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 September 30, 1998, the Company had working capital of
$1,524,678. To date, the Company has funded its operations primarily from sales
of capital stock and investments. 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.. In April 1998 the Company
completed a private placement of common stock of $0.5 million. In May 1998 the
Company completed a private placement of preferred stock for gross proceeds of
$2.0 million, resulting in net proceeds of $1.86 million. In June 1998 the
Company completed another private placement of preferred stock for gross
proceeds of $0.4 million, resulting in net proceeds of $376,000. In July 1998
the Company sold its investment in Manhattan Scientifics, Inc. for $2 million.
Capital expenditures of $53,123 were significantly lower than in 1997 due to
the completion of the tooling for the Digital Home Theater in 1997. The sales of
capital stock and investments along with existing cash balances primarily funded
the net cash used in operating activities of $5.5 million and the $2.0 million
advance to Vidikron made pursuant to the Definitive Acquisition Agreement. As of
September 30, 1998, the Company had cash and cash equivalents of $1,050,287. 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.
Results of Operations
January 1, 1998 to September 30, 1998
The Company had revenues of $931,770 for the nine month period ended
September 30, 1998, all of which was from the sale of the Digital Home Theater
and accessories. Cost of goods sold of $789,072 resulted in gross profit of
$142,698, which was adversely affected by the initial cost of the Texas
Instruments light engine, the principle component of the Digital Home Theater.
During this period, the Company completed development and began production of a
second-generation product, the Series II Digital Home Theater.
During this period, the Company incurred cash expenses of $4,691,797.
With respect to the amount spent in the first nine 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 settling the litigation with a former officer, and
higher R&D is associated with development of the Series II product. The Company
also incurred non-cash expenses of $1,139,597 during the period: a) for $557,286
depreciation and amortization, which was higher than in the first nine months of
1997 due to a full nine months of depreciation of the tooling for the Digital
Home Theater in 1998, b) for the expensing of $356,901 inventory not usable in
the Series II product, and c) for the issuance of stock with a value of $225,410
principally for legal services. The Company also recorded $2,181,059 in
dividends on the Series B, Series F, and Series G Convertible Preferred Stock in
connection with recognizing the dividends on the Series B, the discount on the
Series F and Series G conversion feature, and the warrants issued in connection
with the Series F and Series G Preferred Stock.
January 1, 1997 to September 30, 1997
The Company had revenues of $409,889 for the nine month period ended
September 30, 1997 which was from the sale of the Digital Home Theater. Cost of
goods sold of $395,629 resulted in gross profits of $14,260, which was adversely
affected by the initial cost of the Texas Instruments light engine. During this
period, the Company incurred cash expenses of $5,164,069. The Company incurred
non-cash expenses of $412,105 during the period for depreciation The Company
also recorded $1,684,401 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.
F-11
Year 2000
---------
In 1997, the Company emerged for the development stage. Substantially
all of the Company's business computer systems were acquired after the year 2000
Issue became widely publicized. Consequently, the Company has endeavored to
ensure that computer systems acquired were Year 2000 compliant at the time of
their purchase. The Company believes that it has been substantially successful
in this goal. Computer systems purchased since 1996 had a cost to the Company
of $47,989, which were acquired for the purpose of gearing up for commencement
of sales of the company's principal product, not merely becoming Year 2000
compliant. In this process, the Company believes that it has become Year 2000
compliant. The Company does not anticipate that the cost of final testing of
its systems to assure Year 2000 compliance will be material.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial conditions.
The Company has one major supplier which is Year 2000 compliant. The
Company at present has no individual customer which could have a material
adverse effect on the Company's operations should such customer not be Year 2000
compliant. In addition, the Company intends to evaluate the Year 2000 readiness
of any future significant customers or suppliers.
PART II
Other Information
-----------------
On November 10, 1998, the Company received a temporary exception from
the listing requirements for its Common Stock on the Nasdaq SmallCap Market,
specifically the Company is deficient with respect to the $1.00 minimum bid
price requirement. The Company presently has until December 22, 1998 to rectify
this deficiency. In the event that the Company is unable to rectify this
deficiency by December 22, 1998, or get a further extension from the Nasdaq
Stock Market, the shares of the Company's Common Stock will be delisted from the
Nasdaq SmallCap Market. The Company is currently contemplating certain actions,
subject to stockholder approval, to come into compliance with the $1.00 minimum
bid requirement, including but not limited to a reverse stock split.
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