-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MypPy3nMHcRTnOUle8jsJs7iFcJ29Uc9T6oE31rPfMJIKdf6Vd7wICJxiQX3Gz72 GggxReHo5OQOgD9Ja5DBGg== 0000950144-98-012277.txt : 19981113 0000950144-98-012277.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950144-98-012277 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SI DIAMOND TECHNOLOGY INC CENTRAL INDEX KEY: 0000891417 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 760273345 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-11602 FILM NUMBER: 98743778 BUSINESS ADDRESS: STREET 1: 3006 LONGHORN BOULEVARD STREET 2: SUITE 107 CITY: AUSTIN STATE: TX ZIP: 78758 BUSINESS PHONE: 5123395070 MAIL ADDRESS: STREET 1: 12100 TECHNOLOGY BOULEVARD CITY: AUSTIN STATE: TX ZIP: 78727 10QSB 1 SI DIAMOND TECHDNOLOGY, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NO. 1-11602 SI DIAMOND TECHNOLOGY, INC. (Exact name of Small Business Issuer as specified in charter) TEXAS 76-0273345 (State of (IRS Employer Incorporation) Identification Number) 3006 Longhorn Blvd., Suite 107 AUSTIN, TEXAS 78758 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (512) 339-5020 Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 6, 1998, the registrant had 44,113,801 shares of common stock, par value $.001 per share, issued and outstanding. Transitional Small Business Disclosure Format. Yes [ ] No [X] 2 SI DIAMOND TECHNOLOGY, INC. INDEX Part I Financial Information PAGE Item 1. Financial Statements Consolidated Balance Sheets--September 30, 1998 and December 31, 1997............................. 3 Consolidated Statements of Operations--Three Months and Nine Months Ended September 30, 1998 and 1997..................................................................... 4 Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1998 and 1997..................................................................... 5 Notes to Consolidated Financial Statements........................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 12 Part II Other Information Item 1. Legal Proceedings............................................................................. 17 Item 5. Other Information............................................................................. 17 Item 6. Exhibits and Reports on Form 8-K.............................................................. 16 Signatures ................................................................................................ 18
2 3 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- -------------- Current assets: Cash and cash equivalents.......................................................... $ 4,542 $ 1,000 Accounts receivable, trade......................................................... 50,381 448,042 Receivables from shareholders...................................................... -- 250,000 Escrow funds receivable............................................................ 106,085 -- Prepaid expenses and other current assets.......................................... 52,789 80,128 ------------- -------------- Total current assets............................................................. 213,797 779,170 Property, plant and equipment, net................................................. 167,198 1,841,419 Intangible assets, net............................................................. 10,500 15,000 ------------- -------------- Total assets..................................................................... $ 391,495 $ 2,635,589 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft..................................................................... $ -- $ 156,686 Accounts payable................................................................... 1,406,020 1,272,958 Accrued liabilities................................................................ 777,221 892,553 Notes payable...................................................................... 773,310 550,000 Billings in excess of costs and estimated earnings on uncompleted contracts........ 4,770 6,000 ------------- -------------- Total current liabilities........................................................ 2,961,321 2,878,197 Notes payable, long-term.............................................................. -- 437,593 Commitments and contingencies......................................................... -- -- Stockholders' equity: Convertible preferred stock, $1.00 par value, 2,000,000 shares authorized; Series A, 100 shares issued and outstanding at September 30, 1998 and December 31, 1997.................................... 100 100 Series E, 196 shares issued and outstanding at December 31, 1997........................................................... -- 196 Series F, 1,081 shares issued and outstanding at December 31, 1997........................................................... -- 1,081 Series G, 1,600 and 1,700 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively...................... 1,600 1,700 Common stock, 120,000,000 shares authorized, $.00l par value, 44,113,801 shares issued and outstanding at September 30, 1998; 24,238,356 shares issued and outstanding at December 31, 1997...................... 44,114 24,239 Additional paid-in capital............................................................ 51,457,491 50,386,816 Accumulated deficit................................................................... (54,073,131) (51,094,333) ------------- -------------- Total stockholders' equity....................................................... (2,569,826) (680,201) -------------- --------------- Total liabilities and stockholders' equity....................................... $ 391,495 $ 2,635,589 ============= ==============
The accompanying notes are an integral part of the consolidated financial statements. 3 4 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------------- -------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenues ................................... $ 123,339 $ 965,567 $ 574,005 $ 3,006,442 ------------ ------------ ------------ ------------ Cost of sales .............................. 110,606 1,191,388 1,517,008 3,591,243 Selling, general and administrative expenses 607,245 936,038 1,862,467 2,743,248 Research and development ................... 326,725 125,449 912,417 ------------ ------------ ------------ ------------ 430,693 Operating costs and expenses .......... 1,044,576 2,252,875 4,291,892 6,765,184 Loss from operations .................. (921,237) (1,287,308) (3,717,887) (3,758,742) Other income (expense) Loss on impairment of assets ........ -- -- -- -- Gain (Loss) on disposal of assets ... (25,000) (106,488) 795,697 (622,248) Other income (expense), net ......... 220,568 (143,786) (4,597) ------------ ------------ ------------ ------------ (16,794) Net loss ................................... (725,669) (1,537,582) (2,926,787) (4,397,784) Less preferred stock dividend .............. (125,782) (120,932) (215,107) (662,416) ------------ ------------ ------------ ------------ Net loss applicable to common shareholders . $ (851,451) $ (1,658,514) $ (3,141,894) $ (5,060,200) ============ ============ ============ ============ Net loss per common share .................. $ (0.02) $ (0.09) $ (0.09) $ (0.33) ============ ============ ============ ============ Average shares outstanding ................. 43,175,591 17,559,485 34,616,869 15,357,241 ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements,. 4 5 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss ............................................................ $(2,926,787) $(4,397,784) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense ............................. 526,901 781,303 Services provided for payment of MCC notes ........................ -- (74,495) Non-cash compensation of consultants upon issuance of warrants .... -- 105,251 (Gain) Loss on disposal of assets ................................. (795,697) 622,248 Changes in assets and liabilities: Accounts receivable, trade ...................................... 397,661 423,318 Notes receivable ................................................ -- 15,000 Escrow funds receivable ......................................... 293,915 -- Costs and estimated earnings in excess of billings on uncompleted contracts ..................................................... -- 584,770 Inventory ....................................................... -- 8,727 Prepaid expenses ................................................ 27,339 5,318 Accounts payable and accrued liabilities ........................ 146,055 (1,403,562) Billings in excess of costs and estimated earnings on uncompleted contracts ..................................................... (1,230) 95,291 ----------- ----------- Total adjustments .......................................... 594,944 1,163,169 ----------- ----------- Net cash used in operating activities ........................... (2,331,843) (3,234,615) ----------- ----------- Cash flows from investing activities: Capital expenditures .............................................. (47,335) (34,694) Proceeds from the sale of equipment ............................... 1,750,480 262,895 Expenditures for intangible and other assets ...................... -- -- ----------- ----------- Net cash provided by (used in) investing activities ............. 1,703,145 228,201 ----------- ----------- Cash flows from financing activities: Repayment of notes payable ........................................ (930,000) (871,061) Bank overdraft .................................................... (156,686) -- Proceeds from notes payable ....................................... 1,185,000 500,000 Bank line of credit .............................................. -- (30,000) Redemption of preferred stock ..................................... (332,011) (60,493) Proceeds of stock issuance, net of costs .......................... 865,937 3,655,312 ----------- ----------- Net cash provided by financing activities ....................... 632,240 3,193,758 ----------- ----------- Net increase in cash and cash equivalents ................................ 3,542 187,344 Cash and cash equivalents, beginning of period ........................... 1,000 53,516 ----------- ----------- Cash and cash equivalents, end of the period ............................. $ 4,542 $ 240,860 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements of SI Diamond Technology, Inc. and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and in compliance with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 1997, included in the Company's 1997 Annual Report on Form 10-KSB. The balance sheet information for December 31, 1997 has been derived from the audited financial statements at that date. 2. Supplemental Cash Flow Information Cash paid for interest for the nine months ended September 30, 1998 and 1997 was approximately $27,319 and $108,408, respectively. 3. Capital Stock: Under the terms of an August 1997 agreement between the Company and its Series F preferred stock shareholders, the Company was obligated to renegotiate the agreement if the Company's stock price did not exceed $1.50 per share by October 12, 1997. The share price did not exceed the specified level by that date and as a result, the Company and the Series F preferred stock shareholders reached a new agreement in March 1998 whereby the Series F preferred stock shareholders were allowed to convert one-sixth of the number of Series F preferred shares held as of March 17, 1998 in each of the months from March 1998 through August 1998 into the Company's common stock. The conversion price for each month was the average closing bid price of the Company's common stock for the preceding month, except that the conversion price for March 1998 was $0.15. Upon submission for conversion, the Company had the right to redeem the preferred shares for 107.5% of the original purchase price. As of September 30, 1998, all shares of the Series F preferred shares held as of March 17, 1998 have been converted under the terms of this agreement. As described in greater detail in the Company's 1997 Annual Report on Form 10-KSB, in January 1998, the Company and certain holders of its common stock terminated a subscription agreement that had been signed in October 1997. In connection with the termination of this agreement, the Company received cash proceeds of $250,000 in January 1998. In addition, the investors returned 318,868 shares of the Company's common stock and forfeited warrants giving them the right to purchase 3,948,202 shares of the Company's common stock. In January 1998, the Company received proceeds of $50,000 for the issuance of 250,000 shares of its common stock at a price of $0.20 per share. In May 1998, the Company received proceeds of $47,000 in exchange for the issuance of 470,000 shares of the Company's common stock at a price of $0.10 per share and $425,000 in exchange for the issuance of 1,700,000 shares at a price of $0.25 per share. The Company filed a registration statement on June 17, 1998 to register these shares. As described in greater detail in the Company's 1997 Annual Report on Form 10-KSB, the Company has a convertible debenture outstanding that is convertible in to the Company's common stock at the option of the lender. During the quarter ended June 30, 1998, $200,000 of principal on this debenture was converted into 1,469,199 shares of the Company's common stock at the request of the lender. Also as described in greater detail in the Company's 1997 Annual Report on Form 10-KSB, the Company had notes payable to shareholders that were convertible into the Company's common stock at the option of the lender. During the quarter ended June 30, 1998, $ 300,000 of principal plus the related accrued interest was converted into 2,531,198 shares of the Company's common stock. The shares issued as a result of the conversion of this note were registered on a registration statement dated June 17, 1998. 6 7 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Capital Stock (continued) In July 1998, the Company received $90,000 and issued 600,000 shares of the Company's common stock as a result of the exercise of warrants for the Company's common stock. In July 1998, one of the Company's Series G preferred stock shareholders converted 100 shares of Series G preferred stock into 110,000 shares of the Company's common stock in accordance with the terms of the Series G preferred stock. 4. Notes Payable From January through April 1998, the Company borrowed a total of $680,000 from shareholders of the Company to be used for working capital purposes. The notes were primarily 90 day notes bearing interest at a rate of 15% per annum. The assets of Diamond Tech One, Inc.,("DTO)" a wholly-owned subsidiary of the Company were pledged as collateral for $500,000 of these notes. In connection with this secured loan agreement, the shareholder also received warrants enabling the holder to purchase a total of 600,000 shares of the Company's common stock at $0.15 per share, which approximated the market price of the common stock on the date the agreement was made. These warrants were assigned a value of $0.16 per share. The resulting discount is being amortized as interest expense over the life of the notes. These notes were repaid as part of the transaction in which the Company sold the majority of the operating assets of its DTO subsidiary in May 1998. The remaining unamortized balance of the discount was written off as interest expense at the time the loans were repaid. The remaining $180,000 of unsecured notes payable outstanding at the time of the sale of the DTO assets were also repaid from the sale proceeds. $10,000 of the unsecured notes payable were payable to the Company's President. In June 1998, the Company borrowed $100,000 from a shareholder. This note is a 60 day note secured by all assets of the company and bearing interest at a rate of 15%. From July through September 1998, the Company borrowed an additional $405,000 under short term notes covering a period of 40 to 90 days. These notes all bear interest at a rate of 15% and are secured by all assets of the Company. Of these loans, $100,000 are payable to the Company's Chief Executive Officer, $170,000 are payable to EBT Acquisition Company, a company in which certain of the Company's officers and directors are also shareholders, and $135,000 are payable to other shareholders of the Company. All of these notes that were due prior to the date of this filing have been extended by the Company on a temporary basis. 5. Contingencies Customer Claim at Plasmatron Coatings and Systems, Inc. On May 20, 1996, Semi-Alloys Company ("Plaintiff"), a former customer of Plasmatron Coatings and Systems, Inc. ("Plasmatron"), a wholly-owned subsidiary of the Company, filed a complaint with the Supreme Court of the State of New York, County of Westchester. The complaint names Plasmatron, the Company and Westchester Fire Insurance Company as defendants. Plaintiff claims a breach of contract related to $1 million of coating equipment that Plasmatron delivered in 1993, prior to the Company's ownership of Plasmatron. The Plaintiff claims the equipment does not perform as required under the contract. Plaintiff seeks to recover compensatory, consequential and incidental damages. The amount of this claim is to be determined at trial. No trial date has been set at this time, although it is expected to be no later than September 1999. At this time, the outcome can not be predicted with any certainty and the potential liability, if any, is unknown. The Company believes it has meritorious defenses and intends to continue to vigorously defend this action. 7 8 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Contingencies (continued) Customer Claim at Diamond Tech One, Inc. On April 16, 1998, Alpine Microsystems, Inc. ("Plaintiff"), a customer of DTO, filed a complaint with the Supreme Court of the State of California, County of Santa Clara. The Complaint names DTO and the Company as defendants. Plaintiff claimed a breach of contract related to $271,000 advanced to DTO against work to be performed under certain purchase orders issued by Plaintiff. At the time the suit was filed, work was completed on certain of these purchase orders and in process on others. The Plaintiff claimed that DTO failed to supply the agreed upon services. Plaintiff sought to recover all amounts paid to DTO in connection with these purchase orders as well as attorneys' fees, punitive damages, costs of the suit, interest, and other relief as the court may deem appropriate. On August 4, 1998, the parties agreed to settle this dispute. The Company agreed to repay to Plaintiff $145,000 of the funds advanced by Plaintiff in exchange for a release of all claims by Plaintiff. The settlement was paid from the funds held by the escrow agent related to the sale of the DTO assets. The Company had originally deferred approximately $180,000 of the original $271,000 received from plaintiff for potential settlement of this dispute. The difference between the $180,000 deferred and the $145,000 paid was recorded as income in the quarter ended September 30, 1998. Vendor Claim at Diamond Tech One, Inc. On August 18, 1998, KDF Electronic & Vacuum Services, Inc. ("Plaintiff"), a vendor of DTO, filed a complaint in the United Sates District Court for the Southern District of New York against the Company for unpaid debts of its subsidiary, Diamond Tech One, Inc. The Company was served with notice of this suit on October 14, 1998. All known amounts owed by DTO to the plaintiff are recorded as liabilities of DTO in the consolidated financial statements of the Company. The amounts recorded as liabilities by DTO make up substantially all of the amounts claimed as due by the plaintiff. Other Claims The Company and its subsidiaries are also defendants in various other lawsuits of a non material nature related to the non payment of invoices when due. It is expected that all such lawsuits will be settled for an amount no greater than the liability recorded in the financial statements for such matters and that settlement of such suits will not have a material financial impact on the Company. DiaGasCrown Venture In February 1995, the Company entered into an agreement with Diagascrown, Inc. ("DGC"), a Russian joint stock Company controlled by Gazcomplektimpex, a subsidiary of Gazprom, the Russian national natural gas Company. In return for an equity position in the Company, DGC paid the Company $5,000,000 and granted the Company an exclusive license to DGC display and related diamond technology and license rights to all related background patents. The Company has committed to perform $2.5 million in research and development in Russia through February 1997. This research can be in the form of travel and service performed by the Company's employees in Russia, government funded research performed in Russia and through direct funding of Russian efforts related to displays. According to its internal records, the Company has spent approximately $2,000,000 on this research. Further spending in Russia has been halted since 1996 pending agreement as to the nature and amount of services to be performed in Russia for the remaining balance to be spent under the original agreement. 8 9 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Contingencies (continued) Outlook At September 30, 1998, the Company had a deficit in stockholder's equity of $2,589,826 and current liabilities exceeded current assets by $2,747,524. The Company has developed a plan to allow it to maintain operations until the Company is able to sustain itself on its own revenue, however in order to have time to implement this plan the Company is dependent upon the continued cooperation of its creditors. As of the date of this filing, the Company only has resources to enable it to maintain operations on a day to day basis. The Company expects to be able to obtain additional resources during this time period to enable it to complete the implementation of its plan. The Company's plan is based on raising additional funds to allow each of its subsidiaries to continue to develop their products and bring them to the level whereby each subsidiary is operating at break-even or better. The source of these funds may be from either debt, equity, strategic partners, or the actual sale of a subsidiary, depending on which alternative management believes to be best at the appropriate time. As discussed in Note 6, Business Developments, the Company signed a letter of intent to sell its Electronic Billboard Technology, Inc. ("EBT") Subsidiary for a total price of approximately $5,000,000. The sale of EBT would provide the Company with the necessary funds to enable it to adequately capitalize its remaining subsidiary, Field Emission Picture Element Technology, Inc. ("FEPET"). The Company is also evaluating other sources of funding. If other sources of funding or other business opportunities can be found which would adequately capitalize the Company to allow both FEPET and EBT to develop and produce their products, the proposed sale of EBT may not be necessary. In addition, the Company is working to continue to reduce expenses and increase the revenues of both FEPET and EBT. As a result of the reduction in operating activity related to the disposition of the DTO operating assets, the Company has significantly reduced other costs including selling, general, administrative, and interest costs and expects to continue to reduce costs. This reduction in costs means that the Company requires significantly reduced amounts of capital to fund its ongoing operations. The Company may also sell certain of DTO's intangible assets that were retained when DTO's operating assets were sold. In addition, the Company is seeking additional strategic partners to invest in FEPET to assist it in the development of commercial products using its technology. Management believes that it has the ability to raise short term funding, if necessary, to enable it to continue operations until its plan can be fully implemented. This plan is based on current development plans, current operating plans, the current regulatory environment, historical experience in the development of electronic products, and general economic conditions. Changes could occur which would cause certain assumptions on which this plan is based to be no longer valid. If adequate funds are not available from operations or additional sources of financing, the Company will have to reduce substantially or eliminate expenditures for research and development, testing and production of its products, and associated overhead costs, or obtain funds through arrangements with other entities that may require the Company to relinquish rights to certain of its technologies or products. No assurance can be given that there will be no change that would cause available resources to be consumed before such time or that other sources of funding will be available. Such results could materially and adversely affect the Company. 6. Business Developments On May 8, 1998 the Company signed an agreement to sell the majority of the operating assets of DTO for a total price of approximately $2.2 million, of which $1.8 million was paid at closing and the remaining $400,000 was deposited in escrow. Since that time, $145,000 of the escrowed funds were released in connection with the settlement of the Alpine lawsuit described in Note 5, approximately $113,000 was released to the Company, approximately $27,000 was released to the State of Texas for taxes due, and approximately $9,000 was released to a DTO vendor. The balance of the escrow account was scheduled to be released to the Company on September 5, 1998. The purchaser has the right to make claims against this escrow account in certain circumstances. The Company has been notified by the purchaser of various claims against the account. The Company has objected to these claims and is currently working to resolve these differences in accordance with the terms of the agreement. In 9 10 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Business Developments (continued) addition, the Company has additional claims against the purchaser for amounts expended by the Company on the purchasers behalf after closing. The Company expects that the ultimate settlement of these issues will not differ materially from the amounts recorded in the financial statements. The purchaser has also assumed the building lease on the DTO facility. As a result, the Company has relocated its offices to another leased facility in Austin, Texas. The relocation to this new smaller, less expensive facility has also reduced the Company's ongoing fixed overhead expense. The Company retained all cash, accounts receivable, certain equipment identified as excess, certain intangibles, and all liabilities. The Company is currently in the process of preparing to sell all or a portion of this intangible property, including patents and processes, to the extent that it is not required for the continued operation of its other businesses. In connection with this transaction, all loans secured by the assets of DTO were paid from the proceeds of the sale and the liens were released by the noteholders. On September 14, 1998, the Company signed a letter of intent to sell its Electronic Billboard Technology, Inc. ("EBT") subsidiary for a total of approximately $5 million in cash to EBT Acquisition Company ("Purchaser"). Purchaser is a newly formed Delaware Company formed specifically for the purpose of acquiring the stock of EBT. In addition, as part of the transaction, the Company would acquire warrants which, if exercised, would result in the Company owning approximately 8% of the Purchaser. Certain officers and directors of the Company are also expected to be shareholders of the Purchaser, owning less than 7% of the Purchaser's outstanding common stock. The purpose of this transaction is to provide needed working capital to the Company and to allow the Company to continue its research and development efforts through its remaining subsidiary, Field Emission Picture Element Technology, Inc. The Company is also evaluating other sources of funding. If other sources of funding or other business opportunities can be found which would adequately capitalize the Company to allow both FEPET and EBT to develop and produce their products, the proposed sale of EBT may not be necessary. On August 28, 1998, the Company entered into an agreement with Microelectronics and Computer Technology Corporation ("MCC") whereby it returned certain technology rights to MCC. In connection with the acquisition of MCC's electronics packaging and display fabrication assets in 1995, the Company acquired non exclusive licenses to 144 MCC Patents and other technology. As a result of the 1995 acquisition, the Company was obligated to pay MCC cumulative minimum royalty payments of $500,000 by December 31, 1997 and cumulative minimum royalty payments of $1,000,000 by December 1, 2000. In December 1997, the agreement was amended and MCC transferred and assigned its rights directly to the Company for 62 DFE related patents. The Company had no use for the remaining patents. As part of the August 28, 1998 agreement, the Company agreed to pay $5,000 cash, issue 500,000 shares of the Company's common stock, and return to MCC the rights to these remaining non DFE patents. MCC agreed to accept this as full payment for all minimum amounts due under the original agreement. As of December 31, 1997, the Company had accrued $355,000 as royalties due to MCC, which represented the minimum due of $500,000 less costs the Company had paid to maintain the patents. The shares of SI Diamond common stock issued to MCC were valued at $100,000 based on the market price of the stock at the time the shares were issued. The remaining $250,000 of accrued royalties were taken into income in the quarter ended September 30, 1998. The Company has no further obligations to MCC. 7. Recent Accounting Pronouncements In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. Comprehensive loss approximates the net loss reported. 10 11 SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Subsequent Events In October 1998, the Company borrowed an additional $127,000 under short term notes bearing interest at a rate of 15% and secured by all assets of the Company. Of these notes, $57,000 are payable to EBT Acquisition Company, $50,000 are payable to a Director of the Company, and $20,000 are payable to a shareholder of the Company. In November 1998, the Company borrowed $100,000 from unaffiliated parties under 90 day notes bearing interest at 15% and secured by all assets of the Company. In connection with these 90 day notes to unaffiliated parties, the Company also issued warrants to the note payees enabling them to purchase up to 400,000 shares of the Company's common stock at a price of $0.25, which was approximately 15% above the market price of the stock on the date the notes were issued, for a period of one year from the date of the notes. 11 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 OVERVIEW During the nine months ended September 30, 1998, the Company's primary revenues were earned through microelectronics fabrication and assembly services at Diamond Tech One, Inc. ("DTO"). The Company continued to incur substantial expenses at Field Emission Picture Element Technology, Inc. ("FEPET") in support of the development of its proprietary Diamond Based Field Emission ("DFE") Technology and preproduction costs for wafer bumping at DTO, as well as product development costs at Electronic Billboard Technology, Inc. ("EBT"). In May 1998, the Company sold the majority of the operating assets of its DTO subsidiary to enable to it to pay off debt and reduce expenses so that it could focus on commercialization of its remaining products. As more fully discussed in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1997, the Company expects to incur additional research and development expenses throughout 1998 in developing the Company's DFE technology and in developing and commercializing its electronic billboard product. RECENT DEVELOPMENTS During the nine months ended September 30, 1998, the Company raised a total of $618,000 to fund operations by issuing a total of 3,020,000 shares of its common stock for cash. In addition, during the same time period, the Company borrowed a total of $1,185,000 to fund operations. As described in greater detail in the notes to the financial statements, the majority of these notes were short term notes bearing interest at a rate of 15% and secured by the assets of the Company or a subsidiary. In May 1998, the Company sold the majority of the operating assets of its DTO subsidiary for a total purchase price of approximately $2.2 million, $1.8 million of which was received at closing. The remaining $400,000 was deposited in escrow. The purchaser has also assumed the building lease on the DTO facility. The Company retained all cash, accounts receivable, certain equipment identified as excess, certain intangibles, and all liabilities. In June 1998, the Company and its independent auditor, Coopers & Lybrand L.L.P., terminated their relationship. The Company has had discussions with potential auditors, but not yet hired a successor auditor. In October and November 1998 through the date of this filing, the Company borrowed an additional $227,000 to fund operations. As described in greater detail in the notes to the financial statements, these notes are short term notes bearing interest at a rate of 15% and secured by all assets of the Company. On September 14, 1998, the Company signed a letter of intent to sell its Electronic Billboard Technology, Inc. ("EBT") subsidiary for a total of approximately $5 million in cash to EBT Acquisition Company ("Purchaser"). Purchaser is a newly formed Delaware Company formed specifically for the purpose of acquiring the stock of EBT. In addition, as part of the transaction, the Company would acquire warrants which, if exercised, would result in the Company owning approximately 8% of the Purchaser. Certain officers and directors of the Company are also expected to be shareholders of the Purchaser, owning less than 7% of the Purchaser's outstanding common stock. The purpose of this transaction is to provide needed working capital to the Company and to allow the Company to continue its research and development efforts through its remaining subsidiary, Field Emission Picture Element Technology, Inc. The Company is also evaluating other sources of funding. If other sources of funding or other business opportunities can be found which would adequately capitalize the Company to allow both FEPET and EBT to develop and produce their products, the proposed sale of EBT may not be necessary. 12 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's revenues for the third quarter ended September 30, 1998 totaled $123,399 compared to $965,567 for the third quarter of 1997. The Company earned $574,005 in revenues during the nine month period ended September 30, 1998, (the "1998 Period") as compared with $3,006,442 during the nine month period ended September 30, 1997 (the "1997 Period"). Commercial sales were $574,005 for the 1998 Period compared to $2,248,847 for the 1997 Period. This reduction in revenue during the 1998 Period resulted from the Company's decision to shut down its Plasmatron subsidiary in the third quarter of 1997 and the sale of the DTO operating assets in May 1998. The 1997 Period included $833,355 in revenue from Plasmatron. During the 1998 Period the Company had revenue of $441,704 from DTO, $108,070 from EBT, and $24,231 from FEPET. At September 30, 1998, the Company had a backlog of approximately $180,000, of which approximately $40,000 was from EBT and approximately $140,000 was from FEPET. This is a substantial reduction compared to the backlog of approximately $304,000 at September 30, 1997, however the 1997 backlog was exclusively from DTO. There were no contract research revenues for the 1998 Period compared to $757,595 for the 1997 Period and the Company has no research backlog at the present time. The decreased contract research revenue and backlog in the 1998 Period results from the completion of the spending of funds available to the Company under the $3,500,000 National Institute of Science and Technology ("NIST") contract which commenced during the second quarter of 1995. The NIST contract was intended to provide matching grants to facilitate further research and development on the Company's DFE technology. The Company is continuing to fund research and development of the DFE technology despite the unavailability of any further reimbursement for these costs. The Company's ability to perform the research on its backlog should not require significant addition of personnel. For the 1998 Period, the Company's cost of sales were $1,517,008 or a negative gross margin of 164%, as compared with $3,591,243 or a negative gross margin of 19%, for the 1997 Period. This decreasing margin resulted from a combination of factors. First, the shutdown of Plasmatron impacted the Company's overall gross margins. Plasmatron had a negative gross margin of approximately 2% in the 1997 Period. In addition, the Company had no reimbursed research and development in the 1998 Period. While these items did not significantly affect the absolute dollar amount of the gross margin, it did affect the percentage. The existence of additional revenues and an equal amount of costs in 1997 had the effect of increasing the sales, thereby decreasing the percentage by which costs exceeded sales. Finally, the Company's DTO subsidiary had a negative margin of approximately 190% in the 1998 Period as compared with a negative margin of approximately 110 % in the 1997 Period. The negative margins at DTO were due to low utilization of its facility which had relatively high fixed costs associated with its clean rooms. The increase in negative margin from the 1997 Period to the 1998 Period is primarily the result of increased labor costs due to the addition of a second and third shift, as well as increased support labor to increase DTO's capacity. Customer orders during the 1998 Period did not enable the Company to utilize this increased capacity. The Company's selling, general and administrative expenses were $1,862,467 for the 1998 Period, compared with $2,743,248 for the 1997 Period. The expense decrease resulted from the Company's ongoing efforts to reduce costs and the elimination of general administrative costs associated with the Plasmatron and DTO facilities. Company sponsored research and development expenses for the 1998 Period were $912,417 as compared to $430,693 for the 1997 Period. This increase in research expense is the result of the lack of availability of any outside funding for the Company's research projects. A portion of the research and development expenses incurred in the 1997 Period were reimbursed and therefore not included in the Company's research and development expenses. The Company expects to continue to incur expense in 1998 in support of additional research and development activities related to the commercial development of its DFE technology and its electronic billboard technology. The amount of these expenditures is dependent upon the amount of funding obtained from outside sources to support the research activities and level of spending on other internal activities. In May 1998, the Company sold the majority of the operating assets of its DTO subsidiary. In addition, throughout the 1998 Period, the Company continued its efforts to sell excess equipment. As a result, the Company has recorded a gain on the sale of assets of $795,697 during the nine months ended September 30, 1998. During the 1997 period, the Company had a loss of $622,248, on the disposal of assets, primarily as a result of the shutdown of its Plasmatron subsidiary. Other expense in the 1998 Period consisted of approximately $255,000 in interest expense offset by a reduction of $250,000 in royalty expense resulting from an agreement signed with Microelectronics and Computer Corporation ("MCC"). 13 14 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION At September 30, 1998, the Company had cash and cash equivalents in the amount of $4,542 as compared with cash and cash equivalents of $1,000 at December 31, 1997. This increase in cash is primarily the result of the proceeds of debt and equity transactions, less costs incurred in the 1998 Period. Based on the developmental stages of the Company's DFE and electronic billboard technologies, additional debt, equity, joint ventures, sale of product distribution or technology rights, or other financing will be required in the future. There can be no assurance that any of these financing alternatives can be arranged on commercially acceptable terms. As described in greater detail in the notes to the financial statements, the Company received proceeds of $865,937 from the issuance of common stock and $1,185,000 from the issuance of notes payable during the nine months ended September 30, 1998. A portion of these proceeds from financing activities were used to eliminate the bank overdraft that existed as of December 31, 1997 and to redeem a portion of the Company's Series E Preferred stock. The Company also repaid $930,000 of notes payable during this period. This resulted in net cash provided by financing activities of $964,251 for the 1998 Period. Cash provided by financing activities of $3,193,758 for the 1997 Period was substantially higher because of the issuance of the Company's Series F Preferred and Series G Preferred during that time period. Cash used in operating activities was $2,331,843 for the 1998 Period compared to $3,234,615 for the 1997 Period. The decrease in the cash used by operating activities was primarily the result of a higher level of accounts payable and accrued liabilities during the 1998 Period and a decreased operating loss in the 1998 Period. Accounts payable and accrued expenses increased by $146,055 during the 1998 Period as compared to a decrease of $1,403,562 during the 1997 Period. Cash provided by investing activities during the 1998 Period was $1,703,145 as compared with $228,201 for the 1997 Period. The cash provided in the 1998 Period resulted primarily from the sale of the DTO operating assets, while the cash provided in the 1997 Period resulted primarily from the sale of excess equipment. The principal source of the Company's liquidity has been the funds received from its initial public offering and from the subsequent foreign and exempt offerings of Common Stock or debt instruments. The Company may receive additional funds from the exercise of warrants, although there can be no assurance that such warrants will be exercised and it is unlikely that any significant proceeds from the exercise of warrants will be received in the near future. When the Company needs additional funds, the Company may seek to sell additional debt or equity securities, secure joint venture partnerships, sell certain technology rights, or dispose of one of is subsidiaries. The Company may seek to increase its liquidity through bank borrowings or other financing. There can be no assurance that any of these financing alternatives can be arranged on commercially acceptable terms. The Company believes that its success in reaching profitability will be dependent upon the viability of its products and their acceptance in the marketplace, and its ability to obtain additional financing in the future. Coopers & Lybrand L.L.P., the former independent auditors of the Company, expressed substantial doubt as to the ability of the Company to continue as a going concern based on accumulated losses from operations. See "Report of Independent Accountants" included in the Company's 1997 Annual Report on Form 10-KSB. The Company expects to continue to incur substantial expenses for research and development ("R&D"), product testing, and product marketing. Further, the Company believes that certain proposed products may not be available for commercial sale or routine use for a period of one to two years. Therefore, it is anticipated that the commercialization of the Company's existing and proposed products will require additional capital in excess of the Company's current funding. The combined effect of the foregoing may prevent the Company from achieving profitability for an extended period of time. Because the timing and receipt of revenues from the sale of products will be tied to the achievement of certain product development, testing and marketing objectives which cannot be predicted with certainty, there may be substantial fluctuations in the Company's results of operations. If revenues do not increase as rapidly as anticipated, or if product development and testing and marketing require more funding than anticipated, the Company will be required to curtail its operations and seek additional financing from other sources. 14 15 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of the date of this filing, the Company only has resources to enable it to maintain operations on a day to day basis. The Company expects to be able to continue to obtain additional resources on a day to day basis to allow it to continue to survive until a more permanent solution can be implemented, This belief is based on current development plans, the current state of the Company's business, the current regulatory environment, historical experience in the development of electronic products and general economic conditions. No assurance can be given that there will be no change that would make additional resources unavailable to the Company. Thereafter, if adequate funds are not available from operations or additional sources of financing, the Company will have to reduce substantially or eliminate expenditures for research and development and associated overhead costs, or obtain funds through arrangements with other entities. Such results could materially and adversely affect the Company. OUTLOOK At September 30, 1998, the Company had a deficit in stockholder's equity of $2,589,826 and current liabilities exceeded current assets by $2,747,524. The Company has developed a plan to allow it to maintain operations until the Company is able to sustain itself on its own revenue, however in order to have time to implement this plan the Company is dependent upon the continued cooperation of its creditors. As of the date of this filing, the Company only has resources to enable it to maintain operations on a day to day basis. The Company expects to be able to obtain additional resources during this time period to enable it to complete the implementation of its plan. The Company's plan is based on raising additional funds to allow each of its subsidiaries to continue to develop their products and bring them to the level whereby each subsidiary is operating at break-even or better. The source of these funds may be from either debt, equity, strategic partners, or the actual sale of a subsidiary, depending on which alternative management believes to be best at the appropriate time. As discussed in Note 6, Business Developments, the Company signed a letter of intent to sell its Electronic Billboard Technology, Inc. ("EBT") Subsidiary for a total price of approximately $5,000,000. The sale of EBT would provide the Company with the necessary funds to enable it to adequately capitalize its remaining subsidiary, Field Emission Picture Element Technology, Inc. ("FEPET"). The Company is also evaluating other sources of funding. If other sources of funding or other business opportunities can be found which would adequately capitalize the Company to allow both FEPET and EBT to develop and produce their products, the proposed sale of EBT may not be necessary. In addition, the Company is working to continue to reduce expenses and increase the revenues of both FEPET and EBT. As a result of the reduction in operating activity related to the disposition of the DTO operating assets, the Company has significantly reduced other costs including selling, general, administrative, and interest costs and expects to continue to reduce costs. This reduction in costs means that the Company requires significantly reduced amounts of capital to fund its ongoing operations. The Company may also sell certain of DTO's intangible assets that were retained when DTO's operating assets were sold. In addition, the Company is seeking additional strategic partners to invest in FEPET to assist it in the development of commercial products using its technology. Management believes that it has the ability to raise short term funding, if necessary, to enable it to continue operations until its plan can be fully implemented. This plan is based on current development plans, current operating plans, the current regulatory environment, historical experience in the development of electronic products, and general economic conditions. Changes could occur which would cause certain assumptions on which this plan is based to be no longer valid. If adequate funds are not available from operations or additional sources of financing, the Company will have to reduce substantially or eliminate expenditures for research and development, testing and production of its products, and associated overhead costs, or obtain funds through arrangements with other entities that may require the Company to relinquish rights to certain of its technologies or products. No assurance can be given that there will be no change that would cause available resources to be consumed before such time or that other sources of funding will be available. Such results could materially and adversely affect the Company. 15 16 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 UPDATE The Company has determined that the year 2000 issue will have an immaterial effect on the Company. The year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a recent assessment, the Company determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. All of this software is prepackaged software that was purchased from outside vendors. These vendors all have upgrades available which correct the Year 2000 issue. It is the Company's plan to purchase the upgraded software, where required, in early 1999 to insure adequate time for implementation. The cost of these upgrades will be negligible and is not expected to have a material effect on the operations of the Company. If such upgrades were not installed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has determined that it is not vulnerable to a third party's failure to remediate its own Year 2000 Issues since it has no significant suppliers or large customers. The Company has also determined that it has no exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Company is ensuring that all products currently under development by the Company will be Year 2000 compliant prior to the sale of such products. This assessment is based on the present circumstances of the Company in which the Company has virtually no customers and no significant suppliers. In this scenario, the Company's Year 2000 risk is virtually non-existent. If the Company's business plan is successful and it is able to develop and sell products, the Company may become subject to Year 2000 risk related to third parties. The Company intends to assess the risk associated with third party remediation of Year 2000 issues at the time that it enters into any significant contracts or relationships with third parties and to develop a contingency plan at that time if necessary. 16 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 18, 1998, KDF Electronic & Vacuum Services, Inc. ("Plaintiff"), a vendor of DTO, filed a complaint in the United Sates District Court for the Southern District of New York against the Company for unpaid debts of its subsidiary, Diamond Tech One, Inc. The Company was served with notice of this suit on October 14, 1998. All known amounts owed by DTO to the plaintiff are recorded as liabilities of DTO in the consolidated financial statements of the Company. The amounts recorded as liabilities by DTO make up substantially all of the amounts claimed as due by the plaintiff. ITEM 5. OTHER INFORMATION CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements in this report are forward-looking statements concerning the future operations of the Company. The Company is including the following cautionary statement in this Quarterly Report on Form 10-QSB to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement or expectation or belief will result or be achieved or accomplished. Important factors that could cause the Company's actual results to differ from results in forward-looking statements are incorporated herein by reference from pages ii-vi of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Index to Exhibits on page 19 for a descriptive response to this item. (b) Reports on Form 8-K: (1) Current Report on Form 8-K (Item 5) dated as of September 14, 1998 (filed September 30, 1998). 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SI DIAMOND TECHNOLOGY, INC. (Registrant) Date: November 10, 1998 /s/ Marc W. Eller ---------------------------------------- Marc W. Eller Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 10, 1998 /s/ Douglas P. Baker ---------------------------------------- Douglas P. Baker Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 18 19 INDEX TO EXHIBITS The following documents are filed as part of this Report:
Exhibit ------- 10* Letter of Intent between EBT Acquisition Company and the Company dated September 14, 1998 (Exhibit 99.1 to the Company's Current Report on Form 8-K dated as of September 14, 1998.) 11 Computation of (Loss) Per Common Share 13 Forward-Looking Statements and Important Factors Affecting Future Results (pages ii - vi of the Company's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 1997, incorporated by reference into the Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 1998). 27 Financial Data Schedule
* Incorporated by reference 19 EX-11 2 COMPUTATION OF (LOSS) PER SHARE 1 EXHIBIT 11 SI DIAMOND TECHNOLOGY, INC. COMPUTATION OF (LOSS) PER COMMON SHARE
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------------- -------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Computation of (loss) per common share: Net loss applicable to common shareholders .... $ (851,451) $ (1,658,514) $ (3,141,894) $ (5,060,200) ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding 43,175,591 17,559,485 34,616,869 15,357,241 Net loss per common share ..................... $ (0.02) $ (0.09) $ (0.08) $ (0.33) ============ ============ ============ ============ Computation of (loss) per common share assuming full dilution (A):
No calculation of loss per common share assuming full dilution is submitted because such computation results in an antidilutive loss per common share. EX-13 3 FOWARD LOOKING STATEMENTS AND IMPORTANT FACTORS 1 EXHIBIT 13 FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS AFFECTING FUTURE RESULTS Certain statements in this annual report are forward-looking statements concerning the future operations of SI Diamond Technology, Inc. and it subsidiaries (collectively referred to as the "Company"). The Company is including the following cautionary statement in this Annual Report on Form 10-KSB to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement or expectation or belief will result or be achieved or accomplished. When used in this document, the words "anticipate", "believe", "expect", "estimate", "project", and similar expressions are intended to identify forward-looking statements. Taking into account the foregoing, the following are identified as important factors (but not all factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of the Company. EARLY STAGE OF DFE PRODUCT DEVELOPMENT; NO DFE PRODUCT REVENUES; DFE PRODUCT UNCERTAINTY The Company's Diamond Field Emission ("DFE") technology and products resulting therefrom will require significant additional development, engineering, testing and investment prior to commercialization. The Company's leading potential DFE product is the Diamond Field Emission Lamp ("DFEL"). If the DFEL is successful, the Diamond Field Emission Display ("DFED) is also a possibility. There can be no assurance that either the DFEL or the DFED will be successfully developed, be capable of being produced in commercial quantities on a cost-effective basis or be successfully marketed. HISTORY OF OPERATING LOSSES For the year ended December 31, 1997, the Company suffered a net loss of $6,320,901. For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, the Company suffered net losses of $1,630,978, $7,527,677, $7,255,420, $14,389,856 and $13,709,006, respectively. The Company expects to continue to incur additional operating losses for an extended period of time as it continues to develop products for commercialization, although it expects the magnitude of those losses to decrease. There can be no assurance that the Company will be profitable in the future. Coopers & Lybrand L.L.P., independent auditors of the Company, expressed substantial doubt as to the ability of the Company to continue as a going concern based on accumulated losses from operations. See "Report of Independent Accountants." The Company's operations to date have been primarily financed by the proceeds from the sale of equity securities of the Company and from revenues generated from research and development conducted for third parties; although since the second quarter of 1994, revenues from commercial services and product sales have exceeded those earned through such research and development ("R&D") activities. In order to continue its transition from a contract research and development organization into a Company with viable operations, the Company anticipates substantial product development expenditures for the foreseeable future. 3 2 FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING The Company expects to incur substantial expenses for R&D, product testing, production, manufacturing, product marketing, and administrative overhead. The majority of R&D expenditures are for the development of the Company's DFE technology. Further, the Company believes that certain proposed products may not be available for commercial sale or routine use for a period of one to two years. Therefore, it is anticipated that the commercialization of the Company's existing and proposed products will require additional capital in excess of the Company's current sources of funding. The combined effect of the foregoing may prevent the Company from achieving profitability for an extended period of time. Because the timing and receipt of revenues from the sale of products will be tied to the achievement of certain product development, testing, manufacturing and marketing objectives which cannot be predicted with certainty, there may be substantial fluctuations in the Company's results of operations. If revenues do not increase as rapidly as anticipated, or if product development and testing and marketing require more funding than anticipated, the Company may be required to curtail its expansion and/or seek additional financing from other sources. The Company may seek such additional financing through the offer of debt or equity or any combination thereof at any time. The Company has developed a plan to allow it to maintain operations until the Company is able to sustain itself on its own revenue. However, existing resources at current spending levels are only available to allow the Company to survive on a day to day basis. The Company's plan is primarily dependent on raising funds through strategic partners and debt offerings as well as raising revenues. The major component of the plan is to seek a strategic partner to inject significant capital into the Company's Diamond Tech One, Inc. ("DTO") subsidiary. In September 1997, the Company retained an investment banker to assist in that process and substantive discussions have been held with several interested parties. It is likely that the result of this process will require the Company to give up majority control and may result in a complete sale of the subsidiary. It is anticipated that the proceeds to the Company from this transaction would allow the Company to stabilize its financial condition by allowing it to pay down debt and provide cash to fund future operations. Furthermore, completion of such a transaction would allow the Company to substantially decrease the cost of its remaining operations by allowing it to reduce costs in numerous areas including facility, selling, general, and administrative costs. This reduction in costs would mean that the Company would require significantly reduced amounts of capital to fund its ongoing operations. Management believes that it has the ability to raise short term funding, if necessary, to enable it to continue operations until such a transaction can be completed. In addition, the Company is seeking additional strategic partners to invest in both its Electronic Billboard Technology, Inc. ("EBT"), and Field Emission Picture Element Technology, Inc. ("FEPET") subsidiaries to allow these subsidiaries to continue development of commercial products. It is anticipated that any such strategic partners would receive a minority interest in the subsidiaries of not more than 20% as a result of their investment. It is anticipated that the Company would retain a majority interest of at least 80% in each of these subsidiaries. It is the Company's plan that these investments would allow each of these subsidiaries to continue to develop their products and bring them to the level whereby each subsidiary is operating at break-even or better. This plan is based on current development plans, current operating plans, the current regulatory environment, historical experience in the development of electronic products and general economic conditions. Changes could occur which would cause certain assumptions on which this plan is based to be no longer valid. The Company's plan is primarily dependent on increasing revenues and raising additional funds through strategic partners and additional debt offerings. If adequate funds are not available from operations or additional sources of financing, the Company may have to reduce substantially or eliminate expenditures for research and development, testing and production of its products or obtain funds through arrangements with other entities that may require the Company to relinquish rights to certain of its technologies or products. Such results would materially and adversely affect the Company. 4 3 DEPENDENCE ON PRINCIPAL PRODUCTS The Company's DFE technology is an emerging technology. The financial condition and prospects of the Company are dependent upon market acceptance and sales of the Company's DFE products and its Electronic Billboard and related electronic display products. Additional R&D needs to be conducted with respect to the DFE products and the Electronic Billboard before marketing and sales efforts can be commenced. Market acceptance of the Company's products will be dependent upon the perception within the electronics and instrumentation industries of the quality, reliability, performance, efficiency, breadth of application and cost-effectiveness of the products. There can be no assurance that the Company will be able to gain commercial market acceptance for its products or develop other products for commercial use. COMPETITION; POSSIBLE TECHNOLOGICAL OBSOLESCENCE The display and semiconductor industries are highly competitive and are characterized by rapid technological change. The Company's existing and proposed products will compete with other existing products and may compete against other developing technologies. Development by others of new or improved products, processes or technologies may reduce the size of potential markets for the Company's products. There can be no assurance that such products, processes or technologies will not render the Company's proposed products obsolete or less competitive. Most of the Company's competitors have greater financial, managerial distribution and technical resources than the Company. The Company will be required to devote substantial financial resources and effort to further R&D. There can be no assurance that the Company will successfully differentiate its products from its competitors' products or that the Company will be able to adapt to evolving markets and technologies, develop new products or achieve and maintain technological advantages. TECHNOLOGIES SUBJECT TO LICENSES As a licensee of certain research technologies, the Company has various license agreements with Microelectronics and Computer Technology Corporation ("MCC") and DiaGasCrown, Inc., wherein the Company has acquired rights to develop and commercialize certain research technologies. In certain cases, agreements require the Company to pay royalties on sale of products developed from the licensed technologies and fees on revenues from sublicensees, where applicable, and to pay for the costs of filing and prosecuting patent applications. Each agreement is subject to termination by either party, upon notice, in the event of certain defaults by the other party. The payment of such royalties may adversely affect the future profitability of the Company. NO ASSURANCE OF MARKET ACCEPTANCE Since its inception, the Company has focused its product development efforts on R&D technologies that the Company believes will be a significant advance over currently available technologies. The Company has limited experience in manufacturing and marketing. The new management team that was put in place in 1996 has experience in manufacturing and marketing; however, with any new technology there is a risk that the market may not appreciate the benefits or recognize the potential applications of the technology. Market acceptance of the Company's products will depend, in part, on the Company's ability to convince potential customers of the advantages of such products as compared to competitive products, and will also depend upon the Company's ability to train manufacturers and others to use the Company's products. There can be no assurance that the Company will be able to successfully market its proposed products even if such products perform as anticipated. 5 4 LIMITED MANUFACTURING CAPACITY AND EXPERIENCE The Company has no established commercial manufacturing facilities in the areas in which it is conducting its principal research. Its existing manufacturing, while related, would not directly support manufacturing of the proposed new products. The management team has commercial manufacturing and marketing experience; however, the Company will be required to either employ additional qualified personnel to establish manufacturing facilities or enter into appropriate manufacturing agreements with others. There is no assurance that the Company will be successful in attracting experienced personnel or financing the cost of establishing commercial manufacturing facilities, if required, or be capable of producing a high quality product in quantity for sale at competitive prices. MARKETING AND SALES UNCERTAINTIES There can be no assurance that the DFE related products or the Electronic Billboard and related electronic display products will be successfully developed or that such products will be commercially successful. The Company intends to establish and develop a sales organization to promote, market, and sell its products. This will require significant additional expenditures, management resources and training time. There can be no assurance that the Company will be able to establish such a sales organization. UNPROVEN TECHNOLOGY; NEED FOR SYSTEM INTEGRATION In order to prove that the Company's technologies work and will produce a complete product, the Company must ordinarily integrate a number of highly technical and complicated subsystems into a fully-integrated prototype. There can be no assurance that the Company will be able to successfully complete the development work on any of its proposed products or ultimately develop any marketable products. DEPENDENCE UPON GOVERNMENT CONTRACTS A significant portion of the Company's revenues have been derived from contracts with agencies of the United States government. In the years ended December 31, 1992, 1993, 1994, 1995, 1996, and 1997, such contracts accounted for approximately $930,000, $1,147,000, $820,000, $1,009,000, $2,869,000, and $854,000, respectively, or approximately 99%, 89%, 41%, 33%, 50%, and 24% of the Company's total revenues for each of those periods. The Company's contracts involving the United States government are or may be subject to various risks, including unilateral termination for the convenience of the government, reduction or modification in the event of changes in the government's requirements or budgetary constraints, increased or unexpected costs causing losses or reduced profits under fixed-price contracts or unallowable costs under cost reimbursement contracts, risks of potential disclosure of the Company's confidential information to third parties, the failure or inability of the prime contractor to perform its prime contract in circumstances where the Company is a subcontractor, the failure of the government to exercise options provided for in the contracts and the exercise of "march-in" rights by the government. March-in rights refer to the right of the government or government agency to exercise a non-exclusive, royalty-free, irrevocable, worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. The programs in which the Company participates may extend for several years but are normally funded on an annual basis. There can be no assurance that the government will continue its commitment to programs to which the Company's development projects are applicable or that the Company can compete successfully to obtain funding available pursuant to such programs. The Company currently has no significant commitment for any government funding beyond December 31, 1997 and intends to seek only government funding that directly relates to projects associated with achievement of its strategic objectives. To the extent that the Company is unable to obtain funding from alternate sources, this will adversely affect the Company's ability to continue to perform research and development on its existing and proposed products. 6 5 PATENTS AND OTHER INTELLECTUAL PROPERTY The Company's ability to compete effectively with other companies will depend, in part, on the ability of the Company to maintain the proprietary nature of its technology. Although the Company has been awarded, has filed applications for or has been licensed technology under numerous patents, there can be no assurance as to the degree of protection offered by these patents or as to the likelihood that pending patents will be issued. There can be no assurance that competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investment in competing technologies, have not already or will not apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make and sell its products. There can also be no assurance that competitors will not intentionally infringe the Company's patents. The defense and prosecution of patent suits are both costly and time-consuming, even if the outcome is favorable to the Company. In foreign countries, the expenses associated with such proceedings can be prohibitive. In addition, there is an inherent unpredictability in obtaining and enforcing patents in foreign countries. An adverse outcome in the defense of a patent suit could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease selling its products. Although third parties have not asserted infringement claims against the Company, there can be no assurance that third parties will not assert such claims in the future. Claims that the Company's products infringe on the proprietary rights of others are more likely to be asserted after commencement of commercial sales incorporating the Company's technology. The Company also relies on unpatented proprietary technology, and there can be no assurance that others may not independently develop the same or similar technology or otherwise obtain access to the Company's proprietary technology. To protect its rights in these areas, the Company requires all employees and most consultants, advisors and collaborators to enter into confidentiality agreements. There can be no assurance that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. While the Company has attempted to protect proprietary technology it may develop or acquire and will attempt to protect future developed proprietary technology through patents, copyrights and trade secrets, it believes that its success will depend more upon further innovation and technological expertise. AVAILABILITY OF MATERIALS AND DEPENDENCE ON SUPPLIERS It is anticipated that materials to be used by the Company in producing its future products will be purchased by the Company from outside vendors and, in certain circumstances, the Company may be required to bear the risk of material price fluctuations. It is anticipated by the Company's management that the majority of raw materials to be used in products to be manufactured by the Company will be readily available. However, there can be no assurance that such materials will be available in the future, or if available, will be procurable at prices which will be favorable to the Company. DEPENDENCE ON KEY PERSONNEL The future success of the Company will depend in large part on its ability to attract and retain highly qualified scientific, technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain all personnel necessary for the development of its business. In addition, much of the know-how and processes developed by the Company reside in its key scientific and technical personnel and such know-how and processes are not readily transferable to other scientific and technical personnel. The loss of the services of key scientific, technical and managerial personnel could have a material adverse effect on the Company. 7 EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS 6-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 SEP-30-1998 SEP-30-1997 4,542 240,860 0 0 50,381 511,246 0 0 0 143,917 213,797 1,027,398 994,035 4,744,074 826,837 2,618,318 391,495 3,249,110 2,961,321 2,723,986 0 514,584 0 0 1,700 3,342 44,114 18,196 (2,615,640) (10,998) 391,495 3,249,110 574,005 3,006,442 574,005 3,006,442 1,517,008 3,591,243 4,291,892 6,765,184 (1,045,697) (318,267) 0 622,248 254,597 335,061 (2,926,787) (4,397,784) 0 0 (2,926,787) (4,397,784) 0 0 0 0 0 0 (2,926,787) (4,397,784) (0.09) (0.33) (0.09) (0.33)
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