<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, 1998
---------------
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 August 12, 1998, there were 28,747,525 shares of the Registrant's common
stock outstanding.
<PAGE>
PROJECTAVISION, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
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-11
Financial Condition and Results
of Operations
SIGNATURES
<PAGE>
PROJECTAVISION, INC
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,331,925 $ 566,475
Accounts receivable - net of Allowance 377,608 196,650
Inventory 1,857,604 2,100,695
Investments -- --
Other current assets 1,001,629 1,510,213
------------ ------------
Total Current Assets 4,568,766 4,374,033
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 127,128 68,421
Tooling 5,907,288 5,977,148
Computers and software 259,048 268,088
Assets under capital leases 47,989 47,989
Leasehold improvements 185,030 185,030
------------ ------------
6,526,483 6,546,676
Less: Accumulated depreciation and amortization 851,250 1,209,975
------------ ------------
Property and equipment, net 5,675,233 5,336,701
OTHER ASSETS 168,358 1,817,109
------------ ------------
TOTAL ASSETS $ 10,412,357 $ 11,527,843
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,466,676 $ 2,305,715
Accrued liabilities 1,070,638 685,759
Current portion of capital lease obligations 15,229 16,512
------------ ------------
Total Current Liabilities 3,552,543 3,007,986
------------ ------------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations 22,851 14,261
Other Long-Term Liabilities 250,000 250,000
Convertible Debt 900,000 275,000
------------ ------------
Total Long-term Liabilities 1,172,851 539,261
------------ ------------
TOTAL LIABILITIES 4,725,394 3,547,247
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred Stock
Series A Preferred Stock, $.01 par value
100 shares authorized, 100 shares issued
($100,000 liquidation preference) -- --
Series B Preferred Stock, $.01 par value, 434,667 shares
authorized, 351,258 shares outstanding as of December 31, 1997
and June 30, 1998 ($ 1,756,290 liquidation preference) 3,512 3,512
Series D Preferred Stock, $100 par value, 60,000 shares
authorized; 51,000 shares issued on December 31, 1997
and 41,000 on June 30, 1998 ($100 per share liquidation preference) 5,100,000 4,100,000
Series E Preferred Stock, $1000 par value, 1,650 shares
authorized; 1,650 shares issued on December 31, 1997
and June 30, 1998 ($1,000 per share liquidation preference) 1,650,000 1,650,000
Series F Preferred Stock, $1000 par value, 2,850 shares
authorized; 2,850 shares issued on June 30, 1998
($1,000 per share liquidation preference) -- 2,850,000
Series G Preferred Stock, $1000 par value, 2,400 shares
authorized; 2,400 shares issued on June 30, 1998
($1,000 per share liquidation preference) -- 2,400,000
Common stock $.0001 par value - 50,000,000 shares
authorized; 19,998,997 and 23,661,656 issued and
outstanding in 1997 and 1998 respectively 1,999 2,366
Additional paid-in capital 44,535,906 48,302,660
Accumulated Deficit (45,604,454) (51,327,942)
------------ ------------
Total Stockholders' Equity 5,686,963 7,980,596
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,412,357 $ 11,527,843
============ ============
</TABLE>
See notes to financial statements
F-2
<PAGE>
PROJECTAVISION, INC
STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
REVENUE $ 44,800 $ 162,857 $ 50,400 $ 579,300
------------ ------------ ------------ ------------
LESS: COST OF SALES 45,337 153,362 50,407 508,267
------------ ------------ ------------ ------------
GROSS PROFIT (537) 9,495 (7) 71,033
OPERATING EXPENSES
General and administrative 929,865 905,170 1,647,186 1,701,565
Salaries 358,486 406,222 721,393 814,259
Legal fees 573,517 570,035 743,636 672,933
Depreciation 400,061 181,488 425,663 358,725
Research and development 124,998 614,392 191,988 730,298
Patent and license expense 137,655 22,325 182,521 72,646
------------ ------------ ------------ ------------
Total Operating Expenses 2,524,582 2,699,632 3,912,387 4,350,426
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (2,525,119) (2,690,137) (3,912,394) (4,279,393)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
(Provision for)/recovery of
allowances on advances -- 104,386 -- 378,857
Interest income 53,100 4,853 130,755 16,246
Interest expense - 8% Debentures (31,912) (7,448) (58,409) (14,451)
Interest expense - Amortization of debt expense (47,917) (4,250) (89,122) (16,250)
------------ ------------ ------------ ------------
Other income/(expense) - Net (26,729) 97,541 (16,776) 364,402
------------ ------------ ------------ ------------
Net Loss (2,551,848) (2,592,596) (3,929,170) (3,914,991)
Dividends on Preferred Stock (594,361) (1,475,425) (1,684,401) (1,808,497)
------------ ------------ ------------ ------------
Net Loss Attributable to Common Shareholders $ (3,146,209) $ (4,068,021) $ (5,613,571) $ (5,723,488)
============ ============ ============ ============
Net Loss per Share Attributable
to Common Shareholders $ (.19) $ (.18) $ (.34) $ (.26)
============ ============ ============ ============
AVERAGE NUMBER OF SHARES
OUTSTANDING 16,765,341 22,869,544 16,465,513 21,713,928
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
PROJECTAVISION, INC.
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, DECEMBER 31, 1995 100 $ - 385,982 $ 3,859 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
ISSUANCE OF WARRANTS AND OPTIONS FOR SERVICES
NET LOSS
-------- ---------- ---------- --------- --------- ----------------------------------
BALANCE, DECEMBER 31, 1996 100 0 385,982 3,859 7,500 8 0 0
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK (34,724) (347)
SERIES C PREFERRED STOCK CONVERSION (7,500) (8)
ISSUANCE OF SERIES D PREFERRED STOCK 51,000 5,100,000
ISSUANCE OF SERIES E PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES D PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES E PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES D PREFERRED STOCKHOLDERS
FINANCING COST FOR SERIES D PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES E PREFERRED STOCKHOLDERS
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF COMMON STOCK FOR SERVICES
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
NET LOSS
-------- ---------- ---------- --------- --------- ----------------------------------
BALANCE, DECEMBER 31, 1997 100 0 351,258 3,512 0 0 51,000 5,100,000
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
CONVERSION OF SERIES D PREFERRED STOCK (2,000) (200,000)
ISSUANCE OF SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES F PREFERRED STOCK
FINANCING COST FOR SERIES D PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
NET LOSS
-------- ---------- ---------- --------- --------- ----------------------------------
BALANCE, MARCH 31, 1998 100 $0 351,258 $3,512 0 $0 49,000 $4,900,000
ISSUANCE OF COMMON STOCK
ISSUANCE OF COMMON STOCK FOR SERVICES
CONVERSION OF SERIES D PREFERRED STOCK (8,000) (800,000)
ISSUANCE OF SERIES G PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK
FINANCING COST FOR SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS
NET LOSS
-------- ---------- ---------- --------- --------- ----------------------------------
BALANCE, JUNE 30, 1998 100 $0 351,258 $3,512 0 $0 41,000 $4,100,000
======== ========== ========== ========= ========= ==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SERIES E SERIES F SERIES G
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 0 - $ - 0 - $ - 0 - $ -
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
ISSUANCE OF SERIES C PREFERRED STOCK
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
ISSUANCE OF WARRANTS AND OPTIONS FOR SERVICES
NET LOSS
---------------------- ------------ ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 0 0 0 0 0 0
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK
SERIES C PREFERRED STOCK CONVERSION
ISSUANCE OF SERIES D PREFERRED STOCK
ISSUANCE OF SERIES E PREFERRED STOCK 1,650 1,650,000
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES C PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES D PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES E PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES
D PREFERRED STOCKHOLDERS
FINANCING COST FOR SERIES D PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES
E PREFERRED STOCKHOLDERS
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF COMMON STOCK FOR SERVICES
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
NET LOSS
--------- ------------ ------------ ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 1,650 1,650,000 0 0 0 0
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
CONVERSION OF SERIES D PREFERRED STOCK
ISSUANCE OF SERIES F PREFERRED STOCK 2,850 2,850,000
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES
F PREFERRED STOCK
FINANCING COST FOR SERIES D PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES
F PREFERRED STOCKHOLDERS
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK
NET LOSS
--------- ------------ ------------ ------------- ------------- -------------
BALANCE, MARCH 31, 1998 1,650 $1,650,000 2,850 $2,850,000 0 $0
ISSUANCE OF COMMON STOCK
ISSUANCE OF COMMON STOCK FOR SERVICES
CONVERSION OF SERIES D PREFERRED STOCK
ISSUANCE OF SERIES G PREFERRED STOCK 2,400 2,400,000
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES G PREFERRED STOCK
FINANCING COST FOR SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES
G PREFERRED STOCKHOLDERS
NET LOSS
--------- ------------ ------------ ------------- ------------- -------------
BALANCE, JUNE 30, 1998 1,650 $1,650,000 2,850 $2,850,000 2,400 $2,400,000
========= ============ ============ ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON STOCK PAID IN DEFICIT
SHARES AMOUNT CAPITAL TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 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 3,020,298 3,020,475
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 3,333,333 3,333,333
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES C PREFERRED STOCK 2,357,188 (2,357,188) 8
ISSUANCE OF WARRANTS AND OPTIONS FOR SERVICES 385,800 385,800
NET LOSS (10,880,893) (10,880,893)
------------- ---------- --------------- --------------- -------------
BALANCE, DECEMBER 31, 1996 14,229,401 1,423 40,594,023 (34,157,268) 6,442,045
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK 34,724 3 344 0
SERIES C PREFERRED STOCK CONVERSION 4,881,656 489 (481) 0
ISSUANCE OF SERIES D PREFERRED STOCK 5,100,000
ISSUANCE OF SERIES E PREFERRED STOCK 1,650,000
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES C PREFERRED STOCK 478,248 (478,248) 0
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES D PREFERRED STOCK 1,700,000 (1,700,000) 0
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES E PREFERRED STOCK 550,000 (550,000) 0
ISSUANCE OF WARRANTS TO SERIES D
PREFERRED STOCKHOLDERS 232,620 (232,620) 0
FINANCING COST FOR SERIES D PREFERRED STOCK (75,000) (75,000)
ISSUANCE OF WARRANTS TO SERIES E
PREFERRED STOCKHOLDERS 48,900 (48,900) 0
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS 66,740 6 147,492 (147,498) 0
ISSUANCE OF COMMON STOCK FOR SERVICES 50,000 5 96,870 96,875
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK 726,476 73 762,890 762,963
NET LOSS (8,289,920) (8,289,920)
------------- ---------- --------------- --------------- -------------
BALANCE, DECEMBER 31, 1997 19,988,997 1,999 44,535,906 (45,604,454) 5,686,963
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS 72,041 7 70,161 (70,168) 0
CONVERSION OF SERIES D PREFERRED STOCK 336,896 34 199,966 0
ISSUANCE OF SERIES F PREFERRED STOCK 2,850,000
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES F PREFERRED STOCK 195,404 (195,404) 0
FINANCING COST FOR SERIES D PREFERRED STOCK (317,490) (317,490)
ISSUANCE OF WARRANTS TO SERIES F
PREFERRED STOCKHOLDERS 67,500 (67,500) 0
CONVERSION OF 8% DEBENTURES INTO
COMMON STOCK 954,042 95 718,595 718,690
NET LOSS (1,322,395) (1,322,395)
------------- ---------- --------------- --------------- -------------
BALANCE, MARCH 31, 1998 21,351,976 $2,135 $45,470,042 ($47,259,921) $7,615,768
ISSUANCE OF COMMON STOCK 666,667 67 499,933 500,000
ISSUANCE OF COMMON STOCK FOR SERVICES 141,635 14 225,410 225,424
CONVERSION OF SERIES D PREFERRED STOCK 1,501,378 150 799,850 0
ISSUANCE OF SERIES G PREFERRED STOCK 2,400,000
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES F PREFERRED STOCK 370,454 (370,454) 0
AMORTIZATION OF DISCOUNT (DIVIDEND)
ON SERIES G PREFERRED STOCK 1,028,571 (1,028,571) 0
FINANCING COST FOR SERIES G PREFERRED STOCK (168,000) (168,000)
ISSUANCE OF WARRANTS TO SERIES G
PREFERRED STOCKHOLDERS 76,400 (76,400) 0
NET LOSS (2,592,596) (2,592,596)
------------- ---------- --------------- --------------- -------------
BALANCE, JUNE 30, 1998 23,661,656 $2,366 $48,302,660 ($51,327,942) $7,980,596
============= ========== =============== =============== =============
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
PROJECTAVISION, INC
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1997 1998
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,929,170) $(3,914,991)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 514,784 374,975
Issuance of common stock for services -- 225,410
Allowance taken on investment in unconsolidated affiliate -- (378,857)
Other noncash operating expenses/(income) -- 356,901
Asset and liability management
Changes in other operating assets (526,058) (242,925)
Changes in accounts receivable 180,958
Changes in inventories (243,091)
Accounts payable and other liabilities (281,177) (553,147)
----------- -----------
Net cash used in operating activities (4,221,621) (4,194,767)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (1,409,061) (20,193)
Deposit on Asset Purchase Agreement -- (1,815,000)
Purchases and redemption of government securities 1,365,586 --
----------- -----------
Net cash (used in)/provided by investing activities (43,475) (1,835,193)
----------- -----------
FINANCING ACTIVITIES
Issuance of common stock -- 500,000
Repayment of convertible debt (100,000) --
Issuance of preferred stock 3,500,000 5,250,000
Issuance Fees -- (485,490)
----------- -----------
Net cash provided by financing activities 3,400,000 5,264,510
----------- -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (865,096) (765,450)
CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 1,060,283 1,331,925
----------- -----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 195,187 $ 566,475
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 58,409 $ 3,634
=========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
PROJECTAVISION, INC.
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 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 into
common stock.
In 1997, the Company issued 66,740 shares of its common stock with a value of
$147,498 as payment for the dividend on its series B convertible stock. In
addition, the Company issued 4,881,656 shares of its common stock to retire the
entire issue of 7,500 shares of Series C convertible preferred stock. The
Company also issued 50,000 shares of its common stock for services rendered by
an officer and director of the Company. Finally, the Company issued shares of
common stock in connection with retiring $0.6 million of convertible debt,
leaving a face value on the debt of $ 900,000.
In 1998, the Company issued 72,041 shares of its common stock with a value of
$70,168 as payment for the dividend on its series B convertible stock. In
addition, the Company issued 1,838,274 shares of its common stock to retire
10,000 shares of Series D convertible preferred stock. The Company issued
954,042 shares of common stock in connection with retiring $ 760,000 of
convertible debt, leaving a face value on the debt of $ 140,000. 150,000
warrants with a value of $ 67,500 were issued in connection with the Series F
Convertible Preferred Stock, and 250,000 warrants with a value of $ 76,400 were
issued in connection with the Series G Convertible Preferred Stock. 666,667
shares of common stock were sold for gross proceeds of $ 500,000. 141,635 shares
of common stock were issued for services.
F-6
<PAGE>
PROJECTAVISION, INC.
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 was
formed to complete the 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. Besides
licensing the technology developed, the Company outsources the
manufacture of its products to third party subcontractors. The Company
emerged from the development stage in 1997 and has generated
significant revenue from its planned principal operations. Management
of the Company believes that it has sufficient funds to successfully
sustain its operations. However, the attainment of profitable
operations is dependent upon future events including achieving a level
of revenue adequate to support the Company's then cost structure.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
1997 Form 10-K. The results of operations for the period ended June 30,
1998 are not necessarily indicative of the operating results for the
full year.
The accompanying interim financial statements are unaudited, but in the
opinion of management, include all adjustments, consisting only of
normal recurring accruals considered necessary for a fair presentation
of the results for the interim periods presented.
2. REVENUE
Revenue for the periods ended June 30, 1997 and 1998 consisted of sales
of the Digital Home Theater, the Company's principle product.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1998, 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 $ 275,000 and a fair
value of $ 366,667.
4. 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 the Company to fund its
cash needs through December 31, 1995 to continue its operations, and
$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, in 1996 the Company
classified its investment in Tamarack as available for sale, and, in
order to maximize the recovery of its investment, loaned Tamarack an
additional $100,000 in 1996 and was to have been repaid following
receipt of funds from a government agency. This loan was also fully
reserved in 1997. After eliminating the intercompany accounts and
reflecting previous write-offs, Tamarack's financial statements were
not material to the Company and were not consolidated prior to 1998.
F-7
<PAGE>
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In January, 1998, Tamarack was acquired by Manhattan Scientifics,
Inc.("MSI"), a NASDAQ bulletin-board traded company. All of the shares
of Tamarack (97% of which were represented by the Company's holdings in
Tamarack at the time of the closing) were exchanged for approximately
43 million shares of MSI. Simultaneously therewith, an additional 5
million shares were sold to the public by MSI, resulting in aggregate
gross proceeds of $1 million. Further, in connection with the
transaction, the Company's $1,500,000 loan plus accrued interest
thereon was exchanged for convertible preferred stock of MSI. Each
share of convertible preferred stock is convertible into 50 shares of
MSI common stock. The Company also received a warrant to purchase
750,000 shares of MSI common stock at an exercise price of $0.20 per
share. Subsequent to the closing of this transaction, MSI issued an
aggregate of 7.2 million shares to purchase patents in a portable fuel
cell technology which MSI is planning to develop commercially.
In July 1998, the Company sold its common shares in MSI to an
institutional investor for $ 2 million in net proceeds, concurrent with
the investor making a commitment to secure an additional $1 million
equity capital investment into MSI. The Company intends to use the
proceeds from the sale of its MSI shares as working capital for general
operations. The gain is to be recognized in the third quarter of 1998.
The Company also converted its preferred stock into approximately
9 million MSI common shares. The result of these transactions was to
reduce the Company's ownership position in MSI to approximately 12%,
and, accordingly, at June 30,1998, MSI is not consolidated but rather
has been accounted for under th equity method, as the Company's control
of MSI was temporary.
5. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with three of its
officers and directors and a consulting agreement with one of its
officers and directors. Aggregate minimum compensation under these
agreements will be $535,000 per year through 1999. For 1996, and 1997
salary expense was approximately $577,450, and $710,200 respectively.
6. PREFERRED STOCK
The Series B Convertible Preferred Stock provides for cumulative annual
stock dividends payable in common shares of 8 percent of the
liquidation value of $5 per share (for a total of $1,756,290) to be
paid semiannually and is convertible to one share of common stock,
subject to adjustment. In 1996, 34,200 shares of Series B Convertible
Preferred Stock were converted into common stock. This stock may be
redeemed by the Company if certain conditions are met for $1.00 per
share.
In 1996, the Company issued 7,500 shares of Series C Preferred Stock
for $7,500,000, resulting in net proceeds to The Company of $7,000,000
after fees. The Series C Preferred Stock converts into shares of Common
Stock at a 25% discount of the average closing bid price of the Common
Stock for the five (5) trading days immediately preceding the date of
conversion. The holder of the Series C Preferred Stock has the right to
convert into Common Stock as follows: 25% can be converted on or after
November 1, 1996; 25% may be converted on or after January 1, 1997; 25%
may be converted on or after March 1, 1997; and 25% may be converted on
or after May 1, 1997. The Company, in accordance with the terms and
conditions of the sale of the Series C Preferred Stock, registered the
shares of Common Stock into which the Series C Preferred Stock is
convertible in the third quarter of 1996. The Series C Preferred Stock
pays dividends semi-annually, seven (7) business days after each of
December 31st and June 30th of each year, which may be in cash or
shares of Common Stock at the election of The Company. The dividend
rate is 3% per annum of the liquidation value of $1,000.00 per share
until and through June 30, 1997; 6% per annum from July 1, 1997 through
June 30, 1998; and 8% per annum from July 1, 1998 and thereafter. The
Company recognized a dividend on the Series C Preferred Stock based on
the annualized pro-rata amount of the 25% discount on the conversion
into common stock and on the increase in the dividend rate. During
1997, the Series C Preferred Stock was converted into 4,881,336 shares
of Common Stock, which resulted in retiring the issue.
<TABLE>
<CAPTION>
Original
Six Months Ended June 30, 1998 Total to Vest
------------------------------ -------------
<S> <C> <C>
Dividend accretion on Series C Preferred Stock $ 0 $ 492,650
Amortization of Warrants on Series C Preferred Stock 0 290,000
Amortization of Discount on Series C Preferred Stock 0 2,500,000
</TABLE>
<PAGE>
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. In October, 1997, these
35,000 Series D shares were sold to two other foreign institutional
investor. In December 1997, the Company issued an additional 16,000
shares of 6% Series D convertible preferred stock to the same
institutional investors for a purchase price of $ 1,600,000, resulting
in net proceeds to the Company of $ 1,525,000. Each share of Series D
Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock at any time. 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. After giving effect to the conversion of an aggregate of
$ 410,000 of Series D Preferred Stock subsequent to June 30, 1998,
there currently remains $ 3,690,000 in Series D Preferred Stock
outstanding.
F-8
<PAGE>
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Total to Vest
------------------------------ -------------
<S> <C> <C>
Amortization of Warrants on Series D Preferred Stock 0 232,620
Amortization of Discount on Series D Preferred Stock 0 1,700,000
</TABLE>
In July of 1997, the Company issued 1,000 shares of 8% Series E
convertible preferred stock to one foreign institutional investor for a
purchase price of $ 1,000,000, resulting in net proceeds to the Company
of $ 1,000,000. In December 1997, the Company issued an additional 650
shares of 8% Series E convertible preferred stock to the same foreign
institutional investor for a purchase price of $ 650,000, resulting in
net proceeds to the Company of $ 650,000. Each share of Series E
Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock at any time. 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. After giving effect to the conversion of an aggregate of
$ 140,000 of Series E Preferred Stock subsequent to June 30, 1998,
there currently remains $ 1,510,000 in Series E Preferred Stock
outstanding
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Total to Vest
------------------------------ -------------
<S> <C> <C>
Amortization of Warrants on Series E Preferred Stock 0 48,900
Amortization of Discount on Series E Preferred Stock 0 550,000
</TABLE>
In February of 1998, the Company issued 2,850 shares of 8% Series F
convertible preferred stock to one foreign institutional investor for a
purchase price of $ 2,850,000, resulting in net proceeds to the Company
of $ 2,532,510 after fees. The preferred stock is convertible into the
Company's common stock at a maximum of $ 1.00 per share in five equal
installments every thirty days starting in August 1998. The Series F
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 Company has the right to repurchase the preferred
shares at a 12.5% premium over the issue price within 90 days and at a
25% premium after 90 but before 180 days from the issue date.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Total to Vest
------------------------------ -------------
<S> <C> <C>
Amortization of Warrants on Series F Preferred Stock 67,500 67,500
Amortization of Discount on Series F Preferred Stock 195,404 950,000
</TABLE>
In May of 1998, the Company issued 2,000 shares of 8% Series G
convertible preferred stock to one foreign institutional investor for a
purchase price of $ 2,000,000, resulting in net proceeds to the Company
of $ 1,860,000 after issuance fees. In June 1998 the Company completed
another private placement of preferred stock for gross proceeds of $0.4
million, resulting in net proceeds of $ 376,000. The Series G Preferred
Stock is convertible into Common Stock at a 30% discount to the then
current market price of the Company's Common Stock at the time of
conversion.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 Total to Vest
------------------------------ -------------
<S> <C> <C>
Amortization of Warrants on Series G Preferred Stock 76,400 76,400
Amortization of Discount on Series G Preferred Stock 1,028,571 1,028,571
</TABLE>
<PAGE>
7. CONVERTIBLE DEBT
In February 1996, the Company completed an offshore private placement
of $10,000,000 of convertible debt resulting in net proceeds to the
Company of $9,500,000. The convertible debt bears interest at the rate
of 8% per annum and pays interest quarterly in arrears on any unpaid or
unconverted debt. To the extent not previously converted, the
convertible debt is due in January 1999, and may be repaid in cash or
common stock of the Company at the sole option of the Company. All
conversions of convertible debt into common stock are based upon a 25%
discount of the price of the Company's common stock for five
consecutive trading days immediately prior to the date of conversion.
The Company recognized as interest expense the 25% discount on the
conversion into common stock equal to $ 3,333,333 in 1996. In 1996 the
Company issued 1,772,945 shares of its common stock and paid $4,958,250
in cash in exchange for retiring $8.6 million in convertible debt. In
January 1997, the Company retired $ 100,000 of convertible debt for
cash. During 1997, the Company issued an additional 476,034 shares of
its common stock in exchange for retiring $0.6 million of convertible
debt. In January 1998, the Company issued 954,042 shares of its common
stock in exchange for retiring $ 625,000 of convertible debt. After
giving effect to the conversion of an aggregate of $ 135,000 of
subordinated debt subsequent to June 30, 1998, there currently remains
$ 140,000 in convertible debt outstanding.
F-9
<PAGE>
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. 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. 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 June 30, 1998 are as
follows:
Year Amount
---- ------
1998 $ 139,974
In January 1998 the Company signed a definitive agreement to acquire
substantially all of the assets of Vidikron Industries, S.p.A.
("Vidikron") relating to its video business, including its U.S.
distribution subsidiary, Vidikron of America, Inc. In accordance with
the definitive acquisition agreement, the Company has advanced Vidikron
$ 1,000,000 on a non-refundable basis. In April 1998 the Company
entered into an agreement with Vidikron extending the closing date of
the transaction from April 30, 1998 to July 31, 1998, subject to
further automatic additional extension of up to an additional sixty
(60) days to September 30, 1998 under certain circumstances ("The April
Extension"). Pursuant to the April Extension, the Company has advanced
to Vidikron an additional $ 1,000,000 non-refundable payment towards
the purchase price. The Company made installments of $ 815,000 prior to
June 30, 1998 in connection with this additional $ 1,000,000 payment.
The closing of the acquisition is expressly subject to the satisfactory
completion by the Company of all due diligence and obtaining the
requisite financing to complete the transaction. There can be no
assurance that the Company will be satisfied upon its completion of its
due diligence, that it will be able to secure the necessary financing,
or that it will otherwise be able to effect the acquisition of
Vidikron.
In June 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 the class action suit was dismissed
with prejudice by the U.S. District Court in New York. Plaintiffs
subsequently filed a notice of appeal with the Second Circuit Appellate
Court. Thereafter, in July 1998, the case was settled with the
individual plaintiffs at no cost to the Company other than litigation
costs.
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 alleged, among other actions, breach of employment and patent
assignment agreements. Mr. Dolgoff sought damages, punitive damages,
and equitable relief totaling in excess of $ 100 million. In April
1998, the lawsuit was settled, and all of Mr. Dolgoff's claims and
those of the Company against him were dismissed.
There is currently no litigation outstanding with respect to the
Company.
F-10
<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 thereto.
Liquidity and Capital Resources
As of June 30, 1998, the Company had working capital of $1,366,047. To
date, the Company has funded its operations primarily from sales of capital
stock. In February 1998, the Company completed a private placement of preferred
stock for gross proceeds of $2.85 million resulting in net proceeds of $2.53
million. In April 1998 the Company completed a private placement of common stock
of $ 0.5 million. In May 1998 the Company completed a private placement of
preferred stock for gross proceeds of $ 2.0 million, resulting in net proceeds
of $1.86 million. In June 1998 the Company completed another private placement
of preferred stock for gross proceeds of $0.4 million, resulting in net proceeds
of $ 376,000. These sales of capital stock along with existing cash balances
primarily funded the net cash used in operating activities of $4.2 million and
the $ 1.8 million advance to Vidikron made pursuant to the definitive
acquisition agreement As of June 30, 1998, the Company had cash and cash
equivalents of $ 566,475. In the opinion of management, the Company has
sufficient funds or will be able to raise sufficient funds based on history to
fund future operations.
As of December 31, 1997, the Company had working capital of $1,016,223.
In January 1997, the Company completed a private placement of preferred stock of
$3.5 million, in July 1997 the Company completed a second private placement of
preferred stock of $ 1.0 million, and in December 1997 the Company completed two
more private placements of preferred stock totaling $ 2.25 million. In addition,
the sale of government securities was used to fund working capital and to
purchase production tooling for the Digital Home Theater. As of December 31,
1997, the Company had cash and cash equivalents of $1,331,925.
As of December 31, 1997, the Company had available for Federal income
tax purposes net operating and capital loss carryforwards of approximately
$29,500,000. The Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), may impose certain restrictions on the amount of net operating
loss carryforwards which may be used in any year by the Company.
Results of Operations
January 1, 1998 to June 30, 1998
The Company had revenues of $ 579,300 for the six month period ended
June 30, 1998, all of which was from the sale of the Digital Home Theater and
accessories. Cost of goods sold of $ 508,267 resulted in gross profit of
$71,033, which was adversely affected by the initial cost of the Texas
Instruments light engine, the principle component of the Digital Home Theater.
During this period, the Company completed development and began the initial
production run of a second-generation product, the Series II Digital Home
Theatre.
During this period, the Company incurred cash expenses of $ 3,610,581.
With respect to the amount spent in the first six months of 1998 versus the
amounts in the comparable period in 1997, the increase in general and
administrative expense is due to increased participation in trade shows, higher
salaries reflects the addition of marketing personnel, higher legal fees are
related to the costs of settling the litigation with a former officer, and
higher R&D is associated with development of the Series II product. The Company
also incurred non-cash expenses of $ 756,095 during the period a) for
depreciation, which was higher than in the first six months of 1997 due to a
full six months of depreciation of the tooling for the Digital Home Theater in
1998, b) for the expensing of inventory not usable in the Series II product, and
c) for the issuance of stock principally for legal services. The Company also
recorded $ 1,808,490 in dividends on the Series B, Series F , and Series G
Convertible Preferred Stock in connection with recognizing the dividends on the
Series B, the discount on the Series F and Series G conversion feature, and the
warrants issued in connection with the Series F and Series G Preferred Stock.
January 1, 1997 to June 30, 1997
The Company had revenues of $ 50,400 for the six month period ended
June 30, 1997 which was from the sale of the Digital Home Theater. Cost of goods
sold of $ 50,407 resulted in negative gross profits of $ 7, which was adversely
affected by the initial cost of the Texas Instruments light engine. During this
period, the Company incurred cash expenses of $3,486,724. The Company incurred
non-cash expenses of $ 425,663 during the period for depreciation The Company
also recorded $1,684,401 in dividends on the Series C and D Convertible
Preferred Stock in connection with recognizing the discount on the conversion
feature, for warrants issued in connection with the issuance of Series D
Convertible Preferred Stock, and for Series B Preferred Stock Dividends.
F-11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly executed on this 12th day of August, 1998.
PROJECTAVISION, INC.
By: /s/ Martin Holleran
--------------------------------
Martin Holleran, President
Chief Executive Officer and Director
By: /s/ Jules Zimmerman
--------------------------------
Jules Zimmerman
Secretary, Chief Financial Officer,
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 566,475
<SECURITIES> 0
<RECEIVABLES> 284,181
<ALLOWANCES> (87,531)
<INVENTORY> 2,100,695
<CURRENT-ASSETS> 4,374,033
<PP&E> 6,546,676
<DEPRECIATION> 1,209,975
<TOTAL-ASSETS> 11,527,843
<CURRENT-LIABILITIES> 3,007,986
<BONDS> 0
0
11,003,512
<COMMON> 2,366
<OTHER-SE> (3,025,282)
<TOTAL-LIABILITY-AND-EQUITY> 11,527,843
<SALES> 579,300
<TOTAL-REVENUES> 579,300
<CGS> 508,267
<TOTAL-COSTS> 4,350,426
<OTHER-EXPENSES> (378,853)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,451
<INCOME-PRETAX> (3,914,991)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,914,991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,914,991)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
