<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report pursuant to 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 charter)
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<S> <C>
TEXAS 76-0273345
(State of (IRS Employer
Incorporation) Identification Number)
3006 Longhorn Blvd., Suite 107
AUSTIN, TEXAS 78758
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (512) 339-5020
Indicate by check mark 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 preceding 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 [ ]
As of November 6, 1998, the registrant had 44,113,801 shares of common
stock, par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE> 2
SI DIAMOND TECHNOLOGY, INC.
INDEX
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<S> <C>
Part I Financial Information PAGE
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 1998 and December 31, 1997............................. 3
Consolidated Statements of Operations--Three Months and Nine Months Ended
September 30, 1998 and 1997..................................................................... 4
Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1998 and 1997..................................................................... 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 12
Part II Other Information
Item 1. Legal Proceedings............................................................................. 17
Item 5. Other Information............................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signatures ................................................................................................ 18
</TABLE>
2
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- --------------
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Current assets:
Cash and cash equivalents.......................................................... $ 4,542 $ 1,000
Accounts receivable, trade......................................................... 50,381 448,042
Receivables from shareholders...................................................... -- 250,000
Escrow funds receivable............................................................ 106,085 --
Prepaid expenses and other current assets.......................................... 52,789 80,128
------------- --------------
Total current assets............................................................. 213,797 779,170
Property, plant and equipment, net................................................. 167,198 1,841,419
Intangible assets, net............................................................. 10,500 15,000
------------- --------------
Total assets..................................................................... $ 391,495 $ 2,635,589
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft..................................................................... $ -- $ 156,686
Accounts payable................................................................... 1,406,020 1,272,958
Accrued liabilities................................................................ 777,221 892,553
Notes payable...................................................................... 773,310 550,000
Billings in excess of costs and estimated earnings on uncompleted contracts........ 4,770 6,000
------------- --------------
Total current liabilities........................................................ 2,961,321 2,878,197
Notes payable, long-term.............................................................. -- 437,593
Commitments and contingencies......................................................... -- --
Stockholders' equity:
Convertible preferred stock, $1.00 par value, 2,000,000 shares authorized;
Series A, 100 shares issued and outstanding
at September 30, 1998 and December 31, 1997.................................... 100 100
Series E, 196 shares issued and outstanding
at December 31, 1997........................................................... -- 196
Series F, 1,081 shares issued and outstanding
at December 31, 1997........................................................... -- 1,081
Series G, 1,600 and 1,700 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively...................... 1,600 1,700
Common stock, 120,000,000 shares authorized, $.00l par value,
44,113,801 shares issued and outstanding at September 30, 1998;
24,238,356 shares issued and outstanding at December 31, 1997...................... 44,114 24,239
Additional paid-in capital............................................................ 51,457,491 50,386,816
Accumulated deficit................................................................... (54,073,131) (51,094,333)
------------- --------------
Total stockholders' equity....................................................... (2,569,826) (680,201)
-------------- ---------------
Total liabilities and stockholders' equity....................................... $ 391,495 $ 2,635,589
============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................... $ 123,339 $ 965,567 $ 574,005 $ 3,006,442
------------ ------------ ------------ ------------
Cost of sales .............................. 110,606 1,191,388 1,517,008 3,591,243
Selling, general and administrative expenses 607,245 936,038 1,862,467 2,743,248
Research and development ................... 326,725 125,449 912,417
------------ ------------ ------------ ------------
430,693
Operating costs and expenses .......... 1,044,576 2,252,875 4,291,892 6,765,184
Loss from operations .................. (921,237) (1,287,308) (3,717,887) (3,758,742)
Other income (expense)
Loss on impairment of assets ........ -- -- -- --
Gain (Loss) on disposal of assets ... (25,000) (106,488) 795,697 (622,248)
Other income (expense), net ......... 220,568 (143,786) (4,597)
------------ ------------ ------------ ------------
(16,794)
Net loss ................................... (725,669) (1,537,582) (2,926,787) (4,397,784)
Less preferred stock dividend .............. (125,782) (120,932) (215,107) (662,416)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders . $ (851,451) $ (1,658,514) $ (3,141,894) $ (5,060,200)
============ ============ ============ ============
Net loss per common share .................. $ (0.02) $ (0.09) $ (0.09) $ (0.33)
============ ============ ============ ============
Average shares outstanding ................. 43,175,591 17,559,485 34,616,869 15,357,241
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements,.
4
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
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Cash flows from operating activities:
Net loss ............................................................ $(2,926,787) $(4,397,784)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense ............................. 526,901 781,303
Services provided for payment of MCC notes ........................ -- (74,495)
Non-cash compensation of consultants upon issuance of warrants .... -- 105,251
(Gain) Loss on disposal of assets ................................. (795,697) 622,248
Changes in assets and liabilities:
Accounts receivable, trade ...................................... 397,661 423,318
Notes receivable ................................................ -- 15,000
Escrow funds receivable ......................................... 293,915 --
Costs and estimated earnings in excess of billings on uncompleted
contracts ..................................................... -- 584,770
Inventory ....................................................... -- 8,727
Prepaid expenses ................................................ 27,339 5,318
Accounts payable and accrued liabilities ........................ 146,055 (1,403,562)
Billings in excess of costs and estimated earnings on uncompleted
contracts ..................................................... (1,230) 95,291
----------- -----------
Total adjustments .......................................... 594,944 1,163,169
----------- -----------
Net cash used in operating activities ........................... (2,331,843) (3,234,615)
----------- -----------
Cash flows from investing activities:
Capital expenditures .............................................. (47,335) (34,694)
Proceeds from the sale of equipment ............................... 1,750,480 262,895
Expenditures for intangible and other assets ...................... -- --
----------- -----------
Net cash provided by (used in) investing activities ............. 1,703,145 228,201
----------- -----------
Cash flows from financing activities:
Repayment of notes payable ........................................ (930,000) (871,061)
Bank overdraft .................................................... (156,686) --
Proceeds from notes payable ....................................... 1,185,000 500,000
Bank line of credit .............................................. -- (30,000)
Redemption of preferred stock ..................................... (332,011) (60,493)
Proceeds of stock issuance, net of costs .......................... 865,937 3,655,312
----------- -----------
Net cash provided by financing activities ....................... 632,240 3,193,758
----------- -----------
Net increase in cash and cash equivalents ................................ 3,542 187,344
Cash and cash equivalents, beginning of period ........................... 1,000 53,516
----------- -----------
Cash and cash equivalents, end of the period ............................. $ 4,542 $ 240,860
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of SI Diamond
Technology, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1997, included in the Company's 1997 Annual Report on
Form 10-KSB. The balance sheet information for December 31, 1997 has been
derived from the audited financial statements at that date.
2. Supplemental Cash Flow Information
Cash paid for interest for the nine months ended September 30, 1998 and
1997 was approximately $27,319 and $108,408, respectively.
3. Capital Stock:
Under the terms of an August 1997 agreement between the Company and its
Series F preferred stock shareholders, the Company was obligated to renegotiate
the agreement if the Company's stock price did not exceed $1.50 per share by
October 12, 1997. The share price did not exceed the specified level by that
date and as a result, the Company and the Series F preferred stock shareholders
reached a new agreement in March 1998 whereby the Series F preferred stock
shareholders were allowed to convert one-sixth of the number of Series F
preferred shares held as of March 17, 1998 in each of the months from March 1998
through August 1998 into the Company's common stock. The conversion price for
each month was the average closing bid price of the Company's common stock for
the preceding month, except that the conversion price for March 1998 was $0.15.
Upon submission for conversion, the Company had the right to redeem the
preferred shares for 107.5% of the original purchase price. As of September 30,
1998, all shares of the Series F preferred shares held as of March 17, 1998 have
been converted under the terms of this agreement.
As described in greater detail in the Company's 1997 Annual Report on Form
10-KSB, in January 1998, the Company and certain holders of its common stock
terminated a subscription agreement that had been signed in October 1997. In
connection with the termination of this agreement, the Company received cash
proceeds of $250,000 in January 1998. In addition, the investors returned
318,868 shares of the Company's common stock and forfeited warrants giving them
the right to purchase 3,948,202 shares of the Company's common stock.
In January 1998, the Company received proceeds of $50,000 for the issuance
of 250,000 shares of its common stock at a price of $0.20 per share. In May
1998, the Company received proceeds of $47,000 in exchange for the issuance of
470,000 shares of the Company's common stock at a price of $0.10 per share and
$425,000 in exchange for the issuance of 1,700,000 shares at a price of $0.25
per share. The Company filed a registration statement on June 17, 1998 to
register these shares.
As described in greater detail in the Company's 1997 Annual Report on Form
10-KSB, the Company has a convertible debenture outstanding that is convertible
in to the Company's common stock at the option of the lender. During the quarter
ended June 30, 1998, $200,000 of principal on this debenture was converted into
1,469,199 shares of the Company's common stock at the request of the lender.
Also as described in greater detail in the Company's 1997 Annual Report on Form
10-KSB, the Company had notes payable to shareholders that were convertible into
the Company's common stock at the option of the lender. During the quarter ended
June 30, 1998, $ 300,000 of principal plus the related accrued interest was
converted into 2,531,198 shares of the Company's common stock. The shares issued
as a result of the conversion of this note were registered on a registration
statement dated June 17, 1998.
6
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Capital Stock (continued)
In July 1998, the Company received $90,000 and issued 600,000 shares of the
Company's common stock as a result of the exercise of warrants for the Company's
common stock.
In July 1998, one of the Company's Series G preferred stock shareholders
converted 100 shares of Series G preferred stock into 110,000 shares of the
Company's common stock in accordance with the terms of the Series G preferred
stock.
4. Notes Payable
From January through April 1998, the Company borrowed a total of $680,000
from shareholders of the Company to be used for working capital purposes. The
notes were primarily 90 day notes bearing interest at a rate of 15% per annum.
The assets of Diamond Tech One, Inc.,("DTO)" a wholly-owned subsidiary of the
Company were pledged as collateral for $500,000 of these notes. In connection
with this secured loan agreement, the shareholder also received warrants
enabling the holder to purchase a total of 600,000 shares of the Company's
common stock at $0.15 per share, which approximated the market price of the
common stock on the date the agreement was made. These warrants were assigned a
value of $0.16 per share. The resulting discount is being amortized as interest
expense over the life of the notes. These notes were repaid as part of the
transaction in which the Company sold the majority of the operating assets of
its DTO subsidiary in May 1998. The remaining unamortized balance of the
discount was written off as interest expense at the time the loans were repaid.
The remaining $180,000 of unsecured notes payable outstanding at the time
of the sale of the DTO assets were also repaid from the sale proceeds. $10,000
of the unsecured notes payable were payable to the Company's President.
In June 1998, the Company borrowed $100,000 from a shareholder. This note
is a 60 day note secured by all assets of the company and bearing interest at a
rate of 15%. From July through September 1998, the Company borrowed an
additional $405,000 under short term notes covering a period of 40 to 90 days.
These notes all bear interest at a rate of 15% and are secured by all assets of
the Company. Of these loans, $100,000 are payable to the Company's Chief
Executive Officer, $170,000 are payable to EBT Acquisition Company, a company in
which certain of the Company's officers and directors are also shareholders, and
$135,000 are payable to other shareholders of the Company. All of these notes
that were due prior to the date of this filing have been extended by the Company
on a temporary basis.
5. Contingencies
Customer Claim at Plasmatron Coatings and Systems, Inc.
On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer of
Plasmatron Coatings and Systems, Inc. ("Plasmatron"), a wholly-owned subsidiary
of the Company, filed a complaint with the Supreme Court of the State of New
York, County of Westchester. The complaint names Plasmatron, the Company and
Westchester Fire Insurance Company as defendants. Plaintiff claims a breach of
contract related to $1 million of coating equipment that Plasmatron delivered in
1993, prior to the Company's ownership of Plasmatron. The Plaintiff claims the
equipment does not perform as required under the contract. Plaintiff seeks to
recover compensatory, consequential and incidental damages. The amount of this
claim is to be determined at trial. No trial date has been set at this time,
although it is expected to be no later than September 1999. At this time, the
outcome can not be predicted with any certainty and the potential liability, if
any, is unknown. The Company believes it has meritorious defenses and intends to
continue to vigorously defend this action.
7
<PAGE> 8
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Contingencies (continued)
Customer Claim at Diamond Tech One, Inc.
On April 16, 1998, Alpine Microsystems, Inc. ("Plaintiff"), a customer of
DTO, filed a complaint with the Supreme Court of the State of California, County
of Santa Clara. The Complaint names DTO and the Company as defendants. Plaintiff
claimed a breach of contract related to $271,000 advanced to DTO against work to
be performed under certain purchase orders issued by Plaintiff. At the time the
suit was filed, work was completed on certain of these purchase orders and in
process on others. The Plaintiff claimed that DTO failed to supply the agreed
upon services. Plaintiff sought to recover all amounts paid to DTO in connection
with these purchase orders as well as attorneys' fees, punitive damages, costs
of the suit, interest, and other relief as the court may deem appropriate. On
August 4, 1998, the parties agreed to settle this dispute. The Company agreed to
repay to Plaintiff $145,000 of the funds advanced by Plaintiff in exchange for a
release of all claims by Plaintiff. The settlement was paid from the funds held
by the escrow agent related to the sale of the DTO assets. The Company had
originally deferred approximately $180,000 of the original $271,000 received
from plaintiff for potential settlement of this dispute. The difference between
the $180,000 deferred and the $145,000 paid was recorded as income in the
quarter ended September 30, 1998.
Vendor Claim at Diamond Tech One, Inc.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc. ("Plaintiff"), a
vendor of DTO, filed a complaint in the United Sates District Court for the
Southern District of New York against the Company for unpaid debts of its
subsidiary, Diamond Tech One, Inc. The Company was served with notice of this
suit on October 14, 1998. All known amounts owed by DTO to the plaintiff are
recorded as liabilities of DTO in the consolidated financial statements of the
Company. The amounts recorded as liabilities by DTO make up substantially all of
the amounts claimed as due by the plaintiff.
Other Claims
The Company and its subsidiaries are also defendants in various other lawsuits
of a non material nature related to the non payment of invoices when due. It is
expected that all such lawsuits will be settled for an amount no greater than
the liability recorded in the financial statements for such matters and that
settlement of such suits will not have a material financial impact on the
Company.
DiaGasCrown Venture
In February 1995, the Company entered into an agreement with Diagascrown,
Inc. ("DGC"), a Russian joint stock Company controlled by Gazcomplektimpex, a
subsidiary of Gazprom, the Russian national natural gas Company. In return for
an equity position in the Company, DGC paid the Company $5,000,000 and granted
the Company an exclusive license to DGC display and related diamond technology
and license rights to all related background patents. The Company has committed
to perform $2.5 million in research and development in Russia through February
1997. This research can be in the form of travel and service performed by the
Company's employees in Russia, government funded research performed in Russia
and through direct funding of Russian efforts related to displays. According to
its internal records, the Company has spent approximately $2,000,000 on this
research. Further spending in Russia has been halted since 1996 pending
agreement as to the nature and amount of services to be performed in Russia for
the remaining balance to be spent under the original agreement.
8
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Contingencies (continued)
Outlook
At September 30, 1998, the Company had a deficit in stockholder's equity of
$2,589,826 and current liabilities exceeded current assets by $2,747,524. The
Company has developed a plan to allow it to maintain operations until the
Company is able to sustain itself on its own revenue, however in order to have
time to implement this plan the Company is dependent upon the continued
cooperation of its creditors. As of the date of this filing, the Company only
has resources to enable it to maintain operations on a day to day basis. The
Company expects to be able to obtain additional resources during this time
period to enable it to complete the implementation of its plan.
The Company's plan is based on raising additional funds to allow each of
its subsidiaries to continue to develop their products and bring them to the
level whereby each subsidiary is operating at break-even or better. The source
of these funds may be from either debt, equity, strategic partners, or the
actual sale of a subsidiary, depending on which alternative management believes
to be best at the appropriate time. As discussed in Note 6, Business
Developments, the Company signed a letter of intent to sell its Electronic
Billboard Technology, Inc. ("EBT") Subsidiary for a total price of approximately
$5,000,000. The sale of EBT would provide the Company with the necessary funds
to enable it to adequately capitalize its remaining subsidiary, Field Emission
Picture Element Technology, Inc. ("FEPET"). The Company is also evaluating other
sources of funding. If other sources of funding or other business opportunities
can be found which would adequately capitalize the Company to allow both FEPET
and EBT to develop and produce their products, the proposed sale of EBT may not
be necessary. In addition, the Company is working to continue to reduce expenses
and increase the revenues of both FEPET and EBT. As a result of the reduction in
operating activity related to the disposition of the DTO operating assets, the
Company has significantly reduced other costs including selling, general,
administrative, and interest costs and expects to continue to reduce costs. This
reduction in costs means that the Company requires significantly reduced amounts
of capital to fund its ongoing operations. The Company may also sell certain of
DTO's intangible assets that were retained when DTO's operating assets were
sold. In addition, the Company is seeking additional strategic partners to
invest in FEPET to assist it in the development of commercial products using its
technology. Management believes that it has the ability to raise short term
funding, if necessary, to enable it to continue operations until its plan can be
fully implemented.
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. If adequate funds are not available from operations or additional sources
of financing, the Company will have to reduce substantially or eliminate
expenditures for research and development, testing and production of its
products, and associated overhead costs, or obtain funds through arrangements
with other entities that may require the Company to relinquish rights to certain
of its technologies or products. No assurance can be given that there will be no
change that would cause available resources to be consumed before such time or
that other sources of funding will be available. Such results could materially
and adversely affect the Company.
6. Business Developments
On May 8, 1998 the Company signed an agreement to sell the majority of the
operating assets of DTO for a total price of approximately $2.2 million, of
which $1.8 million was paid at closing and the remaining $400,000 was deposited
in escrow. Since that time, $145,000 of the escrowed funds were released in
connection with the settlement of the Alpine lawsuit described in Note 5,
approximately $113,000 was released to the Company, approximately $27,000 was
released to the State of Texas for taxes due, and approximately $9,000 was
released to a DTO vendor. The balance of the escrow account was scheduled to be
released to the Company on September 5, 1998. The purchaser has the right to
make claims against this escrow account in certain circumstances. The Company
has been notified by the purchaser of various claims against the account. The
Company has objected to these claims and is currently working to resolve these
differences in accordance with the terms of the agreement. In
9
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Business Developments (continued)
addition, the Company has additional claims against the purchaser for amounts
expended by the Company on the purchasers behalf after closing. The Company
expects that the ultimate settlement of these issues will not differ materially
from the amounts recorded in the financial statements.
The purchaser has also assumed the building lease on the DTO facility. As a
result, the Company has relocated its offices to another leased facility in
Austin, Texas. The relocation to this new smaller, less expensive facility has
also reduced the Company's ongoing fixed overhead expense. The Company retained
all cash, accounts receivable, certain equipment identified as excess, certain
intangibles, and all liabilities. The Company is currently in the process of
preparing to sell all or a portion of this intangible property, including
patents and processes, to the extent that it is not required for the continued
operation of its other businesses. In connection with this transaction, all
loans secured by the assets of DTO were paid from the proceeds of the sale and
the liens were released by the noteholders.
On September 14, 1998, the Company signed a letter of intent to sell its
Electronic Billboard Technology, Inc. ("EBT") subsidiary for a total of
approximately $5 million in cash to EBT Acquisition Company ("Purchaser").
Purchaser is a newly formed Delaware Company formed specifically for the purpose
of acquiring the stock of EBT. In addition, as part of the transaction, the
Company would acquire warrants which, if exercised, would result in the Company
owning approximately 8% of the Purchaser. Certain officers and directors of the
Company are also expected to be shareholders of the Purchaser, owning less than
7% of the Purchaser's outstanding common stock. The purpose of this transaction
is to provide needed working capital to the Company and to allow the Company to
continue its research and development efforts through its remaining subsidiary,
Field Emission Picture Element Technology, Inc. The Company is also evaluating
other sources of funding. If other sources of funding or other business
opportunities can be found which would adequately capitalize the Company to
allow both FEPET and EBT to develop and produce their products, the proposed
sale of EBT may not be necessary.
On August 28, 1998, the Company entered into an agreement with
Microelectronics and Computer Technology Corporation ("MCC") whereby it returned
certain technology rights to MCC. In connection with the acquisition of MCC's
electronics packaging and display fabrication assets in 1995, the Company
acquired non exclusive licenses to 144 MCC Patents and other technology. As a
result of the 1995 acquisition, the Company was obligated to pay MCC cumulative
minimum royalty payments of $500,000 by December 31, 1997 and cumulative minimum
royalty payments of $1,000,000 by December 1, 2000. In December 1997, the
agreement was amended and MCC transferred and assigned its rights directly to
the Company for 62 DFE related patents. The Company had no use for the remaining
patents. As part of the August 28, 1998 agreement, the Company agreed to pay
$5,000 cash, issue 500,000 shares of the Company's common stock, and return to
MCC the rights to these remaining non DFE patents. MCC agreed to accept this as
full payment for all minimum amounts due under the original agreement. As of
December 31, 1997, the Company had accrued $355,000 as royalties due to MCC,
which represented the minimum due of $500,000 less costs the Company had paid to
maintain the patents. The shares of SI Diamond common stock issued to MCC were
valued at $100,000 based on the market price of the stock at the time the shares
were issued. The remaining $250,000 of accrued royalties were taken into income
in the quarter ended September 30, 1998. The Company has no further obligations
to MCC.
7. Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive loss approximates the net
loss reported.
10
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Subsequent Events
In October 1998, the Company borrowed an additional $127,000 under
short term notes bearing interest at a rate of 15% and secured by all assets of
the Company. Of these notes, $57,000 are payable to EBT Acquisition Company,
$50,000 are payable to a Director of the Company, and $20,000 are payable to a
shareholder of the Company. In November 1998, the Company borrowed $100,000 from
unaffiliated parties under 90 day notes bearing interest at 15% and secured by
all assets of the Company. In connection with these 90 day notes to unaffiliated
parties, the Company also issued warrants to the note payees enabling them to
purchase up to 400,000 shares of the Company's common stock at a price of $0.25,
which was approximately 15% above the market price of the stock on the date the
notes were issued, for a period of one year from the date of the notes.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
During the nine months ended September 30, 1998, the Company's primary
revenues were earned through microelectronics fabrication and assembly
services at Diamond Tech One, Inc. ("DTO"). The Company continued to incur
substantial expenses at Field Emission Picture Element Technology, Inc.
("FEPET") in support of the development of its proprietary Diamond Based
Field Emission ("DFE") Technology and preproduction costs for wafer bumping
at DTO, as well as product development costs at Electronic Billboard
Technology, Inc. ("EBT"). In May 1998, the Company sold the majority of the
operating assets of its DTO subsidiary to enable to it to pay off debt and
reduce expenses so that it could focus on commercialization of its
remaining products. As more fully discussed in the Company's Annual Report
on Form 10-KSB/A for the year ended December 31, 1997, the Company expects
to incur additional research and development expenses throughout 1998 in
developing the Company's DFE technology and in developing and
commercializing its electronic billboard product.
RECENT DEVELOPMENTS
During the nine months ended September 30, 1998, the Company raised a total
of $618,000 to fund operations by issuing a total of 3,020,000 shares of
its common stock for cash. In addition, during the same time period, the
Company borrowed a total of $1,185,000 to fund operations. As described in
greater detail in the notes to the financial statements, the majority of
these notes were short term notes bearing interest at a rate of 15% and
secured by the assets of the Company or a subsidiary.
In May 1998, the Company sold the majority of the operating assets of its
DTO subsidiary for a total purchase price of approximately $2.2 million,
$1.8 million of which was received at closing. The remaining $400,000 was
deposited in escrow. The purchaser has also assumed the building lease on
the DTO facility. The Company retained all cash, accounts receivable,
certain equipment identified as excess, certain intangibles, and all
liabilities.
In June 1998, the Company and its independent auditor, Coopers & Lybrand
L.L.P., terminated their relationship. The Company has had discussions with
potential auditors, but not yet hired a successor auditor.
In October and November 1998 through the date of this filing, the Company
borrowed an additional $227,000 to fund operations. As described in greater
detail in the notes to the financial statements, these notes are short term
notes bearing interest at a rate of 15% and secured by all assets of the
Company.
On September 14, 1998, the Company signed a letter of intent to sell its
Electronic Billboard Technology, Inc. ("EBT") subsidiary for a total of
approximately $5 million in cash to EBT Acquisition Company ("Purchaser").
Purchaser is a newly formed Delaware Company formed specifically for the
purpose of acquiring the stock of EBT. In addition, as part of the
transaction, the Company would acquire warrants which, if exercised, would
result in the Company owning approximately 8% of the Purchaser. Certain
officers and directors of the Company are also expected to be shareholders
of the Purchaser, owning less than 7% of the Purchaser's outstanding common
stock. The purpose of this transaction is to provide needed working capital
to the Company and to allow the Company to continue its research and
development efforts through its remaining subsidiary, Field Emission
Picture Element Technology, Inc. The Company is also evaluating other
sources of funding. If other sources of funding or other business
opportunities can be found which would adequately capitalize the Company to
allow both FEPET and EBT to develop and produce their products, the
proposed sale of EBT may not be necessary.
12
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues for the third quarter ended September 30, 1998
totaled $123,399 compared to $965,567 for the third quarter of 1997. The
Company earned $574,005 in revenues during the nine month period ended
September 30, 1998, (the "1998 Period") as compared with $3,006,442 during
the nine month period ended September 30, 1997 (the "1997 Period").
Commercial sales were $574,005 for the 1998 Period compared to $2,248,847
for the 1997 Period. This reduction in revenue during the 1998 Period
resulted from the Company's decision to shut down its Plasmatron subsidiary
in the third quarter of 1997 and the sale of the DTO operating assets in
May 1998. The 1997 Period included $833,355 in revenue from Plasmatron.
During the 1998 Period the Company had revenue of $441,704 from DTO,
$108,070 from EBT, and $24,231 from FEPET. At September 30, 1998, the
Company had a backlog of approximately $180,000, of which approximately
$40,000 was from EBT and approximately $140,000 was from FEPET. This is a
substantial reduction compared to the backlog of approximately $304,000 at
September 30, 1997, however the 1997 backlog was exclusively from DTO.
There were no contract research revenues for the 1998 Period compared to
$757,595 for the 1997 Period and the Company has no research backlog at the
present time. The decreased contract research revenue and backlog in the
1998 Period results from the completion of the spending of funds available
to the Company under the $3,500,000 National Institute of Science and
Technology ("NIST") contract which commenced during the second quarter of
1995. The NIST contract was intended to provide matching grants to
facilitate further research and development on the Company's DFE
technology. The Company is continuing to fund research and development of
the DFE technology despite the unavailability of any further reimbursement
for these costs. The Company's ability to perform the research on its
backlog should not require significant addition of personnel.
For the 1998 Period, the Company's cost of sales were $1,517,008 or a
negative gross margin of 164%, as compared with $3,591,243 or a negative
gross margin of 19%, for the 1997 Period. This decreasing margin resulted
from a combination of factors. First, the shutdown of Plasmatron impacted
the Company's overall gross margins. Plasmatron had a negative gross margin
of approximately 2% in the 1997 Period. In addition, the Company had no
reimbursed research and development in the 1998 Period. While these items
did not significantly affect the absolute dollar amount of the gross
margin, it did affect the percentage. The existence of additional revenues
and an equal amount of costs in 1997 had the effect of increasing the
sales, thereby decreasing the percentage by which costs exceeded sales.
Finally, the Company's DTO subsidiary had a negative margin of
approximately 190% in the 1998 Period as compared with a negative margin of
approximately 110 % in the 1997 Period. The negative margins at DTO were
due to low utilization of its facility which had relatively high fixed
costs associated with its clean rooms. The increase in negative margin from
the 1997 Period to the 1998 Period is primarily the result of increased
labor costs due to the addition of a second and third shift, as well as
increased support labor to increase DTO's capacity. Customer orders during
the 1998 Period did not enable the Company to utilize this increased
capacity. The Company's selling, general and administrative expenses were
$1,862,467 for the 1998 Period, compared with $2,743,248 for the 1997
Period. The expense decrease resulted from the Company's ongoing efforts to
reduce costs and the elimination of general administrative costs associated
with the Plasmatron and DTO facilities. Company sponsored research and
development expenses for the 1998 Period were $912,417 as compared to
$430,693 for the 1997 Period. This increase in research expense is the
result of the lack of availability of any outside funding for the Company's
research projects. A portion of the research and development expenses
incurred in the 1997 Period were reimbursed and therefore not included in
the Company's research and development expenses. The Company expects to
continue to incur expense in 1998 in support of additional research and
development activities related to the commercial development of its DFE
technology and its electronic billboard technology. The amount of these
expenditures is dependent upon the amount of funding obtained from outside
sources to support the research activities and level of spending on other
internal activities.
In May 1998, the Company sold the majority of the operating assets of its
DTO subsidiary. In addition, throughout the 1998 Period, the Company
continued its efforts to sell excess equipment. As a result, the Company
has recorded a gain on the sale of assets of $795,697 during the nine
months ended September 30, 1998. During the 1997 period, the Company had a
loss of $622,248, on the disposal of assets, primarily as a result of the
shutdown of its Plasmatron subsidiary. Other expense in the 1998 Period
consisted of approximately $255,000 in interest expense offset by a
reduction of $250,000 in royalty expense resulting from an agreement signed
with Microelectronics and Computer Corporation ("MCC").
13
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
At September 30, 1998, the Company had cash and cash equivalents in the
amount of $4,542 as compared with cash and cash equivalents of $1,000 at
December 31, 1997. This increase in cash is primarily the result of the
proceeds of debt and equity transactions, less costs incurred in the 1998
Period. Based on the developmental stages of the Company's DFE and
electronic billboard technologies, additional debt, equity, joint ventures,
sale of product distribution or technology rights, or other financing will
be required in the future. There can be no assurance that any of these
financing alternatives can be arranged on commercially acceptable terms.
As described in greater detail in the notes to the financial statements,
the Company received proceeds of $865,937 from the issuance of common stock
and $1,185,000 from the issuance of notes payable during the nine months
ended September 30, 1998. A portion of these proceeds from financing
activities were used to eliminate the bank overdraft that existed as of
December 31, 1997 and to redeem a portion of the Company's Series E
Preferred stock. The Company also repaid $930,000 of notes payable during
this period. This resulted in net cash provided by financing activities of
$964,251 for the 1998 Period. Cash provided by financing activities of
$3,193,758 for the 1997 Period was substantially higher because of the
issuance of the Company's Series F Preferred and Series G Preferred during
that time period.
Cash used in operating activities was $2,331,843 for the 1998 Period
compared to $3,234,615 for the 1997 Period. The decrease in the cash used
by operating activities was primarily the result of a higher level of
accounts payable and accrued liabilities during the 1998 Period and a
decreased operating loss in the 1998 Period. Accounts payable and accrued
expenses increased by $146,055 during the 1998 Period as compared to a
decrease of $1,403,562 during the 1997 Period.
Cash provided by investing activities during the 1998 Period was $1,703,145
as compared with $228,201 for the 1997 Period. The cash provided in the
1998 Period resulted primarily from the sale of the DTO operating assets,
while the cash provided in the 1997 Period resulted primarily from the sale
of excess equipment.
The principal source of the Company's liquidity has been the funds received
from its initial public offering and from the subsequent foreign and exempt
offerings of Common Stock or debt instruments. The Company may receive
additional funds from the exercise of warrants, although there can be no
assurance that such warrants will be exercised and it is unlikely that any
significant proceeds from the exercise of warrants will be received in the
near future. When the Company needs additional funds, the Company may seek
to sell additional debt or equity securities, secure joint venture
partnerships, sell certain technology rights, or dispose of one of is
subsidiaries. The Company may seek to increase its liquidity through bank
borrowings or other financing. There can be no assurance that any of these
financing alternatives can be arranged on commercially acceptable terms.
The Company believes that its success in reaching profitability will be
dependent upon the viability of its products and their acceptance in the
marketplace, and its ability to obtain additional financing in the future.
Coopers & Lybrand L.L.P., the former independent auditors of the Company,
expressed substantial doubt as to the ability of the Company to continue as
a going concern based on accumulated losses from operations. See "Report of
Independent Accountants" included in the Company's 1997 Annual Report on
Form 10-KSB.
The Company expects to continue to incur substantial expenses for research
and development ("R&D"), product testing, and product marketing. Further,
the Company believes that certain proposed products may not be available
for commercial sale or routine use for a period of one to two years.
Therefore, it is anticipated that the commercialization of the Company's
existing and proposed products will require additional capital in excess of
the Company's current funding. The combined effect of the foregoing may
prevent the Company from achieving profitability for an extended period of
time. Because the timing and receipt of revenues from the sale of products
will be tied to the achievement of certain product development, testing and
marketing objectives which cannot be predicted with certainty, there may be
substantial fluctuations in the Company's results of operations. If
revenues do not increase as rapidly as anticipated, or if product
development and testing and marketing require more funding than
anticipated, the Company will be required to curtail its operations and
seek additional financing from other sources.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As of the date of this filing, the Company only has resources to enable it
to maintain operations on a day to day basis. The Company expects to be
able to continue to obtain additional resources on a day to day basis to
allow it to continue to survive until a more permanent solution can be
implemented, This belief is based on current development plans, the current
state of the Company's business, the current regulatory environment,
historical experience in the development of electronic products and general
economic conditions. No assurance can be given that there will be no change
that would make additional resources unavailable to the Company.
Thereafter, if adequate funds are not available from operations or
additional sources of financing, the Company will have to reduce
substantially or eliminate expenditures for research and development and
associated overhead costs, or obtain funds through arrangements with other
entities. Such results could materially and adversely affect the Company.
OUTLOOK
At September 30, 1998, the Company had a deficit in stockholder's equity of
$2,589,826 and current liabilities exceeded current assets by $2,747,524.
The Company has developed a plan to allow it to maintain operations until
the Company is able to sustain itself on its own revenue, however in order
to have time to implement this plan the Company is dependent upon the
continued cooperation of its creditors. As of the date of this filing, the
Company only has resources to enable it to maintain operations on a day to
day basis. The Company expects to be able to obtain additional resources
during this time period to enable it to complete the implementation of its
plan.
The Company's plan is based on raising additional funds to allow each of
its subsidiaries to continue to develop their products and bring them to
the level whereby each subsidiary is operating at break-even or better. The
source of these funds may be from either debt, equity, strategic partners,
or the actual sale of a subsidiary, depending on which alternative
management believes to be best at the appropriate time. As discussed in
Note 6, Business Developments, the Company signed a letter of intent to
sell its Electronic Billboard Technology, Inc. ("EBT") Subsidiary for a
total price of approximately $5,000,000. The sale of EBT would provide the
Company with the necessary funds to enable it to adequately capitalize its
remaining subsidiary, Field Emission Picture Element Technology, Inc.
("FEPET"). The Company is also evaluating other sources of funding. If
other sources of funding or other business opportunities can be found which
would adequately capitalize the Company to allow both FEPET and EBT to
develop and produce their products, the proposed sale of EBT may not be
necessary. In addition, the Company is working to continue to reduce
expenses and increase the revenues of both FEPET and EBT. As a result of
the reduction in operating activity related to the disposition of the DTO
operating assets, the Company has significantly reduced other costs
including selling, general, administrative, and interest costs and expects
to continue to reduce costs. This reduction in costs means that the Company
requires significantly reduced amounts of capital to fund its ongoing
operations. The Company may also sell certain of DTO's intangible assets
that were retained when DTO's operating assets were sold. In addition, the
Company is seeking additional strategic partners to invest in FEPET to
assist it in the development of commercial products using its technology.
Management believes that it has the ability to raise short term funding, if
necessary, to enable it to continue operations until its plan can be fully
implemented.
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. If adequate funds are not available
from operations or additional sources of financing, the Company will have
to reduce substantially or eliminate expenditures for research and
development, testing and production of its products, and associated
overhead costs, or obtain funds through arrangements with other entities
that may require the Company to relinquish rights to certain of its
technologies or products. No assurance can be given that there will be no
change that would cause available resources to be consumed before such time
or that other sources of funding will be available. Such results could
materially and adversely affect the Company.
15
<PAGE> 16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 UPDATE
The Company has determined that the year 2000 issue will have an immaterial
effect on the Company. The year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. All of this
software is prepackaged software that was purchased from outside vendors.
These vendors all have upgrades available which correct the Year 2000
issue. It is the Company's plan to purchase the upgraded software, where
required, in early 1999 to insure adequate time for implementation. The
cost of these upgrades will be negligible and is not expected to have a
material effect on the operations of the Company. If such upgrades were not
installed on a timely basis, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company has determined that it is not vulnerable to a third party's
failure to remediate its own Year 2000 Issues since it has no significant
suppliers or large customers. The Company has also determined that it has
no exposure to contingencies related to the Year 2000 Issue for the
products it has sold. The Company is ensuring that all products currently
under development by the Company will be Year 2000 compliant prior to the
sale of such products.
This assessment is based on the present circumstances of the Company in
which the Company has virtually no customers and no significant suppliers.
In this scenario, the Company's Year 2000 risk is virtually non-existent.
If the Company's business plan is successful and it is able to develop and
sell products, the Company may become subject to Year 2000 risk related to
third parties. The Company intends to assess the risk associated with third
party remediation of Year 2000 issues at the time that it enters into any
significant contracts or relationships with third parties and to develop a
contingency plan at that time if necessary.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 18, 1998, KDF Electronic & Vacuum Services, Inc. ("Plaintiff"), a
vendor of DTO, filed a complaint in the United Sates District Court for the
Southern District of New York against the Company for unpaid debts of its
subsidiary, Diamond Tech One, Inc. The Company was served with notice of this
suit on October 14, 1998. All known amounts owed by DTO to the plaintiff are
recorded as liabilities of DTO in the consolidated financial statements of the
Company. The amounts recorded as liabilities by DTO make up substantially all of
the amounts claimed as due by the plaintiff.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report are forward-looking statements concerning the
future operations of the Company. The Company is including the following
cautionary statement in this Quarterly Report on Form 10-QSB to make applicable
and take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statement made by, or on
behalf of, the Company. The factors identified in this cautionary statement are
important factors (but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company.
Where any such forward-looking statement includes a statement of the assumptions
or basis underlying such forward-looking statement, the Company cautions that,
while it believes such assumptions or basis to be reasonable and makes them in
good faith, assumed facts or basis almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Where in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.
Important factors that could cause the Company's actual results to differ from
results in forward-looking statements are incorporated herein by reference from
pages ii-vi of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits on page 19 for a descriptive response
to this item.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K (Item 5) dated as of September 14,
1998 (filed September 30, 1998).
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SI DIAMOND TECHNOLOGY, INC.
(Registrant)
Date: November 10, 1998 /s/ Marc W. Eller
----------------------------------------
Marc W. Eller
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 1998 /s/ Douglas P. Baker
----------------------------------------
Douglas P. Baker
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
10* Letter of Intent between EBT Acquisition Company and the
Company dated September 14, 1998 (Exhibit 99.1 to the
Company's Current Report on Form 8-K dated as of September 14,
1998.)
11 Computation of (Loss) Per Common Share
13 Forward-Looking Statements and Important Factors Affecting
Future Results (pages ii - vi of the Company's Annual Report
on Form 10-KSB/A for the fiscal year ended December 31, 1997,
incorporated by reference into the Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1998).
27 Financial Data Schedule
</TABLE>
* Incorporated by reference
19
<PAGE> 1
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computation of (loss) per common share:
Net loss applicable to common shareholders .... $ (851,451) $ (1,658,514) $ (3,141,894) $ (5,060,200)
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding 43,175,591 17,559,485 34,616,869 15,357,241
Net loss per common share ..................... $ (0.02) $ (0.09) $ (0.08) $ (0.33)
============ ============ ============ ============
Computation of (loss) per common share
assuming full dilution (A):
</TABLE>
No calculation of loss per common share assuming full dilution is submitted
because such computation results in an antidilutive loss per common share.
<PAGE> 1
EXHIBIT 13
FORWARD-LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
Certain statements in this annual report are forward-looking statements
concerning the future operations of SI Diamond Technology, Inc. and it
subsidiaries (collectively referred to as the "Company"). The Company is
including the following cautionary statement in this Annual Report on Form
10-KSB to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.
When used in this document, the words "anticipate", "believe", "expect",
"estimate", "project", and similar expressions are intended to identify
forward-looking statements.
Taking into account the foregoing, the following are identified as
important factors (but not all factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of the Company.
EARLY STAGE OF DFE PRODUCT DEVELOPMENT; NO DFE PRODUCT REVENUES; DFE PRODUCT
UNCERTAINTY
The Company's Diamond Field Emission ("DFE") technology and products
resulting therefrom will require significant additional development,
engineering, testing and investment prior to commercialization. The Company's
leading potential DFE product is the Diamond Field Emission Lamp ("DFEL"). If
the DFEL is successful, the Diamond Field Emission Display ("DFED) is also a
possibility. There can be no assurance that either the DFEL or the DFED will be
successfully developed, be capable of being produced in commercial quantities on
a cost-effective basis or be successfully marketed.
HISTORY OF OPERATING LOSSES
For the year ended December 31, 1997, the Company suffered a net loss
of $6,320,901. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996,
the Company suffered net losses of $1,630,978, $7,527,677, $7,255,420,
$14,389,856 and $13,709,006, respectively. The Company expects to continue to
incur additional operating losses for an extended period of time as it continues
to develop products for commercialization, although it expects the magnitude of
those losses to decrease. There can be no assurance that the Company will be
profitable in the future. Coopers & Lybrand L.L.P., independent auditors of the
Company, expressed substantial doubt as to the ability of the Company to
continue as a going concern based on accumulated losses from operations. See
"Report of Independent Accountants." The Company's operations to date have been
primarily financed by the proceeds from the sale of equity securities of the
Company and from revenues generated from research and development conducted for
third parties; although since the second quarter of 1994, revenues from
commercial services and product sales have exceeded those earned through such
research and development ("R&D") activities. In order to continue its transition
from a contract research and development organization into a Company with viable
operations, the Company anticipates substantial product development expenditures
for the foreseeable future.
3
<PAGE> 2
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
The Company expects to incur substantial expenses for R&D, product
testing, production, manufacturing, product marketing, and administrative
overhead. The majority of R&D expenditures are for the development of the
Company's DFE technology. Further, the Company believes that certain proposed
products may not be available for commercial sale or routine use for a period of
one to two years. Therefore, it is anticipated that the commercialization of the
Company's existing and proposed products will require additional capital in
excess of the Company's current sources of funding. The combined effect of the
foregoing may prevent the Company from achieving profitability for an extended
period of time. Because the timing and receipt of revenues from the sale of
products will be tied to the achievement of certain product development,
testing, manufacturing and marketing objectives which cannot be predicted with
certainty, there may be substantial fluctuations in the Company's results of
operations. If revenues do not increase as rapidly as anticipated, or if product
development and testing and marketing require more funding than anticipated, the
Company may be required to curtail its expansion and/or seek additional
financing from other sources. The Company may seek such additional financing
through the offer of debt or equity or any combination thereof at any time.
The Company has developed a plan to allow it to maintain operations
until the Company is able to sustain itself on its own revenue. However,
existing resources at current spending levels are only available to allow the
Company to survive on a day to day basis. The Company's plan is primarily
dependent on raising funds through strategic partners and debt offerings as well
as raising revenues. The major component of the plan is to seek a strategic
partner to inject significant capital into the Company's Diamond Tech One, Inc.
("DTO") subsidiary. In September 1997, the Company retained an investment banker
to assist in that process and substantive discussions have been held with
several interested parties. It is likely that the result of this process will
require the Company to give up majority control and may result in a complete
sale of the subsidiary. It is anticipated that the proceeds to the Company from
this transaction would allow the Company to stabilize its financial condition by
allowing it to pay down debt and provide cash to fund future operations.
Furthermore, completion of such a transaction would allow the Company to
substantially decrease the cost of its remaining operations by allowing it to
reduce costs in numerous areas including facility, selling, general, and
administrative costs. This reduction in costs would mean that the Company would
require significantly reduced amounts of capital to fund its ongoing operations.
Management believes that it has the ability to raise short term funding, if
necessary, to enable it to continue operations until such a transaction can be
completed.
In addition, the Company is seeking additional strategic partners to
invest in both its Electronic Billboard Technology, Inc. ("EBT"), and Field
Emission Picture Element Technology, Inc. ("FEPET") subsidiaries to allow these
subsidiaries to continue development of commercial products. It is anticipated
that any such strategic partners would receive a minority interest in the
subsidiaries of not more than 20% as a result of their investment. It is
anticipated that the Company would retain a majority interest of at least 80% in
each of these subsidiaries. It is the Company's plan that these investments
would allow each of these subsidiaries to continue to develop their products and
bring them to the level whereby each subsidiary is operating at break-even or
better.
This plan is based on current development plans, current operating
plans, the current regulatory environment, historical experience in the
development of electronic products and general economic conditions. Changes
could occur which would cause certain assumptions on which this plan is based to
be no longer valid. The Company's plan is primarily dependent on increasing
revenues and raising additional funds through strategic partners and additional
debt offerings. If adequate funds are not available from operations or
additional sources of financing, the Company may have to reduce substantially or
eliminate expenditures for research and development, testing and production of
its products or obtain funds through arrangements with other entities that may
require the Company to relinquish rights to certain of its technologies or
products. Such results would materially and adversely affect the Company.
4
<PAGE> 3
DEPENDENCE ON PRINCIPAL PRODUCTS
The Company's DFE technology is an emerging technology. The financial
condition and prospects of the Company are dependent upon market acceptance and
sales of the Company's DFE products and its Electronic Billboard and related
electronic display products. Additional R&D needs to be conducted with respect
to the DFE products and the Electronic Billboard before marketing and sales
efforts can be commenced. Market acceptance of the Company's products will be
dependent upon the perception within the electronics and instrumentation
industries of the quality, reliability, performance, efficiency, breadth of
application and cost-effectiveness of the products. There can be no assurance
that the Company will be able to gain commercial market acceptance for its
products or develop other products for commercial use.
COMPETITION; POSSIBLE TECHNOLOGICAL OBSOLESCENCE
The display and semiconductor industries are highly competitive and are
characterized by rapid technological change. The Company's existing and proposed
products will compete with other existing products and may compete against other
developing technologies. Development by others of new or improved products,
processes or technologies may reduce the size of potential markets for the
Company's products. There can be no assurance that such products, processes or
technologies will not render the Company's proposed products obsolete or less
competitive. Most of the Company's competitors have greater financial,
managerial distribution and technical resources than the Company. The Company
will be required to devote substantial financial resources and effort to further
R&D. There can be no assurance that the Company will successfully differentiate
its products from its competitors' products or that the Company will be able to
adapt to evolving markets and technologies, develop new products or achieve and
maintain technological advantages.
TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies, the Company has various
license agreements with Microelectronics and Computer Technology Corporation
("MCC") and DiaGasCrown, Inc., wherein the Company has acquired rights to
develop and commercialize certain research technologies. In certain cases,
agreements require the Company to pay royalties on sale of products developed
from the licensed technologies and fees on revenues from sublicensees, where
applicable, and to pay for the costs of filing and prosecuting patent
applications. Each agreement is subject to termination by either party, upon
notice, in the event of certain defaults by the other party. The payment of such
royalties may adversely affect the future profitability of the Company.
NO ASSURANCE OF MARKET ACCEPTANCE
Since its inception, the Company has focused its product development
efforts on R&D technologies that the Company believes will be a significant
advance over currently available technologies. The Company has limited
experience in manufacturing and marketing. The new management team that was put
in place in 1996 has experience in manufacturing and marketing; however, with
any new technology there is a risk that the market may not appreciate the
benefits or recognize the potential applications of the technology. Market
acceptance of the Company's products will depend, in part, on the Company's
ability to convince potential customers of the advantages of such products as
compared to competitive products, and will also depend upon the Company's
ability to train manufacturers and others to use the Company's products. There
can be no assurance that the Company will be able to successfully market its
proposed products even if such products perform as anticipated.
5
<PAGE> 4
LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
The Company has no established commercial manufacturing facilities in
the areas in which it is conducting its principal research. Its existing
manufacturing, while related, would not directly support manufacturing of the
proposed new products. The management team has commercial manufacturing and
marketing experience; however, the Company will be required to either employ
additional qualified personnel to establish manufacturing facilities or enter
into appropriate manufacturing agreements with others. There is no assurance
that the Company will be successful in attracting experienced personnel or
financing the cost of establishing commercial manufacturing facilities, if
required, or be capable of producing a high quality product in quantity for sale
at competitive prices.
MARKETING AND SALES UNCERTAINTIES
There can be no assurance that the DFE related products or the
Electronic Billboard and related electronic display products will be
successfully developed or that such products will be commercially successful.
The Company intends to establish and develop a sales organization to promote,
market, and sell its products. This will require significant additional
expenditures, management resources and training time. There can be no assurance
that the Company will be able to establish such a sales organization.
UNPROVEN TECHNOLOGY; NEED FOR SYSTEM INTEGRATION
In order to prove that the Company's technologies work and will produce
a complete product, the Company must ordinarily integrate a number of highly
technical and complicated subsystems into a fully-integrated prototype. There
can be no assurance that the Company will be able to successfully complete the
development work on any of its proposed products or ultimately develop any
marketable products.
DEPENDENCE UPON GOVERNMENT CONTRACTS
A significant portion of the Company's revenues have been derived from
contracts with agencies of the United States government. In the years ended
December 31, 1992, 1993, 1994, 1995, 1996, and 1997, such contracts accounted
for approximately $930,000, $1,147,000, $820,000, $1,009,000, $2,869,000, and
$854,000, respectively, or approximately 99%, 89%, 41%, 33%, 50%, and 24% of the
Company's total revenues for each of those periods. The Company's contracts
involving the United States government are or may be subject to various risks,
including unilateral termination for the convenience of the government,
reduction or modification in the event of changes in the government's
requirements or budgetary constraints, increased or unexpected costs causing
losses or reduced profits under fixed-price contracts or unallowable costs under
cost reimbursement contracts, risks of potential disclosure of the Company's
confidential information to third parties, the failure or inability of the prime
contractor to perform its prime contract in circumstances where the Company is a
subcontractor, the failure of the government to exercise options provided for in
the contracts and the exercise of "march-in" rights by the government. March-in
rights refer to the right of the government or government agency to exercise a
non-exclusive, royalty-free, irrevocable, worldwide license to any technology
developed under contracts funded by the government if the contractor fails to
continue to develop the technology. The programs in which the Company
participates may extend for several years but are normally funded on an annual
basis. There can be no assurance that the government will continue its
commitment to programs to which the Company's development projects are
applicable or that the Company can compete successfully to obtain funding
available pursuant to such programs. The Company currently has no significant
commitment for any government funding beyond December 31, 1997 and intends to
seek only government funding that directly relates to projects associated with
achievement of its strategic objectives. To the extent that the Company is
unable to obtain funding from alternate sources, this will adversely affect the
Company's ability to continue to perform research and development on its
existing and proposed products.
6
<PAGE> 5
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technology. Although the Company has been awarded, has filed
applications for or has been licensed technology under numerous patents, there
can be no assurance as to the degree of protection offered by these patents or
as to the likelihood that pending patents will be issued. There can be no
assurance that competitors in both the United States and foreign countries, many
of which have substantially greater resources and have made substantial
investment in competing technologies, have not already or will not apply for and
obtain patents that will prevent, limit or interfere with the Company's ability
to make and sell its products. There can also be no assurance that competitors
will not intentionally infringe the Company's patents. The defense and
prosecution of patent suits are both costly and time-consuming, even if the
outcome is favorable to the Company. In foreign countries, the expenses
associated with such proceedings can be prohibitive. In addition, there is an
inherent unpredictability in obtaining and enforcing patents in foreign
countries. An adverse outcome in the defense of a patent suit could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease selling its
products. Although third parties have not asserted infringement claims against
the Company, there can be no assurance that third parties will not assert such
claims in the future. Claims that the Company's products infringe on the
proprietary rights of others are more likely to be asserted after commencement
of commercial sales incorporating the Company's technology. The Company also
relies on unpatented proprietary technology, and there can be no assurance that
others may not independently develop the same or similar technology or otherwise
obtain access to the Company's proprietary technology. To protect its rights in
these areas, the Company requires all employees and most consultants, advisors
and collaborators to enter into confidentiality agreements. There can be no
assurance that these agreements will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use, misappropriation or disclosure of such trade secrets,
know-how or other proprietary information. While the Company has attempted to
protect proprietary technology it may develop or acquire and will attempt to
protect future developed proprietary technology through patents, copyrights and
trade secrets, it believes that its success will depend more upon further
innovation and technological expertise.
AVAILABILITY OF MATERIALS AND DEPENDENCE ON SUPPLIERS
It is anticipated that materials to be used by the Company in producing
its future products will be purchased by the Company from outside vendors and,
in certain circumstances, the Company may be required to bear the risk of
material price fluctuations. It is anticipated by the Company's management that
the majority of raw materials to be used in products to be manufactured by the
Company will be readily available. However, there can be no assurance that such
materials will be available in the future, or if available, will be procurable
at prices which will be favorable to the Company.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company will depend in large part on its
ability to attract and retain highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to attract and retain all personnel
necessary for the development of its business. In addition, much of the know-how
and processes developed by the Company reside in its key scientific and
technical personnel and such know-how and processes are not readily transferable
to other scientific and technical personnel. The loss of the services of key
scientific, technical and managerial personnel could have a material adverse
effect on the Company.
7
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