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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 SEPTEMBER 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
November 11, 2002 was 18,487,802.
Part I - Financial Information
Item 1 Financial Statements
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Royalties and license fees $ 269,541 $ 952,919 $ 470,484 $ 2,133,049
Advertising and production revenue 1,580,918 705,988 6,398,086 1,588,727
------------ ------------ ------------ ------------
Total revenue 1,850,459 1,658,907 6,868,570 3,721,776
Costs and expenses:
Sales and marketing 1,805,039 847,669 6,454,326 2,650,218
Product development 897,309 696,182 2,904,070 2,120,231
Field operations and support 921,510 1,399,290 3,596,405 3,933,704
General and administrative 1,410,467 811,619 5,133,530 3,603,327
Severance and other charges 411,111 -- 656,611 --
------------ ------------ ------------ ------------
Total costs and expenses 5,445,436 3,754,760 18,744,942 12,307,480
Operating loss (3,594,977) (2,095,853) (11,876,372) (8,585,704)
Other (expense), net (468,892) (282,222) (442,222) (248,269)
Interest (expense) income, net (1,293,369) 26,453 (1,325,027) 310,409
Losses from equity investment (63,004) (67,526) (196,679) (181,769)
------------ ------------ ------------ ------------
Net loss before income taxes and minority interest (5,420,242) (2,419,148) (13,840,300) (8,705,333)
Income taxes (72,056) -- (177,640) --
Minority interest -- 49,603 -- 197,255
------------ ------------ ------------ ------------
Net loss (5,492,298) (2,369,545) (14,017,940) (8,508,078)
Accretion of preferred stock dividends (1,730) (1,730) (5,189) (5,190)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (5,494,028) $ (2,371,275) $(14,023,129) $ (8,513,268)
============ ============ ============ ============
Basic and diluted net loss per share ($ 0.30) ($ 0.19) ($ 0.77) ($ 0.72)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding 18,487,802 12,620,249 18,102,006 11,832,733
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,705,388 $ 8,360,353
Restricted securities held to maturity 63,476 63,476
Accounts receivable 1,465,747 2,298,897
License rights -- 50,000
Prepaid airtime 2,228,601 2,713,533
Prepaid Cablevision discounts 2,075,380 --
Other current assets 670,123 887,795
------------- -------------
Total current assets 9,208,715 14,374,054
Property and equipment, net 2,008,948 2,856,733
Patents, net 1,198,447 527,682
Identifiable intangibles, net 3,788,918 3,024,167
Goodwill 6,810,989 5,339,244
Investment in/Advances to Revolution Company LLC 381,919 567,795
Cablevision deferred revenue credit -- 4,350,261
Other assets 313,095 180,392
------------- -------------
Total assets $ 23,711,031 $ 31,220,328
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,665,494 $ 5,999,393
Accounts payable to television networks 1,775,655 4,360,372
Advertising and production advances 870,827 --
Secured convertible debt 4,886,052 --
Notes payable 1,782,100 1,090,608
Payable to Presencia 674,760 637,465
Unearned revenue 96,586 179,436
------------- -------------
Total current liabilities 15,751,474 12,267,274
Refundable Cablevision advance payment 3,627,790 --
Unearned revenue 68,173 184,833
Cablevision advance payments -- 7,500,000
Other liabilities 175,102 42,511
------------- -------------
Total liabilities 19,622,539 19,994,618
------------- -------------
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------- ------------
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 September 30, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 81,052 78,751
Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized, issued
and outstanding 12,834 shares at December 31, 2001 and September 30, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 97,850 94,963
------------ ------------
Total redeemable preferred stock 178,902 173,714
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 September 30, 2002, respectively 18,488 17,131
Additional paid-in capital 86,879,428 80,488,924
Deferred compensation -- (81,926)
Other comprehensive loss 425,289 23,542
Accumulated deficit (83,413,615) (69,395,675)
------------ ------------
Total stockholders' equity 3,909,590 11,051,996
------------ ------------
Total liabilities, redeemable preferred stock,
and stockholders' equity $ 23,711,031 $ 31,220,328
============ ============
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $(14,017,940) $ (8,508,078)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of unearned revenue (315,106) (216,578)
Depreciation expense 1,155,508 1,297,010
Amortization of intangibles/license rights 750,712 543,115
Amortization of deferred compensation 81,926 --
Non-cash charges associated with stock, warrant and option grants 325,004 199,362
Non-cash loss from impairment of securities -- 316,433
Non-cash interest from related party notes -- (379,427)
Losses from equity investments 196,679 181,769
Gain on sale of fixed assets (18,283) --
Non-cash promotion expense 50,000 --
Non-cash interest expense 1,159,466 --
Non-cash transfer of inventory to Cablevision 73,290 --
Provision for doubtful accounts 79,201 --
Minority interest -- (197,255)
Changes in assets and liabilities (net of effects of acquisitions):
Trade accounts receivable 700,899 (674,151)
Prepaid airtime 268,439 --
Other current assets 225,399 417,323
Cablevision deferred revenue credit and deferred
royalty payment, net -- 3,149,739
Other assets (25,382) (36,467)
Accounts payable and accrued expenses (740,538) (103,104)
Accounts payable to television networks (1,421,041) --
Advertising and production advances 903,992 --
Unearned revenue 106,666 230,206
Payable to Presencia 28,278 --
Other liabilities (14,731) (1,311)
------------ ------------
Net cash used in operating activities (10,447,562) (3,781,414)
------------ ------------
Cash flows from investing activities:
Investment in/Advances to Revolution Company LLC (10,803) --
Acquisition costs (349,231) (468,921)
Purchases of property and equipment (225,312) (724,228)
Proceeds from the sale of fixed assets 50,157 --
Purchases of license rights -- (400,000)
Increase in patents (46,228) (50,382)
------------ ------------
Net cash used in investing activities (581,417) (1,643,531)
------------ ------------
See accompanying notes to consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
----------------------------
2002 2001
------------ ------------
Cash flows from financing activities:
Proceeds from sales of common stock, net -- 12,827,787
Proceeds from option exercises 5,705 --
Proceeds from issuance of convertible debt, net 4,925,000 --
Capitalized financing costs (50,000) --
Cash received from related party notes receivable -- 66,973
------------ ------------
Net cash provided by financing activities 4,880,705 12,894,760
------------ ------------
Net increase (decrease) in cash and cash equivalents (6,148,274) 7,469,815
Foreign exchange impact on cash 493,309 (4,232)
Cash and cash equivalents at beginning of period 8,360,353 2,418,937
------------ ------------
Cash and cash equivalents at end of period $ 2,705,388 $ 9,884,520
============ ============
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 $ 72,869 $ --
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") is a developer of virtual image technology
that enables the insertion of computer-generated images into live or
pre-recorded video broadcasts. Through its patented computer vision technology,
Live Video Insertion System ("L-VIS(R)"), PVI has provided virtual
advertisements and programming enhancements for thousands of telecasts
worldwide. The L-VIS(R) advanced software and hardware platform incorporates
virtual images, ranging from corporate logos to sophisticated three-dimensional
animated video, into both live and pre-recorded broadcasts.
In the United States, PVI is in the process of migrating its technology from
camera-based systems, which are more expensive to build and operate, to less
expensive and easier to integrate "vision"-based technology, where the L-VIS(R)
platform resides downstream in the broadcast studio. Camera systems utilize
information from a broadcast camera in order to insert an image into a video
stream, which requires the costly enterprise of trucking equipment and crews to
the event. This migration is expected to substantially reduce PVI's cost of
goods sold in the US. In Mexico, which is PVI's largest market, 100% of the
revenue is generated by downstream, vision-based systems.
In collaboration with Cablevision, PVI has developed iPoint(TM). iPoint(TM)
takes half of PVI's L-VIS(R) system and puts it in a set-top-box. This enables
in-program broadcast advertising to be targeted to individual homes with
customized video feeds delivered via cable, satellite, or online transmission.
PVI's sales and marketing strategy is focused on enhancing the company's current
relationships with its key constituents, which include rights holders,
syndicators, leading advertising agencies, sports leagues, and prominent
corporate sponsors, through a process of educating key decision-makers on the
inherent value of the company's offering. Accordingly, management emphasizes a
program of substantial personalized interaction between the company's sales,
marketing, product development, and engineering teams and those organizations
that will either adopt PVI's technology or influence the decision makers.
PVI's marketing approach is to demonstrate that virtual advertising can create
incremental advertising inventory for broadcasters which they can use to
generate incremental ad revenues. PVI then participates in the new revenue
stream created by virtual advertising as opposed to being a source of additional
production cost.
We market our services on a worldwide basis through licensing and royalty
agreements, and through our wholly owned subsidiaries Publicidad Virtual, S.A.
de C.V. ("Publicidad") headquartered in Mexico City, Mexico and, 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 $14.0 million and $7.0 million for the nine
months ended September 30, 2002 and the six months ended 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 our services, 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 taken steps to reduce expenses, restructure operations and improve
profitability. 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. If the option is exercised, we will only be
able to use or commercialize our technology outside of the US, unless we obtain
a US license from Cablevision.
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 21,360,170 and 17,784,610 shares of common stock that were outstanding
at September 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. We will adopt SFAS No. 146 for
restructuring beginning after January 1, 2003.
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
that 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 that 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:
- The unused portion of $1 million must be refunded if unused by June
30,2004
- The unused portion of $2.5 million must be refunded if unused by
June 30, 2005
- 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. If the option is exercised, we will only be able to
use or commercialize our technology outside of the US, unless we obtain a US
license from Cablevision.
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 also been recorded as a prepaid
discount to Cablevision.
The prepaid discount to Cablevision is being recognized as a dollar-for-dollar
reduction in 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. For the
nine months ended September 30, 2002, $1,289,000 was recognized as interest
expense for amortization of the discount, fair value accretion, and stated
interest.
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 approximately $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 nine months ended September 30, 2002, amortization expense of the
intangible assets identified as part of the SciDel acquisition was $125,750.
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
September 30, 2002 September 30, 2001
------------------ ------------------
Revenues $ 1,850,459 $ 3,004,973
Net Loss $ (5,492,298) $ (5,539,362)
Net Loss Applicable to Common Stock $ (5,494,028) $ (5,541,092)
Basic and diluted net loss per share
applicable to common stock $ (0.30) $ (0.34)
Weighted average number of shares
of common stock outstanding 18,487,802 16,140,210
Note -- A charge of $411,111 for severance and other charges was included in the
quarter ended September 30, 2002 with no corresponding charge in the quarter
ended September 30, 2001. Likewise, a reversal of a compensation charge of
$309,087 relating to the option repricing (see note 13) was included in the
quarter ended September 30, 2001 with no corresponding transaction in September
30, 2002.
For the nine months ended
September 30, 2002 September 30, 2001
------------------ ------------------
Revenues $ 6,966,570 $ 8,326,315
Net Loss $(14,509,820) $(17,065,651)
Net Loss Applicable to Common Stock $(14,515,009) $(17,070,841)
Basic and diluted net loss per share
applicable to common stock $ (0.79) $ (1.09)
Weighted average number of shares
of common stock outstanding 18,459,784 15,650,289
Note -- A charge of $656,611 for severance and other charges was included in
the nine months ended September 30, 2002 with no corresponding charge in the
nine months ended September 30, 2001.
6. SEVERANCE AND OTHER CHARGES
In 2002, we recorded $656,611 of additional severance and facility shutdown
expenses as a result of the continued streamlining of our operations in Belgium,
Brazil and the United States. During the nine months ended September 30, 2002, a
total of nine, six and nineteen positions were eliminated in our European,
Brazilian and domestic offices, respectively, representing 100%, 100% and
approximately 29% 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 September 30, 2002:
Type of Cost
-----------------------------------------------------
Employee Facility
Separations Closings Total
------------- ------------- -------------
Balance at January 1, 2002 $ 980,983 $ 78,979 $ 1,059,962
Additions 536,643 119,968 656,611
Deductions (615,582) (135,490) (751,072)
------------- ------------- -------------
Balance at September 30, 2002 $ 902,044 $ 63,457 $ 965,501
============= ============= =============
Of the total balance remaining in the restructuring reserve, approximately
$319,000 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 $143,000 at September 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 $107,000 at September 30, 2002 and $0 at December 31, 2001 is
included in other assets.
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 (see footnote 16). Monthly interest is
payable at the end of each period at a variable rate based on the interbank rate
in Mexico plus three points (12.175% at September 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 September 30, 2002 and December 31,
2001 was $982,100 and $1,090,608, respectively.
On September 12, 2002, Publicidad, a wholly owned subsidiary of PVI, signed a
promissory note payable to Televisa for $800,000. The note has a variable
interest rate based on the interbank rate in Mexico plus 2.5 points (11.675% at
September 30, 2002). The payments on the note are due based on the following
schedule: $300,000 on September 30, 2002, $250,000 on October 15, 2002 and
$250,000 on November 15, 2002. The interest on the loan is applied based on the
days past due for each amount owed. Although paid after their due dates, the
entire September 30, 2002 balance has been paid and $50,000 of the October 15,
2002 balance has been paid as of November 12, 2002.
10. PAYABLE TO PRESENCIA
As a result of the merger with Publicidad, Publicidad entered into a consulting
services agreement with Presencia (see footnote 16) 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. In addition, under the terms of a
letter agreement in consideration of the Reorganization Agreement and the
transactions contemplated, Publicidad was obligated to pay Presencia 2,000,000
Mexican Pesos (approximately $218,000). The balance payable to Presencia under
these agreements was $674,760 and $637,465, on September 30, 2002 and December
31, 2001, respectively. Publicidad paid $1,020,000 to Presencia in calendar 2001
and approximately $279,000 as of September 30, 2002 pursuant these agreements.
11. GUARANTEE OF PERFORMANCE BOND
In May 2002, PVI executed a guarantee 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 September 30, 2002, the unused balance protected by the performance bond
was $383,805, 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 nine months ended
September 30, 2002 and 2001 was as follows:
For the three months ended
September 30, September 30,
2002 2001
------------- -------------
Net loss $ (5,492,298) $ (2,369,545)
Foreign currency translation adjustments 335,294 (90,820)
Unrealized gain (loss) on investments 185,057
------------ ------------
Comprehensive loss $ (5,157,004) $ (2,275,308)
============ ============
For the nine months ended
September 30, September 30,
2002 2001
------------- -------------
Net loss $(14,017,940) $ (8,508,078)
Foreign currency translation adjustments 401,747 100,829
Unrealized gain (loss) on investments (17,177)
------------ ------------
Comprehensive loss $(13,616,193) $ (8,424,426)
============ ============
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:
- The exercise price of the warrant or option is the price per share
set forth in the agreement;
- The exercise period is the term of the option or warrant set forth
in the agreement
- The stock price is the closing price of PVI stock on the last
trading day prior to the date of the grant;
- The risk-free rate is the US Treasury interest rate for the exercise
period; and
- 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 of common stock by us 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 12,794,206.537 shares of PVI's common stock
for a purchase price of $7.00 per share at any time prior to June 25, 2006. 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. For the three-month and nine-month periods
ending September 30, 2002, there were no adjustments to earnings because the
closing price of our common stock was less than the exercise price of $4.375.
For the three months ending September 30, 2001, a $309,000 adjustment to
earnings was taken to reverse a charge taken to adjust the options to fair
value in the immediately preceding quarter. For the nine-month period ending
September 30, 2001, the net effect of these charges was zero.
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 (see Note 16), 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 nine months ended September 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 nine months ended
September 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 nine months ended September 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 nine months ended September 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 September 30, 2002, options to purchase a total of 72,166 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 September 30, 2002, each co-CEO had received options to purchase
97,667 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.
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 of
$1.07. 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 grant. The options will vest in twelve
equal monthly installments.
In July 2002, the Board of Directors authorized the issuance of options to
purchase an aggregate of 114,500 shares of PVI's common stock for an exercise
price of $1.00 per share to certain senior managers whose salaries were reduced.
No compensation expense was recorded in connection with these transactions as
the exercise price of the options was greater than the fair market value of our
common stock on the date of each grant.
In connection with an agreement to provide digital product insertion effective
September 1, 2002, PVI agreed to grant its contract partner warrants to purchase
739,512 shares of PVI common stock at $2.50 per share. The warrants will be
exercisable for five years from the date of issuance and will vest in four
separate equal tranches. The first tranche vested upon the effective date of the
agreement. The second tranche vested on September 26, 2002 the date on which we
determined that the client used commercially reasonable efforts to a) secure
permissions and approvals for, and b) to sell product insertions. The third
tranche will vest provided $5,000,000 worth of advertising sales has been
achieved by December 31, 2003. The fourth tranche will vest upon the sale of
product insertion into a specific television program by the client. The vesting
criteria for the first and second tranches were met during the three months
ended September 30, 2002. Because PVI's obligation to issue warrants arose
during the three months ended September 30, 2002 and the vesting criteria for
the first and second tranches were satisfied during that period, and no sales or
term sheets had yet been executed, PVI has recorded in that period marketing and
sales expense of $166,316 based on the Black Scholes calculation of the value of
the warrants. The fair value of the remaining tranches, if vested, will be
recorded as a discount and will offset related revenues.
In September 2002, the Compensation Committee of the Board of Directors approved
the granting of 59,630 non-qualified options to a former employee to replace
options which were due to expire as a result of the termination of his
employment. Accordingly, we recorded a compensation expense of $3,616 to reflect
the value of those options, which was determined using the Black-Scholes
valuation method.
In September 2002, the Board of Directors approved the issuance of 457,000
options to new members of senior management according to the terms of their
employment. 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
SEPTEMBER 30, 2002
Revenue from external
customers $ 823,097 $ 946,967 $ -- $ 80,395 $ -- $ 1,850,459
Inter-company revenues 504,848 -- -- -- (504,848) --
Operating (loss) $ (1,577,421) $ (1,280,184) $ (430,145) $ (353,923) $ 46,696 $ (3,594,977)
------------ ------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue from external
customers $ 1,627,963 $ -- $ 30,944 $ -- $ -- $ 1,658,907
Inter-company revenues 9,284 -- -- -- (9,284) --
Operating (loss) $ (1,519,008) $ -- $ (568,387) $ -- $ (8,458) $ (2,095,853)
------------ ------------ ------------ ------------ ------------ ------------
United Latin
States America PVI PVI Consolidated
PVI Publicidad Europe Israel Eliminations Total
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue from external
customers $ 1,601,165 $ 5,072,960 $ 67,762 $ 126,683 $ -- $ 6,868,570
Inter-company revenues 1,412,031 -- -- -- (1,412,031) --
Operating (loss) $ (7,292,081) $ (2,668,951) $ (1,411,837) $ (678,720) $ 175,217 $(11,876,372)
------------ ------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue from external
customers $ 3,620,359 $ -- $ 101,417 $ -- $ -- $ 3,721,776
Inter-company revenues 31,810 -- -- -- (31,810) --
Operating (loss) $ (6,928,713) $ -- $ (1,648,533) $ -- $ (8,458) $ (8,585,704)
------------ ------------ ------------ ------------ ------------ ------------
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 also the President of the Board 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. In July 2002, a payment for the 2001 commission override fee of
$60,093 was made to Presencia pursuant to this agreement. For the nine months
ended September 30, 2002, we have incurred $369,000 in accrued contingent
service fees and commission override fees payable to Presencia pursuant to this
agreement.
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, up to and including
May 8, 2003. Also effective September 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, a Presencia shareholder, was appointed to
the Board of Directors of PVI 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
was 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
nine months ended September 30, 2002. The consulting agreement expired May 15,
2002.
In July 2002, PVI engaged Broadband Capital Management LLC ("Broadband Capital")
to serve as its non-exclusive financial advisor. Acorn Technology Fund, L.P.
("Acorn") is a member of Broadband Capital Holdings LLC (an affiliate of
Broadband Capital), holding approximately 3% of the outstanding membership
interests. One of our directors, John Torkelsen, is the Manager of Acorn
Technology Partners, LLC, Acorn's General Partner. We paid Broadband $50,000 as
a retainer. Additional compensation will be based on Broadband's success in
securing financing for PVI.
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
On October 9, 2002 PVI received a letter from the Staff of NASDAQ stating that
the PVI had not met the $10 million stockholders' equity requirement for
continued listing of its common stock on the Nasdaq National Market and that its
common stock was, therefore, subject to delisting. PVI has appealed the Staff's
determination to the NASDAQ Listing Qualifications Panel and a hearing is
scheduled for November 21, 2002. During the appeals process, PVI's common stock
will continue to trade on the Nasdaq National Market. PVI is also currently not
in compliance with the minimum bid price requirement for continued listing on
the Nasdaq National Market and at the hearing must also demonstrate its ability
to meet this requirement in order to maintain its listing. Management believes
that PVI's ability to satisfy the standards for continued listing is contingent
on its ability to secure additional financing before the hearing date.
Effective October 30,2002, the agreements between PVI and each of David Sitt and
Roberto Sonabend regarding their service as interim co-Chief Executive Officers
of PVI were amended to provide that the options to purchase shares of PVI common
stock which were to be granted to each of them at the rate of 10,000 shares for
each calendar month in which he serves as interim co-Chief Executive Officer
through May 8, 2003, (subject to pro-ration for any shorter period) were granted
as of October 30, 2002, subject to vesting at the rate of 10,000 shares for each
calendar month (subject to pro-ration for any shorter period) in which he serves
as interim co-Chief Executive Officer through May 8, 2003. The exercise price of
the options is $0.51 per share, which was the fair market value of our common
stock on the date of grant.
On October 23, 2002, we reached an agreement with a former executive of the
company, whereby the terms of that former employee's severance package were
renegotiated. In accordance with the settlement, the cash obligation was reduced
and an option to purchase 250,000 shares of PVI Common Stock was granted. The
option was fully vested upon the execution of the agreement, is exercisable for
a period of four years at an exercise price of $1.00 per share, and has a Black
Scholes value of $95,625. The net result will be a $523,788 reduction to the
severance and other charges provision for the three month period ending December
31, 2002.
On October 31, 2002, Lawrence Epstein stepped down from his position as our
Chief Financial Officer, VP Finance and Treasurer to pursue other opportunities.
His role and responsibilities were assumed by James Green, who is now both the
Chief Operating Officer and the acting Chief Financial Officer.
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 September 30, 2002 and December
31, 2001 we had an accumulated deficit of approximately $83,376,000 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 our technology 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 service 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 our services
by continuing to develop software applications, such as animated insertions in
event video streams. Such insertions include the virtual first-down line in
football, two- and three-dimensional ads on and off the field and the virtual
off sides line in soccer, and virtual product placement in pre-recorded
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.
Our sales and marketing staff is responsible not only for reaching agreements
with teams, leagues and broadcasters, but also for promoting virtual advertising
to advertisers in order to create market awareness and acceptance and to
negotiate with potential licensees in yet untapped markets worldwide. Even in
situations where we are not selling directly to advertisers we hope to create
advertiser interest and demand by promoting the virtual advertising 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 our virtual advertising and
imaging services, 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 virtual advertising.
We expect to continue generating revenue from ads sold by PVI, rights holders,
or broadcasters that use our services. These revenues are expected to be shared
with the rights holders and or broadcasters. Accordingly, in order to grow
revenues from the use of our services, we will need to enter into additional
agreements with rights holders and broadcasters. 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 our
technology 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 our
technology 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 our services for 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 we 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 our
services, we work to convince advertisers, broadcasters and broadcast rights
holders of the value of those services. 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.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2002 TO THE QUARTER ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues are earned from both advertisers' use of our services and
under the terms of contractual arrangements for visual program enhancements, as
well as by license and royalty fees earned from use of our services outside the
United States. Total revenues for the three months ended September 30, 2002
increased 12% to $1,850,459 from $1,658,907 for the three months ended September
30, 2001 primarily due to the acquisition of Publicidad in September 2001. Total
royalties and license fees decreased 72% to $269,541 from $952,919 for the three
months ended September 30, 2002 and 2001, respectively. Total advertising and
production revenue increased 124% to $1,580,918 for the three months ended
September 30, 2002 from $705,988 for the three months ended September 30, 2001.
The increase in advertising and production revenues is due to revenue increases
of approximately $1,163,000 primarily resulting from the consolidation of
Publicidad and PVI Israel, the addition of the First Down Line to NFL preseason
football games on CBS and the introduction of the branded First Down Line in CBS
SEC college football games. 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. These increases
in advertising and production revenue were partially offset by
reductions of approximately $288,000, primarily due to 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 September 30, 2002 increased 113% to $1,805,039 from $847,669 for
the three months ended September 30, 2001. This resulted primarily from our
consolidation of Publicidad's sales and marketing expenses of approximately
$887,000, which includes $530,000 for television airtime for virtual advertising
in both sports and entertainment programming, and $160,000 in accrued contingent
service fees and commission override fees payable to Presencia pursuant to their
consulting services agreement with Publicidad, along with $197,000 in other
marketing expenses. Also contributing to the increase was $176,000 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, and $166,000 in warrant charges in connection
with an agreement PVI entered into on September 1, 2002 to provide digital
product insertion (see note 13). These increases were partially offset by a
decrease of approximately $175,000 in fees charged to obtain certain
international broadcast and programming rights, and approximately $75,000 due to
the reduction in staff and the 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 our 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
29% to $897,309 for the three months ended September 30, 2002 from $696,182 for
the three months ended September 30, 2001, primarily due to the inclusion of
approximately $119,000 for PVI Israel research costs, and an increase of
approximately $115,000 in product development salaries and overhead-related
costs due to the redeployment of resources.
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of our systems for both domestic and international use, including
training costs for operators, maintenance of our mobile production units, and
support of our systems in the field. Total field operations and support costs
for the three months ended September 30, 2002 decreased 34% to $921,510 from
$1,399,290 for the three months ended September 30, 2001 primarily due to
reduced services for the Indy Racing League, the non-renewal of the San Diego
Padres for the 2002 season, and lower production costs for ESPN Sunday Night
Baseball games and CBS NFL First Down Line. Streamlining of our operations
resulted in shorter on-site setup time required and the ability to provide our
services with a reduced number of personnel resulting in a production cost
savings of approximately $343,000. Also
contributing to the decrease in costs is the decrease of $112,000 in license
fees and lower depreciation expense for field equipment of $230,000. This
decrease is partially offset by the inclusion of approximately $270,000 for
Publicidad's production costs, and a total of $61,000 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
74% to $1,410,467 for the three months ended September 30, 2002 from $811,619
for the three months ended September 30, 2001. This resulted primarily from the
inclusion of approximately $536,000 for Publicidad's general and administrative
costs, and $179,000 for PVI Israel. Another contributing factor is the reversal
of $309,000 recorded in the September 30, 2001 quarter in non-cash compensation
charges in relation to the repricing of employee stock options. These increases
were offset by a reduction in salaries of $192,000 due to the redeployment and
reduction of resources., along with a reduction in the restructuring accrual of
$158,000, and Investor Relations and other general expenses which were $76,000
lower than the year-ago period.
SEVERANCE AND OTHER CHARGES. Total severance and other charges were $411,111 for
the quarter ended September 30, 2002 as compared to $0 for the quarter ended
September 30, 2001. This resulted from additional severance expense of $152,000
in the US from a staff reduction, $46,000 of shutdown costs for our Brazil
office, and $213,000 of additional shutdown cost for our Belgium office (see
note 6).
OTHER (EXPENSE), NET. Total other (expense), net was $468,892 for the three
months ended September 30, 2002 as compared to $282,222 for the three months
ended September 30, 2001. The increase was primarily a result of Publicidad's
and PVI Europe's $487,000 foreign exchange loss on their US dollar denominated
intercompany payables to the parent company. This increase was partly offset by
an other-than-temporary loss of $316,000 on securities available for sale in the
year-ago period.
INTEREST (EXPENSE) INCOME, NET. Total interest (expense) income, net was
$1,293,369 for the three months ended September 30, 2002 as compared to $26,453
of interest income for the three months ended September 30, 2001. This increase
is due to the $1,289,000 of interest expense related to the Cablevision
transaction dated June 25, 2002 (see note 4), of which, $1,159,000 is non-cash,
and the balance of which will either be paid in cash or PVI stock.
LOSSES FROM EQUITY INVESTMENT. Losses from equity investment decreased by 7% to
$63,004 for the three months ended September 30, 2002 from $67,526 for the three
months ended September 30, 2001 as a result of recording our share of the total
net losses from our investment in the Revolution Company, LLC, which began
operations in January 2001.
INCOME TAX EXPENSE. Income tax expense of $72,056 for the three months ended
September 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 December 31, 2001. As such, no additional amounts are
included in the three months ended September 30, 2002.
NET LOSS. As a result of the foregoing factors, our net loss increased 132% to
$5,492,298 for the three months ended September 30, 2002 from $2,369,545 for the
three months ended September 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. A reversal of a compensation charge of
$309,087 and $0 for the stock repricing was recorded during the three months
ended September 30, 2001 and 2002, respectively. As of September 30, 2001, a
reversal to
the original charge was required as the closing price of our common stock on
that date was less than the exercise price of $4.375. As of September 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 $1.6 million to
approximately $823,000 whereas revenue in Latin America increased from $-0- to
$947,000 for the three months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES. Revenues are earned from both advertisers' use of our services and
under the terms of contractual arrangements for virtual program enhancements, as
well as by license and royalty fees earned from the licensing of our technology
for use outside the United States. Total revenues for the nine months ended
September 30, 2002 increased 85% to $6,868,570 from $3,721,776 for the nine
months ended September 30, 2001 primarily due to the acquisition of Publicidad
in September 2001. Total royalties and license fees decreased 78%to $470,484
from $2,133,049 for the nine months ended September 30, 2002 and 2001,
respectively. Total advertising and production revenue increased 303% to
$6,398,086 for the nine months ended September 30, 2002 from $1,588,727 for the
nine months ended September 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). The increase in advertising and production revenues is due to
revenue increases of approximately $5,536,000 primarily resulting from the
consolidation of Publicidad and PVI Israel and increased ad sales by the
Philadelphia Phillies. 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 the increases. These increases in
advertising and production revenue were partially offset by reductions of
approximately $727,000, primarily due to reduced advertising revenue from the
Indy Racing League for the 2002 season, reduced ad revenue from Super Bowl XXXVI
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 nine months ended September 30, 2002
increased 144% to $6,454,326 from $2,650,218 for the nine months ended September
30, 2001. This resulted primarily from our consolidation of Publicidad's sales
and marketing expenses of approximately $3,956,000, which includes $2,985,000
for television airtime for virtual advertising in both sports and entertainment
programming, and $369,000 in accrued contingent service fees and commission
override fees payable to Presencia pursuant to their consulting services
agreement with Publicidad, along with $602,000 in other marketing expenses. Also
contributing to the increase was $594,000 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, and $166,000 in warrant charges in connection with an agreement PVI
entered into on September 1, 2002 to provide digital product insertion (see note
13). These increases were partially offset by a decrease of approximately
$465,000 in fees charged to
obtain certain international broadcast and programming rights, $76,000 in lower
trade show activities, and approximately $371,000 due to the reduction in staff
and the 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 our 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
37% to $2,904,070 for the nine months ended September 30, 2002 from $2,120,231
for the nine months ended September 30, 2001 primarily due to the inclusion of
approximately $275,000 for PVI Israel research costs, along with an increase of
approximately $489,000 in salaries and overhead-related costs due to the
redeployment of resources.
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of our systems for both domestic and international use, including
training costs for operators, maintenance of our mobile production units, and
support of our systems in the field. Total field operations and support costs
for the nine months ended September 30, 2002 decreased 9% to $3,596,405 from
$3,933,704 for the nine months ended September 30, 2001. The decrease was due to
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 resulting in a production cost savings of approximately
$538,000. Also contributing to the decrease is the decrease of $135,000 in
license fees and lower depreciation expense for field equipment of $443,000.
This decrease is offset by the inclusion of approximately $670,000 for
Publicidad's production costs, and a total of $109,000 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
42% to $5,133,530 for the nine months ended September 30, 2002 from $3,603,327
for the nine months ended September 30, 2001. This resulted primarily from the
inclusion of approximately $1,490,000 for Publicidad's general and
administrative costs, and $346,000 for PVI Israel. These increases were offset
by a reduction in salaries of $130,000 due to the redeployment and reduction of
resources, along with a reduction in Investor Relations and other general
expenses of $176,000.
SEVERANCE AND OTHER CHARGES. Total severance and other charges were $656,611 for
the nine months ended September 30, 2002 from $ -0- for the nine months ended
September 30, 2001 as a result of downsizing our workforce worldwide in our
efforts to reduce costs (see note 6).
OTHER (EXPENSE), NET. Total other (expense), net was $442,222 for the nine
months ended September 30, 2002 as compared to $248,269 for the nine months
ended September 30, 2001. The increase was primarily a result of Publicidad's
$822,000 foreign exchange loss on its US dollar denominated intercompany payable
to the parent company, which was offset by PVI Europe's $336,000 foreign
exchange gain on its US dollar denominated intercompany payable to the parent
company. Another mitigating factor was that in the nine months ended September
30, 2001 there was an other-than-temporary loss of $316,000 on securities
available for sale.
INTEREST (EXPENSE) INCOME, NET. Total interest (expense) income, net was
$1,325,027 for the nine months ended September 30, 2002 as compared to $310,409
of interest income for the three months ended September 30, 2001. This is
primarily due to the $1,289,000 of interest expense related to the Cablevision
transaction dated June 25, 2002 (see note 4), of which, $1,159,000 is non-cash,
and the balance of which will either be paid in cash or PVI stock.
LOSSES FROM EQUITY INVESTMENT. Losses from equity investment increased 8% to
$196,679 for the nine months ended September 30, 2002 from $181,769 for the nine
months ended September 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 $177,640 for the nine months ended
September 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 December 31, 2001. As such, no additional amounts are
included in the nine months ended September 30, 2002.
NET LOSS. As a result of the foregoing factors, our net loss increased 65% to
$14,017,940 for the nine months ended September 30, 2002 from $8,508,078 for the
nine months ended September 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. A compensation charge of $0 and $0 for the
stock repricing was recorded during the nine months ended September 30, 2001 and
2002, respectively. For the nine months ending September 30, 2001, a $309,000
charge to earnings was taken in the quarter ending June 30, 2001. That charge
was subsequently reversed in the quarter ending September 30, 2001. As a result,
for the nine-month period ending September 30, 2001, the net effect of these
adjustments was zero. For the nine months ended September 30, 2002 no charge was
necessary as the closing price of our common stock 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 $3.6 million to
approximately $1.6 whereas revenue in Latin America increased from $-0- to $5.0
million for the nine months ended September 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
On October 9, 2002 PVI received a letter from the Staff of NASDAQ stating that
the PVI had not met the $10 million stockholders' equity requirement for
continued listing of its common stock on the Nasdaq National Market and that its
common stock was, therefore, subject to delisting. PVI has appealed the Staff's
determination to the NASDAQ Listing Qualifications Panel and a hearing is
scheduled for November 21, 2002. During the appeals process, PVI's common stock
will continue to trade on the Nasdaq National Market. PVI is also currently not
in compliance with the minimum bid price requirement for continued listing on
the Nasdaq National Market and at the hearing must also demonstrate its ability
to meet this requirement in order to maintain its listing. Management believes
that PVI's ability to satisfy the standards for continued listing is contingent
on its ability to secure additional financing before the hearing date.
On October 23, 2002, we reached an agreement with a former executive of the
company, whereby the terms of that former employee's severance package were
renegotiated. In accordance with the settlement, the cash obligation was reduced
and an option to purchase 250,000 shares of PVI Common Stock was granted. The
option was fully vested upon the execution of the agreement, is exercisable for
a period of four years at an exercise price of $1.00 per share, and has a Black
Scholes value of $95,625. The net result will be a $523,788 reduction to the
severance and other charges provision for the three month period ending December
31, 2002.
Effective October 30,2002, the agreements between PVI and each of David Sitt and
Roberto Sonabend regarding their service as interim co-Chief Executive Officers
of PVI were amended to provide that the options to purchase shares of PVI common
stock which were to be granted to each of them at the rate of 10,000 shares for
each calendar month in which he serves as interim co-Chief Executive Officer
through May 8, 2003, (subject to pro-ration for any shorter period) were granted
as of October 30, 2002, subject to vesting at the rate of 10,000 shares for each
calendar month (subject to pro-ration for any shorter period) in which he serves
as interim co-Chief Executive Officer through May 8, 2003. The exercise price of
the options is $0.51 per share which was the fair market value of our common
stock on the date of grant.
On October 31, 2002, Lawrence Epstein stepped down from his position as our
Chief Financial Officer, VP Finance and Treasurer to pursue other opportunities.
His role and responsibilities were assumed by James Green, who is now both the
Chief Operating Officer and the acting Chief Financial Officer.
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 systems, 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 our services, (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 September 30, 2002, we had cash and cash equivalents of $2,705,388, a
decrease of $5,654,965 from the balance at December 31, 2001. Net cash used in
operating activities increased to $10,447,562 for the nine months ended
September 30, 2002 from $3,781,414 for the nine months ended September 30, 2001
due to several important factors. The primary cause was an increase in net
losses of approximately $5.5 million. A second significant factor was the inflow
of cash from PVI Holding, LLC, a subsidiary of Cablevision, for prepaid
royalties, net of a deferred revenue credit of approximately $3.1 million during
the nine months ended September 30, 2001 with no corresponding transaction in
the nine months ended September 30, 2002. Also contributing to the decrease in
cash was a reduction in our accounts payable and accrued expenses balance of
approximately $2.1 million as payments were made to television rightsholders for
virtual advertising rights. These were partially offset by the reduction in the
prepayment of approximately $268,000 of television network airtime, as well as
an increase in advertising and production advances of approximately $904,000
from our customers.
Net cash used in investing activities decreased to $581,417 for the nine months
ended September 30, 2002 from $1,643,531 for the nine months ended September 30,
2001 as a result of the reduction of approximately $400,000 due to the absence
of license payments which occurred in the prior year, an approximately $499,000
reduction in purchases of property, plant and equipment, and a reduction of
approximately $120,000 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 proceeds from financing activities decreased to $4,880,705 for the nine
months ended September 30, 2002 from $12,894,760 for the nine months ended
September 30, 2001. For the nine months ended September 30, 2001, we recorded
net receipts of approximately $12.8 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 $7.5 million, or 24%, to $ 23.7 million at September 30,
2002 from $31.2 million at December 31, 2001. This decrease was primarily due to
a reduction in our cash balances of approximately $5.7 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 $0.5 million due to the timing of payments and the use
of the purchased
broadcast rights in Mexico and a decrease in trade receivables of $0.8 million.
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 $0.4 million, or 2% to $19.6 million at September
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 $2.1 million. This decrease was partly offset by in increase of $.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
$7.5M in Cablevision advance payments. Also partly offsetting the decrease in
total liabilities was a $.9 increase in advertising and production advances.
Total stockholders' equity decreased $7.2 million, or 65% to $3.9 million at
September 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 unaudited 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 $14.0 million for the
nine months ended September 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 our services, 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.
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 beyond December 31, 2001 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. If the option is exercised,
we will only be able to use or commercialize our technology outside of the US,
unless we obtain a US license from Cablevision.
Our common stock is quoted on the Nasdaq National Market System. On October 9,
2002 PVI received a letter from the Staff of NASDAQ stating that the PVI had not
met the $10 million stockholders' equity requirement for continued listing of
its common stock on the Nasdaq National Market and that its common stock was,
therefore, subject to delisting. PVI has appealed the Staff's determination to
the NASDAQ Listing Qualifications Panel and a hearing is scheduled for November
21, 2002. During the appeals process, PVI's common stock will continue to trade
on the Nasdaq National Market. PVI is also currently not in compliance with
the $1.00 minimum bid price requirement for continued listing on the Nasdaq
National Market and at the hearing must also demonstrate its ability to meet
this requirement in order to maintain its listing. Management believes that
PVI's ability to satisfy the standards for continued listing is contingent on
its ability to secure additional financing before the hearing date. The effects
of delisting include limited news coverage and the limited release of 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. If PVI is unable to
satisfy the requirements of the Nasdaq SmallCap Market, it expects that its
common stock would trade on the OTC Bulletin Board.
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 our services to television viewers,
advertisers, broadcasters and sporting events rights holders;
- - inability of third party sales forces to sell virtual 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 our systems;
- - inability to upgrade and develop software for use of our services 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 September 30, 2002 or September 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Within the 90 days prior
to the date of this Quarterly Report on Form 10-Q, our Co-Chief Executive
Officers and our principal financial officer evaluated the effectiveness of the
Company's disclosure controls and procedures as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Co-Chief Executive Officers and the principal financial
officer have concluded that the Company's current disclosure controls and
procedures are adequate and effective to ensure that information required to be
disclosed in the reports the Company files under the Exchange Act is recorded,
processed, summarized and reported on a timely basis.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation by the Co-Chief
Executive Officers and the principal financial officer.
PART II OTHER INFORMATION
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)
10.1 Summary of amendment of oral agreement between the Company,
Publicidad Virtual S.A. de C.V. and David Sitt, as amended.
10.2 Summary of amendment of oral agreement between the Company,
Publicidad Virtual S.A. de C.V. and Roberto Sonabend, as amended.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
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.
November 14, 2002 By:
/s/ David Sitt
-----------------------
David Sitt
Co-Chief Executive Officer
November 14, 2002 By:
/s/ Roberto Sonabend
-----------------------
Roberto Sonabend
Co-Chief Executive Officer
November 14, 2002 By:
/s/ James Green
-----------------------
James Green,
Chief Operating Officer
(principal financial officer)
I, David Sitt, Co-Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Princeton Video
Image, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and
we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ David Sitt
----------------------------------- ------------------------------
David Sitt
Co-Chief Executive Officer
I, Roberto Sonabend, Co-Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Princeton Video Image,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ Roberto Sonabend
-------------------------------------- ----------------------------
Roberto Sonabend
Co-Chief Executive Officer
I, James Green, Chief Operating Officer and principal financial officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Princeton Video Image,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ James Green
-------------------------------------- ------------------------------
James Green
Chief Operating Officer
(principal financial officer)
EXHIBIT INDEX
Exhibit Description
No.
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)
10.1 Summary of amendment of oral agreement between the Company, Publicidad
Virtual S.A. de C.V. and David Sitt, as amended.
10.2 Summary of amendment of oral agreement between the Company,
Publicidad Virtual S.A. de C.V. and Roberto Sonabend, as amended.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* Confidential treatment requested