year. Cash provided by investing activities was $233,192 in 2000 as compared with cash used in investing activities of $1,736,134 in 1999. 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 2000 was the result of the sale of the majority of our marketable securities portfolio and proceeds received from the sale of the entity which had purchased our previous domain name. No material commitments exist as of December 31, 2000 for future purchases of capital assets. In 2000, we had cash provided by financing activities of $4,632,517. These funds were primarily the result of the sale of equity securities and were primarily used to fund our operating losses. This was a substantial increase over the cash provided by financing activities of $1,214,104 in 1999, when we had a much smaller need for operating capital as a result of the license agreement signed with Canon, Inc. As of December 31, 2000, our current liabilities exceeded our current assets by $888,644, with a current ratio of .4 to 1, compared to a working capital deficit of $356,106 and a current ratio of .8 to 1 as of December 31, 1999. This decrease is primarily the result of the reduction in our cash and marketable securities positions. Current liabilities decreased by $443,129 from 1999 to 2000. The primary reason for this decrease is the total payments of $350,000 made related to a lawsuit settlement that was included in accrued liabilities at December 31, 1999. We do not expect the aggregate payments related to lawsuits to exceed the liabilities recorded in the financial statements and we do not expect aggregate payments related to lawsuits to affect our liquidity beyond using resources that we have set aside to make payments at the appropriate times. If resolution of any of these suits results in a liability greater than that recorded, it could have a material financial impact on us. 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, 2000 were exercised, we would collect proceeds of approximately $466,000. (See Note 12 to the Consolidated Financial Statements.) Proceeds from the exercise of warrants totaled approximately $375,000 in 2000 and $650,000 in 1999. Given that the current price of our common stock is below the exercise price of our outstanding warrants, it is unlikely 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. At the present time, it is also unlikely that significant amounts of options will be exercised, since for current in-the-money options, the current market price of our common stock does not exceed the exercise price of those options by a significant amount. Page 17 27 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 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, McGladrey & Pullen, LLP, expressed uncertainty as to the ability of the Company to continue as a going concern based on accumulated past losses from operations. See "Independent Auditor's Report." Following is a summary of debt and equity proceeds that the Company has received from January 1, 2000 through the date of this filing: 2000 Private Placements During 2000, in a series of private placements under Regulation D of the Securities Act of 1933, we issued a total of 3,992,242 shares of our common stock in exchange for $3,455,000. The shares were issued at a slight discount to the market price of our common stock at the time of issuance. The Company filed registration statements in June and November 2000 to register these shares and to update the registration of other previously registered shares. 2000 Notes In June 2000, we borrowed a total of $375,000 from two separate entities. We repaid $125,000 in January 2001. The remaining $250,000 is due in June 2001 and is convertible into our common stock at the option of the lender at a rate of $0.675 per share. The shares into which this note are convertible were registered on a registration statement declared effective July 17, 2000. 2001 Private Placements and Notes Through March 12, 2001 in a series of private placements under Regulation D of the Securities Act of 1933, we issued a total of 1,178,284 and received total proceeds of $522,047. These shares have not yet been registered. It is likely that we will continue to fund our operations through the use of private placements and Notes until such time as we are able to sustain ourselves on our own revenue. 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. Common Stock for Services As a result of a marketing agreement and related consulting and advisory agreement with Vision Mark, LLC and C&A Consulting Services, LLC., the Company issued 300,000 shares of its common stock in January 2000 to C&A in connection with an agreement to provide an electronic billboard to Eckerd Corporation, a subsidiary of JCPenney , Inc. The shares were valued at $675,000 based upon the market price of the common stock at the time of issuance. A registration statement covering these shares was declared effective June 23, 1999 and amended on several occasions since that date. Page 18 28 Patent Acquisition In June 2000, the Company acquired a patent valued at $250,000. In exchange for this patent, the Company issued 240,164 shares of its common stock. A registration statement covering these shares was declared effective July 17, 2000. We may acquire additional patents in the future, but at the present time we have no plans to do so. 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 19 29 ITEM 7. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditor's Report................................................................ 21 Consolidated Balance Sheets - December 31, 2000 and 1999.................................... 23 Consolidated Statements of Operations - Years Ended December 31, 2000 and 1999.............. 24 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2000 and 1999.......................................................................... 25 Consolidated Statements of Cash Flows - Years Ended December 31, 2000 and 1999.............. 27 Notes to Consolidated Financial Statements.................................................. 28
Page 20 30 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders SI Diamond Technology, Inc. Austin, Texas We have audited the accompanying consolidated balance sheet of SI Diamond Technology, Inc. and Subsidiaries (collectively, the "Company") as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SI Diamond Technology, Inc. and Subsidiaries as of December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and the Company has relied primarily on capital raised through offerings of common stock, preferred stock, and convertible debt securities to fund its operations. It is uncertain whether the Company will be able to secure additional capital to fund its operations and this raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. McGladrey & Pullen, L.L.P. Dallas, Texas March 14, 2001 Page 21 31 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 22 32 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ...................................................... $ 8,818 $ 348,832 Marketable equity securities ................................................... 70,313 719,376 Accounts receivable, trade - net of allowance for doubtful accounts of $30,566 and $6,012 in 2000 and 1999, respectively ..................... 353,154 314,518 Notes receivable ............................................................... -- 60,000 Inventories .................................................................... 153,244 167,775 Prepaid expenses and other current assets ...................................... 90,767 52,312 ------------ ------------ Total current assets ..................................................... 676,296 1,662,813 Property and equipment, net ......................................................... 766,581 1,437,246 Intangible assets, net .............................................................. 190,000 836,021 Other assets ........................................................................ 8,688 7,250 ------------ ------------ Total assets ............................................................. $ 1,641,565 $ 3,943,330 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................... $ 467,414 $ 751,225 Current portion of notes payable ............................................... 496,623 255,473 Obligations under capital lease ................................................ -- 31,432 Accrued liabilities ............................................................ 441,958 723,842 Customer deposits and other current liabilities ................................ 169,795 256,947 ------------ ------------ Total current liabilities ................................................ 1,575,790 2,018,919 ------------ ------------ Note payable, long-term ............................................................. -- 21,623 ------------ ------------ Commitments and contingencies ....................................................... -- -- Minority interest in subsidiary ..................................................... -- 22,547 ------------ ------------ Shareholders' equity : Convertible preferred stock, $1.00 par value, 2,000,000 shares authorized; 850 and 1,100 shares issued and outstanding, respectively .................... 850 1,100 Common stock, 120,000,000 shares authorized, $.001 par value, 60,518,983 and 53,906,719 shares issued and outstanding, respectively ........ 60,519 53,906 Additional paid-in capital ..................................................... 61,272,028 55,410,993 Less stock subscriptions receivable ............................................ (10,850) -- Accumulated deficit ............................................................ (61,256,772) (53,585,758) ------------ ------------ Total shareholders' equity ............................................... 65,775 1,880,241 ------------ ------------ Total liabilities and shareholders' equity ............................... $ 1,641,565 $ 3,943,330 ============ ============
See notes to consolidated financial statements. Page 23 33 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 ------------ ------------ Revenues License fees and royalties ..................................................... $ 25,500 $ 5,842,756 Sign construction .............................................................. 2,257,013 657,553 Government contracts ........................................................... 352,341 -- Advertising .................................................................... 44,931 -- Other .......................................................................... 45,045 251,795 ------------ ------------ Total Revenues ..................................................... 2,724,830 6,752,104 Cost of sales ....................................................................... 1,949,042 674,380 Selling, general and administrative expenses ........................................ 3,881,141 3,356,675 Research and development ............................................................ 2,620,623 1,475,655 Impairment charge ................................................................... 1,838,261 -- ------------ ------------ Operating costs and expenses ............................................. 10,289,067 5,506,710 ------------ ------------ Income (loss) from operations ..................................... (7,564,237) 1,245,394 ------------ ------------ Other income (expense): Gain on disposal of assets ................................................. 375,000 265,688 Net realized and unrealized gains (losses) on marketable securities ........ (449,504) 309,172 Other income (expense), net ................................................ (54,820) (124,017) ------------ ------------ Income (loss) before minority interest in subsidiary earnings ....................... (7,693,561) 1,696,237 Minority interest in subsidiary earnings ............................................ 22,547 (22,547) ------------ ------------ Income (loss) before taxes .......................................................... (7,671,014) 1,673,690 Provision for taxes ................................................................. -- 555,556 ------------ ------------ Net income (loss) ................................................................... (7,671,014) 1,118,134 Accretion on convertible preferred stock ............................................ (90,328) (140,163) ------------ ------------ Net income (loss) applicable to common shareholders ................................. $ (7,761,342) $ 977,971 ============ ============ Earnings (loss) per share Basic ...................................................................... $ (0.14) $ 0.02 ============ ============ Diluted .................................................................... $ (0.14) $ 0.02 ============ ============ Weighted average common shares outstanding Basic ...................................................................... 57,379,240 51,188,385 ============ ============ Diluted .................................................................... 57,379,240 57,401,654 ============ ============
See notes to consolidated financial statements. Page 24 34 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED COMMON ---------------- ------------------- ADDITIONAL ACCUMULATED STOCK SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT SUBSCRIPTION TOTAL ------ -------- ---------- -------- --------------- ------------ ------------ ----------- Balance, January 1, 2000 1,100 $ 1,100 53,906,719 $ 53,906 $ 55,410,993 $(53,585,758) -- $ 1,880,241 Warrants exercised -- -- 375,000 375 374,625 -- -- 375,000 Issuance of common stock as a result of the exercise of employee stock options -- -- 1,125,177 1,125 474,147 -- -- 475,272 Conversion of Series G preferred stock into common stock (250) (250) 317,397 317 (67) -- -- -- Issuance of common shares for cash -- -- 3,992,242 3,993 3,451,007 -- -- 3,455,000 Issuance of common stock shares in payment of short term notes and interest -- -- 62,284 63 132,417 -- -- 132,480 Issuance of common stock warrants for services -- -- -- -- 4,646 -- -- 4,646 Issuance of common stock for patent acquisition -- -- 240,164 240 249,760 -- -- 250,000 Issuance of common stock for services -- -- 300,000 300 674,700 -- -- 675,000 Issuance of common shares for minority interest in subsidiary -- -- 200,000 200 499,800 -- -- 500,000 Stock subscription -- -- -- -- -- -- (10,850) (10,850) Net (loss) -- -- -- -- -- (7,671,014) -- (7,671,014) ------ -------- ---------- -------- ------------ ------------ -------- ----------- Balance, December 31, 2000 850 $ 850 60,518,983 $ 60,519 $ 61,272,028 $(61,256,772) $(10,850) $ 65,775 ====== ======== ========== ======== ============ ============ ======== ===========
See notes to consolidated financial statements. Page 25 35 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
PREFERRED COMMON ------------------ ---------------------- ADDITIONAL ACCUMULATED SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL ------ -------- ---------- -------- --------------- ------------ ------------ 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 ====== ======== ========== ======== ============ ============ ============
See notes to consolidated financial statements. Page 26 36 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 ------------ ------------ Cash flows from operating activities: Net income (loss) ...................................................... $ (7,671,014) $ 1,118,134 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Interest paid in common stock .......................................... 7,480 44,852 Minority interest in subsidiary earnings ............................... (22,547) 22,547 Warrants and stock issued for debt and services ........................ 679,646 66,400 Depreciation and amortization expense .................................. 544,794 171,035 Gain on disposal of assets ............................................. (375,000) (23,688) Non-cash compensation expense .......................................... 23,560 -- Impairment charge ...................................................... 1,838,261 -- Net realized and unrealized (gains) losses on marketable securities .... 449,504 (309,172) Changes in assets and liabilities: Accounts receivable, trade ........................................... (38,636) 174,428 Notes receivable ..................................................... 60,000 (60,000) Inventories .......................................................... 14,531 58,511 Prepaid expenses and other assets .................................... (38,455) 49,196 Accounts payable ..................................................... (283,811) (721,310) Accrued expenses ..................................................... (306,884) 104,667 Customer deposits and other current liabilities ...................... (87,152) 172,626 ------------ ------------ Total adjustments .................................................. 2,465,291 (249,908) ------------ ------------ Net cash provided by (used in) operating activities .................. (5,205,723) 868,226 ------------ ------------ Cash flows from investing activities: Decrease (increase) in deposits ........................................ (1,438) 7,250 Purchase of marketable securities ...................................... (1,966,453) (1,943,522) Sale of marketable securities .......................................... 2,166,012 1,533,318 Capital expenditures ................................................... (339,929) (914,683) Cash paid for acquisition of Sign Builders of America, Inc. ............ -- (427,741) Proceeds from sale of assets ........................................... 375,000 9,244 ------------ ------------ Net cash provided by (used in) investing activities .................. 233,192 (1,736,134) ------------ ------------ Cash flows from financing activities: Proceeds from short-term notes payable ................................. 375,000 250,000 Repayment of short-term notes payable .................................. -- (400,000) Proceeds from issuance of common stock ................................. 4,294,422 1,382,353 Repayment of long-term notes payable and capital lease obligations ..... (36,905) (18,249) ------------ ------------ Net cash provided by financing activities ................................. 4,632,517 1,214,104 ------------ ------------ Net increase (decrease) in cash and cash equivalents ...................... (340,014) 346,196 Cash and cash equivalents, beginning of year .............................. 348,832 2,636 ------------ ------------ Cash and cash equivalents, end of year .................................... $ 8,818 $ 348,832 ============ ============
See notes to consolidated financial statements. Page 27 37 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, OPERATIONS, AND LIQUIDITY: SI Diamond Technology, Inc. and its subsidiaries ("the Company") are engaged in the construction and sale of all types of outdoor signage, the commercialization of electronic digitized sign technology, and the development of products for applications using our proprietary field emission technology. The Company is performing significant research and development related to its Carbon-Based Field Emission ("CFE") technology and electronic digitized sign technology. The Company launched its electronic billboard product in 2000, installed test units at three locations, and began receiving nominal amounts of revenue related to these signs. The Company is continuing to focus on rolling out its full line of display products. The Company is also continuing to pursue license agreements for its technology. Until the Company is able to operate profitably as a result of either revenues from its display products or revenue from license agreements, it will continue to seek additional funds through the equity markets, or raise funds through debt instruments to allow it to maintain operations. There is no assurance that license agreements will be signed, that commercialization of the Company's technology and products will result in income from operations, or that funds will be available in the equity or debt markets. Management believes it will continue to be able to secure additional short term funding, to allow the Company to continue operations until it achieves profitability. 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 since the time of its initial public offering in 1993 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 by others. To the extent that other funding is not available, the research and development performed is being internally funded by the Company. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However the Company has sustained substantial operating losses since inception and continues to sustain losses. In view of this, realization of a portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company. Management believes that actions currently being taken will allow it to achieve profitability and allow the Company to continue as a going concern. 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. Page 28 38 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Revenue recognition In 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, ("SAB 101"). SAB 101 summarizes some of the staff's interpretations of the application of the generally accepted accounting principals to revenue recognition. The Company adopted SAB No. 101 in the fourth quarter of 2000. The accompanying financial statements comply with the provisions of SAB 101. 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 earned under the terms of the agreement. Advertising revenues are recognized as revenue in the period in which the advertising runs. The Company's revenues include reimbursements under agreements to perform research and development for others. 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 and recognizes revenue when it is billed pursuant to the terms of the contract. Agreements with other entities generally allow the other entity to license the Company's technology upon completion of the project. Revenue under these contracts is recognized when it is earned pursuant to the terms of the contract. 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 equity securities The Company's securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. Accounts receivable The Company's SBOA subsidiary frequently sells products to smaller companies on credit, but requires deposits and prepayments where appropriate. It is the Company's policy to record reserves for potential credit losses. Since inception, the Company has experienced minimal losses. 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, 2000 and 1999. Page 29 39 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Property and equipment Property 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. The majority of patent costs, which consist primarily of legal fees, are expensed as incurred. The Company has capitalized the acquisition cost of patents acquired in 2000 and is amortizing the cost of those patents over a period of 25 months. Goodwill represents the excess of the cost of the SBOA acquisition over the fair value of the net assets at the date of acquisition and is being amortized over a period of 15 years. Amortization expense charged to operations was $26,574 in 2000 and $8,858 in 1999. In connection with this acquisition, the Company also signed a covenant not to compete. The covenant not to compete is being amortized over a three year period. Amortization expense charged to operations was $166,667 in 2000 and $55,556 in 1999. Impairment At each balance sheet date, the Company evaluates the carrying amount and the amortization period for its intangible assets and for its long-lived assets. If an indicator of impairment exists, it is recorded at that time. During the current year, property and equipment, as well as goodwill and covenant not to compete were considered impaired. See Note 6 for details related to the impairment write down. 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. Minority Interest in Subsidiary At December 31, 1999, the minority interest in subsidiary represented the 5% of FEPET owned by Diamond Pro-Shop Nomura, Company, Ltd. and was equal to 5% of the book value of FEPET. In February 2000, the Company acquired the remaining 5% of FEPET. At December 31, 2000, no minority interest in any subsidiaries exists. See Note 6 for more information on the acquisition of the minority interest. Page 30 40 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Accretion on convertible preferred stock The Company's Series G Convertible 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, 2000 and 1999, respectively, have been treated as preferred dividends. The entire amount reflected as accretion on convertible preferred stock on the income statement relates to the Series G Preferred stock accretion. Income (loss) per common share Basic per share amounts are computed, generally, by dividing net income or loss by the weighted average number of common shares outstanding. Diluted per-share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. As described in Notes 10, 11 and 12, at December 31, 2000, the Company had convertible preferred shares, options and warrants outstanding to purchase a total of 1,145,123; 5,143,826; and 390,000 shares of common stock, respectively, at a weighted average exercise price of approximately $0.85. However, because the Company incurred a loss in 2000, the inclusion of those potential common shares in the calculation of diluted loss per-share would have an anti-dilutive effect. Therefore, basic and diluted per-share amounts are the same in 2000. In calculating the basic (income) loss per common share, the premium earned by the preferred shareholders, ($90,328 in 2000 and $140,163 in 1999) reduced the net income in 1999 and increased the net loss in 2000. 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. Significant estimates include the NOL reserve, warranty reserve, bad debt reserve, litigation reserves, and the remaining value of impaired assets. Disclosures about fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of certain financial instruments for which it is practicable to estimate that fair value. For cash equivalents, the carrying amount approximates fair value because of the short term nature of these instruments. The fair value of the Company's notes payable and capital lease obligations is estimated based on the quoted market prices for the same, or similar, issues, or on the current rates offered to the Company for debt of the same remaining maturities with similar collateral requirements. At December 31, 2000 and 1999, the fair value of the Company's notes payable and capital lease obligations approximates their carrying values. See Note 4 for information on the fair value of marketable securities. Page 31 41 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. OTHER INCOME The gain on disposal of assets included in other income (expense) was primarily the result of the sale of the Company's previous domain name, diamond.com. The entire gain of $375,000 in 2000 and $250,000 of the total gain of $265,688 in 1999 related to the sale. The remainder of the gain in 1999 was related to miscellaneous equipment sales. In 1999, the Company sold its domain name, diamond.com for $250,000 in cash and notes receivable and an ownership position in the entity that purchased it. In 2000, that entity was sold. As a result of that sale, the Company received an additional $375,000 in cash and an ownership position in the privately held company that purchased it. Because there is no readily available market for the common stock received by the Company, no value has been assigned to it at this time. Other income (expense) is composed of the following:
2000 1999 -------- --------- Lawsuit settlement ...... $ -- $(200,000) Escrow recovery ......... -- 99,708 Interest expense ........ (68,196) (42,933) Other ................... 13,376 19,208 -------- --------- Total ................... $(54,820) $(124,017) ======== =========
The escrow recovery in 1999 was the result of the resolution of a dispute with the purchaser of the assets of Diamond Tech One, Inc. related to claims made against the escrow account by the purchaser in 1998. 4. MARKETABLE EQUITY SECURITIES The Company invests a portion of its working capital in marketable equity securities. All such equity securities are classified as trading securities. The fair market value of marketable securities, at December 31, was determined as follows:
2000 1999 ------- -------- Cost basis ........... $67,120 $540,646 Unrealized gains ..... 3,193 178,730 ------- -------- Fair market value .... $70,313 $719,376 ======= ========
The net realized and unrealized gains (losses) on marketable equity securities consists of the following for the years ended December 31:
2000 1999 --------- -------- Unrealized gains - beginning of the year ....... $(178,730) $ -- Realized gains ................................. 479,990 210,197 Realized losses ................................ (753,957) (79,755) Unrealized gains - end of year ................. 3,193 178,730 --------- -------- Net realized and unrealized gains (losses) ..... $(449,504) $309,172 ========= ========
Page 32 42 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS: Additional information regarding certain balance sheet accounts at December 31, 2000 and 1999 is as follows:
DECEMBER 31, ----------------------------------- 2000 1999 ----------- ----------- Inventories Raw materials ................................... 98,019 111,861 Work in process ................................. 55,225 55,914 ----------- ----------- Total ..................................... $ 153,244 $ 167,775 =========== =========== Property and equipment: Plant and equipment ............................. $ 856,608 $ 830,431 Electronic display units under construction ..... -- 858,509 Electronic Display units ........................ 300,000 -- Furniture and office equipment .................. 229,315 182,057 Vehicles ........................................ 103,079 131,079 ----------- ----------- Total carrying cost ....................... 1,489,002 2,002,076 Less accumulated depreciation ................... (722,421) (564,830) ----------- ----------- $ 766,581 $ 1,437,246 =========== =========== Intangible assets: Patents ......................................... $ 250,000 $ 30,000 Covenant not to compete ......................... -- 500,000 Goodwill and other .............................. -- 398,607 ----------- ----------- Total cost ................................ 250,000 928,607 Less accumulated amortization ................... (60,000) (92,586) ----------- ----------- $ 190,000 $ 836,021 =========== =========== Accrued liabilities: Payroll and related accruals .................... $ 37,693 $ 11,373 Accounting and legal fees ....................... -- 42,500 Lawsuit settlements ............................. 275,000 450,000 Other ........................................... 129,265 219,969 ----------- ----------- Total ..................................... $ 441,958 $ 723,842 =========== ===========
6. IMPAIRMENT OF ASSETS: The impairment charge for 2000 consists of the following: Property and equipment $ 712,500 Goodwill and covenant not to compete 639,761 Minority interest goodwill 486,000 ---------- Total impairment of assets $1,838,261 ==========
PROPERTY AND EQUIPMENT: The electronic display units installed by the Company use technology developed by the Company and are currently installed under test agreements with customers. As a result, the Company is not able to predict future cash flows with sufficient certainty and accordingly, pursuant to the provisions of Financial Accounting Standards Board Pronouncement No.121, ("FAS 121"), has reduced the carrying value of these display units to the lower end of the range of estimated liquidation values of the display units, in the event that ultimate implementation of the Company's strategy related to these boards is unsuccessful. We had expected to implement our advertising strategy in the 4th quarter, but because of delays in moving to the next stage with our customers, our estimates were not met. Accordingly, the impairment adjustment was recorded as of December 31, 2000. Page 33 43 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. IMPAIRMENT OF ASSETS (CONTINUED): SBOA GOODWILL AND COVENANT NOT TO COMPETE: In connection with the acquisition of 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 acquisition. This covenant not to compete was being amortized over the three year period covered by the agreement. The Company also recorded goodwill in connection with the SBOA transaction. This goodwill was being amortized over a fifteen year period. As part of the evaluation of intangible assets at December 31, 2000, the Company determined that the goodwill and covenant not to compete were impaired as of that date. The remaining net book value of these two intangible assets were written off and charged to expense at that date. This determination was based on the failure of SBOA to meet projected sales levels in the 4th quarter of 2000, which caused the Company to reduce sales projections for future periods. MINORITY INTEREST GOODWILL In February 2000, the Company had the opportunity to reacquire the minority interest in its FEPET subsidiary and negotiated to do so by issuing 200,000 shares of the Company's common stock. The Company considered it to be a good decision to reacquire the minority interest for this price, since we considered this to be much less than the true value of the minority interest and it enabled us to acquire total control of what we believe to be a very valuable asset. The transaction was valued based on the market price of the common stock issued. Since FEPET had a negligible book value, this resulted in $486,000 of goodwill. However, since there was no future cash flow directly related to this 5% minority interest, FAS 121 required us to write the goodwill off as impaired at the time that it was acquired. The transaction had no overall effect on stockholders' equity since the value of the stock issued at the time approximated the impairment write off. 7. OPERATING LEASE OBLIGATIONS: The Company leases various facilities and equipment under operating lease agreements having terms expiring at various dates through 2006. Rental expense was $271,156 and $160,554 for the years ended December 31, 2000 and 1999, respectively. Future minimum lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 2000, were as follows: 2001 $187,888 2002 164,894 2003 110,380 2004 47,083 2005, and thereafter 25,202 -------- Total future minimum lease payments $535,447 ========
At December 31, 1999, the Company had a capital lease obligation of $31,432 related to a construction vehicle. Payments of $1,629 per month were due under the capital lease agreement through August 2000. A balloon payment of $17,818 was due in September 2000. Ownership of the vehicle transferred to the Company when the balloon payment was made in September 2000. The cost of the vehicle is included in vehicles and the related amortization is included in accumulated depreciation. Page 34 44 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. NOTES PAYABLE: Notes payable at December 31, 2000 and 1999 consisted of the following:
2000 1999 -------- -------- 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 SBOA. and was convertible into common stock at a rate of $2.127 per share at the option of the note holder. In 2000, the company issued an additional 62,284 shares of common stock in payment of $125,000 of the note payable and related interest of $7,480 on this note $ -- $250,000 Notes payable to shareholder, due June 1, 2001. This note bears interest at a rate of 15%, and is secured by all assets of the Company. This note is convertible into common stock at the option of the holder at a discount of 15% to the floating average for the five trading days preceding the due date of the note. This conversion feature is considered to have negligible value 250,000 -- Note payable to investor, originally due September 2000 and extended to January 2001, bearing interest at a rate of 15%, convertible under the same terms as the preceding note, and secured by all assets of the Company. (See Note 22) 125,000 -- Note payable to a bonding company. This note arose in connection with a lawsuit settlement, bears interest at a rate of 10%, is due in July 2001, and is secured by all assets of the Company 100,000 -- Note payable due in monthly installments of $615 through April 2004, when the remaining balance is due. The entire amount is classified as current because the Company intends to pay the note in full in 2001. This note bears interest at a rate of 7.75% and is secured by a vehicle 21,623 27,096 -------- -------- Total 496,623 277,096 Less current portion 496,623 255,473 -------- -------- Notes payable, long-term $ -- $ 21,623 ======== ========
Total interest expense for all debt was approximately $68,000 and $43,000 for 2000 and 1999, respectively, and is included in other income (expense). Page 35 45 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. INCOME TAXES: The components of deferred tax assets (liabilities) at December 31, 2000 and 1999, were as follows:
DECEMBER 31, ------------------------------------- 2000 1999 ------------ ------------ Deferred tax assets: Net operating loss carryforwards .................... $ 20,170,000 $ 17,427,000 Research and experimentation credits ................ 469,000 478,000 Foreign tax credit credits .......................... 556,000 556,000 Capitalized intangible assets ....................... 509,000 328,000 Depreciation assets ................................. 275,000 37,000 Accrued expenses not deductible until paid .......... 300,000 176,000 ------------ ------------ Total deferred tax assets ........................... 22,279,000 19,002,000 ------------ ------------ Deferred tax liabilities: Unrealized gains on securities ...................... 1,000 61,000 ------------ ------------ Total deferred tax liabilities ...................... 1,000 61,000 ------------ ------------ Net deferred tax assets before valuation allowance ....... 22,278,000 18,941,000 Valuation allowance ...................................... (22,278,000) (18,941,000) ------------ ------------ Net deferred tax asset ................................... $ -- $ -- ============ ============
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, 2000 and 1999.
DECEMBER 31, --------------------------------- 2000 1999 ----------- --------- Expected income tax expense (benefit) .................................................. $(2,608,000) $ 569,000 Effect of net operating loss and tax credit carryforwards with no current benefit ...... 3,337,000 605,000 Foreign taxes paid ..................................................................... -- 555,556 Foreign tax rates ...................................................................... -- (133,000) Income tax credits ..................................................................... -- (556,000) Deductible expenses not charged against book income .................................... (599,000) (450,000) Non-deductible expenses ................................................................ 4,000 4,000 Nontaxable income included in book income .............................................. (90,000) -- Other .................................................................................. (44,000) (39,000) ----------- --------- Total Tax ......................................................................... $ -- $ 555,556 =========== =========
As of December 31, 2000, the Company had net operating loss carryforwards of approximately $60 million that expire from 2006 through 2018, and are available to offset future taxable income. The majority of these carryforwards expire in 2010 and after. Additionally, the Company has tax credit carryforwards related to research and development expenditures of approximately $469,000 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 ownership changes resulting from these stock issuances may limit the Company's ability to utilize any net operating loss carryforwards or credits generated before the changes in ownership. Page 36 46 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. CAPITAL STOCK: Convertible Preferred Stock The Company has authorization for the issuance of 2,000,000 shares of $1.00 par value preferred stock. As of December 31, 2000 and 1999, all preferred shares outstanding were shares of the Company's Series G Preferred Stock. The Series G Preferred Stock had a liquidation preference of $1,145,123 as of December 31, 2000. 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. 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. A total of 850,000 warrants were issued in connection with this transaction. These warrants allow the holder to purchase shares of the Company's common stock at a price of $1.00 per share for a period of 5 years. During 2000, a total of 250 shares of Series G preferred stock were converted into 317,397 shares of the Company's common stock and during 1999, a total of 500 shares of Series G preferred stock were converted into 604,383 shares of the Company's 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 were convertible into 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. These shares were valued at $500,000 based on the market price of the shares at the time of the transaction. This amount was considered goodwill and written off as of the acquisition date. See note 6 for additional information on the impairment write-off. Page 37 47 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. CAPITAL STOCK (CONTINUED): Common Stock During 2000, in a series of private placements of the Company's common stock in exempt offerings under Regulation D of the Securities act of 1933, the Company issued 3,992,242 shares of its common stock and received proceeds of $3,455,000. These shares were issued at prices which represented a slight discount to the market price of the stock at the time of the offerings. A registration statement covering these shares was declared effective November 17, 2000. During 2000, the Company acquired a patent valued at $250,000. In exchange for this patent, the Company issued 240,164 shares of its common stock. A registration statement covering these shares was declared effective July 17, 2000. As described in greater detail in Note 14, the Company has a marketing agreement and related consulting and advisory agreement with Vision Mark, LLC and C&A Consulting Services, LLC. As a result of these agreements, the Company issued 300,000 shares of its common stock in January 2000 to C&A in connection with an agreement signed with Eckerd Corporation, a subsidiary of JCPenney, Inc. The shares were valued at $675,000 based upon the market price of the common stock at the time of issuance. These shares were registered in June 1999. 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. 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. A registration statement covering these shares was declared effective June 23, 1999. As described in greater detail in Note 19, the Company issued a total of 423,132 shares of common stock in connection with its acquisition of the assets of SBOA. A registration statement covering theses shares was filed and declared effective by post-effective amendment on November 29, 1999. In 2000, the Company issued an additional 62,284 shares of its common stock in payment of a note payable and related accrued interest arising in connection with the SBOA acquisition. The amount of the note payable and accrued interest was $132,480. At December 31, 2000 and 1999, common stock was reserved for the following reasons:
2000 1999 ---------- ---------- Conversion of debt ............................... 423,831 62,284 Exercise of stock warrants ....................... 10,090,000 10,599,792 Conversion of preferred stock .................... 1,145,123 1,372,192 Exercise and future grants of stock options ...... 7,170,426 8,295,673 ---------- ---------- Total ............................................ 18,829,380 20,329,941 ========== ==========
Page 38 48 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. 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. 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, 2000, a total of 1,713,236 shares remained available for grant under the 1992 Employees Plan. The following is a summary of stock option activity under the 1992 Employees Plan:
Wgtd. Avg. Number of Exercise Shares Price --------- ---------- Options outstanding at January 1, 1999 ........... 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 --------- Granted ................................. 1,819,545 $ 1.74 Exercised ............................... (665,427) $ 0.40 Canceled ................................ (351,841) $ 1.72 --------- Options outstanding at December 31, 2000 ......... 3,221,110 $ 1.20 =========
Page 39 49 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS (CONTINUED): 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, 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, 2000, a total of 313,364 shares remained available for grant. The following is a summary of stock option activity under the 1992 Director's Plan:
Wgtd. Avg. Number of Exercise Shares Price --------- ---------- Options outstanding at January 1, 1999 ........... 384,903 $ 0.34 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 ------- Granted ................................. 243,333 $ 2.21 Exercised ............................... (16,000) $ 0.375 Canceled ................................ -- $ 0.375 ------- Options outstanding at December 31, 2000 ......... 501,716 $ 1.48 =======
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:
Wgtd. Avg. Number of Exercise Shares Price --------- ---------- Options outstanding at January 1, 1999 ........... 1,200,000 $ 0.375 Granted ................................. 1,300,000 $ 0.50 Exercised ............................... (635,180) $ 0.42 --------- Options outstanding at December 31, 1999 ......... 1,864,820 $ 0.45 --------- Granted ................................. -- -- Exercised ............................... (443,820) $ 0.46 Canceled ................................ -- -- --------- Options outstanding at December 31, 2000 ......... 1,421,000 $ 0.44 =========
Page 40 50 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS (CONTINUED): The fair value of each stock option granted in 2000 and 1999 is estimated on the date of grant using the Black-Scholes option pricing-model with the following weighted-average assumptions: no dividend yield for 2000 and 1999; risk-free interest rate of 6.00% and 5.50% for 2000 and 1999, respectively; the expected lives of the options are five years for 2000 and 1999; and volatility of approximately 100% for both 2000 and 1999. The following table summarizes information about stock options outstanding and exercisable under all three plans at December 31, 2000:
Options Outstanding Options Exercisable - -------------------------------------------------------------------- -------------------------------- Wgtd. Avg. Number Remaining Number Range of Outstanding Contractual Wgtd. Avg. Exercisable Wgtd. Avg. Exercise Prices at 12/31/00 Life Exercise Price at 12/31/00 Exercise Price - --------------- ----------- ----------- -------------- ----------- -------------- $0.00 - $0.49 2,040,559 6.3 Years $0.37 2,036,029 $0.37 $0.50 - $1.00 1,120,600 8.0 Years $0.55 955,600 $0.52 $1.01 - $1.99 1,146,667 7.8 Years $1.51 878,666 $1.51 $2.00 - $4.00 836,000 8.2 Years $2.56 688,443 $2.53 --------- --------- Total 5,143,826 7.3 Years $1.02 4,558,738 $0.95 --------- ---------
The following table summarizes information about stock options outstanding and exercisable under all three plans at December 31, 1999:
Options Outstanding Options Exercisable - -------------------------------------------------------------------- -------------------------------- Wgtd. Avg. Number Remaining Number Range of Outstanding Contractual Wgtd. Avg. Exercisable Wgtd. Avg. Exercise Prices at 12/31/00 Life Exercise Price at 12/31/00 Exercise Price - --------------- ----------- ----------- -------------- ----------- -------------- $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 --------- ---------
The weighted-average fair values of options under the plans granted during 2000 and 1999 were as follows:
2000 1999 -------- -------- Discounted options $ 0.00 $ 0.00 At-the-money options $ 1.12 $ 0.67 Premium options $ 0.00 $ 0.00 Repriced options $ 0.00 $ 0.00
Page 41 51 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS (CONTINUED): During 2000 and 1999, 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 2000 and 1999 would approximate the pro forma amounts as shown below:
2000 1999 ----------- ---------- Net income (loss) As reported $(7,671,014) $1,118,134 SFAS No. 123 Charge 1,800,265 643,535 Pro Forma (9,471,279) 474,599 Net income (loss) per common share - basic and diluted As reported $ (0.14) $ 0.02 Pro Forma $ (0.17) $ 0.01
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. 12. STOCK WARRANTS: Common Stock Warrants 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 325,000 of these warrants were exercised in 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 and 50,000 were exercised in 2000. The remaining 50,000 warrants were extended until June 2001. Page 42 52 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) 12. STOCK WARRANTS (CONTINUED): 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 1999, 40,000 shares at a price of $1.0313 through March 2000, 40,000 shares at a price of $1.375 through September 2000. These warrants were valued at $150,000. All of these warrants were exercised in 1999. 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 were 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. In 2000, the Company issued a total of 10,000 warrants to an individual in connection with services rendered to the Company. The exercise price of these warrants is $0.80 per share and they were valued at $4,646 based on the fair market value of the Company's common stock at the time of issuance. These warrants are exercisable for a period of 5 years from the date of issuance. The following is a summary of outstanding warrants:
NUMBER OF SHARES EXERCISE PRICE --------- -------------- Warrants outstanding at January 1, 1999 .......... 2,195,379 $0.625-7.89 Granted ................................. 60,000 $ 0.88-2.15 Exercised ............................... (970,000) $0.25-1.375 Expired ................................. (385,587) $ 3.90-6.78 --------- Warrants outstanding at December 31, 1999 ........ 899,792 $ 0.88-7.89 Granted ................................. 10,000 $ 0.80 Exercised ............................... (375,000) $ 1.00 Expired or canceled ..................... (144,792) $ 3.90-6.78 --------- Warrants outstanding at December 31, 2000 ........ 390,000 $ 0.80-2.15 =========
The preceding summary of stock warrant activity excludes the C&A warrants described in Note 14 which only become exercisable upon the occurrence of future contingent events. Page 43 53 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 13. SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest was $18,998 and $20,022 for 2000 and 1999, respectively. Cash paid for foreign taxes was $555,556 in 1999. No foreign taxes were paid in 2000. The following non-cash transactions have been excluded from the accompanying consolidated statement of cash flows:
2000 1999 -------- ---------- Non-cash financing activities: Conversion of accounts payable and accrued liabilities into common shares ..... $ -- $ 100,000 Conversion of notes payable and interest into common shares ................... $132,480 $1,049,852 Non-cash investing activities Acquisition of SBOA ........................................................... $ -- $ 900,000 Common shares issued for patent ............................................... $250,000 $ --
14. COMMITMENTS AND CONTINGENCIES: 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. 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, 62 Diamond Field Emission patents and patent applications were assigned directly to the Company and the Company has agreed to pay a royalty fee of 2% of future commercial revenues related to the patents received. The Company has the right to offset one half of the costs of maintaining these patents against any royalties due under the agreement. No payments have been made to, or are due to, MCC under this agreement. 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. At present we are not using the technology developed under this joint venture agreement in any manner and do not anticipate using this technology in the future. It is unlikely that any future amounts will ever be spent. Page 44 54 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES (CONTINUED): Till Keesman Agreement In May 2000, the Company licensed 6 carbon nanotube patents from Till Keesman in exchange for a payment of $250,000 payable in shares of the Company's common stock. Under the terms of the agreement, the Company is obligated to pay license fees equal to 50% of any royalties received by the Company related to these patents. The company is allowed to offset certain expenses, up to a maximum of $50,000 per year, against payments due under this agreement. The agreement also contains provisions related to minimum license fee payments. If the Company does not pay minimum additional license fees of $500,000 by May, 2002, the license will terminate at that point. If the Company does not pay additional cumulative license fees of $1,000,000 (including any fees applied toward the previously described minimum due in May 2002) by May 2004, the license will terminate at that point. The Company is not obligated to make any additional payments, but the license may terminate if these payments are not made. Accordingly, the initial payment of $250,000 for the patents is being amortized over a period of approximately two years. Employment contracts The Company has entered into an employment agreement with its president and chief operating officer. The agreement calls for an annual base salary of $150,000 and for the Company to provide a vehicle for his use. The agreement can be terminated by either party with or without cause with 30 days notice. If the agreement is terminated by the Company without cause, the Company is obligated to pay severance equal to nine months salary. Research and Development commitments As of December 31, 2000, the Company was obligated to perform funded research in the amount of approximately $582,000 on government contracts. The cost of the research in 2001 is expected to approximate the revenue received for the research. Legal Proceedings On November 16, 2000, the former owner of Sign Builders of America, Inc. filed suit against SI Diamond Technology, Inc and Sign Builders of America, Inc. for alleged breach of the purchase agreement related to offsets the Company took against the final note payment. The Company has filed a counterclaim against the former owner for amounts due back to the Company as a result of these offsets. The Company expects the ultimate resolution of this suit to have no material impact on the consolidated financial statements. See Note 5. 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 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 settled this lawsuit in 2000 in exchange for a payment of $28,000. Page 45 55 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES (CONTINUED): Legal Proceedings (cont.) 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 claimed a breach of contract related to $1 million of coating equipment that Plasmatron delivered in 1993, prior to the Company's ownership of Plasmatron. 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 first two notes were paid when due in 2000. 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. In February 2001, the Company agreed to participate in a settlement agreement whereby it would pay a total of $150,000, of which $50,000 is due by June 1, 2001 and the balance of $100,000 is in the form of a note due in July, 2003. See Note 5. The Company previously had a royalty agreement with Texas Digital Systems, Inc. (TDS) which was terminated by TDS pursuant to the terms of the agreement as of December 31, 1999. Under the terms of the agreement, TDS was prohibited from using the Company's technology after the termination of the agreement. The Company believed that TDS was continuing to ship products using our technology and contacted TDS. TDS responded, in part, by filing suit against the Company and EBT for breach of contract in the 272nd Judicial District Court in Brazos County Texas on July 26, 2000. The Company was not served with notice of this suit until December 5, 2000. It is the Company's view that the TDS claim against the Company has little merit and that a significant reason that TDS filed suit was to obtain venue in its home venue of Brazos County rather than in the Company's home county of Travis County. The Company intends to vigorously pursue its claim against TDS and seek damages and an injunction against TDS for continuing to use the Company's technology in TDS products after the termination of the agreement. The Company and its subsidiaries are also defendants in various other lawsuits related to the non-payment of invoices when due, or minor employment matters. 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. If resolution of any of these suits results in a liability greater than that recorded, it could have a material financial impact on us. The above lawsuits resulted in $118,000 and $200,000 charged to operations in 2000 and 1999, respectively. A total of approximately $300,000 was accrued at December 31, 2000. Page 46 56 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES (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 was 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. None of the warrants that are potentially exercisable have been assigned any value as the ultimate exercisability of the warrants is not determined at this point. The Company had revenues of $2,160 in 2000 and no revenues in 1999 resulting from this agreement. 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 shares and all warrants issued under this agreement expire December 31, 2006. Page 47 57 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 15. 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, 2000 and 1999, 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. 16. SIGNIFICANT CUSTOMERS: Accounts receivable - trade includes receivables from two major customers, amounting to $97,120, and $1,974, at December 31, 2000 and 1999 , respectively. Net sales, to these two major customers amounted to $474,467 in 2000 and $38,025 in 1999. 17. RETIREMENT PLAN: The Company sponsors a defined contribution 401k profit sharing plan. No company contributions were made in either 2000 or 1999. 18. RELATED PARTY TRANSACTIONS: In October 1998, EBT 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, the agreement was modified to allow EBT to obtain additional 90 day extensions at a cost of $12,500 for each extension. An additional $37,500 was paid for 3 additional extensions, bringing the total payments to $87,500. EBT can complete the patent assignment agreement at any time by paying the remaining $112,500 due on the initial payment. During 2000, the Company sold electronic display units to Dr. Zvi Yaniv, the Company's President and Chief Operating Officer at a total price of $22,500. This sales price approximated the Company's cost. Page 48 58 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 19. ACQUISITION OF SIGN BUILDERS OF AMERICA, INC.: Effective August 31, 1999, the Company purchased substantially all of the assets and assumed certain liabilities of SBOA. 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: 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 =========
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 at December 31, 1999 to the $1,600,000 reflected above. The notes payable described above were adjusted down at the same date to $250,000 from their initial amount of $450,000 as a result of the same purchase price adjustments. At the time of the due date of the final note in September 2000, additional purchase price adjustments provided for in the agreement were calculated and offset against the payment due at that time. As described in note 14, the seller has initiated a lawsuit in connection with these offsets. Accordingly, the basis of the assets has not been adjusted, pending resolution of that litigation. At December 31, 2000, as part of the review of its intangible assets described in greater detail in Note 6, the Company determined that the Goodwill and Covenant not to Compete received in this acquisition were impaired at that date and the remaining net book value of $639,761 was charged to operations at that time. Page 49 59 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 20. SEGMENT INFORMATION: The Company's operations are classified into three principal reportable segments that provide slightly different products or services.
FEPET SBOA EBT All Other Total ----------- ----------- ----------- ----------- ----------- 2000 Revenue $ 332,961 $ 2,257,013 $ 112,844 $ 22,012 $ 2,724,830 Interest Expense 8,549 12,595 -- 47,052 68,196 Depreciation and Amortization 119,158 278,815 124,994 21,827 544,794 Research and Development 887,933 -- 1,732,690 -- 2,620,623 Impairment Charge -- 639,761 712,500 486,000 1,838,261 Profit (Loss) (1,567,769) (1,058,660) (3,457,843) (1,586,742) (7,671,014) Assets 370,547 814,114 380,809 76,095 1,641,565 Capital Expenditures 2,452 44,678 285,803 6,996 339,929 1999 Revenue 5,794,269 657,553 300,282 -- 6,752,104 Interest Expense 541 5,849 -- 36,553 42,943 Depreciation and Amortization 58,927 89,936 7,267 14,905 171,035 Research and Development 658,219 -- 817,436 -- 1,475,655 Profit (Loss) 3,726,957 (11,917) (807,863) (1,789,043) 1,118,134 Assets 842,842 1,762,863 936,988 400,637 3,943,330 Capital Expenditures 30,000 2,238 880,644 1,801 914,683
Although the chief operating decision maker does not use this segmental financial information in evaluating performance, some segmental financial information is furnished to the chief operating officer for review regarding each subsidiary of the Company. The FEPET segment consists of the activities of FEPET and includes license revenues and contract research revenues related to FEPET's technology. In 2000, all FEPET revenues were contract research revenues. In 1999, approximately 95% of FEPET's revenue came from license fees and the remaining amount came from contract research services. The SBOA segment consists of the activity of SBOA which is the manufacture and installation of custom signage, including electronic, neon, static, and other types of signage. SBOA was acquired in 1999 and the above segment information covers the four month period from September 1, 1999 through December 31, 1999. The Company's EBT subsidiary sells electronic display products, installs electronic display products on customer premises under agreements to share in advertising revenue, sells advertising on displays, and licenses its products or technology to others. Virtually all EBT revenue in 1999 was from licensing technology. The majority of EBT's revenue in 2000 was from the sale of advertising and the sale of electronic display products. All other segments include the Company's general overhead. The accounting policies applied by each of the segments are the same as those used by the Company. Page 50 60 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 21. RESEARCH AND DEVELOPMENT CONTRACTS: The Company makes significant expenditures for research and development. On occasion, the Company may seek funding for a portion of its research and development costs to reduce the cost of such expenditures to the Company. The Company only seeks funding for projects that it already intended to do, or for projects that would apply its technology for other uses in instances where that application would allow the Company to achieve technical milestones that were already part of its goals. The majority of the Company's funded research has been from government contracts. Under government contracts, the government has the right to utilize the results for its purposes and the Company has the right to utilize the technology for commercial purposes. Generally, when the Company contracts with other entities, the entity is also conducting its own internal research related to application of the Company's technology to its products and such expenditures by the entity may exceed the amount of funding provided to the Company. Usually the entity has the right to license the technology at the conclusion of the project, if they desire. The costs of a particular research program may significantly exceed the funding received, however since the research was part of planned research, these contracts generally involve only nominal additional costs to the Company. For financial statement purposes, the Company considers the cost of the contracts to be equal to the revenue received. The following schedule summarizes certain information with respect to research and development contracts:
2000 1999 -------- -------- Contract research revenues ..................... $352,341 $238,713 Costs incurred charged to operations ........... $352,341 $238,713 Amount of additional funding commitments ....... $582,333 $352,341
22. SUBSEQUENT EVENTS: Through March 14, 2001, in exempt offerings under Regulation D of the Securities Act of 1933, the Company issued a total of 1,178,284 shares of its common stock for a total of $522,047. Effective January 2001, the Company entered into a contract with a large Japanese display manufacturer to perform contract research related to the Company's technology. A payment of $600,000 was received in January 2001. In January 2001, the Company paid off a short term note payable in the amount of $125,000. As described in greater detail in Note 14, in February 2001, the Company agreed to participate in a settlement agreement related to a lawsuit whereby it would pay a total of $150,000, of which $50,000 is due by June 1, 2001 and the balance of $100,000 is in the form of a note due in July, 2003. This settlement was accrued as of December 31, 2000. Page 51 61 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On September 6, 2000, SI Diamond Technology, Inc. (the "Registrant") was notified that WallaceSanders & Company had merged with McGladrey & Pullen, LLP and that WallaceSanders & Company would no longer be the auditor for the Registrant. McGladrey & Pullen, LLP was appointed as the Registrant's new auditor effective September 6, 2000. The Auditor's reports from WallaceSanders & Company for the Registrant's past two fiscal years did not contain an adverse opinion or a disclaimer of opinion, and were not qualified as to audit scope or accounting principles. However, the auditor's report for the past two fiscal years were modified regarding the uncertainty of the Registrant's ability to continue as a going concern. The decision to engage McGladrey & Pullen, LLP as the successor to WallaceSanders & Company was recommended and approved by the Registrant's Board of Directors. During 1998 and 1999 and the subsequent interim period preceding the change, there have been no disagreements with WallaceSanders & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Page 52 62 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 9 of this Annual Report on Form 10-KSB/A.
Name Age Class Position Director Since Term Expires ---- --- ----- -------- -------------- ------------ Charles C. Bailey 52 I Director November 1999 2003 David R. Sincox 62 I Director October 1994 2003 Dr. Zvi Yaniv 54 I Director, President, July 1996 2003 Chief Operating Officer Philip C. Shaffer 64 II Director March 1992 2001 Marc W. Eller 45 III Director, Chairman, November 1995 2002 Chief Executive Officer Ronald J. Berman 44 III Director May 1996 2002
- --------- 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. Berman has been a Director since May 1996. Mr. Berman co-founded BEG Enterprises, Inc. with Marc W. Eller and was its President from 1989 until 1998. Mr. Berman currently is President of R.J. Berman Enterprises, Ltd., a real estate development company, Inergi Fitness, and Walkers Warehouse. 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. The Board of Directors has three committees. The audit committee consists of Mr. Sincox and Mr. Bailey. The compensation committee consists of Mr. Shaffer and Mr. Berman. The executive committee consists of Mr. Eller, Mr. Yaniv, and Mr. Shaffer. Page 53 63 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, 2000 through December 31, 2000, all its Officers, Directors, and greater than 10% beneficial owners complied with all Section 16(a) filing requirements applicable to them. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth the total cash compensation paid or to be paid, as well as certain other compensation paid or accrued, for services rendered during the fiscal years ended December 31, 2000, 1999 and 1998 by the Chief Executive Officer and all executive officers whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 2000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation --------------------------------------------- ----------- Other Securities Annual Underlying Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Options(#) - --------------------------- ---- --------- -------- ------------------ ----------- Marc W. Eller, 2000 $170,833 -0- -0- 230,000 Chief Executive Officer 1999 $168,750 $111,250 -0- 250,000 1998 $150,000 -0- -0- 780,000 Zvi Yaniv, President and 2000 $170,833 -0- $3,205 230,000 Chief Operating Officer 1999 $175,000 $125,000 $3,205 150,000 1998 $150,000 -0- $6,839 1,170,000
- --------- (1) No Named Executive Officers received perquisites that exceeded in value the lesser of $50,000 or 10% of such officers' salary and bonus. Dr. Yaniv was provided use of a Company owned automobile valued at $ 3,205 in 2000 and 1999, and $1,882 in 1998. In 1998, Dr. Yaniv was reimbursed $4,957 in connection with the transportation of his household belongings in connection with the relocation of his primary residence to Austin, Texas. Page 54 64 STOCK OPTION GRANTS IN FISCAL YEAR 2000 SI Diamond has an Amended and Restated 1992 Employee Stock Option Plan, which may be used to grant employees, including officers of SI Diamond, incentive stock options designed to qualify under Section 422 of the Internal Code of 1986, or non-qualified stock options. SI Diamond also established the 1998 Directors and Officers Stock Option Plan, which may be used to grant non-qualified stock options to officers and directors of SI Diamond. The following table sets forth information concerning stock-option grants to the Named Executive Officers in 2000.
Number of Percent of Total Securities Underlying Options Granted to Options Employees in Exercise Name Granted(#)(1)(2) in Fiscal Year 2000 or Base Price ($/sh) Expiration Date ---- --------------------- ------------------- -------------------- --------------- Marc W. Eller 30,000 (3) 1.64% $2.75 2/2/2010 200,000 (3) 10.99% $1.50 6/27/2010 Dr. Zvi Yaniv 30,000 (3) 1.64% $2.75 2/2/2010 200,000 (3) 10.99% $1.50 6/27/2010
- --------- (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 2000. Page 55 65 AGGREGATED OPTION EXERCISES IN 2000 AND OPTION VALUES AT DECEMBER 31, 2000 The following table sets forth certain information concerning the number and intrinsic value of the options held by the named executives at December 31, 2000. Year-end values are based on the closing price of $0.39 per share of the common stock on December 31, 2000, 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.
Number of Unexercised Value of Securities Unexercised Underlying In-the-Money Options at Options at December 31, 2000 December 31, 2000 Shares ----------------- ------------------ Acquired Value Exercisable/ Exercisable/ Name on Exercise Realized Unexercisable Unexercisable - ---- ----------- -------- ----------------- ------------------ Marc W. Eller 0 0 200,000/0 $0/$0 Dr. Zvi Yaniv 0 0 1,550,000/0 $17,550/$0
DIRECTOR COMPENSATION FOR 2000
Director Compensation Security Grants in 2000 Name(1) Meeting Fees($)(2) Number of Securities Underlying Options(#)(3) -------- --------------------- --------------------------------------------- David R. Sincox 600 50,000 Philip C. Shaffer 600 50,000 Ronald J. Berman 600 50,000 Nicholas Martin Jr. 350 50,000 Charles C. Bailey 450 43,333
- --------- (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. Martin resigned as a director on January 1, 2001. (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 SI Diamond may grant stock options to any Director who is not a full time salaried employee of the Company. On February 2, 2000, each Director at that time was granted a discretionary grant of 30,000 options under this plan at a price of $2.75 per share. On July 24, 2000, each Director at that time was granted an automatic grant of 20,000 options under this plan at a price of $1.3438, with the exception of Mr. Bailey who was granted 13,333 options. Under the terms of the plan, Mr. Bailey's grant was prorated because of a partial year of service on the Board. All grants in 2000 became exercisable in full on the date of the grant. Page 56 66 All of the 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 The Company has entered into an employment agreement with its president and chief operating officer. The agreement calls for an annual base salary of $150,000 and for the Company to provide a vehicle for his use. The agreement can be terminated by either party with or without cause with 30 days notice. If the agreement is terminated by the Company without cause, the Company is obligated to pay severance equal to nine months salary. Page 57 67 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, 2001, 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/A, 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.
Shares Owned Percent of Title of Class Name and Address of Beneficial Owner Beneficially Class -------------- ------------------------------------ ------------ ---------- Common Stock None -- -- Series G Preferred William W. Gow 100 11.76% Stock 4747 Sunset Blvd. Los Angeles, CA 90027 SCG Cellular 50 5.89% 8584 Katy Freeway, Suite 300 Houston, TX 77024 Chris Lawson 50 5.89% 3737 Glenwood Ave, Suite 400 Raleigh, NC 27612 Steve Aiello 50 5.89% 38984 Santa Barbara Clinton Township, MI 48036 Peerless Distributing 50 5.89% 21700 Northwestern Highway, Suite 1160 Southfield, MI 48075 ARA Services 50 5.89% 29844 High Valley Court Farmington Hills, MI 48331 Klaich Animal Hospital, Ltd. 100 11.73% Amended Profit Sharing Retirement Plan & Trust 1990 South Virginia Street Reno, NV 89502 Nicholas Martin Living Trust 200 23.52% 3113 South University Dr., #600 Ft. Worth, TX 76109 Michael Scott Blechman Family Trust 200 23.53% 295 Shadowood Lane Northfield, IL 60093
Page 58 68 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, 2001, 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.
COMMON STOCK BENEFICIAL PERCENTAGE NAME OWNERSHIP(1) OF CLASS ---- ------------ ---------- Philip C. Shaffer 612,702 * David R. Sincox 411,213 * Charles C. Bailey 43,333 * Marc W. Eller 553,796 * Ronald J. Berman 1,260,222 2.03% Dr. Zvi Yaniv 1,586,000 2.50% All Executive Officers and Directors as a group (7 persons) 4,482,266 6.91%
- --------- * Less than 1% (1) Included in the amounts indicated are shares that are subject to options exercisable within sixty (60)-days of March 14, 2001 pursuant to Rule 13d-3(d)(1) of the Exchange Act. The number of such shares are 500,000 for Mr. Shaffer; 290,000 for Mr. Sincox; 414,383 for Mr. Berman; 1,550,000 for Mr. Yaniv; 43,333 for Mr. Bailey; 200,000 for Mr. Eller; and 3,012,716 for the Directors and executive officers as a group. Page 59 69 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In October 1998, EBT 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, the agreement was modified to allow EBT to obtain additional 90 day extensions at a cost of $12,500 for each extension. An additional $37,500 was paid for 3 additional extensions, bringing the total payments to $87,500. EBT can complete the patent assignment agreement at any time by paying the remaining $112,500 due on the initial payment. During 2000, the Company sold electronic display units to Dr. Zvi Yaniv, the Company's President and Chief Operating Officer at a total price of $22,500. This sales price approximated the Company's cost. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Index to Exhibits on page 61 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 November 30, 2000 Page 60 70 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SI DIAMOND TECHNOLOGY, INC. By: /s/ Marc W. Eller ---------------------------------------- Marc W. Eller, Chief Executive Officer August 27, 2001 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.
Signature Title Date - --------- ----- ---- /s/ Marc W. Eller Chairman, Chief Executive August 27, 2001 - -------------------- Officer (Principal Executive Officer and Marc W. Eller Director) /s/ Tracy Vaught Vice President and August 27, 2001 - ------------------ Chief Financial Officer Tracy Vaught (Principal Financial Officer and Principal Accounting Officer) Philip C. Shaffer* David R. Sincox* Ronald J. Berman* Directors August 27, 2001 Charles G. Bailey* Dr. Zvi Yaniv* *By: /s/ Tracy Vaught ---------------------- (Tracy Vaught, Attorney-in-Fact)
Page 61 71 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.
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------- ---------------------- ------------- 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 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). 4.4* 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). 4.5* 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). 4.6* 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). 4.7* 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). 4.8* Form of Regulation D Subscription agreement by and between the Company and the participants of private placements 4.9* Form of Registration Rights Agreement by and between the Company and the participants of private placements 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).
Page 62 72
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------- ---------------------- ------------- 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 dated 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* Form of Lease Agreement by and between Electronic Billboard Technology, Inc. and Eckerd Corporation (Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of January 21, 2000) 10.17* Form of Lease Agreement by and between Electronic Billboard Technology, Inc. and Eckerd Corporation dated February 25, 2001. 11 Computation of (Loss) per Common Share. 21 Subsidiaries of the Company. 24* Powers of Attorney.
Page 63 EX-11 3 g71379ex11.txt COMPUTATION OF (LOSS) PER COMMON SHARE 1 EXHIBIT 11 SI DIAMOND TECHNOLOGY, INC. COMPUTATION OF (LOSS) PER COMMON SHARE
Three months ended Year ended December 31, December 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ----------- Computation of income (loss) per common share: Net income (loss) applicable to common shareholders $ (2,901,179) $ (670,481) $ (7,761,342) $ 977,971 Weighted average number of common shares 59,671,805 53,651,504 57,379,240 51,188,385 Net income (loss) per common share $ (0.05) $ (0.01) $ (0.14) $ 0.02 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
No computation of diluted loss per common share is included for the 2000 periods or for the three months ended December 31, 1999 because such computation results in an antidilutive loss per common share. Page 64 EX-21 4 g71379ex21.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 Subsidiaries of the Company
Doing Business Subsidiary State of Incorporation under the Following Names - ---------- ---------------------- ------------------------- 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.
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