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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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 000-23415
PRINCETON VIDEO IMAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3062052
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
15 Princess Road, Lawrenceville, New Jersey, 08648
(Address of Principal Executive Offices)
609-912-9400
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 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___
The aggregate number of shares of the issuer's common stock outstanding on
August 12, 2002 was 18,487,802.
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Royalties and license fees $ 51,278 $ 452,720 $ 200,943 $ 1,180,130
Advertising and production revenue 3,536,470 592,489 4,817,168 882,739
------------ ------------ ------------ ------------
Total revenue 3,587,748 1,045,209 5,018,111 2,062,869
Costs and expenses:
Sales and marketing 2,860,323 969,193 4,649,287 1,802,549
Product development 1,047,103 653,414 2,006,761 1,424,049
Field operations and support 1,200,491 1,245,148 2,674,895 2,534,414
General and administrative 1,866,443 1,400,613 3,723,063 2,791,708
Severance and other charges -- -- 245,500 --
------------ ------------ ------------ ------------
Total costs and expenses 6,974,360 4,268,368 13,299,506 8,552,720
Operating loss (3,386,612) (3,223,159) (8,281,395) (6,489,851)
Other (expense) income, net (9,039) (1,129) (4,988) 317,909
Losses from equity investment (58,792) (52,743) (133,675) (114,243)
------------ ------------ ------------ ------------
Net loss before income taxes and
minority interest (3,454,443) (3,277,031) (8,420,058) (6,286,185)
Income taxes (59,118) -- (105,584) --
Minority interest -- 70,183 -- 147,652
------------ ------------ ------------ ------------
Net loss (3,513,561) (3,206,848) (8,525,642) (6,138,533)
Accretion of preferred stock dividends (1,729) (1,730) (3,459) (3,460)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (3,515,290) $ (3,208,578) $ (8,529,101) $ (6,141,993)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.19) $ (0.27) $ (0.48) $ (0.54)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding 18,472,082 11,832,809 17,909,108 11,438,976
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,104,690 $ 8,360,353
Restricted securities held to maturity 63,476 63,476
Accounts receivable 2,509,806 2,298,897
License rights -- 50,000
Prepaid airtime 1,027,831 2,713,533
Prepaid Cablevision discounts 3,113,071 --
Other current assets 487,639 887,795
------------ ------------
Total current assets 13,306,513 14,374,054
Property and equipment, net 2,254,875 2,856,733
Patents, net 1,234,947 527,682
Identifiable intangibles, net 4,008,626 3,024,167
Goodwill 6,810,989 5,339,244
Investment in/Advances to Revolution Company LLC 444,923 567,795
Severance fund for subsidiary employee rights 109,617 --
Cablevision deferred revenue credit -- 4,350,261
Other assets 206,116 180,392
------------ ------------
Total assets $ 28,376,606 $ 31,220,328
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 6,033,884 $ 5,999,393
Accounts payable to television networks 2,123,563 4,360,372
Advertising and production advances 700,860 --
Secured convertible debt 4,634,676 --
Notes payable 1,004,520 1,090,608
Payable to Presencia 584,147 637,465
Unearned revenue 186,936 179,436
------------ ------------
Total current liabilities 15,268,586 12,267,274
Refundable Cablevision advance payment 3,627,790 --
Unearned revenue 205,074 184,833
Cablevision advance payments -- 7,500,000
Other liabilities 169,702 42,511
------------ ------------
Total liabilities 19,271,153 19,994,618
------------ ------------
Commitments and contingencies
Redeemable preferred stock:
Cumulative, Series A, conditionally redeemable, $4.50 par value, authorized,
issued and outstanding 11,363 shares at December 31, 2001 and June 30, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 80,285 78,751
Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized, issued
and outstanding 12,834 shares at December 31, 2001 and June 30, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 96,888 94,963
------------ ------------
Total redeemable preferred stock 177,173 173,714
Stockholders' Equity:
Common stock, $.001 par value, authorized 60,000,000 shares; 17,130,865
and 18,487,802 shares issued and outstanding, net of 279,366 and 214,040 treasury
shares at par at December 31, 2001 and June 30, 2002, respectively 18,488 17,131
Additional paid-in capital 86,741,114 80,488,924
Deferred compensation -- (81,926)
Other comprehensive loss 89,995 23,542
Accumulated deficit (77,921,317) (69,395,675)
------------ ------------
Total stockholders' equity 8,928,280 11,051,996
------------ ------------
Total liabilities, redeemable preferred stock,
and stockholders' equity $ 28,376,606 $ 31,220,328
============ ============
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
June 30,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(8,525,642) $(6,138,533)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of unearned revenue (62,856) (169,198)
Depreciation expense 858,727 871,614
Amortization of intangibles/license rights 561,761 361,708
Amortization of deferred compensation 81,926 --
Non-cash charges associated with stock and option grants 134,960 508,449
Non-cash interest from related party notes -- (379,427)
Losses from equity investments 133,675 114,243
Gain on sale of fixed assets (2,680) --
Non-cash transfer of inventory to Cablevision 73,290 --
Provision for doubtful accounts 69,346 --
Minority interest -- (147,652)
Changes in assets and liabilities (net of effects of acquisitions):
Trade accounts receivable (359,499) (140,503)
Prepaid airtime 1,558,622 --
Other current assets 387,570 370,007
Cablevision deferred revenue credit and deferred
royalty payment, net -- 1,362,822
Other assets (25,724) 94,430
Accounts payable and accrued expenses (222,177) (724,242)
Accounts payable to television networks (2,004,666) --
Advertising and production advances 742,351 --
Unearned revenue 89,497 284,102
Payable to Presencia (51,576) --
Other liabilities (22,426) (15,742)
----------- -----------
Net cash used in operating activities (6,585,521) (3,747,922)
----------- -----------
Cash flows from investing activities:
Investment in/Advances to Revolution Company LLC (10,803) --
Acquisition costs (303,988) (608,606)
Purchases of property and equipment (176,957) (479,860)
Proceeds from the sale of fixed assets 10,952 --
Purchases of license rights -- (400,000)
Increase in patents (31,632) (17,288)
----------- -----------
Net cash used in investing activities (512,428) (1,505,754)
----------- -----------
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
June 30,
--------------------------
2002 2001
----------- -----------
Cash flows from financing activities:
Proceeds from sales of common stock, net -- 5,480,560
Proceeds from option exercises 5,705 --
Proceeds from issuance of convertible debt, net 4,925,000 --
Cash received from related party notes receivable -- 36,012
----------- -----------
Net cash provided by financing activities 4,930,705 5,516,572
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,167,244) 262,896
Foreign exchange impact on cash (88,419) (9,605)
Cash and cash equivalents at beginning of period 8,360,353 2,418,937
----------- -----------
Cash and cash equivalents at end of period $ 6,104,690 $ 2,672,228
=========== ===========
Supplemental cash flow information:
Additional fair value of warrant and debt given to Cablevision
(see Note 4) $ 2,415,283 $ --
Non-cash exchange of iPoint license and equipment for reduction
of advance payments net of deferred revenue credit $ (497,788) $ --
Fair value of warrants/stock issued for acquisition of SciDel $ 3,335,733 $ --
Other non-cash acquisition costs for SciDel $ 118,112 $ --
Stock issued for royalty payment $ -- $ 196,861
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Princeton Video Image, Inc. ("PVI", "we", "us") developed and is marketing a
proprietary hardware and software system (the "L-VIS(R) System") that, through
patented computer vision technology, places computer-generated electronic images
into live and pre-recorded television broadcasts of sports and entertainment
programming. These electronic images range from simple corporate names or logos
to sophisticated multi-media 3-D animated productions. As part of our product
development program, we are developing a series of products to allow viewers to
interact with live or recorded video programming delivered to the home via the
Internet or through interactive television. These applications will enable the
viewer to influence the on-screen presentation of a broadcast which utilizes the
L-VIS System by using a mouse or other pointer, for example, to indicate areas
of interest. We are also developing other applications of technology for the
sports and entertainment fields.
We intend to focus our efforts on increasing market acceptance of the L-VIS
System by continuing to develop software applications, such as animated
insertions in event video streams. Such insertions include the virtual
first-down line in football, the virtual off sides line in soccer, and virtual
product placement in pre-recorded programming. Other software applications being
developed include Internet applications which will allow television viewers to
interact with live or recorded video programming. Under the terms of a joint
collaboration and license agreement we have entered into with Cablevision
Systems Corporation ("Cablevision"), we will work together to develop technology
to create virtual, in-content, interactive and targeted advertising and
enhancement products for use with television distribution.
We market our systems on a worldwide basis through licensing and royalty
agreements, through our majority-owned subsidiary, Princeton Video Image Europe,
N.V. ("PVI Europe"), which is headquartered in Belgium and through our
wholly-owned subsidiaries, Publicidad Virtual, S.A. de C.V. ("Publicidad")
headquartered in Mexico City, Mexico and, as of March 26, 2002, Princeton Video
Image Israel, Ltd. ("PVI Israel") headquartered in Ra'ananna, Israel.
The consolidated financial statements presented herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X and are unaudited. Reference should be made to our audited financial
statements for the six month transition period ended December 31, 2001 including
the footnotes thereto, included in our Annual Report on Form 10-K/A for the same
period. In the opinion of our management, the financial statements reflect all
adjustments (which consist of normal recurring accruals) necessary for a fair
statement of the results of the interim periods presented.
We are subject to a number of risks common to companies in similar states of
operations including, but not limited to, the lack of assurance of the
marketability of our product, intense competition, including entry of new
competitors and products into the market, the risk of technological
obsolescence, the successful integration of acquired businesses and the need to
raise additional funds to support our business operations. Our consolidated
financial statements have been prepared on the basis of accounting principles
applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have incurred net losses of approximately $8.5
million and $7.0 million for the six months ended June 30, 2002 and December 31,
2001, respectively. Our actual working capital requirements will depend on
numerous factors, including the progress of our product development programs,
our ability to maintain our customer base and attract new customers to use the
L-VIS System, the level of resources we will be able to allocate to the
development of greater marketing and sales capabilities, technological advances,
our ability to protect our patent portfolio and the status of our competitors.
We expect to incur costs and expenses in excess of expected revenues during the
ensuing fiscal year as we continue to execute our business strategy of becoming
a global, media services company by adding to our sales and marketing management
force both domestically and internationally, and to strengthen existing
relationships with rights holders, broadcasters and advertisers.
The factors noted in the above paragraph raise substantial doubt concerning our
ability to continue as a going concern. As was previously disclosed in our
Annual Report on Form 10-K for the transition period ended December 31, 2001, as
amended, the consolidated financial statements do not include any adjustments
relating to the recoverability and classification of assets or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern. Our ability to continue as a going concern is dependent upon
the support of our stockholders, creditors, and our ability to close debt or
equity transactions. In the event we are unable to liquidate or satisfy our
liabilities, planned operations may be scaled back or terminated. Additional
funding may not be available when needed or on terms acceptable to us, which
could have a material adverse effect on our business, financial condition and
results of operations. If adequate funds are not available we may continue to
delay or eliminate some expenditures, discontinue or further restructure
operations in selected U.S. or international markets or significantly downsize
our sales, marketing, research and development and administrative functions.
These activities could impact our ability to continue or expand our business or
meet our operating needs. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. The
Company has recently taken steps to reduce expenses, restructure operations and
improve profitability (See Note 18, Subsequent Events). On June 25, 2002, PVI
raised $5 million through the issuance of a secured convertible note and
amendment of existing warrants previously issued to PVI Holding, LLC, a
subsidiary of Cablevision (See Note 4, Cablevision). Our management is in the
process of seeking additional financing with both institutional and strategic
investors. There is no assurance, however, that any such transactions will be
completed, or if they are completed, that they will provide sufficient resources
to support us until we generate sufficient cash flow to fund our operations. If
we are unable to raise $10 million in the form of equity financing and/or
certain other non-refundable cash funding by March 31, 2003, Cablevision has the
option to purchase from PVI a sole, exclusive, perpetual, fully paid up, royalty
free US license for all of PVI's technology at the appraised fair market value.
2. PER SHARE DATA
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", requires the presentation of basic and diluted per share amounts. Basic
per share amounts are computed by dividing net loss applicable to common stock
by the weighted average number of common shares outstanding during the period.
Diluted per share amounts are computed by dividing net loss applicable to common
stock by the weighted average number of common shares outstanding plus the
dilutive effect of common share equivalents.
Since we incurred net losses for all periods presented, both basic and diluted
per share calculations are the same. Accordingly, options and warrants to
purchase 19,878,208 and 4,199,479 shares of common stock that were outstanding
at June 30, 2002 and 2001, respectively, were not included in diluted per share
calculations, as their effect would be antidilutive. In addition, the accretion
of preferred dividends which could be paid out in common stock was not material
for the periods presented.
3. NEW PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The standard provides
accounting and reporting requirements for the impairment of all long-lived
assets (including discontinued operations) and it also extends the reporting
requirements for discontinued operations of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," to all components of an entity. The primary purpose of SFAS No.
144 is to establish guidelines to create a consistent accounting model for the
impairment of long-lived assets to be disposed of and to clarify some
implementation issues of SFAS No. 121. We adopted SFAS No. 144 effective January
1, 2002 and it has not had a material impact on our results of operations,
financial position or cash flows.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". This statement addresses the recognition, measurement and reporting
of costs that are associated with exit and disposal activities. This statement
includes the restructuring activities that are currently accounted for pursuant
to the guidance set forth in EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to exit an Activity (including
Certain Costs Incurred in a Restructuring)", costs related to terminating a
contract that is not a capital lease and one-time benefit arrangements received
by employees who are involuntarily terminated. This statement is effective for
exit or disposal activities initiated after December 31, 2002 with earlier
application encouraged. Previously issued financial statements will not be
restated. The provisions of EITF 94-3 shall continue to apply for exit plans
initiated prior to the adoption of SFAS No. 146. Accordingly, the initial
adoption of SFAS No. 146 will not have an effect on our results of operations,
financial position or cash flows.
4. CABLEVISION
On June 25, 2002, PVI entered into a Note Purchase and Security Agreement (the
"Note Purchase Agreement") with PVI Holding, LLC, a subsidiary of Cablevision
Systems Corporation. Pursuant to the Note Purchase Agreement, on June 25, 2002,
in consideration of $5,000,000 in cash PVI issued to PVI Holding a $5,000,000
secured convertible note which bears interest at 10% per annum and matures on
March 31, 2003. The note is secured by all of PVI's assets. The holder may
convert the note into PVI's common stock at any time prior to maturity at a
price of $2.50 per share. If, prior to the maturity date, PVI sells shares of
its common stock resulting in aggregate cash proceeds of at least ten million
dollars ($10,000,000), PVI may convert the note into shares of its common stock
at a price of $2.50 per share or, if such common stock is sold for an aggregate
weighted average price of less than $1.00 per share, at such weighted average
price. Pursuant to the Note Purchase Agreement, PVI also amended the warrants
which the Company issued to PVI Holding on September 20, 2001. The amendment
entitles PVI Holding to purchase 12,794,207 shares of PVI's common stock for a
purchase price of $7.00 per share at any time prior to June 25, 2006, and
contain anti-dilution provisions which require an adjustment to the number of
shares underlying the warrants and/or the exercise price upon the occurrence of
certain events.
Concurrent with the issuance of the Note, PVI granted Cablevision certain other
rights, including the following:
a) The conversion of a license for iPoint granted pursuant to the Joint
Collaboration and License Agreement to a fully paid up, non-exclusive,
perpetual, royalty free license, and sale of two L-VIS units to Cablevision, in
consideration for an aggregate $3.8 million reduction in the balance of the $7.5
million Cablevision advance payment.
b) The L-VIS License Agreement was amended to reduce charges for certain
services, and to provide, among other amendments, that PVI would be obligated to
refund any unused portion of the Cablevision advance payment if Cablevision
doesn't purchase products and services or generate royalty payments in the
following amounts by the following dates:
o The unused portion of $1 million must be refunded if unused by June 30,2004
o The unused portion of $2.5 million must be refunded if unused by June 30,
2005
o The entire unused balance must be refunded if unused by January 1, 2006
c) PVI also granted Cablevision the option to purchase from PVI a sole,
exclusive, perpetual, fully paid up, royalty free US license for all of PVI's
technology at the appraised fair market value if PVI is unable to raise $10
million in the form of equity financing and/or certain other non-refundable cash
funding by March 31, 2003.
Concurrent with the issuance of the Note, Publicidad and Presencia en Medios,
S.A. de C.V. ("Presencia"), an equity holder in PVI, also amended an existing
consulting services agreement (see Note 16, Related Party Transactions),
pursuant to which Presencia provides consulting services to Publicidad and
receives compensation in the form of a contingent service fee and a commission
override fee. Such fees are based upon a percentage of Publicidad's operating
margins, as defined in the agreement. The amendment simplifies the formula for
calculation of the payments to Presencia, and gives Publicidad the option, under
certain circumstances described in the amendment, of paying the contingent
service fee in PVI common stock.
We have recorded the issuance of convertible debt and the warrant modifications
at their estimated fair values of $4.6 million (net of issuance costs of $200
thousand) and $2.8 million, respectively. The fair value of the warrant
modifications, which was credited to additional paid-in capital, was determined
based on the difference in the Black-Scholes value of the warrants immediately
before and after the modifications. In accordance with Emerging Issues Task
Force Issue 01-09 "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" the excess of the values
assigned to the convertible debt and warrant modifications ($2.4 million) over
the net proceeds received from Cablevision ($5.0 million) has been recorded as
a prepaid discount to Cablevision.
As part of the June 25, 2002 modifications to our License Agreement with
Cablevision, we transferred to Cablevision a fully paid, royalty free, perpetual
license of our iPoint technology and inventory with an agreed upon combined
value of $3.8 million, and reduced the Cablevision advance payments balance from
$7.5 million to $3.6 million. We also agreed to repay the remaining balance of
the advance payments in the event that Cablevision does not meet the purchase
levels described above. A net charge of $498 thousand resulting from the
elimination of the deferred revenue credit of $4.3 million and reduction in the
advance payments balance of $3.8 million has been recorded as a prepaid discount
to Cablevision.
The prepaid discount to Cablevision will be recognized as a dollar-for-dollar
reduction in future revenues from Cablevision; however, to the extent that
straight-line amortization over the nine-month period to maturity of the
convertible debt exceeds the amount recognized as a revenue reduction in any
quarter, such excess will be recorded currently as interest expense.
5. SCIDEL ACQUISITION
On February 27, 2002, we entered into an asset purchase agreement with SciDel
Technologies, Ltd., an Israeli corporation, and its subsidiary, SciDel USA Ltd
(collectively, "SciDel"). On March 26, 2002, we completed the transaction,
whereby Adco Imaging Ltd. ("Adco"), a newly created Israeli wholly owned
subsidiary of PVI, obtained certain assets and liabilities of SciDel. In April
2002, Adco changed its name to Princeton Video Image Israel, Ltd. ("PVI
Israel"). SciDel, which had been engaged in the development and marketing of a
system that enables television broadcasters and the Internet to integrate
advertisements into live and pre-recorded televised sports events, sold certain
of its assets to us and we intend to continue to use the assets for this same
purpose. PVI's primary reasons for acquiring these assets included the value of
SciDel's patent portfolio, its sales relationships, including existing contracts
in Europe, and the know-how of the R&D personnel we retained. The acquisition,
which was a stock-for-assets transaction, was recorded using the purchase method
of accounting. The total purchase price of SciDel was $3.8 million and consisted
of the following:
Shares of PVI stock 1,288,000
PVI average stock price three days before
and after the acquisition was agreed to $ 1.99
Value of PVI stock issued for the acquisition $ 2,560,176
Fair value of warrants issued as
part of the acquisition (670,500) 775,557
Acquisition costs 422,100
-------------
Total purchase price $ 3,757,833
=============
The warrants are exercisable at $9.00 per share and have an expiration date five
years from the date of acquisition. The fair value of the warrants was
determined using a Black-Scholes calculation based on the following assumptions
in addition to the exercise price and exercise period:
Stock price at time of grant: $1.85
Risk-Free Interest rate: 4.285%
Volatility 113%
An allocation of the purchase price over the historical book values of the
acquired assets and assumed liabilities of SciDel has been made as follows:
Net book value of purchased SciDel assets & liabilities $ 146,088
Fair value adjustments:
Patents - 10 year life 760,000
Software Technology - 10 year life 1,130,000
Customer Relationships - 4 year life 250,000
Goodwill - indefinite life 1,471,745
----------
Total fair value adjustments 3,611,745
----------
$3,757,833
==========
The purchase of SciDel has been recorded with an effective date of March 26,
2002, and thus is included in operations from then forward.
For the six months ended June 30, 2002, amortization expense of the intangible
assets identified as part of the SciDel acquisition was $62,875.
The following is a proforma summary of the results of operations as if the
acquisitions of SciDel and Publicidad had been completed on January 1, 2001:
For the three months ended
-------------------------------
June 30, 2002 June 30, 2001
-------------------------------
Revenues $ 3,587,748 $ 2,880,544
Net Loss $ (3,513,561) $ (6,394,079)
Net Loss Applicable to Common Stock $ (3,515,290) $ (6,395,809)
Basic and diluted net loss per share
applicable to common stock $ (0.19) $ (0.40)
Weighted average number of shares
of common stock outstanding 18,472,082 15,799,162
For the six months ended
-------------------------------
June 30, 2002 June 30, 2001
-------------------------------
Revenues $ 5,116,111 $ 5,321,342
Net Loss $ (9,080,402) $ (11,526,189)
Net Loss Applicable to Common Stock $ (9,083,861) $ (11,529,649)
Basic and diluted net loss per share
applicable to common stock $ (0.49) $ (0.75)
Weighted average number of shares
of common stock outstanding 18,445,775 15,405,329
6. SEVERANCE AND OTHER CHARGES
In February 2002 we recorded $245,500 of additional severance expense as a
result of the continued streamlining of our operations in both the United States
and Belgium. During the six months ended June 30, 2002, a total of five and nine
positions were eliminated in our European and domestic offices, respectively,
representing approximately 63% and 13% of the total workforce in the respective
regions. The following table displays the activity and balances of the
restructuring reserve account from January 1, 2002 to June 30, 2002:
Type of Cost
----------------------------------------
Employee Facility
Separations Closings Total
----------------------------------------
Balance at January 1, 2002 $ 980,983 $ 78,979 $1,059,962
Additions 245,500 -- 245,500
Type of Cost
----------------------------------------
Employee Facility
Separations Closings Total
----------------------------------------
Deductions (343,692) (48,938) (392,630)
----------------------------------------
Balance at June 30, 2002 $ 882,791 $ 30,041 $ 912,832
========================================
Of the total balance remaining in the restructuring reserve, approximately
$266,000 will be paid out during the remainder of our fiscal year ending
December 31, 2002, with $335,000 and $312,000 being paid out in the fiscal years
ending December 31, 2003 and 2004, respectively.
7. EMPLOYEE RIGHTS UPON TERMINATION
Israeli law requires the payment of severance pay upon dismissal of an employee
or upon termination of employment in certain other circumstances. The
calculation of severance pay liability is recorded at each balance sheet date on
an undiscounted basis. The balances of approximately $146,000 at June 30, 2002
and $0 at December 31, 2001 were included in other liabilities. A corresponding
asset, consisting of restricted cash, had a balance of approximately $110,000 at
June 30, 2002 and $0 at December 31, 2001.
8. ADVERTISING AND PRODUCTION ADVANCES
Advertising and production advances arise from prepayments by and contractual
advance billings to advertisers for the use of future virtual airtime. These
advances are reduced as airtime is used for virtual insertions.
9. NOTES PAYABLE
On June 13, 2002, Publicidad signed a promissory note to restructure its
original debt with a Mexican bank whereby Publicidad will pay 1,000,000 Mexican
pesos (approximately $100,000) per month for ten months, starting October 7,
2002. The note is guaranteed by Presencia. Monthly interest is payable at the
end of each period at a variable rate based on the interbank rate in Mexico plus
three points (12.96% at June 30, 2002). Proceeds from the loan are being used to
fund the installment payments due to Televisa and TV Azteca. The balance of the
note payable at June 30, 2002 and December 31, 2001 was $1,004,520 and
$1,090,608, respectively.
10. PAYABLE TO PRESENCIA
As a result of the merger with Publicidad, Publicidad entered into a consulting
services agreement with Presencia through December 31, 2004. Pursuant to the
agreement, Presencia will render consulting services to Publicidad and receive
compensation in the form of a contingent service fee and a commission override
fee. The consulting services include guidance, advice and assistance in the
development of Publicidad's existing and prospective customers and the
development and maintenance of relationships with third parties to accomplish
Publicidad's business objectives. The balance payable to Presencia for
consulting services received was $584,147 and $637,465, on June 30, 2002 and
December 31, 2001, respectively. Publicidad paid Presencia $1,020,000 in
calendar 2001 pursuant to this agreement. No payments have been made to
Presencia pursuant to this agreement in the six months ending June 30,2002.
11. GUARANTEE OF PERFORMANCE BOND
In May 2002, PVI executed a guaranty of a performance bond purchased by
Publicidad. The performance bond guarantees advertisers who prepay Publicidad
that, if the advertiser fails to receive virtual advertising services in the
full amount of the advertiser's prepayment, the unused balance will be refunded.
As of June 30, 2002, the unused balance protected by the performance bond was
$536,213, which is included as a portion of the advertising and production
advances on the balance sheet.
12. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", requires disclosure of total
comprehensive income. Comprehensive losses for the three and six months ended
June 30, 2002 and 2001 was as follows:
--------------------------
For the three months ended
June 30, June 30,
2002 2001
--------------------------
Net loss $(3,513,561) $(3,206,848)
Foreign currency translation adjustments 65,541 109,533
Unrealized gain (loss) on investments (74,294)
--------------------------
Comprehensive loss $(3,448,040) $(3,171,609)
==========================
--------------------------
For the six months ended
June 30, June 30,
2002 2001
--------------------------
Net loss $(8,525,642) $(6,138,533)
Foreign currency translation adjustments 66,453 191,649
Unrealized gain (loss) on investments (202,234)
--------------------------
Comprehensive loss $(8,459,189) $(6,149,118)
==========================
13. STOCKHOLDERS' EQUITY
The company uses a Black-Scholes calculation to determine the fair value of
options and warrant agreements issued by the Company. The Black-Scholes value is
calculated using the following variables and assumptions:
o The exercise price of the warrant or option is the price per share set
forth in the agreement;
o The exercise period is the term of the option or warrant set forth in
the agreement
o The stock price is the closing price of PVI stock on the last trading
day prior to the date of the grant;
o The risk-free rate is the US Treasury interest rate for the exercise
period; and
o The volatility is the percent volatility of PVI stock as used by the
company at the time of the grant.
In connection with the asset purchase agreement entered into with SciDel
Technologies, Ltd. as described in Note 5, on March 26, 2002 we issued to SciDel
Technologies, Ltd. an aggregate of 1,288,000 shares of our common stock and a
five year warrant to purchase 670,500 shares of our common stock in exchange for
certain assets. The warrant issued to SciDel is exercisable over a five year
period at a price of $9.00 per share.
In connection with the Stock and Warrant Purchase Agreement we entered into with
Cablevision in 2001, a warrant to purchase 11,471,908 shares of our common stock
was issued to PVI Holding. This warrant was exercisable for three years from the
date of issuance at an exercise price of $8.00, $9.00 and $10.00 per share
during the first, second and third years of the term, respectively. Pursuant to
the terms of the warrant, the number of shares purchasable upon exercise of the
warrant is automatically adjusted upon any issuance by us of common stock so
that the warrant represents the right to purchase the same percentage of
outstanding shares before the issuance as after. Accordingly, a warrant
adjustment to purchase an additional 427,513 shares of our common stock was made
on November 8, 2001, the date of the sale to Presencia of 615,385 shares of
common stock, and another warrant adjustment to purchase an
additional 894,785 shares of our common stock was made on March 26, 2002, the
date of the issuance of 1,288,000 shares of our common stock to SciDel
Technologies, Ltd. As described in Note 4, on June 25, 2002, PVI entered into a
Note Purchase Agreement with PVI Holding, pursuant to which PVI amended these
warrants so that they entitle PVI Holding to purchase 12,794,207 shares of PVI's
common stock for a purchase price of $7.00 per share at any time prior to June
25, 2006. The effect of this warrant amendment is described in Note 4.
On February 2, 2001, our Board of Directors voted to offer all current employees
who held outstanding stock options with an exercise price greater than five
dollars ($5.00) the opportunity to reprice such options to $4.375. A total of
1,406,998 options held by employees and members of the Board of Directors were
repriced. In accordance with Financial Accounting Standards Board Interpretation
("FIN") No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, An Interpretation of APB Opinion No. 25", the repriced options are
subject to variable accounting and thereby have been adjusted to fair value at
June 30, 2002 and 2001. A compensation charge of $309,087 and $0 for the stock
repricing was recorded during the six months ended June 30, 2001 and 2002,
respectively. As of June 30, 2001, the charge was required as the closing price
of our common stock on that date was greater than the exercise price of $4.375.
There was no charge to earnings during the six months ended June 30, 2002
because the closing price of our common stock was less than the exercise price
of $4.375.
In December 2001, the Compensation Committee of the Board of Directors
authorized the issuance of a ten-year option to purchase up to 30,000 shares of
common stock to Emilio Romano, a member of our Board of Directors, for services
provided under a consulting agreement which expired on May 15, 2002. Under the
terms of the agreement, Mr. Romano earned an option to purchase 5,000 shares of
common stock for each full month of service. Each option grant was issued on the
tenth day of the month following the month of service, was fully exercisable on
the date of grant, and at an exercise price equal to the fair market value of
our common stock on the date of grant. In accordance with this agreement, Mr.
Romano received an option to purchase 5,000 shares of common stock on each of
January 10, February 10, March 10, April 10, May 10 and June 10, 2002 at an
exercise price of $2.22, $1.51, $1,77, 1.53, 1.13 and 1.05, respectively. Using
the Black Scholes valuation method, a charge of $29,385 was recorded for the six
months ended June 30, 2002.
In January 2002, the Compensation Committee of the Board of Directors authorized
the issuance of an option to purchase up to 120,000 shares of common stock to a
third party consultant. Under the terms of an agreement with the consultant, the
options will vest at the rate of 5,000 shares per full month of service, a per
share exercise price of $2.44 and a term of eight years. Using the Black Scholes
valuation method, a charge of $60,335 was recorded for the six months ended June
30, 2002.
In January 2002, the Compensation Committee of the Board of Directors authorized
the extension of the exercise period for an option grant previously issued to a
former employee of PVI. This option grant, issued for consulting services, was
valued using the Black Scholes valuation method and a charge of $10,698 was
recorded for the six months ended June 30, 2002. The options expired
unexercised in April 2002.
In January 2002, our management authorized the issuance of an option to purchase
up to 30,000 shares of common stock to a third party consultant at the rate of
5,000 shares per full month of service. Under the terms of an agreement with the
consultant, the options will vest at the rate of 5,000 shares per full month of
service and have a term of three years. Using the Black Scholes valuation
method, a charge of $20,513 was recorded for the six months ended June 30, 2002.
In January 2002, the Compensation Committee of the Board of Directors approved
the creation of a discretionary option pool of 100,000 options, pursuant to the
1993 Amended Stock Option Plan, to be awarded during calendar year 2002, on a
discretionary basis, to individuals who are
employees or consultants of PVI at the time of grant, in recognition of
extraordinary performance or in connection with the execution of an initial or
amended employment or consulting agreement. As of June 30, 2002, options to
purchase a total of 60,500 shares of common stock had been granted from this
pool. No compensation expense was recorded in connection with these transactions
as the exercise price of the options was equal to the fair market value of our
common stock on the date of each grant.
In March 2002, the Board of Directors authorized to grant to each of our
co-Chief Executive officers ("co-CEO"), an option to purchase 10,000 shares of
common stock, up to a maximum of 60,000 options each, for each calendar month of
service as co-CEO (subject to pro-ration for any shorter period). Each option
will be fully vested on the date of grant, have a term of ten years and an
exercise price equal to the fair market value of the common stock on the date of
grant. As of June 30, 2002, each co-CEO had received options to purchase 60,000
shares of common stock. No compensation expense was recorded in connection with
these transactions as the exercise price of the options was equal to the fair
market value of our common stock on the date of each grant.
14. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
We operate on a worldwide basis in only one industry segment, real-time video
imaging. This segment is broken out into geographical regions including the
United States, Latin America, Europe and Israel.
Geographic information is as follows:
United Latin
States America PVI PVI Consolidated
PVI Publicidad Europe Israel Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
Revenue from external customers $ 431,688 $ 3,097,262 $ 20,610 $ 38,188 $ -- $ 3,587,748
Inter-company revenues 526,939 -- -- -- (526,939) --
Operating (loss) (2,454,395) (277,395) (395,396) (322,325) 62,899 (3,386,612)
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2001
Revenue from external customers $ 1,022,567 $ -- $ 22,642 $ -- $ -- $ 1,045,209
Inter-company revenues 6,792 -- -- -- (6.792) --
Operating (loss) (2,672,513) -- (550,646) -- -- (3,223,159)
- ---------------------------------------------------------------------------------------------------------------------------
United Latin
States America PVI PVI Consolidated
PVI Publicidad Europe Israel Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
Revenue from external customers $ 778,068 $ 4,125,993 $ 67,762 $ 46,288 $ -- $ 5,018,111
Inter-company revenues 907,183 -- -- -- (907,183) --
Operating (loss) (5,714,660) (1,388,767) (981,692) (324,797) 128,521 (8,281,395)
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
Revenue from external customers $ 1,992,396 $ -- $ 70,473 $ -- $ -- $ 2,062,869
Inter-company revenues 22,526 -- -- -- (22,526) --
Operating (loss) (5,409,705) -- (1,080,146) -- -- (6,489,851)
- ---------------------------------------------------------------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
Under Israeli law, PVI Israel is committed to pay royalties to the government of
Israel at the rate of 4-6% on the proceeds from the sale of products whose
research and development has been
supported by the government in the form of grants. The royalty commitment is
limited in the aggregate to the amount of the grants, we have received, plus
interest.
16. RELATED PARTY TRANSACTIONS
A member of our Board of Directors, Eduardo Sitt, is also a principal
shareholder and the President of the Board of Directors of Presencia, which has
made several equity investments in PVI and is our former joint venture partner.
In addition, we have entered into a Reorganization Agreement with Presencia and
others pursuant to which we acquired Publicidad, our wholly owned subsidiary.
Mr. Eduardo Sitt is the President of Publicidad, our Mexican subsidiary. In
September 2001, Publicidad entered into a consulting services agreement with
Presencia, the term of which will extend through December 31, 2004. Pursuant to
the consultant services agreement, Presencia will provide consulting services to
Publicidad and is to receive compensation in the form of a contingent service
fee and a commission override fee. Such fees are based upon a percentage of
Publicidad's operating margins, as defined in the agreement. The consultant
service agreement will renew automatically for one-year periods after the
expiration of the initial term; however, the only fee payable after the
expiration of the initial term is the commission override fee. Presencia
received a payment of $1,020,000 from Publicidad in calendar 2001 pursuant to
this agreement. No payments have been made to Presencia pursuant to this
agreement in the six months ending June 30,2002.
On November 8, 2001, David Sitt and Roberto Sonabend were appointed interim
Co-Chief Executive Officers of PVI for an initial period of six months. On July
17, 2002, David Sitt and Roberto Sonabend were authorized to continue to serve
as interim co-CEO's of PVI for an additional twelve months, to and including May
8, 2003. Also effective November 2001, David Sitt and Roberto Sonabend were
hired to serve as Corporate Vice Presidents of Publicidad. David Sitt and
Roberto Sonabend are also stockholders of Presencia.
On September 20, 2001, Emilio Romano was appointed to the Board of Directors as
a designee of Presencia. On November 15, 2001, we entered into a consulting
agreement whereby Mr. Romano would provide consulting services with respect to
our strategic planning and potential business development opportunities. In
exchange for these services, Mr. Romano is paid a fee of $10,000 and a ten-year
option to purchase 5,000 shares of common stock for each month of service
provided. Each option grant is fully vested upon issuance and is priced at the
closing market price on the date of grant. The value of the options issued to
Mr. Romano was calculated using the Black Scholes method and a compensation
charge of $29,385 was recorded for the six months ended June 30, 2002. On
February 15, 2002 this consulting agreement was extended for an additional three
months, to and including May 15, 2002.
Publicidad's personnel are provided by Consultares Asociados Dasi, S.C.
("DASI"), a Mexican service company, of which David Sitt, one of our interim
co-CEO's, is a principal stockholder. Publicidad reimburses DASI the amount that
DASI pays in salaries, taxes, and other costs associated with the employment of
the individuals providing services to Publicidad.
17. LEGAL PROCEEDINGS
On January 29, 2002, the parties entered into a Settlement Agreement regarding
the action entitled Sportvision, Inc., et al v. Princeton Video Image, Inc.
(Civil Action No. 99-CV-20998). Pursuant to the terms of the Settlement
Agreement, the parties entered into a patent cross-license agreement and a
dismissal with prejudice as to all parties was filed on March 9, 2002.
On March 26, 2002, we completed the acquisition of certain assets from SciDel
Technologies, Ltd. In connection with that transaction, the parties filed a
joint dismissal of the action entitled Princeton Video Image, Inc. v. SciDel USA
Ltd. (Civil Action No. 99-386-SLR) on April 9, 2002.
18. SUBSEQUENT EVENTS
In July 2002, PVI took several actions to reduce operating expenses, restructure
operations and improve productivity. The Company decided to discontinue funding
the operating expenses of PVI Europe, PVI's majority-owned subsidiary based in
Brussels, Belgium, which PVI had been funding through loans to the entity since
its formation in August 2000. As a result of this decision PVI Europe is in the
process of terminating its personnel and selling certain of its assets. PVI has
transferred support of its European activities to PVI Israel, Ltd. As a result
of the purchase of SciDel's assets and the acquisition of its European contracts
and support personnel, PVI found it had redundancy in its European operations,
and has been able to reduce the cost of those operations through this
consolidation. Also in July, PVI reduced its US workforce by 14% through a
combination of layoffs and attrition, and has instituted significant salary
reductions for most of senior management. In connection with the salary
reductions, PVI authorized the issuance of options to purchase an aggregate
total of 114,500 shares of PVI's common stock for an exercise price $1.00 per
share to certain managers whose salaries were reduced.
On July 1, 2002, pursuant to the formula award provisions of PVI's Amended 1993
Stock Option Plan, each of the ten members of PVI's Board of Directors received
an option to purchase 10,000 shares of PVI common stock at an exercise price
equal to the fair market value of a share of PVI common stock on the date of
grant ($1.07). The options will vest in twelve equal monthly installments.
On July 17, 2002, David Sitt and Roberto Sonabend were authorized to continue to
serve as co-CEO's of PVI for an additional twelve months, to and including May
8, 2003. For their service as co-CEO's of PVI, Messrs. Sitt and Sonabend were
each authorized to receive: (i) a cash fee of $10,000 and (ii) an option to
purchase 10,000 shares of PVI common stock at fair market value, for each full
month in which each serves as interim co-Chief Executive Officer (subject to
pro-ration for any shorter period).
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our unaudited
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report and in our December 31, 2001
Annual Report on Form 10-K, as amended, which was filed with the Securities and
Exchange Commission.
OVERVIEW
Since our inception in 1990, we have devoted substantially all of our resources
to developing, testing, building and marketing the Live Video Insertion System
("L-VIS(R) System"), an electronic video insertion system based on patented
proprietary technology that was designed to modify broadcasts to television
viewers by inserting electronic video images. We have incurred substantial
operating losses since our inception and as of June 30, 2002 and December 31,
2001 we had an accumulated deficit of approximately $77,921,000 and $69,396,000,
respectively. This deficit is the result of product development expenses
incurred in the development and commercialization of the L-VIS System and
iPoint, an advanced application of PVI's patented technology that supports state
of the art in-program advertising over the Internet or interactive television,
expenses related to field testing of the L-VIS System and its deployment
pursuant to customer contracts, operating expenses relating to our field
operations and sales and marketing
activities, and general administrative costs. We expect to incur additional
losses in the next fiscal year as we strive to evolve into a sports and
entertainment focused global, media services company. We will continue our
business strategy of developing new products and increasing our penetration in
both the domestic and international markets in the field of real-time virtual
image insertion.
We intend to focus our efforts on increasing market acceptance of the L-VIS
System by continuing to develop software applications, such as animated
insertions in event video streams. Such insertions include the virtual
first-down line in football, the virtual off sides line in soccer, and virtual
product placement in pre-recorded programming. Other software applications being
developed include Internet applications which will allow television viewers to
interact with live or recorded video programming. Under a joint collaboration
and license agreement entered into with Cablevision Systems Corporation, we
intend to work together to develop technology to create virtual, in-content,
interactive and targeted advertising and enhancement products for use with
television distribution. In order to increase our revenue generating user base
and to expand into domestic and international markets, we are marketing our
systems on a worldwide basis through licensing and royalty agreements and
through our wholly-owned subsidiaries, Publicidad Virtual, S.A. de C.V.
("Publicidad") and, as of March 26, 2002, Princeton Video Image Israel, Ltd, and
through our majority-owned subsidiary, Princeton Video Image Europe, N.V. ("PVI
Europe"), although in July 2002, we decided to cease funding of our European
operations, and to consolidate their activities with those of PVI Israel (see
Note 18, Subsequent Events).
Our sales and marketing staff is responsible not only for reaching agreements
with teams, leagues and broadcasters, but also for promoting the L-VIS System to
advertisers in order to create market awareness and acceptance and to negotiate
with potential licensees in yet untapped markets worldwide. While purchases of
advertising will typically be done through the rights holder or the broadcaster,
we hope to create advertiser interest and demand by promoting the L-VIS System
directly to potential advertisers as well as third party licensees. Therefore,
we expect to incur substantial additional losses and to experience substantial
negative cash flow from operating activities through the next 12 months or until
such later time as we achieve revenues sufficient to finance our ongoing capital
expenditures and operating expenses. Our ability to produce positive cash flow
will be determined by numerous factors, including our ability to reach
agreements with, and retain, customers for use of the L-VIS System, as well as
various factors outside of our control. Such factors may include contractual
restrictions on the use of video insertion technology, adverse publicity and
news coverage and the inability of third party sales forces to sell L-VIS System
advertising.
We expect to continue generating revenue from ads sold by rights holders that
use the L-VIS System. These revenues are expected to be shared with the rights
holders. Accordingly, in order to grow revenues from the use of the L-VIS
System, we will need to enter into additional agreements with rights holders.
The agreements can take various forms, including revenue sharing agreements
under which we receive a percentage of the fee paid by the advertisers and
contractual arrangements whereby we receive an agreed upon fee for our services.
We recognize revenues when the respective advertisement is inserted into a
television broadcast. Due to the seasonal nature of sporting events, the revenue
generated from the insertion of advertising or program enhancements in sports
programming will fluctuate seasonally. This seasonality is moderated by the
multi-sport capabilities of the L-VIS System and its increasing use in
entertainment and other non-sports related programming.
In addition to the revenue arising from advertising and contractual
arrangements, a second revenue source is the strategic licensing of the L-VIS
System to third parties. These licenses may be territorial in nature or they may
cover individual major broadcast events. In the case of a territorial license,
the licensee is responsible for generating business within the territory and we
share in the business through one or more means including royalties, license
fees, and/or equity participation in the licensee. In the case of individual
events, we receive a flat fee or a fee based on revenues generated by the
licensee, depending on the nature of the license. These license
fees are recognized as revenue when all related commitments have been satisfied
and the fee is considered collectible.
A third revenue source is fees paid for the services provided by the L-VIS
System which support the electronic insertion of visual aids in live sports and
entertainment programming, such as a virtual first-down line in football games,
and the use of logo and name branding during live weekday news programming. We
also offer an advanced post-production product whereby the L-VIS System
technology can place products or logos within existing, pre-recorded television
programs, movie scenes or live television broadcasts. We recognize these
revenues when earned, which is when the enhancement or visual aid is inserted
into a live or pre-recorded television broadcast.
Because our operations relate to the continuing development and marketing of the
L-VIS System, we work to convince advertisers, broadcasters and broadcast rights
holders of the value of the L-VIS System. If we do not generate enough revenues
to cover our operating expenses, we will have to either raise additional money
or substantially reduce the scale of our operations. We may not be able to
obtain additional financing on acceptable terms, or at all. If we cannot raise
money, our business, financial condition and the results of our operations will
be adversely affected.
Our wholly owned subsidiary PVI Israel, Ltd, which acquired the assets of SciDel
Technologies, Ltd. in March 2002, generates revenues from ads sold by rights
holders that use the technology we acquired from Scidel as part of the asset
purchase. The types of agreements that may be entered into to generate revenue
from the Israeli technology, and the business risks associated with the
development and marketing of the technology, are substantially the same as the
agreements and business risks described for L-VIS.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED JUNE 30, 2002 TO THE QUARTER ENDED JUNE 30, 2001
REVENUES. Revenues are earned from both advertisers' use of the L-VIS System and
under the terms of contractual arrangements for visual program enhancements, as
well as by license and royalty fees earned from use of the L-VIS System outside
the United States. Total revenues for the three months ended June 30, 2002
increased 243% to $3,587,748 from $1,045,209 for the three months ended June 30,
2001 primarily due to the acquisition of Publicidad in September 2001. Total
royalties and license fees decreased 89% to $51,278 from $452,720 for the three
months ended June 30, 2002 and 2001, respectively. Total advertising and
production revenue increased 497% to $3,536,470 for the three months ended June
30, 2002 from $592,489 for the three months ended June 30, 2001. Due to the
acquisition of Publicidad, we no longer receive royalties on the revenues earned
by Publicidad, but rather consolidate its revenues as a component of our total
advertising and production revenue, thus accounting for a significant portion of
these fluctuations. Revenue from the sale of two L-VIS Systems to Cablevision in
the quarter is not reflected in total revenue for the period as a result of the
accounting for the $5,000,000 secured convertible note issued to Cablevision
(see Note 4, Cablevision). These increases in revenue were partially offset by
reduced advertising revenue from the Indy Racing League for the 2002 season, and
the non-renewal of our agreement with the San Diego Padres.
SALES AND MARKETING. Sales and marketing expenses include airtime expenses,
salaries and travel expenses of sales and marketing personnel, sales
commissions, public relations, trade shows, promotion, support personnel and
allocated operating costs. Total sales and marketing expenses for the three
months ended June 30, 2002 increased 195% to $2,860,323 from $969,193 for the
three months ended June 30, 2001. This resulted primarily from our consolidation
of Publicidad's sales and marketing expenses of approximately $2,068,000, which
was primarily for television airtime for virtual advertising in both sports and
entertainment programming. Also contributing to the increase was $217,000 of
amortization expense related to the value of the intangible assets, including
customer and
distribution relationships and the Publicidad trade name, acquired in the
acquisition of Publicidad, plus approximately $92,000 in contingent service fees
and commission override fees payable to Presencia pursuant to their consulting
services agreement with Publicidad. These increases were partially offset by a
decrease of approximately $200,000 in fees charged to obtain certain
international broadcast and programming rights, lower trade show activities, and
the decreased use of outside consultants.
PRODUCT DEVELOPMENT. Product development expenses include the costs associated
with all personnel, materials and contract personnel engaged in product
development activities to increase the capabilities of the L-VIS System hardware
platforms, including platforms for overseas use, and to create improved software
programs for individual sports and program enhancement services as well as for
the Internet and interactive television. Total product development costs
increased 60% to $1,047,103 for the three months ended June 30, 2002 from
$653,414 for the three months ended June 30, 2001, primarily due to the
inclusion of approximately $155,000 for PVI Israel research costs, and an
increase of approximately $244,000 in salaries and overhead related to our
ongoing engineering process of the L-VIS System as well as the continuing
development of the iPoint software product.
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of the L-VIS System units for both domestic and international use,
including training costs for operators, maintenance of our mobile production
units, and support of the L-VIS Systems in the field. Total field operations and
support costs for the three months ended June 30, 2002 decreased 4% to
$1,200,491 from $1,245,148 for the three months ended June 30, 2001 primarily
due to fewer ESPN Sunday Night Baseball games, reduced services for the Indy
Racing League, and the non-renewal of the San Diego Padres for the 2002 season.
This decrease is partially offset by the inclusion of approximately $224,000 for
Publicidad's production costs, and a total of $121,000 for PVI Israel's
production costs and the costs associated with the sale of two L-VIS Systems to
Cablevision.
GENERAL AND ADMINISTRATIVE. Total general and administrative expenses increased
33% to $1,866,443 for the three months ended June 30, 2002 from $1,400,613 for
the three months ended June 30, 2001. This resulted primarily from the inclusion
of approximately $494,000 for Publicidad's general and administrative costs, and
$167,000 for PVI Israel. These increases were partially offset by the absence of
approximately $309,000 in non-cash compensation charges recorded in relation to
the repricing of employee stock options.
LOSSES FROM EQUITY INVESTMENT. Losses from equity investment increased 11% to
$58,792 for the three months ended June 30, 2002 from $52,743 for the three
months ended June 30, 2001 as a result of recording our share of the increased
total net losses for our investment in the Revolution Company, LLC, which began
operations in January 2001.
INCOME TAX EXPENSE. Income tax expense of $59,118 for the three months ended
June 30, 2002, was primarily a result of foreign withholding taxes on royalties
from Publicidad
MINORITY INTEREST. Accumulated losses in PVI Europe have reduced the minority
interest to zero as of June 30, 2002.
NET LOSS. As a result of the foregoing factors, our net loss increased 10% to
$3,513,561 for the three months ended June 30, 2002 from $3,206,848 for the
three months ended June 30, 2001.
OPTION REPRICING. On February 2, 2001, the Board of Directors voted to offer all
current employees who held outstanding stock options with an exercise price
greater than $5.00 the opportunity to reprice such options to $4.375. A total of
1,186,998 options held by employees were repriced. In addition, a total of
220,000 options held by directors were repriced. In accordance with Financial
Accounting Standards Board Interpretation (FIN) No. 44, these repriced options
are subject to variable accounting and thereby have been marked to market at
June 30, 2002. A compensation charge of $309,087 and $0 for the stock repricing
was recorded during the three months ended June 30, 2001 and 2002, respectively.
As of June 30, 2001, the
charge was required as the closing price of our common stock on that date was
greater than the exercise price of $4.375. As of June 30, 2002, no charge was
necessary as the closing price of our common stock on that date was less than
the exercise price of $4.375. Future charges relating to this repricing could
have a significant effect on our results of operations in subsequent periods.
SEGMENT REPORTING. We operate on a worldwide basis in only one industry segment,
real-time video imaging which is broken out into geographical business units
based on office locations including the United States, Latin America, Europe and
Israel. Total revenue in the United States decreased from $1.0 million to
approximately $432,000 whereas revenue in Latin America increased from $-0- to
$3.1 million for the three months ended June 30, 2001 and 2002, respectively.
These fluctuations were the result of our acquisition of Publicidad, thus
consolidating their revenues as a component of total revenue rather than
receiving a royalty on Publicidad's revenues.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001
REVENUES. Revenues are earned from both advertisers' use of the L-VIS System and
under the terms of contractual arrangements for visual program enhancements, as
well as by license and royalty fees earned from use of the L-VIS System outside
the United States. Total revenues for the six months ended June 30, 2002
increased 143% to $5,018,111 from $2,062,869 for the six months ended June 30,
2001 primarily due to the acquisition of Publicidad in September 2001. Total
royalties and license fees decreased 83% to $200,943 from $1,180,130 for the six
months ended June 30, 2002 and 2001, respectively. Total advertising and
production revenue increased 446% to $4,817,168 for the six months ended June
30, 2002 from $882,739 for the six months ended June 30, 2001. Due to the
acquisition of Publicidad, we no longer receive royalties on the revenues earned
by Publicidad, but rather consolidate its revenues as a component of our total
advertising and production revenue, thus accounting for a significant portion of
these fluctuations. Revenue from the sale of two L-VIS Systems to Cablevision in
the period is not reflected in total revenue for the period as a result of the
accounting for the $5,000,000 secured convertible note issued to Cablevision
(see Note 4, Cablevision). These increases in revenue were partially offset by
reduced advertising revenue from the world feed of Super Bowl XXXVI and reduced
revenue from the Indy Racing League for the 2002 season, and the non-renewal of
our agreement with the San Diego Padres.
SALES AND MARKETING. Sales and marketing expenses include salaries and travel
expenses of sales and marketing personnel, sales commissions, public relations,
trade shows, promotion, support personnel and allocated operating costs. Total
sales and marketing expenses for the six months ended June 30, 2002 increased
158% to $4,649,287 from $1,802,549 for the six months ended June 30, 2001. This
resulted primarily from our consolidation of Publicidad's sales and marketing
expenses of approximately $3,068,000 which was primarily for television airtime
for virtual advertising in both sports and entertainment programming. Also
contributing to the increase was $434,000 of amortization expense related to the
value of the intangible assets, including customer and distribution
relationships and the Publicidad trade name, acquired in the acquisition of
Publicidad, plus approximately $189,000 in contingent service fees and
commission override fees payable to Presencia pursuant to their consulting
services agreement with Publicidad. These increases were partially offset by a
decrease of approximately $300,000 in fees charged to obtain certain
international broadcast and programming rights, lower trade show activities, and
decreased use of outside consultants.
PRODUCT DEVELOPMENT. Product development expenses include the costs associated
with all personnel, materials and contract personnel engaged in product
development activities to increase the capabilities of the L-VIS System hardware
platforms, including platforms for overseas use, and to create improved software
programs for individual sports and program enhancement services as well as for
the Internet and interactive television. Total product development costs
increased 41% to $2,006,761 for the six months ended June 30, 2002 from
$1,424,049 for the six months ended June 30, 2001 primarily due to the inclusion
of approximately $156,000 for PVI Israel research costs, along with an increase
of approximately $374,000 in salaries and overhead related to our ongoing
engineering process of the L-VIS System as well as the continuing development of
the iPoint software product.
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of the L-VIS System units for both domestic and international use,
including training costs for operators, maintenance of our mobile production
units, and support of the L-VIS Systems in the field. Total field operations and
support costs for the six months ended June 30, 2002 increased 6% to $2,674,895
from $2,534,414 for the six months ended June 30, 2001 primarily due to the
inclusion of approximately $461,000 for Publicidad's production costs, and a
total of $121,000 for PVI Israel's production costs and the costs associated
with the sale of two L-VIS Systems to Cablevision. This increase was partially
offset by fewer ESPN Sunday Night Baseball games, reduced business with the Indy
Racing League, non-renewal of the San Diego Padres for the 2002 season, along
with savings in our domestic production costs associated with the insertion of
the first down line for CBS during the 2001 NFL season. Experience in
streamlining our operations resulted in shorter on-site setup time required and
the ability to provide our services with a reduced number of personnel.
GENERAL AND ADMINISTRATIVE. Total general and administrative expenses increased
33% to $3,723,063 for the six months ended June 30, 2002 from $2,791,708 for the
six months ended June 30, 2001. This resulted primarily from the inclusion of
approximately $884,000 for Publicidad's general and administrative costs, and
$167,000 for PVI Israel. These increases were partially offset by the absence of
approximately $309,000 in non-cash compensation charges recorded in relation to
the repricing of employee stock options.
SEVERANCE AND OTHER CHARGES. Total severance and other charges increased to
$245,500 for the six months ended June 30, 2002 from $ -0- for the six months
ended June 30, 2001 as a result of downsizing our workforce both domestically
and in Europe in our efforts to reduce costs.
OTHER (EXPENSE) INCOME, NET. Total other (expense) income, net was an expense of
$4,988 for the six months ended June 30, 2002 and income of $317,909 for the six
months ended June 30, 2001. The change was primarily a result of lower cash
balances available for investment and the decrease of interest income recorded
on the settlement of the related party notes receivable.
LOSSES FROM EQUITY INVESTMENT. Losses from equity investment increased 17% to
$133,675 for the six months ended June 30, 2002 from $114,243 for the six months
ended June 30, 2001 as a result of recording our share of the increased total
net losses for our investment in the Revolution Company, LLC, which began
operations in January 2001.
INCOME TAX EXPENSE. Income tax expense of $105,584 for the six months ended
June 30, 2002 was primarily a result of foreign withholding taxes on royalties
from Publicidad.
MINORITY INTEREST. Accumulated losses in PVI Europe have reduced the minority
interest to zero as of June 30, 2002.
NET LOSS. As a result of the foregoing factors, our net loss increased 39% to
$8,525,642 for the six months ended June 30, 2002 from $6,138,533 for the six
months ended June 30, 2001.
OPTION REPRICING. On February 2, 2001, the Board of Directors voted to offer all
current employees who held outstanding stock options with an exercise price
greater than $5.00 the opportunity to reprice such options to $4.375. A total of
1,186,998 options held by employees were repriced. In addition, a total of
220,000 options held by directors were repriced. In accordance with Financial
Accounting Standards Board Interpretation (FIN) No. 44, these repriced options
are subject to variable accounting and thereby have been marked to market at
June 30, 2002. A compensation charge of $309,087 and $0 for the stock repricing
was recorded during the six months ended June 30, 2001 and 2002, respectively.
As of June 30, 2001, the charge was required as the closing price of our common
stock on that date was greater than the exercise price of $4.375. As of June 30,
2002, no charge was necessary as the closing price of
our common stock on that date was less than the exercise price of $4.375. Future
charges relating to this repricing could have a significant effect on our
results of operations in subsequent periods.
SEGMENT REPORTING. We operate on a worldwide basis in only one industry segment,
real-time video imaging which is broken out into geographical business units
based on office locations including the United States, Latin America, Europe and
Israel. Total revenue in the United States decreased from $2.0 million to
approximately $778,000 whereas revenue in Latin America increased from
$-0- to $4.1 million for the six months ended June 30, 2001 and 2002,
respectively. These fluctuations were the result of our acquisition of
Publicidad, thus consolidating their revenues as a component of total revenue
rather than receiving a royalty on Publicidad's revenues.
SUBSEQUENT EVENTS
In July 2002, PVI took several actions to reduce operating expenses, restructure
operations and improve productivity. The Company decided to discontinue funding
the operating expenses of PVI Europe, PVI's majority-owned subsidiary based in
Brussels, Belgium, which PVI had been funding through loans to the entity since
its formation in August 2000. As a result of this decision PVI Europe is in the
process of terminating its personnel and liquidating its assets. PVI has
transferred support of its European activities to PVI Israel, Ltd., which was
formed in February 2002 to acquire the assets of Scidel Technologies, Ltd, a
transaction which closed in March. As a result of the purchase of SciDel's
assets and the acquisition of its European contracts and support personnel, PVI
found it had redundancy in its European operations, and has been able to reduce
the cost of those operations through this consolidation. Also in July, PVI
reduced its US workforce by 14% through a combination of layoffs and attrition,
and has instituted significant salary reductions for most of senior management.
In connection with the salary reductions, PVI authorized the issuance of options
to purchase an aggregate total of 114,500 shares of PVI's common stock for an
exercise price $1.00 per share to certain managers whose salaries were reduced.
On July 1, 2002, pursuant to the formula award provisions of PVI's Amended 1993
Stock Option Plan, each of the ten members of PVI's Board of Directors received
an option to purchase 10,000 shares of PVI common stock at an exercise price
equal to the fair market value of a share of PVI common stock on the date of
grant ($1.07). The options will vest in twelve equal monthly installments.
On July 17, 2002, David Sitt and Roberto Sonabend were authorized to continue to
serve as co-Chief Executive Officers of PVI for an additional twelve months, to
and including May 8, 2003. For their service as co-Chief Executive Officers of
PVI, Messrs. Sitt and Sonabend were each authorized to receive: (i) a cash fee
of $10,000 and (ii) an option to purchase 10,000 shares of PVI common stock, for
each calendar month in which each serves as interim co-Chief Executive Officer
(subject to pro-ration for any shorter period).
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses and negative cash flows in each
year since we commenced operations, due primarily to the costs of developing,
testing and building L-VIS Systems and iPoint, and operating expenses relating
to our field operations and sales and marketing activities. Since our inception,
we have primarily financed our operations from (i) the net proceeds from private
placements of common stock, warrants and redeemable preferred stock, (ii) the
payment of a $2,000,000 licensing fee by Presencia in consideration of the
license we granted to Publicidad, (iii) the proceeds of a bridge loan financing
which closed in October 1997, (iv) the proceeds from the initial public offering
of our common stock which closed in December 1997, (v) the investment in debt
and equity of PVI, and the prepayment of license fees
by PVI Holding, a subsidiary of Cablevision Systems Corporation, (vi) revenues
and license fees relating to use of the L-VIS System, (vii) investment income
earned on cash balances and short term investments, and (viii) the sale of a
portion of our state net operating loss and research and development tax
credits.
As of June 30, 2002, we had cash and cash equivalents of $6,104,690, a decrease
of $2,255,663 from the balance at December 31, 2001. Net cash used in operating
activities increased to $6,585,521 for the six months ended June 30, 2002 from
$3,747,922 for the six months ended June 30, 2001 due to several important
factors. The primary cause was an increase in net losses of approximately $2.4
million. A second significant factor was the inflow of cash from PVI Holding,
LLC for prepaid royalties, net of a deferred revenue credit of approximately
$1.4 million during the six months ended June 30, 2001 with no corresponding
transaction in the six months ended June 30, 2002. Also contributing to the
decrease in cash was a reduction in our accounts payable balance of
approximately $1.5 million as payments were made to television rightsholders for
virtual advertising rights. These were partially offset by prepayments of
approximately $1.6 million from customers for airtime, as well as an increase in
advertising and production advances of approximately $742,000.
Net cash used in investing activities decreased to $512,428 for the six months
ended June 30, 2002 from $1,505,754 for the six months ended June 30, 2001 as a
result of the reduction of approximately $400,000 due to the absence of license
payments which occurred in the year ago period, an approximately $300,000
reduction in purchases of property, plant and equipment, and a reduction of
approximately $300,000 in merger costs related to the acquisition of Publicidad
which closed in September 2001, and the acquisition of the assets of Scidel
Technologies, Ltd., which closed in March 2002.
Net cash proceeds from financing activities decreased to $4,930,705 for the six
months ended June 30, 2002 from $5,516,572 for the six months ended June 30,
2001. In February 2001 we recorded net receipts of approximately $5.5 million
from Cablevision for their investment in our common stock and warrants, and in
June 2002 we recorded net receipts of approximately $4.9 million from
Cablevision in consideration for the issuance of a secured convertible note.
FINANCIAL CONDITION
Total assets decreased $2.8 million, or 9%, to $28.4 million at June 30, 2002
from $31.2 million at December 31, 2001. This decrease was primarily due to a
reduction in our cash balances of approximately $2.3 million resulting from our
use of cash in operations, partially offset by receipt of funding from
Cablevision. Also contributing to the decrease was a reduction in prepaid
airtime of approximately $1.7 million due to the timing of payments and the use
of the purchased broadcast rights in Mexico. Also contributing to the decrease
was a net $1.2 million reduction resulting primarily from the accounting for
the issuance of convertible debt to Cablevision (see Note 4, Cablevision).
The decrease consisted of the elimination of a $4.4 million Cablevision
deferred revenue credit and the creation of a $3.1 million prepaid Cablevision
discount. These decreases were partially offset by an increase in identifiable
intangibles and goodwill totaling approximately $2.5 million as a result of
the acquisition of SciDel in March 2002.
Total liabilities decreased $0.7 million, or 4%, to $19.3 million at June 30,
2002 from $20.0 million at December 31, 2001 resulting primarily from a
reduction in the balance of accounts payable to vendors and television networks
of $2.2 million. This decrease was partly offset by an increase of $0.8 million
resulting primarily from the accounting for the issuance of convertible debt to
Cablevision (see Note 4, Cablevision). That increase consisted of the creation
of a $4.6 million liability for secured Cablevision debt and a $3.6 million
refundable Cablevision advance payment, partly offset by the elimination of $7.5
million in Cablevision advance payments. Also partly offsetting the decrease in
total liabilities was a $0.7 million increase in advertising and production
advances.
Total stockholders' equity decreased $2.1 million, or 19%, to $8.9 million at
June 30, 2002 from $11.1 million at December 31, 2001 primarily as a result of
net losses from continuing operations. This decrease was partially offset by the
increase in additional paid-in-capital, primarily as a result of the issuance of
1.3 million shares of our common stock in the SciDel acquisition and the
amendment of Cablevision warrants upon the issuance of convertible debt to
Cablevision (see Note 4, Cablevision).
Our consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of
liabilities in the normal course of business. We have incurred net losses of
approximately $8.5 million for the six months ended June 30, 2002. Our actual
working capital requirements will depend on numerous factors, including the
progress of our product development programs, our ability to maintain our
customer base and attract new customers to use the L-VIS System, the level of
resources we will be able to allocate to the development of greater marketing
and sales capabilities, technological advances, our ability to protect our
patent portfolio and the status of our competitors. We expect to incur costs and
expenses in excess of expected revenues during the ensuing year as we continue
to execute our business strategy of becoming a global, media services company by
adding to our sales and marketing management force both domestically and
internationally, and to strengthen existing relationships with rights holders,
broadcasters and advertisers. In July 2002, PVI took several actions to reduce
operating expenses, restructure operations and improve productivity (see Note
18, Subsequent Events).
The factors noted in the above paragraph raise substantial doubt concerning our
ability to continue as a going concern. As was previously disclosed in our
Annual Report on Form 10-K for the transition period ended December 31, 2001, as
amended, the consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should we be
unable to continue as a going concern. Our ability to continue as a going
concern is dependent upon the support of our shareholders, creditors, and our
ability to close debt or equity transactions. In the event we are unable to
liquidate or satisfy our liabilities, planned operations may be scaled back or
terminated. Additional funding may not be available when needed or on terms
acceptable to us, which could have a material adverse effect on our business,
financial condition and results of operations. If adequate funds are not
available we may delay or eliminate some expenditures, discontinue operations in
selected U.S. or international markets or significantly downsize our sales,
marketing, research and development and administrative functions. These
activities could impact our ability to continue or expand our business or meet
our operating needs. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties. The company has
recently taken steps to reduce expenses, restructure operations and improve
profitability (see Note 18, Subsequent Events). On June 25, 2002, PVI raised $5
million through the issuance of a secured convertible note to PVI Holding, LLC,
a subsidiary of Cablevision Systems Corporation (see Note 4, Cablevision). The
company is in the process of seeking additional financing with both
institutional and strategic investors. There is no assurance, however, that any
such transactions will be completed, or if they are completed, that they will
provide sufficient resources to support us until we generate sufficient cash
flow to fund our operations. If we are unable to raise $10 million in the form
of equity financing and/or certain other non-refundable cash funding by March
31, 2003, Cablevision has the option to purchase from PVI a sole, exclusive,
perpetual, fully paid up, royalty free US license for all of PVI's technology
at the appraised fair market value.
Our common stock is quoted on the Nasdaq National Market System ("NMS"). The
continued listing of our common stock is conditioned upon our meeting certain
asset, stock price and other criteria. Effective June 29, 2001, the SEC approved
certain changes the NMS made to its quantitative listing standards. Among other
things, the NMS changed the minimum $4,000,000 net tangible assets requirement
to $10,000,000 in stockholders' equity. We do not currently meet this standard.
If we cannot correct our failure to meet this listing criterion, our common
stock may be delisted. The effects of delisting include limited news coverage
and the limited release of the market prices of our common stock. Delisting may
also diminish investors' interest in our common stock restrict the trading
market and reduce the price for our common stock. Delisting may also restrict us
from issuing additional securities or securing additional financing at a price
that is reasonable. If we are delisted from NMS, we may apply to transfer our
common stock to the Nasdaq SmallCap market. However, in order to transfer
securities to the Nasdaq SmallCap Market, we would need to satisfy the continued
inclusion requirements of that market, which include a minimum $1.00 bid price
requirement. In recent weeks PVI has been unable to consistently meet the $1.00
minimum bid price requirement. If our common stock nevertheless were to trade on
the Nasdaq SmallCap Market, or if it were not to trade on the Nasdaq Stock
Market, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the market value of our common stock.
As of December 31, 2001, we had net operating loss carryforwards for federal
income tax purposes of approximately $47,660,000 which expire in the years 2006
through 2022.
Based upon our initial public offering of common stock in December 1997, we have
undergone an additional "ownership change" within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"). Under Section 382 of
the Code, upon undergoing an ownership change, our right to use our then
existing net operating loss carryforwards as of the date of the ownership change
is limited during each future year to a percentage of the fair market value of
our then outstanding capital stock immediately before the ownership change. In
addition, if other ownership changes have occurred prior to this ownership
change, the utilization of such losses may be further limited. The timing and
manner in which we may utilize the net operating loss carryforwards in any year
will be limited by Section 382 of the Code.
EFFECT OF INFLATION
Domestic inflation has not had a significant impact on our sales or operating
results. However, inflation may have an impact upon business in a number of
international markets.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report, including Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contain forward-looking statements. Such statements can be identified by the use
of forward-looking words such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations and projections of results of operations or of financial
conditions. When considering such forward-looking statements, you should keep in
mind that certain risks may cause actual results to differ from any projections
contained in forward-looking statements. These risks include:
- - adverse economic conditions;
- - integration of acquired businesses;
- - inability to raise sufficient funds to operate the business prior to
becoming cash flow positive;
- - intense competition, including entry of new competitors and products;
- - adverse federal, state, local and foreign government regulation;
- - inadequate capital to operate our business;
- - unexpected costs and operating deficits;
- - lower revenues than forecast;
- - inability to successfully market the L-VIS System to television viewers,
advertisers, broadcasters and sporting events rights holders;
- - inability of third party sales forces to sell L-VIS System advertising;
- - contractual restrictions on use of video insertion technology;
- - risks associated with doing business in international markets;
- - seasonal fluctuations based upon the game schedules of each sport;
- - challenges to our patent and proprietary technology;
- - technological obsolescence of the L-VIS System;
- - inability to upgrade and develop software for use of the L-VIS System with
new sports and other new uses;
- - the possible fluctuation and volatility of our operating results and
financial condition;
- - adverse publicity and news coverage; and
- - delisting of our common stock from the Nasdaq National Market.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We do not have material exposure to market risk from market risk sensitive
instruments. Our exposure to market risk for changes in interest rates relates
to the increase or decrease in the
amount of interest income we can earn on our investment portfolio. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. We work to ensure the safety and preservation
of invested principal funds by limiting default risk, market risk and
reinvestment risk. We reduce default risk by investing in investment grade
securities. A hypothetical 100 basis point drop in interest rates along the
entire interest rate yield curve would not significantly affect the fair value
of our interest sensitive financial instruments at June 30, 2002 or June 30,
2001. Declines in interest rates over time will, however, reduce our interest
income. Other than intercompany transactions between our domestic and foreign
entities, we generally do not have significant transactions denominated in a
currency other than the functional currency applicable to each entity.
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 25, 2002, PVI entered into a Note Purchase and Security
Agreement (the "Note Purchase Agreement") with PVI Holding, LLC, a
subsidiary of Cablevision Systems Corporation. Pursuant to the Note
Purchase Agreement, on June 25, 2002, in consideration of $5,000,000 in
cash PVI issued to PVI Holding a $5,000,000 secured convertible note
which bears interest at 10% per annum and matures on March 31, 2003.
The holder may convert the note into PVI's common stock at any time
prior to maturity at a price of $2.50 per share. If, prior to the
maturity date, PVI sells shares of its common stock resulting in
aggregate cash proceeds of at least ten million dollars ($10,000,000),
it may convert the note into shares of its common stock at a price of
$2.50 per share or, if such common stock is sold for an aggregate
weighted average price of less than $1.00 per share, at such weighted
average price. Pursuant to the Note Purchase Agreement PVI also issued
to PVI Holding amended and restated warrants in replacement of the
warrants which the Company issued to PVI Holding on September 20, 2001.
The amended and restated warrants entitle PVI Holding to purchase
12,794,206.537 shares of PVI's common stock for a purchase price of
$7.00 per share at any time prior to June 25, 2006, and contain
anti-dilution provisions which require an adjustment to the number of
shares underlying the warrants and/or the exercise price upon the
occurrence of certain events. This issuance of our securities was
exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) as a transaction not involving a public offering. The
securities were issued for investment only and not for purposes of
distribution. A legend to such effect was affixed to the convertible
promissory note and the warrant certificate. PVI Holding received
adequate information about our business.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed on
September 17, 2001)
3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001, filed on November 14, 2001)
4.1 Warrant Certificate, dated as of March 26, 2002, issued to SciDel
Technologies, Ltd. (Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed on March 29,
2002).
4.2 Amended and Restated Warrant Certificate, dated as of June 25,
2002, issued to PVI Holding, LLC (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on
July 9, 2002)
10.1* Note Purchase and Security Agreement, dated as of June 25, 2002,
made by and between the Company and PVI Holding, LLC
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on July 9, 2002)
10.2 Convertible Promissory Note Agreement, dated as of June 25, 2002,
issued to PVI Holding, LLC (Incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed on July 9,
2002)
10.3* Amended and Restated L-VIS(R) System License Agreement, dated as
of June 25, 2002, by and between the Company and Cablevision
Systems Corporation (Incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on July 9, 2002).
10.4* Amended and Restated Joint Collaboration and License Agreement,
dated as of June 25, 2002, by and between the Company and
Cablevision Systems Corporation (Incorporated by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K filed on
July 9, 2002)
10.5 Proprietary Information Escrow Agreement, dated as of June 25,
2002, by and among the Company, Cablevision Systems Corporation,
and Kramer Levin Naftalis & Frankel LLP (Incorporated by
reference to Exhibit 10.5 to the Company's Current Report on Form
8-K filed on July 9, 2002)
10.6 Option Agreement, dated as of June 25, 2002, issued to
Cablevision Systems Corporation (Incorporated by reference to
Exhibit 10.6 to the Company's Current Report on Form 8-K filed on
July 9, 2002)
10.7 iPoint(TM) Technology License Agreement, dated as of June 25,
2002, by and between the Company and Cablevision Systems
Corporation (Incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K filed on July 9, 2002)
10.8 Summary of oral agreement between the Company, Publicidad Virtual
S.A. de C.V. and David Sitt, as amended.
10.9 Summary of oral agreement between the Company, Publicidad Virtual
S.A. de C.V. and Roberto Sonabend, as amended.
10.10 Employment Agreement by and between the Company and Mervyn
Trappler, dated as of April 25, 2002 (Incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, filed on May 15, 2002).
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* Confidential treatment requested
(b) Reports on Form 8-K
On May 15, 2002, PVI filed an amended current report on Form 8-K/A for
the purpose of amending its current report on Form 8-K dated March 26,
2002, and filed March 29, 2002, which reported the acquisition of
substantially all of the assets of SciDel Technologies, Ltd., to add
Item 7 consisting of financial statements for SciDel Technologies,
Inc. and an unaudited pro forma condensed combined balance sheet and
statement of operations.
On July 9, 2002, PVI filed a current report on Form 8-K, dated June
25, 2002, announcing the execution of a Note Purchase and Security
Agreement with PVI Holding, LLC and the consummation of the
transactions contemplated thereby.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Princeton Video Image, Inc.
August 14, 2002 By: /s/ David Sitt
-----------------------
David Sitt
Co-Chief Executive Officer
August 14, 2002 By: /s/ Roberto Sonabend
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Roberto Sonabend
Co-Chief Executive Officer
August 14, 2002 By: /s/ Lawrence L. Epstein
-----------------------
Lawrence L. Epstein,
Chief Financial Officer
Chief Financial Officer and
Treasurer
(principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed
on September 17, 2001)
3.2 Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, filed on November
14, 2001)
4.1 Warrant Certificate, dated as of March 26, 2002, issued to
SciDel Technologies, Ltd. (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed
on March 29, 2002).
4.2 Amended and Restated Warrant Certificate, dated as of June
25, 2002, issued to PVI Holding, LLC (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on July 9, 2002)
10.1* Note Purchase and Security Agreement, dated as of June 25,
2002, made by and between the Company and PVI Holding, LLC
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on July 9, 2002)
10.2 Convertible Promissory Note Agreement, dated as of June 25,
2002, issued to PVI Holding, LLC (Incorporated by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on July 9, 2002)
10.3* Amended and Restated L-VIS(R)System License Agreement, dated
as of June 25, 2002, by and between the Company and
Cablevision Systems Corporation (Incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K
filed on July 9, 2002).
10.4* Amended and Restated Joint Collaboration and License
Agreement, dated as of June 25, 2002, by and between the
Company and Cablevision Systems Corporation (Incorporated by
reference to Exhibit 10.4 to the Company's Current Report on
Form 8-K filed on July 9, 2002)
10.5 Proprietary Information Escrow Agreement, dated as of June
25, 2002, by and among the Company, Cablevision Systems
Corporation, and Kramer Levin Naftalis & Frankel LLP
(Incorporated by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K filed on July 9, 2002)
10.6 Option Agreement, dated as of June 25, 2002, issued to
Cablevision Systems Corporation (Incorporated by reference to
Exhibit 10.6 to the Company's Current Report on Form 8-K
filed on July 9, 2002)
10.7 iPoint(TM)Technology License Agreement, dated as of June 25,
2002, by and between the Company and Cablevision Systems
Corporation (Incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K filed on July 9, 2002)
10.8 Summary of oral agreement between the Company, Publicidad
Virtual S.A. de C.V. and David Sitt, as amended.
10.9 Summary of oral agreement between the Company, Publicidad
Virtual S.A. de C.V. and Roberto Sonabend, as amended.
10.10 Employment Agreement by and between the Company and Mervyn
Trappler, dated as of April 25, 2002 (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2002, filed on
May 15, 2002).
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Confidential treatment requested