<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 June 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 June 30, 1997, there were 16,765,341 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 June 30,
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,060,283 $ 195,197
Accounts and other receivables - net -- 181,188
Inventory -- 357,264
Investments 3,437,386 2,071,800
Other current assets 851,198 1,136,155
------------ ---------
Total Current Assets 5,348,867 3,941,594
PROPERTY AND EQUIPMENT
Furniture, fixtures, and equipment 68,422 68,422
Tooling Costs 4,208,005 5,553,976
Computers, and software 226,019 241,120
Assets under capital leases -- 47,989
Lessehold improvements 185,030 185,030
------------ ---------
4,687,476 6,096,537
Less: Accumulated depreciation and amortization 242,896 668,559
------------ ---------
Property and equipment net 4,444,580 5,427,978
OTHER ASSETS 339,041 41,690
------------ ---------
TOTAL ASSETS $ 10,132,488 $ 9,411,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,718,004 $ 780,883
Accrued liabilities 200,476 836,575
Current portion of capital lease obligations -- 14,045
------------ ---------
Total Current Liabilities 1,927,480 1,631,503
------------ ---------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations -- 30,773
Convertible Debt 1,762,963 1,736,111
------------ ---------
Total Long-term Liabilities 1,762,963 1,766,884
------------ ---------
TOTAL LIABILITIES 3,690,443 3,398,387
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS'EQUITY
Preferred stocks
Series A Preferred Stock, $.01 per 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 June 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; 3,290 shares
outstanding as of June 30, 1997; ($100,000 liquidation preference) 8 3
Series D Preferred Stock, $100 par value
60,000 shares authorized; 35,000 shares issued;
($3,500,000 liquidation preference) -- 3,500,000
Common stock $.0001 par value - 30,000,000 shares
authorized; 14,229,401 and 16,765,341 issued and
outstanding respectively 1,423 1,676
Additional paid in capital 38,760,690 40,445,190
Deficit accumulated during the development stage (32,323,935) (37,937,506)
------------ ---------
Total Stockholders Equity 6,442,045 6,012,875
------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 10,132,488 $ 9,411,262
============ ============
</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 June 30, Six Months Ended June 30, Incorporation)
--------------------------- ------------------------- to June 30,
1996 1997 1998 1997 1997
<S> <C> <C> <C> <C> <C>
REVENUE $ -- $ 44,800 $ -- $ 50,400 $ 1,505,400
LESS: COST OF SALES 45,337 -- -- 50,407 50,407
GROSS PROFIT (537) -- -- (7) 1,454,993
OPERATING EXPENSES
General and administrative 474,982 929,865 1,094,207 1,647,186 11,015,948
Salaries 245,068 358,486 669,760 721,393 5,547,249
Legal fees 187,623 573,517 440,828 743,636 3,781,694
Depreciation and amortization 374,313 400,061 421,748 425,663 723,997
Research and development (37,138) 124,998 312,354 191,988 6,003,240
Patent and license expense 113,701 137,655 138,084 182,521 1,670,573
---------- ---------- ---------- ---------- -----------
Total Operating Expenses 1,358,549 2,524,582 3,076,981 3,912,387 28,742,701
---------- ---------- ---------- ---------- -----------
LOSS FROM OPERATIONS (1,358,549) (2,525,119) (3,076,981) (3,912,394) (27,287,708)
---------- ---------- ---------- ---------- -----------
OTHER INCOME (EXPENSE)
Provision for allowances on advances (40,049) -- (58,149) -- (189,260)
Interest income 127,082 53,100 207,460 130,755 1,637,615
Interest expense - 8% Debentures (138,359) (31,912) (273,715) (58,409) (437,128)
Interest expense - Amortization of debt expense -- (47,917) -- (89,122) (2,123,805)
---------- ---------- ---------- ---------- -----------
Other Income/(expense) - Net (51,326) (26,729) (124,404) (16,776) (1,112,578)
---------- ---------- ---------- ---------- -----------
LOSS BEFORE EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE (1,409,875) (2,551,848) (3,201,385) (3,929,170) (28,400,286)
---------- ---------- ---------- ---------- -----------
EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE -- -- -- -- (4,897,314)
---------- ---------- ---------- ---------- -----------
NET LOSS (1,409,875) (2,551,848) (3,201,385) (3,929,170) (33,297,600)
---------- ---------- ---------- ---------- -----------
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (.16) $ (.19) $ (.25) $ (.33)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
0UTSANDING 13,897,347 16,765,341 13,097,392 16,465,513
============ ============ ============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE>
PROJECTAVISION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF ST0CKHOLDERS' 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>
BALANCE, JANUARY 1, 1996 100 $0 385,962 $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 3
SERIES C PREFERRED STOCK PLACEMENT FEE
CASH DIVIDEND ON SERIES C PREFERRED STOCK
EXERCUSE OF STOCK OPTIONS
AMORTIZATION OF DISCOUNT ON 6% DEBENTURES
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES C PREFERRED STOCK
ISSUE WARRANTS AND OPTIONS F0R SERVICES
NET LOSS
--- ---- ------- ------ ----- --- -------- ---------
BALANCE, DECEMBER 31, 1996 100 $0 385,962 $3,859 7,500 $0 0 $0
=== ==== ======= ====== ===== === ======== =========
ISSUANCE OF SERIES D PREFERRED STOCK 35,000 3,500,000
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK (37,742) (347)
SERIES C PREFERRED STOCK CONVERSION (4,200) (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 0 361,258 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 $0 361,258 $3,512 3,290 $3 35,000 $3,500,000
=== ==== ======= ====== ===== === ====== ==========
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
ADDITIONAL DURING
COMMON STOCK PAID IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 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 (164,393) 0
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK 1,772,945 177 3,441,573 3,441,750
ISSUANCE OF SERIES C PREFERRED STOCK 7,449,992 7,500,000
SERIES C PREFERRED STOCK PLACEMENT FEE (500,000) (500,000)
CASH DIVIDEND ON SERIES C PREFERRED STOCK (123,750) (123,750)
EXERCUSE OF STOCK OPTIONS 30,000 3 24,372 24,375
AMORTIZATION OF DISCOUNT ON 6% 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 F0R SERVICES 385,800 385,800
NET LOSS (9,047,560) (9,047,560)
----------- ------ ----------- ------------ ----------
BALANCE, DECEMBER 31, 1996 $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 24,688 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 16,765,341 1,676 39,850,727 (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 $16,765,341 $1,676 $40,445,190 ($37,937,506) $6,012,875
=========== ====== =========== ============ ==========
</TABLE>
F-4
<PAGE>
PROJECTAVISION, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
September 9,
1988 (Date of
Six Months Ended June 30, Incorporation)
------------------------- to June 10,
1996 1997 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,201,385) $ (3,929,170) $(33,297,600)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization and depreciation 421,748 514,784 813,120
Issuance of common stock for services -- -- 1,664,131
Allowance taken on investment in unconsolidated affiliate -- -- 2,129,252
Other noncash operating expenses -- -- 2,360,149
Settlement of legal fees -- -- (97,287)
Provision for allowances on advances -- -- 298,426
Equity in loss of unconsolidated affiliate -- -- 2,695,996
Asset and liability management
Changes in operating assets 206,655 (526,058) (2,060,108)
Accounts payable and other liabilities 638,787 (281,177) 1,792,960
---------- -------- ----------
Not cash used in operating activities (1,934,195) (4,221,621) (23,700,961)
---------- -------- ----------
INVESTING ACTIVITIES
Capital expenditures (1,226,721) (1,409,061) (6,096,536)
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 (4,896,983) 1,365,586 (2,071,800)
---------- -------- ----------
Net cash used in investing activities (6,123,704) (43,751 (13,023,584)
---------- -------- ----------
FINANCING ACTIVITIES
Proceeds from notes payable 10,000,000 -- 10,800,000
Private placement costs -- -- (518,506)
Repayment of notes payable (4,357,000) (100,000) (6,180,955)
Issuance of preferred stock 7,500,000 3,500,000 11,716,341
Issuance Fees (500,000) -- (500,000)
Series C Preferred Stock Dividend (11,250) -- (123,750)
Proceeds from issuance of common stock -- -- 18,617,239
Proceeds from warrants excercised -- -- 2,760,612
Proceeds from stock options exercised 24,375 -- 398,750
Deferred public offering costs (500,000) -- (50,000)
---------- -------- ----------
Net cash provided by financing activities 12,156,125 3,400,000 38,919,732
---------- -------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 4,098,226 (865,096) 195,187
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 3,491,982 1,060,283 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 7,590,208 $ 195,187 $ 195,187
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 135,356 $ 58,409 $ 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 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 for 34,724
shares of its series B convertible preferred stock
In 1997, the Company issued 24,588 shares of its common stock with a value of
$77,196 as payment for the dividend on its series B convertible preferred stock.
In addition, 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 2,628,714 shares of common stock.
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 Companys
1996 Form 10-K. The results of operations for the period ended June 30,
1997 are not necessarily indicative of the operating results for the
full year.
2. REVENUE
Revenue for the period 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 had the right to
acquire up to 50 percent of Tamaracks common stock representing 37.2
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 Companys 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. 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 Tamaracks 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. This
amount is included in other current assets and was repaid in July 1997
following receipt of funds from a government agency.
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
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 time to
appeal the dismissal has not yet expired.
<PAGE>
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 Companys annual stockholders meeting scheduled for February
29, 1996. The Dolgoffs alleged, among other things, manipulation of the
election process and breaches of the Companys 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, another 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 a
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 Companys 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 Companys motion to dismiss Mr. Dolgoffs entire complaint, and
denied Mr. Dolgoffs motion to have a receiver appointed.
The Company appealed the New York Supreme Courts decision regarding
the disqualification of Anderson, Kill and the denial of its motion to
dismiss Mr. Dolgoffs complaint. Mr. Dolgoff appealed the New York
Supreme Courts 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 courts disqualification
of Anderson, Kill and the lower courts 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 courts
decision that, at this preliminary stage of the litigation, Mr.
Dolgoffs 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 plaintiffs purchase of the
Companys 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 Companys
management, based upon discussions with counsel, believe that they have
a meritorious defense and intend a vigorous defense against these
claims. The Companys management believes that the outcome of these
matters will not have a material adverse effect on its financial
position or results of operations.
In July 1997 the Company entered into an exclusive engagement for 60
days with Newport Capital Partners, Inc. to assist the Company in
raising approximately $ 7.5 million in an equity and debt private
placement.
F-9
<PAGE>
MANAGEMENTS 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 June 30, 1997, the Company had working capital of $ 2,310,019. With
respect to changes in the first six months of 1997 versus the amounts recorded
in the first six 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. In
March 1997 the Company shipped its first Digital Home Theater to retail
distribution.
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. The unsecured debt requires quarterly
interest payments in cash based upon a annual interest rate of 8%. The debt
matures in three (3) years, at which time any of this debt then outstanding is
to be repaid by the Company in cash or common stock, at the Companys option. The
debt is convertible into the Companys Common Stock in whole or in part, at the
option of the investor, at any time during the three year life of the debt, but
not before 60 days (with respect to 50% of the debt) or 90 days (with respect to
the entire debt) after the date of the investment. All conversions into Common
Stock are at a 25% discount to the then-present price of the Companys Common
Stock at the time of conversion. The Company used the proceeds from these
offering principally in connection with the commencement of the production and
introduction of its Digital Home Theater projector. All of the debt received in
this offering was raised from institutional investors located in Belgium,
Canada, Israel, Saudi Arabia, Singapore, Switzerland and England.
In June 1996 the Company issued an aggregate of $ 7,500,000 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 $ 1.5 million
of convertible debt. At June 30, 1997, 3,290 shares of this Series C Preferred
Stock are eligible for conversion, and 4,210 shares have already been converted
into 2,226,186 shares of the Companys Common Stock. The Series C Preferred Stock
is convertible into Common Stock at a 25% discount to the then current market
price of the Companys Common Stock at the time of conversion (the Series C
Conversion Price); provided, however, that in the event that the Series C
Conversion price is less than $ 1.50 per share, then under no circumstances can
shares of Series C Preferred Stock be converted into the Companys Common Stock
until such time as the Series C Conversion Price exceeds $ 1.50 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 Series C 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 Series C Conversion Price shall
be reduced by an additional $ 0.50.
In January 1997 the Company issued an aggregate of 35,000 shares of Series D
convertible preferred stock to two foreign institutional investors for an
aggregate purchase price of $ 3,500,000.
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 $ 50,400 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 $37,500,000 from its
inception to June 30, 1997. The Company has continued to incur losses since June
30, 1997. As of December 31, 1996, the Company had a available for Federal
income tax purposes net operating and capital loss carry-forwards of
approximately $21,000,000. 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 Registrants 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
August 13, 1997
<TABLE> <S> <C>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 195,187
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