<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, 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 May 13, 1998, there were 22,822,051 shares of the Registrant's common
stock outstanding.
<PAGE>
PROJECTAVISION, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of F-11
Financial Condition and Results
of Operations
PART II --OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K F-12
SIGNATURES
<PAGE>
PROJECTAVISION, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
A S S E T S 1997 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,331,925 $ 899,166
Accounts receivable - net of allowance for doubtful accounts 377,608 415,525
Inventory - net 1,857,604 2,442,965
Other current assets 1,001,629 995,647
------------ ------------
Total Current Assets 4,568,766 4,753,303
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 127,128 207,887
Tooling 5,907,288 5,941,059
Computers and software 259,048 298,120
Assets under capital leases 47,989 63,747
Leasehold improvements 185,030 186,301
------------ ------------
6,526,483 6,697,114
Less: Accumulated depreciation and amortization 851,250 1,155,765
------------ ------------
Property and equipment, net 5,675,233 5,541,349
OTHER ASSETS 168,358 1,723,134
------------ ------------
TOTAL ASSETS $10,412,357 $12,017,786
============ ============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Accounts payable $ 2,466,676 $ 2,423,445
Accrued liabilities 1,070,638 931,161
Convertible Debt -- 275,000
Current portion of capital lease obligations 15,229 15,857
------------ ------------
Total Current Liabilities 3,552,543 3,645,463
------------ ------------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations 22,851 18,643
Other Long-Term Liabilities 250,000 250,000
Convertible Debt 900,000 --
------------ ------------
Total Long-term Liabilities 1,172,851 268,643
------------ ------------
TOTAL LIABILITIES 4,725,394 3,914,106
MINORITY INTEREST -- 762,384
STOCKHOLDERS' EQUITY
Preferred stocks
Series A Preferred Stock, $.01 par value 100 shares authorized,
100 shares issued
($100,000 liquidation preference) -- --
Series B Preferred Stock, $.01 par value, 434,667 shares
authorized, 351,258 shares outstanding as of December 31, 1997
and March 31, 1998 ($ 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 49,000 on March 31, 1998 ($4,900,000 liquidation preference) 5,100,000 4,900,000
Series E Preferred Stock, $1000 par value, 1,650 shares
authorized; 1,650 shares issued on December 31, 1997
and March 31, 1998 ($1,650,000 liquidation preference) 1,650,000 1,650,000
Series F Preferred Stock, $1000 par value, 2,2850 shares
authorized; 2,850 shares issued on March 31, 1998
($2,850,000 liquidation preference) -- 2,850,000
Common stock $.0001 par value - 50,000,000 shares
authorized; 19,998,997 and 21,351,976 issued and
outstanding in 1997 and 1998 respectively 1,999 2,135
Additional paid-in capital 44,535,906 45,470,042
Accumulated deficit (45,604,454) (47,534,393)
------------ ------------
Total Stockholders' Equity 5,686,963 7,341,296
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,412,357 $12,017,786
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
PROJECTAVISION, INC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1998
<S> <C> <C>
REVENUE $ 5,600 $ 416,443
------------ ------------
LESS: COST OF SALES 5,070 354,906
------------ ------------
GROSS PROFIT 530 61,537
OPERATING EXPENSES
General and administrative 717,320 1,052,015
Salaries 362,907 410,345
Legal fees 170,119 245,400
Depreciation 25,601 188,905
Research and development 66,992 148,957
Patent and license expense 44,865 26,843
------------ ------------
Total Operating Expenses 1,387,804 2,072,465
------------ ------------
LOSS FROM OPERATIONS (1,387,274) (2,010,928)
------------ ------------
OTHER INCOME (EXPENSE)
Minority Interest -- 420,168
Interest income 77,654 11,393
Interest expense - 8% Debentures (26,497) (5,500)
Interest expense - Amortization of debt expense (41,205) (12,000)
------------ ------------
Other income/(expense) - Net 9,952 414,061
------------ ------------
Net Loss (1,377,322) (1,596,867)
Dividends on Preferred Stock -- (333,072)
------------ ------------
Net Loss Attributable to Common Shareholders $ (1,377,322) $ (1,929,939)
============ ============
Net Loss per Share Attributable to Common Shareholders $ (.08) $ (.09)
============ ============
AVERAGE NUMBER OF SHARES
OUTSTANDING 16,514,899 20,545,472
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
PROJECTAVISION, INC.
CONSOLIDATED 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
into Common Stock (2,000) (200,000)
Issuance of Series F Preferred Stock
Amortization of Discount (Dividend)
on Series F Preferred Stock
Financing Cost for Series F 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series E Series F
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 0 $ -- 0 $ -- 12,388,790 $1,239
Issuance of Common Stock
for preferred stock dividends 37,666 4
Conversion of 8% Debentures into
Common Stock 1,772,945 177
Issuance of Series C Preferred Stock
Series C Preferred Stock Placement Fee
Cash Dividend on Series C Preferred Stock
Exercise of Stock Options 30,000 3
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 14,229,401 1,423
Conversion of Series B Preferred
Stock into Common Stock 34,724 3
Series C Preferred Stock Conversion 4,681,656 489
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 66,740 6
Issuance of Common Stock for Services 50,000 5
Conversion of 8% Debentures into
Common Stock 726,476 73
Net Loss
------ --------- ------ ------ ----------- -------
Balance, December 31, 1997 1,650 1,650,000 0 0 19,966,997 1,999
Issuance of Common Stock
for Series B Preferred Stock Dividends 72,041 7
Conversion of Series D Preferred Stock
into Common Stock 336,896 34
Issuance of Series F Preferred Stock 2,850 2,850,000
Amortization of Discount (Dividend)
on Series F Preferred Stock
Financing Cost for Series F Preferred Stock
Issuance of Warrants to Series F
Preferred Stockholders
Conversion of 8% Debentures into
Common Stock 954,042 95
Net Loss
------ --------- ----- --------- ----------- -------
Balance, March 31, 1998 1,650 $1,650,000 2,850 $2,850,000 21,351,978 $2,135
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Accumu-
Paid-In lated
Capital Deficit Total
<S> <C> <C> <C>
Balance, December 31, 1995 $24,318,651 $(20,641,044) $3,682,705
Issuance of Common Stock
for preferred stock dividends 154,389 (154,393) 0
Conversion of 8% Debentures into
Common Stock 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 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 (2,367,188) 0
Issuance of Warrants and Options for Services 385,800 385,808
Net Loss (10,880,893) (10,680,893)
----------- ------------ ----------
Balance, December 31, 1996 40,594,023 (34,157,288) 5,442,045
========== =========== =========
Conversion of Series B Preferred
Stock into Common Stock 334 0
Series C Preferred Stock Conversion (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 147,492 (147,498) 0
Issuance of Common Stock for Services 96,870 98,875
Conversion of 8% Debentures into
Common Stock 762,890 762,963
Net Loss (8,289,920) (8,289,920)
----------- ------------ ----------
Balance, December 31, 1997 44,535,906 (45,604,454) 5,686,963
========== =========== =========
Issuance of Common Stock
for Series B Preferred Stock Dividends 70,161 (70,168)
Conversion of Series D Preferred Stock
into Common Stock 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 F 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 718,595 718,690
Net Loss (1,596,867) (1,596,867)
----------- ------------ ----------
Balance, March 31, 1998 $45,470,042 ($47,534,393) $7,341,296
========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
PROJECTAVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1997 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,377,322) $(1,596,867)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 25,601 188,905
Allowance taken on investment in unconsolidated affiliate 74,636 --
Minority Interest -- 762,384
Asset and liability management
Changes in other operating assets (345,441) (823,266)
Changes in accounts receivable -- (37,917)
Changes in inventories -- (585,361)
Accounts payable and other liabilities (706,540) 297,484
----------- -----------
Net cash used in operating activities (2,329,066) (1,794,638)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (871,515) (170,631)
Deposit on Asset Purchase Agreement -- (1,000,000)
Purchases and redemption of government securities 290,034 --
----------- -----------
Net cash (used in) by investing activities (581,481) (1,170,631)
----------- -----------
FINANCING ACTIVITIES
Repayment of convertible debt (100,000) --
Issuance of preferred stock 3,500,000 2,850,000
Costs incurred in raising equity -- (317,490)
----------- -----------
Net cash provided by financing activities 3,400,000 2,532,510
----------- -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 489,453 (432,759)
CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 1,060,283 1,331,925
----------- -----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 1,549,736 $ 899,166
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 26,497 $ 1,834
=========== ===========
</TABLE>
See notes to consolidated 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 336,896 shares of its common stock to retire
2,000 shares of Series D convertible preferred stock. The Company issued
954,042 shares of common stock in connection with retiring $ 625,000 of
convertible debt, leaving a face value on the debt of $ 275,000. 150,000
Warrants with a value of $67,500 were issued in connection with the Series F
Convertible Preferred Stock.
F-6
<PAGE>
PROJECTAVISION, INC.
NOTES TO CONSOLIDATED 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 March
31, 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 March 31, 1997 and 1998 consisted of
sales of the Digital Home Theater, the Company's principal product.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 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. CONSOLIDATED 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 CONSOLIDATED 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 44 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 the 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. As the Company owns 64.5% of the
Common Shares of MSI, MSI has been consolidated into the Company in
1998. The excess of MSI's net assets, which have been reduced for
minority interests relating to the portion of MSI not owned by the
Company, over the Company's investment in MSI has been recorded as a
reduction in the basis of the patents held by MSI.
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.
<PAGE>
<TABLE>
<CAPTION>
Original
Three Months Ended March 31, 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>
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.
F-8
<PAGE>
PROJECTAVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, 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.
<TABLE>
<CAPTION>
Three Months Ended March 31, 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>
Three Months Ended March 31, 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 fees.
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. There
currently remains $275,000 in convertible debt outstanding.
F-9
<PAGE>
PROJECTAVISION, INC.
NOTES TO CONSOLIDATED 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 March 31, 1998 are as
follows:
Year Amount
---- --------
1998 $226,060
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 towards the purchase price 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 a 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 agreed, among other things, to advance to Vidikron an
additional $1,000,000 non-refundable payment towards the purchase price
in four installments by June 26, 1998. The Company made the first
installment of $300,000 in May 1998 in connection with this additional
$1,000,000 payment. The closing of the Vidikron 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 assurances 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 of 1995 and August of 1995, two class action lawsuits were
filed against the Company as well as certain of its officers and
directors by stockholders of the Company. In October of 1995 the
plaintiffs in the second action joined as plaintiffs in the first
action, and the second action was dismissed without prejudice. In
July 1996, the class action suit was dismissed without prejudice, and
the plaintiffs were given an opportunity to replead. Upon repleading,
the class action suit alleged numerous violations of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including, but
not limited to, violations of Section 10(b) of the Exchange Act. The
suit also alleged claims for negligent misrepresentation and for
common law fraud and deceit. In response, the Company and the
individual defendants submitted motions to dismiss the action. In
July 1997 these motions were granted, and the class action suit was
dismissed with prejudice by the U.S. District Court in New York.
Plaintiffs have filed a notice of appeal with the Second Circuit
Appellate Court.
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.
In the above action that continues to be pending, the Company's
management, based upon discussions with counsel, believe that it has a
meritorious defense and intends to vigorously defense against these
claims. The Company's management believes that the outcome of this
litigation will not have a material adverse effect on its financial
position or results of operations.
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 March 31, 1998, the Company had working capital of $ 1,107,840.
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, which funded the net cash used in operating activities of $1.79 million
and the $1.0 million advance to Vidikron made pursuant to the definitive
acquisition agreement. In April 1998 the Company completed a private placement
of common stock of $ 0.5 million, and in May 1998 the Company completed another
private placement of $2.0 million preferred stock resulting in net proceeds of
$1.86 million. As of March 31, 1998, the Company had cash and cash equivalents
of $899,166. 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.
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 an
annual interest rate of 8%. The debt matures in three (3) years, at which time
any convertible debt then outstanding is to be repaid by the Company in cash
or common stock, at the sole option of the Company.The Company used the
proceeds from this offering principally in connection with the commencement of
the production and introduction of its Digital Home Theater. In June, 1996,
the Company completed a private placement of 7,500 shares of a newly created
Series C Convertible Preferred stock for $ 7.5 million which resulted in net
proceeds to the Company of $7 million after paying investment banking fees.
The proceeds of this private placement were used primarily to retire
unconverted portions of the convertible debt which the Company issued in
February of 1996. There currently remains $ 275,000 of convertible debt as of
March 31, 1998.
Results of Operations
January 1, 1997 to March 31, 1997
The Company had revenues of $ 5,600 for the three month period ended
March 31, 1997 which was from the sale of the Digital Home Theater. Cost of
goods sold of $ 5,070 resulted in gross profits of $ 530. During this period,
the Company incurred cash expenses of $1,362,203. The Company also recorded
$1,089,940 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.
January 1, 1998 to March 31, 1998
The Company had revenues of $ 416,443 for the three month period ended
March 31, 1998, all of which was from the sale of the Digital Home Theater and
accessories. Cost of goods sold of $ 354,906 resulted in gross profit of $61,537
and was adversely affected by the high initial cost of the Texas Instruments
Light Engine.
During this period, the Company incurred cash expenses of $1,883,560.
With respect to the amount spent in the first three 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 the public offering of the common stock of Manhattan
Scientifics, and higher R&D is associated with development of product
enhancements. The Company also incurred non-cash expenses of $ 188,905 during
the period for depreciation, which was higher than in the first three months of
1997 due to a full quarter of depreciation of the tooling for the Digital Home
Theater.
The Company also recorded $ 333,072 in dividends on the Series B and Series F
Convertible Preferred Stock in connection with recognizing the dividends on
the Series B, the discount on the Series F conversion feature, and the
warrants issued in connection with the Series F Preferred Stock.
F-11
<PAGE>
Projectavision, Inc.
Two Penn Plaza, Suite 640
New York, New York 10121
April 30, 1998
Vidikron Industries, S.p.A.
Via Dei Guasti, 29
20020 Misuito (Milano), Italy
Re: Agreement of Purchase and Sale of Assets dated January 20th, 1998 by
and between Projectavision, Inc. ("Projectavision") and Vidikron
Industries, S.p.A. ("Vidikron")
Gentlemen:
Reference is hereby made to the above-referenced Asset Purchase Agreement.
Inasmuch as it is the intention of Vidikron and Projectavision to proceed with
the transaction contemplated by the Asset Purchase Agreement, by execution and
delivery of this letter, each of Projectavision and Vidikron reaffirm their
intention to effect the transaction contemplated by the Asset Purchase
Agreement, subject to amending the Asset Purchase Agreement as hereinbelow set
forth.
Specifically, the parties hereto agree that the Asset Purchase Agreement
shall be amended as follows:
1. The second sentence of Section 3(a) shall be deleted in its entirety and
replaced with the following:
"Notwithstanding the foregoing, in the event that all of the
conditions set forth in Section 14 below have been satisfied or
waived, except for Purchaser's delivery obligation pursuant to Section
5(a)(i), Purchaser shall have the right to extend the Closing Date to
July 31, 1998 (subject to further extension as set forth in the
immediately following sentence) by paying to directly to the Company,
by certified or cashiers bank check or wire transfer, (i) Three
Hundred Thousand Dollars ($300,000) on or before May 11, 1998, (ii)
Two Hundred and Fifty Thousand Dollars ($250,000) on or before May 26,
1998, (iii) Two Hundred and Fifty Thousand Dollars ($250,000) on or
before June 11, 1998, and (iv) Two Hundred Thousand Dollars
($200,000.00) on or before June 26, 1998 (all such sums, in the
aggregate, are sometimes hereinafter referred to as the "Third
Prepayment"); provided; however; that the Company agrees that the
holdback previously contemplated under this Section 3(a) in
conjunction with Section 15(a) below will be accommodated by the
parties in a manner to be mutually agreed upon and so as to maintain
the overall economics of the transaction. Notwithstanding anything set
forth herein to the contrary, Purchaser shall have the right, provided
that Purchaser is otherwise in compliance with the provisions of this
Section 3(a), to extend the Closing Date to September 30, 1998, solely
in the event that it is required to do so because the Company needs
additional time to obtain the stockholder approvals necessary in order
to effect the transaction contemplated by the Asset Purchase
Agreement."
2. Section 19 of the Asset Purchase Agreement is hereby deleted in its
entirety and replaced with the revised Section 19 a copy of which (marked to
show changes) is annexed hereto.
Except as expressly set forth in this letter and the annex hereto, all of
the terms and conditions set forth in the Asset Purchase Agreement shall remain
in full force and effect.
In the event that the foregoing accurately reflects our agreement to effect
the transaction contemplated by and amend the Asset Purchase Agreement as
hereinabove set forth, please acknowledge such by counter-executing the copy of
this letter where indicated below.
Very truly yours,
PROJECTAVISION, INC.
By: /s/ Martin J. Holleran
-------------------------------
Martin J. Holleran
President and Chief Executive Officer
Agreed to and Accepted by:
VIDIKRON INDUSTRIES, S.p.A.
By: /s/ Flavio Peralda
---------------------
Flavio Peralda
President
F-12
<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 13th day of May, 1998.
PROJECTAVISION, INC.
By: /s/ Martin Holleran
----------------------------------
Martin Holleran, President
Chief Executive Officer and Director
In accordance with the Exchange Act this report has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Marvin Maslow Chairman of the Board of Directors May 13, 1998
-------------------------
Marvin Maslow
/s/ Martin Holleran President, Chief Executive Officer and
------------------------- Director
Martin Holleran May 13, 1998
/s/ Jules Zimmerman Officer, Secretary and Chief Financial May 13, 1998
------------------------- Director
Jules Zimmerman
/s/ Martin D. Fife Director May 13, 1998
-------------------------
Martin D. Fife
/s/ Richard S. Hickok Director May 13, 1998
-------------------------
Richard S. Hickok
/s/ Dr. Craig I. Fields Director May 13, 1998
-------------------------
Dr. Craig I. Fields
/s/ Arthur Lipper III Director May 13, 1998
-------------------------
Arthur Lipper III
/s/ Sherman Langer Director May 13, 1998
-------------------------
Sherman Langer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 899,166
<SECURITIES> 0
<RECEIVABLES> 448,325
<ALLOWANCES> (32,800)
<INVENTORY> 2,442,965
<CURRENT-ASSETS> 4,753,303
<PP&E> 6,697,114
<DEPRECIATION> 1,155,765
<TOTAL-ASSETS> 12,017,786
<CURRENT-LIABILITIES> 3,645,463
<BONDS> 0
0
9,403,512
<COMMON> 2,135
<OTHER-SE> (2,064,351)
<TOTAL-LIABILITY-AND-EQUITY> 12,017,786
<SALES> 416,443
<TOTAL-REVENUES> 416,443
<CGS> 354,906
<TOTAL-COSTS> 2,072,465
<OTHER-EXPENSES> (431,561)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,500
<INCOME-PRETAX> (1,596,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,596,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,596,867)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
