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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 MARCH 31, 2003
[ ] 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 [ ]
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate number of shares of the issuer's common stock outstanding on May
6, 2003 was 18,487,802.
Part I - Financial Information
Item 1 Financial Statements
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
March 31,
----------------------------
2003 2002
---- ----
Advertising and production revenue $ 1,814,118 $ 1,280,698
Royalties and license fees 151,561 149,665
----------------------------
Total revenue 1,965,679 1,430,363
Costs and expenses:
Cost of services sold 1,588,475 1,600,380
General and administrative 1,142,591 1,857,716
Sales and marketing 764,846 958,802
Product development 666,849 984,681
Depreciation and amortization 431,601 676,330
Severance and other charges 39,868 245,500
----------------------------
Total costs and expenses 4,634,230 6,323,409
Operating loss (2,668,551) (4,893,046)
Other income (expense), net 37,186 6,455
Interest expense (1,356,634) (35,164)
Interest income 8,808 31,023
Loss from equity investment - (74,883)
----------------------------
Net loss before income taxes (3,979,191) (4,965,615)
Income taxes (20,385) (46,466)
----------------------------
Net loss (3,999,576) (5,012,081)
Accretion of preferred stock dividends (1,729) (1,730)
----------------------------
Net loss applicable to common stock $ (4,001,305) $ (5,013,811)
============================
Basic and diluted net loss per share ($ 0.22) ($ 0.29)
============================
Weighted average number of shares of
common stock outstanding 18,487,802 17,346,134
============================
2
See accompanying notes to condensed consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
as of
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 644,399 $ 937,421
Restricted securities held to maturity 63,476 63,476
Accounts receivable, net of allowances of $64,694 and $64,694 749,956 1,546,547
License rights 150,000 150,000
Prepaid airtime 1,129,211 653,685
Prepaid Cablevision discounts - 1,037,690
Other current assets 1,172,567 486,911
------------ ------------
Total current assets 3,909,609 4,875,730
Property and equipment, net 1,650,368 1,839,388
Patents, net 757,036 794,996
Identifiable intangibles, net 2,174,349 2,328,210
Goodwill 3,896,244 3,896,244
Other assets 293,681 364,611
------------ ------------
Total assets $ 12,681,287 $ 14,099,179
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,169,523 $ 5,260,963
Accounts payable to television networks 1,270,098 1,525,984
Advertising and production advances 1,479,687 202,607
Secured convertible debt 7,302,399 5,137,427
Notes payable 375,588 671,300
Payable to Presencia 218,451 333,789
Unearned revenue 55,000 129,549
------------ ------------
Total current liabilities 15,870,746 13,261,619
Refundable Cablevision advance payment 3,627,790 3,627,790
License obligations 200,000 200,000
Other liabilities 60,544 74,443
------------ ------------
Total liabilities 19,759,080 17,163,852
------------ ------------
Commitments and contingencies
(CONTINUED)
3
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
as of
March 31, December 31,
2003 2002
------------ ------------
Redeemable preferred stock:
Cumulative, Series A, conditionally redeemable, $4.50 par value, authorized,
issued and outstanding 11,363 shares at March 31, 2003 and December 31, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 82,586 81,819
Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized, issued
and outstanding 12,834 shares at March 31, 2003 and December 31, 2002;
redemption value equal to carrying value (par plus all accrued but unpaid dividends) 99,775 98,813
------------ ------------
Total redeemable preferred stock 182,361 180,632
------------ ------------
Stockholders' Equity:
Common stock, $.001 par value at March 31, 2003 and December 31, 2002;
authorized 60,000,000 shares; 18,487,802 shares issued and outstanding, net
of 214,040 treasury shares at March 31, 2003 and December 31, 2002 18,488 18,488
Additional paid-in capital 87,358,591 87,330,153
Other comprehensive (loss) income (34,273) 9,438
Accumulated deficit (94,602,960) (90,603,384)
------------ ------------
Total stockholders' equity (7,260,154) (3,245,305)
------------ ------------
Total liabilities, redeemable preferred stock, and stockholders' equity $ 12,681,287 $ 14,099,179
============ ============
4
See accompanying notes to condensed consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
March 31,
---------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (3,999,576) $ (5,012,081)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of unearned revenue (74,549) (68,269)
Depreciation expense 236,572 468,248
Amortization of intangibles/license rights 232,529 258,082
Amortization of deferred compensation - 40,962
Non-cash charges associated with stock and option grants 30,168 84,973
Loss from equity investments - 74,883
Non-cash interest expense 1,192,706 -
Changes in assets and liabilities (net of effects of acquisitions):
Accounts receivable 726,190 526,125
Prepaid airtime (478,723) 649,864
Other current assets (659,594) 90,086
Cablevision deferred revenue credit and deferred
royalty payment, net - 27,255
Other assets 33,430 (5,823)
Accounts payable and accrued expenses 59,339 (891,746)
Accounts payable to television networks (219,226) (1,680,902)
Advertising and production advances 1,228,195 952,419
Unearned revenue - 88,931
Payable to Presencia (115,338) (151,913)
Other liabilities (13,899) (13,472)
------------ ------------
Net cash used in operating activities (1,821,776) (4,562,378)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (54,839) (74,597)
Proceeds from the sale of securities 9,984 -
Increase in patents (3,210) (20,958)
Investment in/Advances to Revolution Company LLC - (10,803)
Acquisition costs - (37,275)
------------ ------------
Net cash used in investing activities (48,065) (143,633)
------------ ------------
(CONTINUED)
5
PRINCETON VIDEO IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
For the three months ended
March 31,
---------------------------
2003 2002
---- ----
Cash flows from financing activities:
Proceeds from issuance of convertible debt, net 1,862,291 -
Capitalized financing costs (24,177) -
Repayment of notes payable (275,670) -
Proceeds from option exercises - 5,705
------------ ------------
Net cash provided by financing activities 1,562,444 5,705
------------ ------------
Net (decrease) in cash and cash equivalents (307,397) (4,700,306)
Foreign exchange impact on cash 14,375 (39,286)
Cash and cash equivalents at beginning of period 937,421 8,360,353
------------ ------------
Cash and cash equivalents at end of period $ 644,399 $ 3,620,761
============ ============
Supplemental cash flow information:
Cash payments for:
Interest $ 16,790 $ 35,108
Income taxes $ 11,297 $ 6,831
Fair value of warrants/stock issued in acquisition of SciDel $ - $ 3,335,733
Non-cash acquisition costs for SciDel $ - $ 384,725
6
See accompanying notes to condensed consolidated financial statements.
PRINCETON VIDEO IMAGE, INC.
NOTES TO CONDENSED 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. 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 a prototype of iPoint(TM).
iPoint(TM) takes half of PVI's L-VIS(R) system and puts it in a set-top-box.
This would enable 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 has been 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 has been to demonstrate that virtual advertising can
create incremental advertising inventory for broadcasters, which can be used 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 year ended December 31, 2002 including the footnotes thereto,
included in our Annual Report on Form 10-K 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
7
realization of assets and the satisfaction of liabilities in the normal course
of business. We have incurred net losses of approximately $4.0 million and $21.2
million for the three months ended March 31, 2003 and the year ended December
31, 2002, respectively.
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 year ended December 31, 2002, 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.
The Company has reduced expenses to the maximum extent possible, including the
furloughing of thirty-two employees but has not been able to secure additional
financing. As a result, the Company expects to file for Chapter 11 bankruptcy
protection in the next several days. PVI is negotiating with a newly formed
entity owned by Presencia en Medios, SA de CV and Cablevision Systems
Corporation to purchase substantially all of the assets of PVI and to provide
debtor-in-possession financing for approximately 90 days. The asset sale would
be subject to bankruptcy court approval and a competitive bidding procedure in
accordance with bankruptcy law. The filing and the agreement are subject to the
successful negotiation of definitive agreements and the approval of PVI's board
of directors.
If the bankruptcy filing is completed, certain adjustments would be made to the
consolidated financial statements in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganizations Under the Bankruptcy Code".
PVI expects that if the asset sale is consummated PVI would be liquidated
pursuant to a plan of liquidation which would be subject to the approval of the
bankruptcy court. In the event of a liquidation, any recovery for shareholders
of PVI would be highly unlikely and would depend on the outcome of the
competitive bidding procedure.
If the company were to continue operations, it would still have outstanding
three secured convertible promissory notes, which were outstanding as of March
31, 2003, in the aggregate principal amount of $7,000,000 (the "Secured Notes"),
which were issued or amended pursuant to the Note Purchase and Security
Agreement with Presencia en Medios, SA de CV ("Presencia") and PVI Holding LLC,
a subsidiary of Cablevision Systems Corporation ("Cablevision") dated as of
February 18, 2003 and as amended on March 20, 2003. The Secured Notes mature on
July 31, 2003 and are secured by a security interest in all of our assets in
favor of Presencia and Cablevision. Presencia and Cablevision have the right to
extend the maturity of the Secured Notes for up to two years. In the event that
either Presencia or Cablevision choose not to extend the maturity date of the
Secured Notes held by them and we are not able to obtain additional funding, we
will not be able to repay the debt under the Secured Notes. This could result in
a default and the exercise of their rights as secured creditors by either
Presencia or Cablevision. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
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.
8
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 21,734,676 and 20,050,213 shares of common stock that were outstanding
at March 31, 2003 and 2002, 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. PRO FORMA STOCK COMPENSATION
The company accounts for its stock-based employee compensation plan under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation.
For the three months ended
March 31,
2003 2002
------------ ------------
Net loss applicable to common stock,
as reported $ (4,001,305) $ (5,013,811)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects 558,727 823,183
------------ ------------
Pro forma net loss applicable to
common stock $ (4,560,032) $ (5,836,994)
============ ============
Earnings per share:
Basic and diluted - as reported $ (0.22) $ (0.29)
============ ============
Basic and diluted - pro forma $ (0.25) $ (0.34)
============ ============
The pro forma compensation expense of $558,727 and $823,183 for the three months
ended March 31, 2003 and 2002, respectively, was calculated on the fair value of
each option using the minimum value method for those options issued prior to
October 17, 1997 (the date of initial filing with the SEC) and using the
Black-Scholes method for those options issued on October 17, 1997 and later. The
following weighted average assumptions were used in the calculations:
March 31,
2003 2002
-----------------------------
Risk free interest rate 2.45% 2.48%
Expected option lives 4.23 years 4.24 years
Expected volatility 106.7% 106.7%
4. CABLEVISION
9
On June 25, 2002, PVI entered into a Note Purchase and Security Agreement (the
"2002 Note Purchase Agreement") with PVI Holding. Pursuant to the 2002 Note
Purchase Agreement, in consideration of $5,000,000 in cash PVI issued to PVI
Holding a $5,000,000 secured convertible note, which bore interest at 10% per
annum and was to mature on March 31, 2003 (the "Note"). The Note was secured by
all of PVI's assets. . The Note provided that the holder could convert the Note
into PVI's common stock at any time prior to maturity at a price of $2.50 per
share. The Note also provided that if, prior to the maturity date, PVI sold
shares of its common stock resulting in aggregate cash proceeds of at least
$10.0 million, PVI could convert the Note into shares of its common stock at a
price of $2.50 per share or, if such common stock were sold for an aggregate
weighted average price of less than $1.00 per share, at such weighted average
price. On February 18, 2003, PVI entered into a Note Purchase and Security
Agreement (the "2003 Note Purchase Agreement") with Presencia en Medios, S.A. de
C.V. ("Presencia") and PVI Holding pursuant to which PVI issued to PVI Holding a
$5,000,000 amended and restated secured convertible note in replacement of the
Note (the "Amended and Restated Note"). The Amended and Restated Note is
initially convertible by the holder into common stock of PVI at $.75 per share.
In the event that PVI sells any security (equity, debt or otherwise) in a
qualifying transaction (a "New Financing"), the holder of the Amended and
Restated Note would have the right to convert the Amended and Restated Note to
PVI common stock at $.75 per share or into the security being issued by PVI in
the New Financing, on the same terms as such security is being sold in the New
Financing. Following the first New Financing, the common stock conversion price
of $.75 per share is increased to $2.50 per share. In addition, the holder will
have the right to convert the Amended and Restated Note into any security issued
in any New Financing that occurs while the Amended and Restated Note is
outstanding, subject to all of the terms of such New Financing. The holder of
the Amended and Restated Note is prohibited from converting it under any
circumstances at a price below $.38 per share, the closing price of PVI's common
stock on February 14, 2003. The Amended and Restated Note is secured by all of
PVI's assets. Pursuant to the 2002 Note Purchase Agreement, PVI also amended the
warrants that the Company issued to PVI Holding on September 20, 2001. The
amended warrant 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 contains 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. Refer to note 17 "Subsequent events" for details
of amendments to this agreement.
Concurrent with the issuance of the Note on June 25, 2002, PVI granted
Cablevision certain other rights, including the following:
a) The conversion of a license for iPoint(TM) 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(R) 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(R) License Agreement, which grants Cablevision and its affiliates
the right to use our L-VIS(R) System and related proprietary rights in its
businesses, 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 $10.0
million in the form of equity financing and/or certain other non-refundable cash
funding by March 31, 2003 (later extended to July 31, 2003 in connection with
the 2003 Note Purchase Agreement). 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.
10
Concurrent with the issuance of the Note, Publicidad and Presencia also amended
an existing consulting services agreement (see note 15), 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(TM) 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 $497,788 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
three months ended March 31, 2003, $1,289,064 was recognized as interest expense
for amortization of the discount, fair value accretion, and stated interest. As
of March 31, 2003, the prepaid discount to Cablevision is fully depreciated.
5. PRESENCIA
Pursuant to the 2003 Note Purchase Agreement, PVI issued to Presencia secured
convertible notes in the amount of $1,500,000 and $500,000, on February 18, 2003
and March 20, 2003, respectively, in exchange for cash. These notes bear
interest at 10% per annum and mature on July 31, 2003 (with the holder having
the right to extend the maturity date for up to two years) upon terms identical
to those of the PVI Holding Amended and Restated Note. The notes are initially
convertible by the holders into common stock of PVI at $.75 per share. In the
event that PVI sells any security (equity, debt or otherwise) in a qualifying
transaction (a "New Financing"), the holders of the notes would have the right
to convert the notes to PVI common stock at $.75 per share or into the security
being issued by PVI in the New Financing, on the same terms as such security is
being sold in the New Financing. Following the first New Financing, the common
stock conversion price of $.75 per share is increased to $2.50 per share. In
addition, the holders will have the right to convert the notes into any security
issued in any New Financing that occurs while the notes are outstanding, subject
to all of the terms of such New Financing. The holders of the notes are
prohibited from converting the notes under any circumstances at a price below
$.38 per share, the closing price of PVI's common stock on February 14, 2003. To
secure payment of its obligations under the notes, PVI has granted Presencia a
security interest in all of its assets. As a result of this transaction, PVI
Holding and Presencia share
11
the security interest in PVI's assets on a pari passu basis. Refer to note 17
"Subsequent events" for details of amendments to this agreement.
6. 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 $3.7 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 349,231
------------
Total purchase price $ 3,684,964
============
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%
The final allocation of the purchase price to the acquired assets and assumed
liabilities of SciDel based on a fair value appraisal of the assets and
liabilities and acquisition costs is 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 1,398,876
------------
Total purchase price $ 3,684,964
============
In the fourth quarter of 2002, as part of our annual SFAS Nos. 142 and 144
analyses, a write-down of goodwill and the identifiable intangible assets was
recorded.
The purchase of SciDel has been recorded with an effective date of March 26,
2002, and thus is included in operations from then forward.
12
For the three-months ended March 31, 2003, amortization expense of the
intangible assets identified as part of the SciDel acquisition was $38,685.
The following is a pro forma summary of the unaudited results of operations as
if the SciDel acquisition had been completed on January 1, 2002:
For the three
months ended
March 31, 2002
--------------
Revenues $ 1,528,363
Net Loss (5,503,961)
Net Loss Applicable to Common Stock (5,505,691)
Basic and diluted net loss per share
applicable to common stock $ (0.30)
Weighted average number of shares
of common stock outstanding 18,419,467
7. SEVERANCE AND OTHER CHARGES
In February 2002, we recorded $245,500 of additional severance expense as a
result of the continued streamlining of our operations in both the United States
and Belgium. During the three months ended March 31, 2002, a total of five and
nine positions were eliminated in our European and domestic offices,
respectively, representing approximately 63% and 13% of the total workforce in
the respective regions.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2002 to March 31, 2002:
Type of Cost
-----------------------------------------
Employee Facility
Separations Closings Total
-----------------------------------------
Balance at January 1, 2002 $ 980,983 $ 78,979 $ 1,059,962
Additions 245,500 - 245,500
Deductions (186,511) (24,524) (211,035)
-----------------------------------------
Balance at March 31, 2002 $ 1,039,972 $ 54,455 $ 1,094,427
=========================================
In the three months ended March 31, 2003, we recorded $39,868 of severance and
facility shutdown expenses as a result of the continued streamlining of our
operations in both the United States and Israel. During the three months ended
March 31, 2003, one position was eliminated in our domestic office resulting in
a charge of $6,438. In addition, we recorded $33,430 to severance and other
charges for the buyout of future lease payments due on our Israeli office. As a
result of the reduction in staff in our Israel subsidiary in December 2002, the
space was vacated in January 2003.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2003 to March 31, 2003:
13
Type of Cost
-----------------------------------------
Employee Facility
Separations Closings Total
-----------------------------------------
Balance at January 1, 2003 $ 395,596 $ 39,661 $ 435,257
Additions 6,438 33,430 39,868
Deductions (117,079) (42,508) (159,587)
-----------------------------------------
Balance at March 31, 2003 $ 284,955 $ 30,583 $ 315,538
=========================================
The balance as of March 31, 2003 is expected to be paid out during the fiscal
year ending December 31, 2003.
8. NOTES PAYABLE
In 2001, Publicidad obtained a short-term loan, denominated in Mexican pesos,
from a Mexican bank which was payable in May 2002. The note, which is guaranteed
by Presencia, bore an interest rate of 10.9%. Proceeds from the loan were used
to fund the installment payments due to Televisa and TV Azteca. On June 13,
2002, Publicidad signed a promissory note to restructure the loan 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 note 15) and matures on July 7, 2003. Monthly interest is payable at the
end of each period at a variable rate based on the interbank rate in Mexico plus
three points (12.15% at March 31, 2003). The balance of the notes payable at
March 31, 2003 and December 31, 2002 was $375,588 and $671,300, respectively.
9. PAYABLE TO PRESENCIA
As a result of the merger with Publicidad, Publicidad entered into a consulting
services agreement with Presencia (see note 15) 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 plus 15% VAT (approximately $255,000). The balance payable to
Presencia under these agreements was $218,451 and $333,789, on March 31, 2003
and December 31, 2002, respectively.
10. GUARANTEE OF PERFORMANCE BOND
In March 2003, Publicidad executed a performance bond, which 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 a condition of the performance bond,
Publicidad remitted approximately $657,279 as a security deposit to the bond
company, which is included in other current assets. As of March 31, 2003, the
unused balance protected by the performance bond was $1,013,430, which is
included as a portion of the advertising and production advances on the balance
sheet.
11. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income", requires disclosure of total comprehensive income. Comprehensive losses
for the three months ended March 31, 2003 and 2002 was as follows:
14
For the three months ended March 31,
2003 2002
---- ----
Net loss $ (3,999,576) $ (5,012,081)
Foreign currency translation adjustments (43,711) 932
---------------------------
Comprehensive loss $ (4,043,287) $ (5,011,149)
===========================
12. 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 6, 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 months ending March 31, 2003 and
2002, there were no adjustments to earnings because the closing price of our
common stock was less than the exercise price of $4.375.
15
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 15), then 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, and March 10, 2002 at
an exercise price of $2.22, $1.51, $1.77, respectively. Using the Black-Scholes
valuation method, a charge of $17,619 was recorded for the three months ended
March 31, 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 $30,168 was recorded for the three months ended
March 31, 2003 and 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 $9,509 was
recorded for the three months ended March 31, 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 $22,677 was recorded for the three months ended March 31,
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.
In October 2002, the Compensation Committee approved that an additional 100,000
option shares be added to the discretionary option pool and authorized the use
of such pool be extended until December 31, 2003. As of March 31, 2003 and 2002,
options to purchase a total of 72,990 and 32,500 shares of common stock had been
granted from this pool, respectively. No compensation expense was recorded in
connection with options granted to employees out of this option pool, 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 the grant to each of our
co-Chief Executive officers ("co-CEO") of an option to purchase 10,000 shares of
common stock, up to a maximum of 60,000 shares (later increased to 180,000
shares) 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. 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. As of March 31, 2003,
each co-CEO had received options to purchase 180,000 shares of common stock. No
compensation expense was recorded in connection with these transactions as
16
the exercise price of the options was equal to the fair market value of our
common stock on the date of each grant.
In February 2003, the Board of Directors approved the grant of 275,000 options
to each of David Sitt and Roberto Sonabend in consideration of service as
Corporate Vice Presidents of Publicidad. Of these options 75,000 vested
immediately and the remainder vests in equal monthly installments over 24
months. The term of the options is ten years from date of grant and the exercise
price is $.50 per share. At the same time the Board of Directors approved the
grant of 55,000 options to each of David Sitt and Roberto Sonabend in
consideration of salary reductions in August, September and October, 2002. Such
options vested immediately and have a term of ten years from date of grant and
an exercise price of $1.00 per share.
13. 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
MARCH 31, 2003
Revenue from external
customers $ 342,765 $ 1,517,114 $ - $ 105,800 $ - $ 1,965,679
Inter-company revenues 203,845 - - 17,411 (221,256) -
Operating (loss) (2,164,557) (424,579) - (79,415) - (2,668,551)
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 2002
Revenue from external
customers $ 346,380 $ 1,028,731 $ 47,152 $ 8,100 $ - $ 1,430,363
Inter-company revenues 380,244 - - - (380,244) -
Operating (loss) (3,260,265) (1,109,635) (586,296) (2,472) 65,622 (4,893,046)
- -----------------------------------------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES
SARNOFF AGREEMENT
David Sarnoff Research Center, Inc. ("Sarnoff") has granted PVI a worldwide
license to practice Sarnoff's technology related to the electronic recognition
of landmarks, including an exclusive license covering the specific fields of
television advertising and television sports. We have also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising.
During the term of the exclusive license for television advertising and
television sports applications, we are obligated to pay Sarnoff royalties based
upon a percentage of our gross revenues. During the first several years of the
agreement, all royalties were accrued as earned. Payments for all accrued
royalties through December 31, 1998 became due in January 1999 and were paid in
full by December 1999. Commencing in January 1999, minimum quarterly royalties
of $100,000 became due in order to maintain the license. For the calendar years
1999 and 2000 and the first quarter of
17
2001, we had the option of paying these minimum royalties in cash or with PVI
stock at its last issue price and, accordingly, elected to issue stock for all
royalties due for the years ended December 31, 1999 and 2000 and the quarter
ended March 31, 2001. Royalties earned subsequent to March 31, 2001 are required
to be paid in cash. Accordingly, we recorded total royalty expense in the amount
of $100,000 for the three months ended March 31, 2003 and 2002, respectively. As
of March 31, 2003, we had a payable balance of $800,000 to Sarnoff.
On September 20, 2002, we notified Sarnoff that we are no longer using the
technology and patents licensed to us by Sarnoff effective June 30, 2002.
THESEUS AGREEMENT
In December 1995, we entered into a license agreement with Theseus Research,
Inc. ("Theseus") whereby we were granted a non-exclusive worldwide license,
without the right of sublicense, to use Theseus technology in our system. A
prepayment was made at the time the agreement was executed and royalties earned
are offset against this prepayment. As of March 31, 2003, the royalties earned
were greater than the initial prepayment, and as such, we have recorded an
accrual of $5,331 for the difference. During the term of the license, we will
pay royalties of between .05% and .20% of net sales on a quarterly basis. The
agreement terminates with the expiration of the last of the patents included in
the licensed technology.
PVI ISRAEL ROYALTY
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. As of March 31, 2003 and December 31,
2002, we had an accrued royalty balance of $21,866 and $16,257 for this
commitment, respectively.
15. 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 services 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. For the three
months ended March 31, 2003 and 2002, we have accrued $46,551 and $96,570,
respectively, in contingent service fees and commission override fees payable to
Presencia pursuant to this agreement. The balance payable to Presencia under
these agreements was $218,451 and $333,789, on March 31, 2003 and December 31,
2002, respectively.
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. In February 2003, PVI
entered into employment agreements with each of David Sitt and Roberto Sonabend.
For their services as Corporate Vice Presidents of Publicidad, each of Messrs.
Sitt and Sonabend will be paid an annual salary of $200,000. The employment
agreements provide that Messrs. Sitt and Sonabend are
18
employees at will and are entitled to six months severance under certain
specified circumstances. 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 $17,619 was recorded for the
three months ended March 31, 2002. The consulting agreement expired May 15,
2002. Mr. Romano resigned from the Board of Directors effective April 11, 2003.
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 former 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. Mr. Torkelsen resigned from the Board on January 15,
2003.
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.
16. LEGAL PROCEEDINGS
On April 25, 2003, an action was commenced in the Civil Court of the City of New
York, County of New York, by Southern Progress Corporation, our landlord for our
New York City office, located at 100 Park Avenue, for unpaid rent, late charges
and utilities in the aggregate amount of $80,661 (plus legal costs) and a
warrant of eviction. PVI plans to respond to this action in a timely manner. PVI
has recorded a liability for the rent owed as of March 31, 2003.
On January 30, 2003, PVI filed a bankruptcy request in respect of its
subsidiary, PVI Europe NV, a Belgian corporation, with the Commercial Court in
Brussels. On February 5, 2003, PVI Europe NV was declared bankrupt by the
Commercial Court of Brussels.
17. SUBSEQUENT EVENTS
On April 7, 2003, PVI sold a $650,000 secured convertible promissory note to
Presencia. This note has terms identical to those notes described in note 5. On
the same date, in connection with the sale of this note and pursuant to the 2003
Note Purchase Agreement, PVI (a) issued to Presencia warrants to purchase 34,932
shares of common stock at an exercise price of $6.22 per share, (b) amended
previously outstanding warrants to purchase 1,536,825 shares of PVI common stock
held by Presencia to reduce the exercise price by 22.22% of the original
exercise price and extend the expiration date by four years and (c) issued to
PVI Holding warrants to purchase 106,329 shares of common stock at an exercise
price of $6.53 per share and 2,658 shares of common stock at an exercise price
of $9.43 per share. In addition, pursuant to the 2003 Note Purchase Agreement,
the Stock and Warrant Purchase Agreement, dated as of February 4, 2001, by and
between PVI and PVI Holding, as amended by letter agreement, dated as of July
23, 2001, was further amended to reflect PVI Holding's waiver of certain of its
governance rights.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for a discussion of the Company's anticipated filing
for Chapter 11 bankruptcy protection. On May 19, 2003, PVI's Board of Directors
authorized PVI's Mexican subsidiary, Publicidad Virtual, SA de CV ("PV") to
enter into an agreement with Presencia en Medios, SA de CV ("Presencia")
pursuant to which Presencia will make a loan of approximately $200,000 to PV.
The loan will be secured by a pledge of approximately $200,000 of PV's accounts
receivable, will bear simple interest at the rate of 10% per annum and will
have a term of sixty (60) days. The loan is intended to fund operating expenses
of PV and PVI pending the anticipated Chapter 11 bankruptcy filing.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
19
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, 2002
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 March 31, 2003 and December 31,
2002 we had an accumulated deficit of approximately $94,603,000 and $90,603,000,
respectively. This deficit is largely the result of product development expenses
incurred in the development and commercialization of the Live Video Insertion
System ("L-VIS(R) System") and iPoint(TM), an advanced application of PVI's
patented technology that would support state of the art in-program advertising
over the Internet or interactive television, expenses related to field testing
of the L-VIS(R) System and its deployment pursuant to customer contracts,
operating expenses relating to our field operations and sales and marketing
activities, and general administrative costs. We expect to incur additional
losses in the next fiscal year as we strive to evolve into a sports and
entertainment focused global, media services company. We will continue our
business strategy of developing new products and increasing our penetration in
both the domestic and international markets in the field of real-time virtual
image insertion.
We have derived revenue from ads sold by rights holders that use the L-VIS
System, from strategic licensing of the L-VIS System to third parties, and from
fees paid for the services provided by the L-VIS System which support the
electronic insertion of visual aids in live sports and entertainment
programming. We have incurred significant operating losses and negative cash
flows in each year since we commenced operations.
As previously reported in our Annual Report on Form 10-K for the year ended
December 31, 2002, there has been substantial doubt concerning our ability to
continue as a going concern. The Company has reduced expenses to the maximum
extent possible, including the furloughing of thirty-two employees but has not
been able to secure additional financing. As a result, the Company expects to
file for Chapter 11 bankruptcy protection in the next several days. PVI is
negotiating with a newly formed entity owned by Presencia en Medios, SA de CV
and Cablevision Systems Corporation to purchase substantially all of the assets
of PVI and to provide debtor-in-possession financing for approximately 90 days.
The asset sale would be subject to bankruptcy court approval and a competitive
bidding procedure in accordance with bankruptcy law. The filing and the
agreement are subject to the successful negotiation of definitive agreements
and the approval of PVI's board of directors.
If the bankruptcy filing is completed, certain adjustments would be made to the
consolidated financial statements in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganizations Under the Bankruptcy Code".
PVI expects that if the asset sale is consummated PVI would be liquidated
pursuant to a plan of liquidation which would be subject to the approval of the
bankruptcy court. In the event of a liquidation, any recovery for shareholders
of PVI would be highly unlikely and would depend on the outcome of the
competitive bidding procedure.
20
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED MARCH 31, 2003 TO THE QUARTER ENDED MARCH 31,
2002 (UNAUDITED)
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 March 31, 2003
increased 37% to $1,965,679 from $1,430,363 for the three months ended March 31,
2002. Total advertising and production revenue increased 42% to $1,814,118 for
the three months ended March 31, 2003 from $1,280,698 for the three months ended
March 31, 2002. The increase in advertising and production revenues of $619,000
is due to increased revenues from our international subsidiaries, and activity
in domestic college football. These increases are primarily due to an increase
in volume for the NFLI international feed of Superbowl XXXVII in Mexico, and the
introduction of virtual insertions for the ABC College Bowl Series on New Year's
Day. These increases in advertising and production revenue were partially offset
by reductions of approximately $86,000, primarily due to the non-renewal of the
contracts from CBS Early show and Grammy Awards. Total royalties and license
fees increased 1% to $151,561 from $149,665 for the three months ended March 31,
2003 and 2001, respectively. The increase is due to the increased volume for the
international feed of NFL activity with our Canadian Licensee, offset by the
termination of the agreement with our Korean Licensee.
COST OF SERVICES SOLD. Costs of services sold expenses include airtime expenses
and the costs associated with the material production, operational support of
our systems for both domestic and international use, including training costs
for operators, maintenance of our mobile production units,
21
and support of our systems in the field. Total cost of services sold expenses
for the three months ended March 31, 2003 decreased 1% to $1,588,475 from
$1,600,380 for the three months ended March 31, 2002. The decrease is a result
of the reduction of staff in operations and vehicle expenses due to the
introduction of the studio vision based system resulting in a production cost
savings of approximately $206,000. This was offset by an increase of $187,000 in
airtime purchased for virtual advertising in both sports and entertainment
programming.
GENERAL AND ADMINISTRATIVE. Total general and administrative expenses decreased
38% to $1,142,591 for the three months ended March 31, 2003 from $1,857,716 for
the three months ended March 31, 2002. The decreases were due to a reduction in
the administrative staff that resulted in a decrease in salaries of $251,000,
the closure of the European office that resulted in savings of $157,000 in
administrative expenses. Another contributing factor was reductions in other
general expenses in the Mexico subsidiary of $72,000 and reductions in Legal,
Consultant, and other Administrative Fees of $235,000 related to our continued
cost reduction efforts.
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 three months ended March 31, 2003 decreased
20% to $764,846 from $958,802 for the three months ended March 31, 2002. The
decreases were a result of the closure of European office that resulted in
savings of $105,000 in marketing expenses along with reduced trade show
activities, and the use of outside consultants, which resulted in a savings of
$89,000.
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 decreased
32% to $666,849 for the three months ended March 31, 2003 from $984,681 for the
three months ended March 31, 2002. The decreases were due to a reduction in the
engineering staff that resulted in a decrease in salaries and outside services
of $394,000. This is offset by the inclusion of approximately $76,000 for PVI
Israel research costs.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expenses
decreased by 36% to $431,601 for the three months ended March 31, 2003 from
$676,300 for the three months ended March 31, 2002 as a result of a decreased
depreciation related to assets that are fully depreciated.
SEVERANCE AND OTHER CHARGES. Total severance and other charges were $39,868 for
the quarter ended March 31, 2003 as compared to $245,500 for the quarter ended
March 31, 2002. The decrease is a result of the absence of the severance costs
of $245,000 associated with the closure of the European office that was incurred
in the year ago period. This was partly offset by a $33,000 charge associated
with the restructuring of the Israeli office and a $6,000 severance charge in
the parent company. Refer to note 7 for more details.
OTHER INCOME (EXPENSE), NET. Total other income (expense), net was $37,186 for
the three months ended March 31, 2003 as compared to $6,455 for the three months
ended March 31, 2002. The increase was primarily the result of the inclusion of
PVI Europe's foreign exchange losses of $59,000 on their US dollar denominated
intercompany payables to the parent company in the three months ended March 31,
2002 with no corresponding loss in the three months ended March 31, 2003. This
increase was partially offset by $18,000 of franchise and other taxes incurred
in the three months ended March 31, 2003. Also offsetting the increase was a
reduction in Publicidad's foreign exchange gains of $15,000 on their US dollar
denominated intercompany payables to the parent company.
INTEREST EXPENSE. Total interest expense was $1,356,634 for the three months
ended March 31, 2003 as compared to $35,164 of interest income for the three
months ended March 31, 2002. This increase is primarily due to $1,340,000 of
interest expense related to the Cablevision and Presencia
22
transactions dated June 25, 2002 (see notes 4 and 5), of which, $1,193,000 is
non-cash, and the balance of which will either be paid in cash or PVI stock.
INTEREST INCOME. Total interest income was $8,808 for the three months ended
March 31, 2003 as compared to $31,023 of interest income for the three months
ended March 31, 2002. This decrease is a result of lower cash balances available
for investment.
LOSS FROM EQUITY INVESTMENT. Loss from equity investment decreased by 100% to $0
for the three months ended March 31, 2003 from $74,883 for the three months
ended March 31, 2002 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. In December 2002, the Board concluded that the carrying amount of
the investment is not recoverable based on its undiscounted cash flows from
Revolution Company, LLC, and as such, the remaining investment balance of
$578,598 was written off.
NET LOSS. As a result of the foregoing factors, our net loss decreased 20% to
$3,999,576 for the three months ended March 31, 2003 from $5,012,081 for the
three months ended March 31, 2002.
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. As of March 31, 2003 and 2002, no charge was
necessary as the closing price of our common stock on those dates were 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 regions including
the United States, Latin America, Canada, Europe and all other regions. For the
period ended March 31, 2003, total revenues increased $535,316 to $1,965,679
from $1,430,363 in the same period in 2002. This increase was due to Latin
America's increase of approximately $488,000 in revenue primarily as a result of
political elections and the increase of advertising space in broadcasts of
soccer matches in Mexico. In 2003, we recognized approximately $98,000 of
additional revenue in Israel as a result of consolidating their results for a
full three months. Offsetting these increases was the elimination of
approximately $47,000 in PVI Europe revenue as a result of the office closing in
Belgium.
Operating Loss decreased $2,224,495 to $2,668,551 for the three months ended
March 31, 2003 from $4,893,046 for the three months ended March 31, 2002.
Operating losses in the United States declined by approximately $1.1 million as
a result of the continued effort to reduce overhead expenses and the
introduction of the studio vision based system. Also contributing to the
improvement in operating loss is the increase in Latin America's gross margins
of approximately $296,000 and the elimination of PVI Europe's operating loss of
approximately $586,000 as a result of the office closing in Belgium.
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
23
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 March 31, 2003, we had cash and cash equivalents of $644,399, a decrease
of $293,022 from the balance at December 31, 2002. Net cash used in operating
activities decreased to $1,766,358 for the three months ended March 31, 2003
from $4,562,378 for the three months ended March 31, 2002. The decrease was due
to a reduction in net losses of approximately $1.0 million and a $1.2 million
non-cash interest expense charge in the three months ended March 31, 2003 with
no corresponding transaction in the three months ended March 31, 2002. Also
contributing to the decrease in cash used was an increase in our accounts
payable and accrued expenses balance of approximately $2.4 million primarily as
a result of reduced payments to television rightsholders for virtual advertising
rights as well as an increase in advertising and production advances of
approximately $276,000 from our customers. These were partially offset by the
increase in prepaid television airtime of approximately $1.1 million, as well as
an increase in other current assets of approximately $750,000, which was
primarily due to a deposit on a performance guarantee required by one of
Publicidad's customers.
Net cash used in investing activities decreased to $48,065 for the three months
ended March 31, 2003 from $143,633 for the three months ended March 31, 2002 as
a result of the reduction of approximately $37,000 due to the absence of
acquisition costs, which occurred in the prior year, and an approximately
$20,000 reduction in purchases of property, plant and equipment.
Net proceeds from financing activities increased to $1,562,444 for the three
months ended March 31, 2003 from $5,705 for the three months ended March 31,
2002. The increase was primarily a result of net receipts of approximately $1.9
million from Presencia in consideration for the issuance of a secured
convertible note, which was recorded during the three months ended March 31,
2003. This was offset slightly by a repayment of approximately $276,000 of
Publicidad's note payable in the same period.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for a discussion of the Company's anticipated filing for
Chapter 11 bankruptcy protection.
FINANCIAL CONDITION
Total assets decreased $1.4 million, or 10%, to $12.7 million at March 31, 2003
from $14.1 million at December 31, 2002. This decrease was primarily due to the
amortization of prepaid Cablevision discounts of approximately $1.0 million as
well as a decrease of approximately $797,000 in trade receivables. These
decreases were partially offset by an increase of approximately $686,000 in
other current assets, primarily due to a deposit on a performance guarantee
required by one of Publicidad's customers.
Total liabilities increased $2.6 million, or 15% to $19.8 million at March 31,
2003 from $17.2 million at December 31, 2002 resulting primarily from the
issuance of $2.0 million of convertible debt to Presencia (see note 5). Also
contributing to the increase in total liabilities was a $1.3 million increase in
advertising and production advances. These increases were partly offset by a
reduction in the balance of accounts payable to vendors and television networks
of approximately $347,000 and reductions to notes payable and Presencia payable
of approximately $411,000.
Total stockholders' equity decreased $4.0 million, or 124% to ($7.2) million at
March 31, 2003 from ($3.2) million at December 31, 2002 primarily as a result of
net losses from continuing operations.
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 year ended December 31, 2002 including the footnotes thereto,
included in our Annual Report on Form 10-K 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 $4.0 million and $21.2 million for the
three months ended March 31, 2003 and the year ended December 31, 2002,
respectively.
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 year ended December 31, 2002, 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.
The Company has reduced expenses to the maximum extent possible, including the
furloughing of thirty-two employees but has not been able to secure additional
financing. As a result, the Company expects to file for Chapter 11 bankruptcy
protection in the next several days. PVI is negotiating with a newly formed
entity owned by Presencia en Medios, SA de CV and Cablevision Systems
Corporation to purchase substantially all of the assets of PVI and to provide
debtor-in-possession financing for approximately 90 days. The asset sale would
be subject to bankruptcy court approval and a competitive bidding procedure in
accordance with bankruptcy law. The filing and the agreement are subject to the
successful negotiation of definitive agreements and the approval of PVI's board
of directors.
If the bankruptcy filing is completed, certain adjustments would be made to the
consolidated financial statements in accordance with Statement of Position 90-7
"Financial Reporting by Entities in Reorganizations Under the Bankruptcy Code".
PVI expects that if the asset sale is consummated PVI would be liquidated
pursuant to a plan of liquidation which would be subject to the approval of the
bankruptcy court. In the event of a liquidation, any recovery for shareholders
of PVI would be highly unlikely and would depend on the outcome of the
competitive bidding procedure.
If the company were to continue operations, it would still have outstanding
three secured convertible promissory notes, which were outstanding as of March
31, 2003, in the aggregate principal amount of $7,000,000 (the "Secured Notes"),
which were issued or amended pursuant to the Note Purchase and Security
Agreement with Presencia en Medios, SA de CV ("Presencia") and PVI Holding LLC,
a subsidiary of Cablevision Systems Corporation ("Cablevision") dated as of
February 18, 2003 and as amended on March 20, 2003. The Secured Notes mature on
July 31, 2003 and are secured by a security interest in all of our assets in
favor of Presencia and Cablevision. Presencia and Cablevision have the right to
extend the maturity of the Secured Notes for up to two years. In the event that
either Presencia or Cablevision choose not to extend the maturity date of the
Secured Notes held by them and we are not able to obtain additional funding, we
will not be able to repay the debt under the Secured Notes. This could result
in a default and the exercise of their rights as secured creditors by either
Presencia or Cablevision. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
24
Our common stock traded on The Nasdaq National Market (the "National Market")
from December 17, 1997 to January 6, 2003, and on the Nasdaq SmallCap Market
(the "SmallCap Market") from January 7, 2003 to March 12, 2003 under the symbol
"PVII."
Since March 13, 2003, our common stock has been quoted on the Over-the-Counter
(OTC) Bulletin Board and continues to trade under the ticker symbol PVII. Our
common stock was transferred from the National Market to the SmallCap Market on
January 7, 2003 pursuant to a Nasdaq decision, which required that, to maintain
the listing on the SmallCap Market, our common stock must evidence a closing bid
price of at least $1.00 per share on or before March 10, 2003. Our common stock
failed to achieve that bid price and effective with the close of business on
March 12, 2003, our common stock was delisted from The Nasdaq Stock Market. The
effects of this delisting may include limited news coverage and the limited
release of the market prices of our common stock. Delisting may
25
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.
As of December 31, 2002, we had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $54,530,000, which expire in the
years 2006 through 2022. The timing and manner in which the U.S. net operating
loss carryforwards may be utilized in any year by us, will be limited by
Internal Revenue Code Section 382. As of December 31, 2002, we had foreign net
operating loss carryforwards of approximately $4,843,000, which primarily expire
in the years 2006 through 2011.
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.
SUBSEQUENT EVENTS
On April 7, 2003, PVI sold a $650,000 secured convertible promissory note to
Presencia. This note has identical terms as the notes described in note 5. On
the same date, in connection with the sale of this note and pursuant to the 2003
Note Purchase Agreement, PVI (a) issued to Presencia warrants to purchase 34,932
shares of common stock at an exercise price of $6.22 per share and (b) amended
previously outstanding warrants to purchase 1,536,825 shares of PVI common stock
held by Presencia to reduce the exercise price by 22.22% of the original
exercise price and extend the expiration date by four years. In addition,
pursuant to the 2003 Note Purchase Agreement, the Stock and Warrant Purchase
Agreement, dated as of February 4, 2001, by and between PVI and PVI Holding, as
amended by letter agreement, dated as of July 23, 2001, was further amended to
reflect PVI Holding's waiver of certain of its governance rights.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" for a discussion of the Company's anticipated filing
for Chapter 11 bankruptcy protection. On May 19, 2003, PVI's Board of Directors
authorized PVI's Mexican subsidiary, Publicidad Virtual, SA de CV ("PV") to
enter into an agreement with Presencia en Medios, SA de CV ("Presencia")
pursuant to which Presencia will make a loan of approximately $200,000 to PV.
The loan will be secured by a pledge of approximately $200,000 of PV's accounts
receivable, will bear simple interest at the rate of 10% per annum and will
have a term of sixty (60) days. The loan is intended to fund operating expenses
of PV and PVI pending the anticipated Chapter 11 bankruptcy filing.
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, may
contain forward-looking statements that would be relevant if the Company were
to continue in operation. As described above in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview," the
Company anticipates filing for Chapter 11 bankruptcy protection. However, if
the Company were to continue operations, any forward-looking statements such as
statements discussing future expectations and projections of results of
operations or financial conditions would be subject to risks that could cause
actual results to differ from any projections contained in the 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;
26
- 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 March 31, 2003 or March 31, 2002. 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 1. Legal Proceedings.
On April 25, 2003, an action was commenced in the Civil Court of the
City of New York, County of New York, by Southern Progress Corporation, our
landlord for our New York City office, located at 100 Park Avenue, for unpaid
rent, late charges and utilities in the aggregate amount of $80,661 (plus legal
costs) and a warrant of eviction. PVI plans to respond to this action in a
timely manner.
On January 30, 2003, PVI filed a bankruptcy request in respect of its
subsidiary, PVI Europe NV, a Belgian corporation, with the Commercial Court in
Brussels. On February 5, 2003, PVI Europe NV was declared bankrupt by the
Commercial Court of Brussels.
27
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 Note Purchase and Security Agreement dated as of February 18, 2003, among Princeton Video Image, Inc., Presencia en Medios,
S.A. de C.V., and PVI Holding LLC. (Incorporated by reference to Exhibit 10. 29 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, filed on April 1, 2003)
10.2 Amendment dated as of March 20, 2003, to Note Purchase and Security Agreement dated as of February 18, 2003, among
Princeton Video Image, Inc., Presencia en Medios, S.A. de C.V., and PVI Holding LLC.
10.3 Second Amendment dated as of April 4, 2003, to Note Purchase and Security Agreement dated as of February 18, 2003, among
Princeton Video Image, Inc., Presencia en Medios, S.A. de C.V., and PVI Holding LLC.
10.4 Convertible Promissory Note dated as of February 18, 2003, from Princeton Video Image, Inc. to Presencia en Medios, S.A. de
C.V. (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, filed on April 1, 2003)
10.5 Convertible Promissory Note dated as of March 20, 2003, from Princeton Video Image, Inc. to Presencia en Medios, S.A. de
C.V.
10.6 Convertible Promissory Note dated as of April 7, 2003, from Princeton Video Image, Inc. to Presencia en Medios, S.A. de
C.V.
10.7 Amendment dated as of February 18, 2003 to Option Agreement dated as of June 25, 2002 between Princeton Video Image, Inc.
and Cablevision Systems Corp. (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, filed on April 1, 2003)
10.8 Amendment dated as of February 18, 2003, to Proprietary Information Escrow Agreement, dated as of June 25, 2002, among
Princeton Video Image, Inc., Cablevision Systems Corp., and Kramer Levin Naftalis & Frankel LLP. (Incorporated by reference
to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on April 1,
2003)
10.9+ Offer of Employment Letter Princeton Video Image, Inc. to David Sitt dated February 18, 2003. (Incorporated by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on April 1,
2003)
28
10.10+ Offer of Employment Letter from Princeton Video Image, Inc. to Roberto Sonabend dated February 18, 2003. (Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed
on April 1, 2003)
10.11 Amended and Restated Convertible Promissory Note dated February 18, 2003, from Princeton Video Image, Inc. to PVI Holding
LLC. (Incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, filed on April 1, 2003)
10.12 Amendment dated as of February 18, 2003 to the Reorganization Agreement dated as of December 28, 2000, among Princeton
Video Image, Inc., Presencia en Medios, S.A., Eduardo Sitt, David Sitt, Roberto Sonabend, Presence en Media LLC, Virtual
Advertisement LLC, PVI LA, LLC, and Princeton Video Image Latin America, LLC. (Incorporated by reference to Exhibit 10.36
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on April 1, 2003)
10.13+ Letter Agreement, dated March 28, 2003, amending Employment Agreement between Princeton Video Image, Inc. and Brown F
Williams.
10.14 Amendment dated as of April 4, 2003 to Stock and Warrant Purchase Agreement, dated as of February 4, 2001, by and between
Princeton Video Image, Inc. and PVI Holding, LLC, as amended.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------
+ Denotes a management contract or compensation plan or arrangement
required to be filed as an exhibit pursuant to Item 14(a) of this Form
10-Q.
(b) Reports on Form 8-K
On January 8, 2003, PVI filed a current report on Form 8-K, dated January 7,
2003, reporting that the listing of its common stock was transferred to The
Nasdaq Small Cap Market.
On January 21, 2003, PVI filed a current report on Form 8-K, dated January 21,
2003, reporting the resignation of John Torkelsen from its Board of Directors.
On February 21, 2003, PVI filed a current report on Form 8-K, dated February 18,
2003, reporting the issuance of secured convertible debt pursuant to a Note
Purchase and Security Agreement.
On March 12, 2003, PVI filed a current report on Form 8-K reporting the
delisting of its common stock from The Nasdaq Stock Market.
29
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.
May 20, 2003 By: /s/ David Sitt
-----------------------------
David Sitt
Co-Chief Executive Officer
May 20, 2003 By: /s/ Roberto Sonabend
-----------------------------
Roberto Sonabend
Co-Chief Executive Officer
May 20, 2003 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: May 20, 2003 /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: May 20, 2003 /s/ Roberto Sonabend
-----------------------------
Roberto Sonabend
Co-Chief Executive Officer
I, James Green, Chief Operating Officer Executive 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: May 20, 2003 /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 Note Purchase and Security Agreement dated as of February 18,
2003, among Princeton Video Image, Inc., Presencia en Medios,
S.A. de C.V., and PVI Holding LLC. (Incorporated by reference
to Exhibit 10. 29 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, filed on April 1,
2003)
10.2 Amendment dated as of March 20, 2003, to Note Purchase and
Security Agreement dated as of February 18, 2003, among
Princeton Video Image, Inc., Presencia en Medios, S.A. de
C.V., and PVI Holding LLC.
10.3 Second Amendment dated as of April 4, 2003, to Note Purchase
and Security Agreement dated as of February 18, 2003, among
Princeton Video Image, Inc., Presencia en Medios, S.A. de
C.V., and PVI Holding LLC.
10.4 Convertible Promissory Note dated as of February 18, 2003,
from Princeton Video Image, Inc. to Presencia en Medios, S.A.
de C.V. (Incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, filed on April 1, 2003)
10.5 Convertible Promissory Note dated as of March 20, 2003, from
Princeton Video Image, Inc. to Presencia en Medios, S.A. de
C.V.
10.6 Convertible Promissory Note dated as of April 7, 2003, from
Princeton Video Image, Inc. to Presencia en Medios, S.A. de
C.V.
10.7 Amendment dated as of February 18, 2003 to Option Agreement
dated as of June 25, 2002 between Princeton Video Image, Inc.
and Cablevision Systems Corp. (Incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, filed on April 1,
2003)
10.8 Amendment dated as of February 18, 2003, to Proprietary
Information Escrow Agreement, dated as of June 25, 2002, among
Princeton Video Image, Inc., Cablevision Systems Corp., and
Kramer Levin Naftalis & Frankel LLP. (Incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, filed
on April 1, 2003)
10.9+ Offer of Employment Letter Princeton Video Image, Inc. to
David Sitt dated February 18, 2003. (Incorporated by reference
to Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, filed on April 1,
2003)
10.10+ Offer of Employment Letter from Princeton Video Image, Inc. to
Roberto Sonabend dated February 18, 2003. (Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, filed
on April 1, 2003)
10.11 Amended and Restated Convertible Promissory Note dated
February 18, 2003, from Princeton Video Image, Inc. to PVI
Holding LLC. (Incorporated by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, filed on April 1, 2003)
10.12 Amendment dated as of February 18, 2003 to the Reorganization
Agreement dated as of December 28, 2000, among Princeton Video
Image, Inc., Presencia en Medios, S.A., Eduardo Sitt, David
Sitt, Roberto Sonabend, Presence en Media LLC, Virtual
Advertisement LLC, PVI LA, LLC, and Princeton Video Image
Latin America, LLC. (Incorporated by reference to Exhibit
10.36 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, filed on April 1, 2003)
10.13+ Letter Agreement, dated March 28, 2003, amending Employment
Agreement between Princeton Video Image, Inc. and Brown F
Williams.
10.14 Amendment dated as of April 4, 2003 to Stock and Warrant
Purchase Agreement, dated as of February 4, 2001, by and
between Princeton Video Image, Inc. and PVI Holding, LLC, as
amended.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- --------------
+Denotes a management contract or compensation plan or arrangement required to
be filed as an exhibit pursuant to Item 14(a) of this Form
10-Q.