<PAGE> 1
U.S. 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, 1997
[ ] 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)
12100-A TECHNOLOGY BLVD.
AUSTIN, TEXAS 78727
Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (512) 331-6200
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 12, 1997, the registrant had 21,508,359 shares of common
stock, par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE> 2
SI DIAMOND TECHNOLOGY, INC.
INDEX
<TABLE>
<CAPTION>
Part I Financial Information PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 1997 and December 31, 1996............................. 3
Consolidated Statements of Operations--Three Months and Nine Months Ended
September 30, 1997 and 1996..................................................................... 4
Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1997 and 1996..................................................................... 5
Notes to Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 11
Part II Other Information
Item 5. Other Information............................................................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................................................. 15
Signatures ................................................................................................ 16
</TABLE>
2
<PAGE> 3
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 240,860 $ 53,516
Accounts receivable, trade....................................................... 511,246 934,564
Notes receivable................................................................... -- 15,000
Inventory.......................................................................... 143,917 329,643
Costs and estimated earnings in excess of billings
on uncompleted contracts....................................................... -- 584,770
Prepaid expenses and other assets.................................................. 131,375 136,693
------------- --------------
Total current assets............................................................. 1,027,398 2,054,186
Property, plant and equipment, net................................................. 2,125,756 3,143,510
Intangible assets, net............................................................. 95,956 423,563
------------- --------------
Total assets..................................................................... $ 3,249,110 $ 5,621,259
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 1,163,402 $ 2,647,487
Accrued liabilities................................................................ 1,169,467 1,210,427
Bank line of credit................................................................ -- 30,000
Notes payable...................................................................... 285,951 961,222
Capital lease obligations.......................................................... -- 71,061
Billings in excess of costs and estimated earnings on uncompleted contracts........ 105,166 9,875
------------- --------------
Total current liabilities........................................................ 2,723,986 4,930,072
Notes payable, long-term.............................................................. 514,584 --
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, 1997 and December 31, 1996.................................... 100 100
Series E, 292 and 646 shares issued and outstanding
at September 30, 1997 and December 31, 1996, respectively...................... 292 646
Series F, 1,250 shares issued and outstanding
at September 30, 1997.......................................................... 1,250 --
Series G, 1,700 shares issued and outstanding
at September 30, 1997.......................................................... 1,700 --
Common stock, 120,000,000 shares authorized, $.00l par value,
18,195,815 shares issued and outstanding at September 30, 1997;
13,126,083 shares issued and outstanding at December 31, 1996...................... 18,196 13,126
Additional paid-in capital............................................................ 49,105,180 45,412,283
Accumulated deficit................................................................... (49,103,719) (44,705,442)
Unearned compensation................................................................. (12,459) (29,526)
------------- --------------
Total stockholders' equity....................................................... 10,540 691,187
------------- --------------
Total liabilities and stockholders' equity....................................... $ 3,249,110 $ 5,621,259
============= ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................................... $ 965,567 $ 1,272,718 $ 3,006,442 $ 4,244,465
------------ ------------ ------------ ------------
Cost of sales .............................. 1,191,388 1,266,043 3,591,243 4,690,199
Selling, general and administrative expenses 936,038 1,158,098 2,743,248 5,973,221
Research and development ................... 125,449 765,005 430,693 4,676,470
------------ ------------ ------------ ------------
Operating costs and expenses .......... 2,252,875 3,189,146 6,765,184 15,339,890
Loss from operations .................. (1,287,308) (1,916,428) (3,758,742) (11,095,425)
Other income (expense)
Loss on impairment of assets ........ -- -- -- (850,000)
Loss on disposal of assets .......... (106,488) -- (622,248) (350,000)
Other income (expense), net ......... (143,786) (55,676) (16,794) 183,758
------------ ------------ ------------ ------------
Net loss ................................... (1,537,582) (1,972,104) (4,397,784) (12,111,667)
Less preferred stock dividend .............. (120,932) (205,768) (662,416) (1,128,894)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders . $ (1,658,514) $ (2,177,872) $ (5,060,200) $(13,240,561)
============ ============ ============ ============
Net loss per common share .................. $ (0.09) $ (0.18) $ (0.33) $ (1.16)
============ ============ ============ ============
Weighted average shares outstanding ........ 17,559,485 12,285,750 15,357,241 11,443,123
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $(4,397,784) $(12,111,667)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ..................................... 781,303 860,579
Services provided for payment of MCC notes ........................ (74,495) (337,227)
Non-cash compensation of consultants and noteholders
upon issuance of warrants ....................................... 105,251 --
Revaluation of stock warrants ..................................... -- 450,000
Loss on disposal and impairment of assets ......................... 622,248 850,000
Changes in assets and liabilities:
Accounts receivable, trade ...................................... 423,318 (1,433,630)
Notes receivable ................................................ 15,000 300,000
Costs and estimated earnings in excess of billings on uncompleted
contracts ..................................................... 584,770 258,251
Inventory ....................................................... 8,727 (301,500)
Prepaid expenses and other current assets ....................... 5,318 (73,918)
Accounts payable and accrued liabilities ........................ (1,403,562) 927,619
Billings in excess of costs and estimated earnings on uncompleted
contracts ..................................................... 95,291 107,533
----------- ------------
Total adjustments .......................................... 1,163,169 1,607,707
----------- ------------
Net cash used in operating activities ........................... (3,234,615) (10,503,960)
----------- ------------
Cash flows from investing activities:
Capital expenditures .............................................. (34,694) (606,994)
Proceeds from the sale of equipment ............................... 262,895 552,265
Net change in intangibles and other assets ........................ -- 4,514
----------- ------------
Net cash provided by (used in) investing activities ............. 228,201 (50,215)
----------- ------------
Cash flows from financing activities:
Repayment of notes payable ........................................ (871,061) (260,219)
Proceeds from notes payable ....................................... 500,000 11,500
Bank line of credit .............................................. (30,000) --
Redemption of series F preferred stock ............................ (60,493) --
Proceeds of stock issuance, net of costs .......................... 3,655,312 10,845,635
----------- ------------
Net cash provided by financing activities ....................... 3,193,758 10,596,916
----------- ------------
Net increase in cash and cash equivalents ................................ 187,344 42,741
Cash and cash equivalents, beginning of period ........................... 53,516 293,593
----------- ------------
Cash and cash equivalents, end of the period ............................. $ 240,860 $ 336,334
=========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of SI Diamond
Technology, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1996, included in the Company's 1996 Annual Report on
Form 10-KSB/A. The balance sheet information for December 31, 1996 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, 1997 and
1996 was approximately $108,408 and $23,293, respectively.
3. Capital Stock:
Preferred Stock
In March 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company issued 1,700 shares of its Series F Preferred
Stock ("Series F Preferred"). The offering provided gross proceeds of $1,700,000
to the Company less expenses of $172,500. The registration statement covering
shares of the Company's Common Stock into which the Series F Preferred is
convertible was declared effective June 9, 1997.
From June 1997 through August, 1997, through an exempt offering under
Regulation D of the Securities Act of 1933 the Company issued 1,700 shares of
its Series G Preferred Stock ("Series G Preferred"). The offering provided gross
proceeds of $1,700,000 to the Company. There were no material expenses
associated with this offering. The registration statement covering shares of the
Company's Common Stock into which the Series G Preferred is convertible will be
filed in November 1997.
In September 1997 the Company completed an agreement with Diamond Pro-shop
Nomura Co., Ltd., (DPN) an affiliate of Noritake. Both DPN and Noritake are
corporations organized under the laws of Japan. Under the terms of the
agreement, DPN acquired Preferred Stock convertible into a 5% ownership
interest in the Company's FEPET subsidiary and acquired certain licensing and
marketing rights for products developed by FEPET in exchange for a payment of
$500,000. This payment was allocated $100,000 to Capital Stock, and $400,000 to
licensing rights and products which FEPET is required to provide under the
agreement. Of the portion of the proceeds allocated to licensing rights and
products, $360,000 was recorded as revenue and $40,000 was deferred based on the
amount of development work remaining.
Common Stock
During the nine months ended September 1997, the Company issued 100,000
shares and received a total of $ 100,000 in proceeds from the exercise of
warrants. These warrants were issued in connection with the Company's October
1996 debt financing.
During the nine months ended September 1997, the Company issued
approximately 239,000 shares of the Company's Common Stock to creditors of the
Company as payment for approximately $235,000 of existing indebtedness.
6
<PAGE> 7
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Capital Stock (continued)
In October 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company received subscriptions for a total of
$3,500,000 of the Company's Common Stock. These funds will be received over a
seven month period as described in the remainder of this paragraph. In October
1997, the Company issued 1,414,667 shares of its Common Stock and received gross
proceeds of $500,000 less expenses of $14,500. In November 1997, the Company
will issue 1,577,884 shares of its Common Stock and receive gross proceeds of
$500,000 less expenses of $14,500. The Company will receive additional gross
proceeds of $500,000, less expenses of $14,500, each month from December 1997
through April 1998. The number of shares to be issued in exchange for these
proceeds is dependent upon the market price of the Company's Common Stock at the
time. The registration statement covering a portion of these shares of the
Company's Common Stock was declared effective October 28, 1997. A registration
statement covering the remainder of the shares will be filed in November 1997.
4. Notes Payable
In February 1997, the Company closed an offering of 8% Convertible
Debentures (the "Debentures") under Regulation S of the Securities Act of 1933.
The Company agreed to issue two Debentures, each with a face amount of $555,555.
The Debentures bear interest at a rate of 8%. The entire unpaid principal and
accumulated interest on the Debentures shall be due and payable on the second
anniversary of the date on which the Debentures were issued. On March 7, 1997
the Company received gross proceeds of $555,555, less expenses of $55,755, for
the issuance of the first debenture. The second debenture was to be issued
within 60 days of issuance of the first debenture; however, the lender defaulted
on its obligation to fund the second debenture. As a result of this default the
Company and the lender have renegotiated the terms of the first debenture to
place restrictions on the lender's ability to convert the debenture to common
stock.
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 there is uncertainty associated with any litigation, the Company
believes that the ultimate resolution of this matter will not have a material
adverse effect on its financial position, results of operations or cash flows.
Outlook
The Company anticipates that capital raised to date, including commitments
received for future funding, will enable it to maintain its operations at the
existing level for approximately seven months after the date of this filing. The
Company is, however, planning for increased revenues both from existing products
and products currently in the development stage during this period, as well as
developing other sources of funding. If the Company's plans are successful, the
Company anticipates that the capital raised to date will allow it to maintain
its operations until the Company is self sustaining. There is no assurance that
these plans will be successful. If such plans are only partially successful, the
seven month period would be extended, however the capital raised to date may not
be sufficient to allow the Company to maintain operations until the Company is
self sustaining. 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. 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.
7
<PAGE> 8
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Contingencies (continued)
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 through December 31, 1996. Further spending in Russia has been
temporarily halted pending agreement as to the nature and amount of the services
to be performed in Russia for the remaining balance to be spent under the
original agreement.
6. Business Developments
The Company occupied two separate leased facilities in Austin, Texas. In
connection with its ongoing cost reduction efforts, the Company consolidated its
operations into one facility. In connection with this move, the Company
abandoned leasehold improvements having a net book value of approximately
$111,000. These leasehold improvements were written off in the quarter ended
June 1997 and are reflected in the income statement as part of the loss on
disposal of assets. There was no impact on the Company's cash as a result of
this write-off.
During the quarter ended June 1997, the Company made the decision to
dispose of its Plasmatron subsidiary. While Plasmatron was marginally profitable
and provided slightly positive cash flow, the near-term outlook for Plasmatron
was one of negative cash flow. The remote location and nature of the business
required an inordinately high amount of management attention relative to other
more promising areas of the business, so the Company decided to concentrate on
its high potential business areas and dispose of Plasmatron. Given the size of
the company, the nature of the business, and the existence of the customer claim
described in Note 5, no purchaser for the business as an ongoing entity could be
found. The Company is liquidating Plasmatron in an orderly manner. In connection
with the decision to close Plasmatron, the Company wrote off goodwill having a
net book value of approximately $224,000 and reduced certain inventory to its
expected liquidation value, resulting in a reduction in inventory of
approximately $256,000. Both of these charges, totaling approximately $480,000
are included in the income statement as part of the loss on disposal of assets.
There was no impact on the Company's cash as a result of this write-off.
7. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 "Earnings per Share" and No. 129 "Disclosure of Information About
Capital Structure." SFAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is designed to improve
earnings per share information by simplifying the existing computational
guidelines and revising previous disclosure requirements. SFAS No. 129
consolidates the existing disclosure requirements to disclose certain
information about an entity's capital structure. Both statements are effective
for periods ending after December 15, 1997. Management has not yet determined
the impact that SFAS No. 128 will have on earnings per share, and there are no
changes in disclosures associated with adoption of SFAS No. 129.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.
8
<PAGE> 9
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Recent Accounting Pronouncements (continued)
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
Management believes that the Company currently substantially complies with
the requirements of SFAS No. 130 and SFAS No. 131 and that the implementation of
the standards will not have a material impact on the Company's financial
results.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OVERVIEW
During the nine months ended September 30, 1997, the Company's primary
revenues were earned through microelectronics fabrication and assembly
services at Diamond Tech One, Inc. ("DTO") and from performing research
under government contracts. The Company continued to incur substantial
expenses 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 EBT. As more fully
discussed in the Company's Annual Report on Form 10-KSB/A for the year
ended December 31, 1996, the Company expects to incur additional research
and development expenses throughout 1997 and 1998 in developing the
Company's DFE technology and in developing and commercializing its
electronic billboard product.
RECENT DEVELOPMENTS
In February 1997, the Company closed an offering of 8% Convertible
Debentures (the "Debentures") under Regulation S of the Securities Act of
1933. The Company agreed to issue two Debentures, each with a face amount
of $555,555. The Debentures bear interest at a rate of 8%. The entire
unpaid principal and accumulated interest on the Debentures shall be due
and payable on the second anniversary of the date on which the Debentures
were issued. On March 7, 1997 the Company received gross proceeds of
$555,555, less expenses of $55,755, for the issuance of the first
debenture. The second debenture was to be issued within 60 days of issuance
of the first debenture, however the lender defaulted on its obligation to
fund the second debenture. As a result of this default the Company and the
lender have renegotiated the terms of the first debenture to place
restrictions on the lender's ability to convert the debenture to common
stock.
In March 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company issued 1,700 shares of its Series F
Preferred Stock ("Series F Preferred"). The offering provided gross
proceeds of $1,700,000 to the Company less expenses of $172,500. The
registration statement covering shares of the Company's Common Stock into
which the Series F Preferred is convertible was declared effective June 9,
1997.
From June 1997 through August, 1997, through an exempt offering under
Regulation D of the Securities Act of 1933 the Company issued 1,700 shares
of its Series G Preferred Stock ("Series G Preferred"). The offering
provided gross proceeds of $1,700,000 to the Company. There were no
material expenses associated with this offering. The registration statement
covering shares of the Company's Common Stock into which the Series G
Preferred is convertible will be filed in November 1997.
During the quarter ended June 30, 1997 as part of its ongoing efforts to
reduce expenditures and streamline operations, the Company adopted a
reorganization plan. As part of this plan the Company decided to close its
Plasmatron subsidiary and combine its operations into one facility in
Austin. As a result of this, the Company has recorded a loss on disposal of
assets of $622,248. This reorganization had no impact on the Company's cash
position.
In September 1997 the Company completed an agreement with Diamond Pro-shop
Nomura Co., Ltd., (DPN) an affiliate of Noritake. Both DPN and Noritake are
corporations organized under the laws of Japan. Under the terms of the
agreement, DPN acquired Preferred Stock convertible into a 5% ownership
interest in the Company's FEPET subsidiary and acquired certain licensing
and marketing rights for products developed by FEPET in exchange for a
payment of $500,000. This payment was allocated $100,000 to Capital Stock
and $400,000 to licensing rights and products which FEPET is required to
provide under the agreement. Of the portion of the proceeds allocated to
licensing rights and products, $360,000 was recorded as revenue and $40,000
was deferred based on the amount of development work remaining.
10
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS (CONTINUED)
In October 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company received subscriptions for at total of
$3,500,000 of the Company's Common Stock. These funds will be received over
a seven month period as described in the remainder of this paragraph. In
October 1997, the Company issued 1,414,667 shares of its Common Stock and
received gross proceeds of $500,000 less expenses of $14,500. In November
1997, the Company will issue 1,577,884 shares of its Common Stock and
receive gross proceeds of $500,000 less expenses of $14,500. The Company
will receive additional gross proceeds of $500,000, less expenses of
$12,400, each month from December 1997 through April 1998. The number of
shares to be issued in exchange for these proceeds is dependent upon the
market price of the Company's Common Stock at the time. The registration
statement covering a portion of these shares of the Company's Common Stock
was declared effective October 28, 1997. A registration statement covering
the remainder of the shares will be filed in November 1997.
RESULTS OF OPERATIONS
The Company's revenues for the third quarter ended September 30, 1997
totaled $965,567 compared to $1,272,718 for the third quarter of 1996. The
Company earned $3,006,442 in revenues during the nine month period ended
September 30, 1997, (the "1997 Period") as compared with $4,244,465 during
the nine month period ended September 30, 1996 (the "1996 Period").
Commercial sales were $2,248,847 for the 1997 Period compared to $1,894,243
for the 1996 Period. Commercial revenues in the 1997 Period were
approximately 42% from the Company's DTO subsidiary, 39% from the Company's
Plasmatron subsidiary, and 17% from the Company's FEPET subsidiary.
Commercial revenues in the 1996 period were primarily from DTO. Diamond
Tech One's commercial backlog as of September 30, 1997 was approximately
$304,000 as compared with approximately $648,000 at September 30, 1996. The
reduction in backlog at DTO is a result of the change in strategic
direction at DTO whereby DTO is moving to become an ongoing repetitive
manufacturer rather than a supplier of nonrecurring research or prototype
projects. Contract research revenues for the 1997 Period were $757,595
compared to $2,659,887 for the 1996 Period. At September 30, 1997, the
Company had a research backlog of approximately $313,000 in anticipated
future revenues from its existing contracts, as compared with a backlog of
approximately $1,650,000 at June 30, 1996. The decreased contract revenue
for the 1997 Period resulted primarily from the Company's focus on only
performing research related to its core business operations that can be
commercialized in a relatively short time period. The majority of contract
research revenue in both periods resulted from the Company's DFE technology
development related to the $3,500,000 National Institute of Science and
Technology ("NIST") contract which commenced during the second quarter of
1995. The NIST contract is intended to provide matching grants to
facilitate further research and development on the Company's DFE
technology. The decrease in the contract research backlog results from
spending on the NIST contract. The Company's ability to perform the
research on its backlog should not require significant addition of
personnel.
For the 1997 Period, the Company's cost of sales were $3,591,243 or a
negative gross margin of 19%, as compared with $4,690,199 or a negative
gross margin of 10%, for the 1996 Period. The increased negative margin in
the 1997 Period resulted from lower DTO revenues during the period which
resulted in lower absorption of its fixed costs. The negative margins are
the result of the low utilization of the DTO facility which has relatively
high fixed costs associated with the operation of its clean rooms. DTO had
a negative gross margin of 110 % during the 1997 Period. The Company's
selling, general and administrative expenses were $2,743,248 for the 1997
Period, compared with $5,973,221 for the 1996 Period. The expense decrease
resulted primarily from the Company's May 1996 reorganization which
resulted in a significant reduction of the Company's overhead expenses. The
1996 Period also included a higher level of fund raising activity as well
as $450,000 of contract settlements with underwriters during that time.
Company sponsored research and development expenses for the 1997 Period
were $430,693 as compared to $4,676,470 for the 1996 Period. This reduction
in research expense is the result of the Company's decision to focus on
commercialization of its existing products and to discontinue all research
that is not at least partially funded and is not directly related to the
Company's strategic business objectives. The Company expects to continue to
incur expense in 1997 and 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 are dependent upon the amount of funding obtained from outside
sources to support the research activities.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
During the quarter ended June 30, 1997 as part of its ongoing efforts to
reduce expenditures and streamline operations, the Company adopted a
reorganization plan. As part of this plan the Company decided to close its
Plasmatron subsidiary and combine its remaining operations into one
facility in Austin. As a result of this, the Company has recorded a loss on
disposal of assets of $622,248. This reorganization had no impact on the
Company's cash position. The loss on disposal of assets in the 1996 Period
is the result of the discontinuance of operations of the Company's SIDT
Coatings subsidiary during that period.
FINANCIAL CONDITION
At September 30, 1997, the Company had cash and cash equivalents in the
amount of $240,860 as compared with cash and cash equivalents of $53,516 at
December 31, 1996. This increase in cash is a result of the Company's
successful Regulation D stock offering and Regulation S Debenture offering
in March 1997 and its successful regulation D stock offering in June 1997,
less costs incurred in the period. As discussed in greater detail below,
subsequent to September 30, 1997 the Company completed an additional
Regulation D offering in October 1997 to provide it with the capital to
continue development of its technologies.
In February 1997, the Company closed an offering of 8% Convertible
Debentures (the "Debentures") under Regulation S of the Securities Act of
1933. The Company agreed to issue two Debentures, each with a face amount
of $555,555. The Debentures bear interest at a rate of 8%. The entire
unpaid principal and accumulated interest on the Debentures shall be due
and payable on the second anniversary of the date on which the Debentures
were issued. On March 7, 1997 the Company received gross proceeds of
$555,555, less expenses of $55,755, for the issuance of the first
debenture. The second debenture was to be issued within 60 days of issuance
of the first debenture, however the lender defaulted on its obligation to
fund the second debenture. As a result of this default the Company and the
lender have renegotiated the terms of the first debenture to place
restrictions on the lender's ability to convert the debenture to common
stock.
In March 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company issued 1,700 shares of its Series F
Preferred Stock ("Series F Preferred"). The offering provided gross
proceeds of $1,700,000 to the Company less expenses of $172,500. The
registration statement covering shares of the Company's Common Stock into
which the Series F Preferred is convertible was declared effective June 9,
1997.
From June 1997 through August, 1997, through an exempt offering under
Regulation D of the Securities Act of 1933 the Company issued 1,700 shares
of its Series G Preferred Stock ("Series G Preferred"). The offering
provided gross proceeds of $1,700,000 to the Company. There were no
material expenses associated with this offering. The registration statement
covering shares of the Company's Common Stock into which the Series G
Preferred is convertible will be filed in November 1997.
In September 1997 the Company completed an agreement with Diamond Pro-shop
Nomura Co., Ltd., (DPN) an affiliate of Noritake. Both DPN and Noritake are
corporations organized under the laws of Japan. Under the terms of the
agreement, DPN acquired Preferred Stock convertible into a 5% ownership
interest in the Company's FEPET subsidiary and acquired certain licensing
and marketing rights for products developed by FEPET in exchange for a
payment of $500,000. This payment was allocated $100,000 to Capital Stock
and $400,000 to licensing rights and products which FEPET is required to
provide under the agreement. Of the portion of the proceeds allocated to
licensing rights and products, $360,000 was recorded as revenue and $40,000
was deferred based on the amount of development work remaining.
In October 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company received subscriptions for at total of
$3,500,000 of the Company's Common Stock. These funds will be received over
a seven month period as described in the remainder of this paragraph. In
October 1997, the Company issued 1,414,667 shares of its Common Stock and
received gross proceeds of $500,000 less expenses of $14,500. In November
1997, the Company will issue 1,577,884 shares of its Common Stock and
receive gross proceeds of $500,000 less expenses of $14,500. The
12
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company will receive additional gross proceeds of $500,000, less expenses
of $14,500, each month from December 1997 through April 1998. The number of
shares to be issued in exchange for these proceeds is dependent upon the
market price of the Company's Common Stock at the time. The registration
statement covering a portion of these shares of the Company's Common Stock
was declared effective October 28, 1997. A registration statement covering
the remainder of the shares will be filed in November 1997.
In the nine months ended September 1997, the Company received a total of $
100,000 in proceeds from the exercise of warrants. These warrants were
issued in connection with the Company's October 1996 debt financing.
Cash used in operating activities was $3,234,615 for the 1997 Period
compared to $10,503,960 for the 1996 Period. The decrease in the
requirement of cash flows was primarily the result of a generally lower
level of company sponsored research and development, sales and marketing,
and administrative expenses during the 1997 Period.
Cash provided by investing activities during the 1997 Period was $228,201
as compared with cash used in investing activities of $50,215 for the 1996
Period. The cash provided in the 1997 Period resulted from the sale of
excess equipment. The cash used in the 1996 Period resulted primarily from
the purchase of 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. When the Company needs additional funds, the Company may seek to
sell additional debt or equity securities, secure joint venture
partnerships, or sell certain technology rights. The Company may seek to
increase its liquidity through bank borrowings or other financing. There
can be no assurance that any of these financing alternatives can be
arranged on commercially acceptable terms. The Company believes that its
success in reaching profitability will be dependent upon the viability of
its products and their acceptance in the marketplace, and its ability to
obtain additional financing in the future.
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.
OUTLOOK
It is anticipated that losses will continue throughout 1997 and into
1998 as the Company continues to fund the development of its DFE technology
and its electronic billboard. Increased commercial revenues are anticipated
in the Company's DTO and EBT subsidiaries; however, they may not be
sufficient to offset the planned research and development efforts and
selling, general and administrative expenses. Sales from the DFE products
or the electronic billboard are not anticipated in 1997. Full commercial
development of the Company's DFE technology and electronic billboard may
require additional funds that may not be available at terms acceptable to
the Company. Should the Company be unable to obtain acceptable additional
debt or equity financings, management intends to eliminate or reduce the
level of internally funded research and development and to reduce the level
of administrative expense. Management believes that capital raised to date,
including commitments received for future funding, will enable it to
maintain its operations at the existing level for approximately seven
months after the date of this filing. The Company is, however, planning for
increased revenues both from existing products and products currently in
the development stage during this period, as well as developing other
13
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OUTLOOK (CONTINUED)
sources of funding. If these plans are successful, the Company anticipates
that the capital raised to date will allow it to maintain its operations
until the Company is self sustaining. There is no assurance that these
plans will be successful. If such plans are only partially successful, the
seven month period would be extended, however the capital raised to date
may not be sufficient to allow the Company to maintain operations until the
Company is self sustaining. 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. 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
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/A for the fiscal year
ended December 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Index to Exhibits on page 17 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 July 25, 1997
(2) Current Report on Form 8-K (Item 5) dated as of August 7, 1997
15
<PAGE> 16
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 14, 1997 /s/ Marc W. Eller
------------------------------------
Marc W. Eller
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 /s/ Douglas P. Baker
-------------------------------------
Douglas P. Baker
Chief Financial Officer
(Principal Financial Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
11 Computation of (Loss) Per Common Share
13 Forward-Looking Statements and Important Factors Affecting
Future Results (pages ii - vi of the Company's Annual Report
on Form 10-KSB/A for the fiscal year ended December 31, 1996,
incorporated by reference into the Quarterly Report on Form
10-QSB for the fiscal quarter ended September 30, 1997).
27 Financial Data Schedule
</TABLE>
17
<PAGE> 1
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of (loss) per common share:
Net loss applicable to common shareholders .... $ (1,658,514) $ (2,177,872) $ (5,060,200) $(13,240,561)
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding 17,559,485 12,285,750 15,357,241 11,443,123
Net loss per common share ..................... $ (0.09) $ (0.18) $ (0.33) $ (1.16)
============ ============ ============ ============
</TABLE>
Computation of (loss) per common share
assuming full dilution (A):
(A) No calculation of loss per common share assuming full dilution is
submitted because such computation results in an antidilutive loss per
common share.
<PAGE> 1
EXHIBIT 13
FORWARD - LOOKING STATEMENTS AND IMPORTANT
FACTORS AFFECTING FUTURE RESULTS
Certain statements in this annual report are forward-looking statements
concerning the future operations of SI Diamond Technology, Inc. and it
subsidiaries (collectively referred to as the "Company"). The Company is
including the following cautionary statement in this Annual Report on Form
10-KSB to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement or expectation or belief will result or be achieved or accomplished.
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, 1996, the Company suffered a net loss
of $13,709,006. For the years ended December 31, 1992, 1993, 1994, and 1995, the
Company suffered net losses of $1,630,978, $7,527,677, $7,255,420, and
$14,389,856, 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 and there can be no assurance that the Company
will be profitable in the future. The Company's operations to date have been
primarily financed by the proceeds of 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.
<PAGE> 2
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
The Company expects to incur substantial expenses for R&D, product
testing, production, manufacturing, product marketing, and administrative
overhead. The majority of R&D expenditures are for the development of the
Company's DFE technology. Further, the Company believes that certain proposed
products may not be available for commercial sale or routine use for a period of
one to two years. Therefore, it is anticipated that the commercialization of the
Company's existing and proposed products will require additional capital in
excess of the Company's current sources of funding. The combined effect of the
foregoing may prevent the Company from achieving profitability for an extended
period of time. Because the timing and receipt of revenues from the sale of
products will be tied to the achievement of certain product development,
testing, manufacturing and marketing objectives which cannot be predicted with
certainty, there may be substantial fluctuations in the Company's results of
operations. If revenues do not increase as rapidly as anticipated, or if product
development and testing and marketing require more funding than anticipated, the
Company may be required to curtail its expansion and/or seek additional
financing from other sources. The Company may seek such additional financing
through the offer of debt or equity or any combination thereof at any time.
The Company has developed a plan to maintain operations for 12-18
months from the date of this Annual Report. However, existing resources at
current spending levels are only available for approximately 2-3 months. This
estimate 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 to
cause available resources to be consumed before such time. The Company's plan is
primarily dependent on increasing revenues and raising additional funds through
strategic partners, additional debt offerings, or additional equity 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.
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. 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, semiconductor, and coating system 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.
<PAGE> 3
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. The Company's principal license agreement with MCC requires the
Company to pay exclusivity fees under certain circumstances in order to maintain
the Company's exclusive rights under the MCC Agreement. 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.
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 new management team that was put in place 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 will be successfully developed or that such products will
be commercially successful. The Company intends to establish a sales
organization to promote, market, and sell its products. To develop a sales
organization 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.
<PAGE> 4
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 and 1996, such contracts accounted for
approximately $930,000, $1,147,000, $820,000, $1,009,000, and $2,869,000,
respectively, or approximately 99%, 89%, 41%, 33%, and 50% 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. A reduction in, or discontinuance of, such
commitment or of the Company's participation in these programs would have a
material adverse effect on the Company's business, operating results and
financial condition.
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.
<PAGE> 5
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SI DIAMOND TECHNOLOGY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 240,860 442,884
<SECURITIES> 0 0
<RECEIVABLES> 511,246 1,658,948
<ALLOWANCES> 0 0
<INVENTORY> 143,917 346,868
<CURRENT-ASSETS> 1,027,398 2,708,950
<PP&E> 4,744,074 4,896,258
<DEPRECIATION> 2,618,318 1,921,967
<TOTAL-ASSETS> 3,249,110 6,633,603
<CURRENT-LIABILITIES> 2,723,986 4,524,788
<BONDS> 514,584 0
0 0
3,342 766
<COMMON> 18,196 12,934
<OTHER-SE> (10,998) 2,095,115
<TOTAL-LIABILITY-AND-EQUITY> 3,249,110 6,633,603
<SALES> 3,006,442 4,244,465
<TOTAL-REVENUES> 3,006,442 4,244,465
<CGS> 3,591,243 4,690,199
<TOTAL-COSTS> 6,765,184 15,339,890
<OTHER-EXPENSES> (318,267) (207,051)
<LOSS-PROVISION> 622,248 1,200,000
<INTEREST-EXPENSE> 335,061 23,293
<INCOME-PRETAX> (4,397,784) (12,111,667)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,397,784) (12,111,667)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,397,784) (12,111,667)
<EPS-PRIMARY> (0.33) (0.16)
<EPS-DILUTED> (0.33) (1.16)
</TABLE>
