FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-26380
-----------------------------------------------
PIXTECH, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3214691
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Avenue Olivier Perroy, 13790 Rousset, France
- --------------------------------------------------------------------------------
(Address of principal executiv offices) (Zip code)
011-33-4-42-29-10-00
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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 _
-
The number of shares outstanding of each of the issuer's classes of common stock
as of
Class Outstanding at November 5, 1999
----- -------------------------------
Common Stock, $.01 par value 36,044,284
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<TABLE>
<CAPTION>
PIXTECH, INC.
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TABLE OF CONTENTS
-----------------
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Comprehensive Operations
for the Three Months and Nine Months Ended September 30, 1999
and 1998, and the period from June 18, 1992 through
September 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and 1998, and the period
from June 18, 1992 through September 30, 1999 5
Condensed Consolidated Statement of Stockholders' Equity 6 - 7
Notes to Financial Statements 8 - 12
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 16
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 2 Changes in Securities 18
ITEM 3 Default upon Senior Securities 18
ITEM 4 Submission of matters to a Vote of Security Holders 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
</TABLE>
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<TABLE>
<CAPTION>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents available. . . . . . . . . . . . . . . . . . . . . . $ 2,395 $ 10,166
Restricted cash - short term . . . . . . . . . . . . . . . . . . . . . . . . . 2,560 1,685
Accounts receivable:
Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 456
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 161
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,460 980
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 919 1,354
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,317 14,802
Restricted cash - long term. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,105 8,427
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 27,033 18,826
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 150
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,329 4,643
Other assets - long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 546
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,185 $ 47,394
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities :
Current portion of long term debt. . . . . . . . . . . . . . . . . . . . . . . $ 4,564 $ 3,410
Current portion of capital lease obligations . . . . . . . . . . . . . . . . . 2,528 2,189
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,707 7,514
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,346 1,544
--------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 19,145 14,657
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 2,162
Long term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . 9,648 8,391
Capital lease obligation, less current portion . . . . . . . . . . . . . . . . . 8,056 8,399
Other long term liabilities, less current portion. . . . . . . . . . . . . . . . 47 528
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,240 34,137
=============== ==============
STOCKHOLDERS' EQUITY
Convertible preferred stock Series E, $0.01 par value, authorized
shares-500,000 ; issued and outstanding shares- 297,269 ; 367,269 respectively. 3 4
Common stock, $0.01 par value, authorized shares-60,000,000 ;
issued and outstanding shares-23,567,138 ; 15,000,329 respectively . . . . 236 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 83,524 68,999
Cumulative other comprehensive income . . . . . . . . . . . . . . . . . . . (2,656) (1,740)
Deficit accumulated during development stage . . . . . . . . . . . . . . . . (75,162) (54,156)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 5,945 13,257
--------------- --------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 43,185 $ 47,394
=============== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Period from
Three Months Nine Months June 18, 1992
Ended September 30, Ended September 30, (date of
------------------ -------------------- inception)
through
September
30,
1999 1998 1999 1998 1999
-------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Cooperation and license revenues . . . . . . . . $ -- $ 238 $ -- $ 1,239 $ 26,449
Product sales. . . . . . . . . . . . . . . . . . 71 135 410 222 3,236
Other revenues . . . . . . . . . . . . . . . . . 877 225 3,191 1,768 9,097
-------- -------- --------- ----------
Total revenues . . . . . . . . . . . . . . . 948 598 3,601 3,229 38,782
-------- -------- --------- --------- ----------
Cost of revenues
License fees and royalties . . . . . . . . . . . (82) (80) (254) (281) (1,770)
-------- -------- --------- --------- ----------
Gross margin . . . . . . . . . . . . . . . . . . . 866 518 3,347 2,948 37,012
-------- -------- --------- --------- ----------
Operating expenses
Research and development:
Acquisition of intellectual property rights. . . -- -- -- (125) (4,890)
Other. . . . . . . . . . . . . . . . . . . . . . (7,210) (5,107) (19,413) (13,460) (91,941)
-------- -------- --------- --------- ----------
(7,210) (5,107) (19,413) (13,585) (96,831)
Marketing and sales. . . . . . . . . . . . . . . (338) (371) (1,018) (1,064) (7,625)
Administrative and general expenses. . . . . . . (787) (639) (2,289) (1,862) (15,105)
-------- -------- --------- --------- ----------
(8,335) (6,117) (22,720) (16,511) (119,561)
-------- -------- --------- --------- ----------
Loss from operations . . . . . . . . . . . . . . . (7,469) (5,599) (19,373) (13,563) (82,549)
Other income / (expense)
Interest income / expense. . . . . . . . . . . . (244) (208) (608) (462) (507)
Foreign exchange gains / (losses). . . . . . . . 112 844 (1,025) 1,553 1
-------- -------- --------- --------- ----------
(132) 636 (1,633) 1,091 (506)
Loss before income tax benefit . . . . . . . . . . (7,601) (4,963) (21,006) (12,472) (83,055)
Income tax benefit . . . . . . . . . . . . . . . . -- 1,047 -- 1,047 7,893
-------- -------- --------- --------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . $(7,601) $(3,916) $(21,006) $(11,425) $ (75,162)
======== ======== ========= ========= ==========
Dividends accrued to holders of Preferred Stock (78) -- (377) -- (389)
-------- -------- --------- --------- ----------
Net loss to holders of Common Stock. . . . . . . . $(7,679) $(3,916) $(21,383) $(11,425) $ (75,551)
======== ======== ========= ========= ==========
Net loss per share of Common Stock . . . . . . . $ (0.32) $ (0.26) $ (1.10) $ (0.79)
======== ======== ========= =========
Shares of Common Stock used in
computing net loss per share . . . . . . . . . 23,408 14,778 19,037 14,462
Net loss . . . . . . . . . . . . . . . . . . . . $(7,601) $(3,916) $(21,006) $(11,425) $ (75,162)
Change in other comprehensive income . . . . . . (129) 677 (916) 464 (2,656)
-------- -------- --------- --------- ----------
Comprehensive net loss . . . . . . . . . . . . . $(7,730) $(3,239) $(21,922) $(10,961) $ (77,818)
======== ======== ========= ========= ==========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
PERIOD FROM
JUNE 18, 1992
(DATE OF
INCEPTION)
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net loss $(21,006) $(11,425) $(75,162)
Total adjustments to net loss . . . . . . . . . . . . . . . . . 9,300 5,719 31,446
--------- --------- ---------
Net cash used in operating activities . . . . . . . . . . . . . (11,706) (5,706) (43,716)
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property plant and equipment . . . . . . . . . . . (625) (764) (19,945)
Reclassification of cash available as restricted cash . . . . . 1,299 -- (8,813)
Additions to intangible assets. . . . . . . . . . . . . . . . . -- -- (130)
--------- --------- ---------
Net cash provided by / (used in) investing activities . . . . . 674 (764) (28,888)
FINANCING ACTIVITIES
Stock issued. . . . . . . . . . . . . . . . . . . . . . . . . . 4,179 3 ,981 71,683
Proceeds from long-term borrowings. . . . . . . . . . . . . . . -- -- 16,287
Proceeds from sale leaseback transactions . . . . . . . . . . . -- -- 2,731
Payments for equipment purchases financed by accounts payable . -- -- (3,706)
Repayments of long term borrowing and capital lease obligations (1,481) (3,836) (9,298)
--------- --------- ---------
Net cash provided by financing activities . . . . . . . . . . . 2,698 145 77,697
--------- --------- ---------
Effect of exchange rates on cash. . . . . . . . . . . . . . . . 563 243 (2,698)
--------- --------- ---------
Net (decrease) / increase in cash and cash equivalents. . . . . (7,771) (6,082) 2,395
Cash and cash equivalents beginning of period . . . . . . . . . 10,166 12,428 --
--------- --------- ---------
Cash and cash equivalents end of period . . . . . . . . . . . . $ 2,395 $ 6,346 $ 2,395
========= ========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------------
SERIES A SERIES B SERIES C
-------- -------- --------
SHARES SHARES SHARES
----------- --------- -----------
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT
----------- ------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 18, 1992
Issuance of convertible preferred stock, net of issuance
costs in 1992, 1993 and 1994. . . . . . . . . . . . . . . . 1,557,003 2,368 363,447 589 3,044,846 8,615
Issuance of Common stock in 1992 and 1993
Issuance of Common stock under stock option
plan in 1994 and 1995
Purchase of 28,761 shares of Common stock- Treasury
stock in 1994
Reissuance of 28,761 shares of Common stock
held in treasury in 1995
Common stock issued in initial public offering in 1995, net
of issuance costs -- $1,080
Conversion of preferred stock in 1995. . . . . . . . . . . . (1,557,003) (2,368) (363,447) (589) (3,044,846) (8,615)
Translation adjustment
Net loss from June 18, 1992 (date of inception)
through December 31, 1995
----------- ------- --------- ------- ----------- -------
BALANCE AT DECEMBER 31, 1995
Issuance of Common stock under stock option plan
Issuance of warrants in connection with acquisition of the
assets of Panocorp
Translation adjustment
Net loss-Year ended December 31, 1996
----------- ------- --------- ------- ----------- -------
BALANCE AT DECEMBER 31, 1996
Common stock issued in public offering, net of issuance
costs -- $796
Issuance of Common stock under stock option plan
Translation adjustment
Net loss-Year ended December 31, 1997
----------- ------- --------- ------- ----------- -------
BALANCE AT DECEMBER 31, 1997
Common stock issued in private placements, net of issuance
costs -- $44
Issuance of Series E convertible preferred stock,
net of issuance costs -- $822
Issuance of Common stock under stock option plan
Translation adjustment
Net loss-Year ended December 31, 1998
----------- ------- --------- ------- ----------- -------
BALANCE AT DECEMBER 31, 1998
Common stock issued in private placements (unaudited)
Issuance costs and dividends accrued in relation to
Series E Convertible Preferred stock issued in
December 1998 (unaudited)
Conversion of Series E preferred stock (unaudited)
Issuance of common stock in connection with the
acquisition of certain assets of Micron
Display, net of issuance costs -- $513 (unaudited)
Issuance of warrants (unaudited)
Issuance of common stock following conversion of
Sumitomo convertible loan (unaudited)
Issuance of common stock under stock option
plan (unaudited)
Translation adjustment (unaudited)
Net loss- Nine months ended September 30, 1999 (unaudited)
----------- ------- --------- ------- ----------- -------
BALANCE AT SEPTEMBER 30, 1999 (UNAUDITED) . . . . . . . . . . -- -- -- -- -- --
=========== ======= ========= ======= =========== =======
CONVERTIBLE PREFERRED STOCK
--------------------------------------
SERIES D SERIES E
-------- --------
SHARES SHARES
--------- --------
ISSUED AMOUNT ISSUED AMOUNT
--------- ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 18, 1992
Issuance of convertible preferred stock, net of issuance
costs in 1992, 1993 and 1994. . . . . . . . . . . . . . . . 430,208 1,224
Issuance of Common stock in 1992 and 1993
Issuance of Common stock under stock option
plan in 1994 and 1995
Purchase of 28,761 shares of Common stock- Treasury
stock in 1994
Reissuance of 28,761 shares of Common stock
held in treasury in 1995
Common stock issued in initial public offering in 1995, net
of issuance costs -- $1,080
Conversion of preferred stock in 1995. . . . . . . . . . . . (430,208) (1,224)
Translation adjustment
Net loss from June 18, 1992 (date of inception)
through December 31, 1995
--------- ------- -------- --------
BALANCE AT DECEMBER 31, 1995
Issuance of Common stock under stock option plan
Issuance of warrants in connection with acquisition of the
assets of Panocorp
Translation adjustment
Net loss-Year ended December 31, 1996
--------- ------- -------- --------
BALANCE AT DECEMBER 31, 1996
Common stock issued in public offering, net of issuance
costs -- $796
Issuance of Common stock under stock option plan
Translation adjustment
Net loss-Year ended December 31, 1997
--------- ------- -------- --------
BALANCE AT DECEMBER 31, 1997
Common stock issued in private placements, net of issuance
costs -- $44
Issuance of Series E convertible preferred stock,
net of issuance costs -- $822 . . . . . . . . . . . . . . . 367,269 $ 4
Issuance of Common stock under stock option plan
Translation adjustment
Net loss-Year ended December 31, 1998
--------- ------- -------- --------
BALANCE AT DECEMBER 31, 1998. . . . . . . . . . . . . . . . . 367,269 4
Common stock issued in private placements (unaudited)
Issuance costs and dividends accrued in relation to
Series E Convertible Preferred stock issued in
December 1998 (unaudited)
Conversion of Series E preferred stock (unaudited) . . . . . (70,000) (1)
Issuance of common stock in connection with the
acquisition of certain assets of Micron
Display, net of issuance costs -- $513 (unaudited)
Issuance of warrants (unaudited)
Issuance of common stock following conversion of
Sumitomo convertible loan (unaudited)
Issuance of common stock under stock option
plan (unaudited)
Translation adjustment (unaudited)
Net loss- Nine months ended September 30, 1999 (unaudited)
--------- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 (UNAUDITED) . . . . . . . . . . -- -- 297,269 $ 3
========= ======= ======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
-------------------
DIVIDENDS
-----------
ACCRUED TO
-----------
ADDITIONAL HOLDERS OF OTHER
------------ ----------- ---------------
SHARES PAID-IN PREFERRED COMPREHENSIVE
---------- ------------ ----------- ---------------
ISSUED AMOUNT CAPITAL STOCK INCOME
---------- ------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 18, 1992
Issuance of convertible preferred stock, net of
issuance costs in 1992, 1993 and 1994. . . . . . . . .
Issuance of Common stock in 1992 and 1993 . . . . . . . 132,301 $ 1 $ 96
Issuance of Common stock under stock option
plan in 1994 and 1995 . . . . . . . . . . . . . . . . 84,258 1 31
Purchase of 28,761 shares of Common
stock- Treasury stock in 1994. . . . . . . . . . . .
Reissuance of 28,761 shares of Common stock
held in treasury in 1995. . . . . . . . . . . . . . . 3
Common stock issued in initial public offering
in 1995, net of issuance costs -- $1,080. . . . . . . 2,500,000 25 20,973
Conversion of preferred stock in 1995 . . . . . . . . . 5,395,504 54 12,742
Translation adjustment. . . . . . . . . . . . . . . . . $ 515
Net loss from June 18, 1992 (date of inception)
through December 31, 1995 . . . . . . . . . . . . . . 3
---------- ------- ------------ ----------- ---------------
BALANCE AT DECEMBER 31, 1995 . . . . . . . . . . . . . . 8,112,063 81 33,844 515
Issuance of Common stock under stock option plan. . . . 29,083 0 11
Issuance of warrants in connection with acquisition
of the assets of Panocorp. . . . . . . . . . . . . . 230
Translation adjustment. . . . . . . . . . . . . . . . . (953)
Net loss-Year ended December 31, 1996. . . . . . . . .
---------- ------- ------------ ----------- ---------------
BALANCE AT DECEMBER 31, 1996 . . . . . . . . . . . . . . 8,141,146 81 34,085 (438)
Common stock issued in public offering, net of
issuance costs -- $796. . . . . . . . . . . . . . . 5,570,819 56 22,958
Issuance of Common stock under stock option plan. . . . 50,767 1 25
Translation adjustment. . . . . . . . . . . . . . . . . (1,694)
Net loss-Year ended December 31, 1997 . . . . . . . . .
---------- ------- ------------ ----------- ---------------
BALANCE AT DECEMBER 31, 1997 . . . . . . . . . . . . . . 13,762,732 $ 138 $ 57,067 $ (2,132)
Common stock issued in private placements, net
of issuance costs -- $44. . . . . . . . . . . . . . 1,236,222 12 4,493
Issuance of Series E convertible preferred stock,
net of issuance costs -- $822. . . . . . . . . . . . . 7,449 (12)
Issuance of Common stock under stock option plan. . . . 1,375 1
Translation adjustment. . . . . . . . . . . . . . . . . 392
Net loss-Year ended December 31, 1998 . . . . . . . . .
---------- ------- ------------ ----------- ---------------
BALANCE AT DECEMBER 31, 1998 . . . . . . . . . . . . . . 15,000,329 150 69,011 (12) (1,740)
Common stock issued in private placements (unaudited) . 150,000 1 351
Issuance costs and dividends accrued in relation to
Series E Convertible Preferred stock issued in
December 1998 (unaudited) . . . . . . . . . . . . . . (36) (377)
Conversion of Series E preferred stock (unaudited). . . 1,114,220 11 (10)
Issuance of common stock in connection with the
acquisition of certain assets of Micron Display, net
of issuance costs -- $513 (unaudited) . . . . . . . . 7,133,562 71 14,131
Issuance of warrants (unaudited). . . . . . . . . . . 297
Issuance of common stock following conversion
of Sumitomo convertible loan (unaudited). . . . . . . 100,000 1 144
Issuance of common stock under stock option
plan (unaudited). . . . . . . . . . . . . . . . . . . 69,027 1 26
Translation adjustment (unaudited). . . . . . . . . . . (916)
Net loss- Nine months ended
September 30, 1999 (unaudited). . . . . . . . . . . .
---------- ------- ------------ ----------- ---------------
BALANCE AT SEPTEMBER 30, 1999 (UNAUDITED). . . . . . . . 23,567,138 $ 236 $ 83,913 (389) $ (2,656)
========== ======= ============ =========== ===============
DEFICIT
-------------
ACCUMULATED
-------------
DURING
-------------
DEVELOPMENT TREASURY
------------- ----------
STAGE STOCK TOTAL
------------- ---------- ---------
<S> <C> <C> <C>
BALANCE AT JUNE 18, 1992
Issuance of convertible preferred stock, net of
issuance costs in 1992, 1993 and 1994. . . . . . . . . $ 12,796
Issuance of Common stock in 1992 and 1993 . . . . . . . 97
Issuance of Common stock under stock option
plan in 1994 and 1995 . . . . . . . . . . . . . . . . 32
Purchase of 28,761 shares of Common
stock- Treasury stock in 1994. . . . . . . . . . . . $ (11) (11)
Reissuance of 28,761 shares of Common stock
held in treasury in 1995. . . . . . . . . . . . . . . 11 14
Common stock issued in initial public offering
in 1995, net of issuance costs -- $1,080. . . . . . . 20,998
Conversion of preferred stock in 1995
Translation adjustment. . . . . . . . . . . . . . . . . 515
Net loss from June 18, 1992 (date of inception)
through December 31, 1995 . . . . . . . . . . . . . . $ (9,910) (9,910)
BALANCE AT DECEMBER 31, 1995 . . . . . . . . . . . . . . (9,910) 24,530
Issuance of Common stock under stock option plan. . . . 11
Issuance of warrants in connection with acquisition
of the assets of Panocorp. . . . . . . . . . . . . . 230
Translation adjustment. . . . . . . . . . . . . . . . . (953)
Net loss-Year ended December 31, 1996. . . . . . . . . (11,719) (11,719)
BALANCE AT DECEMBER 31, 1996 . . . . . . . . . . . . . . (21,629) 12,099
Common stock issued in public offering, net of
issuance costs -- $796. . . . . . . . . . . . . . . 23,014
Issuance of Common stock under stock option plan. . . . 25
Translation adjustment. . . . . . . . . . . . . . . . . (1,694)
Net loss-Year ended December 31, 1997 . . . . . . . . . (14,664) (14,664)
BALANCE AT DECEMBER 31, 1997 . . . . . . . . . . . . . . $ (36,293) $ 18,780
Common stock issued in private placements, net
of issuance costs -- $44. . . . . . . . . . . . . . 4,506
Issuance of Series E convertible preferred stock,
net of issuance costs -- $822. . . . . . . . . . . . . 7,440
Issuance of Common stock under stock option plan. . . . 1
Translation adjustment. . . . . . . . . . . . . . . . . 392
Net loss-Year ended December 31, 1998 . . . . . . . . . (17,863) (17,863)
BALANCE AT DECEMBER 31, 1998 . . . . . . . . . . . . . . (54,156) 13,257
Common stock issued in private placements (unaudited) . 352
Issuance costs and dividends accrued in relation to
Series E Convertible Preferred stock issued in
December 1998 (unaudited) . . . . . . . . . . . . . . (413)
Conversion of Series E preferred stock (unaudited). . . --
Issuance of common stock in connection with the
acquisition of certain assets of Micron Display, net
of issuance costs -- $513 (unaudited) . . . . . . . . 14,202
Issuance of warrants (unaudited). . . . . . . . . . . 297
Issuance of common stock following conversion
of Sumitomo convertible loan (unaudited). . . . . . . 145
Issuance of common stock under stock option
plan (unaudited). . . . . . . . . . . . . . . . . . . 27
Translation adjustment (unaudited). . . . . . . . . . . (916)
Net loss- Nine months ended
September 30, 1999 (unaudited). . . . . . . . . . . . (21,006) (21,006)
------------- ---------
BALANCE AT SEPTEMBER 30, 1999 (UNAUDITED). . . . . . . . $ (75,162) -- $ 5,945
============= ========== =========
</TABLE>
See accompanying notes.
7
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE A - BASIS OF PRESENTATION
The financial information as of September 30, 1999, and for the three and nine
months ended September 30, 1999 is unaudited but includes all adjustments, which
are of a normal recurring nature and, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations for
the periods presented. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Operating results of
the three-month and nine-month periods ending September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 (the "1998
Financial Statements"), included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
NOTE B - INVENTORIES
Inventory consists of raw material and spare parts.
NOTE C - RESTRICTED CASH
In August 1997, the Company provided Unipac Optoelectronics Corp. ("Unipac"),
its Asian manufacturing partner, a written bank guaranty in an amount of $10,000
pursuant to the display foundry agreement (the "Foundry Agreement") signed in
May 1997 between the Company and Unipac in order to implement volume production
of Field Emission Displays ("FEDs") at Unipac's manufacturing line. The Company
granted the issuing banks a security interest in its cash and cash equivalents
for the same amount. The pledged cash and cash equivalents have been recorded
as short-term and long-term restricted cash in the balance sheet. Under certain
conditions of the Foundry Agreement, Unipac can sell certain equipment to the
Company. The payment for such equipment will be secured by Unipac through the
exercise of the bank guaranty. Both the amount of the guaranty to Unipac and
the amount of the security interest to the banks are expected to decrease to
match the net amount of equipment leased by Unipac to the Company. These
amounts have started to decrease according to the conditions of the bank
guaranty.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Pursuant to the Foundry Agreement, volume FED production equipment was installed
at Unipac's facility. That equipment was purchased and funded by Unipac, and a
portion of it is leased to PixTech, which amounted to $11,962 as at September
30, 1999. According to Financial Accounting Standard 13, "Accounting for
Leases", PixTech's share of equipment was recorded as assets under the caption
"Property, Plant and Equipment", in the net amount of $9,619 as at September 30,
1999. Depreciation of $489 was recorded during the three-month period ended
September 30, 1999. As of September 30, 1999, the related capital lease
obligation amounted to $10,031, of which $2,149 were recorded as current
portion.
In connection with the Micron Transaction (See "Note E - Micron Transaction"),
production equipment located in Boise, Idaho, was acquired by the Company in May
1999. This acquisition was recorded in the amount of $13,316. The estimated
fair value of net assets acquired in the Micron Transaction was approximately
$9,157 in excess of the cost of net assets acquired. The estimated fair value
of property, plant and equipment of $22,473 was proportionally reduced to the
extent that the fair value of net assets acquired exceeded cost, resulting in
property plant and equipment of $13,316 (See "Note E - Micron Transaction").
8
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE E - MICRON TRANSACTION
On March 19, 1999, the Company entered into a definitive agreement to purchase
certain assets of Micron Technology, Inc. relating to field emission displays
including equipment and other tangible assets, certain contract rights and cash
(the "Micron Transaction"). The Micron Transaction was closed on May 19, 1999
and was accounted for as an acquisition of assets. The accompanying financial
statements reflect the acquisition of assets for a cost of $17,932 and the
assumption of certain liabilities in the amount of $2,958, in consideration of
the issuance of 7,133,562 shares of the Company's Common Stock and a warrant to
purchase 310,000 shares of the Company's Common Stock. (See "Note F -
Stockholders' equity"). The estimated fair value of net assets acquired in the
Micron Transaction was approximately $9,157 in excess of the cost of net assets
acquired. Consequently, the estimated fair value of property, plant and
equipment of $22,473 was proportionally reduced to the extent that the fair
value of net assets acquired exceeded cost resulting in property plant and
equipment of $13,316 In addition, the Company received cash in the amount of
$4,350. Therefore, of the assets acquired for $17,932, $13,316 was reflected
under the caption "Property, Plant and Equipment", and $4,350 under the caption
"Cash available".
The following unaudited pro forma financial disclosure presents the combined
results of operations for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 as if the transaction had been completed at the
beginning of the periods indicated, after giving effect to certain adjustments,
including additional personnel costs and depreciation expenses. This pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the transaction been completed at the beginning of
the periods indicated, and may not be indicative of the future results.
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1998 September 30, 1999
------------------- --------------------
<S> <C> <C>
Net loss. . . . . . . . . . . . . . $ (26,986) $ (24,684)
- ----------------------------------- ------------------- --------------------
Net loss to holders of common stock (26,998) (25,061)
- ----------------------------------- ------------------- --------------------
Net loss per share of common stock. $ (1.25) $ (1.09)
- ----------------------------------- ------------------- --------------------
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY
Common Stock : In consideration of the Micron Transaction, the Company issued
7,133,562 shares of the Company's Common Stock, representing a total amount of
$14,717, and a warrant to purchase 310,000 shares of the Company's Common Stock
at an exercise price of approximately $2.25 per share. The fair value of the
310,000 warrants was computed using the Black-Scholes model and was estimated at
$257.
In August 1999, the Company issued 100,000 shares of the Company's Common Stock
to Sumitomo following the conversion of $145 of a $5,000 convertible note issued
in 1997 to Sumitomo. This note is convertible into shares of the Company's
common stock at a price equal to 80% of the market price of the common stock at
the time of conversion, the market price being determined as the average closing
market price over the twenty consecutive trading days immediately prior to the
notice of conversion.
9
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
On August 9, 1999, the Company entered into a private equity line agreement with
Kingsbridge Capital Ltd (the "Kingsbridge Agreement"). Under the terms of the
equity line, PixTech has the irrevocable right, subject to certain conditions,
to draw up to $15 million cash in exchange for PixTech's common stock, in
increments over a two-year period. Such conditions include limitations
depending on the volume and the market price of PixTech's common stock. The
Company may begin to make draws under the facility upon the registration of the
shares for resale with the Securities and Exchange Commission, which was
declared effective as at September 27, 1999. To date, the Company has not
issued shares in connection with the Kingsbridge Agreement. Shares will be
issued at a 10% discount to the market price at the time of any draw, if the
stock price is at or above $3.00, or at a 12% discount if the stock price is
below $3.00. The Company also issued to Kingsbridge a warrant for 100,000
shares of common stock exercisable until February 6, 2003 at an exercise price
of $2.30 per share.
The Company has an obligation to issue a warrant to purchase 35,000 shares of
our common stock to Needham & Company, Inc., in connection with an agreement for
financial advisory services dated May 11, 1999, which is exercisable at a price
of $2.26 per share and expires on May 10, 2004. The fair value of the 35,000
warrants was estimated at $40 using the Black-Scholes model
Convertible Preferred Stock : In July 1999, 70,000 shares of Series E Preferred
Stock were converted into shares of Common Stock at an average conversion price
of $1.47, resulting in the issuance of 1,114,220 shares of the Company's Common
Stock. As at September 30, 1999 , there were 297,269 shares of Series E
Preferred Stock outstanding. These shares of Series E Preferred Stock were
convertible into shares of Common Stock. As at September 30, 1999, the Series E
Stock, including accrued dividends, would have been convertible into 4,445,863
shares of Common Stock using a conversion price of $1.59, equal to the average
closing price of the Company's Common Stock over the 10 trading days ending
September 29, 1999. Consequently, there were 28,013,001 shares of Common Stock
or equivalent to shares of Common Stock outstanding as at September 30, 1999.
The holders of Series E Preferred Stock issued in December 1998 are entitled to
receive cumulative dividends. Dividends are calculated on a 6% interest basis
per annum on the purchase price paid for the Series E Preferred shares for the
numbers of days that the stock price is above $2.253, on an 8% interest basis
for the numbers of days that the stock price is between $1.127 and $2.253, and
on a 10% interest basis for the numbers of days that the stock price is below
$1.127. During the nine-month period ended September 30, 1999, dividends of
$377 were accrued and recorded against Stockholders' Equity. As of September
30, 1999, the cumulative dividend recorded against Stockholders' Equity amounted
to $389.
On October 15, 1999, PixTech sold 12,427,146 shares of its common stock, $.01
par value, to Unipac Optoelectronics Corporation at a price of $1.60938 per
share (see Note J - Subsequent event). Pursuant to PixTech's certificate of
designation (the "Certificate") filed with the Secretary of State of the State
of Delaware on December 22, 1998 with respect to the Series E Convertible
Preferred Stock, the Common Stock Issue Price (as such term is defined in the
Certificate) shall, for purposes of determining the number of shares into which
the Series E Preferred Stock is convertible only, be $1.60938 instead of
$2.25313. Consequently, the series E stock is generally convertible into our
common stock at a rate equal to the lesser of (a) $1.60938, and (b) the average
closing price of our common stock over the ten trading day ending period ending
on the day immediately preceding the day upon conversion.
10
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(all amounts in thousands except share amounts)
NOTE G - LITIGATION
The Company has received correspondence from Futaba Corporation and its legal
counsel since January 1998 alleging the following : (i) PixTech is infringing
one or more patents owned by Futaba relating to the construction and manufacture
of its displays that are not expressly included under the license agreement
between Futaba and PixTech, (ii) PixTech's use of terms such as "alliance" and
"partners" in describing the nature of its contractual relationships with
Motorola, Raytheon and Futaba in reports filed with the SEC is misleading and
(iii) certain provisions in the Foundry Agreement with Unipac constitute an
impermissible sublicense of Futaba technology. PixTech does not believe such
claims have any merit and has denied each of the allegations in correspondences
with Futaba and its counsel and is in discussions with Futaba concerning their
allegations. Futaba has also claimed that the Company improperly supplied
certain Futaba proprietary information to Unipac, and that Unipac has in turn
disclosed such information to a third party vendor. If Futaba were to prevail
on any of these claims, PixTech may be required, among other adverse
consequences, to modify the construction and manufacture of its displays and
may, as a result, be materially adversely affected.
To the Company's knowledge, there are no other exceptional facts or litigation
that could have or that have in the recent past had any significant impact on
its business, results, financial situation, or assets and liabilities.
NOTE H - COMMITMENTS AND CONTINGENCIES
Operating leases
The Company is obligated under operating lease agreements for equipment and
manufacturing and office facilities. Minimum annual rental commitments under
non cancelable leases at September 30, 1999, are as follows :
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999 . . . . . . . . . . $ 91
2000 .. . . . . . . . . 367
2001 .. . . . . . . . . 335
2002 .. . . . . . . . . 126
2003 .. . . . . . . . . 1
----
Total minimum payments . $920
====
</TABLE>
Capital leases
The Company is obligated under certain sale-leaseback transactions for
equipment used in its pilot production plant. Pursuant to the Display Foundry
Agreement signed in 1997 with Unipac, PixTech's share of volume FEDs production
installed at Unipac's facility is leased to PixTech. According to Financial
Accounting Standard 13, "Accounting for Leases", a capital lease obligation was
recorded which amounted to $10,031 as at September 30, 1999 (See Note
D-Property, Plant and Equipment). Future minimum payments under these
obligations are as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999, DUE FOR THE YEARS ENDING DECEMBER 31,
<S> <C>
1999 .. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,020
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,737
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,426
2003 .. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,285
2004 .. . . . . . . . . . . . . . . . . . . . . . . . . . . 910
--------
Total minimum payments .. . . . . . . . . . . . . . . . . . 12,211
Less amount representing interest . . . . . . . . . . . . . (1,627)
--------
Present value of minimum capitalized lease payments . . . . $10,584
========
</TABLE>
11
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(all amounts in thousands except share amounts)
Long term debt
Long-term debt consists of certain loans payable under which future minimum
payments are as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999, DUE FOR THE YEARS ENDING DECEMBER 31,
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,257
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,094
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . 802
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . 861
-------
Total minimum payments. . . . . . . . . . . . . . . . . . . $14,212
=======
</TABLE>
12
<PAGE>
PIXTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTE I - FINANCIAL POSITION
During the nine months ended September 30, 1999, the Company has continued to
experience losses and has used cash in operating activities, which has adversely
affected the Company's liquidity. At September 30, 1999, the Company had a net
working deficit of $10,828 and a deficit accumulated during the development
stage of $75,162. In October 1999, the Company significantly improved its
liquidity and financial position with the completion of a $20 million equity
private placement with Unipac (see Note I-Subsequent event). The Company
expects that cash available at September 30, 1999 together with the anticipated
proceeds from the Kingsbridge Agreement, from various grants and loans and from
R&D tax credits, will be sufficient to meet its cash requirements until at least
December 31, 2000. The Company intends to continue improving its liquidity and
financial position through capital increases expected to take place in 2000.
There can be however no assurance that additional funds will be available
through capital increases when needed or on terms acceptable to the Company.
NOTE J - SUBSEQUENT EVENT
On October 6, 1999, the Company entered into a Common Stock Purchase Agreement
with Unipac, for a private placement of $20,000 of the Company's common stock.
The private placement closed on October 15, 1999 with the issuance of 12,427,146
shares of Common Stock at approximately $1.61 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Product Sales. The Company recognized product sales of $410,000 in the
nine-month period ended September 30, 1999, as compared to $222,000 in the
nine-month period ended September 30, 1998. In the nine-month periods ended
September 30, 1998 and 1999, product revenues primarily consisted of shipments
of displays sold at volume prices to Zoll Medical, thus reflecting a significant
increase in the number of displays shipped to that customer. Since the last
quarter of 1998, the Company has begun shipping its FED displays manufactured by
its contract manufacturer, Unipac, to its customers in limited quantities.
During the three-month period ended September 30, 1999, unit shipments from
Taiwan represented 7% of total shipments, as compared to 21% during the
three-month period ended June 30, 1999. After the earthquake in Taiwan which
occurred in September 1999, the Company rapidly resumed its production process
of field emission displays. Only minimal damage to the facility and equipment
was reported and there were a limited amount of initial production losses. The
Company expects an increase of product shipments from Taiwan in the last quarter
of 1999.
Other Revenues. Other revenues consist of funding under various public
development contracts and other miscellaneous revenues. The Company recognized
other revenues of $877,000 in the three-month period ended September 30, 1999,
as compared to $225,000 in the three-month period ended September 30, 1998. Of
these revenues, in the three-month period ended September 30, 1999, $716,000 was
related to a development contract awarded to the Company by DARPA (Defense
Advanced Research Projects Agency) in August 1999 and $125,000 to the disposal
of fixed assets. Under the terms of the DARPA contract, the Company will
receive a total amount of approximately $4.7 million to develop a color FED.
The Company recognized other revenues of $3.2 million in the nine-month period
ended September 30, 1999, as compared to $1.8 million in the nine-month period
ended September 30, 1998. Of these revenues, in the nine-month period ended
September 30, 1999, $1.3 million were related to an incentive from French local
authorities awarded in 1994 to the Company to establish its pilot plant in
Montpellier, France, and $961,000 were related to a development contract from
European Union signed in 1997, for which recognition as revenue of the related
contribution, collected mainly in 1997 and in 1998, had been deferred until all
conditions stipulated in the agreement were met. In the nine-month period ended
September 30, 1998, other revenues included $1.2 million related to a
development contract granted in December 1994 from the French Ministry of
Industry to support manufacturing of FEDs.
Other Research and Development Expenses. The Company expensed $7.2 million for
research and development costs during the three-month period ended September 30,
1999, an increase of 41% over the $5.1 million incurred in the three-month
period ended September 30, 1998. These expenses include salaries and associated
expenses for in-house research and development activities conducted both in its
pilot plant and its research and development facility in Boise, Idaho, the cost
of staffing and operating the Company's pilot manufacturing facility and the
cost of supporting the transfer and adaptation of the Company's FED technology
to Unipac, as well as obligations to CEA under the LETI Research Agreement, and
miscellaneous contract consulting fees. This increase primarily reflected the
costs associated with the research and development activities conducted in Boise
following the Micron Transaction signed at the end of May 1999 and the cost of
supporting the transfer of FED manufacturing processes to Unipac. As part of
the acquisition of Micron's Display assets in May 1999, the Company hired 44
employees to work on the production equipment acquired in the Boise facility,
thus reinforcing its FED technology development efforts. In addition, the
development team located in Santa Clara was moved to Boise with an aim to focus
its efforts on the expansion of the large display effort. Research and
development expenses amounted to $19.4 million for the nine-month period ended
September 30, 1999, as compared to $13.6 million for the nine month period ended
September 30, 1998.
Sales and Marketing Expenses. The Company expensed $338,000 for sales and
marketing during the three-month period ended September 30, 1999, as compared to
$371,000 during the three-month period ended September 30, 1998, reflecting a
one-time decrease in communication and advertising expenses. The Company
believes sales and marketing expenses may increase in the future, reflecting the
expansion of the Company's sales and marketing organization both in the United
States and in Europe, in order to achieve a successful commercialization phase
for the Company's products. Sales and marketing expenses remained stable at
$1.0 million during the nine-month period ended September 30, 1999, as compared
to the same period ended September 30, 1998.
General and Administrative Expenses. General and administrative expenses
amounted to $787,000 in the three-month period ended September 30, 1999, an
increase of 23% over general and administrative expenses incurred in the
three-month period ended September 30, 1998, which amounted to $639,000,
reflecting an increase in consulting expenses. General and administrative
expenses amounted to $2.3 million for the nine-month period ended September 30,
1999, as compared to $1.9 million for the nine month period ended September 30,
1998.
13
<PAGE>
Interest Income (Expense), Net. Interest income is comprised of interest on
available and restricted cash. Interest expense is comprised of interest
payable on long-term obligations. Net interest expense was $244,000 in the
three-month period ended September 30, 1999, as compared to $208,000 in the
three-month period ended September 30, 1998, reflecting the decrease in cash
balances and the increase in long-term liabilities. Net interest expense
amounted to $608,000 in the nine-month period ended September 30, 1999, as
compared to $462,000 in the nine-month period ended September 30, 1998.
Currency Fluctuations. Although a significant portion of the Company's
revenues are denominated in U.S. dollars, a substantial portion of the Company's
operating expenses are denominated in Euros. Gains and losses on the conversion
to U.S. dollars of assets and liabilities denominated in Euros may contribute to
fluctuations in the Company's results of operations, which are reported in U.S.
dollars. Most of the Company's capital lease obligation is expressed in
Taiwanese dollars. In the past, fluctuations of the parity of the Taiwanese
dollar versus the Euro caused significant foreign exchange gains or losses and
may continue to do so in the future. The Company recorded net foreign exchange
loss of $1.0 million in the nine-month period ended September 30, 1999, while
the Company recorded net foreign exchange gain of $1.6 million in the nine-month
period ended September 30, 1998. The Company cannot predict the effect of
exchange rate fluctuations on future operating results. To date, the Company
has not undertaken hedging transactions to cover its currency exposure, but it
may do so in the future.
LIQUIDITY AND CAPITAL RESOURCES.
Cash used in operations was $11.7 million for the nine-month period ended
September 30, 1999, as compared to cash used in operations of $5.7 million for
the nine-month period ended September 30, 1998. This increase corresponded to
the following factors : (i) absence of significant cash receipts from revenues
in the nine-month period ended September 30, 1999, and (ii) increase in
operating expenses associated with Taiwan start-up costs and with the funding of
the operations in Boise.
The Company has used $43.7 million in cash to fund its operating activities from
inception through September 30, 1999 and has incurred $28.8 million in capital
expenditures and investments.
Capital expenditures were $625,000 during the nine-month period ended September
30, 1999 as compared to $764,000 during the same period of 1998. These capital
expenditures exclude the assets acquired pursuant to the Micron Transaction as
those assets were acquired in consideration for Common Stock issuance. They
also exclude assets acquired under capital lease obligations. During the
nine-month period ended September 30, 1999, capital expenditures remained
focused on limited capacity expansion in the pilot manufacturing facility.
Implementing volume production at Unipac's manufacturing plant required
significant capital expenditures. Pursuant to the Foundry Agreement, Unipac
funded a $14.7 million capital expenditure for equipment. A portion of that
equipment is leased to PixTech and amounted to $12.0 million as of September 30,
1999. The Company expects that additional capital expenditures will be required
in 1999 and in 2000 to increase capacity at Unipac and to complete
implementation of manufacturing processes, both for monochrome and for color
products.
As at September 30, 1999, restricted cash amounted to $8.7 million and was
related to the security interest granted in 1997 by the Company to Unipac,
pursuant to the Foundry Agreement, in relation to the purchase and funding by
Unipac of volume FEDs production equipment. During the nine-month period ended
September 30, 1999, the written bank guaranty provided by the Company to Unipac
decreased to match the net amount of equipment leased by Unipac to the Company.
The decrease of this bank guaranty corresponded to a simultaneous similar
decrease of the amount of the security interest to the banks, thus resulting in
an $1.3 million increase of the cash available to fund the Company's activities.
Both the amount of this written bank guaranty and the corresponding security
interest to the banks are expected to continue decreasing in the future.
14
<PAGE>
Cash flows generated from financing activities were $2.7 million in the
nine-month period ended September 30, 1999, as compared to $145,000 in the
nine-month period ended September 30, 1998. This net cash flow consisted of
sales of shares of Common Stock, resulting in net proceeds to the Company of
$4.2 million, while long term liabilities decreased by $1.5 million. In
consideration of the 7,133,562 shares of Common Stock and 310,000 warrants
issued pursuant to the Micron Transaction, the Company was granted certain
assets, assumed certain liabilities, and received $4.3 million in cash. Cash
flows generated from financing activities in the nine-month period ended
September 30, 1999 excluded non-cash transactions related to the acquisition of
these assets and the assumption of these liabilities, and resulted in net
proceeds to the Company of $3.8 million (net of issuance costs). Cash flows
generated from financing activities included the sales of shares of Common Stock
in a private placement in January 1999, resulting in net proceeds to the Company
of $352,000, but excluded non-cash transactions related to the conversion of
70,000 series E preferred stock in July 1999 and to the conversion into shares
of common stock of $145,000 of the convertible loan issued to Sumitomo in 1997.
Long term liabilities increased by $2.0 million in the nine-month period ended
September 30, 1999, representing two zero-interest loans granted to the Company
by French local authorities, while the repayments amounted to $3.5 million,
resulting in a net decrease of $1.5 million. Of the repayments which occurred
in the nine-month period ended September 30, 1999, $1.3 million was related to
the first repayment of the $5.0 million straight loan granted to the Company in
1997 by Sumitomo Corporation.
Since its inception, the Company has funded its operations and capital
expenditures primarily from the proceeds of equity financing aggregating $71.7
million and from proceeds aggregating $19.0 million from borrowings and
sale-leaseback transactions.
In 1997 and January 1999, the Company entered into two R&D agreements with
French authorities. Under these agreements, the Company expects to benefit from
zero-interest loans totaling approximately $3.0 million, of which $2.0 million
were received in the nine-month period ended September 30, 1999, and $1.0
million are expected to be received in 2000.
In November 1998, the Company entered into an R&D agreement with French
authorities. Under this agreement, the Company expects to benefit from a grant
totaling approximately $900,000, of which $260,000 was collected in the
three-month period ended September 30, 1999, and $580,000 and $60,000 are
expected to be collected in 2000 and 2001 respectively. The $260,000 amount
collected in the three-month period ended September 30, 1999 was not recognized
as income as all conditions stipulated in the agreement were not met.
In February 1997, the Company entered into an R&D agreement with the
European Union and other European industrial companies. The contribution of the
European Union to the costs incurred by the Company amounts to $961,000 over the
period, of which $736,000 were collected in 1997 and 1998 and $225,000 were
collected in 1999. The total contribution was recognized as income in the
nine-month period ended September 30, 1999, as all conditions stipulated in the
agreement were met.
On August 5, 1999, the Company was awarded a development contract by DARPA
(Defense Advanced Research Projects Agency). Under the terms of the contract,
the Company will receive approximately $4.7 million to develop a color FED. In
the three-month period ended September 30, 1999, $716,000 was recognized as
income under this contract and is expected to be collected in the last quarter
of 1999.
The Company recognized French income tax benefits of $7.9 million since
inception. These income tax benefits represent tax credits for research and
development activities conducted in France, which are paid in cash to the
Company if it is not able to credit them against future income tax liabilities
within three fiscal years. In 1998, the Company collected $2.8 million,
representing R&D tax credits recorded in 1993 and 1994. In April 1999, the
Company collected $3.0 million from R&D tax credit recorded in 1995.
On August 9, 1999, the Company entered into a private equity line agreement with
Kingsbridge Capital Ltd (the "Kingsbridge Agreement"). Under the terms of the
equity line, PixTech has the irrevocable right, subject to certain conditions,
to draw up to $15 million cash in exchange for PixTech's common stock, in
increments over a two-year period. Such conditions include limitations depending
on the volume and the market price of PixTech's common stock. The Company may
begin to make draws under the facility upon the registration of the shares for
resale with the Securities and Exchange Commission, which was declared effective
as at September 27, 1999. To date, the Company has not issued shares in
connection with the Kingsbridge Agreement. Shares will be issued at a 10%
discount to the market price at the time of any draw, if the market is at or
above $3.00, or at a 12% discount if the stock price is below $3.00.
On October 6, 1999, the Company entered into a Common Stock Purchase Agreement
with Unipac, for a private placement of $20 million of PixTech's common stock.
The private placement closed on October 15, 1999, and the Company collected $20
million, in exchange for the issuance of 12,427,146 shares of common stock.
15
<PAGE>
Cash available at September 30, 1999 amounted to $2.4 million as compared to
$10.2 million at December 31, 1998. In October 1999, the Company significantly
improved its liquidity and financial position with the completion of the $20
million equity private placement with Unipac. The Company expects that cash
available at September 30, 1999 together with the anticipated proceeds from the
Kingsbridge Agreement, from the various grants and loans described above and
from R&D tax credits, will be sufficient to meet its cash requirements,
including repayment of the current portion of its long term obligations in the
amount of $7.0 million at September 30, 1999, until at least December 31, 2000.
The Company will require substantial funds to conduct research, development and
testing, to develop and expand commercial-scale manufacturing systems and to
market any resulting products. Changes in technology or a growth of sales beyond
currently anticipated levels will also require further investment. The
Company's capital requirements will depend on many factors, including the rate
at which the Company can develop its products, the market acceptance of such
products, the levels of promotion and advertising required to launch such
products and attain a competitive position in the marketplace and the response
of competitors to the Company's products. There can be no assurance that funds
for these purposes, whether from equity or debt financing, or other sources,
will be available when needed or on terms acceptable to the Company.
YEAR 2000 DISCLOSURE
There is a significant uncertainty regarding the effect of the Year 2000 issue
because computer systems that do not properly recognize date sensitive
information when the year changes to 2000 could generate erroneous data or
altogether fail. The Company has conducted a comprehensive review of its
computer systems and manufacturing equipment to identify applications that could
be affected by the inability of certain computer systems to format and
manipulate data containing dates including the year 2000 and subsequent years.
Based upon that review, we expect to have our systems Year 2000 compliant by the
end of November, 1999. Although management does not expect that costs
associated with modifying existing computer systems and manufacturing equipment
will have a significant impact on its financial position or result of
operations, there can be no assurance that such modifications will be
successfully implemented or that these costs will not be significant. To date,
we estimate that we have expended $60,000 on our Year 2000 program and
anticipated expending an additional $30,000 during the remainder of 1999. In
addition, the Company depends on a limited group of suppliers. There can be no
assurance that those suppliers will not be significantly impacted by the Year
2000 issue. If those suppliers are significantly impacted by the Year 2000
issue, such suppliers may not be able to continue their supply of parts to the
Company without interruption. The Company is in the process of identifying
third party vendors that are non-Year 2000 compliant and of assessing the
following consequences. In particular, the Company requested Unipac, its
Taiwanese manufacturing partner, to assess whether its computer systems and
manufacturing equipment could be affected by the Year 2000 issue and, if so, to
present a contingency plan. Unipac disclosed to PixTech its Year 2000
compliance plan as well as its contingency plan. To implement its large volume
manufacturing strategy, the Company is dependent on Unipac's ability to be
successful in addressing the Year 2000 issue. The Company's continued use of a
vendor which is not Year 2000 compliant or the failure of the Company's own
computer systems or manufacturing equipment to be fully Year 2000 compliant
could materially adversely affect the Company's business, financial position and
results of operations.
16
<PAGE>
STRATEGIC ISSUES AND RISKS
The Company is currently focused on the following activities which it believes
are necessary to the success of its business: (i) successfully implementing the
manufacture of FEDs by its Taiwanese contract manufacturer, Unipac; (ii)
improving its manufacturing processes and yields, both in its pilot plant and at
Unipac; (iii) expanding its customer base and product offering, and (iv)
continuing the development of its FED technology, including the development of
large FED displays. In evaluating its outlook, certain risks and issues filed
as exhibit 99.1 to this 10-Q should be considered.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk exposure inherent to our international operations creates
potential for losses arising from adverse changes in foreign currency exchange
rates. We are exposed to the foreign currency exchange rate risk in two main
areas : (i) a substantial portion of our operating expenses are and are expected
to be denominated in Euros, (ii) most of our capital lease obligation is
expressed in Taiwanese dollars. Fluctuations of the parity of the Taiwanese
dollar versus the Euro or the US dollar may cause significant foreign exchange
gains or losses. In addition, gains and losses arising from the conversion to
U.S. dollars of assets and liabilities denominated in Euros or in Taiwanese
dollars may contribute to fluctuations in our results of operations, which are
reported in U.S. dollars. To date, we have not undertaken hedging transactions
to cover the currency exposure. We are also exposed to interest rate risks in
connection with certain long term debt. We do not, however, enter into market
sensitive instruments for trading purposes. As of September 30, 1999, we had an
$8.6 million loan payable, bearing interest at the prime rate plus 0.75%, of
which $3.8 million is payable in three equal installments every six months, the
next payment being due November 7, 1999. The remaining $4.8 million is due
November 2000 and is convertible, partially or wholly, at the holder's option,
into shares of our common stock at a conversion price equal to 80% of the market
price on the date of conversion, the market price being determined as the
average closing market price over the twenty consecutive trading days
immediately prior to the notice of conversion.
17
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
September 30, 1999
<S> <C> <C>
PART II Other Information
ITEM 1 Legal Proceedings:
Not applicable.
ITEM 2 Changes in Securities:
(a) Not applicable
(b) Not applicable
(c) In July 1999, 70,000 shares of Series E Preferred Stock were converted into shares of
Common Stock, resulting in the issuance of 1,114,220 shares of the Company's Common
Stock. As at October 31, 1999, there were 297,269 shares of Series E Preferred Stock
outstanding.
In August 1999, the Company issued 100,000 shares of the Company's Common Stock
to Sumitomo following the conversion of $145 of a $5,000 convertible note issued in
1997 to Sumitomo.
In August 1999, the Company entered into a private equity line agreement with
Kingsbridge Capital Ltd. Under the terms of the equity line, PixTech has the irrevocable
right, subject to certain conditions, to draw up to $15 million cash in exchange for
PixTech's common stock, in increments over a two-year period. The Company may begin
to make draws under the facility upon the registration of the shares for resale with the
Securities and Exchange Commission, which was declared effective as at September 27,
1999. To date, the Company has not issued shares in connection with the Kingsbridge
Agreement.
In August 1999, the Company issued to Kingsbridge a warrant for 100,000 shares of
common stock exercisable until February 6, 2003 at an exercise price of $2.30 per share.
In October 1999, the Company sold 12,427,146 shares of Common Stock to Unipac
Optoelectronics Corporation, a Taiwanese Corporation, pursuant to Regulation S of the
Securities Act of 1933.
ITEM 3 Defaults upon Senior Securities:
Not applicable.
ITEM 4 Submission of matters to a Vote of Security Holders :
None
ITEM 5 Other Information:
None.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
September 30, 1999
<S> <C> <C>
ITEM 6 Exhibits and reports on Form 8-K:
(a) Exhibits :
10.50 Common Stock Purchase Agreement by and between PixTech, Inc. and Unipac
Optoelectronics Corporation dated as of October 6, 1999. Filed as exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the Commission on October 28, 1999
and incorporated herein by reference.
10.51 Private Equity Line Agreement by and between Kingsbridge Capital Limited and
PixTech, Inc. dated as of August 9, 1999. Filed as exhibit 10.48 to the Company's
Registration Statement on Form S-1 filed with the Commission on September 13, 1999
and incorporated herein by reference.
10.52 Registration Rights Agreement dated as of August 9, 1999 by and between
PixTech, Inc. and Kingsbridge Capital Limited. Filed as exhibit 10.49 to the Company's
Registration Statement on Form S-1 filed with the Commission on September 13, 1999
and incorporated herein by reference.
99.1 Important Factors Regarding Future Results
27. Financial Data Schedule
(b) Reports on Form 8-K :
A report on Form 8-K/A was filed on August 9, 1999, amending the report on Form 8-K
filed on May 27, 1999, to include unaudited pro forma consolidated financial statements
under Item 7 (b). The report on Form 8-K filed on May 27, 1999 reported under Item 2
the closing by the Company of an Acquisition Agreement with Micron Technology, Inc.
A report on Form 8-K was filed on October 28, 1999, reporting under Item 5 the closing
by the Company of a private placement of securities with Unipac Optoelectronics
Corporation.
</TABLE>
19
<PAGE>
PIXTECH, INC.
September 30, 1999
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.
PIXTECH, INC.
Date: November 10, 1999 BY: /s/ Yves Morel
---------------------------------------
Yves Morel
Vice President, Chief Financial Officer
Date: November 10, 1999 BY: /s/ Cathie Tomao
---------------------------------------
Cathie Tomao
Chief Accounting Officer
20
<PAGE>
<TABLE>
<CAPTION>
PIXTECH, INC.
September 30, 1999
EXHIBIT INDEX
<S> <C>
Exhibit No.
- -----------
10.50 Common Stock Purchase Agreement by and between PixTech, Inc. and Unipac
Optoelectronics Corporation dated as of October 6, 1999. Filed as exhibit 2.1
to the Company's Current Report on Form 8-K filed with the Commission on
October 28, 1999 and incorporated herein by reference.
10.51 Private Equity Line Agreement by and between Kingsbridge Capital Limited
and PixTech, Inc. dated as of August 9, 1999. Filed as exhibit 10.48 to the
Company's Registration Statement on Form S-1 filed with the Commission on
September 13, 1999 and incorporated herein by reference.
10.52 Registration Rights Agreement dated as of August 9, 1999 by and between
PixTech, Inc. and Kingsbridge Capital Limited. Filed as exhibit 10.49 to the
Company's Registration Statement on Form S-1 filed with the Commission on
September 13, 1999 and incorporated herein by reference.
27 Financial Data Schedule
99.1 Important Factors Regarding Future Results
</TABLE>
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2395
<SECURITIES> 0
<RECEIVABLES> 983
<ALLOWANCES> 0
<INVENTORY> 1460
<CURRENT-ASSETS> 8317
<PP&E> 27033
<DEPRECIATION> 16545
<TOTAL-ASSETS> 43185
<CURRENT-LIABILITIES> 19145
<BONDS> 0
0
3
<COMMON> 236
<OTHER-SE> 5706
<TOTAL-LIABILITY-AND-EQUITY> 43185
<SALES> 71
<TOTAL-REVENUES> 948
<CGS> 82
<TOTAL-COSTS> 8335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (244)
<INCOME-PRETAX> (7601)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7601)
<EPS-BASIC> .32
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1 IMPORTANT FACTORS REGARDING FUTURE RESULTS
You should carefully consider the following risk factors, in addition to
other publicly available information in deciding whether to invest in PixTech
stock.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE.
We have a history of losses as follows:
<TABLE>
<CAPTION>
Loss to Common
Operating Net Losses Stockholders
--------------------- ---------------
<S> <C> <C>
Nine Months ended September 30, 1999 $ 21.0 million $ 21.3 million
Year Ended December 31, 1998 $ 19.7 million $ 17.9 million
Year Ended December 31, 1997 $ 15.8 million $ 14.7 million
</TABLE>
The losses were due in part to limited revenues and to various
expenditures, including expenditures associated with:
- - research and development activities;
- - pilot production activities; and
- - preparation and start-up of volume manufacturing in Taiwan, at Unipac.
1
<PAGE>
We expect to incur operating losses in the future due primarily to:
- - continuing research and development activities to develop field emission
displays larger than 15 inch in diagonal and color displays;
- - manufacturing start-up costs in Taiwan, and
- - expansion of our sales and marketing activities.
As a result of these losses, as of September 30, 1999, we had an
accumulated deficit of approximately $75.2 million.
Our ability to achieve and maintain profitability is highly dependent upon
the successful commercialization of our monochrome and color displays. We
cannot assure you that we will ever be able to successfully commercialize our
products or that we will ever achieve profitability.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE.
We have incurred negative cash flows from operations since inception, and
have expended, and will need to expend, substantial funds to complete our
planned technology and product development efforts, including:
- - continuous improvement of our manufacturing processes in order to achieve
yields that will lead to an acceptable cost of products;
- - continuous product development activities in order to develop color
displays that meet market requirements and to develop a range of products
offered for sales;
- - continuous research and development activities in order to develop
displays larger than 15 inch in diagonal; and
- - expansion of our marketing, sales and distribution activities.
2
<PAGE>
In addition to the above requirements, we expect that we will require
additional capital either in the form of debt or equity, regardless of whether
and when we reach profitability, for the following activities:
- - working capital;
- - acquisition of manufacturing equipment to expand manufacturing capacity;
and
- - further product development.
Our future capital requirements and the adequacy of our available funds
depend on numerous factors, including:
- - the rate of increase in manufacturing yields by Unipac, in Taiwan;
- - the magnitude, scope and results of our product development efforts;
- - the costs of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
- - competing technological and market developments; and
- - expansion of strategic alliances for the development, manufacturing, sale,
marketing and distribution of our products.
We currently expect to run out of money in December 2000. We have entered
into an equity line agreement with Kingsbridge which provides that we may issue
and sell, from time to time, up to an aggregate of $15,000,000 of our common
stock, subject to the satisfaction of certain conditions. We cannot assure you
that we will meet all of the conditions required to obtain financing under the
equity line agreement. Even if we were able to meet the required conditions, we
may have to raise additional money from other sources in order to continue to
fund our operations.
WE MAY HAVE PROBLEMS RAISING MONEY WE NEED IN THE FUTURE.
In the future, we expect that we will need to obtain additional money from
sources outside our company, as we have done in the past. If we cannot obtain
money when we need it, we may need to reduce our production of products and
development of new products. There is no guarantee that any of the outside
sources will provide us with money when we need it. In addition, even if we are
able to find outside sources which will provide us with money when we need it,
in order to raise this money we may be required to issue securities with better
rights than the rights of our common stock or we may be required to take other
actions which lessen the value of our current common stock, including borrowing
money on terms that are not favorable to us.
Our ability to raise capital from Kingsbridge through the equity line
agreement is subject to the satisfaction of certain conditions at the time of
each sale of common stock to Kingsbridge (none of which is within the control of
Kingsbridge). These conditions include, but are not limited to, the following:
3
<PAGE>
- - the registration statement we have filed to register the common stock
purchased by Kingsbridge under the equity line agreement for resale must be
effective;
- - our representations and warranties to Kingsbridge set forth in the equity
line agreement must be accurate as of the date of each put of our common stock;
- - no statue, rule, regulation, executive order, decree, ruling or injunction
shall be in effect which prohibit or directly and adversely affects any of the
transactions contemplated by the equity line agreement;
- - at the time we put our common stock to Kingsbridge, there cannot have been
any material adverse change in our business, operations, properties, prospects
or financial condition since the date of filing of our most recent report with
the SEC pursuant to the Securities Exchange Act of 1934;
- - the number of shares already held by Kingsbridge, together with those
shares we are proposing to put, cannot exceed 9.9% of the total amount of our
common stock that would be outstanding upon completion of the put;
- - our common stock must meet certain price and trading volume guidelines
including those on Annex A of the equity line agreement; and
- - at least 15 trading days must have elapsed since the date of the last put
notice.
We may not satisfy all of these conditions, and therefore may not be able
to sell shares to Kingsbridge pursuant to the equity line agreement.
DUE TO THE CONVERSION OF SERIES E PREFERRED STOCK, HOLDERS OF COMMON STOCK MAY
FACE SIGNIFICANT DILUTION.
In December 1998, we issued 367,269 shares of series E stock, at a price of
$22.5313 per share, to certain institutional investors. The series E stock is
generally convertible into our common stock at a rate equal to the lesser of (a)
$1.60938, and (b) the average closing price of our common stock over the ten
trading day ending period ending on the day immediately preceding the day upon
conversion. When our common stock price falls below $1.60938, the conversion of
the series E stock may result in the issuance of a significant number of
additional shares of common stock, and may cause significant dilution to current
holders of our common stock. Even before the shares of series E stock are
converted, the holders of the series E stock vote on the basis of the number of
shares of common stock that the series E stock can be converted into.
Therefore, a large drop in our stock price may result in a large amount of
voting control being held by a small number of stockholders.
4
<PAGE>
HOLDERS OF OUR SERIES E PREFERRED STOCK COULD ENGAGE IN SHORT SELLING TO REDUCE
THEIR CONVERSION PRICE.
A decrease in the price of our common stock below the $1.60938 maximum
conversion price could result in the series E preferred stock being convertible
into more shares of common stock. Increased sales volume of our common stock
could put downward pressure on the market price of the shares. This fact could
encourage holders of series E preferred stock to sell short our common stock
prior to conversion of the series E preferred stock, thereby potentially causing
the market price to decline. The selling stockholders could then convert their
series E preferred stock and use the share of common stock received upon
conversion to cover their short position. The selling stockholders could
thereby profit by the decline in the market price of the common stock caused by
their short selling.
QUALIFICATIONS IN THE REPORT OF OUR INDEPENDENT PUBLIC ACCOUNTANTS MAY AFFECT
OUR ABILITY TO CONTINUE AS A GOING CONCERN.
In their audit report on the consolidated financial statements for the year
ended December 31, 1998 contained in our Annual Report and elsewhere in this
prospectus, our independent public accountants, Ernst & Young, included an
explanatory paragraph indicating their view that we would require additional
funding to continue operations which raised substantial doubt about our ability
to continue as a going concern. We cannot assure you that Ernst & Young's
opinion on future financial statements will not include a similar explanatory
paragraph if we are unable to raise sufficient funds or generate sufficient cash
flow from operations to cover the cost of our operations. The continued
inclusion of this paragraph could raise concerns about our ability to fulfill
our contractual obligations, may adversely affect our relationships with third
parties, and we may not be able to complete future financings.
5
<PAGE>
IF WE FAIL TO CONTINUE TO MEET NASDAQ'S LISTING MAINTENANCE REQUIREMENT, NASDAQ
MAY DELIST OUR COMMON STOCK.
There is a possibility that our common stock could be delisted from the
Nasdaq National Market. While our common stock is currently quoted on the
Nasdaq National Market, in order to remain quoted on the Nasdaq National Market,
we must meet certain requirements with respect to:
- - market capitalization (the market value of all outstanding shares of our
common stock);
- - public float (the number of outstanding shares of common stock held by
those not affiliated with us);
- - market value of public float;
- - market price of the common stock;
- - number of market makers;
- - number of shareholders; and
- - net tangible assets (total assets minus total liabilities and intangible
assets).
If the price of our common stock were to fall significantly below our
current trading range, Nasdaq may approach us regarding our continued listing on
the Nasdaq National Market. This situation could result from the rights
contained in the series E stock, which is convertible into common stock at a
conversion price based on a future price of our common stock. If Nasdaq were to
begin delisting proceedings against us, it could reduce the level of liquidity
currently available to our stockholders. With regard to future priced
securities such as our series E stock, Nasdaq is concerned with the following,
among other things:
- - disproportionate voting rights;
- - minimum bid price of a company's common stock; and
- - public interest concerns.
6
<PAGE>
The holders of our series E stock may vote their series E stock as if they
were holders of common stock and are entitled to the number of votes equal to
the number of shares of common stock that the series E stock is convertible into
at the time of voting. If our common stock price were to fall significantly,
this right may be deemed to violate a Nasdaq maintenance requirement due to the
disproportionate voting right, when compared to our common stock, that each
share of series E stock would have.
Moreover, in order to continue to be listed on Nasdaq, the minimum bid
price of our common stock must stay above $1.00. In addition to the
fluctuations of the market in general and our common stock in particular, a
decrease in our common stock price that causes the number of shares of common
stock issuable upon conversion of the series E stock to increase may exert
downward pressure on the price of our common stock. This may drive the minimum
bid price of our common stock below $1.00, thus violating a Nasdaq maintenance
requirement. On October 29, 1999 the minimum bid price on our common stock was
$1.969. Nasdaq has also stated that in egregious situations, future priced
securities, such as our series E stock, may raise public interest concerns that
may result in the delisting of our common stock, if Nasdaq deems the delisting
necessary to prevent fraudulent and manipulative acts and practices.
If our common stock is delisted from the Nasdaq National Market, we could
apply to have the common stock quoted on the Nasdaq SmallCap Market. The Nasdaq
SmallCap Market has a similar set of criteria for initial and continued
quotation. We may not, however, meet the requirements for initial or continued
quotation on the Nasdaq SmallCap Market. If we were not able to meet the
requirements of the Nasdaq SmallCap Market, trading of our common stock could be
conducted on an electronic bulletin board established for securities that do not
meet the Nasdaq SmallCap Market listing requirements, in what is commonly
referred to as the "pink sheets."
7
<PAGE>
In addition, if our common stock were delisted from the Nasdaq National
Market, we may not have the right to obtain funds under the equity line
agreement and it could be more difficult for us to obtain future financing. In
addition, if our common stock is delisted, investors' interest in our common
stock would be reduced, which would materially and adversely affect trading in,
and the price of, our common stock.
BECAUSE WE USE A SINGLE CONTRACT MANUFACTURER TO MANUFACTURE OUR FIELD EMISSION
DISPLAYS WE MAY BE UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF PRODUCTS AND WE MAY
HAVE LESS CONTROL OF PRICE.
Unipac, a liquid crystal display manufacturer and an affiliate of UMC,
Taiwan's second largest Semiconductor manufacturer, is our only contract
manufacturer. In the future, we expect that the products that will be
manufactured at Unipac and sold to our customers will represent the majority of
our revenues. If we are not able to implement our manufacturing plans with
Unipac as soon as we expect, we will not be able to ship medium to large volumes
of field emission display products. Moreover, we will have less control over
the price of the finished products, the timeliness of their delivery and their
reliability and quality. Finally, we will not be able to obtain an acceptable
cost for our field emission displays through high volume manufacturing, as
compared to manufacturing field emission displays at our pilot production
facility. This situation would materially adversely affect our revenues and
costs of producing products.
Expectations about the final timing of this manufacturing plan with Unipac
are forward-looking statements that still involve risks and uncertainties,
including the ease or difficulty of the transfer of the field emission display
technology to Unipac.
Our failure to adequately manage this contract manufacturing relationship
or any delays in the shipment of our products would adversely affect us.
8
<PAGE>
OUR MANUFACTURING PROCESSES ARE STILL UNDER DEVELOPMENT AND WE STILL NEED TO
OBTAIN COMMERCIALLY ACCEPTABLE YIELDS AND ACCEPTABLE COSTS OF PRODUCTS OR OUR
COSTS TO PRODUCE OUR DISPLAYS WILL BE TOO HIGH FOR US TO BE PROFITABLE.
In order for us to succeed, we must continue to develop and produce a range
of products incorporating our field emission display technology. At this time,
we have successfully developed only one monochrome field emission display
product that has been incorporated into a commercial end-user application and
that is being targeted at various markets. We will need to complete the
development of additional field emission display products to enlarge our market
opportunity, and there is no guaranty that we will succeed in these development
efforts. If we do not develop these new products, we will need to rely on sales
of a single product to be successful.
We have used our manufacturing facility in Montpellier, France to develop
manufacturing processes but it has produced only a limited number of products
suitable for sale. Additionally, to date, we have not completed testing of our
manufacturing processes at Unipac. In order for us to be successful, we must
improve our manufacturing yields in order to demonstrate the low cost potential
of our field emission display technology. Even if we succeed in completing the
development and testing of our manufacturing processes, we can not be sure that
the favorable characteristics demonstrated by our current displays manufactured
at our pilot manufacturing facility will be reproduced on a cost-effective basis
in commercial production.
We have, at this time, encountered a number of delays in the development of
our products and processes, and it is possible that further delays will occur.
Any significant delays could cause us to miss certain market opportunities and
could reduce our product sales.
9
<PAGE>
WE NEED TO FURTHER ENHANCE OUR DISPLAY PERFORMANCE OF OUR COLOR DISPLAYS OR OUR
DISPLAYS MAY NEVER BE ACCEPTED BY A LARGE NUMBER OF POTENTIAL CUSTOMERS.
We may never improve the performance characteristics of our color displays
to a level that is commercially acceptable or fail to do so on a timely basis,
either of which could result in potential customers not buying our products.
Key elements of display performance are brightness, power efficiency and
stability over time (life time and reliability). We are seeking to balance
brightness with power efficiency to produce bright and low power-consumption
displays. Display reliability depends on a large number of factors, including
the manufacturing process used in assembling the displays as well as the
characteristics of the materials, including phosphors, used in the display. In
order to produce color displays that will provide the product life and other
characteristics necessary for most applications, we need to make further
advances in our manufacturing processes and in the selection of the materials we
use.
WE MAY NEVER BE ABLE TO FUND THE RESEARCH AND DEVELOPMENT ACTIVITIES NEEDED TO
DEVELOP LARGE DISPLAYS.
We need to conduct a significant research and development effort in order
to bring our current 15-inch field emission display prototype to a stage where
it can be manufactured in volume at an acceptable cost. We may never be able to
fund that effort. Even if we were able to develop a product that could be
manufactured, we would have to locate or build a manufacturing facility to
produce our displays. Currently, Unipac has a facility and equipment to build
small displays only. We may not be able to fund the amount needed in order to
acquire or build a manufacturing facility for our large displays. If we are
unable to develop or manufacture large displays, we will miss large market
opportunities for flat panel displays.
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WE MAY REDUCE RESEARCH OR DEVELOPMENT PROGRAMS TO CONSERVE CAPITAL, INCREASING
OUR DEPENDENCE ON REMAINING PROGRAMS.
We are constantly reviewing and prioritizing programs, and we may reduce
some programs to conserve capital. Any cut would increase our dependence on our
remaining programs, and would increase the risk from those programs to our
business as a whole, which could materially and adversely affect our chances of
obtaining profitability. While we plan to allocate our resources to those
programs with the greatest potential to contribute to a sound financial and
operating position, we may fail to do so.
WE FACE INTENSE COMPETITION AND NEED TO COMPETE WITH CURRENT AND FUTURE
COMPETING TECHNOLOGIES THAT MAY OUTPERFORM OUR DISPLAYS THUS MAKING OUR DISPLAY
UNDESIRABLE.
Our competitors may succeed in developing products that outperform our
displays or that are more cost effective. If our competitors develop products
that offer significant advantages over our products and we are unable to improve
our technology, or develop or acquire alternative technology that is more
competitive, we may not be able to sell our displays.
The market for flat panel display products is currently dominated by
products utilizing liquid crystal display technology. Certain liquid crystal
display manufacturers, such as Canon, Sharp, NEC, Hitachi, Samsung and Toshiba
have substantially greater name recognition and financial, technological,
marketing and other resources than us. Presently liquid crystal displays are in
short demand and independent forecasts predict that this may continue over a
certain period of time. However, liquid crystal display manufacturers have made,
and continue to make, substantial investments in increasing capacity as well as
product performance. We believe that, over time, this, combined with new
competitors entering the flat panel displays market, may cause over-supply
conditions and may have the effect of reducing average selling prices of flat
panel displays. In order to effectively compete, we could be required to
increase the performance of our products or reduce prices. In the event of
price reductions, we will not be able to maintain gross margins unless we reduce
our cost of sales.
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There are a number of domestic and international companies developing and
marketing display devices using alternative technologies to liquid crystal
display technology, such as vacuum fluorescent displays, electro-luminescent
panels and plasma panels. Additionally, some of the basic field emission
display technology is in the public domain and, as a result, we have a number of
potential direct competitors developing field emission displays or developing
fundamental field emission displays technology, including Canon, Futaba,
Motorola, Sony, Fujitsu, Samsung and Toshiba, as well as smaller companies,
including Candescent, and Silicon Diamond Technology. Although we own the
rights to significant technological advances in field emission display
technology, potential competitors may have developed or may soon develop
comparable or superior field emission display technology. Many of the
developers of alternative flat panel display and competing field emission
display technologies have substantially greater name recognition and financial,
research and development, manufacturing and marketing resources than us, and
have made and continue to make substantial investments in improving their
technologies and manufacturing processes.
BECAUSE POTENTIAL CUSTOMERS MAY NOT ACCEPT OUR PRODUCTS WE MAY NEVER SELL THE
NUMBER OF DISPLAYS REQUIRED TO MAKE OUR BUSINESS PROFITABLE.
We are uncertain about the potential size and timing of our target market
opportunities. We anticipate marketing our displays to original equipment
manufacturer customers, which are customers that will incorporate our product
into their final product. It is possible that demand for any particular product
by these customers will not last or that new markets will fail to develop as we
expect, or at all. Our ability to have consumer products sold that incorporate
our displays will depend, in part, on the following factors:
- - whether original equipment manufacturers select our products for
incorporation into their products;
- - the successful introduction of such products by the original equipment
manufacturers; and
- - the successful commercialization of products developed by parties
incorporating our products.
It takes a long time for any product to achieve market success, and any
success is never certain. The introduction of new products is often delayed by
the need to have the products selected by an original equipment manufacturer and
designed into the original equipment manufacturer's products. For certain
products, the delay attributable to a manufacturer's design cycle may be a year
or longer. Factors affecting the length of these delays include:
- - the size of the manufacturer;
- - the type of application; and
- - whether the displays are being designed into new products or fitted into
existing applications.
If volume production of such products is delayed for any reason, our
competitors may introduce new technologies or refine existing technologies which
could diminish the commercial acceptance of our products.
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WE HAVE LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES.
We have limited internal sales, marketing and distribution experience and
capabilities. Until recently, we were a development stage company with no
products or product sales. Consequently, we had not established significant
sales, marketing, or distribution operations within our company. Recently,
however, we have begun sales of our displays to customers. We will not be able
to develop significant revenues from the sales of our products unless we can
attract and retain highly qualified employees to market and oversee the
distribution of our products. If we are unable to establish and maintain
significant sales, marketing and distribution efforts, either internally or
through arrangements with third parties, we may be adversely affected.
FUTURE COOPERATION AND LICENSE REVENUES MAY DECREASE.
From 1993 to 1995, we entered into various cooperation and license
agreements under which we were paid money for achieving certain milestones. At
this time, we have received all expected revenues associated with these
milestone payments. If we fail to enter into new royalty-bearing licenses or
cooperation agreements, we could be adversely affected as we have relied on
these revenues in the past and revenues from product sales may not increase as
we expect. For instance, we must execute further cooperation and/or license
agreements with third parties that are not existing licensees before we will
receive any future cooperation or license revenues. Should we successfully
enter such agreements, a portion of the revenues from these contracts may need
to be shared with our existing licensees. Cooperation and license revenues
accounted for approximately 34% of our revenues in 1998.
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In addition, we will only recognize royalty revenues under cooperation and
license agreements with existing or future licenses if any of our licensees
incorporate licensed technology into products that are successfully
commercialized. We can not guarantee that any of our licensees will
successfully develop or commercialize any field emission display products. We
believe that one of our existing licensees, Raytheon Company, may have suspended
our internal program to develop field emission displays.
WE MAY HAVE DIFFICULTY PROTECTING PATENTS AND OTHER PROPRIETARY RIGHTS TO OUR
TECHNOLOGY AND MAY THEREFORE BE UNABLE TO PREVENT COMPETITORS FROM USING OUR
TECHNOLOGY.
We have been granted, have filed applications for, and have been licensed
under a number of patents in the United States and other countries. We rely on
these patents and licenses for an advantage in our industry and any infringement
of these patents and licenses will lessen our advantage. However, rights
granted under patents may not provide us with any competitive advantage over
competitors with similar technology, and any issued patents may not contain
claims sufficiently broad to protect against these competitors.
We have not conducted an independent review of patents issued to other
companies. We cannot be certain that we were the first creator of inventions
covered by pending patent applications or the first to file patent applications
on such inventions because patent applications in the United States are
maintained in secrecy until patents issue and the publication of discoveries in
scientific or patent literature tends to lag behind actual discoveries by
several months. Competitors in both the United States and other countries may
have applied for or obtained, or may in the future apply for and obtain, patents
that will prevent, limit or interfere with our ability to make and sell our
products.
We also rely on unpatented, proprietary technology which is significant to
the development and manufacture of our displays. Others may independently
develop the same or similar technology or obtain access to our unpatented
technology. If we are unable to maintain the proprietary nature of our
technologies, our competitors may develop products using our technology.
Moreover, claims that our products infringe on the proprietary rights of
others are more likely to be asserted after we begin commercial sales of
products using our technology. It is possible that competitors will infringe
our patents. Even the successful defense and prosecution of patent suits is
costly and time consuming. The adverse outcome of a patent suit could subject
us to significant liabilities to other parties, require disputed rights to be
licensed from third parties or require us to stop selling our products.
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We have received correspondence from Futaba Corporation and its legal
counsel beginning in February 1998 alleging the following:
- - we are infringing one or more patents owned by Futaba relating to the
construction and manufacture of our displays that are not expressly included
under the license agreement between us and Futaba;
- - our use of terms such as "alliance" and "partners" in describing the
nature of our contractual relationships with Motorola, Raytheon and Futaba in
reports filed with the SEC is misleading; and
- - certain provisions in our agreement with Unipac constitute an
impermissible sublicense of Futaba technology.
We do not believe such claims have any merit and have denied each of the
allegations in correspondences with Futaba and our counsel. Futaba has also
claimed that we improperly supplied certain Futaba proprietary information to
Unipac, and that Unipac has, in turn, disclosed such information to a third
party vendor. If Futaba prevails on any of these claims, we may be required to
modify the construction and manufacture of our displays and may, as a result, be
materially adversely affected.
BECAUSE A LARGE PERCENTAGE OF OUR NET ASSETS AND OUR COSTS IS EXPRESSED IN
EUROS, CURRENCY FLUCTUATIONS MAY CAUSE GAINS OR LOSSES.
A large percentage of our net assets and of our costs is expressed in
Euros, but our financial statements are stated in U.S. dollars. In 1998, 50% of
our assets and 60% of our costs were expressed in Euros. In the nine month
period ended September 30, 1999, 20% of our assets and 48% of our costs were
expressed in Euros. Fluctuations of the value of the U.S. dollar versus the
Euro may cause significant gains or losses. Most of our capital lease
obligation is expressed in Taiwanese dollars and thus fluctuations of the value
of the Taiwanese dollar versus the Euro may also cause significant foreign
exchange gains or losses.
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CERTAIN ANTI-TAKEOVER PROVISIONS THAT WE HAVE INSTITUTED MAY LIMIT OUR STOCK
PRICE.
Certain provisions of our restated certificate of incorporation and by-laws
may discourage a third party from offering to purchase the company and may also
adversely affect the market price of our common stock. These provisions,
therefore, inhibit actions that would result in a change in control of the
company, including an action that may give the holders of the common stock the
opportunity to realize a premium over the then-prevailing market price of their
stock.
In addition, under our restated certificate of incorporation we can issue
preferred stock with such designations, rights and preferences as our board of
directors determines from time to time. This type of preferred stock could be
used as a method of discouraging, delaying or preventing a change in control of
the company. In addition, the series E stock issued by the company in December
1998 and any additional shares of preferred stock that we may issue in the
future may adversely affect the voting and dividend rights, rights upon
liquidation and other rights of the holders of common stock. We do not
currently intend to issue any additional shares of preferred stock, but we
retain the right to do so in the future.
Furthermore, we are subject to Section 203 of the Delaware General
Corporation Law, which may discourage takeover attempts.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO ATTRACT OR RETAIN KEY PERSONNEL.
We are highly dependent on the principal members of our management and
staff, the loss of whose services might significantly delay or prevent the
achievement of research, development or strategic objectives. Our success
depends on our ability to retain key employees and to attract additional
qualified employees. Competition for such personnel is intense, and we may not
be able to retain existing personnel and to attract, assimilate or retain
additional highly qualified employees in the future.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
A large number of shares of common stock already outstanding, or issuable
upon exercise of options and warrants, are eligible for resale, which may
adversely affect the market price of the common stock. As of November 5, 1999,
we had 36,044,284 shares of common stock outstanding. An additional 4,705,605
shares of common stock are issuable upon the exercise of outstanding options and
warrants. Substantially all of the shares subject to outstanding options and
warrants will, when issued upon exercise, be available for immediate resale in
the public market pursuant to currently effective registration statements under
the Securities Act, or pursuant to Rule 701 promulgated thereunder.
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THE EQUITY LINE AGREEMENT AND CONVERTIBLE NOTE MAY HAVE A DILUTIVE IMPACT ON OUR
SHAREHOLDERS.
The sale of shares pursuant to the equity line agreement or conversion of
the note held by Sumitomo will have a dilutive impact on our stockholders. As a
result, our net income or loss per share could be materially decreased in future
periods, and the market price of our common stock could be materially and
adversely affected. In addition, the common stock to be issued under the equity
line agreement and upon conversion of the Sumitomo note will be issued at a
discount to the then-prevailing market price of the common stock. These
discounted sales could have an immediate adverse effect on the market price of
the common stock. We also issued to Kingsbridge a warrant for 100,000 shares of
common stock exercisable until February 6, 2003 at an exercise price of $2.30
per share. The issuance or resale of such shares and the shares issuable upon
exercise of these warrants may have a further dilutive effect on our common
stock and could adversely affect our price.
WE MAY NOT SUCCESSFULLY INTEGRATE MICRON'S DISPLAY DIVISION OPERATIONS, AND THE
INTEGRATION OF THE BUSINESSES MAY BE COSTLY.
In May 1999, we purchased certain assets of Micron Technology, Inc.
relating to field emission displays including equipment and other tangible
assets, contract rights related to the tangible assets and $4.35 million in
cash.
The continued integration of our operations may temporarily distract
management's attention from the day-to-day business. While the current process
of integrating Micron's operations has showed good progress, if we fail to
integrate Micron's operations quickly and efficiently, our business and results
of operations may be impaired.
Some of the things we must accomplish in order to integrate Micron's
operations include:
- - educate previous and new employees about our technologies and platforms;
- - coordinate or combine research and development efforts;
- - manage prior and new relationships with suppliers and customers; and
- - align the strategic plans of two previously independent management teams.
These integration efforts may be costly. If we have underestimated these
initial costs of integration, our initial results will be worse than
anticipated.
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