<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, 1999
[ ] 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)
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)
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 3, 1999, the registrant had 53,582,594 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
<TABLE>
<CAPTION>
Part I Financial Information PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--September 30, 1999 and December 31, 1998................................. 3
Consolidated Statements of Operations--Three Months and Nine Months Ended
September 30, 1999 and 1998......................................................................... 4
Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1999 and 1998......................................................................... 5
Notes to Consolidated Financial Statements............................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................... 11
Part II Other Information
Item 1. Legal proceedings.................................................................................. 15
Item 4. Submission of matters to a vote of security holders................................................ 16
Item 5. Other Information.................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
Signatures.......................................................................................................... 18
</TABLE>
2
<PAGE> 3
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 1,427,557 $ 2,636
Accounts receivable, trade .............................................. 547,122 184,020
Inventory ................................................................. 253,521 65,529
Prepaid expenses and other assets ......................................... 713,392 101,508
------------ ------------
Total current assets .................................................... 2,941,592 353,693
Property, plant and equipment, net ........................................ 599,619 160,670
Intangible assets, net .................................................... 1,084,710 9,000
Other assets .............................................................. 7,250 14,500
------------ ------------
Total assets ............................................................ $ 4,633,171 $ 537,863
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 776,830 $ 1,419,604
Notes payable ............................................................. 478,400 1,165,000
Capital lease obligations ................................................. 36,319 --
Accrued liabilities ....................................................... 882,677 584,987
Billings in excess of costs and estimated earnings on uncompleted contracts 168,755 4,770
------------ ------------
Total current liabilities ............................................... 2,342,981 3,174,361
Commitments and contingencies ................................................ -- --
Stockholders' equity (deficit):
Preferred stock, $1.00 par value, 2,000,000 shares authorized; Series A
convertible, 100 shares issued and
outstanding at December 31, 1998 ...................................... -- 100
Series G convertible, 1,200 and 1,600 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively ................ 1,200 1,600
Common stock, $.00l par value, 120,000,000 shares authorized,
53,261,279 and 45,986,617 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively .................. 53,261 45,987
Additional paid-in capital ................................................... 55,190,253 52,019,707
Accumulated deficit .......................................................... (52,954,524) (54,703,892)
------------ ------------
Total stockholders' equity (deficit) .................................... 2,290,190 (2,636,498)
------------ ------------
Total liabilities and stockholders' equity (deficit) .................... $ 4,633,171 $ 537,863
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 4
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .......................................... $ 309,117 $ 123,339 $ 6,108,614 $ 574,005
------------ ------------ ------------ ------------
Cost of sales ..................................... 152,045 110,606 252,136 1,517,008
Selling, general and administrative expenses ...... 752,470 607,245 2,548,106 1,862,467
Research and development .......................... 360,925 326,725 1,120,323 912,417
------------ ------------ ------------ ------------
Operating costs and expenses ................. 1,265,440 1,044,576 3,920,565 4,291,892
Income (loss) from operations ..................... (956,323) (921,237) 2,188,049 (3,717,887)
Other income (expense), net ....................... 152,345 195,568 (438,681) 791,100
------------ ------------ ------------ ------------
Income (loss) before Federal Income Tax ........... (803,978) (725,669) 1,749,368 (2,926,787)
Federal Income Tax ................................ -- -- -- --
------------ ------------ ------------ ------------
Net Income (loss) ................................ (803,978) (725,669) 1,749,368 (2,926,787)
Less preferred stock dividend ..................... (33,221) (125,782) (110,916) (215,107)
------------ ------------ ------------ ------------
Net Income (loss) applicable to common shareholders $ (837,199) $ (851,451) $ 1,638,452 $ (3,141,894)
============ ============ ============ ============
Earnings (loss) per share
Basic ........................................ $ (0.02) $ (0.02) $ 0.03 $ (0.09)
============ ============ ============ ============
Diluted ...................................... $ (0.02) $ (0.02) $ 0.03 $ (0.09)
============ ============ ============ ============
Weighted average shares outstanding
Basic ........................................ 52,452,791 43,175,591 50,358,597 34,616,869
============ ============ ============ ============
Diluted ...................................... 52,452,791 43,175,591 57,194,036 34,616,869
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ 1,749,368 $(2,926,787)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization expense ............................. 78,894 526,901
Gain on disposal of assets ........................................ -- (795,697)
Interest paid in common stock ..................................... 44,852 --
Warrants issued for services ...................................... 66,400 --
Changes in assets and liabilities:
Accounts receivable, trade ...................................... (58,176) 397,661
Escrow funds receivable ......................................... -- 293,915
Inventory ....................................................... (27,235) --
Prepaid expenses and other current assets ....................... (611,884) 27,339
Accounts payable and accrued liabilities ........................ (432,203) 146,055
Billings in excess of costs and estimated earnings on uncompleted
contracts and customer deposits ............................... 84,434 (1,230)
----------- -----------
Total adjustments .......................................... (854,918) 594,944
----------- -----------
Net cash provided by (used in) operating activities ............. 894,450 (2,331,843)
----------- -----------
Cash flows from investing activities:
Capital expenditures .............................................. (49,230) (47,335)
Cash paid for the acquisition of SignBuilders ..................... (425,911) --
Intangible assets ................................................. (648) --
Proceeds from the sale of equipment ............................... -- 1,750,480
Decrease in deposits and other assets ............................. 7,250 --
----------- -----------
Net cash (used in) provided by investing activities ............. (468,539) 1,703,145
----------- -----------
Cash flows from financing activities:
Repayment of notes payable ........................................ (412,058) (930,000)
Bank overdraft .................................................... -- (156,686)
Proceeds from notes payable ....................................... 250,000 1,185,000
Redemption of preferred stock ..................................... -- (332,011)
Proceeds of stock issuance, net of costs .......................... 1,161,068 865,937
----------- -----------
Net cash provided by financing activities ....................... 999,010 632,240
----------- -----------
Net increase in cash and cash equivalents ................................ 1,424,921 3,542
Cash and cash equivalents, beginning of period ........................... 2,636 1,000
----------- -----------
Cash and cash equivalents, end of the period ............................. $ 1,427,557 $ 4,542
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
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. All significant intercompany transactions and balances have been
eliminated in consolidation. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1998, included in the Company's 1998
Annual Report on Form 10-KSB. The consolidated balance sheet information for
December 31, 1998 has been derived from the audited consolidated financial
statements at that date.
2. Supplemental Cash Flow Information
Cash paid for interest for the nine months ended September 30, 1999
and 1998 was approximately $24,484 and $27,319, respectively.
3. Stockholders' Equity
In February 1999, the Company issued 200,000 restricted shares of its
common stock for a total of $110,000 in cash in an exempt offering under
Regulation D of the Securities Act of 1933. The Company also received $508,880
and issued 1,275,337 common shares as the result of the exercise of options and
received $542,188 and issued 730,000 common shares as the result of the
exercise of warrants during the nine months ended September 30, 1999.
In March 1999, all outstanding shares of the Company's Series A
preferred shares were converted into 125,275 shares of its common stock. During
the nine months ended September 30, 1999, 400 shares of the Company's Series G
preferred shares were converted into 480,643 shares of its common stock.
As described in greater detail in Note 4, a total of 4,240,275 shares
of the Company's common stock were issued during the nine months ended
September 30, 1999 in connection with convertible notes payable issued by the
Company.
As described in greater detail in Note 10, the Company issued a total
of 423,132 shares of common stock in connection with its acquisition of the
assets of Sign Builders of America, Inc.
4. Notes Payable
As described in greater detail in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998, the Company had a total of
$1,165,000 in short term notes payable outstanding at December 31, 1998. A
total of $805,000 of these notes were convertible into shares of the Company's
common stock at the option of the lender. During January 1999, the Company
borrowed an additional $200,000 under similar convertible notes and $50,000
under notes payable in cash. During the nine months ended September 30, 1999,
$1,005,000 of the convertible notes, including accrued interest, were converted
into 4,240,275 shares of the Company's common stock. A total of $410,000 of
short-term notes payable, including accrued interest, were repaid in cash.
At December 31, 1998, $100,000 of short-term convertible notes payable
were payable to the Company's Chief Executive Officer. These notes resulted
from the CEO's personal guarantee of a loan made by an investor. The loan was
made to the CEO, who in turn loaned the money to the Company under the same
terms. In April 1999, these notes payable were assigned by the CEO to the
holder of the underlying note payable. The assignee of these notes payable
converted the notes, including accrued interest, into 442,904 shares of the
Company's common stock in April 1999.
6
<PAGE> 7
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 delivered by
Plasmatron 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. The trial was originally
scheduled for August 1999, however the trial date has been postponed by the
court and not been rescheduled. At this time, the outcome cannot be predicted
with any certainty and the potential liability, if any, is unknown. The Company
believes it has meritorious defenses and intends to continue to vigorously
defend this action.
On April 30, 1998, Universal Bonding Company, managing general agent
for Westchester Fire Insurance Company filed a complaint with the Superior
Court of New Jersey, Atlantic county. The Complaint named Richland Glass
Company, Inc., Robert Williams, Joan Williams, Bawa Singh, Narinder Singh,
Gaylord Evey and Doris Evey, all guarantors under the bond, as defendants. All
defendants were former owners, or associated with former owners, of Plasmatron.
Defendant Gaylord Evey filed an answer with the court naming Plasmatron, the
Company, Nicholas Rettino, and the Rettino Insurance agency as third party
defendants and asking for indemnification by the third party defendants. A
separate indemnification claim filed by Richland Glass against the same third
party defendants was consolidated with this case. The amount of this claim is
to be determined at trial; however, any potential amounts due by either the
Company or its subsidiary are dependent upon the finding of liability against
the bonding company in the New York case. No trial date has been set in the New
Jersey case.
Customer Claim at Diamond Tech One, Inc.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor
of Diamond Tech One, Inc. ("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. The Company settled the suit in
April 1999 by paying a portion of the amount owed by Diamond Tech One, Inc. in
exchange for a complete release from all further liability.
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 was allowed to 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
7
<PAGE> 8
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Contingencies
Outlook
As a result of the royalty agreement signed with Canon, Inc. in March
1999, the Company was profitable for the nine months ended September 30, 1999.
It is anticipated that the Company will be profitable for 1999, based on this
royalty agreement, as it continues to fund the development of its DFE
technology and its electronic billboard and related electronic display
products. There can be no assurance that the Company will be profitable in the
future. Full commercial development of the Company's DFE technology and
electronic billboard may require additional funds that may not be available at
terms acceptable to the Company; however, the Company expects to be able to
obtain the funding necessary.
The Company has developed contingency plans to allow it to maintain
operations until the Company is able to sustain itself on its own revenue. The
plan is primarily dependent on raising funds through the licensing of its
technology and through strategic partners and debt offerings. The Company is
also concentrating on raising revenue by seeking customers on a revenue sharing
basis for its electronic billboard product. Management believes that it has the
ability to continue to raise additional funding, if necessary, to enable it to
continue operations until its plan can be completed. At the present time the
Company has existing resources available, including commitments, to sustain
itself for a period of approximately six months from the date of this report at
current spending levels and based on current spending plans.
This plan is based on current development plans, current operating
plans, the current regulatory environment, historical experience in the
development of electronic products and general economic conditions. Changes
could occur which would cause certain assumptions on which this plan is based
to be no longer valid. The Company's plan is primarily dependent on increasing
revenues and raising additional funds through strategic partners and additional
debt offerings. If adequate funds are not available from operations, or
additional sources of financing, the Company may have to eliminate, or reduce
substantially, expenditures for research and development, testing and
production of its products. The Company also has the option of obtaining funds
by assigning, or selling, rights to certain of its technologies or products.
6. Business Developments
In March 1999, the Company signed a license agreement with Canon, Inc.
a large Japanese manufacturer of information and office products. Under the
terms of this agreement, the Company received $5,000,000 on March 31, 1999
representing gross royalties of $5,555,556, less related foreign taxes of
$555,556. In exchange for this payment, the Company granted Canon Inc., a paid
up worldwide non-exclusive license to certain of the Company's patents and
patent applications.
In August 1999, the Company entered into an agreement to sell its
domain name, diamond.com, to a newly formed entity, Diamond.com, LLC. The
Company received a deposit of $75,000 at the time the agreement was signed in
August 1999 and it received an additional $75,000 in October 1999 when the
transfer was officially completed by the registrar. In addition, the Company
received a note payable in the amount of $100,000 payable in six equal monthly
installments from October 1999 to March 2000. The Company's FEPET subsidiary
also received a 10% interest in the newly formed entity. In the event
Diamond.com, LLC is sold, FEPET is guaranteed to receive minimum proceeds equal
to the greater of $750,000 or 10% of the sales price. The guaranteed minimum
increases by $100,000 at the end of each of October, 2000, 2001, and 2002.
In September 1999, the Company acquired substantially all the assets
of, and assumed certain liabilities of SignBuilders of America, Inc. ("Sign
Builders") for a total of $1,800,000. The Company paid $450,000 in cash, issued
a note payable in the amount of $450,000 and issued 423,132 shares of common
stock based on the average share price of $2.127 per share for the five day
period preceding the date of the sale. See note 10 for additional details
related to the acquisition.
8
<PAGE> 9
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Related Party Transactions
As described in greater detail in Item 12 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998, the
Company's subsidiary, Electronic Billboard Technology, Inc. has entered into a
Patent Assignment and Royalty Agreement with Advanced Technology Incubator,
Inc., ("ATI"). ATI is owned by Dr. Zvi Yaniv, the Company's President and Chief
Operating Officer. The assignment is conditioned on an initial payment of
$200,000 from the Company to ATI. The payment was initially due February 15,
1999, but the time for payment was extended to 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 is 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.
In April 1999, the Company paid ATI $12,500 and extended the payment period for
three months until July 15, 1999. In each of July and October 1999, the Company
paid an additional $12,500 to extend the patent until October 15, 1999 and
January 15, 2000, respectively. In January 2000 the Company can either complete
the patent assignment in exchange for a payment of $162,500, extend it for
another three months for a payment of $12,500, or allow the agreement to lapse.
8. Income Taxes
As discussed in more detail in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998, the Company had a net
operating loss available to it for federal income tax purposes as of December
31, 1998. A portion of this net operating loss carryforward was used to offset
the taxable income for the nine month period ended September 30, 1999. If this
net operating loss carryforward had not been available, the Company would have
recorded approximately $625,000 in income tax for the nine month period ended
September 30, 1999.
9. Earnings Per Share
The Company computes Earnings per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic earnings per share is
computed by dividing the net income available to common stockholders for the
period by the weighted average number of common shares outstanding during the
period. Common equivalent shares, composed of incremental common shares
issuable upon the exercise of stock options or warrants, the conversion of
convertible debts securities, or the conversion of convertible preferred stock
are included in diluted earnings per share to the extent such shares are
dilutive.
9
<PAGE> 10
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Acquisition of Sign Builders of America, Inc.
Effective August 31, 1999, the Company purchased substantially all of
the assets and assumed certain liabilities of Sign Builders. The assets
acquired and liabilities assumed were recorded at fair values as a purchase
acquisition and have been accounted for as a non-cash transaction in the
consolidated statement of cash flows. The Company used cash of $450,000,
executed a note payable bearing interest at an annual rate of 6% in the amount
of $450,000, and issued common stock valued at $900,000 to finance the
transaction. The assets acquired and liabilities assumed are as follows:
<TABLE>
<S> <C>
Cash $ 24,089
Accounts receivable 304,926
Inventory 160,757
Property and equipment 446,898
Goodwill and covenant not to compete 1,096,777
Accounts payable (52,931)
Accrued expenses (34,188)
Customer deposits (79,551)
Notes payable (28,829)
Capital leases payable (37,948
-----------
Total Purchase Price $ 1,800,000
===========
</TABLE>
The cash paid of $450,000 is reflected in the consolidated statement of cash
flows net of the $24,089 of cash received in connection with the acquisition of
the assets. The purchase agreement contains certain contingencies related to
the sales of the acquired business during the time period from September 1,
1999 through December 31, 1999 which could result in downward adjustments to
the purchase price. If Sign Builders sales do not equal or exceed $1,124,759
for the period from September 1, 1999 through December 31, 1999, the purchase
price is reduced by 50% of the dollar amount of the shortfall. Any such
downward adjustments would result in change in the total purchase price and
accordingly, the purchase price allocation reflected above and would reduce the
amounts payable under the notes payable issued in connection with the
transaction.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the Sign Builders acquisition had been completed as
of the beginning of the periods presented. The pro forma data give effect to
actual operating results prior to the acquisition and adjustments to interest
expense, goodwill amortization and income taxes. No effect has been given to
cost reductions or synergies in this presentation. These pro forma amounts do
not purport to be indicative of the results that would have actually been
obtained if the acquisition had occurred as of the beginning of the periods
presented or that may be obtained in the future.
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues 690,812 123,339 7,983,855 574,005
Net Income (loss) (813,309) (780,382) 1,821,531 (3,105,685)
Earnings (loss) per common share
Basic $ (0.02) $ (0.02) $ 0.03 $ (0.09)
Diluted $ (0.02) $ (0.02) $ 0.03 $ (0.09)
</TABLE>
10
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
OVERVIEW
During the nine months ended September 30, 1999, the
Company's primary revenues were earned as a result of a license
agreement signed by the Company's Field Emission Picture Element
Technology, Inc. ("FEPET") subsidiary with Canon, Inc. 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.
Effective August 31, 1999, the Company purchased substantially all of
the assets of, and assumed certain liabilities of Sign Builders of
America, Inc. The Company also continued to incur significant product
development costs at Electronic Billboard Technology, Inc. ("EBT") in
connection with the completion of the working model of its electronic
billboard product. As more fully discussed in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998, the
Company expects to incur additional research and development expenses
throughout 1999 in developing the Company's DFE technology and in
refining, commercializing, and installing its electronic billboard
product.
RECENT DEVELOPMENTS
In March 1999, the Company signed a license agreement with
Canon, Inc., a large Japanese manufacturer of information and office
products. Under the terms of this agreement, the Company received
$5,000,000 on March 31, 1999 representing gross royalties of
$5,555,556, less related foreign taxes of $555,556. In exchange for
this payment, the Company granted Canon, Inc. a paid up worldwide
non-exclusive license to substantially all of the Company's patents
and patent applications.
In August 1999, the Company signed an agreement to sell its
domain name, diamond.com, to a newly formed entity, Diamond.com, LLC.
In exchange, the Company received cash of $150,000, a note receivable
in the amount of $100,000 payable in equal monthly installments from
October 1999 through March 2000. In addition, the Company's FEPET
subsidiary received a 10% ownership interest in the newly formed
entity. In the event Diamond.com, LLC is sold, FEPET is guaranteed to
receive minimum proceeds equal to the greater of $750,000 or 10% of
the sales price. The guaranteed minimum increases by $100,000 at the
end of each of October 2000, 2001, and 2002. This sale was completed
and the domain name was transferred to Diamond.com, LLC in October
1999.
In September 1999, the Company acquired substantially all the
assets of, and assumed certain liabilities of Sign Builders of
America, Inc. for a total of $1,800,000. The Company paid $450,000 in
cash, issued a note payable in the amount of $450,000 and issued
423,132 shares of common stock based on the average share price of
$2.127 per share for the five day period preceding the date of the
sale. The purchase price is subject to downward of adjustment if
certain minimum sales levels are not achieved for the period from
September 1, 1999 through December 31, 1999. Any such downward
adjustments will reduce the amount due under the notes payable.
RESULTS OF OPERATIONS
The Company's revenues for the third quarter ended September
30, 1999 totaled $309,117 compared to $123,339 for the third quarter
of 1998. The Company earned $6,108,614 in revenues during the nine
month period ended September 30, 1999, (the "1999 Period") as compared
with $574,005 during the nine month period ended September 30, 1998
(the "1998 Period"). During the 1999 Period, the Company had revenues
of $5,721,846 from its FEPET subsidiary, $228,944 in revenues from its
EBT subsidiary,157,825 from its Sign Builders of America, Inc. ("Sign
Builders") subsidiary. FEPET had revenues of $5,555,556 from licensing
certain of its patents and patent applications. The remaining $166,290
of FEPET revenue was derived from its collaborative efforts with
Diamond Pro-Shop Nomura Co., Ltd. ("DPN"). Virtually all of the EBT
revenues resulted from its royalty agreement with Texas Digital
Systems ("TDS"). The Sign Builders revenues resulted from sale and
construction of signs during the period it was owned by the Company
from September 1, 1999 through September 30, 1999. Revenues in the
1998 Period were substantially all from fabrication and assembly
services at the Company's Diamond Tech One, Inc. ("DTO") subsidiary.
The operating assets of DTO were sold in May 1998.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
The Company had a revenue backlog of $72,423 as of September
30, 1999 at FEPET and approximately $266,000 at SignBuilders. The
backlog at FEPET is the result of funds that have been received from
DPN, but not yet recognized as revenue because the services related to
these funds are to be performed in the future. The backlog at
Sign Builders results from orders received, but not yet completed as of
September 30, 1999. EBT has no revenue backlog at March 31, 1999. For
purposes of calculating its backlog, the Company includes only those
verifiable commitments that exist as of the backlog date. Under the
Company's agreement with TDS, the Company receives a royalty when TDS
ships a product. During the 1999 Period, EBT received approximately
$225,000 in royalties related to the TDS agreement. TDS has an
agreement with a major national fast food chain, whereby the TDS
product is available to franchisees. The Company's agreement with TDS
ends in December 1999.
The Company had no contract research revenues for the either
the 1999 Period or the 1998 Period. At September 30, 1999 and 1998,
the Company had no research backlog of anticipated future revenues
from governmental research contracts. The Company is continuing to
fund research and development of the DFE technology despite the
unavailability of any further reimbursement for these costs. In
October 1999, the Company received a commitment for a government grant
in the amount of approximately $70,000.
For the 1999 Period, the Company's cost of sales were
$252,136, or a gross margin of 96%, as compared with $1,517,008 or a
negative gross margin of 164%, for the 1998 Period. This increased
margin resulted from a combination of factors. First, substantially
all of the Company's revenue in the 1999 Period resulted from royalty
agreements that have minimal ongoing costs associated with the
agreement. In addition, the Company's DTO subsidiary, which accounted
for the majority of sales and costs of sales in the 1998 Period had a
negative margin due to low utilization of its facility which had
relatively high fixed costs associated with its clean rooms.
The Company's general and administrative expenses were
$2,548,106 for the 1999 Period, compared with $1,862,467 for the 1998
Period. The primary reason for the increase was a $500,000 fee paid in
1999 to an unrelated third party in connection with the Canon patent
license agreement that the Company completed in March 1999. In
addition, there were increased professional fees during the 1999
Period as a result of expenses associated with the Company's
acquisition of Sign Builders. Company sponsored research and
development expenses for the 1999 Period were $1,120,323, as compared
to $912,417 for the 1998 Period. This increase in research expense is
primarily the result of the spending on the development of the
Company's Electronic Billboard. The Company expects to continue to
incur expense in 1999 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.
The Company had other expense of $438,681 in the 1999 Period
compared to other income of $791,100 in the 1998 Period. The other
expense in 1999 was primarily the result of foreign taxes of $555,556
associated with the Company's royalty agreement signed with Canon,
Inc. during March 1999, partially offset by the gain recorded on the
sale of the Company's domain name. The other income in the 1998 Period
was primarily the result of gains on the sale of assets associated
with the Company's DTO subsidiary in May 1998.
12
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash
equivalents in the amount of $1,427,557 as compared with cash and cash
equivalents of $2,636 at December 31, 1998. This increase in cash is
primarily the result of the cash provided by operations in the 1999
Period. The cash provided by operations was the result of the
$5,555,556 of licensing revenue received by the Company in connection
with its patent license agreement, partially offset by operating costs
during the 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 $1,161,068 from the
issuance of common stock and $250,000 from the issuance of notes
payable during the nine months ended September 30, 1999. The Company
also repaid $412,058 of notes payable during this period. This
resulted in net cash provided by financing activities of $999,010 for
the 1999 Period. Cash provided by financing activities was $632,240
for the 1998 Period.
Cash provided by operating activities was $894,450 for the
1999 Period compared to cash used in operating activities of
$2,331,843 for the 1998 Period. The increase in the cash provided by
operating activities was primarily the result of the patent license
agreement signed during the 1999 Period.
Cash used in investing activities during the 1999 Period was
$468,539 as compared with cash provided by investing activities of
$1,703,145 for the 1998 Period. The cash provided in the 1998 Period
resulted primarily from sale of the DTO assets, while the cash used in
the 1999 Period was primarily the result of equipment purchases and
the acquisition of substantially all of the assets of Sign Builders.
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. When the Company needs additional funds,
the Company may seek to sell additional debt or equity securities,
secure joint venture partnerships, or sell certain technology rights.
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. Wallace Sanders & Co., independent auditors
of the Company, expressed substantial doubt as to the ability of the
Company to continue as a going concern based on accumulated losses
from operations. See "Independent Auditors' Report." included in the
Company's 1998 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. 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
sustained 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 may be required to cut back some of its
operations and seek additional financing from other sources.
13
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
OUTLOOK
As of September 30, 1999, the Company eliminated its deficit
in both stockholder's equity and working capital. As a result of the
royalty agreement signed in March 1999 with Canon, Inc., it is
anticipated that the Company will be profitable in 1999 as it
continues to fund the development of its DFE technology and its
electronic billboard and related electronic display products. There
can be no assurance that the Company will be profitable in the future.
Full commercial development of the Company's DFE technology and
electronic billboard may require additional funds that may not be
available at terms acceptable to the Company. The Company has a
contingency plan to allow it to maintain operations until the Company
is able to sustain itself on its own revenue. At the present time the
Company has the existing resources, including commitments, to sustain
it for a period of approximately six months from the date of this
report at current spending levels and given current spending plans.
The plan is primarily dependent on raising funds through the licensing
of its technology and through strategic partners and debt offerings.
The Company is also concentrating on raising revenue by seeking
customers for its electronic billboard product. Management believes
that it has the ability to continue to raise additional funding, if
necessary, to enable it to continue operations until its plan can be
completed.
Management's belief that it has the resources to sustain
itself for approximately six months from the date of this report 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 cause available resources to be consumed before such time.
Thereafter, 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, and associated overhead
costs. The Company also has the option of obtaining by assigning or
selling rights to certain of its technologies or products.
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
would 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. The company upgraded its software
during the period ended September 30, 1999 and its internal systems
are now Year 2000 compliant. If such upgrades were not installed on a
timely basis, the Year 2000 Issue could have had 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 delivered by
Plasmatron 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. A trial date had
tentatively been set for August 1999. In June 1999, that trial date was
postponed and has not been rescheduled at the present time. 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.
On April 30, 1998, Universal Bonding Company, managing general agent
for Westchester Fire Insurance Company filed a complaint with the Superior
Court of New Jersey, Atlantic county. The Complaint named Richland Glass
Company, Inc., Robert Williams, Joan Williams, Bawa Singh, Narinder Singh,
Gaylord Evey and Doris Evey, all guarantors under the bond, as defendants. All
defendants were former owners, or associated with former owners, of Plasmatron.
Defendant Gaylord Evey filed an answer with the court naming Plasmatron, the
Company, Nicholas Rettino, and the Rettino Insurance agency as third party
defendants and asking for indemnification by the third party defendants. A
separate indemnification claim filed by Richland Glass against the same third
party defendants was consolidated with this case. The amount of this claim is
to be determined at trial; however, any potential amounts due by either the
Company or its subsidiary are dependent upon the finding of liability against
the bonding company in the New York case. No trial date has been set in the New
Jersey case.
On August 18, 1998, KDF Electronic & Vacuum Services, Inc., a vendor
of Diamond Tech One, Inc. ("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. The Company settled the suit in
April 1999 by paying a portion of the amount owed by Diamond Tech One, Inc. in
exchange for a complete release from all further liability.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On July 26, 1999 the Company held its 1999 Annual Meeting of
Shareholders. The following items were presented to a vote of the holders (the
"Shareholders") of the Company's issued and outstanding Common Stock and Series
G Preferred Stock:
(1) The Shareholders elected David R. Sincox and Dr. Zvi Yaniv to
the Company's Board of Directors as Class I Directors, whose
terms expire at the Company's 2000 Annual Meeting of
Shareholders.
(2) The Shareholders elected Philip C. Shaffer and Nicholas
Martin, Jr. to the Company's Board of Directors as Class II
Directors, whose terms expire at the Company's 2001 Annual
Meeting of Shareholders.
(3) The Shareholders elected Marc W. Eller and Ronald J. Berman
to the Company's Board of Directors as Class III Directors,
whose terms expire at the Company's 2001 Annual Meeting of
Shareholders.
(4) The Shareholders ratified the appointment of Wallace Sanders
& Company as the Company's independent auditors for the 1999
fiscal year.
The number of votes cast for each of the above is summarized in the
table below. (Pursuant to the Company's Amended and Restated Articles of
Incorporation, the holders of the Company's Series G Preferred Stock cast votes
equivalent to the number of shares of the Company's Common Stock into which the
shares of Series G Preferred Stock were convertible as of June 8, 1999. All
numbers in the table below represent shares of Common Stock or the voting
equivalent thereof):
<TABLE>
<CAPTION>
Broker
Item Submitted to Shareholders For Against Abstain Non-Votes Total
---------- ------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Election of David R. Sincox 45,859,692 155,261 0 0 46,014,953
Election of Dr. Zvi Yaniv 45,860,192 154,761 0 0 46,014,953
Election of Philip C. Shaffer 45,859,692 155,261 0 0 46,014,953
Election of Nicholas Martin, Jr. 45,847,442 167,511 0 0 46,014,953
Election of Marc W. Eller 45,860,192 154,761 0 0 46,014,953
Election of Ronald J. Berman 45,860,192 154,761 0 0 46,014,953
Ratification of Wallace Sanders &
Company as auditors 45,900,113 46,699 68,141 0 46,014,953
</TABLE>
16
<PAGE> 17
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-vii of the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998. The Company undertakes no obligation
to publicly update any forward-looking statements, whether as a result of new
information, future events, or otherwise. You are advised, however, to consult
any further disclaimers the Company may make on related subjects in our 10-QSB,
8-K, and 10KSB reports to the SEC.
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 2) dated as of September
3, 1999.
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.
<TABLE>
<S> <C>
SI DIAMOND TECHNOLOGY, INC.
(Registrant)
Date: November 5, 1999 /s/ Marc W. Eller
----------------------------------------------------
Marc W. Eller
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1999 /s/ Douglas P. Baker
----------------------------------------------------
Douglas P. Baker
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
</TABLE>
18
<PAGE> 19
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
11 Computation of (Loss) Per Common Share
13 Forward-Looking Statements and Important Factors Affecting
Future Results (pages ii - vii of the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998,
incorporated by reference into the Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1999).
27 Financial Data Schedule (for SEC use only)
</TABLE>
19
<PAGE> 1
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months ended Sept. 30, Six Months ended Sept. 30,
------------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Computation of income (loss) per common share:
Net income (loss) applicable to common
shareholders $ (817,199) $ (851,451) $ 1,648,452 $(3,141,894)
Weighted average number of common shares 52,452,781 43,175,501 50,358,595 34,616,869
Net income (loss) per common share $ (0.02) $ (0.02) $ 0.03 $ (0.09)
Computation of income (loss) per common
share assuming full dilution:
Net income (loss) applicable to common
stockholders
1,648,452
Plus: Income impact of assumed conversions
Series G 110,916
Interest
21,832
Income available to common stockholders 1,781,200
Weighted average number of common
shares outstanding 50,358,595
Plus incremental shares from dilutive securities
Convertible preferred stock 1,732,303
Convertible notes payable 849,108
Warrants 621,557
Options 3,542,473
Adjusted weighted average number of
common shares outstanding
57,104,036
Net income (loss) per common share 0.03
</TABLE>
No computation of diluted loss per common share is included for the 1998
periods or for the three months ended September 30, 1999 because such
computation results in an antidilutive loss per common share.
<PAGE> 1
EXHIBIT 13
FORWARD-LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
Our disclosure and analysis in this report contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
They use words such as "anticipate", "believe", "expect", "estimate",
"project", "intend", "plan", and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. From time to time, we also
may provide oral or written forward-looking statements in other materials we
release to the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks or
uncertainties. Many factors mentioned in the following discussion - for
example, product development, competition, and the availability of funding -
will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as the result of new information, future events, or
otherwise. You are advised, however, to consult any further disclosures we make
on related subjects in our 10-Q, 8-K, and 10-K reports to the SEC. Also note
that we provide the following cautionary discussion of risks, uncertainties,
and possibly inaccurate assumptions relevant to our business. These are factors
that we think could cause our actual results to differ materially from expected
and historical results. Other factors besides those listed here could also
adversely affect the Company. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
DFE PRODUCT DEVELOPMENT IS IN ITS EARLY STAGES AND THE OUTCOME IS UNCERTAIN
Our Diamond Field Emission ("DFE") technology, and any products that
use this technology, will require significant additional development,
engineering, testing and investment prior to commercialization. Our leading
potential DFE product is a cathode, or light source, intended for use in a
display. If the cathode is successful, a display using this cathode is also a
possibility. The cathode or display may not be successfully developed. If
either of these products is developed, it may not be possible to produce these
products in significant quantities at a price that is competitive with other
similar products.
THERE ARE NO CURRENT DFE PRODUCT REVENUES
We currently receive no revenue from any products related to our DFE
technology. The only revenues that we receive related to our DFE technology are
revenues for continued research on the technology. We may never receive product
revenues from the DFE technology.
OUR SUCCESS IS DEPENDENT ON OUR PRINCIPAL PRODUCTS
Our DFE technology is an emerging technology. Our financial condition
and prospects are dependent upon market acceptance and sales of our DFE
products and our Electronic Billboard and related electronic display products.
Additional R&D needs to be conducted on the DFE products before marketing and
sales efforts can be commenced. Market acceptance of our products will be
dependent upon the perception within the electronics and instrumentation
industries of the quality, reliability, performance, efficiency, breadth of
application and cost-effectiveness of the products. There can be no assurance
that we will be able to gain commercial market acceptance for our products or
develop other products for commercial use.
<PAGE> 2
WE HAVE A HISTORY OF OPERATING LOSSES
We have a history of operating losses and have never had a profitable
quarter or year. We have incurred operating losses as shown below:
<TABLE>
<CAPTION>
Year Ended December 31 Net Loss
---------------------- ------------
<S> <C>
1992 $ (1,630,978)
1993 $ (7,527,677)
1994 $ (7,255,420)
1995 $(14,389,856)
1996 $(13,709,006)
1997 $ (6,320,901)
1998 $ (3,557,548)
</TABLE>
We may continue to incur additional operating losses for an extended
period of time as we continue to develop products. We do, however, expect to be
profitable in 1999. We may not be profitable beyond 1999. Wallace Sanders &
Company, independent auditors of the Company, have expressed substantial doubt
as to our ability to continue as a going concern based on these accumulated
losses from operations. See "Independent Auditors' Report." We have funded our
operations to date primarily through the proceeds from the sale of our equity
securities. In order to continue our transition from a contract research and
development organization to an organization with ongoing operations, we
anticipate that substantial product development expenditures will continue to
be incurred.
WE HAVE FUTURE CAPITAL NEEDS AND THE SOURCE OF THAT FUNDING IS UNCERTAIN
We expect to continue to incur substantial expenses for R&D, product
testing, production, manufacturing, product marketing, and administrative
overhead. The majority of R&D expenditures are for the development of our DFE
technology and our electronic billboard product. Some of our proposed products
may not be available for commercial sale or routine use for a period of one to
two years. Commercialization of our existing and proposed products will require
additional capital in excess of our current sources of funding. A shortage of
capital may prevent us from achieving profitability for an extended period of
time. Because the timing and receipt of revenues from the sale of products will
be tied to the achievement of certain product development, testing,
manufacturing and marketing objectives, which cannot be predicted with
certainty, there may be substantial fluctuations in our results of operations.
If revenues do not increase as rapidly as anticipated, or if product
development and testing and marketing require more funding than anticipated, we
may be required to curtail our expansion and/or seek additional financing from
other sources. We may seek additional financing through the offer of debt or
equity or any combination of the two at any time.
We have developed a plan to allow us to maintain operations until we
are able to sustain ourselves on our own revenue. At the present time we have
existing resources, including royalties receivable, to sustain ourselves for a
period of approximately 18 months from the date of this report at current
spending levels. We believe that we have the ability to continue to raise short
term funding, if necessary, to enable us to continue operations until our plan
can be completed. Our plan is primarily dependent on raising funds through the
licensing of our technology and through strategic partners and debt offerings.
We are also concentrating on raising revenue by seeking customers for our
electronic billboard product, which is currently under development.
Our plan is based on current development plans, current operating
plans, the current regulatory environment, historical experience in the
development of electronic products and general economic conditions. Changes
could occur which would cause certain assumptions on which this plan is based
to be no longer valid. Our plan is primarily dependent on increasing revenues
and raising additional funds through strategic partners and additional debt
offerings. If adequate funds are not available from operations or additional
sources of financing, we may have to eliminate, or reduce substantially,
expenditures for research and development, testing and production of our
products. We may have to obtain funds through arrangements with other entities
that may require us to relinquish rights to certain of our technologies or
products. These actions could materially and adversely affect the Company.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE AND WE MAY NOT
REMAIN COMPETITIVE
<PAGE> 3
The display industry is highly competitive and is characterized by
rapid technological change. Our existing and proposed products will compete
with other existing products and may compete against other developing
technologies. Development by others of new or improved products, processes or
technologies may reduce the size of potential markets for our products. There
is no assurance that other products, processes or technologies will not render
our proposed products obsolete or less competitive. Most of our competitors
have greater financial, managerial, distribution, and technical resources than
us. We will be required to devote substantial financial resources and effort to
further R&D. There can be no assurance that we will successfully differentiate
our products from our competitors' products, or that we will adapt to evolving
markets and technologies, develop new products, or achieve and maintain
technological advantages.
WE HAVE TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies through various license
and assignment agreements with Microelectronics and Computer Technology
Corporation and DiaGasCrown, Inc., we have acquired rights to develop and
commercialize certain research technologies. In certain cases, agreements
require us to pay royalties on the sale of products developed from the licensed
technologies and fees on revenues from sublicensees. We also have to pay for
the costs of filing and prosecuting patent applications. Each agreement is
subject to termination by either party, upon notice, in the event of certain
defaults by the other party. The payment of such royalties may adversely affect
the future profitability of the Company.
OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET
Since our inception, we have focused our product development and R&D
efforts on technologies that we believe will be a significant advance over
currently available technologies. With any new technology, there is a risk that
the market may not appreciate the benefits or recognize the potential
applications of the technology. Market acceptance of our products will depend,
in part, on our ability to convince potential customers of the advantages of
such products as compared to competitive products. It will also depend upon our
ability to train manufacturers and others to use our products. We currently
have a limited marketing organization and there is no assurance that we will be
able to successfully market our proposed products even if such products perform
as anticipated.
WE HAVE LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
We have no established commercial manufacturing facilities in the
areas in which we are conducting our principal research. The management team
has commercial manufacturing and marketing experience in other industries and
with other products in the display industry; however, we have no experience in
manufacturing our proposed products. At the present time, we have no intention
of establishing a manufacturing facility. We are focusing our efforts on
licensing our technology to others for use in their manufacturing processes. We
intend to contract with a qualified manufacturer for assembly services related
to our electronic billboard product, which is currently under development. To
the extent that any of our other products require manufacturing facilities, we
intend to contract with a strategic partner or other qualified manufacturer.
<PAGE> 4
WE MAY NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS
We intend to establish and develop a sales organization to promote,
market, and sell our products. This may require significant additional
expenditures, management resources, and training time. There can be no
assurance that we will be able to establish a successful sales organization.
WE ARE DEPENDENT ON THE AVAILABILITY OF MATERIALS AND SUPPLIERS
We anticipate that the materials to be used in producing our future
products will be purchased from outside vendors. In certain circumstances, we
may be required to bear the risk of material price fluctuations. We anticipate
that the majority of raw materials used in products to be manufactured by the
Company or its strategic partners will be readily available. However, there is
no assurance that these materials will be available in the future, or if
available, will be procurable at prices favorable to the Company or its
strategic partners.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our future success will depend on our ability to attract and retain
highly qualified scientific, technical and managerial personnel. Competition
for such personnel is intense. We may not be able to attract and retain all
personnel necessary for the development of our business. In addition, much of
the know-how and processes developed by the Company reside in our key
scientific and technical personnel. This know-how and these processes are not
readily transferable to other scientific and technical personnel. The loss of
the services of key scientific, technical and managerial personnel could have a
material adverse effect on us.
WE MAY NOT BE ABLE TO PROVIDE SYSTEM INTEGRATION
In order to prove that our technologies work and will produce a
complete product, we must ordinarily integrate a number of highly technical and
complicated subsystems into a fully-integrated prototype. There is no assurance
that we will be able to successfully complete the development work on any of
our proposed products or ultimately develop any marketable products.
WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY
Our ability to compete effectively with other companies will depend on
our ability to maintain the proprietary nature of our technology. Although we
have been awarded, have filed applications for, or have been licensed
technology under numerous patents, the degree of protection offered by these
patents or the likelihood that pending patents will be issued is uncertain.
Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investment in
competing technologies, may already have, or may apply for and obtain patents
that will prevent, limit or interfere with our ability to make and sell our
products. Competitors may also intentionally infringe on our patents. The
defense and prosecution of patent suits is both costly and time-consuming, even
if the outcome is favorable to the Company. In foreign countries, the expenses
associated with such proceedings can be prohibitive. In addition, there is an
inherent unpredictability in obtaining and enforcing patents in foreign
countries. An adverse outcome in the defense of a patent suit could subject us
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require us to cease selling our products.
Although third parties have not asserted infringement claims against us, there
is no assurance that third parties will not assert such claims in the future.
Claims that our products infringe on the proprietary rights of others are more
likely to be asserted after commencement of commercial sales incorporating our
technology.
<PAGE> 5
We also rely on unpatented proprietary technology, and there is no
assurance that others will not independently develop the same or similar
technology, or otherwise obtain access to our proprietary technology. To
protect our rights in these areas, we require all employees and most
consultants, advisors and collaborators to enter into confidentiality
agreements. These agreements may not provide meaningful protection for our
trade secrets, know-how, or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets,
know-how, or other proprietary information. While we have attempted to protect
proprietary technology that we develop or acquire and will continue to attempt
to protect future proprietary technology through patents, copyrights and trade
secrets, we believe that our success will depend upon further innovation and
technological expertise.
OUR REVENUES HAVE BEEN DEPENDENT ON GOVERNMENT CONTRACTS IN THE PAST
In previous years, a significant part of our revenues were derived
from contracts with agencies of the United States government. Following is a
summary of those revenues in recent years:
<TABLE>
<CAPTION>
Revenues from Percentage of
Year Ended December 31 Gov. Contracts Total Revenue
---------------------- -------------- -------------
<S> <C> <C>
1992 $ 930,000 99%
1993 $1,147,000 89%
1994 $ 820,000 41%
1995 $1,009,000 33%
1996 $2,869,000 50%
1997 $ 854,000 24%
1998 $ 0 0%
</TABLE>
We currently have no significant commitment for any future government
funding and do not intend to seek any government funding unless it directly
relates to achievement of our strategic objectives. To the extent that we are
unable to obtain funding from alternate sources, this could adversely affect
our ability to continue to perform research and development on our proposed
products.
Contracts involving the United States government are, or may be,
subject to various risks including, but not limited to, the following:
- - Unilateral termination for the convenience of the government
- - Reduction or modification in the event of changes in the government's
requirements or budgetary constraints
- - Increased or unexpected costs causing losses or reduced profits under
fixed-price contracts or unallowable costs under cost reimbursement
contracts
- - Potential disclosure of our confidential information to third parties
- - The failure or inability of the prime contractor to perform its prime
contract in circumstances where we are a subcontractor
- - The failure of the government to exercise options provided for in the
contracts
- - The right of the government to obtain a non-exclusive, royalty free,
irrevocable world-wide license to technology developed under contracts
funded by the government if we fail to continue to develop the technology
<PAGE> 6
YEAR 2000 ISSUES MAY EXPOSE US TO LIABILITY
Some computers, software, and other equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of the systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900 rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Year 2000 Problem."
The Year 2000 Problem presents us potential risks including, but not limited
to, the following:
- - Products sold to customers - We have had very limited product sales to
customers and believe that all products sold to customers are Year 2000
complaint. Our risk in this area is extremely limited.
- - Internal Infrastructure - We have completed an internal evaluation and
have determined that all of our internal systems will be Year 2000
compliant well prior to the end of 1999. Our risk in this area is
extremely limited.
- - Suppliers/third party relationships - There is no assurance that our
suppliers or other third parties that we rely on will resolve any or all
Year 2000 problems with their systems on a timely basis. Since we have no
significant suppliers of product, we believe our risk is limited in this
area.
- - External Infrastructure - We are dependent on other entities such as
governmental units, utilities, banks, etc. that maintain an external
infrastructure necessary for us to operate. Although we expect that such
entities are addressing and solving their Year 2000 problems, there is no
assurance that these problems will be addressed and solved on a timely
basis.
WE ARE EXPOSED TO MATERIAL LITIGATION
We have been sued by a former customer of Plasmatron for damages that
the former customer claims that it incurred as a result of the alleged failure
of the machine provided by Plasmatron to perform as intended. Various trade
creditors have also filed suit to collect unpaid trade amounts due. We expect
these items to be resolved with no material impact on our financial statements.
If we were to become subject to a judgment that exceeds our ability to pay,
that judgment could have a material impact on our financial condition and could
affect our ability to continue in existence.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,427,557
<SECURITIES> 0
<RECEIVABLES> 553,122
<ALLOWANCES> 6,000
<INVENTORY> 253,521
<CURRENT-ASSETS> 2,941,592
<PP&E> 1,440,788
<DEPRECIATION> 841,169
<TOTAL-ASSETS> 4,633,171
<CURRENT-LIABILITIES> 2,342,981
<BONDS> 0
0
1,200
<COMMON> 53,261
<OTHER-SE> 2,235,729
<TOTAL-LIABILITY-AND-EQUITY> 4,633,171
<SALES> 6,108,614
<TOTAL-REVENUES> 6,108,614
<CGS> 252,136
<TOTAL-COSTS> 3,920,565
<OTHER-EXPENSES> (392,365)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,316
<INCOME-PRETAX> 1,749,368
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,749,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,749,368
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
