SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 34-19218
PROJECTAVISION, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3499909
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Two Penn Plaza, Suite 640
New York, New York 10121
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(Address of principal executive offices) Zip Code
(212)971-3000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, Par Value $.0001 Per Share
Redeemable Warrants
Series B Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
On March 24, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $22,191,953.70 based upon the average of
the closing bid and asked prices of $ 1.05 as of March 24, 1998.
As of March 24, 1998, 21,279,935 shares of the Registrant's Common Stock
were outstanding.
Documents Incorporated By Reference
Document Where Incorporated
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None. N/A
PART I
Item 1. BUSINESS.
General
The Company is in the business of identifying, developing, patenting,
supporting, manufacturing and marketing technical innovations in the electronic
display and information industry. The Company was formed to capitalize on, and
generate revenues and profits primarily from a) the manufacture and sale of
products based on its technology and b) the licensing of its proprietary
patents, inventions, systems and technologies to manufacturers. The Company's
first commercial video production system, its Digital Home Theater(TM) ("DHT"),
is currently in production. The DHT is a modular, large screen digital
entertainment system that can be used as either a 60-inch rear projection
television, a front projector capable of casting an image up to 20 feet diagonal
in size, or as an SVGA-compatible computer monitor. The Company believes that
the DHT uniquely positions the Company in the market because the DHT represents
the convergence of front projectors, rear projection televisions, and computer
monitors. The DHT incorporates a lightweight, removable projector that utilizes
digital technology developed by Texas Instruments called Digital Light
Processing ("DLP") in concert with the Company's proprietary dual-use front/rear
projection system.
Digital technology is beginning to gain prominence in the video display
industry, and has started to replace competing technologies, such as cathode ray
tube ("CRT") and liquid crystal display ("LCD"). DLP is currently the leading
new digital video technology, and Texas Instruments has demonstrated its
commitment to this emerging technology by continuing to upgrade and improve its
proprietary DLP technology. Texas Instruments' DLP system for projection display
is based on its Digital Mirror Device ("DMD") DMD microchip. As a consequence,
DLP, an innovative yet proven technology, is increasingly being adopted by
numerous projection and consumer electronic companies.
Video Products
The Company's technologies utilize both the new Texas Instruments Digital
Light Processing (DLP) light engines and liquid crystal displays (LCDs) as light
valves and high brightness light sources in concert with the Company's
proprietary electronic and optical processing systems. The new generation
technologies differ significantly from conventional cathode ray tube ("CRT")
technology, which has been used for the past fifty years in virtually all
television and video systems. The Company's technologies are capable of
producing giant screen displays that are bright and sharp, have rich color
saturation and high contrast. The Company is the owner of seven (7) United
States patents, covering its technologies, and nine (9) foreign patents around
the world. An additional thirteen (13) patent applications have been filed by
the Company in the United States with respect to the Company's proprietary
technologies. In addition, the Company has also filed forty-seven (47) patent
applications in various foreign countries for improvements to its technologies
and for protection of related technologies.
The Company has formed a non-exclusive strategic corporate alliance and entered
into an OEM Agreement with Texas Instruments with respect to the purchase of the
DMD, which is a component of the DLP that has been developed by Texas
Instruments. The Company has also entered into arrangements with third parties
for the manufacture and production of its video projection systems which
currently include the Projector and the proprietary Digital Home Theater
mechanical and electronics designs. The Company has entered into arrangements
with third parties for the marketing and distribution of its video projection
systems. The Company has also licensed, on a non-exclusive basis, its patented
"depixelization" micro-optics and brightness enhancement technologies, which are
applicable to a wide range of video projection systems, to Matsushita Electric
Industrial Co., a Japanese company that distributes consumer electronic products
in the U.S. under the Panasonic brand name, and to Samsung Electronics Co., a
Korean company that distributes products under the Samsung brand name. These
non-exclusive licenses offer consumer electronics manufacturers the right to use
certain of the Company's patented technologies. The Company is seeking to enter
into similar, non-exclusive patent license agreements for its depixelization and
other technologies with other parties in a variety of markets. In addition to
licensing its technologies for potential uses in the television market, the
Company also intends to offer licenses of its video projection technologies to
commercial and military users. Other potential markets for the Company's
technologies include medical imaging, laptop computers, CAD/CAE workstations,
computer monitor replacement, arcade games, video interactives, home shopping,
video teleconferencing, sports entertainment viewing, education, training and
advertising.
1
The Video Display Industry
The video display industry encompasses numerous markets, and the Company
currently competes in three segments: (i) front projection systems, (ii) rear
projection television (big screen TVs) and (iii) computer monitors. Stanford
Resources, Inc., an industry research firm, estimates the revenue of these three
segments at approximately $27.2 billion in 1997. The projection display market,
which comprises primarily the front projection and rear projection television
markets, is expected to increase from 1.4 million units in 1996 to 3.1 million
units in 2002, representing an increase in revenues from $5.8 billion in 1996 to
$10.0 billion in 2002. The consumer television category captured the largest
share of projection display revenues in 1996 at 47.7% while business
applications were second with 30.5%. Education (9.4%), sports and entertainment
(6.2%), military/government (3.3%), and public information (2.6%) composed the
remainder of the projection display market.
Over the last decade, consumer interest in home theater systems and large
screen televisions has increased dramatically, fueled by decreasing equipment
prices and an ever-expanding universe of movies, sporting events and other
programming available via cable television, direct broadcast satellite,
laserdisc, VCRs, and most recently, digital video disc ("DVD"). One of the
fastest growing segments of the video display industry is the market for
direct-view televisions with diagonal screen sizes exceeding 30-inches, and
projection televisions, which have screen sizes exceeding 40-inches. Sales of
30-inch or greater direct view televisions and projection televisions increased
22% and 10%, respectively, in 1996. As screen sizes have increased, image
impairments, such as low resolution, artifacts and noise, have become more
readily apparent. Moreover, the better quality images produced by DVDs, digital
satellite transmission and high-resolution computer monitors have made viewers
more discriminating and have elevated image quality expectations. The Company
believes that this trend will accelerate with the advent of digital high
definition television ("HDTV"). The Federal Communications Commission recently
established standards for HDTV broadcasting in the U.S. and has targeted the
eventual phase-out of analog (NTSC) broadcasting by the year 2006.
Currently, one of the most significant trends in the consumer electronics
industry is that of "convergence," which refers to the merging of traditional
consumer electronics, such as audio, video and personal communications products,
with the digital world of the PC. Advances in microprocessors, the availability
of low cost memory and storage, high quality displays, sophisticated software
and the emergence of the World Wide Web have fueled the growth in multimedia
applications on the PC. In essence, the technologies of home entertainment (the
living room) and home information (the home office) are merging to create a new
product category. The advent of digital television and its convergence with the
PC, combined with the growing demand for home theater systems and projection
televisions, are effecting another convergence, that of the front projection,
projection television and, computer monitor markets. The Company believes that
it is uniquely positioned to capitalize on this convergence because the DHT,
with its front/rear projection and SVGA computer monitor capability, is the
first and currently the only product that addresses these three, heretofore
discrete, markets. These markets combined are expected to increase to $32.5
billion in revenue by 2002.
In 1996, North America represented 74.3%, or 1.18 million units, of the
global projection display market. Europe, Japan and the rest of the world each
account for less than 10% of total unit shipments. The wide gap between North
America and the other regions is caused by the tremendous difference in rear
projection television sales as well as the early adoption of multimedia
presentations in U.S. businesses and educational institutions. North America and
Europe represent 68.1% and 16.9%, respectively, of the total dollar volume of
the global projection display market in 1996, reflecting the relatively low
prices of big screen TVs in the U.S. and a higher-priced product mix in Europe.
2
Front Projection
The front projection market, estimated at $2.5 billion in revenue in 1996,
comprises primarily commercial applications, including corporate presentations,
demonstrations and seminars, hotels and conference centers, bars and
restaurants, education and training, and video teleconferencing. To a lesser
extent, front projection displays are used in consumer applications, principally
customized large screen home theater systems. Front projector sales are expected
to increase to $5.8 billion by 2002 due to the rapid growth in the multimedia
business presentation market, as well as the growing popularity of home theater
systems, primarily in the U.S. Front projection systems based on liquid crystal
display ("LCD") technology currently dominate the front projection market with
approximately $1.8 billion in sales in 1996. LCD-based front projectors offer
lower prices, more compact designs, and equal or higher brightness as compared
to projectors based on cathode ray tube ("CRT") technology. As a result,
shipments of front CRT projectors, mostly for home theater applications, are
expected to peak in 1996 at $463 million in sales and decline to $213 million in
2002. New "chip-based" projectors, including those based on Texas Instruments'
digital micromirror device ("DMD") were introduced in 1996. Initially, the
business market has been the major revenue source for chip-based front
projectors. Front chip-based systems are expected to become a major player in
the commercial market due to superior picture performance and declining prices
resulting from significant cost reductions. Stanford Resources estimates that
sales of front chip-based systems will increase to over $900 million by 2002.
Projection Television (Rear Projection)
The rear projection television market, estimated at $3.0 billion in
revenue in 1996, principally consists of consumer big screen televisions. In
spite of all the new projection display technologies that have been developed,
displays based on CRT technology continue to dominate this market. While
projection televisions represent only 3.5% of the unit shipments in the overall
U.S. color television market, they account for over 20% of total revenues, which
were estimated at $8.6 billion in 1996. Growth in this category will be
propelled by lower prices, an increasing desire for bigger screens, rising
demand for replacement units, and the market penetration of digital video disc
("DVD"). Worldwide sales of rear projection televisions are expected to increase
from 975,000 units in 1996 to 1.6 million units in 2002, representing an
increase in market value from $3.0 billion in 1997 to $3.6 billion in 2002.
Developments in LCD and chip-based projectors are expected to dampen the growth
in CRT rear projectors. LCD-based rear projection systems have become successful
in some professional niche applications, and sales are expected to grow to $170
million by 2002. Chip-based systems, including the DMD, were introduced in 1997
and sales are expected to increase significantly as costs decline relative to
CRT-based systems.
Computer Monitors
The computer monitor market has widespread commercial and consumer
applications. The worldwide market for CRT display monitors is estimated at 84.2
million units and nearly $21 billion in revenues in 1997. This market is
estimated to increase to 113.5 million units and approximately $25 billion in
revenues by 2002. The continued growth of the personal computer ("PC") and
workstation market will drive the growth in computer monitors. The Company
expects that the trends toward larger computer screen sizes and enhanced picture
quality for multimedia applications will create demand for the DHT as a computer
monitor. Companies such as Compaq Computer Corp. and Gateway 2000, Inc. have
already introduced big screen PC/TV products, and the Company intends to explore
joint ventures with computer manufacturers to introduce similar PC/TV products
that incorporate the DHT.
CRT Technology
Most existing color televisions up to 35 inch screen size use CRT systems,
the basis of virtually all televisions produced since the 1940s. CRT technology
has certain inherent limitations for production of big screen picture displays,
including size, weight and vacuum. As a practical matter, CRT television is not
manufacturable in sizes in excess of 40 inches.
The cost of producing cathode ray tubes and other aspects of the CRT
technology used for big screen display is high. As a result, CRT-based big
screen television generally is disproportionately more expensive than small
screen size television.
3
While some improvements in CRT big screen televisions continue to be made,
the Company's management believes it is unlikely that new CRT-based big screen
televisions will be produced competitive to the advantages of big or giant
screen LCD television technology.
The Company's Technologies
The Company's DMD and LCD projection technologies combine the Company's
patented optical and electronic processing systems with high brightness light
sources. Use of DMDs and LCDs eliminates the cathode ray tube, which in big
screen televisions is large, bulky, heavy and fragile. DMD panels and LCD
semiconductors do not pose the health hazards of CRTs and are smaller, more
compact, lighter and less fragile than cathode ray tubes. In reproducing images
in color, CRTs generate X-ray radiation that may be harmful to persons who view
the images at close range over long periods of time. Further, CRTs generate
electro-magnetic fields of considerable magnitude. The physiological effects of
these fields on persons who view the screens at close range is still under
study. The use of DMDs or LCDs in the Company's projection systems will not
result in the generation of X-rays or intense electro-magnetic fields.
LCD television technology was first developed approximately 19 years ago.
Unlike CRT technology, which is a mature technology that has been used for
approximately the past 50 years in virtually all television and video projection
systems, LCD technology is still being significantly refined and improved.
Management anticipates that LCDs, like other solid-state devices, ultimately
will be made more compact, durable, efficient and inexpensive. Like CRT-based
color televisions, LCD-based color televisions are capable of displaying 525
scanning lines and 330 lines of resolution using standard NTSC broadcast
signals. LCD projection technologies presently contain certain inherent image
quality limitations. The Company's patented technologies are designed to
overcome these limitations and produce an image offering continuous tone
photographic effect enabling substantially increased viewer perception of image
quality when compared with LCD televisions that do not utilize the Company's
depixalization system. The Company believes that its technologies overcome
limitations in current LCDs that might otherwise limit the use of LCDs for
standard NTSC and high definition television ("HDTV") displays and will improve
the ability to display images comparable in quality to those currently produced
by CRT-based projectors. Texas Instruments' DLP system for projection display is
based on its Digital Mirror Device ("DMD") DMD microchip, a highly integrated
semiconductor light switch. A DLP projector combines DMD microchips with digital
signal processing, memory, software, optical components, and an illumination
source to create extremely bright, high resolution (SVGA) display systems.
DLP is currently the leading digital video technology in the world, and
the Company believes this technology is superior to competing display
technologies, including cathode ray tube ("CRT") and liquid crystal display
("LCD"). The two-chip DLP light engine installed in the DHT produces a bright,
crisp picture without visible pixels or flicker. The DHT is lightweight and easy
to assemble, making it user-friendly for both consumers and retailers.
Furthermore, the DHT is fully digital, thus it can be upgraded to receive HDTV
broadcast signals.
The Company is aware of the development by other companies of innovative
flat panel and television systems. These technologies do not use CRT or
projection to produce an image, but instead rely on other technologies including
plasma, thin film electro-luminescence, solid-state lasers, light pipe systems,
vibrating mirror systems, cold cathode screens, PLZT, FED (field emission
display) and others. The Company believes that flat-panel displays using certain
of these technologies ultimately may be usable as HDTV receivers, and, if so
used, potentially, may be competitive with the Company's technologies.
4
Digital Home Theater(TM) (DHT)
The DHT is a modular, large screen, digital entertainment system that can
be used as either a 60-inch rear projection television, a front projector
capable of casting an image of up to 20 feet in size, or as an SVGA-compatible
computer monitor. The DHT produces a bright, crisp picture without visible
pixels and it is lightweight and easy to assemble, making it user-friendly for
both consumers and retailers. The heart of the DHT is the projector, which
contains a proprietary DLP light engine supplied by Texas Instruments. The
complete projector utilizes the Company's proprietary technology and engineering
innovations, including audio/video connection docking and user interfaces, power
management sequence, audio processing and amplification, and a central control
and monitoring system. The key interface of the DHT is a 50-pin docking station
that connects the projector and the cabinet. This proprietary interface allows
for the easy removal and replacement of the projector when switching between
front and rear projection formats. The cabinet also includes storage for the
front projection lens and a second external docking station. Furthermore, since
the DHT is a 100% digital design, it can be upgraded to receive HDTV broadcast
signals.
Features of the DHT
Picture Size - The picture size produced by the DHT in the front
projection format can be varied continuously to up to a 20-foot diagonal
picture by changing the projection distance or by adjusting the DHT's
built-in zoom lens. The lens can increase the size of the projected image
by a magnitude of 100%.
No Flicker - In contrast to current CRT projection television systems,
Projectavision's DLP-based system does not employ the old scan line
technology, which causes flicker laden images.
Picture Quality - The DHT is capable of displaying large size images with
rich color and high contrast on a screen or on a white or light-colored
surface. The DHT produces images with a continuous tone photographic
effect without visible pixels, enabling viewers to perceive substantially
improved image quality.
Design - The DHT is a lightweight, modular design made up of three
components: the cabinet, screen and projector. The cabinet is made of
lightweight plastics and is only 23 inches deep. The projector is
portable, weighing only 30 pounds, resulting in an easy switch between
front and rear projection formats. The entire product can be assembled in
minutes using four wing nuts.
Other Features - The DHT has a built-in television tuner/receiver and
audio system, UHF and VHF tuning and a user-friendly interface operated by
remote control. The DHT can be connected to cable television, video games,
VCRs, laser disc players, DVD players, desktop and laptop computers, and
direct broadcast satellite systems.
Research and Development
From the Company's inception in September, 1988 through December 31, 1997,
the Company has invested approximately $6,400,000 for research and development
of its technology. The Company has constructed production prototypes and
completed substantially all research and development activities in connection
with the Projector and the Digital Home Theater, although certain refinements
are still ongoing, including optimizing picture brightness. The Company has and
continues to explore the feasibility of using light valves other than LCDs in
its projection technologies.
The Company has applied for U.S. patent protection for a portable,
knockdown folding rear screen video display cabinet which includes its own
screen and may be used in conjunction with the Projector, as well as for its
thin screen display technology. The proposed screen is to have a 50" diagonal
measurement, only six (6) inches thick, and relies on a variation of the
Company's video projection technologies as an image source.
Partnerships, Alliances, and Licenses
Projectavision has entered into a number of key strategic alliances in
order to design, manufacture and distribute the DHT. Projectavision believes
that strong alliances are the key to insuring the successful development and
continued growth of the Company.
5
Texas Instruments
Projectavision's relationship with Texas Instruments began in the fall of
1995 and initially involved a major engineering effort to jointly develop the
DLP technology that is incorporated into the Company's DHT projector. Texas
Instruments has invested approximately $500 million over the past eight years to
research and develop the DLP technology. The second phase of this alliance,
which is currently underway, involves the production of the two-chip DLP light
engine and, to date, over 300 production engines have been received from Texas
Instruments. In the first quarter of 1998, Texas Instruments transferred
manufacturing of the two-chip DLP light engine to Solectron Corporation, a
California-based global supplier of various manufacturing services to electronic
OEMs. Solectron currently manufactures single- and three-chip DLP systems for
Texas Instruments. The Company expects to continue working with Texas
Instruments on improving the DLP technology for current and future products.
C-MAC Electronic Systems Inc.
Projectavision has contracted with C-MAC Electronic Systems Inc. ("C-MAC")
to produce the DHT projector. C-MAC, a publicly traded company based in Quebec,
Canada, is a leading international manufacturer of advanced microelectronics for
major OEMs, including Northern Telecom Limited and International Business
Machines Corporation, among others. C-MAC markets its products and services to
OEMs in the telecommunications, computer, military hardware, medical equipment
and automobile industries.
Como Products
Projectavision has contracted with Como Plastics, located in Columbus,
Indiana, to manufacture the rear cabinet and to assemble and ship the DHT to
customers. Como Plastics is a subsidiary of LDM Corporation, a large, privately
held plastics design and molding company based in Detroit, Michigan. LDM is a
major supplier to Ford Motor Company and General Motors Corporation, as well as
to major consumer electronics companies such as Thomson and Toshiba.
Boxlight Corporation
Commercial distribution of the DHT will be conducted through an alliance
with Boxlight, a leading seller of projection products to the commercial market
with sales of $60 million in 1996. Boxlight distributes products directly to
corporations, educational institutions, hotels/conference centers and
bars/restaurants. Boxlight has a reputation for providing unparalleled service
to its customers and partners, and it continues to grow dramatically. In 1997,
for the fourth consecutive year, Boxlight was named by Inc. magazine as one of
the 500 fastest growing private companies in the U.S.
Other Partnerships and Alliances
Tandy Corporation, a large publicly traded consumer electronics company,
will provide the after sales product service for the DHT nationwide. The Company
has retained the services of the Hamilton Group, a privately held marketing
services firm located in Detroit, Michigan to provide a toll-free customer
service number as well as gather and to analyze information regarding consumer
reaction to the DHT. The DHT was designed by Lunar Design, a nationally
recognized industrial design firm. The innovative quality of the DHT's design
was recognized when Projectavision was awarded the Innovations'97 Design and
Engineering Showcase Award at the recent Consumer Electronics Show. Montalbano
Development Inc., a New York-based firm, was responsible for the mechanical
design and engineering work for the DHT. In addition, the Company enjoys
strategic alliances with several high-end video enhancement companies including
Faroudja, Inc. and Genesis.
Vidikron Acquisition.
In January 1998 the Company signed a definitive agreement to acquire
substantially all of the assets of Vidikron Industries, S.p.A. ("Vidikron")
relating to its video business, including its U.S. distribution subsidiary,
Vidikron of America, Inc. In accordance with the definitive acquisition
agreement, the Company has advanced Vidikron $ 1,000,000 on a non-refundable
basis. The closing of the acquisition is expressly subject to the satisfactory
completion by the Company of all due diligence and obtaining the requisite
financing to complete the transaction. There can be no 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.
6
Marketing
Public relations, advertising and media coverage have increased consumer
awareness of the DHT. Feature articles have appeared in leading publications,
including magazines such as Home Theater, Popular Electronics, GQ, Rolling
Stone, Wired, Playboy, and Audio/Video, and newspapers such as The New York
Times. The DHT has been featured at major trade shows such as InfoComm, Comdex
and the Consumer Electronics Show, where the DHT received the coveted Industrial
Design & Engineering Award.
Distribution
The DHT is being marketed through both retail and commercial distribution
channels. Retail distribution will initially focus on high-end custom
installation retailers who have the experience and understanding to sell this
unique product to consumers. As the customer base expands and consumer
acceptance grows, the Company expects to expand retail distribution to higher
volume channels, including regional and national consumer electronics chains and
superstores, thereby increasing volume substantially. The Company employs
independent sales firms nationwide for retail distribution of the DHT.
Tamarack Investment and Purchase of Shares by Manhattan Scientifics, Inc.
In April, 1993, the Company entered into an agreement with Tamarack
Storage Devices, Inc. ("Tamarack"), a spin-off development stage company of the
Microelectronics and Computer Technology Corporation, a research consortium of
leading U.S. technology companies of which the Company is a member. Tamarack
which was established to commercialize holographic storage technology for
various uses such as for the personal computer workstation, commercial storage
and the consumer electronics market. Pursuant to the April 1993 agreement, the
Company acquired approximately 37% of Tamarack's issued and outstanding voting
securities. In addition, since Tamarack did not achieve certain revenue
benchmarks by the end of the first calendar quarter of 1995, the Company
exercised its right in March, 1996 to purchase, for minimal consideration,
additional shares of Tamarack's Common Stock such that upon effecting such
purchase, the Company assumed ownership of approximately 53% of Tamarack's
issued and outstanding voting securities.
In May, 1994, the Company loaned Tamarack an additional $1,500,000 and in
connection therewith also received warrants to purchase additional shares of
Tamarack's common stock, the precise amount of which is dependent upon the
timing and pricing of a future equity offering by Tamarack. From August through
December of 1995, the Company advanced an aggregate of an additional $97,339
either directly to or for the benefit of Tamarack for general working capital
purposes. Due to Tamarack's inability, to date, to commercialize its holographic
storage technology and Tamarack's current lack of prospects, the Company has
recorded a reserve against its entire investment in Tamarack, including the loan
of $1,500,000. In November, 1996, the Company loaned Tamarack an additional
$100,000 which has been reserved.
In January 1998, Tamarack was acquired by Manhattan Scientific, Inc.,
"MSI") (formally 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
of MSI were sold to the public, resulting in aggregate gross proceeds of
$1 million to MSI. 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 this 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 has
agreed to issue an aggregate of 7.2 million shares to purchase patents in a
portable fuel cell technology which MSI is planning to develop commercially.
7
Proprietary Rights
Projectavision is the owner of seven (7) United States patents and nine
(9) foreign patents in a number of countries and has sixty (60) patent
applications pending in numerous industrialized nations around the world. The
Company has filed for further patent protection in the United States and in
various foreign countries for improvements in its technologies. Specifically in
1995, the Company filed separate patent applications covering its thin screen
system, collimation increasing means, light splitting means, input lens arrays
on opposite sides of the image forming element, double input lens array, real
illumination polarized screen and brightness enhancing technologies.
Applications covering such technologies have also been filed in Canada, China
(People's Republic), Europe (E.P.O.), India, Japan, Mexico, South Korea and
Taiwan. Also in 1995, three additional "design" patent applications were filed
in the United States covering Projectavision's rear screen technology systems.
Rear screen technology utility applications were also filed in Canada, China
(People's Republic), Europe (E.P.O.), India, Japan, Mexico, South Korea and
Taiwan. Notwithstanding the Company's patent or pending patent applications,
there can be no assurance that others have not developed such technologies
without the Company's knowledge, or that such pending applications will be
allowed or that others will not independently develop similar technologies,
duplicate the Company's technologies or design around the patented aspects of
the Company's technologies. Even though the Company has been issued patents,
challenges may be instituted by third parties as to the validity, enforceability
and infringement of the patents. In the event that if others are able to design
around the Company's patents, the Company's business could be materially and
adversely affected. In addition, in the event the Company's products are based
upon the DLP developed by Texas Instruments, the Company will also be dependent
to a certain extent on the efficacy of Texas Instruments' patents relative to
the DLP, of which there can be no assurance. The Company has not conducted any
independent analysis of the patents owned by Texas Instruments relating to the
DLP.
The cost of the litigation to uphold the validity and enforceability and
prevent infringement of the Company's patents can be substantial. The Company's
patent counsel, has conducted a study to determine whether the manufacture, use
or sale in the United States of the projector would infringe patents of others.
The study reviewed patents covering active matrix LCDs, optics and LCDs and
various electronic and optical components used in conjunction with such
combinations. Counsel has determined that the combination of features disclosed
in the Company's patent application would not constitute literal infringement of
the patents reviewed.
Counsel also has reviewed certain of the patents covered by the literal
infringement study to determine whether the combination of features described in
the Company's application would infringe such patents under the doctrine of
equivalents. Under this doctrine, a product which does not literally infringe a
patent because it does not have all features of any of the patent claims might,
nevertheless, be deemed to infringe such patent, if and only if the difference
between the patented product and accused products are insubstantial. Counsel has
concluded that the combination of features described in the Company's patent
application would not infringe any of the patents included in counsel's doctrine
of equivalents study under the doctrine of equivalents. With respect to those
patents which were not included in the doctrine of equivalents study, counsel
has advised the Company that even if the combination of features described in
the Company's application would infringe such patents under the doctrine of
equivalents it is likely that either (i) suitable non-infringing alternative
components would be available, or (ii) the Company will be able to obtain a
license from the owner of such patent. In order for the Company to obtain such a
license it may be necessary for the Company to grant a cross license of the
Company's patent-pending technology to a potential licensor.
8
Counsel also has reviewed the patents to determine whether the components
of the Projector set forth in the Company's patents constitute literal
infringement of the other patents reviewed. Counsel has concluded that the
manufacture, use or sale in the United States of the Projector including such
components would not constitute literal infringement of the patents reviewed;
however, Counsel will not be able to determine whether the components of the
Projector would infringe the remaining patents reviewed until certain components
to be used in the Projector are definitively selected. Counsel has not reviewed
the patents to determine whether the components of the Projector disclosed in
the Company's patent application would constitute infringement of the patents
directed to such components under the doctrine of equivalents. However, counsel
has advised the Company that, as a matter of law, any component purchased from a
seller in the normal course of business ("off the shelf") is purchased with a
warranty from the seller that such component does not constitute literal or
equivalents infringement of patents of others. In addition, counsel has advised
that if the Company arranges to have certain components manufactured to its
specifications and, therefore, is not deemed to have purchased such components
off the shelf it is likely that either (i) the seller of such component will
indemnify the Company from patent infringement claims, or (ii) the Company will
be able to obtain a license from the owner of the patent which is infringed.
However, there can be no assurance that the Company will enter into any such
arrangements and if the Company is unable to enter into such arrangements, its
business may be adversely affected.
In some cases, the Company may rely on trade secrets to protect its
innovations. There can be no assurance that trade secrets will be established or
that others will not independently develop similar or superior technologies. The
Company routinely requires employees, Directors, consultants and other third
parties to whom confidential information has been or will be disclosed, to agree
to keep the Company's proprietary information confidential and to refrain from
using such information in any manner that is adverse to the Company's interest.
However, there can no assurance that such agreements will be complied with or
will be enforceable.
The Company is the owner of the trade name Projectavision, Inc. This mark
was registered by the United States Patent and Trademark Office on February 4,
1997.
The following Trademark applications have been filed:
TRADEMARK COUNTRIES STATUS
- --------- --------- ------
DHT and DIGITAL HOME U.S.A., Europe, Japan, Korea,
THEATER Taiwan, India, China, Canada Mexico,
Brazil, Chile, Peru and Argentina Pending
COMPUTER THEATER U.S.A Pending
KANGAROO U.S.A. Pending
CHT U.S.A., and Taiwan Pending
COMPUTER HOME THEATER U.S.A., and Taiwan Pending
Generally, pending trademark applications significantly inhibit the
ability of a third party to obtain registration for identical or similar marks
to those of the Company's during the pendency of application. However, the
specific trademark laws in each of the countries vary.
The Company also registered the trademark PROJECTAVISION in Japan on
October 31, 1995. Intent-to-Use applications for this mark have also been filed
in European Countries, Korea, Taiwan, India, China, Canada, Mexico, Chile, Peru,
Argentina and Brazil. In addition to the trademark PROJECTAVISION, the Company
has applied for registration of several Intend-to-Use trademark applications
various countries.
On April 7, 1995, Eugene Dolgoff, a founder of the Company and its former
Chief Scientist, filed suit against the Company alleging, among other things,
certain ownership rights with respect to the Company's technologies. See Item 3
"Legal Proceedings."
9
Competition
Projectavision's DHT is currently the only product that addresses simultaneously
the front projection, rear projection television, and computer monitor markets.
As a result, there are no direct competitors to the DHT. However, the Company
faces competition from a variety of companies in each of the distinct markets
targeted by the DHT. The following table summarizes the position of the Company
vis-a-vis its competitors in the industry.
Table 1
Competitive Product Platform
----------------------------------------------------------------------------
Rear Rear Front Front Front
Projection Projection Projection Projection Projection
VIDEO VIDEO/DATA VIDEO DATA VIDEO/DATA
----------------------------------------------------------------------------
Projectavision X X X X X
----------------------------------------------------------------------------
Vidikron X X X
----------------------------------------------------------------------------
Sony X X X X
----------------------------------------------------------------------------
RCA X
----------------------------------------------------------------------------
Zenith X X
----------------------------------------------------------------------------
Mitsubishi X X
----------------------------------------------------------------------------
Sharp X X
----------------------------------------------------------------------------
JVC X X
----------------------------------------------------------------------------
Nview X
----------------------------------------------------------------------------
InFocus X
----------------------------------------------------------------------------
Proxima X
----------------------------------------------------------------------------
Electrohome X X
----------------------------------------------------------------------------
Runco X X
----------------------------------------------------------------------------
Davis X X
----------------------------------------------------------------------------
Barco X X
----------------------------------------------------------------------------
Source: Projectavision, Inc.
Front Projection
The front projection market is dominated by LCD-based products. Over the last
few years, the number of LCD projector companies has risen dramatically. Many
large electronics firms with LCD manufacturing experience and large consumer
electronics and office products divisions decided that the LCD projector market
offered attractive opportunities. Sharp Corporation was the leader in LCD
projection, introducing LCD-based front projectors in 1989. Toshiba Corp.
entered the U.S. market in 1996. In addition, companies such as Sony Corporation
("Sony"), Panasonic Broadcast and Television Systems Co. and Philips Consumer
Electronic Company ("Philips") have revamped their small LCD projector product
lines and sales efforts to become major players. The total number of companies
offering LCD front projectors under their own brand name increased from 10 in
1992 to 34 in 1996.
Table 2
LCD Front Projection Market
1996 U.S. Market Share
(Based on Unit Sales)
Rank Company Share
---- ----------------------- ---------
1 Sharp Corporation 15% - 25%
2 In Focus Systems 15% - 25%
3 Proxima Corp. 10% - 20%
4 Epson America 4% - 8%
5 nView Corp. 4% - 8%
6 Sanyo Electric Co., Ltd. 4% - 8%
7 NEC Corporation 4% - 8%
8 Polaroid Corp. 4% - 8%
9 Eiki International, Inc. 2% - 4%
10 3M Visual Systems Division 2% - 4%
All others less than 2% each
Source: Stanford Resources, Inc., Projection Displays, 1996.
10
Major suppliers of CRT-based front video projectors include Sony, Zenith
Electronics Corporation, Runco International ("Runco") and Barco, Inc.
("Barco"). Sony, NEC and Barco are the leaders in the data category, and
Vidikron, Electrohome, Ltd., Sony, Barco and NEC are strongly positioned in the
high-resolution front CRT projector market.
Projection Television (Rear Projection)
CRT-based products dominate the rear projection television market. Chip-based
systems, like Projectavision's DHT, were introduced in 1997.
Table 3
Rear Projection Television Market
1996 U.S. Market Share
(Based on Unit Sales)
Rank Brand Name Share
---- -------------- -----
1 RCA-Pro Scan 14%
2 Mitsubishi 13%
3 Magnavox 11%
4 Hitachi 11%
5 Sony 10%
6 Pioneer 10%
7 Zenith 8%
8 Toshiba 6%
9 Sears LXI 3%
10 GE 2%
All others 12%
Source: Stanford Resources, Inc., Projection Displays, 1996.
DMD/DLP Licensees
A number of companies, in addition to Projectavision, have licensed Texas
Instruments' DLP technology. Projection companies marketing DLP-based desktop
projectors include nView Corp., In Focus Systems, Inc., Proxima Corp., ASK AS,
Davis A/S and Liesegang. Companies addressing the home theater market include
Runco and Vidikron Industries, however, only Projectavision currently has a
chip-based rear projection television on the market. Digital Projection Ltd. (a
Rank Brimar division), Electrohome Ltd. and Sony have all introduced
high-brightness models and a number of other companies, including Philips, are
evaluating the technology for a variety of products.
Government Regulations
The Food and Drug Administration ("FDA") of the U.S. Department of Health
and Human Services regulates television radiation emissions. State and local
governments also may regulate television radiation emissions. Compliance with
these regulations, or exemptions therefrom, will be necessary prior to
commencement of marketing of the Projector and the Digital Home Theater. The
Company believes that the Projector and the Digital Home Theater will comply
with applicable regulations. Current FDA regulations do not require FDA review
or approval prior to the manufacturing or marketing of the Projector or the
Digital Home Theater. If the Company's technology is used in the medical imaging
market, it may have to comply with FDA requirements pertaining to medical
devices, including possible extensive premarketing approval requirements. If the
Company is required to obtain premarketing approval from the FDA, use of the
technology in the medical imaging market could be significantly delayed and the
cost of obtaining such approval could be substantial.
The Company has obtained a UL listing for the Digital Home Theater
Projector.
The Company is unable to predict the extent of any governmental regulation
which might arise from future United States or foreign legislative or
administrative action.
11
Personnel
As of March 15, 1998, the Company employed fourteen (14) persons, all of
whom provide management and administrative services on a full-time basis. The
Company also has consulting arrangements with a number of engineers who assist
the Company in research and development. The Company also employs its Chief
Financial Officer pursuant to a consulting agreement. See "Employment
Agreements."
The Company believes that its employee relations are satisfactory,
notwithstanding a charge of discrimination that was filed against the Company
and settled and which was related solely to the actions of Mr. Dolgoff. See Item
3, "Legal Proceedings."
Item 2. PROPERTIES
The Company presently leases approximately 12,000 square feet of office
space for executive and research facilities at Two Penn Plaza, Suite 640, New
York, NY 10121. These facilities were originally subleased from an unaffiliated
party at a rate of approximately $17,000 per month. The sublease expired on
January 30, 1996, at which time, the Company entered into a direct lease with
the landlord for the same premises until December 31, 1998 at a rent of
approximately $23,500 per month.
Item 3. LEGAL PROCEEDINGS
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, and the appeal is in the midst of the briefing process..
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 alleges,
among other actions, breach of employment and patent assignment agreements. Mr.
Dolgoff is seeking damages, punitive damages, and equitable relief totaling in
excess of $ 100 million. In April 1996, the New York State Supreme Court issued
an order and opinion which disqualified the Company's litigation counsel,
Anderson Kill, & Olick, P.C. ("Anderson, Kill") on the basis that Anderson, Kill
had a conflict of interest vis-a-vis Mr. Dolgoff, substantially denied the
Company's motion to dismiss Mr. Dolgoff's entire complaint, and denied Mr.
Dolgoff's motion to have a receiver appointed.
12
The Company appealed the New York Supreme Court's decision regarding the
disqualification of Anderson, Kill and the denial of its motion to dismiss Mr.
Dolgoff's complaint. Mr. Dolgoff appealed the New York Supreme Court's denial of
his motion to have a receiver appointed. In January of 1997, the Supreme Court
of the State of New York Appellate Division First Department, affirmed the lower
court's disqualification of Anderson, Kill and the lower court's motion to
dismiss and ordered that a receiver be appointed to protect whatever interest,
if any, the former officer and employee of the Company may ultimately be able to
prove that he has in any inventions Mr. Dolgoff assigned to the Company. The
Supreme Court subsequently issued a decision restricting the scope of the
receivership sought by Mr. Dolgoff. However, the receivership order has not as
yet been entered. At this time, neither the Appellate Court, nor any other
court, has determined that Mr. Dolgoff has any proof to support his claims; the
Appellate Court has merely reaffirmed the lower court's decision that, at this
preliminary stage of the litigation, Mr. Dolgoff's complaint has satisfied
procedural pleading requirements. As a consequence of new facts having come to
the attention of the Company, the Company has amended its pleadings and filed
counterclaims against Mr. Dolgoff, his affiliated companies, Breakthrough
Enterprises, Inc. and Floating Images, Inc. for, among other things, fraud,
breach of fiduciary duty, misappropriation of trade secrets, conversion, breach
of contract, diversion of corporate assets and opportunities, unjust enrichment,
and tortious interference with contractual relations, in connection with which
the Company is seeking injunctive relief and a constructive trust, in addition
to monetary damages in excess of $ 100 million.
In 1996, a suit was filed by a individual investor against the Company and
Marvin Maslow, Chairman of the Board of Directors, alleging fraudulent
inducement in connection with the plaintiff's purchase of the Company's
securities. In March 1997 the case was dismissed by the U.S. District Court in
Florida on jurisdictional grounds.
In the remaining action outstanding with Mr. Dolgoff, the Company's management,
based upon discussions with counsel, believe that they have meritorious defenses
to Mr. Dolgoff's claims. The Company's management believes that the outcome of
these matters will not have a material adverse effect on its financial position
or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, Redeemable Warrants and Series B Preferred
Stock are quoted on NASDAQ under the following symbols:
Common Stock: PJTV
Redeemable Warrants: PJTVW
Series B Preferred Stock: PJTVP
The Common Stock and Redeemable Warrants were initially registered and
traded as Units and were not separately transferrable until August 24, 1991. The
Units commenced trading in the over-the-counter market on the closing of the
Company's initial public offering on August 1, 1990.
On February 27, 1992 the Company announced a two-for-one stock split,
effective March 2, 1992. Accordingly, all quoted prices for the Company's
securities commencing with the first quarter of 1992 are adjusted to reflect the
March 1992 two-for-one stock split.
The Series B Preferred Stock was initially registered on September 9, 1992
in connection with the Company's Redeemable Warrant incentive program (the
"Warrant Incentive Program"). Prior to that time, there was no public market for
the Series B Preferred Stock. Pursuant to the Warrant Incentive Program, holders
of the Company's Redeemable Warrants who exercised their Redeemable Warrants
within 65 days after September 9, 1992 received one (1) share of Series B
Preferred Stock for every three (3) Redeemable Warrants exercised. In connection
with the Warrant Incentive Program, the Company issued 246,452 shares of Series
B Preferred Stock.
13
The Common Stock and Series B Preferred Stock of the Company are quoted on
the NASDAQ Small Cap Market. There is no public trading market for the Company's
Redeemable Warrants (which were delisted from the Nasdaq Small Cap Market in
December 1997), the Series A Preferred Stock (of which there is only one (1)
holder), the Series D Preferred Stock (of which there are only two (2) holders),
the Series E Preferred Stock (of which there is only one holder), or the Series
F Preferred Stock that was issued in February 1998 (of which there is only one
holder). The high and low bid quotations for the Common Stock, Redeemable
Warrants and Series B Preferred Stock for each full quarterly period for the
fiscal years ending December 31, 1996 and December 31, 1997 and for the Common
Stock and Series B Preferred Stock for the first quarter of 1998 through March
24, 1998 are listed below:
COMMON STOCK WARRANTS PREFERRED STOCK
1996 Calendar Quarter Quoted Bid Price Quoted Bid Price Quoted Bid Price
- --------------------- ---------------- ---------------- ----------------
High Low High Low High Low
First Quarter 4.56 4.00 5.25 5.00 6.00 5.00
Second Quarter 3.56 2.19 4.00 3.25 4.00 3.00
Third Quarter 4.00 2.81 6.13 4.25 4.50 4.00
Fourth Quarter 3.69 2.56 6.50 5.50 3.50 2.75
COMMON STOCK WARRANTS PREFERRED STOCK
1997 Calendar Quarter Quoted Bid Price Quoted Bid Price Quoted Bid Price
- --------------------- ---------------- ---------------- ----------------
High Low High Low High Low
First Quarter 3.47 2.00 5.50 2.00 3.75 2.25
Second Quarter 2.68 1.63 6.50 3.00 3.00 2.00
Third Quarter 2.19 1.50 6.50 3.00 2.75 2.00
Fourth Quarter 2.06 .75 6.50 3.00 2.00 1.06
COMMON STOCK PREFERRED STOCK
1998 Calendar Quarter Quoted Bid Price Quoted Bid Price
- --------------------- ---------------- ----------------
High Low High Low
First Quarter (through
March 24, 1998) 1.50 0.625 1.50 0.938
On March 24, 1998 the closing bid and asked prices of Common Stock
as reported on the NASDAQ system were $ 1.06 and $1.03 per share, respectively.
On December 3, 1997, the closing bid and asked prices of Warrants as reported on
the NASDAQ system were $3.00 and $3.00 per Warrant, respectively. The warrants
have since been delisted. On March 6, 1998, the last day prices were quoted for
the Series B Preferred Stock, the closing bid and asked prices of Series B
Preferred Stock on the NASDAQ system were $0.94 and $0.94, respectively.
On March 24, 1998 there were 411 holders of record of Common Stock
and 21,279,935 shares of Common Stock issued and outstanding, and there were 6
holders of record of Series B Preferred Stock and 351,258 shares of Series B
Preferred Stock issued and outstanding.
No cash dividends have been paid by the Company and management does
not anticipate paying cash dividends in the foreseeable future.
14
Item 6. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from the
financial statements and notes thereto. The financial statements as of December
31, 1996 and December 31, 1997 and for the three years in the period ended
December 31, 1997 are included elsewhere in this Annual Report on Form 10-K.
This information should be read in conjunction with the financial statements and
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Statements of Operations Data
For the Years Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Revenues $ 105,000 $ -0- $ 200,000 $ 150,000 $ 1,017,645
Research and Development $ 276,215 $ 827,660 $ 608,651 $ 2,389,329 $ 1,240,578
Net Loss $ (2,730,242) $ (5,632,283) $ (6,471,638) $(10,880,893) $ (8,289,920)
Basic and Diluted Net Loss per Share
Attributable to Common Shareholders $ (.26) $ (.47) $ (.51) $ (.99) $ (.64)
Average Number of Common Shares
Outstanding 10,449,499 11,895,648 12,606, 678 13,586,705 17,968,876
Balance Sheet Data
December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Working capital $ 5,181,003 $ 6,659,132 $ 3,341,425 $ 3,421,387 $ 1,016,223
Total assets $ 8,300,501 $ 9,850,523 $ 4,168,415 $ 10,132,488 $ 10,412,357
Total liabilities $ 390,580 $ 236,473 $ 485,710 $ 3,690,443 $ 4,725,394
Accumulated deficit $ (8,216.949) $(14,015,013) $(20,641,044) $(34,157,268) $(45,604,454)
Stockholders' equity $ 7,909,921 $ 9,614,050 $ 3,682,705 $ 6,442,045 $ 5,686,963
Computation of Per Share Loss
For the Years Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Average Number of Common Shares
Outstanding 10,449,499 11,895,648 12,606,678 13,586,705 17,968,876
Net Loss $ (2,730,242) $ (5,632,283) $ (6,471,638) $(10,880,893) $ (8,289,920)
Dividends on Preferred Stock -- -- -- (2,635,331) (3,157,266)
Basic and Diluted Net Loss per Share
Attributable to Common Shareholders $ (.26) $ (.47) $ (.51) $ (.99) $ (.64)
-------------------------------------------------------------------------
15
Item 7. 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 in Item 14 hereof.
Liquidity and Capital Resources
As of December 31, 1997, the Company had working capital of $ 1,016,223.
To date, the Company has funded its operations primarily from sales of capital
stock and the issuance of debt securities. 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.
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 Theatre.
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 $0.6 million of convertible debt as of
March 15, 1998
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.
16
Results of Operations
January 1, 1995 to December 31, 1995
The Company had revenues of $200,000 for the twelve month period ended
December 31, 1995, all of which was from licensing agreements. During this
period, the Company incurred cash expenses of $3,873,607. The Company also
incurred non-cash expenses of $3,160,138 during this period relating to the
issuance of stock for services incurred for salaries paid or payable to officers
and employees of, and consultants to, the Company as compensation for services
rendered to the Company, and the aforementioned reserve of the Company's
interest in its affiliate, Tamarack Storage Devices, Inc.
January 1, 1996 to December 31, 1996
The Company had revenues of $150,000 for the twelve month period ended
December 31, 1996, all of which was from licensing agreements. During this
period, the Company incurred cash expenses of $6,940,812. The Company also
incurred non-cash expenses of $ 3,868,016 during the period relating to the
issuance of warrants and options as compensation for services rendered to the
Company and for the early retirement of debt. The Company also recorded
$2,635,331 in dividends on the Series C Convertible Preferred Stock in
connection with recognizing the discount on the conversion feature.
January 1, 1997 to December 31, 1997
The Company had revenues of $1,017,645 for the twelve month period ended
December 31, 1997, all of which was from the sale of the Digital Home Theater.
Cost of goods sold of $ 990,044 was adversely affected by the high cost of the
Texas Instruments light engine as well as by expedited transportation costs.
Gross profit was $ 27,601.
During this period, the Company incurred cash expenses of $7,375,155. With
respect to changes in the full year 1997 versus the amounts recorded in the full
year of 1996, the increase in general and administrative expense is due to
increased participation in trade shows and to higher advertising and travel
expense. Higher legal fees are due to the on-going litigation with a former
officer of the Company. The Company also incurred non-cash expenses of $
1,110,221 during the period for depreciation, for the issuance of warrants and
options in connection with the sale of preferred stock, for the issuance of
common stock for compensation for services rendered to the Company, and for
accrued bonuses.
The Company also recorded $3,157,266 in dividends on the Series C, D, and E
Convertible Preferred Stock in connection with recognizing the discount on the
conversion feature, for warrants issued in connection with the issuance of
Series D and E Convertible Preferred Stock, and for Series B Preferred Stock
Dividends.
Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. If the Company's programs
with date-sensitive functions are not Year-2000 compliant, they may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or in miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company
intends to complete its assessment of its Year 2000 issues in the near future,
but it believes at present that it has no Year 2000 issues material to its
business, operations or financial condition.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements following Item 14 of this Annual Report on Form
10-K.
17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are listed below,
followed by a brief description of their business experience during the past
five years.
Term
Name Age Position Expires
- ---- --- -------- -------
Marvin Maslow 60 Chairman of the Board 1999
of Directors
Martin Holleran 55 President, Chief Executive
Officer and Director 2000
Martin D. Fife 70 Director 2000
Craig I. Fields 51 Director 1998
Richard S. Hickok 72 Director 1999
Arthur L. Lipper 66 Director 1998
Jules Zimmerman 63 Chief Financial Officer, 1999
Secretary and Director
Sherman Langer 51 Director 1999
Marvin Maslow, a co-founder of the Company, has served as Chairman of the
Board of Directors of the Company since its inception. Mr. Maslow also served as
the Company's Chief Executive Officer from inception through September 30, 1996,
when he voluntarily resigned as Chief Executive Officer of the Company,
endorsing the appointment by the Board of Mr. Martin Holleran as Chief Executive
Officer of the Company. Mr. Maslow also served as an officer and a director of
DKY, Inc. ("DKY"), the Company's predecessor in interest from October 1988 until
June 12, 1990, when DKY was merged into the Company. Mr. Maslow also served as
Chief Financial Officer of the Company from its inception until the consummation
of its initial public offering in August, 1990.
Martin J. Holleran, has served as President of the Company since November,
1993. On September 30, 1996, Mr. Holleran became Chief Executive Officer of the
Company, at which time, he retained the title of President but resigned as the
Chief Operating Officer of the Company, a position which he had also held since
November, 1993. Prior to 1993, Mr. Holleran served as President and Chief
Executive Officer of Thomson Consumer Electronics Marketing and Sales Company
("Thomson") from 1988 to 1992. At Thomson, Mr. Holleran had overall
responsibility for the marketing, sales and distribution of the RCA and GE
brands of consumer electronic products sold in North and South America. From
1992 until 1993, Mr. Holleran was President and Chief Operating Officer of
Emerson Radio.
18
Martin D. Fife, a founder of the Company, has served on the Board of
Directors since its inception. In addition, Mr. Fife was the Secretary of the
Company from its inception until January 1993. Mr. Fife served as an officer and
a director of DKY from August 1988 until July 12, 1990 when DKY was merged into
the Company. Mr. Fife has been the Chairman of the Board of Directors of Skysat
Communication Network Corporation, a public company, since its inception in July
1992. Since 1987, Mr. Fife has been Chairman of the Board of Magar Inc., a
company of which he is a founder specializing in financial products and the
development of early stage companies. From 1985 to 1989, Mr. Fife was President
of Intergold USA, Inc., a Company involved in the sale and processing of
precious metals. From 1986 to 1989, Mr. Fife was President of Agremp Holdings
Incorporated, an operator of storage elevators. Since April 1992, Mr. Fife has
been a director of the Nova Group, a company engaged in the recycling of
industrial plastics. Since 1974, Mr. Fife has served as a director or trustee of
several investment companies advised by the Dreyfus Corporation, a registered
investment adviser, and currently serves as a director or trustee of the
following thirteen investment companies: The Dreyfus Fund Incorporated, Dreyfus
Liquid Assets, Inc., Dreyfus Municipal Income, Inc., Dreyfus New York Municipal
Income, Inc., Dreyfus California Municipal Income, Inc., Dreyfus Worldwide
Dollar Money Market Fund, Inc., Dreyfus Short-Term Fund, Inc., Dreyfus
Short-Term Income Fund, Inc., Dreyfus Asset Allocation Fund, Inc., Dreyfus
Growth Allocation Fund, Inc., Dreyfus Institutional Short-Term Treasury Fund,
Dreyfus Short-Intermediate Government Fund and Dreyfus Short-Intermediate
Municipal Bond Fund.
Dr. Craig I. Fields has served as a Director since September 1994 and has
been Chairman of the Company's Business and Technical Advisory Board since
January 1, 1993. From April 1989 to April 1990, Dr. Fields was the Director of
the United States Government's Defense Advanced Research Projects Agency
(DARPA). From July 1990 to June 1994, Dr. Fields was the Chairman and Chief
Executive Officer of the Microelectronics and Computer Technology Corporation
(MCC). Since September 1994, Dr. Fields has served as Vice Chairman of Alliance
Gaming Corporation (formerly known as United Gaming, Incorporated), a
diversified entertainment company in the gaming industry. Dr. Fields currently
serves as the Chairman of the Defense Science Board, an advisory board to the
Secretary of Defense. Dr. Fields also serves on the Science and Technology
Advisory Panel supporting the Director of Central Intelligence; on the United
States Advisory Council on the National Information Infrastructure; and on the
US-Israel Science and Technology Commission. Dr. Fields is also a member of the
Board of ENSCO, Perot Systems Corporation and Intertech. Dr. Fields is on the
Advisory Boards of SRI International, United Technologies Corporation and the
Economic Strategy Institute. Dr. Fields is also an advisor to SAIC. In 1988, Dr.
Fields was awarded the President's Distinguished Executive Rank Award for
outstanding service, and in 1990 the President's Meritorious Executive Rank
Award.
Richard S. Hickok, a certified public accountant, served as a Director of
the Company from December 1988 to March 1989. Mr. Hickok has continuously served
as a Director of the Company since February 1990. From October 1989 to December
31, 1996, Mr. Hickok served as an officer, director and stockholder of Hickok
Associates, Inc., a company that provides financial consulting services ("Hickok
Associates"). From 1948 to 1983, Mr. Hickok was associated with KMG Main
Hurdman, Certified Public Accountants in various capacities. Mr. Hickok served
as Chairman of the Board of KMG Main Hurdman from 1981 to 1983, and in 1983 he
retired and was elected Chairman Emeritus. Since 1983 Mr. Hickok has been a
financial consultant. During the past five years Mr. Hickok also has served as a
director of Marsh McLennan Companies, Inc., Comstock Resources, Inc., Marcam,
Inc. and Alpine Lace Brands, Inc.
Arthur Lipper III, is an experienced, independent investment banker and
corporate advisor, and has served as a Director of the Company since March,
1996. He has a particular interest in assisting early stage, growing
enterprises. He is also an established author and lecturer on subjects relating
to investing in and financing businesses. His most recent book is entitled The
Guide for Venture Investing Angels - Financing and Investing in Private
Companies. He is also a strong advocate of independent members of boards of
directors taking an active role in representing the interests of the owners of
the companies in the management of the business. He has been a member of the New
York Stock Exchange and many other stock and commodity exchanges. Mr. Lipper has
been an advisor to the Company and has served on tits Business and Technical
Advisory Committee since 1993.
Jules Zimmerman has served as a Director since January 1993, as Secretary
of the Company since February 1994 and as the Chief Financial Officer of the
Company since 1990. Mr. Zimmerman served as an officer, director and stockholder
of Hickok Associates, Inc., a company that provides financial consulting
services ("Hickok Associates"). He was employed by Avon Products Inc. for 12
years and served as Avon's Senior Vice President and Chief Financial Officer
from 1984 to 1988. From 1992 through 1995, Mr. Zimmerman was a member of the
Board of Directors of Winners All International, as well as its
predecessor-in-interest, National Child Care Company. He is a Director of the GP
Financial and was the President of the New York Chapter of the National
Association of Corporate Directors from September 1990 through December 1992.
19
Sherman Langer has been the Company's Senior Vice President of Marketing
and Sales since October 1994 and has served as a member of the Board since
February, 1996. Mr. Langer was a consultant to the Company from February 1994
until October 1994. From June 1988 through January 1994, Mr. Langer was the
General Manager of the Consumer LCD Products Division of the Sharp Electronics
Corporation.
Broad Classification and Committees and Advisory Board
The Company adopted a classified Board of Directors in February, 1990. The
Board of Directors presently consists of eight members divided into three
classes. The Company currently has three (3) Directors whose term expires in
1999, three (3) Directors whose term expires in 2000 and two (2) Directors whose
term expires in 1998. Having a classified Board of Directors may be viewed as
inhibiting a change in control of the Company and having possible anti-takeover
effects. Officers of the Company serve at the discretion of the Board of
Directors.
The Company has an Audit Committee, a Compensation Committee and an
Executive Committee. The Audit Committee reviews the engagement of the
independent accountants, reviews and approves the scope of the annual audit
undertaken by the independent accountants and reviews the independence of the
accounting firm. The Audit Committee also reviews the audit and non-audit fees
of the independent accountants and the adequacy of the Company's internal
control procedures. The Audit Committee is presently comprised of Richard S.
Hickok, Jules Zimmerman and Martin D. Fife. The Audit Committee held one (1)
meeting during 1997. The Compensation Committee reviews compensation issues
relating to executive management and makes recommendations with respect thereto
to the Board of Directors. The Compensation Committee is presently comprised of
Jules Zimmerman, Richard Hickok, Martin Fife and Craig Fields. The Compensation
Committee held one (1) meeting in 1997. The Executive Committee exercises all
the powers and authority of the Board of Directors in the management and affairs
of the Company between meetings of the Board of Directors, to the extent
permitted by law. However, the Executive Committee may not take any action
unless a meeting of the Board of Directors cannot be convened within three days
after notice thereof. The current members of the Executive Committee are Martin
D. Fife, Martin Holleran and Marvin Maslow. The Executive Committee had one (1)
meeting in 1997. The Company formed a Special Executive Committee in 1995 to
deal with all matters relative to certain litigations in which the Company is a
defendant. The Special Executive Committee is not empowered to make any
decisions on behalf of the Board of Directors. The Special Executive Committee
is comprised of Marvin Maslow, Martin Holleran, Martin Fife, Jules Zimmerman,
Richard Hickok and Craig Fields. The Special Executive Committee held no meeting
in 1997. The Board also held four (4) regular and six (6) special meetings in
1997.
Except for Mssrs. Fields and Lipper, each member of the Board of Directors
who is not an officer or employee of the Company receives $8,000 per year, plus
$1,000 for each Board of Directors or committee meetings attended for serving as
Director. In 1997, Dr. Craigs Fields received an aggregate of $ 24,000 from the
Company, and Mr. Arther Lipper, and his affiliated entities, received an
aggregate of $ 48,000 from the Company. These sums include payments to Msssrs.
Fields and Lipper by the Company for various consulting services provided by
each of them to the Company in 1997, which services were in addition to their
duties as an outside director. The Company reimburses its Directors for
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors or committee meetings attended. There are no family relationships
among any Directors or officers.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
its Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission") and the National
Association of Securities Dealers, Inc. Officers, directors and greater than ten
percent stockholders are required by the Commission to furnish the Company with
copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no reports on Form 5
were required for those persons, the Company believes that during 1993 all
filing requirements applicable to its officers, directors and greater than ten
percent stockholders were complied with.
20
Executive Compensation
The following table sets forth the cash compensation paid by the Company
to executive officers of the Company for the year ended December 31, 1997 whose
total annual salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------------------
(b) (c) (d) (e) (f) (g) (h) (i)
Other All
Annual Restricted Other
Compen- Stock LTIP Compen-
Name and Sation Awards Options/ Payouts Sation
Principal Position Year Salary($) Bonus($) $ $ SARs(#) $ $
- ------------------ ---- --------- -------- ------ ---------- ------- ------- ------
Marvin Maslow,(1) 1997 $150,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Chairman of the Board 1996 $150,000 $ -0- $ -0- $ -0- 1,000,000(1) $ -0- $100,000(2)
Of Directors 1995 $150,000 $ -0- $ -0- $ -0- $ -0- $ -0-
Martin Holleran, 1997 $220,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President, Chief 1996 $180,000 $ -0- $ -0- $ -0- 1,000,000(4) $ -0- $100,000(5)
Executive Officer 1995 $180,000 $ -0- $ -0- $ -0- 50,000(3) $ -0- $ -0-
And Director
Sherman Langer 1997 $165,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Senior Vice President 1996 $130,000 $ -0- $ -0- $ -0- 100,000 $ -0- $ -0-
Of Marketing and
Sales and Director
(1) On March 12, 1996, the Company cancelled 187,500 unvested stock options
granted in 1994 having an exercise price of $5.375 per share and granted
Mr. Maslow 1,000,000 non-qualified stock options having an exercise price
of $4.375 per share, which exercise price was subsequently reduced to
$3.00 on January 9, 1997. To date, 333,333 of these options have vested,
and the balance vest upon the Company achieving certain milestones.
(2) Represents a one-time cost-of-living adjustment made to Mr. Maslow's July
1990 employment agreement with the Company.
(3) Mr. Holleran had a restricted stock award of 50,000 shares of common stock
pursuant to his Employment Agreement with the Company dated November 1,
1993. The vesting schedule relative to all 50,000 shares of restricted
common stock was amended by the Board of Directors on October 21, 1994.
Fifty percent (50%) of such 50,000 shares previously vested in annual
increments of 1/3 each commencing November 1, 1994, and the other fifty
percent (50%) of such shares vested in annual increments of 1/3 each,
commencing November 1, 1994, provided that certain performance criteria
were met. All such 50,000 shares vested on January 1, 1995. In December
1995, Mr. Holleran's Employment Agreement with the Company was amended to
cancel the restricted stock award and replace it with 50,000 non-qualified
stock options exercisable at the then current market price of $4.375 per
share.
(4) On March 12, 1996, the Company cancelled 125,000 unvested stock options
granted in 1994 having an exercise price of $5.375 per share and granted
Mr. Holleran 1,000,000 non-qualified stock options having an exercise
price of $4.375 per share, which exercise price was subsequently reduced
to $3.00 on January 9, 1997. To date, 333,333 of these options have
vested, and the balance vest upon the Company achieving certain
milestones.
(5) Represents a one-time cost-of-living adjustment made to Mr. Holleran's
1993 employment agreement with the Company.
21
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Unexercised
Number of In-the-Money
Options/SARs Options/SARs
At Fiscal At Fiscal
Year End (#) Year End (#)
Shares
Name and Acquired on Value Exercisable Exercisable
Principal Position Exercise (#) Realized ($) Unexecisable Unexecisable
- ------------------ ------------ ------------ ------------ ------------
Marvin Maslow -0- N/A 1,375,000 Exercisable 0/0
Chief Executive Officer,
Chairman of the Board
Of Directors
Martin Holleran, -0- N/A 1,250,000 Exercisable 0/0
President and Chief
Operating Officer
Martin Fife, -0- N/A 150,000 Exercisable 0/0
Vice Chairman of the
Board of Directors
Jules Zimmerman, -0- N/A 120,000 Exercisable 0/0
Chief Financial Officer
And Director
Sherman Langer -0- N/A 152,000 Exercisable 0/0
Senior Vice President
Of Marketing and
Sales and Director
Craig Fields, -0- N/A 150,000 Exercisable 0/0
Director
Richard Hickok, -0- N/A 100,000 Exercisable 0/0
Director
Arthur Lipper III -0- N/A 100,000 Exercisable 0/0
Director
22
Executive Employment Agreements
The Company entered into an employment agreement in July 1990 with Marvin
Maslow to serve as Chief Executive Officer of the Company. Mr. Maslow's
employment agreement, which was to initially expire in July, 1995, was
automatically extended in January 1995 by its terms for an additional 30 months.
That employment agreement was terminated and replaced with a new executive
employment agreement effective March 1, 1997 The term of Mr. Maslow's new
employment agreement is six (6) years with a two-year extension, and it contains
change in control provisions.
The Company entered into a three (3) year employment agreement with Mr.
Martin Holleran in November 1993 to serve as the Company's President and Chief
Operating Officer at a salary of $180,000 per year. Upon the expiration of this
agreement (which was orally extended by the parties subsequent to its term), the
Company entered into a new executive employment agreement with Mr. Holleran
effective March 1, 1997. The term of Mr. Holleran's new executive employment
agreement is six (6) years with a two-year extension, and it contains change in
control provisions.
Effective January 1, 1997, the Company entered into an executive
employment agreement with Mr. Sherman Langer. The term of Mr. Langer's
employment agreement is three (3) years and provides for a salary of $165,000
per year and also contains certain change in control provisions.
Each of Messrs. Maslow, Holleran and Langer have agreed not to compete
with the Company during the term of his respective employment agreement or for a
period of two years after the termination thereof. All of the executive
employment agreements contain termination for cause provisions.
Subsequent to the closing of the Company's initial public offering in
1990, the Company retained Jules Zimmerman as Chief Financial Officer of the
Company. In connection therewith, the Company entered into a consulting
agreement with Mr. Zimmerman and Hickok Associates whereby the Company is billed
on an hourly basis for the work performed by Mr. Zimmerman. Hickok Associates
discontinued operations as of December 31, 1996. Since that time Mr. Zimmerman
has continued to provide his services to the Company as Chief Financial Officer
on an hourly basis.
Indemnification Agreements
The Company has entered into an Indemnification Agreement with each of its
Directors and any officer, employee, agent or fiduciary designated by the Board
of Directors which provides that the Company indemnify the Director or other
party thereto to the fullest extent permitted by applicable law. The agreement
includes indemnification, to the extent permitted by applicable law, against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any civil or criminal action or administrative proceeding arising out of
the indemnitee's performance of his duties as a Director or officer of the
Company. Such indemnification is available if the indemnitee acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his conduct was unlawful.
Under the Indemnification Agreement, the entitlement of a Director or
officer to indemnification will be determined by a majority vote of a quorum of
disinterested Directors, or if such quorum either is not obtainable or so
directs, by independent counsel or by the stockholders of the Company, as
determined by such disinterested Directors. If a change of control of the
Company has occurred, the entitlement of such Director or officer to
indemnification shall be determined by independent counsel selected by such
Director or officer, unless such Director or officer requests that either the
Board or the stockholders make such determination.
23
Each Indemnification Agreement will require the Company to advance
litigation expenses at the request of the Director or officer who is a party
thereto whether prior to or after final resolution of a proceeding, provided
that he undertakes to repay such advances if it is ultimately determined that he
is not entitled to indemnification for his expense. The advance of litigation
expenses will thereby be mandatory upon satisfaction of certain conditions by
such Director or officer.
The Company has entered into an Indemnification Agreement with all of its
Directors and officers. In addition, upon Dr. Fields' forming the Company's
Board of Directors, the Company also agreed to indemnify Dr. Fields with respect
to the aforementioned litigation relating to Tamarack during the period prior to
Dr. Fields' joining the Company's Board of Directors. The Company has obtained
officers' and directors' liability insurance which provides a maximum of
$4,000,000 of coverage, subject to a $100,000 deductible payable by the Company
except under certain circumstances for securities related matters in which case
the deductible is $200,000. Any payments made by the Company under an
Indemnification Agreement which are not covered by the insurance policy may have
an adverse impact on the Company's earnings.
Stock Option Plans and Agreements
Incentive Option Plan - In February 1990, the Directors of the Company
adopted and the stockholders of the Company approved the adoption of the
Company's 1990 Incentive Stock Option and Appreciation Plan which was amended in
June and July 1990. The purpose of the Incentive Option Plan is to enable the
Company to encourage key employees and Directors to contribute to the success of
the Company by granting such employees and Directors incentive stock options
("ISOs"), as well as non-qualified options and options and stock appreciation
rights ("SARs"). In November of 1993, a majority of the stockholders of the
issued and outstanding shares of common stock voted in favor of increasing the
number of shares with respect to which options and SARs may be granted under the
Incentive Option Plan from 400,000 to 1,000,000.
The Incentive Option Plan will be administered by the Board of Directors
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, non-qualified options or SARs (in
tandem with an option or freestanding) or a combination thereof, and the number
of shares to be subject to such options and SARs.
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price not less than the fair market value of the
Common Stock on the date the option is granted. Non-qualified options and
freestanding SARs may be granted with any exercise price. SARs granted in tandem
with an option have the same exercise price as the related option.
The total number of shares with respect to which options and SARs may be
granted under the Incentive Option Plan is 1,000,000. ISOs may not be granted to
an individual to the extent that in the calendar year in which such ISOs first
become exercisable the shares subject to such ISOs have a fair market value on
the date of grant in excess of $100,000. No option or SAR may be granted under
the incentive Option Plan after February 20, 2000 and no option or SAR may be
outstanding for more than ten years after its grant.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. SARs may be settled, in the Board of Directors' discretion, in
cash, Common Stock, or in a combination of cash and Stock. The exercise of SARs
cancels the corresponding number of shares subject to the related option, if
any, and the exercise of an option cancels any associated SARs. Subject to
certain exceptions, options and SARs may be exercised any time up to three
months after termination of the holder's employment.
The Incentive Option Plan may be terminated or amended at any time by the
Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
or SARs under the Incentive Option Plan or materially increase the benefits of
participants.
To date no options or SARs have been granted under the Incentive Option
Plan. No determinations have been made regarding the persons to whom options or
SARs will be granted in the future, the number of shares which will be subject
to such options or SARs or the exercise prices to be fixed with respect to any
option or SAR.
24
Non-Qualified Option Plan - In February 1990, the Directors and
stockholders of the Company adopted the 1990 Non-Qualified Stock Option Plan
which was amended in June and July 1990. The purpose of the Non-Qualified Option
Plan is to enable the Company to encourage key employees, Directors and
consultants to contribute to the success of the Company by granting such
employees, Directors and consultants non-qualified options. The Non-Qualified
Option Plan will be administered by the Board of Directors in the same manner as
the Incentive Option Plan.
The Non-Qualified Option Plan provides for the granting of non-qualified
options at such exercise price as may be determined by the Board of Directors,
in its discretion. In November of 1993, a majority of the stockholders of the
issued and outstanding shares of common stock voted in favor of increasing the
number of shares with respect to which options and SARs may be granted under the
Incentive Option Plan from 400,000 to 1,000,000 and with respect to which
options may be granted under the Non-Qualified Plan from 1,500,000 to 5,000,000.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment.
The Non-Qualified Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the
Non-Qualified Option Plan may not be amended to increase the number of shares
subject to the Non-Qualified Option Plan, change the class of persons eligible
to receive options under the Non-Qualified Option Plan or materially increase
the benefits of participants.
As of December 31, 1997, an aggregate of 4,302,833 options have been
granted under the Non-Qualified Option Plan. Through December 31, 1997, 230,000
non-qualified options have been exercised.
Performance Graph
[The following table was depicted as a line graph in the printed material.]
- --------------------------------------------------------------------------------
12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
100.0 208.0 81.5 89.8 48.5 18.3
100.0 114.8 112.2 158.7 195.2 239.6
100.0 163.0 184.9 286.9 318.1 340.4
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading,
the previous trading day is used.
D. The index level for all series was set to $100.00 on 12/31/92.
- --------------------------------------------------------------------------------
25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 24, 1997,
known to the Company regarding beneficial ownership of the Company's Common
Stock by: (i) any holder of more than five percent of the outstanding shares;
(ii) the Company's directors; and (iii) the directors and officers of the
Company as a group:
Shares Percentage Shares Percentage
of (%) of of (%) of
Common Total Preferred Total
Stock Common Stock Preferred
Name Owned(1)(2) Stock(3) Owned Stock
- ---- ----------- -------- --------- ---------
Martin D. Fife (4) 211,668 1.0% -0- -0-
405 Lexington Avenue
New York, NY 10174
Richard S. Hickok (5) 105,000 .5% -0- -0-
11 Deep Pond Circle
South Orlenas, MA 02662
Marvin Maslow (6) 1,403,073 6.6% 25,000 7.1%
Projectavision, Inc.
Two Penn Plaza
Suite 640
New York, NY 10121
Jules Zimmerman (7) 120,000 .6% -0- -0-
20 West 64th Street
New York, NY 10023
Martin Holleran (8) 1,300,000 6.1% -0- -0-
Projectavision, Inc. %
Two Penn Plaza
Suite 640
New York, NY 10121
Dr. Craig I. Fields (9) 150,000 .7% -0- -0-
1101 30th Street, N.W
Suite 500
Washington, D.C. 20007
Sherman Langer (10) 152,000 .7% -0- -0-
Projectavision, Inc.
Two Penn Plaza
Suite 640
New York, NY 10121
Arthur Lipper, III -0- -0- -0- -0-
14911 Carninito Ledera
Del Mar, CA 92014
All Directors, Nominees and Officers Group
(consisting of 7 persons) (4)(5)(6)(7)
(8)(9)(10) 3,441,741 16.2% 25,000 7.1%
(1) Except as otherwise indicated, all shares of Common Stock are beneficially
owned, and sole investment and voting power is held, by the persons named.
(2) Gives effect to the reverse stock split of one-for-11.3467611 shares of
Common Stock in February, 1990, two-for-three shares of Common Stock in
July, 1990, and two-for-one stock split in March, 1992.
(3) In accordance with Rule 13d-3(d), includes in addition to 21,279,935
shares of the Company's Common Stock outstanding, all of the shares of
Common Stock issuable upon the issuance of options held by officers and
directors within sixty (60) days.
26
(4) Includes 150,000 non-qualified options granted to and beneficially owned
by Mr. Fife to acquire 150,000 shares of Common Stock. Does not include
100 shares of non-voting Series A Preferred Stock issued to Mr. Fife.
(5) Includes 100,000 non-qualified options granted to and beneficially owned
by Mr. Hickok to acquire an aggregate of 100,000 shares of Common Stock of
the Company.
(6) Includes (i) 1,375,000 shares of Common Stock subject to 1,375,000
non-qualified stock options. Does not include 4,038 shares of Common Stock
owned by Mr. Maslow's adult child. Mr. Maslow disclaims beneficial
ownership of the shares of Common Stock owned by his adult child. Mr.
Maslow received 25,000 shares of Series B Preferred Stock on May 15, 1992
for services rendered in the second quarter of 1992.
(7) Includes 120,000 non-qualified options granted to and beneficially owned
by Mr. Zimmerman to acquire 120,000 shares of the Company's Common Stock.
(8) Includes 1,250,000 non-qualified options granted to and beneficially owned
by Mr. Holleran to acquire 1,250,000 shares of the Company's Common Stock.
(9) Includes 150,000 non-qualified options granted to and beneficially owned
by Dr. Fields to acquire 150,000 shares of the Company's Common Stock.
(10) Includes 152,000 non-qualified options granted to and beneficially owned
by Mr. Langer to acquire 152,000 shares of the Company's Common Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through July 31, 1995 the Company made advances of approximately $300,000
to another entity, whose president is the brother of Martin Holleran, the
Company's President and Chief Operating Officer, in contemplation of making an
investment in such other entity. The Company ultimately did not make such an
investment and the advance was fully reserved for on the Company's financial
statements as of December 31, 1995. In November, 1996, $109,166 of the advance
was repaid to the Company as a final settlement of amounts advanced.
27
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of the Company are incorporated herein
by reference to Part II, Item 8:
Independent Auditors' Report F - 1
Balance Sheets at December 31, 1996 and 1997 F - 2
Statements of Operations for the Years Ended December 31, 1995,
1996, and 1997 F - 3
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996, and 1997 F - 4
Statements of Cash Flows for the Years Ended December 31,
1995, 1996, and 1997 F - 5
Notes to Financial Statements F - 6
- ----------
(a) (2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.
(a) (3) Exhibits
The following is a list of exhibits filed as part of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
Exhibit No.
3.2.1 Amended Certificate of Designation for Series D Cumulative Preferred
Stock
3.2.1 Certificate of Designation for Series E Preferred Stock
10.52 Acquisition Agreement and Related Agreements with Vidikron Industries,
S.p.A.
27 Financial Data Schedule
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Projectavision, Inc.:
We have audited the accompanying balance sheets of Projectavision, Inc. (the
"Company") as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Projectavision, Inc. as of December 31, 1996
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------------
New York, New York
March 18, 1998
F-1
PROJECTAVISION, INC
BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, December 31,
1996 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,060,283 $ 1,331,925
Accounts receivable - net of Allowance of $ 11,540 -- 377,608
Inventory -- 1,857,604
Investments 3,437,386 --
Other current assets 851,198 1,001,629
------------ ------------
Total Current Assets 5,348,867 4,568,766
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 68,422 127,128
Tooling 4,208,005 5,907,288
Computers and software 226,019 259,048
Assets under capital leases -- 47,989
Leasehold improvements 185,030 185,030
------------ ------------
4,687,476 6,526,483
Less: Accumulated depreciation and amortization 242,896 851,250
------------ ------------
Property and equipment, net 4,444,580 5,675,233
OTHER ASSETS 339,041 168,358
------------ ------------
TOTAL ASSETS $ 10,132,488 $ 10,412,357
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,718,004 $ 2,466,676
Accrued liabilities 209,476 1,070,638
Current portion of capital lease obligations -- 15,229
------------ ------------
Total Current Liabilities 1,927,480 3,552,543
------------ ------------
LONG-TERM LIABILITIES
Long-term portion of capital lease obligations -- 22,851
Other Long-Term Liabilities -- 250,000
Convertible Debt 1,762,963 900,000
------------ ------------
Total Long-term Liabilities 1,762,963 1,172,851
------------ ------------
TOTAL LIABILITIES 3,690,443 4,725,394
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stocks
Series A Preferred Stock, $.01 par value
100 shares authorized, 100 shares issued
($100,000 liquidation preference) -- --
Series B Preferred Stock, $.01 par value
434,667 shares authorized, 385,982 and 351,258 shares
outstanding as of December 31, 1996 and 1997, respectively
($ 1,756,290 liquidation preference) 3,859 3,512
Series C Preferred Stock, $.001 par value
7,500 shares authorized; 7,500 shares issued; 7,500 shares and no shares
outstanding as of December 31, 1996 and 1997, respectively ($100,000
liquidation preference) 8 --
Series D Preferred Stock, $100 par value 60,000 shares authorized; 51,000
shares issued;
($5,100,000 liquidation preference) -- 5,100,000
Series E Preferred Stock, $1,000 par value 1,650 shares authorized; 1,650
shares issued;
($1,650,000 liquidation preference) -- 1,650,000
Common stock $.0001 par value - 50,000,000 shares
authorized; 14,229,401 and 19,988,997 issued and
outstanding in 1996 and 1997 respectively 1,423 1,999
Additional paid-in capital 40,594,023 44,535,906
Accumulated Deficit (34,157,268) (45,604,454)
------------ ------------
Total Stockholders' Equity 6,442,045 5,686,963
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,132,488 $ 10,412,357
============ ============
See notes to financial statements
F-2
ROJECTAVISION, INC
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------
1995 1996 1997
REVENUE $ 200,000 $ 150,000 $ 1,017,645
------------ ------------ ------------
COST OF SALES -- -- 990,044
------------ ------------ ------------
GROSS PROFIT 200,000 150,000 27,601
OPERATING EXPENSES
General and administrative 1,562,746 2,179,132 3,230,742
Salaries 778,279 1,266,287 1,518,695
Legal fees 1,001,737 1,017,909 1,347,146
Depreciation 73,739 91,284 608,355
Research and development 608,651 2,389,329 1,240,578
Patent and license expense 243,229 362,967 283,030
------------ ------------ ------------
Total Operating Expenses 4,268,381 7,306,908 8,228,546
------------ ------------ ------------
LOSS FROM OPERATIONS (4,068,381) (7,156,908) (8,200,945)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
(Provision for)/recovery of
allowances on advances (125,017) 109,166 --
Interest income 362,107 458,979 167,855
Interest expense - 8% Debentures (352,049) (117,524)
Interest expense - Amortization of debt expense -- (3,868,016) (39,306)
------------ ------------ ------------
Other income/(expense) - Net 237,090 (3,651,920) 11,025
------------ ------------ ------------
Loss before Equity in Loss of
Unconsolidated Affiliate (3,831,291) (10,808,828) (8,189,920)
Equity in Loss of Unconsolidated Affiliate (2,640,347) (72,065) (100,000)
------------ ------------ ------------
Net Loss (6,471,638) (10,880,893) (8,289,920)
Dividends on Preferred Stock -- (2,635,331) (3,157,266)
------------ ------------ ------------
Net Loss Attributable to Common Shareholders $ (6,471,638) $(13,516,224) $(11,447,186)
============ ============ ============
Basic and Diluted Net Loss
per Share Attributable to Common Shareholders $ (.52) $ (.99) $ (.64)
============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,390,962 13,586,705 17,968,876
============ ============ ============
See Notes to Financial Statements
F - 3
PROJECTAVISION, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, DECEMBER 31, 1994 100 $ 0 410,144 $4,101 0 $ 0
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK (24,162) (242)
ISSUANCE OF COMMON STOCK
FOR PROFESSIONAL SERVICES.
NET LOSS
------- -- ------- ------ ----- --
BALANCE, DECEMBER 31, 1995 100 0 385,982 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
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
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
======= == ======= ====== ===== ==
SERIES D SERIES E
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, DECEMBER 31, 1994 0 $0 0 $0 12,228,803 $1,223
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS 52,795 6
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK 24,162 2
ISSUANCE OF COMMON STOCK
FOR PROFESSIONAL SERVICES. 83,030 8
NET LOSS
------ ---------- ----- ---------- ---------- ------
BALANCE, DECEMBER 31, 1995 0 0 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 4,881,656 489
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 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 51,000 $5,100,000 1,650 $1,650,000 19,988,997 $1,999
====== ========== ===== ========== ========== ======
ADDITIONAL
PAID IN ACCUMULATED
CAPITAL DEFICIT TOTAL
BALANCE, DECEMBER 31, 1994 $23,623,739 $(14,015,013) $ 9,614,050
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK DIVIDENDS 154,388 (154,393) 0
ISSUANCE OF COMMON STOCK
FOR PREFERRED STOCK 240 0
ISSUANCE OF COMMON STOCK
FOR PROFESSIONAL SERVICES. 540,284 540,292
NET LOSS (6,471,638) (6,471,638)
----------- ----------- ----------
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 (2,357,188) 0
ISSUANCE OF WARRANTS AND OPTIONS FOR SERVICES 385,800 385,800
NET LOSS (10,880,893) (10,880,893)
----------- ----------- ----------
BALANCE, DECEMBER 31, 1996 40,594,023 (34,157,268) 6,442,045
CONVERSION OF SERIES B PREFERRED
STOCK INTO COMMON STOCK 344 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 96,875
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
=========== =========== ==========
See Notes to Financial Statements
F-4
PROJECTAVISION, INC
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------
1995 1996 1997
OPERATING ACTIVITIES
Net loss $ (6,471,638) $(10,880,893) $ (8,289,920)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 73,739 3,959,300 647,661
Issuance of common stock for services 540,292 -- 96,875
Allowance taken on investment in unconsolidated affiliate 2,129,252 -- --
Other noncash operating expenses -- -- 115,690
Provision for allowances on advances 125,017 (109,166) --
Equity in loss of unconsolidated affiliate 511,094 72,065 --
Asset and liability management
Changes in other operating assets (179,370) (597,659) 15,255
Changes in accounts receivable (377,608)
Changes in inventories (1,857,604)
Accounts payable and other liabilities 249,237 1,441,770 1,897,914
------------ ------------ ------------
Net cash used in operating activities (3,022,377) (6,114,583) (7,751,737)
------------ ------------ ------------
INVESTING ACTIVITIES
Capital expenditures (30,397) (4,322,105) (1,839,007)
Investment in and advances to unconsolidated affiliate (94,240) -- (150,000)
Interest accrued on loan to unconsolidated affiliate (67,314) -- --
Purchases and redemption of government securities 2,993,320 (3,437,386) 3,437,386
------------ ------------ ------------
Net cash (used in)/provided by investing activities 2,801,369 (7,759,491) 1,448,379
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from notes payable -- 10,000,000 --
Private placement costs -- (500,000) --
Repayment of convertible debt -- (4,958,250) (100,000)
Issuance of preferred stock -- 7,500,000 6,750,000
Issuance Fees -- (500,000) (75,000)
Series C Preferred Stock Dividend -- (123,750) --
Proceeds from stock options excercised -- 24,375 --
------------ ------------ ------------
Net cash provided by financing activities 0 11,442,375 6,575,000
------------ ------------ ------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (221,008) (2,431,699) 271,642
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 3,712,990 3,491,982 1,060,283
------------ ------------ ------------
CASH AND CASH EQUIVALENTS-END OF YEAR $ 3,491,982 $ 1,060,283 $ 1,331,925
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ -- $ 352,049 $ 1,834
============ ============ ============
See notes to financial statements
F-5
PROJECTAVISION, INC.
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------
In 1995, the Company issued 52,795 of its common stock as payment with a value
of $ 154,393 for the dividend on its series B convertible stock. In addition,
the Company issued 50,000 shares of its common stock for services rendered by an
officer and director of the Company. These shares were canceled by the Company
in December 1995. Also, the Company issued 24,162 shares of its common stock for
24,162 shares of its series B convertible preferred stock, and 83,030 shares of
its common stock for professional services rendered and to be rendered.
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.
F-6
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Projectavision, Inc. (the "Company"), a Delaware
corporation, was incorporated on September 9, 1988. The Company was formed
to complete the development of a unique proprietary solid state projection
television and related video display technology. In addition, the Company
will seek to identify new high technology and electronic products for
consumers and commercial customers. Besides licensing the technology
developed, the Company outsources the manufacture of its products to third
party subcontractors. The Company emerged from the development stage in
1997 and has generated significant revenue from its planned principal
operations. Management of the Company believes that it has sufficient
funds to successfully sustain its operations. However, the attainment of
profitable operations is dependent upon future events including achieving
a level of revenue adequate to support the Company's then cost structure.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents - The company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
Inventories - Inventories are stated at the lower of cost or market. Costs
have been determined based on the first-in, first out (FIFO) method.
Property and Equipment - Property and equipment is stated at cost and
depreciated on the straight-line basis over the estimated useful lives of
the respective assets, with the exception of the plastic injection mold
design and tooling costs for the Digital Home Theater for which
depreciation is based on units-of-production, but using a maximum 10-year
straight-line floor. The estimated useful service lives of the assets are
as follows:
Tooling 100,000 units/10 years maximum
Furniture, fixtures and equipment 7 years.
Computers and software 5 years
Demo Units 3 years
Leasehold improvements lesser of 3 years or remaining
term of lease
Investments - The Company places its temporary cash with high credit
quality financial institutions and by policy, limits the amount of credit
exposure with any one financial institution.
Revenue Recognition - Revenues are recorded at the time of shipment of
products or performance of services.
Research and Development - Costs are expensed as incurred.
Net Loss Per Share - Net loss per share is computed based on the number of
shares outstanding during the period after deducting dividends on
preferred stock. The effect of other potentially dilutive securities is
not included because their effect is anti-dilutive. The fully diluted
number of shares at December 31, 1995, 1996, and 1997 are 12,606,678,
13,802,421, and 18,184,592 respectively.
Earnings (Loss) Per Common Share - In 1997 the Financial Accounting
Standards Board issued Statement of Accounting Standards No. 128 ("SFAS
128") "Earnings per Share" which the Company adopted for both interim and
annual reports. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS"). It replaces the
presentatin of primary and fully diluted EPS with basic and diluted EPS.
Basic EPS excludes the dilutive effect of stock options. It is based upon
the weighted average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. At present, the Company's diluted EPS and
basic EPS are the same, as all of the Company reporting periods have shown
only net losses, making the inclusion of any stock options or other
securities convertible into common stock antidilutive.
Newly Issued Accounting Standards - In 1997 Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income"
was issued. The Company is required to adopt SFAS 130 for fiscal 1998.
Also in 1997 Statement of Financial Accounting Standards No. 131 ("SFAS
131"). Disclosures about Segments of an Enterprise and Related
Information" was issued. SFAS 131 requires public enterprises to disclose
information relating to segments of their operations using a management
approach.
Income Taxes - The Company's accounting for income taxes is such that
deferred taxes, determined based on the difference between the financial
statement and tax basis of assets and liabilities, using enacted tax
rates, as well as any net operating or capital loss or tax credit carry
forwards are expected to reduce taxes payable in future years.
Stock-Based Compensation - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December
15, 1995 and adoption of the measurement and recognition provisions for
non-employee transactions no later than after December 15, 1995. The
standard defines a fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but are not required, to adopt the fair
value method of accounting for employee stock-based transactions. The
Company will continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but discloses in a note to the financial statements pro forma
net income and per share amounts as if the Company had applied the new
method of accounting.
Assessment of Asset Impairment - The Company periodically assesses the
recoverability of the carrying value of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The assessment of recoverability of the carrying
amount of an asset is based on estimated undiscounted future cash flows
from the use of the asset and eventual disposition. If the estimated
undiscounted future cash flows are less than the carrying value, an
impairment loss is charged to operations based on the difference between
the carrying amount and the fair value of the asset.
F-7
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. REVENUE
Revenue for the years ended December 31, 1995 and 1996 consisted of
royalty income from licensing agreements which is recognized when earned.
Revenue for the year ended December 31, 1997 consisted of sales of the
Digital Home Theater.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, the fair values of cash, cash equivalents,
investments, and accounts payable and accrued liabilities approximated
their carrying values because of the short-term nature of these accounts.
Convertible debt has a carrying value of $ 900,000 and a fair value of
$1,200,000. At December 31, 1996, convertible debt had a carrying value of
$1,762,983 and a fair value of $2,130,000.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In 1993, the Company entered into an agreement with Tamarack Storage
Devices, Inc. ("Tamarack") pursuant to which The Company had the right to
acquire up to 50 percent of Tamarack's common stock representing 37.2
percent of the issued and outstanding voting securities of Tamarack. Under
the terms of the agreement, the Company invested $3,000,000 in the
aggregate in Tamarack and had accounted for this investment under the
equity method. The goodwill recorded with this investment, which
represented the excess of the Company's investment over the underlying net
assets of Tamarack, was $1,883,995. Such amount was being amortized over
ten years and is reported in the statement of operations as Equity in Loss
from Unconsolidated Affiliate. Amortization expense related to such
goodwill for the fiscal years ended December 31, 1994 and 1995 was
$197,884 and $148,413, respectively. The Company issued 32,000 shares of
common stock (valued at $109,120) for advisory services received in
connection with the acquisition. In 1994 the Company loaned Tamarack
$1,500,000 with interest payable at 6 percent.
In 1995, Tamarack received a commitment from Projectavision to fund its
cash needs through December 31, 1995 to continue its operations as then
constituted. Pursuant to this $94,240 was advanced to Tamarack. The
Company recorded a reserve against its investment in Tamarack of $300,000
in 1994, and at December 31, 1995 the Company reduced its investment in
and advances to Tamarack to zero recording an additional reserve of
$2,129,252 due to Tamarack's inability, to date, to commercialize its
holographic storage technology and its current lack of prospects. In
addition, 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 are not material to the Company and have not been consolidated.
In January 1998, Tamarack was acquired by Manhattan Scientific,
Inc., ("MSI") (formally 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 of MSI were sold to the public,
resulting in aggregate gross proceeds of $1 million to MSI. 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 this 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 has agreed to issue an aggregate of 7.2 million shares to purchase
patents in a portable fuel cell technology which MSI is planning to
develop commercially.
5. PROVISION FOR ALLOWANCE ON ADVANCES
The Company had made advances through July 31, 1995 in contemplation of an
investment in a high technology company. The president of the Company is
related to an individual who is an executive officer and director of
Projectavision. Such advances aggregated $298,426 and had been fully
reserved for at December 31, 1995. In 1996 $ 109,166 of these funds were
paid to the Company as a final settlement of the amounts advanced, and
the balance was written off.
6. ASSIGNMENT AGREEMENT
On March 19, 1990, an officer/stockholder of the Company entered into an
assignment agreement with the Company whereby all rights, title and
interest to the projection technology were assigned to the Company. The
rights, title and interest to the United States patent and foreign patents
relating to the projector technology under development by the Company were
originally applied for by this officer/stockholder.
F-8
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. 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. Aggregated minimum compensation under these agreements will
be $535,000 per year through 1999. For 1995, 1996, and 1997 salary expense
was approximately $527,000, $577,450, and $710,200 respectively.
8. COMMON STOCK
In 1995 the Company issued 83,030 shares of common stock and in 1997 the
Company issued 50,000 shares of common stock for legal, financial, and
design services. These shares were accounted for as an expense equal to
the fair market value of the stock, with a corresponding increase to
capital stock and additional paid in capital.
In April 1997 the Company's shareholders approved a resolution increasing
the number of shares authorized from 30,000,000 to 50,000,000.
9. 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.
Original
Year Ended December 31, 1997 Total to Vest
---------------------------- -------------
Dividend accretion on Series C Preferred Stock $ 76,727 $ 492,650
Amortization of Warrants on Series C Preferred Stock 23,734 290,000
Amortization of Discount on Series C Preferred Stock 377,787 2,500,000
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 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. 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.
Year Ended December 31, 1997 Total to Vest
---------------------------- -------------
Amortization of Warrants on Series D Preferred Stock 232,620 232,620
Amortization of Discount on Series D Preferred Stock 1,700,000 1,700,000
F-9
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Year Ended December 31, 1997 Total to Vest
---------------------------- -------------
Amortization of Warrants on Series E Preferred Stock 48,900 48,900
Amortization of Discount on Series E Preferred Stock 550,000 550,000
In February of 1998, the Company issued 1,685 shares of 8% Series F
convertible preferred stock to one foreign institutional investor for a
purchase price of $ 1,685,000, resulting in net proceeds to the Company of
$ 1,525,210 after fees. The preferred stock is convertible into the
Company's common stock at $ 1.00 per shares in five equal installments
every thirty days starting in August 1998. The preferred shares may be
repurchased by the Company 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.
10. 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 340,674 shares of
its common stock in exchange for retiring $0.3 million of convertible
debt. There currently remains as of March 18, 1998 $250,000 in convertible
debt outstanding.
F-10
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK OPTION PLANS
Non-qualified Option Plan - The Company has reserved 5,000,000 shares of
common stock for issuance upon exercise of options under a non-qualified
stock option plan adopted in February 1990 and amended in June 1990, July
1990, and November 1993. All options granted under this plan have been
granted at fair market value at the date of grant. In January, 1997,
$2,138,000 options were repriced at $3.00. The following is a summary of
non-qualified option plan activity for the three years ended December 31,
1997:
1995 1996 1997
Outstanding at January 1 2,455,333 2,210,833 4,208,833
---------- ---------- ----------
Granted 68,000 2,682,500 2,232,000
Expired -- -- --
Canceled (312,500) (660,125) (2,138,000)
Exercised -- (24,375) --
---------- ----------
Outstanding at December 31 2,210,833 4,208,833 4,302,833
========== ========== ==========
Available for grant at December 31 2,789,167 791,167 467,180
========== ========== ==========
Weighted average option exercise price information for the years 1995,
1996, and 1997 follows:
1995 1996 1997
Outstanding at January 1 3.63 3.56 4.06
Granted 2.70 4.34 2.94
Expired -- -- --
Canceled 2.50 3.56 4.52
Exercised -- 0.81 --
Outstanding at December 31 3.56 4.06 3.25
Exercisable at December 31 3.56 3.95 3.29
Significant option groups outstanding at December 31, 1997 and related
weighted average price and life information follow:
Exercise Price Number of Weighted Average Weighted Average Number of
Range Options Price Remaining Life (Years) Exercised
$ 1.00-$2.99 84,000 $ 1.188 4 none
$ 3.00-$3.99 3,376,000 $ 3.093 6 none
$ 4.00-$4.99 105,000 $ 4.196 4 none
$ 5.00-$7.99 737,833 $ 5.375 2 none
The weighted fair value at date of grant for options granted in 1996 and
1997 was $ 2.59 and $ 2.92 per option, respectively. The fair value of
options at date of grant was estimated based on the opinion of such fair
value attributed by recipients of two of the grants with the following
weighted average assumptions:
1995 1996 1997
Expected life (Years) 5 5 5
Interest Rate 6.25 % 6.25 % 6.10 %
Volatility 89 % 89 % 72 %
Dividend Yield 0 % 0 % 0 %
Stock-based compensation costs did not impact pretax income or earnings
per share in 1995, 1996 and 1997. These costs would have been increased by
$ 0.2 million or ($ 0.02) per share in 1995, $ 4.9 million, or ($ 0.35)
per share, in 1996 and $ 4.2 million, or ($ 0.23) per share, in 1997 had
the fair values of the options been recognized as compensation expense on
a straight line basis over the vesting period of the grant.
F-11
PROJECTAVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK OPTION PLANS (Continued)
Incentive Option Plan - In February 1990, the 1988 Incentive Stock Option
and Appreciation Plan was terminated and a new plan, as amended in June
1990, July 1990, and November 1993 was adopted under which options to
purchase 1,000,000 shares of common stock have been reserved. The
incentive option plan provides for the granting of incentive stock options
(ISOS) at an exercise price not less than the fair market value of the
common stock on the date the option is granted. ISOS may not be granted to
an individual to the extent that, in the calendar year in which such ISOS
first become exercisable, the shares subject such ISOS have a fair market
value on the date of grant in excess of $100,000. No option may be granted
after February 20, 2000, and no option may be outstanding for more than
ten years after its grant. As of December 31, 1997, no options have been
granted under the Plan.
12. RELATED PARTY TRANSACTIONS
In 1989 advances totaling $10,833 were made to a principal stockholder of
DKY and were outstanding at December 31, 1997.
13. INCOME TAXES
As of December 31, 1996 and 1997, the composition of the Company's net
deferred taxes was as follows:
1996 1997
Deferred tax assets $ 9,800,000 $ 13,100,000
Less valuation allowance (9,800,000) (13,100,000)
------------ ------------
Net $ -- $ --
============ ============
Deferred tax assets principally result from the availability of net
operating and capital loss carry-forwards to offset income earned in
future years. The offsetting valuation allowance reduces total deferred
tax assets to an amount management believes will likely be realized.
At December 31, 1997, the Company had tax net operating and capital loss
carry-forwards of approximately $29,500,000, which expire in the years
2003 through 2013. The utilization of tax net operating and capital losses
may be subject to certain limitations.
14. 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 for office space as of December 31,
1997 are as follows:
Year Amount
---- ------
1998 $ 301,413
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
$204,832, $209,695 and $257,554, respectively.
In 1997 the Company awarded bonuses totalling $250,000.
In January 1998 the Company signed a definitive agreement to acquire
substantially all of the assets of Vidikron Industries, S.p.A.
("Vidikron") relating to its video business, including its U.S.
distribution subsidiary, Vidikron of America, Inc. In accordance with the
definitive acquisition agreement, the Company has advanced Vidikron
$1,000,000 on a non-refundable basis. The closing of the acquisition is
expressly subject to the satisfactory completion by the Company of all due
diligence and obtaining the requisite financing to complete the
transaction. There can be no 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.
F-12
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES (Continued)
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, and the appeal is in the midst of the briefing process.
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
alleges, among other actions, breach of employment and patent assignment
agreements. Mr. Dolgoff is seeking damages, punitive damages, and
equitable relief totaling in excess of $ 100 million. In April 1996, the
New York State Supreme Court issued an order and opinion which
disqualified the Company's litigation counsel, Anderson Kill, & Olick,
P.C. ("Anderson, Kill") on the basis that Anderson, Kill had a conflict of
interest vis-a-vis Mr. Dolgoff , substantially denied the Company's motion
to dismiss Mr. Dolgoff's entire complaint, and denied Mr. Dolgoff's motion
to have a receiver appointed.
The Company appealed the New York Supreme Court's decision regarding the
disqualification of Anderson, Kill and the denial of its motion to dismiss
Mr. Dolgoff's complaint. Mr. Dolgoff appealed the New York Supreme Court's
denial of his motion to have a receiver appointed. In January of 1997, the
Supreme Court of the State of New York Appellate Division First
Department, affirmed the lower court's disqualification of Anderson, Kill
and the lower court's motion to dismiss and ordered that a receiver be
appointed to protect whatever interest, if any, the former officer and
employee of the Company may ultimately be able to prove that he has in any
inventions Mr. Dolgoff assigned to the Company. The Supreme Court
subsequently issued a decision restricting the scope of the receivership
sought by Mr. Dolgoff. However, the receivership order has not as yet been
entered. At this time, neither the Appellate Court, nor any other court,
has determined that Mr. Dolgoff has any proof to support his claims; the
Appellate Court has merely reaffirmed the lower court's decision that, at
this preliminary stage of the litigation, Mr. Dolgoff's complaint has
satisfied procedural pleading requirements. As a consequence of new facts
having come to the attention of the Company, the Company has amended its
pleadings and filed counterclaims against Mr. Dolgoff, his affiliated
companies, Breakthrough Enterprises, Inc. and Floating Images, Inc. for,
among other things, fraud, breach of fiduciary duty, misappropriation of
trade secrets, conversion, breach of contract, diversion of corporate
assets and opportunities, unjust enrichment, and tortious interference
with contractual relations, in connection with which the Company is
seeking injunctive relief and a constructive trust, in addition to
monetary damages in excess of $ 100 million.
In 1996, a suit was filed by a individual investor against the Company and
Marvin Maslow, Chairman of the Board of Directors, alleging fraudulent
inducement in connection with the plaintiff's purchase of the Company's
securities. In March 1997 the case was dismissed by the U.S. District
Court in Florida on jurisdictional grounds.
In all of the above actions, the Company's management, based upon
discussions with counsel, believe that they have a meritorious defense
against these claims and intend a vigorous defense against these claims.
The Company's management believes that the outcome of these matters will
not have a material adverse effect on its financial position or results of
operations.
15. Business Concentration
In 1997, revenues from one customer accounted for approximately 25% of
Digital Home Theater revenues. No other single customer accounts for more
than 5%.
The Company is dependent upon certain vendors for the manufacture of
significant components in its Digital Home Theater. If these vendors were
to become unwilling or unable to continue to manufacture these products in
the required volumes, the Company would have to identify and qualify
acceptable alternative vendors. The inability to develop alternate
sources, if required in the future, could result in delays or reductions
in product shipments.
F-13
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 24th day of March, 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:
Signature Title Date
--------- ----- ----
/s/ Marvin Maslow Chairman of the Board of
- ----------------------------- Directors March 24, 1998
Marvin Maslow
/s/ Martin Holleran President, Chief Executive
- ----------------------------- Officer and Director March 24, 1998
Martin Holleran
/s/ Jules Zimmerman Officer, Secretary and
- ----------------------------- Chief Financial Director March 24, 1998
Jules Zimmerman
/s/ Martin D. Fife Director March 24, 1998
- -----------------------------
Martin D. Fife
/s/ Richard S. Hickok Director March 24, 1998
- -----------------------------
Richard S. Hickok
/s/ Dr. Craig I. Fields Director March 24, 1998
- -----------------------------
Dr. Craig I. Fields
/s/ Arthur Lipper III Director March 24, 1998
- -----------------------------
Arthur Lipper III
/s/ Sherman Langer Director March 24, 1998
- -----------------------------
Sherman Langer