SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q/A QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 1998 -------------- Commission File Number 33-33997 -------- Projectavision Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3499909 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Two Penn Plaza, Suite 640, New York, NY 10121 ---------------------------------------------------- (Address of Principal Executive Offices) (zip code) (212) 971-3000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ As of May 13, 1998, there were 22,822,051 shares of the Registrant's common stock outstanding. PROJECTAVISION, INC. FORM 10-Q/A TABLE OF CONTENTS PAGE ---- PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-7 Item 2. Management's Discussion and Analysis of F-11 Financial Condition and Results of Operations PART II --OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K F-12 SIGNATURES PROJECTAVISION, INC. CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, March 31, A S S E T S 1997 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,331,925 $ 899,166 Accounts receivable - net of allowance for doubtful accounts 377,608 415,525 Inventory - net 1,857,604 2,442,965 Other current assets 1,001,629 995,647 ------------ ------------ Total Current Assets 4,568,766 4,753,303 PROPERTY AND EQUIPMENT Furniture, fixtures and equipment 127,128 207,887 Tooling 5,907,288 5,941,059 Computers and software 259,048 298,120 Assets under capital leases 47,989 63,747 Leasehold improvements 185,030 186,301 ------------ ------------ 6,526,483 6,697,114 Less: Accumulated depreciation and amortization 851,250 1,155,765 ------------ ------------ Property and equipment, net 5,675,233 5,541,349 OTHER ASSETS 168,358 1,723,134 ------------ ------------ TOTAL ASSETS $10,412,357 $12,017,786 ============ ============ L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y CURRENT LIABILITIES: Accounts payable $ 2,466,676 $ 2,423,445 Accrued liabilities 1,070,638 931,161 Convertible Debt -- 275,000 Current portion of capital lease obligations 15,229 15,857 ------------ ------------ Total Current Liabilities 3,552,543 3,645,463 ------------ ------------ LONG-TERM LIABILITIES Long-term portion of capital lease obligations 22,851 18,643 Other Long-Term Liabilities 250,000 250,000 Convertible Debt 900,000 -- ------------ ------------ Total Long-term Liabilities 1,172,851 268,643 ------------ ------------ TOTAL LIABILITIES 4,725,394 3,914,106 MINORITY INTEREST -- 762,384 STOCKHOLDERS' EQUITY Preferred stocks Series A Preferred Stock, $.01 par value 100 shares authorized, 100 shares issued ($100,000 liquidation preference) -- -- Series B Preferred Stock, $.01 par value, 434,667 shares authorized, 351,258 shares outstanding as of December 31, 1997 and March 31, 1998 ($ 1,756,290 liquidation preference) 3,512 3,512 Series D Preferred Stock, $100 par value, 60,000 shares authorized; 51,000 shares issued on December 31, 1997 and 49,000 on March 31, 1998 ($4,900,000 liquidation preference) 5,100,000 4,900,000 Series E Preferred Stock, $1000 par value, 1,650 shares authorized; 1,650 shares issued on December 31, 1997 and March 31, 1998 ($1,650,000 liquidation preference) 1,650,000 1,650,000 Series F Preferred Stock, $1000 par value, 2,2850 shares authorized; 2,850 shares issued on March 31, 1998 ($2,850,000 liquidation preference) -- 2,850,000 Common stock $.0001 par value - 50,000,000 shares authorized; 19,998,997 and 21,351,976 issued and outstanding in 1997 and 1998 respectively 1,999 2,135 Additional paid-in capital 44,535,906 45,470,042 Accumulated deficit (45,604,454) (47,534,393) ------------ ------------ Total Stockholders' Equity 5,686,963 7,341,296 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,412,357 $12,017,786 ============ ============ See Notes to Consolidated Financial Statements F-2 PROJECTAVISION, INC CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - -------------------------------------------------------------------------------- Three Months Ended March 31, ---------------------------------- 1997 1998 (as restated see Note 9) REVENUE $ 5,600 $ 416,443 ------------ ------------ LESS: COST OF SALES 5,070 354,906 ------------ ------------ GROSS PROFIT 530 61,537 OPERATING EXPENSES General and administrative 717,320 1,052,015 Salaries 362,907 410,345 Legal fees 170,119 245,400 Depreciation 25,601 188,905 Research and development 66,992 148,957 Patent and license expense 44,865 26,843 ------------ ------------ Total Operating Expenses 1,387,804 2,072,465 ------------ ------------ LOSS FROM OPERATIONS (1,387,274) (2,010,928) ------------ ------------ OTHER INCOME (EXPENSE) Minority Interest -- 420,168 Interest income 77,654 11,393 Interest expense - 8% Debentures (26,497) (5,500) Interest expense - Amortization of debt expense (41,205) (12,000) ------------ ------------ Other income/(expense) - Net 9,952 414,061 ------------ ------------ Net Loss (1,377,322) (1,596,867) Dividends on Preferred Stock (1,089,940) (333,072) ------------ ------------ Net Loss Attributable to Common Stockholders $ (2,467,262) $ (1,929,939) ============ ============ Net Loss per Share Attributable to Common Stockholders $ (.15) $ (.09) ============ ============ AVERAGE NUMBER OF SHARES OUTSTANDING 16,514,899 20,545,472 ============ ============ See Notes to Consolidated Financial Statements F-3 PROJECTAVISION, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- Series A Series B Series C Series D Preferred Stock Preferred Stock Preferred Stock Preferred Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance, December 31, 1995 100 $ -- 385,982 $3,859 0 $ -- 0 $ -- Issuance of Common Stock for preferred stock dividends Conversion of 8% Debentures into Common Stock Issuance of Series C Preferred Stock 7,500 8 Series C Preferred Stock Placement Fee Cash Dividend on Series C Preferred Stock Exercise of Stock Options Amortization of Discount on 8% Debentures Amortization of Discount (Dividend) on Series C Preferred Stock Issuance of Warrants and Options for Services Net Loss ----- ------ ------- ------- ---- ----- ----- --------- Balance, December 31, 1996 100 0 385,982 3,859 7,500 8 0 0 Conversion of Series B Preferred Stock into Common Stock (34,724) (347) Series C Preferred Stock Conversion (7,500) (8) Issuance of Series D Preferred Stock 51,000 5,100,000 Issuance of Series E Preferred Stock Amortization of Discount (Dividend) on Series C Preferred Stock Amortization of Discount (Dividend) on Series D Preferred Stock Amortization of Discount (Dividend) on Series E Preferred Stock Issuance of Warrants to Series D Preferred Stockholders Financing Cost for Series D Preferred Stock Issuance of Warrants to Series E Preferred Stockholders Issuance of Common Stock for Series B Preferred Stock Dividends Issuance of Common Stock for Services Conversion of 8% Debentures into Common Stock Net Loss ----- ------ ------- ------- ---- ----- ----- --------- Balance, December 31, 1997 100 0 351,258 3,512 0 0 51,000 5,100,000 Issuance of Common Stock for Series B Preferred Stock Dividends Conversion of Series D Preferred Stock into Common Stock (2,000) (200,000) Issuance of Series F Preferred Stock Amortization of Discount (Dividend) on Series F Preferred Stock Financing Cost for Series F Preferred Stock Issuance of Warrants to Series F Preferred Stockholders Conversion of 8% Debentures into Common Stock Net Loss ----- ------ ------- ------- ---- ----- ----- --------- Balance, March 31, 1998 100 $ 0 351,258 $3,512 $ 0 $ 0 49,000 4,900,000 Series E Series F Preferred Stock Preferred Stock Common Stock Shares Amount Shares Amount Shares Amount Balance, December 31, 1995 0 $ -- 0 $ -- 12,388,790 $1,239 Issuance of Common Stock for preferred stock dividends 37,666 4 Conversion of 8% Debentures into Common Stock 1,772,945 177 Issuance of Series C Preferred Stock Series C Preferred Stock Placement Fee Cash Dividend on Series C Preferred Stock Exercise of Stock Options 30,000 3 Amortization of Discount on 8% Debentures Amortization of Discount (Dividend) on Series C Preferred Stock Issuance of Warrants and Options for Services Net Loss ------ ------ ------ ------ ----------- ------- Balance, December 31, 1996 0 0 0 0 14,229,401 1,423 Conversion of Series B Preferred Stock into Common Stock 34,724 3 Series C Preferred Stock Conversion 4,681,656 489 Issuance of Series D Preferred Stock Issuance of Series E Preferred Stock 1,650 1,650,000 Amortization of Discount (Dividend) on Series C Preferred Stock Amortization of Discount (Dividend) on Series D Preferred Stock Amortization of Discount (Dividend) on Series E Preferred Stock Issuance of Warrants to Series D Preferred Stockholders Financing Cost for Series D Preferred Stock Issuance of Warrants to Series E Preferred Stockholders Issuance of Common Stock for Series B Preferred Stock Dividends 66,740 6 Issuance of Common Stock for Services 50,000 5 Conversion of 8% Debentures into Common Stock 726,476 73 Net Loss ------ --------- ------ ------ ----------- ------- Balance, December 31, 1997 1,650 1,650,000 0 0 19,966,997 1,999 Issuance of Common Stock for Series B Preferred Stock Dividends 72,041 7 Conversion of Series D Preferred Stock into Common Stock 336,896 34 Issuance of Series F Preferred Stock 2,850 2,850,000 Amortization of Discount (Dividend) on Series F Preferred Stock Financing Cost for Series F Preferred Stock Issuance of Warrants to Series F Preferred Stockholders Conversion of 8% Debentures into Common Stock 954,042 95 Net Loss ------ --------- ----- --------- ----------- ------- Balance, March 31, 1998 1,650 $1,650,000 2,850 $2,850,000 21,351,978 $2,135 Additional Accumu- Paid-In lated Capital Deficit Total Balance, December 31, 1995 $24,318,651 $(20,641,044) $3,682,705 Issuance of Common Stock for preferred stock dividends 154,389 (154,393) 0 Conversion of 8% Debentures into Common Stock 3,020,298 3,020,475 Issuance of Series C Preferred Stock 7,499,992 7,500,000 Series C Preferred Stock Placement Fee (500,000) (500,000) Cash Dividend on Series C Preferred Stock (123,750) (123,750) Exercise of Stock Options 24,372 24,375 Amortization of Discount on 8% Debentures 3,333,333 3,333,333 Amortization of Discount (Dividend) on Series C Preferred Stock 2,357,188 (2,367,188) 0 Issuance of Warrants and Options for Services 385,800 385,808 Net Loss (10,880,893) (10,680,893) ----------- ------------ ---------- Balance, December 31, 1996 40,594,023 (34,157,288) 5,442,045 ========== =========== ========= Conversion of Series B Preferred Stock into Common Stock 334 0 Series C Preferred Stock Conversion (481) 0 Issuance of Series D Preferred Stock 5,100,000 Issuance of Series E Preferred Stock 1,650,000 Amortization of Discount (Dividend) on Series C Preferred Stock 478,248 (478,248) 0 Amortization of Discount (Dividend) on Series D Preferred Stock 1,700,000 (1,700,000) 0 Amortization of Discount (Dividend) on Series E Preferred Stock 550,000 (550,000) 0 Issuance of Warrants to Series D Preferred Stockholders 232,620 (232,620) 0 Financing Cost for Series D Preferred Stock (75,000) (75,000) Issuance of Warrants to Series E Preferred Stockholders 48,900 (48,900) 0 Issuance of Common Stock for Series B Preferred Stock Dividends 147,492 (147,498) 0 Issuance of Common Stock for Services 96,870 98,875 Conversion of 8% Debentures into Common Stock 762,890 762,963 Net Loss (8,289,920) (8,289,920) ----------- ------------ ---------- Balance, December 31, 1997 44,535,906 (45,604,454) 5,686,963 ========== =========== ========= Issuance of Common Stock for Series B Preferred Stock Dividends 70,161 (70,168) Conversion of Series D Preferred Stock into Common Stock 199,966 0 Issuance of Series F Preferred Stock 2,850,000 Amortization of Discount (Dividend) on Series F Preferred Stock 195,404 (195,404) 0 Financing Cost for Series F Preferred Stock (317,490) (317,490) Issuance of Warrants to Series F Preferred Stockholders 67,500 (67,500) 0 Conversion of 8% Debentures into Common Stock 718,595 718,690 Net Loss (1,596,867) (1,596,867) ----------- ------------ ---------- Balance, March 31, 1998 $45,470,042 ($47,534,393) $7,341,296 ========== ============ ========== See Notes to Consolidated Financial Statements F-4 PROJECTAVISION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------- Three Months Ended March 31, ----------------------------------- 1997 1998 ----------- ----------- OPERATING ACTIVITIES Net loss $(1,377,322) $(1,596,867) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 25,601 188,905 Allowance taken on investment in unconsolidated affiliate 74,636 -- Minority Interest -- 762,384 Asset and liability management Changes in other operating assets (345,441) (823,266) Changes in accounts receivable -- (37,917) Changes in inventories -- (585,361) Accounts payable and other liabilities (706,540) 297,484 ----------- ----------- Net cash used in operating activities (2,329,066) (1,794,638) ----------- ----------- INVESTING ACTIVITIES Capital expenditures (871,515) (170,631) Deposit on Asset Purchase Agreement -- (1,000,000) Purchases and redemption of government securities 290,034 -- ----------- ----------- Net cash (used in) by investing activities (581,481) (1,170,631) ----------- ----------- FINANCING ACTIVITIES Repayment of convertible debt (100,000) -- Issuance of preferred stock 3,500,000 2,850,000 Costs incurred in raising equity -- (317,490) ----------- ----------- Net cash provided by financing activities 3,400,000 2,532,510 ----------- ----------- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 489,453 (432,759) CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD 1,060,283 1,331,925 ----------- ----------- CASH AND CASH EQUIVALENTS-END OF PERIOD $ 1,549,736 $ 899,166 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest $ 26,497 $ 1,834 =========== =========== See notes to consolidated financial statements F-5 PROJECTAVISION, INC. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: - ------------------------------------------------------------------------------- In 1996, the Company issued 37,666 shares of its common stock with a value of $ 154,393 as payment for the dividend on its series B convertible stock. In addition, the Company issued 1,772,945 shares of its common stock and paid $4,958,250 in cash in exchange for retiring $8.4 million of convertible debt.. Also, the Company issued 34,724 shares of its common stock in connection with the conversion of 34,724 shares of its Series B convertible preferred stock into common stock. In 1997, the Company issued 66,740 shares of its common stock with a value of $ 147,498 as payment for the dividend on its series B convertible stock. In addition, the Company issued 4,881,656 shares of its common stock to retire the entire issue of 7,500 shares of Series C convertible preferred stock. The Company also issued 50,000 shares of its common stock for services rendered by an officer and director of the Company. Finally, the Company issued shares of common stock in connection with retiring $0.6 million of convertible debt, leaving a face value on the debt of $ 900,000. In 1998, the Company issued 72,041 shares of its common stock with a value of $ 70,168 as payment for the dividend on its series B convertible stock. In addition, the Company issued 336,896 shares of its common stock to retire 2,000 shares of Series D convertible preferred stock. The Company issued 954,042 shares of common stock in connection with retiring $ 625,000 of convertible debt, leaving a face value on the debt of $ 275,000. 150,000 Warrants with a value of $67,500 were issued in connection with the Series F Convertible Preferred Stock. F-6 PROJECTAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization - Projectavision, Inc. (the "Company"), a Delaware corporation, was incorporated on September 9, 1988. The Company was formed to complete the development of a unique proprietary solid state projection television and related video display technology. In addition, the Company will seek to identify new high technology and electronic products for consumers and commercial customers. Besides licensing the technology developed, the Company outsources the manufacture of its products to third party subcontractors. The Company emerged from the development stage in 1997 and has generated significant revenue from its planned principal operations. Management of the Company believes that it has sufficient funds to successfully sustain its operations. However, the attainment of profitable operations is dependent upon future events including achieving a level of revenue adequate to support the Company's then cost structure. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1997 Form 10-K. The results of operations for the period ended March 31, 1998 are not necessarily indicative of the operating results for the full year. The accompanying interim financial statements are unaudited, but in the opinion of management, include all adjustments, consisting only of normal recurring accruals considered necessary for a fair presentation of the results for the interim periods presented. 2. REVENUE Revenue for the periods ended March 31, 1997 and 1998 consisted of sales of the Digital Home Theater, the Company's principal product. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS At March 31, 1998, the fair values of cash, cash equivalents, investments, and accounts payable and accrued liabilities approximated their carrying values because of the short-term nature of these accounts. Convertible debt has a carrying value of $ 275,000 and a fair value of $ 366,667. 4. INVENTORY Inventories are stated at the lower of cost or market on a first-in first-out basis. At December 31, 1997 and March 31, 1998, respectively, inventories are summarized, as follows: Parts $797,297 $1,070,470 Works in process 678,882 955,427 Finished Goods 381,425 417,048 ---------- ---------- Total $1,857,604 $2,442,965 5. CONSOLIDATED AFFILIATE In 1993, the Company entered into an agreement with Tamarack Storage Devices, Inc. ("Tamarack") pursuant to which the Company had the right to acquire up to 50 percent of Tamarack's common stock representing 37.2 percent of the issued and outstanding voting securities of Tamarack. Under the terms of the agreement, the Company invested $3,000,000 in the aggregate in Tamarack and had accounted for this investment under the equity method. The goodwill recorded with this investment, which represented the excess of the Company's investment over the underlying net assets of Tamarack, was $1,883,995. Such amount was being amortized over ten years and is reported in the statement of operations as Equity in Loss from Unconsolidated Affiliate. Amortization expense related to such goodwill for the fiscal years ended December 31, 1994 and 1995 was $197,884 and $148,413, respectively. The Company issued 32,000 shares of common stock (valued at $109,120) for advisory services received in connection with the acquisition. In 1994 the Company loaned Tamarack $1,500,000 with interest payable at 6 percent. In 1995, Tamarack received a commitment from the Company to fund its cash needs through December 31, 1995 to continue its operations, and $94,240 was advanced to Tamarack. The Company recorded a reserve against its investment in Tamarack of $300,000 in 1994, and at December 31, 1995 the Company reduced its investment in and advances to Tamarack to zero recording an additional reserve of $2,129,252 due to Tamarack's inability, to date, to commercialize its holographic storage technology and its current lack of prospects. In addition, in 1996 the Company classified its investment in Tamarack as available for sale, and, in order to maximize the recovery of its investment, loaned Tamarack an F-7 PROJECTAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- additional $100,000 in 1996 and was to have been repaid following receipt of funds from a government agency. This loan was also fully reserved in 1997. After eliminating the intercompany accounts and reflecting previous write-offs, Tamarack's financial statements were not material to the Company and were not consolidated prior to 1998. In January, 1998, Tamarack was acquired by Manhattan Scientifics, Inc.("MSI"), a NASDAQ bulletin-board traded company. All of the shares of Tamarack (97% of which were represented by the Company's holdings in Tamarack at the time of the closing) were exchanged for 44 million shares of MSI. Simultaneously therewith, an additional 5 million shares were sold to the public by MSI, resulting in aggregate gross proceeds of $1 million. Further, in connection with the transaction, the Company's $1,500,000 loan plus accrued interest thereon was exchanged for convertible preferred stock of MSI. Each share of convertible preferred stock is convertible into 50 shares of MSI common stock. The Company also received a warrant to purchase 750,000 shares of MSI common stock at an exercise price of $0.20 per share. Subsequent to the closing of the transaction, MSI issued an aggregate of 7.2 million shares to purchase patents in a portable fuel cell technology which MSI is planning to develop commercially. As the Company owns 64.5% of the Common Shares of MSI, MSI has been consolidated into the Company in 1998. The excess of MSI's net assets, which have been reduced for minority interests relating to the portion of MSI not owned by the Company, over the Company's investment in MSI has been recorded as a reduction in the basis of the patents held by MSI. 6. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with three of its officers and directors and a consulting agreement with one of its officers and directors. Aggregate minimum compensation under these agreements will be $535,000 per year through 1999. For 1996, and 1997 salary expense was approximately $577,450, and $710,200 respectively. 7. 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, 37,666 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 Three Months Ended March 31, 1998 Total to Vest ---------------------------------- ------------- Dividend accretion on Series C Preferred Stock $ 0 $ 492,650 Amortization of Warrants on Series C Preferred Stock 0 290,000 Amortization of Discount on Series C Preferred Stock 0 2,500,000 In January of 1997, the Company issued an aggregate of 35,000 shares of 6% Series D convertible preferred stock to two foreign institutional investors for an aggregate purchase price of $3,500,000, resulting in net proceeds to the Company of $3,500,000. In October, 1997, these 35,000 Series D shares were sold to two other foreign institutional investor. In December 1997, the Company issued an additional 16,000 shares of 6% Series D convertible preferred stock to the same institutional investors for a purchase price of $1,600,000, resulting in net proceeds to the Company of $1,525,000. Each share of Series D Preferred Stock is convertible, at the option of the holder, into shares of the Company's Common Stock at any time. The Series D Preferred Stock is convertible into Common Stock at a 25% discount to the then current market price of the Company's Common Stock at the time of conversion. F-8 PROJECTAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Three Months Ended March 31, 1998 Total to Vest --------------------------------- ------------- Amortization of Warrants on Series D Preferred Stock 0 232,620 Amortization of Discount on Series D Preferred Stock 0 1,700,000 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. Three Months Ended March 31, 1998 Total to Vest --------------------------------- ------------- Amortization of Warrants on Series E Preferred Stock 0 48,900 Amortization of Discount on Series E Preferred Stock 0 550,000 In February of 1998, the Company issued 2,850 shares of 8% Series F convertible preferred stock to one foreign institutional investor for a purchase price of $ 2,850,000, resulting in net proceeds to the Company of $ 2,532,510 after fees. The preferred stock is convertible into the Company's common stock at a maximum of $ 1.00 per share in five equal installments every thirty days starting in August 1998. The Series F Preferred Stock is convertible into Common Stock at a 25% discount to the then current market price of the Company's Common Stock at the time of conversion. The Company has the right to repurchase the preferred shares at a 12.5% premium over the issue price within 90 days and at a 25% premium after 90 but before 180 days from the issue date. Three Months Ended March 31, 1998 Total to Vest --------------------------------- ------------- Amortization of Warrants on Series F Preferred Stock 67,500 67,500 Amortization of Discount on Series F Preferred Stock 195,404 950,000 In May of 1998, the Company issued 2,000 shares of 8% Series G convertible preferred stock to one foreign institutional investor for a purchase price of $ 2,000,000, resulting in net proceeds to the Company of $ 1,860,000 after fees. 8. CONVERTIBLE DEBT In February 1996, the Company completed an offshore private placement of $10,000,000 of convertible debt resulting in net proceeds to the Company of $9,500,000. The convertible debt bears interest at the rate of 8% per annum and pays interest quarterly in arrears on any unpaid or unconverted debt. To the extent not previously converted, the convertible debt is due in January 1999, and may be repaid in cash or common stock of the Company at the sole option of the Company. All conversions of convertible debt into common stock are based upon a 25% discount of the price of the Company's common stock for five consecutive trading days immediately prior to the date of conversion. The Company recognized as interest expense the 25% discount on the conversion into common stock equal to $ 3,333,333 in 1996. In 1996 the Company issued 1,772,945 shares of its common stock and paid $4,958,250 in cash in exchange for retiring $8.6 million in convertible debt. In January 1997, the Company retired $ 100,000 of convertible debt for cash. During 1997, the Company issued an additional 476,034 shares of its common stock in exchange for retiring $0.6 million of convertible debt. In January 1998, the Company issued 954,042 shares of its common stock in exchange for retiring $ 625,000 of convertible debt. There currently remains $275,000 in convertible debt outstanding. F-9 PROJECTAVISION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. COMMITMENTS AND CONTINGENCIES On November 18, 1994 the Company entered into a non exclusive, non-transferable license without a right to sub-license, except to related companies, with Samsung Electronics Co. pursuant to which the Company gave to Samsung the right to use the Company's patented depixelization technology (as defined) in connection with the manufacturing and marketing of LCD projectors. The license is co-terminus with the life of the patents and patent applications relating to the proprietary rights underlying the license. The future minimum rental commitments as of March 31, 1998 are as follows: Year Amount ---- -------- 1998 $226,060 In January 1998 the Company signed a definitive agreement to acquire substantially all of the assets of Vidikron Industries, S.p.A. ("Vidikron") relating to its video business, including its U.S. distribution subsidiary, Vidikron of America, Inc. In accordance with the definitive acquisition agreement, the Company has advanced Vidikron $ 1,000,000 towards the purchase price on a non-refundable basis. In April 1998 the Company entered into an agreement with Vidikron extending the closing date of the transaction from April 30, 1998 to July 31, 1998, subject to a further automatic additional extension of up to an additional sixty (60) days to September 30, 1998 under certain circumstances ("The April Extension"). Pursuant to the April extension, the Company has agreed, among other things, to advance to Vidikron an additional $1,000,000 non-refundable payment towards the purchase price in four installments by June 26, 1998. The Company made the first installment of $300,000 in May 1998 in connection with this additional $1,000,000 payment. The closing of the Vidikron acquisition is expressly subject to the satisfactory completion by the Company of all due diligence and obtaining the requisite financing to complete the transaction. There can be no assurances that the Company will be satisfied upon its completion of its due diligence, that it will be able to secure the necessary financing, or that it will otherwise be able to effect the acquisition of Vidikron. In June of 1995 and August of 1995, two class action lawsuits were filed against the Company as well as certain of its officers and directors by stockholders of the Company. In October of 1995 the plaintiffs in the second action joined as plaintiffs in the first action, and the second action was dismissed without prejudice. In July 1996, the class action suit was dismissed without prejudice, and the plaintiffs were given an opportunity to replead. Upon repleading, the class action suit alleged numerous violations of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but not limited to, violations of Section 10(b) of the Exchange Act. The suit also alleged claims for negligent misrepresentation and for common law fraud and deceit. In response, the Company and the individual defendants submitted motions to dismiss the action. In July 1997 these motions were granted, and the class action suit was dismissed with prejudice by the U.S. District Court in New York. Plaintiffs have filed a notice of appeal with the Second Circuit Appellate Court. In April 1995 a legal action was brought against the Company, certain members of the Board of Directors, and an employee of the Company by Eugene Dolgoff, a founder and former officer of the Company. The complaint alleged, among other actions, breach of employment and patent assignment agreements. Mr. Dolgoff sought damages, punitive damages, and equitable relief totaling in excess of $ 100 million. In April 1998, the lawsuit was settled, and all of Mr. Dolgoff's claims and those of the Company against him were dismissed. In the above action that continues to be pending, the Company's management, based upon discussions with counsel, believe that it has a meritorious defense and intends to vigorously defense against these claims. The Company's management believes that the outcome of this litigation will not have a material adverse effect on its financial position or results of operations. 10. RESTATEMENT Subsequent to the issuance of the Company's financial statements in the March 31, 1998 Form 10-Q, management determined that the Company should restate its quarterly financial statements for the three month period ended March 31, 1997 to record $1,089,940 in preferred stock dividends related to the Series C and D preferred stock, which are convertible into shares of common stock at a 25% discount to the market value of the common stock at the date of the preferred stock's issuance. The intrinsic value of this beneficial conversion feature has been recognized as a return to preferred shareholders from the date of issuance of the preferred stock to the date in which the preferred stock becomes eligible for conversion into common stock. As a result, preferred dividends and the net loss attributable to common stockholders for the three month period ended March 31, 1997 have been restated. A Summary of the significant effects of the restatement is as follows: Three Months Ended March 31, 1997 ---------------------------------- As Originally As Reported Restated ------------- ------------ Net loss $ (1,377,322) $ (1,377,322) Preferred stock dividends -- (1,089,940) ------------ ------------ Net loss attributable to common stockholders $ (1,377,322) $ (2,467,262) ============ ============ Net loss per share attributable to common stockholders $ (.08) $ (.15) ============ ============ F-10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis should be read in conjunction with the financial statements and notes thereto. Liquidity and Capital Resources As of March 31, 1998, the Company had working capital of $ 1,107,840. To date, the Company has funded its operations primarily from sales of capital stock. In February 1998, the Company completed a private placement of preferred stock for gross proceeds of $2.85 million resulting in net proceeds of $2.53 million, which funded the net cash used in operating activities of $1.79 million and the $1.0 million advance to Vidikron made pursuant to the definitive acquisition agreement. In April 1998 the Company completed a private placement of common stock of $ 0.5 million, and in May 1998 the Company completed another private placement of $2.0 million preferred stock resulting in net proceeds of $1.86 million. As of March 31, 1998, the Company had cash and cash equivalents of $899,166. In the opinion of management, the Company has sufficient funds or will be able to raise sufficient funds based on history to fund future operations. As of December 31, 1997, the Company had working capital of $1,016,223. In January 1997, the Company completed a private placement of preferred stock of $3.5 million, in July 1997 the Company completed a second private placement of preferred stock of $ 1.0 million, and in December 1997 the Company completed two more private placements of preferred stock totaling $ 2.25 million. In addition, the sale of government securities was used to fund working capital and to purchase production tooling for the Digital Home Theater. As of December 31, 1997, the Company had cash and cash equivalents of $1,331,925. As of December 31, 1997, the Company had available for Federal income tax purposes net operating and capital loss carryforwards of approximately $29,500,000. The Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), may impose certain restrictions on the amount of net operating loss carryforwards which may be used in any year by the Company. In February, 1996, the Company completed a private placement of convertible debt of $10.0 million which resulted in $9.5 million in net proceeds to the Company after paying a 5% investment banking fee. The unsecured debt requires quarterly interest payments in cash based upon an annual interest rate of 8%. The debt matures in three (3) years, at which time any convertible debt then outstanding is to be repaid by the Company in cash or common stock, at the sole option of the Company.The Company used the proceeds from this offering principally in connection with the commencement of the production and introduction of its Digital Home Theater. In June, 1996, the Company completed a private placement of 7,500 shares of a newly created Series C Convertible Preferred stock for $ 7.5 million which resulted in net proceeds to the Company of $7 million after paying investment banking fees. The proceeds of this private placement were used primarily to retire unconverted portions of the convertible debt which the Company issued in February of 1996. There currently remains $ 275,000 of convertible debt as of March 31, 1998. Results of Operations January 1, 1997 to March 31, 1997 The Company had revenues of $ 5,600 for the three month period ended March 31, 1997 which was from the sale of the Digital Home Theater. Cost of goods sold of $ 5,070 resulted in gross profits of $ 530. During this period, the Company incurred cash expenses of $1,362,203. The Company also recorded $1,089,940 in dividends on the Series C and D Convertible Preferred Stock in connection with recognizing the discount on the conversion feature, for warrants issued in connection with the issuance of Series D Convertible Preferred Stock, and for Series B Preferred Stock Dividends. January 1, 1998 to March 31, 1998 The Company had revenues of $ 416,443 for the three month period ended March 31, 1998, all of which was from the sale of the Digital Home Theater and accessories. Cost of goods sold of $ 354,906 resulted in gross profit of $61,537 and was adversely affected by the high initial cost of the Texas Instruments Light Engine. During this period, the Company incurred cash expenses of $1,883,560. With respect to the amount spent in the first three months of 1998 versus the amounts in the comparable period in 1997, the increase in general and administrative expense is due to increased participation in trade shows, higher salaries reflects the addition of marketing personnel, higher legal fees are related to the costs of the public offering of the common stock of Manhattan Scientifics, and higher R&D is associated with development of product enhancements. The Company also incurred non-cash expenses of $ 188,905 during the period for depreciation, which was higher than in the first three months of 1997 due to a full quarter of depreciation of the tooling for the Digital Home Theater. The Company also recorded $ 333,072 in dividends on the Series B and Series F Convertible Preferred Stock in connection with recognizing the dividends on the Series B, the discount on the Series F conversion feature, and the warrants issued in connection with the Series F Preferred Stock. F-11 Projectavision, Inc. Two Penn Plaza, Suite 640 New York, New York 10121 April 30, 1998 Vidikron Industries, S.p.A. Via Dei Guasti, 29 20020 Misuito (Milano), Italy Re: Agreement of Purchase and Sale of Assets dated January 20th, 1998 by and between Projectavision, Inc. ("Projectavision") and Vidikron Industries, S.p.A. ("Vidikron") Gentlemen: Reference is hereby made to the above-referenced Asset Purchase Agreement. Inasmuch as it is the intention of Vidikron and Projectavision to proceed with the transaction contemplated by the Asset Purchase Agreement, by execution and delivery of this letter, each of Projectavision and Vidikron reaffirm their intention to effect the transaction contemplated by the Asset Purchase Agreement, subject to amending the Asset Purchase Agreement as hereinbelow set forth. Specifically, the parties hereto agree that the Asset Purchase Agreement shall be amended as follows: 1. The second sentence of Section 3(a) shall be deleted in its entirety and replaced with the following: "Notwithstanding the foregoing, in the event that all of the conditions set forth in Section 14 below have been satisfied or waived, except for Purchaser's delivery obligation pursuant to Section 5(a)(i), Purchaser shall have the right to extend the Closing Date to July 31, 1998 (subject to further extension as set forth in the immediately following sentence) by paying to directly to the Company, by certified or cashiers bank check or wire transfer, (i) Three Hundred Thousand Dollars ($300,000) on or before May 11, 1998, (ii) Two Hundred and Fifty Thousand Dollars ($250,000) on or before May 26, 1998, (iii) Two Hundred and Fifty Thousand Dollars ($250,000) on or before June 11, 1998, and (iv) Two Hundred Thousand Dollars ($200,000.00) on or before June 26, 1998 (all such sums, in the aggregate, are sometimes hereinafter referred to as the "Third Prepayment"); provided; however; that the Company agrees that the holdback previously contemplated under this Section 3(a) in conjunction with Section 15(a) below will be accommodated by the parties in a manner to be mutually agreed upon and so as to maintain the overall economics of the transaction. Notwithstanding anything set forth herein to the contrary, Purchaser shall have the right, provided that Purchaser is otherwise in compliance with the provisions of this Section 3(a), to extend the Closing Date to September 30, 1998, solely in the event that it is required to do so because the Company needs additional time to obtain the stockholder approvals necessary in order to effect the transaction contemplated by the Asset Purchase Agreement." 2. Section 19 of the Asset Purchase Agreement is hereby deleted in its entirety and replaced with the revised Section 19 a copy of which (marked to show changes) is annexed hereto. Except as expressly set forth in this letter and the annex hereto, all of the terms and conditions set forth in the Asset Purchase Agreement shall remain in full force and effect. In the event that the foregoing accurately reflects our agreement to effect the transaction contemplated by and amend the Asset Purchase Agreement as hereinabove set forth, please acknowledge such by counter-executing the copy of this letter where indicated below. Very truly yours, PROJECTAVISION, INC. By: /s/ Martin J. Holleran ------------------------------- Martin J. Holleran President and Chief Executive Officer Agreed to and Accepted by: VIDIKRON INDUSTRIES, S.p.A. By: /s/ Flavio Peralda --------------------- Flavio Peralda President F-12 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 11th day of December, 1998. PROJECTAVISION, INC. By: /s/ Martin Holleran ---------------------- Martin Holleran, President Chief Executive Officer and Director By: /s/ Jules Zimmerman ------------------------------- Jules Zimmerman Secretary, Chief Financial Officer, and Director