<PAGE>
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 June 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 August 8, 1997, the registrant had 17,705,632 shares of common stock,
par value $.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
SI DIAMOND TECHNOLOGY, INC.
INDEX
PAGE
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--June 30, 1997
and December 31, 1996.................................... 3
Consolidated Statements of Operations--Three Months
and Six Months Ended June 30, 1997 and 1996.............. 4
Consolidated Statements of Cash Flows--Six Months Ended
June 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.................. 9
Part II Other Information
Item 5. Other Information..................................... 13
Item 6. Exhibits and Reports on Form 8-K...................... 13
Signatures .............................................................. 14
2
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
Current assets:
Cash and cash equivalents........................ $ 299,535 $ 53,516
Accounts receivable, trade..................... 1,205,468 934,564
Stock subscriptions receivable................... 950,000 --
Notes receivable................................. -- 15,000
Inventory........................................ 186,813 329,643
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. 137,697 584,770
Prepaid expenses and other assets................ 92,528 136,693
------------ ------------
Total current assets......................... 2,872,041 2,054,186
Property, plant and equipment, net............... 2,402,339 3,143,510
Intangible assets, net........................... 95,956 423,563
------------ ------------
Total assets................................. $ 5,370,336 $ 5,621,259
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,358,673 $ 2,647,487
Accrued liabilities.............................. 902,576 1,210,427
Bank line of credit.............................. 410,000 30,000
Notes payable.................................... 835,625 961,222
Capital lease obligations........................ 25,552 71,061
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. 239,806 9,875
------------ ------------
Total current liabilities.................... 3,772,232 4,930,072
Notes payable, long-term.......................... 508,333 --
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 June 30, 1997 and December 31, 1996......... 100 100
Series E, 437 and 646 shares issued and
outstanding at June 30, 1997 and
December 31, 1996.............................. 437 646
Series F, 1,640 shares issued and outstanding
at June 30, 1997............................... 1,640 --
Common stock, 120,000,000 shares authorized,
$.00l par value, 16,085,143 shares issued
and outstanding at June 30, 1997; 13,126,083
shares issued and outstanding at
December 31, 1996............................... 16,085 13,126
Additional paid-in capital........................ 47,053,205 45,412,283
Preferred stock subscribed, but unissued.......... 1,600,000
Accumulated deficit............................... (47,566,137) (44,705,442)
Unearned compensation............................. (15,559) (29,526)
------------ ------------
Total stockholders' equity...................... 1,089,771 691,187
------------ ------------
Total liabilities and stockholders' equity...... $ 5,370,336 $ 5,621,259
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 1,028,048 $ 2,068,503 $ 2,040,875 $ 2,971,747
----------- ----------- ----------- ------------
Cost of sales............................................ 1,210,561 2,089,661 2,399,855 3,424,156
Selling, general and administrative expenses............. 955,676 2,172,549 1,807,210 4,815,123
Research and development................................. 151,064 1,784,040 305,244 3,911,465
----------- ----------- ----------- ------------
Operating costs and expenses........................ 2,317,301 6,046,250 4,512,309 12,150,744
Loss from operations................................ (1,289,253) (3,977,747) (2,471,434) (9,178,997)
Other income (expense)
Loss on impairment of assets........................ -- -- -- (850,000)
Loss on disposal of assets.......................... (515,760) -- (515,760) (350,000)
Other income, net................................... 77,119 8,235 126,992 239,434
----------- ----------- ----------- ------------
Net loss................................................. (1,727,894) (3,969,512) (2,860,202) (10,139,563)
Less preferred stock dividend............................ (263,268) (699,610) (541,484) (923,128)
----------- ----------- ----------- ------------
Net loss applicable to common shareholders............... $(1,991,162) $(4,669,122) $(3,401,686) $(11,062,691)
=========== =========== =========== ============
Net loss per common share................................ $ (0.13) $ (0.42) $ (0.24) $ (1.00)
=========== =========== =========== ============
Average shares outstanding............................... 15,065,460 11,169,930 14,327,869 11,014,827
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements,.
4
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
June 30,
--------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss........................................ $(2,860,202) $(10,139,563)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense.......... 532,883 629,474
Services provided for payment of MCC notes..... (74,495) (282,776)
Revaluation of stock warrants.................. -- 450,000
Loss on impairment of net assets............... 515,760 850,000
Changes in assets and liabilities:
Accounts receivable, trade................... (270,904) (1,534,667)
Notes receivable............................. 15,000 300,000
Costs and estimated earnings in excess
of billings on uncompleted contracts........ 447,073 (74,247)
Inventory.................................... 41,081 --
Prepaid expenses............................. 44,165 (87,916)
Accounts payable and accrued liabilities..... (1,475,508) 1,523,092
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 229,931 388,588
----------- ------------
Total adjustments.......................... 4,986 2,161,548
----------- ------------
Net cash used in operating activities........ (2,855,216) (7,978,015)
----------- ------------
Cash flows from investing activities:
Capital expenditures........................... (12,345) (645,605)
Proceeds from the sale of equipment............ 184,270 27,265
Expenditures for intangible and other assets... -- (93,608)
----------- ------------
Net cash provided by (used in) investing
activities................................. 171,925 (711,948)
----------- ------------
Cash flows from financing activities:
Repayment of notes payable..................... (245,509) (246,391)
Proceeds from notes payable.................... 500,000 --
Bank line of credit........................... 380,000 --
Redemption of series F preferred stock......... (60,493) --
Proceeds of stock issuance, net of costs....... 2,355,312 10,850,624
----------- ------------
Net cash provided by financing activities.... 2,929,310 10,604,233
----------- ------------
Net increase in cash and cash equivalents......... 246,019 1,914,270
Cash and cash equivalents, beginning of period.... 53,516 293,593
----------- ------------
Cash and cash equivalents, end of the period...... $ 299,535 $ 2,207,863
=========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
5
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of SI Diamond
Technology, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 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 six months ended June 30, 1997 and 1996 was
approximately $92,152 and $13,290, 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.
In June 1997, through an exempt offering under Regulation D of the
Securities Act of 1933 the Company received subscriptions for 1,600 shares of
its Series G Preferred Stock ("Series G Preferred"). As of June 30, 1997, the
Company received proceeds of $650,000 and $950,000 was recorded as subscriptions
receivable. As of August 8, 1997, the Company has received subscriptions for 100
additional shares and received proceeds of $100,000. As of that date total
proceeds of $1,700,000 have been received and 1,700 shares of the Series G
Preferred have been issued. The Company has the right to issue an additional
1,300 shares of the Series G Preferred prior to the end of August 1997 and
expects to issue a minimum of 500 shares ($500,000) by that date. There were no
material expenses associated with this offering and the entire $1,700,000
received to date is available to the Company for its use. The registration
statement covering shares of the Company's Common Stock into which the Series G
Preferred is convertible has not yet been filed, but is expected to be filed and
declared effective by the end of August 1997.
Common Stock
In the six months ended June 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 six months ended June 1997, the Company issued approximately
89,000 shares of the Company's Common Stock to creditors of the Company as
payment for approximately $85,000 of existing indebtedness.
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
6
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SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Payable (continued)
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. The Company and the
lender are currently in negotiations to resolve this situation; however, the
Company has informed the lender that no conversion will be allowed, related to
the first debenture until a satisfactory settlement has been reached. The
Company has also notified the lender of its intent to offset its damages related
to the default on the second debenture against any payments due on the first
debenture.
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 planned operations
for approximately two to three months after the date of this filing. 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.
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.
7
<PAGE>
SI DIAMOND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 now in the process of 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 $181,000. Both of these charges, totaling
approximately $405,000 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 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.
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 these new standards and that the implementation of the
standards will not have a material impact on the Company's financial results.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
OVERVIEW
During the six months ended June 30, 1997, the Company's primary revenues were
earned through microelectronics fabrication and assembly services at Diamond
Tech One, Inc. ("DTO"), manufacture of coatings systems at Plasmatron Coatings
and Systems, Inc. ("Plasmatron"), 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 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. The Company
and the lender are currently in negotiations to resolve this situation,
however the Company has informed the lender that no conversion will be
allowed, related to the first debenture until a satisfactory settlement has
been reached. The Company has also notified the lender of its intent to offset
its damages related to the default on the second debenture against any
payments due on the first debenture.
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.
In June 1997, through an exempt offering under Regulation D of the Securities
Act of 1933 the Company received subscriptions for 1,600 shares of its Series
G Preferred Stock ("Series G Preferred"). As of June 30, 1997, the Company
received proceeds of $650,000 and $950,000 was recorded as subscriptions
receivable. As of August 8, 1997, the Company has received subscriptions for
100 additional shares and received proceeds of $100,000. As of that date total
proceeds of $1,700,000 have been received and 1,700 shares of the Series G
Preferred have been issued. The Company has the right to issue an additional
1,300 shares of the Series G Preferred prior to the end of August 1997 and
expects to issue a minimum of 500 shares ($500,000) by that date. There were
no material expenses associated with this offering and the entire $1,700,000
received to date is available to the Company for its use. The registration
statement covering shares of the Company's Common Stock into which the Series
G Preferred is convertible has not yet been filed, but is expected to be filed
and declared effective by the end of August 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
$515,760. This reorganization had no impact on the Company's cash position.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues for the second quarter ended June 30, 1997 totaled
$1,028,048 compared to $2,068,503 for the second quarter of 1996. The Company
earned $2,040,875 in revenues during the six month period ended June 30, 1997,
(the "1997 Period") as compared with $2,971,747 during the six month period
ended June 30, 1996 (the "1996 Period"). Commercial sales were $1,446,391 for
the 1997 Period compared to $1,406,391 for the 1996 Period. Commercial
revenues in the 1997 Period are from the Company's Plasmatron and DTO
subsidiaries in roughly equal amounts. Commercial revenues in the 1996 period
were primarily from DTO. Plasmatron's commercial backlog as of June 30, 1997
was approximately $574,000 as compared with approximately $719,000 at June 30,
1996. Diamond Tech One's commercial backlog as of June 30, 1997 was
approximately $104,000 as compared with approximately $743,000 at June 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 $594,484
compared to $1,478,122 for the 1996 Period. At June 30, 1997, the Company had
a research backlog of approximately $451,000 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 $2,399,855 or a negative
gross margin of 18%, as compared with $3,424,156 or a negative gross margin of
15%, for the 1996 Period. 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 88% during the 1997 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 Company's selling, general and
administrative expenses were $1,807,210 for the 1997 Period, compared with
$4,815,123 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 $305,244 as compared to
$3,911,465 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 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.
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 $515,760. 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.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At June 30, 1997, the Company had cash and cash equivalents in the amount of
$299,535 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. 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.
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. The Company
and the lender are currently in negotiations to resolve this situation;
however, the Company has informed the lender that no conversion will be
allowed, related to the first debenture until a satisfactory settlement has
been reached. The Company has also notified the lender of its intent to offset
its damages related to the default on the second debenture against any
payments due on the first debenture.
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.
In June 1997, through an exempt offering under Regulation D of the Securities
Act of 1933 the Company received subscriptions for 1,600 shares of its Series
G Preferred Stock ("Series G Preferred"). As of June 30, 1997, the Company
received proceeds of $650,000 and $950,000 was recorded as subscriptions
receivable. As of August 8, 1997, the Company has received subscriptions for
100 additional shares and received proceeds of $100,000. As of that date total
proceeds of $1,700,000 have been received and 1,700 shares of the Series G
Preferred have been issued. The Company has the right to issue an additional
1,300 shares of the Series G Preferred prior to the end of August 1997 and
expects to issue a minimum of 500 shares ($500,000) by that date. There were
no material expenses associated with this offering and the entire $1,700,000
received to date is available to the Company for its use. The registration
statement covering shares of the Company's Common Stock into which the Series
G Preferred is convertible has not yet been filed, but is expected to be filed
and declared effective by the end of August 1997.
In the six months ended June 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 $2,855,216 for the 1997 Period compared
to $7,978,015 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 $171,925 as
compared with cash used in investing activities of $711,948 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.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
The Company anticipates that capital raised to date, including commitments
received for future funding, will enable it to maintain its planned operations
for approximately two to three months after the date of this filing. This
belief is based on current development plans, the current state of the
Company's business, the current regulatory environment, historical experience
in the development of electronic products and general economic conditions. No
assurance can be given that there will be no change that would cause available
resources to be consumed before such time. Thereafter, if adequate funds are
not available from operations or additional sources of financing, the Company
will have to reduce substantially or eliminate expenditures for research and
development and associated overhead costs, or obtain funds through
arrangements with other entities. Such results could materially and adversely
affect the Company.
OUTLOOK
It is anticipated that losses will continue throughout 1997 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 will 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 the capital raised to date, including
commitments received for future funding, will be adequate to fund the
Company's operations and current developmental funding plans for approximately
two to three months. Management is in the process of seeking additional
funding and has developed a plan to reduce expenses to enable it to continue
operations at the planned level for a period of 12 months, at which point it
would be expected that the Company could sustain itself through internally
generated funding. This plan is primarily dependent on increasing revenues and
raising additional funding through a strategic partner, debt offerings, or
equity offerings.
12
<PAGE>
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 15 for a descriptive
response to this item.
(b) Reports on Form 8-K:
(1) None
13
<PAGE>
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: August 11, 1997 /s/ Marc W. Eller
_____________________________________
Marc W. Eller
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1997 /s/ Douglas P. Baker
_____________________________________
Douglas P. Baker
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as part of this Report:
Exhibit
-------
*3(I).1 Amendment to Amended and Restated Articles of Incorporation of the
Company as filed with the Secretary of State of the State of Texas
on May 1, 1997 (Exhibit 3(I).1 to the Company's Current Report on
Form 8-K dated as of August 4, 1997 (File No. 1-11602)).
*3(I).2 Amendment to Amended and Restated Articles of Incorporation of the
Company as filed with the Secretary of State of the State of Texas
on August 4 , 1997 (Exhibit 3(I).2 to the Company's Current Report
on Form 8-K dated as of August 4, 1997 (File No. 1-11602)).
*3(I).3 Statement of Resolutions Establishing and Designating the
Company's Series G Preferred Stock, as filed with the Secretary of
State of the State of Texas on June 11, 1997 (Exhibit 3.1 to the
Company's Current Report on Form 8-K dated as of July 25, 1997
(File No. 1-11602)).
*4.1 Form of Regulation D Subscription Agreement by and between the
Company and the Holders of the Company's Series G Preferred Stock
(Exhibit 4.1 to the Company's Current Report on Form 8-K dated as
of July 25, 1997 (File No. 1-11602)).
*4.2 Form of Registration Rights Agreement by and between the Company
and the Holders of the Company's Series G Preferred Stock (Exhibit
4.2 to the Company's Current Report on Form 8-K dated as of
July 25, 1997 (File No. 1-11602)).
*4.3 Form of Warrant by and between the Company and the Holders of the
Company's Series G Preferred Stock (Exhibit 4.3 to the Company's
Current Report on Form 8-K dated as of July 25, 1997 (File
No. 1-11602)).
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 June 30, 1997).
27 Financial Data Schedule
* Incorporated by reference
15
<PAGE>
EXHIBIT 11
SI DIAMOND TECHNOLOGY, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computation of (loss) per common share:
Net loss applicable to common shareholders................. $ (1,991,162) $ (4,669,122) $ (3,401,686) $(11,062,691)
------------ ------------ ------------ ------------
Weighted average number of common shares outstanding......... 15,065,460 11,169,930 14,327,869 11,014,827
Net loss per common share.................................. $ (0.13) $ (0.42) $ (0.24) $ (1.00)
============ ============ =========== ============
</TABLE>
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.
<PAGE>
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>
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>
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>
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>
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>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 299,535 2,207,863
<SECURITIES> 0 0
<RECEIVABLES> 1,205,468 1,789,994
<ALLOWANCES> 0 0
<INVENTORY> 186,813 20,847
<CURRENT-ASSETS> 2,872,041 4,780,942
<PP&E> 4,744,074 5,221,258
<DEPRECIATION> 2,341,735 1,886,896
<TOTAL-ASSETS> 5,370,336 9,710,073
<CURRENT-LIABILITIES> 3,772,232 5,577,926
<BONDS> 508,333 0
0 0
2,177 943
<COMMON> 16,085 11,784
<OTHER-SE> 1,071,509 4,063,210
<TOTAL-LIABILITY-AND-EQUITY> 5,370,336 9,710,073
<SALES> 2,040,875 2,971,747
<TOTAL-REVENUES> 2,040,875 2,971,747
<CGS> 2,399,855 3,424,156
<TOTAL-COSTS> 4,512,309 12,150,744
<OTHER-EXPENSES> (317,656) (252,724)
<LOSS-PROVISION> 515,760 1,200,000
<INTEREST-EXPENSE> 190,664 13,290
<INCOME-PRETAX> (2,860,202) (10,139,563)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,860,202) (10,139,563)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,860,202) (10,139,563)
<EPS-PRIMARY> (0.24) (1.00)
<EPS-DILUTED> (0.24) (1.00)
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