<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, 1999
--------------
Commission File Number 33-33997
--------
Vidikron Technologies Group, 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.)
1 Evertrust Plaza 11th Floor, Jersey City, NJ 07302
(Address of Principal Executive Offices) (zip code)
(201) 938-0099
(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 No X
As of May 17, 1999, there were 1,049,825 shares of the Registrant's common stock
outstanding.
<PAGE>
SPECIAL CAUTINARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. Such forward-looking statements are principally contained in the
sections "Part 1 - Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and include, without limitation, the
Company's expectations and estimates as to: the Company's integration of the
Vidikron Acquisition; the Company's ability to successfully address Year 2000
issues and the costs and timing of the steps it expects to take; the Company's
future financial performance, including its ability to generate sufficient cash
flow and meet working capital requirements; the introduction of new products;
the market for the Company's products; and the Company's business operations in
general. In addition, in those and other portions of this Form 10-Q, the words
"anticipates," "believes" "estimates," "expects" "plans," "intends" and similar
words or phrases, as they relate to the Company and its subsidiaries, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks and uncertainties and that could cause the actual results to
differ materially from those expressed in any forward-looking statements made by
the Company. The Company does not intend to update these forward-looking
statements
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, 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
Financial Condition and Results
of Operations F-11
Item 3. Quantitative and Qualitative Disclosure about Market Risk F-12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K F-13
SIGNATURES F-14
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1999
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,280,107 $ 142,669
Accounts receivable 1,934,426 2,338,602
Inventory 4,617,680 3,917,574
Investments 500,000 500,000
Other current assets 299,575 471,818
----------- -----------
Total Current Assets 9,631,788 7,370,663
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 436,278 364,311
Tooling 2,250,143 2,250,144
Computers and software 411,095 411,466
Assets under capital leases 47,989 47,989
Leasehold improvements 8,824 28,591
----------- -----------
3,154 329 3,132,501
Less: Accumulated depreciation and amortization 290,662 452,300
----------- -----------
Property and equipment, net 2,863,667 2,680,200
GOODWILL - Net of accumulated amortization of $130,337 5,985,094 6,192,297
TRADEMARKS - Net of accumulated amortization of $18,8440 599,216 584,141
OTHER ASSETS 150,635 211,168
----------- -----------
TOTAL ASSETS $19,230,400 $17,033,345
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EOUITY
CURRENT LIABILITIES:
Accounts payable $ 3,597,729 $ 4,076,971
Accrued liabilities 1,297,500 1,096,986
Notes payable 7,889,197 1,249,550
Bank debt 1,681,579 1,494,678
Convertible debt 140,000 --
Current portion of capital lease obligations 17,904 18,643
----------- -----------
Total Current Liabilities 14,623,909 7,938,828
----------- -----------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations 4,947 --
Other long-term liabilities 498,188 247,703
Convertible debt -- --
----------- -----------
Total Long-term Liabilities 503,135 247,703
----------- -----------
TOTAL LIABILITIES 15,127,044 8,186,531
STOCKHOLDERS' EQUITY
Preferred stocks
Series A Preferred Stock, $.01 par value
100 shares authorized, 100 shares issued
($1,000 liquidation preference per share) -- --
Series B Preferred Stock, $.01 par value
434,667 shares authorized, 251,258 shares outstanding as of
December 31, 1998 and March 31,1999 ($5 liquidation preference per share) 3,512 3,512
Series D Preferred Stock, $100 par value
60,000 shares authorized; 36,900 shares issued as of
December 31, 1998 ($100 liquidation preference per share) 3,690,000 --
Series E Preferred Stock, $1,000 par value
1,650 shares authorized; 1,510 shares issued as of
December 31, 1998 ($1,000 liquidation preference per share) 1,510,000 --
Series F Preferred Stock, $1,000 par value
2,850 shares authorized; 2,850 shares issued as of
December 31, 1998 ($1,000 liquidation preference per share) 2,850,000 --
Series G Preferred Stock. $1,000 par value
2,400 shares authorized; 2,400 shares issued as of December 31, 1998 and
400 shares issued as of March 31, 1999 ($1,000 liquidation preference per share) 2,400,000 400,000
Series I Preferred Stock, $.01 par value
16,190 shares authorized; 16,190 shares issued as of
March 31, 1999 ($1,000 liquidation preference per share) -- 16,190,000
Common stock $.004 per value - 1,250,000 shares
authorized; 1,146,327 and 1,049,825 issued and
outstanding December 31, 1998 and March 31, 1999 respectively 4,585 4,199
Cumulative Translation Adjustment (21,353) 89,279
Additional pald-in capital 50,846,300 51,089,853
Accumulated Deficit (57,179,688 (58,930,029)
----------- -----------
Total Stockholders' Equity 4,103,356 8,846,814
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $19,230,400 $17,033,345
=========== ===========
</TABLE>
The consolidated financial statements reflect a 40-to-1 reverse stock split
See notes to consolidated financial statements
F-2
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1999
<S> <C> <C>
REVENUE $ 416,443 $ 3,978,490
COST OF SALES 354,906 3,089,355
----------- -----------
GROSS PROFIT 61,537 889,135
OPERATING EXPENSES
Sales and marketing 358,834 743,398
General and administrative 1,348,926 1,377,657
Depreciation and amortization 188,905 317,722
Research and development 148,957 61,394
Patent and license expense 26,843 20,819
----------- -----------
Total Operating Expenses 2,072,465 2,520,990
----------- -----------
LOSS FROM OPERATIONS (2,010,928) (1,631,855)
----------- -----------
OTHER INCOME (EXPENSE)
Minority Interest 420,168 --
Interest income 11,393 3,166
Interest expense (5,500) (51,402)
Interest expense - Amortization of debt expense (12,000) --
----------- -----------
Other income/(expense) - Net 414,061 (48,236)
----------- -----------
Net Loss (1,596,867) (1,680,091)
Dividends on Preferred Stock (333,072) (70,250)
----------- -----------
Net Loss Attributable to Common Shareholders $(1,929,939) $(1,750,341)
=========== ===========
Net Loss per Share Attributable to Common Shareholders $ (3.76) $ (1.74)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 513,637 1,004,603
=========== ===========
</TABLE>
The consolidated financial statements reflect a 40-to-1 reverse stock split.
See notes to consolidated financial statements
F-3
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE SERIES A SERIES B
TRANSLATION PREFERRED STOCK PREFERRED STOCK
ADJUSTMENT SHARES AMOUNT SHARES AMOUNT
----------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ -- 100 ## 365,962 $3,859
NET LOSS
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK (34,724) (347)
SERIES C PREFERRED STOCK CONVERSION STOCK
ISSUANCE OF SERIES D PREFERRED STOCK
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
----------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1997 0 100 0 351,258 3,512
NET LOSS
CUMULATIVE TRANSLATION ADJ (21,353)
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
CONVERSION OF SERIES D PREFERRED STOCK
FINANCING COST FOR SERIES D PREFERRED STOCK
CONVERSION OF SERIES E PREFERRED STOCK
ISSUE SHARES TO SERIES E PREFERRED STOCKHOLDER
ISSUANCE OF SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS
ISSUANCE OF SERIES G PREFERRED STOCK
FINANCING COST FOR SERIES G PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS
ISSUE SHARES TO SERIES G PREFERRED STOCKHOLDER
ISSUANCE OF COMMON STOCK
ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR SERVICES
----------- ------- ------ ------- ------
BALANCE, DECEMBER 31, 1998 (21,353) 100 -- 351,258 3,512
NET LOSS
CUMULATIVE TRANSLATION ADJ 110,632
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES AND PREFERRED STOCK INTO
SERIES I PREFERRED STOCK
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF SERIES I PREFERRED STOCK
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES
ADJUST ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR INVESTMENT BANKING SERVICES
----------- ------- ------ ------- ------
BALANCE, MARCH 31, 1999 $ 89,279 100 $ 0 351,258 $3,512
=========== ======= ====== ======= ======
</TABLE>
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7,500 $ 8 0 -- 0 --
NET LOSS
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK
SERIES C PREFERRED STOCK CONVERSION STOCK (7,500) (8)
ISSUANCE OF SERIES D PREFERRED STOCK 51,000 5,100,000
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
------- ------ -------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1997 0 0 51,000 5,100,000 1,650 1,650,000
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
CONVERSION OF SERIES D PREFERRED STOCK (14,000) (1,410,000)
FINANCING COST FOR SERIES D PREFERRED STOCK
CONVERSION OF SERIES E PREFERRED STOCK (140) (140,000)
ISSUE SHARES TO SERIES E PREFERRED STOCKHOLDER
ISSUANCE OF SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS
ISSUANCE OF SERIES G PREFERRED STOCK
FINANCING COST FOR SERIES G PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS
ISSUE SHARES TO SERIES G PREFERRED STOCKHOLDER
ISSUANCE OF COMMON STOCK
ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR SERVICES
------- ------ -------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1998 0 -- 36,900 3,690,000 1,510 1,510,000
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES AND PREFERRED STOCK INTO
SERIES I PREFERRED STOCK (36,900) ($3,690,000) (1,510) ($1,510,000)
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF SERIES I PREFERRED STOCK
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES
ADJUST ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR INVESTMENT BANKING SERVICES
------- ------ -------- ----------- -------- -----------
BALANCE, MARCH 31, 1999 0 $ 0 0 $ 0 0 $ 0
======= ====== ======== =========== ======== ===========
</TABLE>
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES F SERIES G
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 0 -- 0 --
NET LOSS
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK
SERIES C PREFERRED STOCK CONVERSION STOCK
ISSUANCE OF SERIES D PREFERRED STOCK
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
-------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1997 0 0 0 0
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
CONVERSION OF SERIES D PREFERRED STOCK
FINANCING COST FOR SERIES D PREFERRED STOCK
CONVERSION OF SERIES E PREFERRED STOCK
ISSUE SHARES TO SERIES E PREFERRED STOCKHOLDER
ISSUANCE OF SERIES F PREFERRED STOCK 2,850 2,850,000
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS
ISSUANCE OF SERIES G PREFERRED STOCK 2,400 2,400,000
FINANCING COST FOR SERIES G PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS
ISSUE SHARES TO SERIES G PREFERRED STOCKHOLDER
ISSUANCE OF COMMON STOCK
ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR SERVICES
-------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1998 2,850 2,850,000 2,400 2,400,000
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES AND PREFERRED STOCK INTO
SERIES I PREFERRED STOCK (2,850) ($2,850,000) (2,000) ($2,000,000)
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF SERIES I PREFERRED STOCK
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES
ADJUST ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC.
ISSUANCE OF COMMON STOCK FOR INVESTMENT BANKING SERVICES
-------- ----------- -------- -----------
BALANCE, MARCH 31, 1999 0 $ 0 400 $400,000
======== =========== ======== ===========
</TABLE>
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES I
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 0 -- 355,735 1,423
NET LOSS
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK 868 3
SERIES C PREFERRED STOCK CONVERSION STOCK 122,042 489
ISSUANCE OF SERIES D PREFERRED STOCK
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 1,669 6
ISSUANCE OF COMMON STOCK FOR SERVICES 1,250 5
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK 18,161 73
-------- ----------- -------- ----------
BALANCE, DECEMBER 31, 1997 0 0 499,725 1,999
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK 43,851 175
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS 8,739 34
CONVERSION OF SERIES D PREFERRED STOCK 96,897 396
FINANCING COST FOR SERIES D PREFERRED STOCK
CONVERSION OF SERIES E PREFERRED STOCK 20,741 83
ISSUE SHARES TO SERIES E PREFERRED STOCKHOLDER 5,000 20
ISSUANCE OF SERIES F PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS
ISSUANCE OF SERIES G PREFERRED STOCK
FINANCING COST FOR SERIES G PREFERRED STOCK
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS
ISSUE SHARES TO SERIES G PREFERRED STOCKHOLDER 62,500 250
ISSUANCE OF COMMON STOCK 103,333 414
ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC. 300,000 1,200
ISSUANCE OF COMMON STOCK FOR SERVICES 3,541 14
-------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1998 0 -- 1,146,327 4,585
NET LOSS
CUMULATIVE TRANSLATION ADJ
TOTAL COMPREHENSIVE LOSS
CONVERSION OF 8% DEBENTURES AND PREFERRED STOCK INTO
SERIES I PREFERRED STOCK 10,190 10,190,000
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS
ISSUANCE OF SERIES I PREFERRED STOCK 6,000 6,000,000
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES 858 3
ADJUST ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC. (155,991) (624)
ISSUANCE OF COMMON STOCK FOR INVESTMENT BANKING SERVICES 58,633 235
-------- ----------- --------- ----------
BALANCE, MARCH 31, 1999 16,190 $16,190,000 1,049,825 $ 4,199
======== =========== ========= ==========
</TABLE>
<PAGE>
[RESTUBBED FROM PREVIOUS TABLE]
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PAID IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 40,594,023 (34,157,268) 6,442,045
NET LOSS (8,269,920) (8,269,920)
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK 344 0
SERIES C PREFERRED STOCK CONVERSION STOCK (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 (147,496) 0
ISSUANCE OF COMMON STOCK FOR SERVICES 96,870 96,875
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK 762,890 762,963
---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 44,535,906 (45,604,454) 5,686,963
NET LOSS (9,312,278) (9,312,278)
CUMULATIVE TRANSLATION ADJ (21,353)
-----------
TOTAL COMPREHENSIVE LOSS (9,333,631)
CONVERSION OF 8% DEBENTURES INTO COMMON STOCK 866,915 867,090
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS 140,451 (140,485) 0
CONVERSION OF SERIES D PREFERRED STOCK 1,409,604 0
FINANCING COST FOR SERIES D PREFERRED STOCK (317,490) (317,490)
CONVERSION OF SERIES E PREFERRED STOCK 139,917 0
ISSUE SHARES TO SERIES E PREFERRED STOCKHOLDER 17,980 18,000
ISSUANCE OF SERIES F PREFERRED STOCK 2,850,000
AMORTIZATION OF DISCOUNT (DIVIDEND) ON
SERIES F PREFERRED STOCK 950,000 (950,000) 0
ISSUANCE OF WARRANTS TO SERIES F PREFERRED STOCKHOLDERS 67,500 (67,500) 0
ISSUANCE OF SERIES G PREFERRED STOCK 2,400,000
FINANCING COST FOR SERIES G PREFERRED STOCK (168,000) (168,000)
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES G PREFERRED STOCK 1,028,571 (1,028,571) 0
ISSUANCE OF WARRANTS TO SERIES G PREFERRED STOCKHOLDERS 76,400 (76,400) 0
ISSUE SHARES TO SERIES G PREFERRED STOCKHOLDER 224,750 225,000
ISSUANCE OF COMMON STOCK 499,586 500,000
ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC. 1,148,800 1,150,000
ISSUANCE OF COMMON STOCK FOR SERVICES 225,410 225,424
---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 50,846,300 (57,179,688) 4,103,356
NET LOSS (1,680,091) (1,680,091)
CUMULATIVE TRANSLATION ADJ 110,632
-----------
TOTAL COMPREHENSIVE LOSS (1,569,459)
CONVERSION OF 8% DEBENTURES AND PREFERRED STOCK INTO
SERIES I PREFERRED STOCK 140,000
ISSUANCE OF COMMON STOCK
FOR SERIES B PREFERRED STOCK DIVIDENDS (70,250) (70,250)
ISSUANCE OF SERIES I PREFERRED STOCK 6,000,000
ISSUANCE OF COMMON STOCK FOR LEGAL SERVICES 23,292 23,295
ADJUST ISSUANCE OF COMMON STOCK TO ACQUIRE TRADEMARKS AND
MINORITY INTEREST IN VIDIKRON OF AMERICA, INC. 624 0
ISSUANCE OF COMMON STOCK FOR INVESTMENT BANKING services 219,637 219,872
----------- ------------ -----------
BALANCE, MARCH 31, 1999 $51,089,853 ($58,930,029) $8,846,814
=========== ============ ===========
</TABLE>
The consolidated financial statements reflect a 40-to-1 reverse stock split.
F-4
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(1,596,867) $(1,680,091)
Adjustments to reconcile net loss to not cash used in operating activities:
Depreciation and amortization 188,905 317,722
Minority Interest 762,384 -
Other noncash operating expenses -- 32,375
Asset and liability management
Changes in accounts receivable (37,917) (404,176)
Changes In Inventory (586,381) 700,106
Changes in other operating assets (823,266) (275,776)
Changes In accounts payable 297,484 481,242
Changes In other liabilities -- (1,116,904)
----------- -----------
Net cash used in operating activities (1,794,638) (1,945,502)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (170,631) (5,036)
Payment for purchase of Vidikron, net of cash acquired (1,000,000) -
----------- -----------
Net cash (used in) investing activities (1,170,631) (5,036)
----------- -----------
FINANCING ACTIVITIES
Repayment Bank Debt -- (186,900)
Issuance of preferred stock 2,850,000 -
Issuance fees for preferred stock (317,490) -
----------- -----------
Net cash provided by/(used in) financing activities 2,532,510 (186,900)
----------- -----------
(DECREASE) IN CASH AND CASH EQUIVALENTS (432,759) (2,137,438)
CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 1,331,925 2,260,107
----------- -----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $899,166 $142,669
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for Interest $1,834 $51,402
=========== ===========
The consolidated financial statements reflect a 40-to-1 reverse stock split.
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------
In 1997, the Company issued 1,669 shares of its common stock with a value of
$147,492 as payment for the dividend on its Series B convertible preferred
stock. In addition, the Company issued 122,042 shares of its common stock to
retire the entire issue of 7,500 shares of Series C convertible preferred stock.
The Company also issued 1,250 shares of its common stock for services rendered
by an officer and director of the Company. Finally, the Company issued 18,161
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 8,739 shares of its common stock with a value of
$140,451 as payment for the dividend on its Series B convertible preferred
stock. The Company issued 98,897 shares of its common stock to retire 14,100
shares of Series D convertible preferred stock. The Company issued 20,741 shares
of its common stock to retire 140 shares of Series E convertible preferred stock
The Company issued 43,851 shares of common stock in connection with retiring
$760,000 of convertible debt, leaving a face value on the debt of $140,000.
3,750 warrants with a value of $ 67,500 were issued in connection with the
Series F Convertible Preferred Stock, and 6,250 warrants with a value of $
76,400 were issued in connection with the Series G convertible preferred stock.
5,000 shares were issued under the terms and conditions pertaining to the Series
F convertible preferred stock, and 62,500 shares were issued under the terms and
conditions pertaining to the Series G convertible preferred stock. 103,333
shares of common stock were sold for gross proceeds of $500,000. 3,541 shares of
common stock were issued for services. 258,333 shares were issued to acquire the
Vidikron trademark, and 41,667 shares were issued to acquire the minority
interest in Vidikron of America, Inc.
The Company issued 144,009 shares of common stock as partial consideration for
the transfer to the Company of certain trademarks and attendant intellectual
property rights in connection with the acquisition of certain assets and
assumption of certain liabilities from Vidikron Industries, S.p.A. In 1999 the
Company issued an aggregate of 59,491 shares of common stock as partial
consideration for investment banking services rendered in connection with the
Vidikron transaction and for legal services.
F-6
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
NOTES TO MARCH 31, 1999 (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Vidikron Technologies Group, Inc. (the "Company,"
formerly Projectavision, Inc.), a Delaware corporation, was
incorporated on September 9, 1988. The Company was originally formed to
complete the development of a unique proprietary solid state projection
television and related video display technology. With the Company
completing the acquisition of certain assets and assumption of certain
liabilities of Vidikron Industries, S.p.A. in December 1998, the
Company added a recognized name and now sells high-end home theater
projection televisions and accessories worldwide
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
1998 Form 10-K. The results of operations for the period ended March
31, 1999 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.
Certain reclassifications have been made to the consolidated balance
sheet as of December 31,1998 and the consolidated statement of
operations for the first quarter of 1998 to conform to this year's
presentation.
2. ACCOUNTS RECEIVABLE
At December 31, 1998 and March 31, 1999, the allowance for bad debt was
$212,040 and $274,383 respectively.
3. INVENTORY
Inventories are stated at the lower of cost or market on a first-in
first-out basis. At December 31, 1998 and March 31, 1999, respectively,
inventories are summarized, as follows:
December 31, March 31,
1998 1999
---- ----
Parts $ 1,684,868 $ 1,590,063
Work in process 991,235 799,743
Finished Goods 1,941,577 1,510,958
----------- -----------
Total $ 4,617,680 $ 3,900,764
4. UNCONSOLIDATED AFFILIATE
In 1993, the Company entered into an agreement with Tamarack Storage
Devices, Inc. ("Tamarack") under which 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. The Company issued
800 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%.
In 1995, Tamarack received a commitment from the Company to fund its
cash needs through December 31, 1995 to continue its operations as then
constituted. Pursuant to this commitment, $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>
VIDIKRON TECHNOLOGIES GROUP, INC.
NOTES TO MARCH 31, 1999 (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. UNCONSOLIDATED AFFILIATE (continued)
In January 1998, Tamarack was acquired by Manhattan Scientific, Inc.
("MSI") (formerly Grand Enterprises, Ltd.) 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,
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 182,525 shares of
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. During 1998 the Company's
chief executive officer and the chairman of its board of directors
serve on the board of directors of MSI. As the Company owns 64.5% of
the common shares of MSI, MSI was consolidated into the Company.
In July 1998, the Company sold its common shares in MSI to an
institutional investor for $2 million in net proceeds. The Company used
the proceeds from the sale of its MSI shares as working capital for
general operations, with the gain 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 September 30, 1998, MSI was accounted for under
the cost method. In October 1998, the Company sold its remaining
ownership position in MSI to one of the owners of the Company's
preferred stock for $500,000 and recognized a gain. On December 7, 1998
the Company reacquired its ownership position of approximately 9
million MSI common shares as part of the financing obtained from the
owners of the Company's preferred stock for the acquisition of the
video business from Vidikron Industries, S.p.A. On April 23, 1999 the
Company sold its common shares in MSI for $500,000 in cash.
5. COMMON STOCK
In February 1999 the Company's stockholders approved a forty-for-one
reverse split, the effect of which has been retroactively restated.
6. PREFERRED STOCK
The Series B Convertible Preferred Stock provides for cumulative annual
stock dividends payable in common shares of 8% of the liquidation value
of $5 per share (for a total of $1,756,290) to be paid semiannually and
is convertible into one share of common stock, subject to adjustment.
In 1997, 34,724 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 122,042 shares of
Common Stock, which resulted in retiring the issue.
<TABLE>
<CAPTION>
Original
Three Months Ended March 31, 1999 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>
F-8
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
NOTES TO MARCH 31, 1999 (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In January 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 investors. 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 after
fees. 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
$1,410,000 of Series D Preferred Stock in 1998 and to the conversion of
$3,690,000 of Series D Preferred Stock into Series I Preferred Stock in
February 1999, the issue was retired.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Total to Vest
--------------------------------- -------------
<S> <C> <C>
Amortization of Warrants on Series D Preferred Stock $ - $ 232,620
Amortization of Discount on Series D Preferred Stock - 1,700,000
</TABLE>
In July 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 in 1998 and to the
conversion of $2,510,000 of Series E Preferred Stock into Series I
Preferred Stock in February 1999, the issued was retired.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Total to Vest
--------------------------------- -------------
<S> <C> <C>
Amortization of Warrants on Series E Preferred Stock $ - $ 48,900
Amortization of Discount on Series E Preferred Stock - 550,000
</TABLE>
In February 1998, the Company issued 2,850 shares of 8% Series F
convertible preferred stock to one 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 $40.00 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 had 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. After giving effect to the conversion of $2,850,000 of Series F
Preferred Stock into Series I Preferred Stock in February 1999, the issue
was retired.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Total to Vest
--------------------------------- -------------
<S> <C> <C>
Amortization of Warrants on Series F Preferred Stock $ - $ 67,500
Amortization of Discount on Series F Preferred Stock - 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. In June 1998 the Company completed another private placement of
preferred stock to a second foreign institutional investor for gross
proceeds of $400,000, 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. After giving effect to the conversion of $2,000,000 of Series G
Preferred Stock in February 1999, there currently remains $400,000 in
Series G Preferred Stock outstanding.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Total to Vest
--------------------------------- -------------
<S> <C> <C>
Amortization of Warrants on Series G Preferred Stock $ - $ 76,400
Amortization of Discount on Series G Preferred Stock - 1,028,571
</TABLE>
F-9
<PAGE>
VIDIKRON TECHNOLOGIES GROUP, INC.
NOTES TO MARCH 31, 1999 (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In February 1999, the Company issued an aggregate of 16,190,000 shares of
9% Series I convertible preferred stock to the investors who had provided
the financing for the acquisition of certain of the video assets and the
assumption of certain liabilities of Vidikron Industries, S.p.A. These
shares of Series I Preferred Stock were issued to such investors in
exchange for the $6,000,000 in Notes issued to such investors in December
upon the close of the Vidikron transaction. These Notes, by their terms,
were automatically convertible into equity securities of the Company upon
the Company obtaining the requisite stockholders' approval, which the
Company obtained in February 1999. In addition, all of the Series D, E, and
F Preferred Stock and all but $400,000 of the Series G Preferred Stock were
converted into Series I Preferred Stock at that time. The Series I
Preferred Stock is convertible into shares of Common Stock at the rate of
$2.40 per share. Series I Preferred Stock carries a cumulative dividend
payable in cash or common stock at the option of the Company. The dividend
rate is 9% per year if paid in cash and 13.5% per share if paid in shares
of common stock. Dividends are payable commencing December 31, 1999.
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 44,324 shares of its common stock and paid
$4,958,250 in cash in exchange for retiring $8,400,000 in convertible debt.
In January 1997, the Company retired $100,000 of convertible debt for cash.
During 1997, the Company issued an additional 11,901 shares of its common
stock in exchange for retiring $600,000 of convertible debt. In January
1998, the Company issued 43,851 shares of its common stock in exchange for
retiring $760,000 of convertible debt. In February, 1999, the remaining
$140,000 in convertible debt was converted into Series I Preferred Stock of
the Company.
8. COMMITMENTS AND CONTINGENCIES
In June 1995 and August 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 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. In
July 1998, the case was settled with the individual plaintiffs at no cost
to the Company.
<PAGE>
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 for $ 500,000, of which $250,000 was paid and $250,000 was accrued,
and all of Mr. Dolgoff's claims and those of the Company against him were
dismissed. $125,000 of the accrued amount was paid in April 1999 to Mr.
Dolgoff.
In December, 1998, a shareholder of the Company initiated an action in
Supreme Court, State of New York, alleging common law fraud, negligence and
breach of fiduciary duty claims against the Company and its Directors. In
February, 1999 the Company and the Defendant Directors moved to dismiss
this action based upon undisputed documentary evidence and based upon an
assertion that the Complaint failed to state a cause of action. The
Plaintiffs' responsive papers were filed in April, 1999 and reply papers
are due to be submitted by the Company and the Defendant Directors in May,
1999. Based upon discussions with counsel, the Company's management
believes that the motion to dismiss is well-founded. In the event, however,
that the motion were not granted, the Company's management believes that it
has meritorious defenses and intends to vigorously defend 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>
VIDIKRON TECHNOLOGIES GROUP, INC.
NOTES TO MARCH 31, 1999 (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. NOTES PAYABLE AND BANK DEBT
The Company obtained the financing used for the Vidikron acquisition
through the issuance of $6.0 million in Notes for cash to the existing
owners of the Company's Preferred Stock and Convertible Debt. These Notes
were converted into Series I Convertible Preferred Stock in March 1999.
Additionally, $1.0 million in Notes were issued to the sellers of the
Vidikron assets acquired. These Notes are due in December 1999, carry no
interest for the first six months, and carry an interest rate of 15%
annually thereafter until the due date. Finally, the Company has Notes with
Texas Instruments, Inc. with an outstanding balance of approximately
$414,000 as of March 31, 1999 payable in installments through July 1999 at
an interest rate of 8% annually.
The Company had outstanding as of March 31, 1999 a loan of $ 1,197,400
bearing interest of 10.45% which was scheduled to mature on June 30, 1999.
This loan was assumed by the Company in connection with the acquisition of
certain assets and assumption of certain liabilities of Vidikron
Industries, S.p.A.. On December 28, 1998, the lender sent notice of their
intention to accelerate the loan due to a breach of a change in control
covenant. The Company is in negotiations with the lender and is seeking to
substitute a new facility to satisfy this obligation.
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, 1999, the Company had cash of $142,669 and current ratio of .93
to 1.0. Net cash used in operations was $ 1,945,902 due primarily to the net
loss for the quarter. During the quarter, $6,000,000 in Notes payable due to the
preferred shareholders classified as a current liability as of December 31, 1998
were converted into Series I Preferred Stock.
The Company had outstanding as of March 31, 1999 a loan of $1,197,400 bearing
interest of 10.45%, which was scheduled to mature on June 30, 1999. This loan
was assumed by the Company in connection with the Vidikron Acquisition. On
December 28, 1998 the lender sent notice of its intention to accelerate the loan
due to the breach of a change in control covenant. The Company has entered into
a forebearance agreement with the lender which calls for regular payments of
principle and is seeking to substitute a new facility to satisfy this
obligation. Failure to find a substitute lender could have a material adverse
effect on the Company. In addition, oral commitments of $2,000,000 in equity
financing have been obtained to close simultaneously with the new facility.
Although discussions are currently taking place with another lender, there can
be no assurances that the Company will be successful in attracting a substitute
lender, nor can there be any assurances that the Company will successfully
consummate the equity financing.
To date, the Company has funded its operations primarily from sales of capital
stock and convertible debt. In February 1998, the Company completed a private
placement of preferred stock of $2.85 million. In May 1998 the Company completed
a second private placement of preferred stock of $2.4 million and a private
placement of common stock of $500,000. In December 1998 the Company completed a
private placement of convertible Notes totaling $6.0 million in connection with
financing the Vidikron Acquisition.
The Company has a subsidiary in Italy and does not hedge the foreign exchange
risk associated with transactions in foreign currencies.
<PAGE>
Results of Operations
January 1, 1999 to March 31, 1999
The Company had revenues of $3,978,490 for the three month period ended March
31, 1999, which is approximately a ten-fold increase from the same period last
year, due to sales of Vidikron-brand products. Cost of goods sold of $3,089,355,
approximately a nine-fold increase, resulted in gross profit of $889,135 and
includes additions to inventory reserves of $94,000 for slow-moving inventory.
Even with this addition to inventory reserves, gross profit improved over
14-fold versus the same period last year, reflecting the higher profitability of
the Vidikron brand.
The Company incurred cash expenses of $2,203,268 in this period, an increase of
17%, reflecting the sales and marketing and the general and administrative
expenses related to the Vidikron operations acquired in the fourth quarter of
1998. Sales and marketing expenses of $743,398 in the current quarter were 107%
greater than the same period last year. General and administrative expenses were
$ 1,377,657 for the first quarter of 1999, only 2% greater than the same period
last year. Research and development expenses of $61,394 were lower by almost
60%, reflecting the prior years' spending on the Digital Home Theater. Patent
and license expense was 22% lower, reflecting a change in Company philosophy
from a development company to a marketing and sales company. The Company also
incurred non-cash expenses of $317,722 during the period for depreciation and
amortization, and increase of 68%, reflecting the amortization of the goodwill
associated with the Vidikron acquisition.
F-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Interest expense of $51,402 was nine times higher than the first quarter last
year due to bank debt which was assumed as part of the Vidikron acquisition.
1998 results also included $420,168 of non-recurring minority interest connected
with Manhattan Scientifics, Inc. which was consolidated into the Company in the
first quarter of 1998.
The Company recorded $70,250 in dividends on the Series B Preferred Stock during
the first quarter of 1999. The dividends recorded in the same period in the
prior year included the Series B dividends as well as the amortization of the
discount feature connected with other Preferred Stock issues. The net loss
attributable to common shareholders of $1,750,341 was a 9% improvement versus
the same period last year.
January 1, 1998 to March 31, 1998
The Company had revenues of $ 416,443 for the three month period ended March 31,
1998 which was from the sale of the Digital Home Theater. Cost of goods sold of
$ 354,906 resulted in gross profits of $ 61,537, which was adversely affected by
the 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 spent in the comparable
period in 1997, the increase in general and administrative expense is due to
increased participation in trade shows, higher salaries reflecting the addition
of marketing personnel, higher legal fees related to the costs of the public
offering of common stock of Manhattan Scientifics, Inc., and higher R&D
associated with the development of product enhancements to the Digital Home
Theater. The Company incurred non-cash expenses of $188,905 during the period
for depreciation. The Company also recorded $333,072 in dividends (i) on the
Series F Convertible Preferred Stock in connection with recognizing the discount
on the conversion feature, (ii) for warrants issued in connection with the
issuance of Series F Convertible Preferred Stock, and (iii) for Series B
Preferred Stock Dividends.
Year 2000
Substantially all of the Company's business computer systems were acquired after
the year 2000 issue became widely publicized. Consequently, the Company has
endeavored to ensure that computer systems acquired were Year 2000 compliant at
the time of their purchase. The Company believes that it has been substantially
successful in that goal. The Company does not anticipate that the costs of final
testing of its systems to assure Year 2000 compliance will exceed $ 25,000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty of the Year 2000 problem, resulting in part form the uncertainty of
the Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity,
or financial condition.
The Company is in the process of verifying that all key suppliers are year 2000
compliant and has ascertained that at least one major supplier is Year 2000
compliant. The Company at present has no individual customer which could have a
material adverse effect on the Company's operations should such customer not be
Year 2000 compliant. In addition, the Company intends to evaluate the Year 2000
readiness of any future significant customers or suppliers.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable
F-12
<PAGE>
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(b) Report on Form 8-K
------------------
None
F-13
<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 17th day of May, 1999.
VIDIKRON TECHNOLOGIES GROUP, INC.
By: /s/ Phillip Siegel
------------------------------
Phillip Siegel, Chairman and CEO
By: /s/ Stuart Barlow
------------------------------
Stuart Barlow
Vice President Finance
(principal financial officer)
F-14
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