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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 March 31, 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 May 10, 1999, the registrant had 50,865,739 shares of common
stock, par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
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<CAPTION>
SI DIAMOND TECHNOLOGY, INC.
INDEX
Part I Financial Information Page
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets--March 31, 1999 and December 31, 1998................................. 3
Consolidated Statements of Operations--Three Months Ended
March 31, 1999 and 1998........................................................................ 4
Consolidated Statements of Cash Flows--Three Months Ended
March 31, 1999 and 1998........................................................................ 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis or Plan of Operation.................................... 9
Part II Other Information
Item 1. Legal Proceedings............................................................................. 13
Item 5. Other Information............................................................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................................................. 14
Signatures .............................................................................................. 15
</TABLE>
2
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<TABLE>
<CAPTION>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 4,116,631 $ 2,636
Accounts receivable, trade......................................................... 82,329 184,020
Inventory.......................................................................... 67,529 65,529
Prepaid expenses and other assets.................................................. 122,488 101,508
------------- --------------
Total current assets............................................................. 4,388,977 353,693
Property, plant and equipment, net................................................. 142,576 160,670
Intangible assets, net............................................................. 7,500 9,000
Other Assets....................................................................... 14,833 14,500
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Total assets..................................................................... $ 4,553,886 $ 537,863
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................... $ 1,428,473 $ 1,419,604
Notes payable...................................................................... 100,000 1,165,000
Accrued liabilities................................................................ 918,701 584,987
Billings in excess of costs and estimated earnings on uncompleted contracts........ 217,263 4,770
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Total current liabilities........................................................ 2,664,437 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, 1,550 and 1,600 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively............................. 1,550 1,600
Common stock, $.00l par value, 120,000,000 shares authorized,
50,228,360 and 45,986,617 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively................................. 50,228 45,987
Additional paid-in capital............................................................ 53,170,579 52,019,707
Accumulated deficit................................................................... (51,332,908) (54,703,892)
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Total stockholders' equity (deficit)............................................. 1,889,449 (2,636,498)
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Total liabilities and stockholders' equity (deficit)............................. $ 4,553,886 $ 537,863
============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
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<S> <C> <C>
Revenues............................................................................ $ 5,657,117 $ 338,220
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Cost of sales....................................................................... 19,431 814,703
Selling, general and administrative
expenses......................................................................... 1,221,288 692,271
Research and development............................................................ 380,849 282,020
------------- --------------
Operating costs and expenses..................................................... 1,621,568 1,788,994
Income (loss) from operations.................................................... 4,035,549 (1,450,774)
Other expense, net.................................................................. 664,565 69,509
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Income (loss) before Federal income tax.......................................... 3,370,984 (1,520,283)
Federal income tax.................................................................. -- --
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Net income (loss)............................................................ $ 3,370,984 $ (1,520,283)
============= ==============
Less preferred stock dividend....................................................... (38,945) (71,063)
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Net income (loss) applicable to common stockholders................................. $ 3,332,039 $ (1,591,346)
============= ==============
Earnings (loss) per share
Basic............................................................................ $ 0.07 $ (0.06)
============= ==============
Diluted.......................................................................... $ 0.06 $ (0.06)
============= ==============
Average shares outstanding
Basic............................................................................ 47,798,022 26,050,306
============= ==============
Diluted.......................................................................... 54,852,952 26,050,306
============= ==============
</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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ 3,370,984 $ (1,520,283)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization expense........................................ 19,594 219,446
Interest paid in common stock................................................ 35,099 --
Changes in assets and liabilities:
Accounts receivable, trade................................................. 101,691 243,978
Inventory.................................................................. (2,000) (13,965)
Prepaid expenses........................................................... (20,980) 12,788
Accounts payable and accrued liabilities................................... 342,583 456,495
Billings in excess of costs and estimated earnings on uncompleted
contracts................................................................ 212,493 (900)
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Total adjustments..................................................... 688,480 917,842
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Net cash provided by (used in) operating activities........................ 4,059,464 (602,441)
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Cash flows from investing activities:
Capital expenditures......................................................... -- (44,035)
Increase in Deposits......................................................... (333) --
Proceeds from the sale of equipment.......................................... -- 15,710
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Net cash used in investing activities...................................... (333) (28,325)
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Cash flows from financing activities:
Repayment of notes payable................................................... (410,000) --
Proceeds from notes payable.................................................. 250,000 580,000
Bank overdraft............................................................... -- (156,686)
Proceeds of stock issuance, net of costs..................................... 214,864 300,000
------------- --------------
Net cash provided by financing activities.................................. 54,864 723,314
------------- --------------
Net increase in cash and cash equivalents........................................... 4,113,995 92,548
Cash and cash equivalents, beginning of period...................................... 2,636 1,000
------------- --------------
Cash and cash equivalents, end of period............................................ $ 4,116,631 $ 93,548
============= ==============
</TABLE>
The accompanying notes are an integral part of the 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, 1998,
included in the Company's 1998 Annual Report on Form 10-KSB. The balance
sheet information for December 31, 1998 has been derived from the audited
financial statements at that date.
2. Supplemental Cash Flow Information:
Cash paid for interest for the three months ended March 31, 1999 was
$19,173. No cash was paid for interest for the three months ended March 31,
1998.
3. Capital Stock.
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 $88,448
and issued 235,865 shares as the result of the exercise of options and
received $16,416 and issued 25,000 shares as the result of the exercise of
warrants during the quarter ended March 31, 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 quarter ended March 31, 1999, 50 shares of the Company's Series G
preferred shares were converted into 58,232 shares of its common stock.
As described in greater detail in Note 4, a total of 3,597,371 shares of
the Company's common stock were issued during the quarter ended March 31,
1998 in connection with convertible notes payable issued by the Company.
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 quarter ended March 31, 1999,
$905,000 of the convertible notes, including accrued interest, were converted
into 3,597,371 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 March 31, 1999, the remaining $100,000 of short-term notes payable
were payable to the Company's Chief Executive Officer and convertible into
shares of the Company's common stock at a rate of $0.25 per share. 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. As of April 30,
1999, the Company had no remaining notes payable.
6
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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. A trial date has tentatively been set for August 1999. At this time,
the outcome can not be predicted with any certainty and the potential
liability, if any, is unknown. The Company believes it has meritorious
defenses and intends to continue to vigorously defend this action.
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.
Outlook
As a result of the royalty agreement signed and payment received in
March 1999, the Company completed its first profitable quarter. 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 a plan 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 for its electronic
billboard product, which is currently under development. Management believes
that it has the ability to continue to raise additional funding, if
necessary, to enable it to continue operations until its plan can be
completed. At the present time the Company has existing cash available to
sustain it for a period of approximately 12 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, 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.
7
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the DGC
display and related diamond technology and license rights to all related
background patents. The Company has committed to perform $2.5 million in
research and development in Russia. According to its internal records, the
Company has spent approximately $2.0 million on this research through
December 31, 1998. Spending in Russia has been halted since 1996 pending
agreement as to the nature and amount of the services to be performed in
Russia for the remaining balance to be spent under the original agreement.
There have been no substantive discussions related to future spending in
Russia since the time that spending was halted.
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. At that time the Company can
either complete the patent assignment in exchange for a payment of $187,500,
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 of approximately $51 million 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 three month
period ended March 31, 1999. If this net operating loss carryforward had not
been available, the Company would have recorded $1,175,000 in income tax for
the three month period ended March 31, 1999.
8
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THREE MONTHS ENDED MARCH 31, 1999 AND 1998:
OVERVIEW
During the quarter ended March 31, 1999, the Company's primary revenues
were earned as a result of royalty and licensing agreements at its
subsidiaries, Field Emission Picture Element Technology ("FEPET") and
Electronic Billboard Technology, Inc. ("EBT"). The Company continued to
incur substantial expenses in support of the development of its proprietary
Diamond Based Field Emission ("DFE") Technology. 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
developing and commercializing its electronic billboard product through its
FEPET and EBT subsidiaries.
RECENT DEVELOPMENTS
In March 1999, the Company signed a license agreement with a large
manufacturer of information and office products. Under the terms of this
agreement, the Company 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 the licensee a paid up
worldwide non-exclusive license to certain of the Company's patents and
patent applications.
During the quarter ended March 31, 1999, the Company converted a total of
$905,000 of short-term notes payable into equity of the Company. This
resulted in the issuance of 3,597,371 shares of the Company's common stock.
RESULTS OF OPERATIONS
The Company's revenues for the first quarter ended March 31, 1999 (the
"1999 Period") totaled $5,657,117 compared to $338,220 for the first
quarter ended March 31, 1998 (the "1998 Period"). During the 1999 Period,
the Company had revenues of $5,576,006 from its FEPET subsidiary and
$81,111 in revenues from its EBT subsidiary. FEPET had revenues of
$5,555,556 from licensing certain of its patents and patent applications.
The remaining $20,450 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"). 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.
The Company had a revenue backlog of $217,363 as of March 31, 1999 at
FEPET. This backlog 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. 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 1998 Period, EBT received
approximately $81,000 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. If all remaining franchisees ordered one unit, it
would result in the Company receiving between $1,700,000 and $2,000,000 in
future royalty payments.
The Company had no contract research revenues for the either the 1999
Period or the 1998 Period. At March 31, 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. The Company's ability to perform the research on its
backlog should not require significant addition of personnel.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
For the 1999 Period, the Company's costs of sales were $19,431, or less
than 1% of revenues, as compared with $814,703, or an excess of 141% over
revenues, 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 had a negative margin of approximately 127% in the 1998 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 Company's general and administrative expenses were $1,221,288 for the
1999 Period, compared with $692,271 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 patent license agreement that the Company
completed during the quarter. Company sponsored research and development
expenses for the 1999 Period were $380,849, as compared to $282,020 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.
Other expense increased from $69,509 in the 1998 Period to $664,565 in the
1999 Period. The primary reason for the increase was the foreign taxes of
$555,556 associated with the Company's royalty agreement signed during the
quarter.
FINANCIAL CONDITION
At March 31, 1999, the Company had cash and cash equivalents in the amount
of $4,116,631 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 $5,000,000 received by the Company in
connection with its patent license agreement, partially offset by other
operating costs during the quarter. 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 $214,864 from the issuance of common stock
and $250,000 from the issuance of notes payable during the quarter ended
March 31, 1999. A portion of these proceeds from financing activities were
used to retire other notes payable that existed as of December 31, 1998.
This resulted in net cash provided by financing activities of $54,864 for
the 1999 Period. Cash provided by financing activities of $723,314 for the
1998 Period was substantially higher because of the issuance of a greater
amount of notes payable during the 1998 Period. No debt repayments were
made during the 1998 Period.
Cash provided by operating activities was $4,059,564 for the 1999 Period
compared to cash used in operating activities of $602,441 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 $333 as
compared with cash used by investing activities of $28,325 for the 1998
Period. The cash used in the 1998 Period resulted primarily from the
purchase of equipment.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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, 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. 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 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 will be required to curtail its operations and
seek additional financing from other sources.
OUTLOOK
As of March 31, 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, 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 developed a plan to
allow it to maintain operations until the Company is able to sustain itself
on its own revenue. At the present time the Company has the existing
resources, including royalties receivable to sustain it for a period of
approximately 12 months from the date of this report at current spending
levels. The plan is primarily dependent on raising funds through the
licensing of its technology and through strategic partners and debt
offerings. The Company is also concentrating on raising revenue by seeking
customers for its electronic billboard product, which is currently under
development. Management believes that it has the ability to continue to
raise additional funding, if necessary, to enable it to continue operations
until its plan can be completed.
This 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 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 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.
Such results could materially and adversely affect the Company.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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. The Company is in the process of purchasing and installing these
upgrades at the present time. 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.
12
<PAGE>
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 has tentatively been set for August 1999. At this time,
the outcome can not be predicted with any certainty and the potential
liability, if any, is unknown. The Company believes it has meritorious
defenses and intends to continue to vigorously defend this action.
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.
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.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits on page 16 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 February 3, 1999
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and 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: May 13, 1999 /s/ Marc W. Eller
------------------------------------------
Marc W. Eller
Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: May 13, 1999 /s/ Douglas P. Baker
------------------------------------------
Douglas P. Baker
Vice President and Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
The following documents are filed as part of this Report:
<S> <C>
EXHIBIT
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 March 31, 1999).
27 Financial Data Schedule
</TABLE>
16
<PAGE>
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Computation of income (loss) per common share:
Net income (loss) applicable to common stockholders $ 3,332,039 $ (1,591,346)
Weighted average number of common shares
outstanding 47,798,022 26,050,306
Net income (loss) per common share $ 0.07 $ (0.06)
Computation of income (loss) per common share
assuming full dilution:
Net income (loss) applicable to common stockholders 3,332,039
Plus: Income impact of assumed conversions
Preferred stock dividends 38,945
Interest on convertible notes 21,834
------------
Income available to common stockholders
assuming conversion 3,392,818
============
Weighted average number of common
Shares outstanding 47,798,022
Plus incremental shares from dilutive securities
Convertible preferred stock 1,959,297
Convertible notes payable 2,435,660
Warrants 246,616
Options 2,413,357
------------
Adjusted weighted average number of
common shares 54,852,952
============
Net income (loss) per common share 0.06
</TABLE>
No computation of diluted loss per common share is included for the 1996 period
because such Computation results in an antidilutive loss per common share.
<PAGE>
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 i
<PAGE>
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.
Page ii
<PAGE>
Our plan is based on current development plans, current operating plans,
the current regulatory environment, historical experience in the development
of electronic products and general economic conditions. Changes could occur
which would cause certain assumptions on which this plan is based to be no
longer valid. Our plan is primarily dependent on increasing revenues and
raising additional funds through strategic partners and additional debt
offerings. If adequate funds are not available from operations or additional
sources of financing, we may have to eliminate, or reduce substantially,
expenditures for research and development, testing and production of our
products. We may have to obtain funds through arrangements with other
entities that may require us to relinquish rights to certain of our
technologies or products. These actions could materially and adversely affect
the Company.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE AND WE MAY NOT
REMAIN COMPETITIVE
The display industry is highly competitive and is characterized by rapid
technological change. Our existing and proposed products will compete with
other existing products and may compete against other developing
technologies. Development by others of new or improved products, processes or
technologies may reduce the size of potential markets for our products. There
is no assurance that other products, processes or technologies will not
render our proposed products obsolete or less competitive. Most of our
competitors have greater financial, managerial, distribution, and technical
resources than us. We will be required to devote substantial financial
resources and effort to further R&D. There can be no assurance that we will
successfully differentiate our products from our competitors' products, or
that we will adapt to evolving markets and technologies, develop new
products, or achieve and maintain technological advantages.
WE HAVE TECHNOLOGIES SUBJECT TO LICENSES
As a licensee of certain research technologies through various license
and assignment agreements with Microelectronics and Computer Technology
Corporation and DiaGasCrown, Inc., we have acquired rights to develop and
commercialize certain research technologies. In certain cases, agreements
require us to pay royalties on the sale of products developed from the
licensed technologies and fees on revenues from sublicensees. We also have to
pay for the costs of filing and prosecuting patent applications. Each
agreement is subject to termination by either party, upon notice, in the
event of certain defaults by the other party. The payment of such royalties
may adversely affect the future profitability of the Company.
OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET
Since our inception, we have focused our product development and R&D
efforts on technologies that we believe will be a significant advance over
currently available technologies. With any new technology, there is a risk
that the market may not appreciate the benefits or recognize the potential
applications of the technology. Market acceptance of our products will
depend, in part, on our ability to convince potential customers of the
advantages of such products as compared to competitive products. It will also
depend upon our ability to train manufacturers and others to use our
products. We currently have a limited marketing organization and there is no
assurance that we will be able to successfully market our proposed products
even if such products perform as anticipated.
WE HAVE LIMITED MANUFACTURING CAPACITY AND EXPERIENCE
We have no established commercial manufacturing facilities in the areas
in which we are conducting our principal research. The management team has
commercial manufacturing and marketing experience in other industries and
with other products in the display industry; however, we have no experience
in manufacturing our proposed products. At the present time, we have no
intention of establishing a manufacturing facility. We are focusing our
efforts on licensing our technology to others for use in their manufacturing
processes. We intend to contract with a qualified manufacturer for assembly
services related to our electronic billboard product, which is currently
under development. To the extent that any of our other products require
manufacturing facilities, we intend to contract with a strategic partner or
other qualified manufacturer.
Page iii
<PAGE>
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 iv
<PAGE>
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 v
<PAGE>
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.
Page vi
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 4,116,631 93,548
<SECURITIES> 0 0
<RECEIVABLES> 82,329 204,064
<ALLOWANCES> 0 0
<INVENTORY> 67,529 13,965
<CURRENT-ASSETS> 4,388,977 378,917
<PP&E> 955,781 4,076,979
<DEPRECIATION> 813,205 2,396,176
<TOTAL-ASSETS> 4,553,886 1,680,803
<CURRENT-LIABILITIES> 2,664,437 4,127,704
<BONDS> 0 0
0 0
1,550 2,903
<COMMON> 50,228 28,738
<OTHER-SE> 1,837,671 (2,086,125)
<TOTAL-LIABILITY-AND-EQUITY> 4,553,886 (2,054,484)
<SALES> 5,657,117 338,220
<TOTAL-REVENUES> 5,657,117 338,220
<CGS> 19,431 814,703
<TOTAL-COSTS> 1,621,568 1,788,994
<OTHER-EXPENSES> 630,439 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 34,126 69,509
<INCOME-PRETAX> 3,370,984 (1,520,283)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 3,370,984 (1,520,283)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,370,984 (1,520,283)
<EPS-PRIMARY> 0.07 (0.06)
<EPS-DILUTED> 0.06 (0.06)
</TABLE>