<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 March 31, 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 May 9, 1997, there were 16,815,341 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 March 31,
1996 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,060,283 $ 1,549,736
Investments 3,437,386 3,147,352
Other current assets 851,198 1,423,591
------------ -----------
Total Current Assets 5,348,867 6,120,679
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 68,422 68,422
Tooling Costs 4,208,005 5,070,801
Computers and software 226,019 234,738
Leasehold improvements 185,030 185,030
------------ -----------
4,687,478 5,558,991
Less: Accumulated depreciation and amortization 242,896 268,497
------------ -----------
Property and equipment, net 4,444,580 5,290,494
OTHER ASSETS 339,041 69,034
------------ -----------
TOTAL ASSETS $ 10,132,488 $11,480,207
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,927,480 $ 1,221,040
------------ -----------
Total Current Liabilities 1,927,480 1,221,040
------------ -----------
LONG-TERM CONVERTIBLE DEBT - NET 1,762,963 1,694,444
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, $.01 par value
434,667 shares authorized, 351,258 shares outstanding
($ 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; ($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 16,514,899 issued and
outstanding respectively 1,423 1,651
Additional paid-in capital 38,760,690 39,850,754
Deficit accumulated during the development stage (32,323,935) (34,791,197)
------------ -----------
Total Stockholders' Equity 6,442,045 8,564,723
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $110,132,488 $11,480,207
============ ===========
</TABLE>
See notes to financial statement
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 March 31, Incorporation)
---------------------------- to March 31,
1996 1997 1997
<S> <C> <C> <C>
REVENUE $ -- $ 5,600 $ 1,460,600
LESS: COST OF SALES -- 5,070 5,070
----------- ----------- ------------
GROSS PROFIT -- 530 1,455,530
OPERATING EXPENSES
General and administrative 642,998 717,320 10,086,082
Salaries 424,692 362,907 5,188,763
Legal fees 253,205 170,119 3,208,177
Depreciation and amortization 19,658 25,601 323,935
Research and development 325,717 66,992 5,878,244
Patent and license expense 24,384 44,865 1,532,917
----------- ----------- ------------
Total Operating Expenses 1,690,654 1,387,804 26,218,118
----------- ----------- ------------
LOSS FROM OPERATIONS (1,690,654) (1,387,274) (24,762,588)
----------- ----------- ------------
OTHER INCOME (EXPENSE)
Provision for allowances on advances (18,100) -- (189,260)
Interest income 80,378 77,654 1,584,514
Interest expense - 8% Debentures (135,356) (26,497) (405,216)
Interest expense - Amortization of debt expense (27,778) (41,205) (2,075,888)
----------- ----------- ------------
Other income/(expense) - Net (100,856) 9,952 (1,085,850)
----------- ----------- ------------
LOSS BEFORE EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE (1,791,510) (1,377,322) (25,848,438)
----------- ----------- ------------
EQUITY IN LOSS OF
UNCONSOLIDATED AFFILIATE -- -- (4,897,314)
----------- ----------- ------------
NET LOSS (1,791,510) (1,377,322) (30,745,752)
=========== =========== ===========
NET LOSS PER SHARE $( .14) $( .08)
=========== ===========
AVERAGE NUMBER OF SHARES
OUTSTANDING 12,608,846 16,514,899
=========== ===========
</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>
BALANCE, JANUARY 1, 1996 100 0 385,982 3,859 0 #REFI 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 #REFI 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
NET LOSS
---- ---- -------- ------ ----- ----- ------ ----------
BALANCE, DECEMBER 31, 1997 100 0 361,258 $3,512 3,290 #REFI 35,000 $3,500,000
==== ==== ======== ====== ===== ===== ====== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DEFICIT 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 24,316,651 (20,641,044) 3,682,705
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS 37,666 4 154,389 (15,393) 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 (600,000) (600,000)
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 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
NET LOSS (1,377,322) (1,377,322)
---------- ------ ----------- ------------ ----------
BALANCE, DECEMBER 31, 1997 16,514,899 $1,651 $39,860,754 ($34,791,197) $8,564,723
========== ====== =========== ============ ==========
</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
Three Months Ended March 31, Incorporation)
---------------------------- to March 31,
1996 1997 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,791,510) $(1,377,322) $(30,745,752)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization and depreciation 47,436 25,601 323,937
Issuance of common stock for services -- -- 1,664,131
Other noncash operating expenses -- 74,636 2,434,685
Settlement of legal fees -- -- (97,287)
Provision for allowances on advances -- -- 298,426
Equity in loss of unconsolidated affiliate -- -- 2,895,996
Asset and liability management
Changes in operating assets 110,701 (345,441) (1,879,491)
Accounts payable 42,468 (706,440) 1,367,697
----------- ---------- -----------
Net cash used in operating activities (1,590,905) (2,329,066) (23,937,658)
----------- ---------- -----------
INVESTING ACTIVITIES
Capital expenditures (16,276) (871,515) (5,558,990)
Investment in and advances to unconsolidated affiliate -- -- (4,703,440)
Allowance taken on investment in unconsolidated affiliate -- -- 2,129,252
Interest accrued on loan to unconsolidated affiliate -- -- (121,808)
Licenses -- -- (30,000)
Purchases and redemption of government securities (4,850,672) 290,034 (3,147,352)
----------- ---------- -----------
Net cash used in investing activities (4,866,948) (581,481) (11,432,338)
----------- ---------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable 10,000,000 -- 10,800,000
Private placement costs -- -- (518,505)
Repayment of notes payable -- (100,000) (6,180,955)
Issuance of preferred stock -- 3,500,000 11,716,341
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 -- -- 398,750
Deferred public offering costs -- -- (50,000)
----------- ---------- -----------
Net cash provided by financing activities 9,500,000 3,400,000 36,919,732
----------- ---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,042,147 489,453 1,549,736
CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 3,491,982 1,060,283 --
----------- ---------- -----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 6,534,129 $1,549,736 $ 1,549,736
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 135,356 $ 26,497 $ 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.
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 Form10-K. The results of operations for the period ended March 31,
1997 are not necessarily indicative of the operating results for the
full year.
2. REVENUE
Revenue for the period consisted of the initial billings for the
Digital Home Theater.
Included in cumulative revenues is $ 1,000,000 in funding from a
government agency.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1997, the fair values of cash, cash equivalents,
investments, and accounts payable and accrued liabilities approximated
their carrying values because of the short-term nature of these
accounts. Convertible debt has a carrying value of $ 2,000,000 and a
fair value of $ 1,694,444.
4. 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 Tamarack's 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 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.
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. This
amount is included in other current assets and is to be repaid in July
1997 following receipt of funds from a government agency.
5. ASSIGNMENT AGREEMENT
On March 19, 1990, an officer/stockholder of the Company entered into
an assignment agreement with the Company whereby all rights, title and
interest to the projection technology were assigned to the Company. The
rights, title and interest to the United States patent and foreign
patents relating to the projector technology under development by the
Company were originally applied for by this officer/stockholder.
F-7
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three of its
officers and directors. Aggregate minimum compensation under these
agreements will be $535,000 per year through 1997.
7. 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 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 Series D Conversion Price
shall be reduced by an additional $ 0.50.
8. RELATED PARTY TRANSACTIONS
In 1989 advances totaling $10,833 were made to a principal stockholder
of DKY and were outstanding at December 31,1996.
9. COMMITMENTS AND CONTINGENCIES
On November 18, 1994 the Company entered into a non exclusive,
non-transferable license without a right to sub-license, except to
related companies, with Samsung Electronics Co. ("Samsung") pursuant to
which the Company gave to Samsung the right to use the Company's
patented depixelization technology (as defined) in connection with the
manufacturing and marketing of LCD projectors. The license is
co-terminus with the life of the patents and patent applications
relating to the proprietary rights underlying the license.
The future minimum rental commitments as of December 31, 1996 are as
follows:
Year Amount
---- ------
1997 $ 257,554
1998 21,462
---------
$ 279,016
=========
Rent expense for the years ended December 31, 1995 and 1996 was
$204,832 and $209,695, respectively.
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 appeal. The class action suit
now alleges 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 alleges
claims for negligent misrepresentation and for common law fraud and
deceit. In response, the Company and the individual defendants have
submitted motions to dismiss the action. These motions are pending
before the Court.
F-8
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (Continued)
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. A settlement agreement has been entered into
between the Company and the Dolgoffs, which includes, amother things,
the Company taking steps to move one of its Directors from one class to
another class so as to balance the size of its three (3) classes of
directors. A hearing with respect to the settlement agreement has been
scheduled before the Delaware Chancery Court for May 23, 1997.
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 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. At the present time, neither the nature, nor scope, nor term
of the receivership has been determined, all of which will be decided
by the New York State Supreme Court, which initially denied the former
officer and employee's motion for a receivership. 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 all of the above actions, 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.
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 March 31, 1997, the Company had working capital of $5,043,868. 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 Company's option.
The debt is convertible into the Company's 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
Company's 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 the present time, 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 Company's Common Stock. The Series C
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 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
Company's 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 anaggregate of 35,000 shares of Series D
convertible preferred stock to two foreign institutional investors for an
aggregate purchase price of $ 3,500,000. For a description of the terms and
conditions of the Series D Preferred Stock, see Footnote 7 on page F-8.
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 $ 5,600 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 $34,500,000 from its
inception to March 31, 1997. The Company has continued to incur losses since
March 31, 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 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
May 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,549,736
<SECURITIES> 3,147,352
<RECEIVABLES> 1,423,591
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<CURRENT-ASSETS> 6,120,679
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<DEPRECIATION> 268,497
<TOTAL-ASSETS> 11,480,207
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0
3,503,515
<COMMON> 1,651
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<TOTAL-LIABILITY-AND-EQUITY> 11,480,207
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<CGS> 5,070
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<OTHER-EXPENSES> (77,654)
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<INCOME-PRETAX> (1,377,322)
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