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 |
