<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarter ended September 30, 1997
------------------
Commission File Number 33-33997
--------
Projectavision Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3499909
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Penn Plaza, Suite 640, New York, NY 10121
---------------------------------------------------
(Address of Principal Executive Offices) (zip code)
(212) 971-3000
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and 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 13, 1997, there were 19,902,277 shares of the Registrant's common
stock outstanding.
<PAGE>
PROJECTAVISION, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
Item 1. Financial Statements
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-7
Item 2. Management's Discussion and Analysis of F-10
Financial Condition and Results
of Operations
SIGNATURES
<PAGE>
PROJECTAVISION, INC
(A Development Stage Company)
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,060,283 $ 311,463
Accounts receivable - net -- 170,148
Inventory -- 1,025,315
Investments 3,437,386 1,191,504
Other current assets 851,198 1,061,982
------------ ------------
Total Current Assets 5,348,867 3,760,412
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 68,422 119,699
Tooling Costs 4,208,005 5,608,308
Computers and software 226,019 241,819
Assets under capital leases -- 47,989
Leasehold improvements 185,030 185,030
------------ ------------
4,687,476 6,202,845
Less: Accumulated depreciation and amortization 242,896 655,001
------------ ------------
Property and equipment, net 4,444,580 5,547,844
OTHER ASSETS 339,041 35,444
------------ ------------
TOTAL ASSETS $ 10,132,488 $ 9,343,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,718,004 $ 1,658,075
Accrued liabilities 209,476 557,765
Current portion of capital lease obligations -- 14,625
------------ ------------
Total Current Liabilities 1,927,480 2,230,465
------------ ------------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations -- 26,892
Convertible Debt 1,762,963 1,629,865
------------ ------------
Total Long-term Liabilities 1,762,963 1,656,757
------------ ------------
TOTAL LIABILITIES 3,690,443 3,887,222
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stocks
Series A Preferred Stock, $.01 par value
100 shares authorized, 100 shares issued
($100,000 liquidation preference) -- --
Series B Preferred Stock, $.01 par value
434,667 shares authorized, 351,258 shares outstanding
as of September 30, 1997 ($ 1,929,910 liquidation preference) 3,859 3,512
Series C Preferred Stock, $.001 par value
7,500 shares authorized; 7,500 shares issued; no shares
outstanding as of September 30, 1997 8 0
Series D Preferred Stock, $100 par value
60,000 shares authorized; 35,000 shares issued;
($3,500,000 liquidation preference) -- 3,500,000
Series E Preferred Stock, $1000 par value
1,000 shares authorized; 1,000 shares issued;
($1,000,000 liquidation preference) -- 1,000,000
Common stock $.0001 par value - 50,000,000 shares
authorized; 14,229,401 and 19,594,375 issued and
outstanding respectively 1,423 1,959
Additional paid-in capital 38,760,690 41,115,680
Deficit accumulated during the development stage (32,323,935) (40,164,673)
------------ ------------
Total Stockholders' Equity 6,442,045 5,456,478
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,132,488 $ 9,343,700
============ ============
</TABLE>
See notes to financial statements
F-2
<PAGE>
PROJECTAVISION, INC
(A Development Stage Company)
STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
September 9,
1988 (Date of
Three Months Ended September 30, Nine Months Ended September 30, Incorporation)
---------------------------------- ------------------------------- to September 30,
1996 1997 1996 1997 1997
Restated Restated
<S> <C> <C> <C> <C> <C>
REVENUE $ 150,000 $ 358,784 $ 150,000 $ 409,889 $ 1,864,889
LESS: COST OF SALES -- 344,517 -- 395,629 395,629
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 150,000 14,267 150,000 14,260 1,469,260
OPERATING EXPENSES
General and administrative 410,915 600,340 1,505,123 2,257,628 11,626,390
Salaries 266,822 445,642 936,581 1,167,036 5,992,892
Legal fees 158,628 304,935 657,604 1,048,571 4,086,629
Depreciation and amortization 58,185 (13,558) 479,934 412,105 710,439
Research and development 191,577 304,750 503,930 486,634 6,297,886
Patent and license expense 104,360 21,679 242,445 204,200 1,692,252
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,190,487 1,663,788 4,325,617 5,576,174 30,406,488
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,040,487) (1,649,521) (4,175,617) (5,561,914) (28,937,228)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Provision for allowances on
advances -- (100,000) -- (100,000) (289,260)
Interest income 152,687 28,030 360,147 158,784 1,665,644
Interest expense-8% Debentures (46,334) (31,781) (320,049) (90,190) (468,909)
Interest expense-Amortization of
debt expense -- -- (1,544,678) (89,122) (2,123,805)
------------ ------------ ------------ ------------ ------------
Other income/(expense) - Net 106,353 (103,751) (1,504,580) (120,528) (1,216,330)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE (934,134) (1,753,272) (5,680,197) (5,682,442) (30,153,558)
------------ ------------ ------------ ------------ ------------
EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE -- -- -- -- (4,897,314)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (934,134) $ (1,753,272) $ (5,680,197) $ (5,682,442) $(35,050,872)
============ ============ ============ ============ ============
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (.15) $ (.12) $ (.53) $ (.45)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 14,271,681 19,009,450 13,595,111 17,323,908
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
F - 3
<PAGE>
PROJECTAVISION, INC
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 100 $0 385,982 $ 3,859 0 $0 0 $0
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK
DIVIDENDS
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
ISSUANCE OF SERIES C PREFERRED STOCK 7,500 8
SERIES C PREFERRED STOCK PLACEMENT FEE
CASH DIVIDEND ON SERIES C PREFERRED STOCK
EXERCISE OF STOCK OPTIONS
AMORTIZATION OF DISCOUNT ON 8% DEBENTURES
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK
ISSUE WARRANTS AND OPTIONS FOR SERVICES
NET LOSS
-------- --------- ------------ --------- ---------- --------- ---------- -------------
BALANCE, DECEMBER 31, 1996 100 0 385,982 $3,859 7,500 $8 0 $0
======== ========= ============ ========= ========== ========= ========== =============
ISSUANCE OF SERIES D PREFERRED STOCK 35,000 3,500,000
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK (34,724) (347)
SERIES C PREFERRED STOCK CONVERSION (4,210) (5)
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK
ISSUE WARRANTS TO SERIES D PREFERRED STOCKHOLDERS
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS
EXERCISE OF STOCK OPTIONS
NET LOSS
-------- --------- ------------ --------- ---------- --------- ---------- -------------
BALANCE, MARCH 31, 1997 100 0 351,258 3,512 3,290 3 35,000 3,500,000
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK
NET LOSS
-------- --------- ------------ --------- ---------- --------- ---------- -------------
BALANCE, JUNE 30, 1997 100 $0 351,258 $3,512 3,290 $3 35,000 $3,500,000
SERIES C PREFERRED STOCK CONVERSION (3,290) (3)
ISSUE SERIES E PREFERRED STOCK
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES E PREFERRED STOCK
ISSUANCE OF COMMON STOCK FOR SALARY
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
NET LOSS
-------- --------- ------------ --------- ---------- --------- ---------- -------------
BALANCE, SEPTEMBER 30, 1997 100 $0 351,258 $3,512 0 $0 35,000 $3,500,000
======== ========= ============ ========= ========== ========= ========== =============
</TABLE>
See notes to financial statements
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
ACCUMULATED
SERIES E ADDITIONAL DEFICIT DURING
PREFERRED STOCK COMMON STOCK PAID IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 0 $0 12,388,790 $1,239 $24,318,651 (20,641,044) $3,682,705
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK
DIVIDENDS 37,666 4 154,389 (154,393) 0
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK 1,772,945 177 3,441,573 3,441,750
ISSUANCE OF SERIES C PREFERRED STOCK 7,499,992 7,500,000
SERIES C PREFERRED STOCK PLACEMENT FEE (500,000) (500,000)
CASH DIVIDEND ON SERIES C PREFERRED STOCK (123,750) (123,750)
EXERCISE OF STOCK OPTIONS 30,000 3 24,372 24,375
AMORTIZATION OF DISCOUNT ON 8% DEBENTURES 1,078,725 1,078,725
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK 2,357,188 (2,357,188) 0
ISSUE WARRANTS AND OPTIONS FOR SERVICES 385,800 385,800
NET LOSS (9,047,560) (9,047,560)
----- --------- ---------- ----- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1996 0 $0 14,229,401 1,423 $38,760,690 (32,323,935) $6,442,045
===== ========= ========== ===== =========== =========== ==========
ISSUANCE OF SERIES D PREFERRED STOCK 3,500,000
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK 34,724 3 344 0
SERIES C PREFERRED STOCK CONVERSION 2,226,186 223 (218) 0
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK 318,171 (318,171) 0
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK 530,973 (530,973) 0
ISSUE WARRANTS TO SERIES D PREFERRED STOCKHOLDERS 163,600 (163,600) 0
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS 24,588 2 77,194 (77,196) 0
EXERCISE OF STOCK OPTIONS 250,442 25 (25) 0
NET LOSS (1,377,322) (1,377,322)
----- ---------- ---------- ----- ----------- ----------- ----------
BALANCE, MARCH 31, 1997 0 0 16,766,341 1,676 39,850,729 (34,791,197) 8,564,723
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK 160,077 (160,077) 0
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK 434,384 (434,384) 0
NET LOSS (2,551,848) (2,551,848)
----- ---------- ---------- ----- ----------- ----------- ----------
BALANCE, JUNE 30, 1997 0 $0 16,765,341 1,676 $40,445,190 (37,937,506) $6,012,875
SERIES C PREFERRED STOCK CONVERSION 2,655,470 266 (263) 0
ISSUE SERIES E PREFERRED STOCK 1,000 1,000,000 1,000,000
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS 42,152 4 70,295 (70,299) 0
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK 170,199 (170,199) 0
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES E PREFERRED STOCK 233,397 (233,397) 0
ISSUANCE OF COMMON STOCK FOR SALARY 50,000 5 96,870 96,875
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK 81,412 8 99,992 100,000
NET LOSS (1,753,272) (1,753,272)
----- ---------- ---------- ----- ----------- ----------- ----------
BALANCE, SEPTEMBER 30, 1997 1,000 $1,000,000 19,594,375 1,959 $41,115,680 (40,164,673) $5,456,478
===== ========== ========== ===== =========== =========== ==========
</TABLE>
See notes to financial statements
F-4
<PAGE>
PROJECTAVISION, INC
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
September 9,
1988 (Date of
Nine Months Ended September 30, Incorporation)
----------------------------------- to September 30,
1996 1997 1997
Restated
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,135,519) $ (5,682,442) $(35,050,872)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 479,935 412,105 2,745,124
Issuance of common stock for services -- -- 1,664,131
Allowance taken on investment in unconsolidated affiliate -- 100,000 2,229,252
Other noncash operating expenses -- -- 288,216
Settlement of legal fees (11,250) -- (97,287)
Provision for allowances on advances -- -- 189,260
Equity in loss of unconsolidated affiliate -- -- 2,768,061
Asset and liability management
Changes in operating assets 269,111 (1,102,650) (2,562,349)
Accounts payable and other liabilities 96,882 293,654 2,367,791
------------ ------------ ------------
Net cash used in operating activities (3,300,841) (5,979,333) (25,458,673)
------------ ------------ ------------
INVESTING ACTIVITIES
Capital expenditures (3,047,863) (1,515,369) (6,202,844)
Investment in and advances to unconsolidated affiliate -- -- (4,703,440)
Interest accrued on loan to unconsolidated affiliate -- -- (121,808)
Licenses -- -- (30,000)
Purchases and redemption of government securities (4,959,470) 2,245,882 (1,191,504)
------------ ------------ ------------
Net (cash used in)/provided by investing activities (8,007,333) 730,513 (12,249,596)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from notes payable 10,000,000 -- 10,800,000
Private placement costs -- -- (518,505)
Repayment of notes payable (4,607,000) -- (6,080,955)
Issuance of preferred stock 7,500,000 4,500,000 12,716,341
Issuance Fees (500,000) -- (500,000)
Series C Preferred Stock Dividend -- -- (123,750)
Proceeds from Issuance of common stock -- -- 18,617,239
Proceeds from warrants excercised -- -- 2,760,612
Proceeds from stock options excercised 24,375 -- 398,750
Deferred public offering costs (500,000) -- (50,000)
------------ ------------ ------------
Net cash provided by financing activities 11,917,375 4,500,000 38,019,732
------------ ------------ ------------
INCREASE\(DECREASE) IN CASH AND CASH EQUIVALENTS 609,201 (748,820) 311,463
CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 3,491,982 1,060,283 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 4,101,183 $ 311,463 $ 311,463
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 320,049 $ 190 $ 378,546
============ ============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------
In 1996, the Company issued an aggregate of 37,666 shares of its common stock
with a value of $ 154,393 as payment for the dividend on its series B
convertible preferred stock. In addition, the Company issued 1,772,945 shares of
its common stock and paid $4,958,250 in cash in exchange for retiring $8.4
million of convertible debt. Also, the Company issued 34,724 shares of its
common stock in connection with the conversion of 34,724 shares of its series B
convertible preferred stock
In 1997, the Company issued an aggregate of 66,748 shares of its common stock
with a value of $ 140,503 as payment for the dividend on its series B
convertible preferred stock. The Company issued 2,226,186 shares of its common
stock in exchange for retiring 4,210 shares of Series C convertible preferred
stock in the First Quarter and retired the entire balance of 3,290 shares of the
Series C convertible preferred stock in July by issuing 2,655,470 shares of
common stock. In addition, in the quarter ended September 30, 1997, the Company
issued 81,412 shares of its common stock in connection with the conversion of
$100,000 of its convertible debt, and as of October 25, 1997, the Company has
issued another 307,902 shares of its common stock in connection with the
conversion of $ 400,000 of its convertible debt, leaving a face value on the
debt of $ 1,000,000.
F-6
<PAGE>
PROJECTAVISION, INC.
(A Development stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Projectavision, Inc. (the "Company"), a Delaware
corporation, was incorporated on September 9, 1988. The Company has
been formed to complete development of a unique proprietary solid state
projection television and related video display technology. In
addition, the Company will seek to identify new high technology and
electronic products for consumers and commercial customers. The Company
is a development stage enterprise and has generated no significant
revenue from its planned principal operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
1996 Form 10-K. The results of operations for the period ended
September 30, 1997 are not necessarily indicative of the operating
results for the full year.
2. REVENUE
Revenue for the period for products shipped consisted of billings for
the Digital Home Theater.
Included in cumulative revenues is $ 1,000,000 in funding from a
government agency.
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In 1993, the Company entered into an agreement with Tamarack Storage
Devices, Inc. ("Tamarack") pursuant to which the Company acquired
shares of Tamarack's common stock representing approximately 37 percent
of the issued and outstanding voting securities of Tamarack. Under the
terms of the agreement, the Company invested $3,000,000 in the
aggregate in Tamarack and had accounted for this investment under the
equity method. The goodwill recorded with this investment, which
represented the excess of the Company's investment over the underlying
net assets of Tamarack, was $1,883,995. Such amount was being amortized
over ten years and is reported in the statement of operations as Equity
in Loss from Unconsolidated Affiliate. Amortization expense related to
such goodwill for the fiscal years ended December 31, 1994 and 1995 was
$197,884 and $148,413, respectively. The Company issued 32,000 shares
of common stock (valued at $109,120) for advisory services received in
connection with the acquisition. In 1994 the Company loaned Tamarack
$1,500,000 with interest payable at 6 percent per annum. When Tamarack
failed to meet proscribed levels of profitability by March 31, 1995,
the Company automatically received under the terms of its agreement
with Tamarack additional shares of Tamarack's common stock, increasing
the Company's voting equity interest in Tamarack to approximately 53%.
In 1995, Tamarack received a commitment from Projectavision to fund its
cash needs through December 31, 1995 to continue its operations as then
constituted. Pursuant to this $94,240 was advanced to Tamarack.
The Company recorded a reserve against its investment in Tamarack of
$300,000 in 1994 and at December 31, 1995 the Company reduced its
investment in and advances to Tamarack to zero recording an additional
reserve of $2,129,252 due to Tamarack's inability, to date, to
commercialize its holographic storage technology and its current lack
of prospects. In addition, Tamarack continues to incur losses, and its
viability to achieve profitable operations is doubtful.
In November, 1996, the Company loaned $ 100,000 to Tamarack and
originally secured by a government receivable. This amount was written
off on the Company's books as of September 30, 1997.
F-7
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
4. PREFERRED STOCK
In January of 1997, the Company issued an aggregate of 35,000 shares of
6% Series D convertible preferred stock to two foreign institutional
investors for an aggregate purchase price of $ 3,500,000, resulting in
net proceeds to the Company of $ 3,500,000. Each share of Series D
Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock as follows: 8,750 shares on or
after May 1, 1997; 8,750 shares on or after July 1, 1997; 8,750 shares
on or after September 1, 1997; and 8,750 shares on or after November 1,
1997. The Series D Preferred Stock is convertible into Common Stock at
a 25% discount to the then current market price of the Company's Common
Stock at the time of conversion (the "Series D Conversion Price");
provided, however, that in the event that the Series D Conversion price
is less than $ 2.00 per share, then under no circumstances can shares
of Series D Preferred Stock be converted into the Company's Common
Stock until such time as the Series D Conversion Price exceeds $ 2.00
per share, subject to the following: (i) in the event that the Company
fails to either ship 2,500 projectors or generate $ 12,500,000
projector revenues during the period January 1, 1997 through June 30,
1997, then the minimum Series D Conversion Price shall be reduced by
$0.50, or (ii) in the event that the Company fails to ship 2,500
projectors and generate $ 12,500,000 of projector revenues during the
period July 1, 1997 through December 31, 1997, then the minimum Series
D Conversion Price shall be reduced by an additional $ 0.50. The 25%
discount is being recognized as a dividend over the shortest period in
which the shares can be converted into common stock.
In July of 1997, the Company issued an aggregate of 1,000 shares of 8%
Series E convertible preferred stock to one foreign institutional
investor for an aggregate purchase price of $ 1,000,000, resulting in
net proceeds to the Company of $1,000,000. Each share of Series E
Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock as follows: 250 shares on or after
August 15, 1997; 250 shares on or after October 15, 1997; 250 shares on
or after December 15, 1997; and 250 shares on or after February 15,
1998. The Series E Preferred Stock is convertible into Common Stock at
a 25% discount to the then current market price of the Company's Common
Stock at the time of conversion (the "Series E Conversion Price");
provided, however, that in the event that the Series E Conversion price
is less than $ 1.50 per share, then under no circumstances can shares
of Series E Preferred Stock be converted into the Company's Common
Stock until such time as the Series E Conversion Price exceeds $ 1.50
per share, subject to the following: (i) in the event that the Company
fails to either ship 417 projectors per month or generate $ 2,085,000
projector revenues per month during the period June 1, 1997 through
December 31, 1997, then the Series E Conversion Price shall be reduced
by $ 0.50 at a rate of $0.083 per month, but (ii) in the event that the
Company ships 2,500 projectors or generates $ 12,500,000 of projector
revenues by December 31, 1997, then the Series E Conversion Price shall
be restored to $1.50. The 25% discount will be recognized as a dividend
over the shortest period in which the shares can be converted into
common stock.
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
In April of 1997, the Company entered into a capital lease for computer
equipment. Future minimum lease payments are $ 15,246 in 1997, $ 20,328
in both 1998 and 1999, and $ 5,082 in 2000.
In June of 1995 and August of 1995, two class action lawsuits were
filed against the Company as well as certain of its officers and
directors by stockholders of the Company. In October of 1995 the
plaintiffs in the second action joined as plaintiffs in the first
action, and the second action was dismissed without prejudice. In July
1996, the class action suit was dismissed without prejudice, and the
plaintiffs were given an opportunity to replead. Upon repleading, the
class action suit alleged numerous violations of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including, but
not limited to, violations of Section 10(b) of the Exchange Act. The
suit also alleged claims for negligent misrepresentation and for common
law fraud and deceit. In response, the Company and the individual
defendants submitted motions to dismiss the action. In July 1997 these
motions were granted, and the class action suit was dismissed with
prejudice by the U.S. District Court in New York. Plaintiffs have filed
a notice of appeal with the Second Circuit Appellate Court, but have
not yet perfected the notice of appeal.
In January 1996, Mr. and Mrs. Eugene Dolgoff sued the Company and
certain members of the Board of Directors in the Chancery Court in the
State of Delaware, and in connection therewith moved to preliminarily
enjoin the Company's annual stockholders' meeting scheduled for
February 29, 1996. The Dolgoffs alleged, among other things,
manipulation of the election process and breaches of the Company's
charter documents. The Dolgoffs' request to preliminarily enjoin the
meeting was denied. Subsequently, a settlement agreement was entered
into between the Company and the Dolgoffs, which was approved by the
Delaware Chancery Court which includes, among other things, the Company
reimbursing the Dolgoffs for a portion of their legal expenses and
moving one of its Directors from one class to another class so as to
balance the size of its three (3) classes of directors.
F-8
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES (Continued)
In April 1995 a legal action was brought against the Company, certain
members of the Board of Directors, and an employee of the Company by
Eugene Dolgoff, a founder and former officer of the Company. The
complaint alleges, among other actions, breach of employment and patent
assignment agreements. Mr. Dolgoff is seeking damages, punitive
damages, and equitable relief totaling in excess of $ 100 million. In
April 1996, the New York State Supreme Court issued an order and
opinion which disqualified the Company's litigation counsel, Anderson
Kill, & Olick, P.C. ("Anderson, Kill") on the basis that Anderson, Kill
had a conflict of interest vis-a-vis Mr. Dolgoff , substantially denied
the Company's motion to dismiss Mr. Dolgoff's entire complaint, and
denied Mr. Dolgoff's motion to have a receiver appointed.
The Company appealed the New York Supreme Court's decision regarding
the disqualification of Anderson, Kill and the denial of its motion to
dismiss Mr. Dolgoff's complaint. Mr. Dolgoff appealed the New York
Supreme Court's denial of his motion to have a receiver appointed. In
January of 1997, the Supreme Court of the State of New York Appellate
Division First Department, affirmed the lower court's disqualification
of Anderson, Kill and the lower court's motion to dismiss and ordered
that a receiver be appointed to protect whatever interest, if any, the
former officer and employee of the Company may ultimately be able to
prove that he has in any inventions Mr. Dolgoff assigned to the
Company. The Supreme Court has issued a decision restricting the scope
of the receivership. However, the receivership order has not as yet
been entered. At this time, neither the Appellate Court, nor any other
court, has determined that Mr. Dolgoff has any proof to support his
claims; the Appellate Court has merely reaffirmed the lower court's
decision that, at this preliminary stage of the litigation, Mr.
Dolgoff's complaint has satisfied procedural pleading requirements. As
a consequence of new facts having come to the attention of the Company,
the Company has amended its pleadings and filed counterclaims against
Mr. Dolgoff, his affiliated companies, Breakthrough Enterprises, Inc.
and Floating Images, Inc. for, among other things, fraud, breach of
fiduciary duty, misappropriation of trade secrets, conversion, breach
of contract, diversion of corporate assets and opportunities, unjust
enrichment, and tortious interference with contractual relations, in
connection with which the Company is seeking injunctive relief and a
constructive trust, in addition to monetary damages in excess of $ 100
million.
In 1996, a suit was filed by a individual investor against the Company
and Marvin Maslow, Chairman of the Board of Directors, alleging
fraudulent inducement in connection with the plaintiff's purchase of
the Company's securities. In March 1997 the case was dismissed by the
U.S. District Court in Florida on jurisdictional grounds.
In the remaining action outstanding with Mr. Dolgoff, the Company's
management, based upon discussions with counsel, believe that they have
a meritorious defense and intend a vigorous defense against these
claims. The Company's management believes that the outcome of these
matters will not have a material adverse effect on its financial
position or results of operations.
<PAGE>
6. 1996 FINANCIAL STATEMENTS
The Company is restating its quarterly financial statements for each
quarter in the nine-month period ended September 30, 1996. There is no
change in the full year reported results. This restatement is being
made due to the Company's recording amortization of a discount relating
to debt issued in the first quarter of 1996, which was convertible
into common stock at a discount, in the fourth quarter rather than
recording and amortizing this discount over the earliest
conversion period. Similarly, amortization of dividends recorded on
convertible preferred stock relating to the ability of the holders of
such preferred stock to convert their shares into common stock at a
discount were recorded in the fourth quarter rather than recording and
amortizing them over the earliest conversion period. Reported results
for the year properly reflect this interest expense and these preferred
stock dividends.
The adjustments to the reported quarterly results to properly reflect
the timing of the recognition of the interest and dividends have no
impact on the Company's stockholders' equity. The impact of the
restatement on the timing of the Company's reported net loss and net
loss per share attributable to common shareholders is summarized below:
<TABLE>
<CAPTION>
Period Ended September 30, 1996
-------------------------------------------------------------------
Three Months Nine Months
----------------------------- --------------------------------
As Originally As Originally
Reported Restated Reported Restated
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ ( 934,134) $ (934,134) $ (4,135,519) $ (5,680,197)
Net loss per share attributable
to common stockholders $ (0.07) $ (0.15) $ (0.30) $ (0.53)
</TABLE>
F-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management discussion and analysis should be read in conjunction
with the financial statements and notes there to.
As of September 30, 1997, the Company had working capital of $ 1,529,947. With
respect to changes in the first nine months of 1997 versus the amounts
recorded in the first nine months of 1996, the increase in general and
administrative expense is due to increased participation in trade shows and
to higher advertising and travel expense. Higher legal fees are due to the
on-going litigation with a former officer of the Company. To date, the
Company has funded its operations primarily from sales of capital stock. In
January 1997, the Company completed a private placement of preferred stock
of $3.5 million, and in July 1997 the Company completed a private placement
of preferred stock of $ 1.0 million. In addition, the sale of government
securities were used to fund working capital and to purchase production
tooling for the Digital Home Theater. As of September 30th 1997 the
Company had cash and cash equivalence of $311,463 and government securities
of $1,191,504. In March 1997 the Company shipped its first Digital Home
Theater to retail distribution, and for the three (3) months ended September
30, 1997, the Company had sales of $ 358,784.
As of December 31, 1996, the Company had working capital of $3,421,387. The
Company has funded its operations primarily from sales of capital stock. In
February 1996, the Company completed a private placement of convertible debt of
$10.0 million which resulted in $9.5 million in net proceeds to the Company
after paying a 5% investment banking fee.
In June 1996 the Company issued an aggregate of $ 7,500,000 for 7,500 shares of
a newly created Series C Preferred Stock to an Australian financial institution
pursuant to Regulation D of the Securities Act, resulting in net proceeds to the
Company of $ 7,000,000. The net proceeds from the sale of the Series C
Convertible Preferred Stock were used primarily to retire unconverted portions
of the convertible debt issued in February 1996. There currently remains
outstanding $ 1.0 million of convertible debt. At June 30, 1997, 4,210 shares
were converted into 2,226,186 shares of the Company's Common Stock, and the
balance of 3,290 shares of the Series C Preferred Stock were converted into
2,655,470 shares of common stock in July 1997.
The Company also intends to rely on arrangements with retailers and contract
manufacturers in connection with meeting the balance of the capital requirements
necessary for the Company to manufacture, market and distribute the Digital Home
Theater. The Company is in the development stage and, to date, its sole revenues
have been $1,455,000 in fees and $ 409,889 from the sale of the Digital Home
Theater. Of such fees, $1,000,000 was derived from a government agency to
develop certain projection technology for use in a high definition television
projector and the remaining balance, $455,000, from licensing agreements. The
Company has completed research and development with respect to the Digital Home
Theater projector, although certain engineering refinements are still ongoing,
including optimizing picture brightness for a new rear projection system.
Primarily as a result of work performed in developing its technology, the
Company has sustained losses aggregating approximately $35,000,000 from its
inception to September 30, 1997. The Company has continued to incur losses since
September 30, 1997. As of December 31, 1996, the Company had available for
Federal income tax purposes net operating and capital loss carry-forwards of
approximately $25,000,000. The Internal Revenue Code of 1986, as amended, may
impose certain restrictions on the amount of net operating loss carry-forwards
which may be used in any year by the Company.
F-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration has duly authorized and caused the undersigned to sign this
report on the Registrant's behalf:
PROJECTAVISION, INC.
By: /s/ Martin Holleran
------------------------------------
Martin Holleran, President/
Chief Executive Officer and
Director
By: /s/ Jules Zimmerman
------------------------------------
Jules Zimmerman, Chief
Financial Officer and
Director
November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 311,463
<SECURITIES> 1,191,504
<RECEIVABLES> 175,748
<ALLOWANCES> (5,600)
<INVENTORY> 1,025,315
<CURRENT-ASSETS> 3,760,412
<PP&E> 6,202,845
<DEPRECIATION> (655,001)
<TOTAL-ASSETS> 9,343,700
<CURRENT-LIABILITIES> 2,230,465
<BONDS> 1,629,865
0
4,503,512
<COMMON> 1,959
<OTHER-SE> 951,007
<TOTAL-LIABILITY-AND-EQUITY> 9,343,700
<SALES> 358,784
<TOTAL-REVENUES> 358,784
<CGS> 344,517
<TOTAL-COSTS> 1,663,788
<OTHER-EXPENSES> 71,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,781
<INCOME-PRETAX> (1,753,272)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,753,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,753,272)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
