<PAGE>
Filed Pursuant to Rule 424(b)1
File No. 333-37725
PROSPECTUS
4,000,000 SHARES
PRINCETON VIDEO IMAGE, INC.
COMMON STOCK
------------------
Princeton Video Image, Inc. ("PVI" or the "Company") hereby offers 4,000,000
shares (the "Shares") of common stock, no par value per share (the "Common
Stock"), of the Company (the "Offering"). Prior to the Offering, there has been
no public market for the Common Stock, and there can be no assurance that a
market will develop or be sustained after the Offering. The Common Stock has
been approved for quotation on the Nasdaq National Market under the symbol
"PVII", subject to notice of issuance. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price.
The Company has also registered on the registration statement of which this
Prospectus constitutes a part the offering by certain selling shareholders (the
"Selling Shareholders") from time to time of up to 700,000 shares of Common
Stock and the offering of 2,000,000 shares and such indeterminate number of
additional shares of Common Stock as may be sold solely in connection with the
market making activities of Allen & Company Incorporated ("Allen"). Concurrently
with the Offering, and subject to certain lock-up arrangements, such Selling
Shareholders may offer and sell such shares of Common Stock on the Nasdaq
National Market, in negotiated transactions or otherwise. No underwriting
arrangements have been entered into by the Selling Shareholders. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Shareholders or from the resale in the trading market of shares that may be sold
solely in connection with the market making activities of Allen. See "Shares
Eligible for Future Sale."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING
PUBLIC DISCOUNTS AND COMMISSIONS (1) PROCEEDS TO COMPANY (2)
<S> <C> <C> <C>
Per Share................................. $7.00 $0.49 $6.51
Total (3)................................. $ 28,000,000 $ 1,960,000 $ 26,040,000
</TABLE>
(1) Does not reflect warrants entitling Allen and Barington Capital Group, L.P.
("Barington") (collectively, the "Representatives"), who are serving as the
several underwriters named herein (collectively, the "Underwriters"), to
purchase from the Company, for a period of five years from the date of this
Prospectus, up to 400,000 shares of Common Stock at an exercise price equal
to 120% of the initial public offering price (the "Representatives'
Warrants"). Does not reflect the Company's reimbursement of the
Representatives' out-of-pocket expenses incurred in connection with the
Offering, which are estimated to be $300,000. The Company has also agreed to
indemnify the Underwriters against certain liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). Allen, as the beneficial
owner of 18.8% of the Company's Common Stock, may be deemed to be an
affiliate of the Company. Enrique F. Senior, an Executive Vice President and
Managing Director of Allen, is a director of the Company and may be deemed
to be the beneficial owner of 19.2% of the Company's Common Stock (which
includes the shares of Common Stock beneficially owned by Allen). See
"Underwriting."
(2) Before deducting expenses payable by the Company (including the
Representatives' expenses of approximately $300,000) estimated at $905,000.
See "Use of Proceeds."
(3) The Company has granted to the Underwriters an option exercisable within 45
days after the closing date of the Offering to purchase up to 600,000
additional shares of Common Stock on the same terms and conditions as set
forth above solely to cover over-allotments (the "Over-Allotment Option").
If the Over-Allotment Option is exercised in full, the total Price to
Public, total Underwriting Discounts and Commissions and total Proceeds to
Company will be $32,200,000, $2,254,000 and $29,946,000, respectively. See
"Underwriting."
The Common Stock offered hereby is offered subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject any order, in whole or part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made at the offices
of Allen & Company Incorporated, 711 Fifth Avenue, New York, New York, 10022, on
or about December 19, 1997.
ALLEN & COMPANY BARINGTON CAPITAL GROUP
INCORPORATED
<PAGE>
The date of this Prospectus is December 16, 1997.
<PAGE>
"[The inside front cover page of the Prospectus contains two images taken
from a broadcast of a San Francisco Giants Major League Baseball game. Each
image depicts a baseball pitcher, near the left edge of the image, a batter just
to the right of center, and a catcher and umpire, near the right edge of the
image. In addition, the bottom image contains a "Giants" logo inserted by the
Company's L-VIS(TM) System to appear as if it is located on the wall located
behind home plate. The "Giants" logo is located just to the left of the center
of the top image and is partially occluded by the head and upper torso of the
pitcher. The caption "With L-VIS(TM)" is located above the bottom image and the
caption "Without L-VIS(TM)" is located above the top image.]"
As of the effective date of the Registration Statement, the Company will
become subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the Commission. The Company
intends to furnish its shareholders annual reports containing financial
statements audited by independent accountants, and such other periodic reports
as the Company may deem appropriate or as may be required by law.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
L-VIS-TM- is a trademark of Princeton Video Image, Inc. The Company has
applied to the U.S. Patent and Trademark Office for registration of the
trademark, L-VIS. Trade names and trademarks of other companies appearing in
this Prospectus are the property of their respective holders.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION WITH THAT
INFORMATION AND THOSE FINANCIAL STATEMENTS AND NOTES. PROSPECTIVE INVESTORS ARE
URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION
IS NOT EXERCISED. EXCEPT AS OTHERWISE INDICATED, ALL SHARE INFORMATION AND PER
SHARE AMOUNTS SET FORTH IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO REFLECT A
2-FOR-1 STOCK SPLIT EFFECTIVE ON SEPTEMBER 3, 1997. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS." THE
SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
THE COMPANY
COMPANY OVERVIEW
Princeton Video Image, Inc. ("PVI" or the "Company") developed and is
marketing a real-time video insertion system that, through patented pattern
recognition technology, places computer-generated electronic advertising images
into television broadcasts of sporting and other events. These electronic images
range from simple corporate names or logos to sophisticated multi-media 3-D
animated productions. During the broadcast of a sporting event, for example,
these images can be placed to appear to be physically located in various high
visibility locations in a stadium or even on a playing field (e.g., behind home
plate and in the vicinity of goal posts). The Company believes that its Live
Video Insertion System (the "L-VIS System"), which is an integrated hardware and
software system, transcends limitations of traditional television broadcast
advertising mechanisms and can expand the television broadcast advertising
paradigm by placing images into live, as well as pre-recorded, television
broadcasts.
PVI believes that the L-VIS System can substantially benefit (i)
advertisers, through the placement of their ads in new, high visibility
locations and the ability to "narrow cast" by region and brand; (ii)
broadcasters, through a new revenue stream from additional inventory of
advertising space; and (iii) teams and leagues, through increased revenue
streams and greater flexibility and control over in-stadium advertising. As of
September 1997, the L-VIS System had been used to insert advertising images into
more than 300 live television broadcasts of baseball games, soccer matches,
football games and tennis matches, including (i) the 1997 National Football
League ("NFL") pre-season games of the Baltimore Ravens, Pittsburgh Steelers,
San Diego Chargers, San Francisco 49ers, Minnesota Vikings and Washington
Redskins, (ii) several college bowl games and regular season college football
games, and (iii) the 1997 Major League Baseball ("MLB") home games of the San
Francisco Giants and the San Diego Padres. Advertisers who have run ads using
the L-VIS System include: The Coca-Cola Company, Gateway 2000, Inc., GTE
Corporation, Staples, Inc., Toyota Motor Corporation, Kellogg Company, Southwest
Airlines Co., National Car Rental Systems, PepsiCo, Inc., Nissan Motor Company,
Ltd., and Pacific Bell. Additionally, PVI is currently in discussion with
several national network broadcasters including ABC, NBC and ESPN regarding the
use of the L-VIS System with respect to several high-profile sporting events.
INDUSTRY OVERVIEW
Sports advertising and sponsorship is a significant market both inside and
outside the United States. Advertisers in the United States spent an aggregate
of approximately $8.7 billion to purchase television advertising and sponsorship
rights with respect to sporting events in 1996, according to information from
the following industry sources. The 1996 network and cable television sports
advertising markets in the United States were reported by Paul Kagan Associates,
Inc. to be approximately $3.7 billion and $1.1 billion, respectively. The
December 1995 IEG Sponsorship Report, a sports newsletter published bi-weekly by
the International Events Group, projected that $3.9 billion would be spent to
sponsor specific teams,
3
<PAGE>
stadium locations and sporting events in 1996. The Company estimates that
approximately $9 billion was spent on various forms of television sports
advertising and sponsorship in 1996 outside the United States.
The Company believes that, with the advent of cable and satellite
television, the resulting increase in broadcasting channels, and the ease with
which viewers can change or "surf" among these channels, the effectiveness of
the traditional 30-second advertising spot may diminish. The Company further
believes that the growth of sports sponsorship is largely driven by the desire
on the part of advertisers to be "in the game" by having their brands and
products visible during the broadcast of televised live events. The development
of video insertion technology has created a new method of advertising in which
the electronically inserted brand or message can appear, to the television
viewer, to be a part of the stadium where the event is taking place.
Additionally, the L-VIS System can increase the signage capacity of the stadium
or venue from the television viewer's perspective. By exposing the television
viewer to the brand or message during the event, the advertiser is "in the game"
and can be more confident that its message will actually be seen by viewers, as
the advertisement can be placed strategically to appear on the television screen
where traditional signage may not be practical or available.
THE L-VIS SYSTEM
The L-VIS System is a system of proprietary hardware and software that has
been designed by the Company to insert electronic virtual images into live
televised sports broadcasts. The inserted images may be two or three
dimensional, static or animated, opaque or semi-transparent and may be placed so
that they appear to exist on the playing field or in the stadium where the game
is being played. If a player or other object moves in front of an image that is
inserted on a wall or a playing field, the L-VIS System is programmed so that
the passing object occludes that portion of the inserted image. The L-VIS System
can also be used to insert a free standing image so that the image will occlude
a player or other object that "passes behind" it.
The Company's L-VIS System is based upon state of the art, patented pattern
recognition technology. The Company believes that the L-VIS System is the only
video insertion technology that can reliably insert stable broadcast quality
images in outdoor live sporting events and provide for practical occlusion in
stadium environments. The L-VIS System may also be located anywhere in the
television distribution chain, including the stadium where a broadcast typically
originates, the television studio to which a broadcast is relayed and the
microwave links or satellite ground stations where the broadcast is relayed for
distribution to the viewing public. It is the Company's belief that all of these
attributes are necessary for commercial success.
The Company believes that use of the L-VIS System can provide additional
revenue to advertising rights holders and broadcasters and can provide
substantial advantages compared to other forms of advertising, including
scrolling mechanical billboards and 30-second television spots. Without
affecting the stadium, the L-VIS System can create new inventory for advertising
rights holders by providing new advertising locations that are unavailable for
conventional billboards, such as the space in the vicinity of the goal posts
during a football game. An L-VIS System can also place advertising in high
visibility locations, such as the wall behind home plate in a baseball game.
Additionally, the L-VIS System can provide animated and video advertising
in-game, when appropriate, to enhance the impact of the advertisement.
The L-VIS System allows for "narrow casting," the broadcasting of specific
advertising to specific geographical regions. Thus, where desired, a rights
holder can sell the same advertising space to different advertisers for
broadcast to different markets. For instance, the L-VIS System could be used to
insert a soft drink advertisement in a domestic broadcast and a juice
advertisement in an overseas broadcast of the same event. The L-VIS System gives
local advertisers the ability to advertise within national and international
events and enables different advertisers to occupy the same space at different
times during a game.
4
<PAGE>
STRATEGY
The Company's objective is to become the leading provider of electronic
advertising to the sports television advertising market worldwide. The key
elements of the Company's strategy include (i) developing relationships with
rights owners such as the NFL, the National Basketball Association, MLB, FIFA
(soccer's international governing body), other sports governing bodies and
specific teams; (ii) developing relationships with national network broadcasters
such as NBC, CBS, ABC, ESPN, and FOX; (iii) working with high-profile
advertisers to assist them in understanding and capitalizing on the use of the
L-VIS System; and (iv) developing L-VIS System software for additional sporting
and other events.
The Company expects to generate revenues from the sharing of advertising
revenue among the Company, rights holders and broadcasters and from the fees
generated through strategic licensing of the Company's technology. The right to
insert electronic images for advertising purposes into a live broadcast, and
hence the right to sell advertising using the L-VIS System, is held by different
groups in different situations. For example, individual MLB teams control the
rights to the local broadcasts of their regular season games, while MLB controls
the national broadcast of regular season games, play-off games and the World
Series. These rights may be sold for specific games and/or entire seasons to
another party, most notably a broadcaster, who pays the rights holder an
up-front fee for the rights. In each case, the Company must negotiate for the
use of the L-VIS System with the rights holder or holders, typically in exchange
for a percentage of the advertising revenue generated using the L-VIS System.
Because the L-VIS System uses the live feed from the broadcaster to insert
electronic images, the broadcaster must also approve the use of the L-VIS
System. Accordingly, arrangements with several parties including the rights
holder and the broadcaster must be established.
Advertising space using the L-VIS System will be sold either by the rights
holder or by the broadcaster, depending on the specific arrangement between such
parties, and advertising revenues from such advertising will be shared among the
rights holder, the broadcaster and the Company. Accordingly, the Company's
revenues will, to a large extent, be derived from the sales and marketing
efforts of entities that are well versed in selling ad space for sporting events
to large advertisers but that are independent of the Company. To gain
acceptance, the Company has actively discussed the benefits and unique uses of
the L-VIS System with a limited number of high-profile sporting event
advertisers and plans to expand this effort significantly.
In addition to existing software modules that enable the L-VIS System to be
used in live broadcasts of baseball, football, soccer and tennis, the Company is
developing, or intends to develop, software for motor sports, basketball and
golf. The Company also intends to make the L-VIS System available for use with
other events, such as pay-per-view boxing, concerts and award shows such as the
Oscars and the Grammys.
HISTORY
The Company was incorporated in New Jersey on July 23, 1990 by its founders,
Brown F Williams, Chairman of the Board and Treasurer of the Company, and Roy J.
Rosser, Ph.D., Director of Special Projects of the Company. Prior to founding
the Company, Mr. Williams was a senior executive at RCA Laboratories, Inc. with
respect to the development of high technology products. Dr. Rosser was one of
the inventors of the image insertion technology that is the basis for the L-VIS
System. The Company's executive offices are located at 15 Princess Road,
Lawrenceville, New Jersey 08648, and its telephone number is 609-912-9400.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by
the Company........................ 4,000,000 shares of Common Stock
Common Stock Outstanding Immediately
Prior to the Offering (1).......... 3,308,472 shares of Common Stock
Common Stock to be Outstanding
Following the Offering (1)(2)...... 7,308,472 shares of Common Stock
Risk Factors......................... The shares of Common Stock offered hereby involve a
high degree of risk and immediate and substantial
dilution and should be purchased only by persons who
can afford to sustain a total loss of their
investment. See "Risk Factors" and "Dilution."
Use of Proceeds...................... The net proceeds of the Offering will be used by the
Company for: (i) L-VIS System manufacture and
deployment, (ii) research and development, (iii)
repayment of debt, (iv) capital expenditures, (v)
sales and marketing, and (vi) working capital and
general corporate purposes. See "Use of Proceeds."
Nasdaq National Market
Trading Symbol (3)................. PVII
</TABLE>
- ------------------------
(1) Does not include (i) 300,000 shares of Common Stock issuable upon exercise
of warrants (the "Bridge Warrants") issued by the Company to purchasers of
its 10% Senior Secured Promissory Notes (the "Bridge Notes") in connection
with a debt financing consummated prior to the Offering (the "Bridge
Financing"); (ii) 777,130 shares issuable upon exercise of other outstanding
warrants to purchase shares of Common Stock; (iii) 1,560,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options
granted to executive officers, employees and consultants under the Company's
Amended 1993 Stock Option Plan (the "Stock Option Plan"), including
1,210,724 shares issuable upon the exercise of outstanding options. See
"Management--Stock Option Plan," "Certain Transactions" and "Description of
Securities."
(2) Does not include (i) up to 600,000 shares of Common Stock issuable upon
exercise of the Over-Allotment Option, and (ii) 400,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrants. See
"Underwriting."
(3) There is currently no market for the Common Stock and there can be no
assurance that a market for the Common Stock will develop after the
Offering. The Common Stock has been approved for quotation on the Nasdaq
National Market, subject to notice of issuance. There can be no assurance,
however, that the Company will be able to maintain listing of the Common
Stock on such market. See "Risk Factors--Absence of Public Market;
Negotiated Offering Price."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial data set forth below with respect to the Company's
statements of operations for the years ended June 30, 1997 and 1996 and the
balance sheet date at June 30, 1997 have been derived from the financial
statements of the Company, included elsewhere in this Prospectus, audited by
Coopers & Lybrand L.L.P., independent accountants. The report of Coopers &
Lybrand L.L.P., dated September 11, 1997, except for Note 14, for which the date
is October 1, 1997, contains an explanatory paragraph with respect to the
Company's ability to continue as a going concern. The summary financial data for
the three months ended September 30, 1997 and 1996 are derived from unaudited
financial statements included herein. The unaudited financial statements include
all adjustments, consisting only of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and results of operations for those periods. Operating results for the three
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending June 30, 1998 or any future
period. The data set forth below should be read in conjunction with, and is
qualified in its entirety by, reference to the Financial Statements and notes
thereto included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
(UNAUDITED)
FISCAL YEAR ENDED JUNE 30, THREE MONTHS ENDED SEPT. 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fee......................................... $ 130,526 $ 1,000,000 $ 57,626 $ 25,000
Advertising revenue................................. 81,108 9,600 75,177 29,198
------------- ------------- ------------- -------------
Total revenue....................................... 211,634 1,009,600 132,803 54,198
Costs and expenses:
L-VIS System costs.................................. 1,274,890 949,804 416,732 190,836
Selling, general and administrative................. 3,028,895 2,602,928 1,223,811 738,130
Research and development............................ 1,722,598 1,604,455 445,994 349,161
------------- ------------- ------------- -------------
Total costs and expenses.......................... 6,026,383 5,157,187 2,086,537 1,278,127
Operating loss........................................ (5,814,749) (4,147,587) (1,953,734) (1,223,929)
Interest and other income............................. (84,088) (237,063) (16,372) (36,527)
------------- ------------- ------------- -------------
Net loss.............................................. $ (5,730,661) $ (3,910,524) $ (1,937,362) $ (1,187,402)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AT SEPT 30, 1997 (UNAUDITED)
--------------------------------------------
PRO FORMA
AS ADJUSTED
JUNE 30, 1997 ACTUAL PRO FORMA (1) (2)
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $ (855,605) $ (1,266,043) 383,957 23,496,457
Total assets........................................ 2,761,216 2,449,309 5,449,309 27,211,809
Long term debt...................................... 0 0 0 0
Total redeemable preferred stock.................... 903,555 914,567 914,567 914,567
Deficit accumulated during the development stage.... (19,541,554) (21,478,916) (21,478,916) (23,501,416)
Total shareholders' equity (deficit)................ (1,004,951) (1,303,569) 346,431 23,458,931
</TABLE>
- ------------------------
(1) Pro Forma to give effect to the Bridge Financing, which was completed in
October 1997, including the allocation of $1,650,000 of the proceeds of the
Bridge Financing to additional paid-in capital relating to the estimated
fair value of the Bridge Warrants issued in the transaction. See
"Description of Securities--Debt Securities."
(2) Pro Forma, as adjusted to give effect to the sale by the Company of the
4,000,000 Shares offered hereby at the initial public offering price of
$7.00 per share and receipt of the net proceeds therefrom, the application
of a portion of the net proceeds of the Offering to repay certain
outstanding indebtedness, as set forth under "Use of Proceeds," the
write-off of the debt issuance costs and interest associated with the
indebtedness to be repaid and the write-off of the unamortized discounts
related to the estimated fair value of the Bridge Warrants. See "Use of
Proceeds."
7
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND
SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR
ENTIRE INVESTMENT. THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN
INVESTMENT IN THE COMMON STOCK. IT MUST BE RECOGNIZED THAT OTHER RISKS, NOT NOW
FORESEEN, MIGHT BECOME SIGNIFICANT IN THE FUTURE AND THAT THE RISKS THAT ARE NOW
FORESEEN MIGHT AFFECT THE COMPANY TO A GREATER EXTENT THAN IS NOW FORESEEN, OR
IN A MANNER NOT NOW CONTEMPLATED. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY
CONSIDER ALL INFORMATION CONTAINED IN THIS PROSPECTUS AND SHOULD GIVE PARTICULAR
ATTENTION TO THE FOLLOWING RISK FACTORS BEFORE DECIDING TO PURCHASE THE COMMON
STOCK OFFERED HEREBY.
DEVELOPMENT STAGE COMPANY
The Company was incorporated in 1990, but has had a limited operating
history. The Company's operations to date have related primarily to the
technical development of the L-VIS System and its introduction and marketing in
various markets. To date, the Company has 11 L-VIS System units (each, an "L-VIS
Unit") available for operation and is subject to all of the risks inherent in a
company with a limited operating history. The Company is currently attempting to
achieve sufficient acceptance of the L-VIS System with advertisers, broadcasters
and sporting event rights holders, and enter into a sufficient number of
satisfactory contracts to generate revenue adequate to meet operating expenses.
In the event adequate revenues are not generated, the Company will be required
either to raise additional debt and/or equity capital to fund its cash
requirements or to reduce substantially the scale of its operations. There can
be no assurance that the Company will be able to raise such additional capital.
There also can be no assurance that the Company will succeed in addressing any
or all of these objectives and the failure to do so would have a material
adverse effect on its business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
SUBSTANTIAL AND CONTINUING OPERATING LOSSES
The Company has not had a profitable period of operations since its
inception. The Company incurred net losses of $3,910,524 and $5,730,661 for the
fiscal years ended June 30, 1996 and 1997, respectively and $1,937,362 for the
three month period ended September 30, 1997, and at September 30, 1997, had an
accumulated deficit of approximately $21.5 million, primarily from expenses
related to the development of the L-VIS System. To date, the Company has earned
revenues only from two MLB teams for games broadcast during the 1996 and 1997
seasons, four NFL football teams for 1997 local broadcasts of pre-season games,
Comcast Cable of New Jersey for broadcasts of minor league baseball games, ESPN
with respect to broadcasts of certain Western Athletic Conference college
football games, and from a licensing arrangement with Presencia en Medios, S.A.
de C.V. ("Presencia").
The Company expects to continue to incur substantial losses at least through
calendar year 1998 due to the significant costs associated with the
manufacturing, marketing and further enhancement of the L-VIS System. There can
be no assurance that the Company will ever achieve profitability. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stage of development, particularly companies in new or rapidly evolving
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company has received a report from its independent accountants
containing an explanatory paragraph that describes the uncertainty as to the
ability of the Company to continue as a going concern as described in Note 2 to
the Financial Statements. There can be no assurance that the Company will
achieve profitable operations or that the Company will be able to continue its
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Financial Statements-- Report of Independent
Accountants."
8
<PAGE>
DEPENDENCE ON MARKET ACCEPTANCE
The Company expects to derive substantially all of its revenues from the
operation of the L-VIS System. The ability of the Company to market successfully
the L-VIS System will depend upon broad acceptance of its technology by at least
four distinct groups of participants in the sports advertising market:
television viewers, advertisers, broadcasters and sporting event rights holders.
To be successful, there must be satisfactory commercial arrangements among the
advertisers, rights holders, broadcasters and the Company. To date, few
broadcasters, broadcast rights holders and advertisers have agreed to use the
L-VIS System during live sports broadcasts. Moreover, there is no data on
television viewers' reactions to the L-VIS System. However, some press coverage
of the Company's technology has raised concerns about its desirability and
potential misuse. For instance, an article has described inserted advertising
images as subliminal advertising. In addition, the technology has been described
as tampering with the television picture in a manner which may not be ethical. A
danger of overcommercialization has also been voiced. There can be no assurance
that the use of the Company's system will be accepted by television viewers or
that the Company will be able to combat effectively potential future negative
publicity regarding its or similar technology. Further, there can be no
assurance that existing arrangements will continue or that the Company will be
able to enter into additional arrangements. The failure of any one or more of
the market participants to embrace use of the L-VIS System will prevent the
Company from successfully marketing the L-VIS System, which would have a
material adverse effect on its business, financial condition and results of
operations, could result in a total loss by the holders of Common Stock of their
entire investment and, further, could impair the Company's ability to continue
its operations. See "Business--Strategy" and "-- Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon a number of key technical and management
personnel, including Brown F Williams, Chairman of the Board and Treasurer;
Douglas J. Greenlaw, President and Chief Executive Officer; Samuel A. McCleery,
Vice President of Marketing and Sales; Louis A. Lippincott, Director of Hardware
Development; Howard J. Kennedy, Director of Software Development; and Roy J.
Rosser, Director of Special Projects. The loss of the services of one or more
key individuals will have a material adverse impact on the Company. The
Company's success also depends on its ability to attract and retain additional
qualified financial, technical, marketing and other key management personnel.
The Company faces competition for such personnel, and there can be no assurance
that it will be able to attract or retain such personnel. The Company has
employment agreements only with Messrs. Williams, Greenlaw and McCleery. The
Company has obtained key man life insurance on the lives of Messrs. Williams and
McCleery in the amounts of $2 million and $1 million, respectively. The Company
intends to purchase key man life insurance on the life of Mr. Greenlaw, assuming
reasonable quotations are available. Although its employees are subject to
certain confidentiality and non-competition obligations, there can be no
assurance that the Company's key personnel will remain with the Company or will
not become employed by a competitor. In addition, the Company relies on
consultants to assist it in research and development strategy. All of the
Company's consultants are employed by third parties and may have commitments to,
or consulting or advisory contracts with, other entities that may limit their
availability to the Company. See "Management" and "Business--Employees."
DEPENDENCE ON THIRD PARTY SALES FORCES
Pursuant to the terms of existing contracts and future contracts, if any,
the Company receives or expects to receive, as the case may be, a percentage of
the advertising revenues earned by rights holders which control the marketing
and sales of L-VIS System advertising. There can be no assurance that the rights
holders will be successful in marketing and selling L-VIS System advertising. If
the rights holders are unable to enter into arrangements with a substantial
number of advertisers, such failure will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Strategy" and "--Sales and Marketing."
9
<PAGE>
RISKS ASSOCIATED WITH EXPANSION AND GROWTH
The Company intends to grow, in part, by increasing its product development
activities and expanding its sales force and other marketing activities. The
Company expects that the expenditures relating to these efforts will precede its
realization of the benefits, if any, of such expenditures. The Company's
operating results will be adversely affected if sales do not increase in
proportion to the increase in expenses caused by this expansion. Implementation
of the Company's proposed expansion will be dependent on, among other things,
its ability to identify markets, hire and retain skilled management, financial,
marketing and engineering personnel, and manage growth. As the Company increases
its product development activities, it may become increasingly dependent upon
contract manufacturing, which will, in turn, necessitate devoting additional
Company resources to monitoring operations, controlling costs and maintaining
effective quality, inventory and service controls. There can be no assurance
that the Company will be able to implement successfully its business strategy or
otherwise expand its operations, that its system, procedures and controls will
be adequate to support its operations or that the anticipated increase in
manufacturing capacity and reliance on outsourcing the operation of L-VIS Units
will not have a material adverse effect on its business, financial condition or
results of operations. See "Business--Sales and Marketing" and "--Manufacturing
and Supply."
CONTRACTUAL RESTRAINTS ON USE OF VIDEO INSERTION TECHNOLOGY
Existing or future agreements among advertisers, sponsors, syndicators,
promoters, broadcasters and cable operators may include provisions that inhibit
or prohibit the use of video insertion technology in television broadcasts.
These restrictions may have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
such entities will be willing to enter into amendments of existing agreements,
or, if willing, will do so on terms acceptable to the Company and other relevant
parties. Furthermore, there can be no assurance that prospective users of the
L-VIS System will not enter into new agreements inhibiting use of the L-VIS
System. The Company believes that one manufacturer of scrolling billboards used
in stadiums has included such restraints in its contracts. See
"Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL STRATEGY
The Company plans to increase its efforts to market the L-VIS System outside
the United States. There can be no assurance that the Company will be successful
in this respect. The Company currently plans to market the L-VIS System
internationally through strategic partners and other key licensees of its
technology. There can be no assurance that the Company will be able to enter
into or maintain favorable relationships with any partners or licensees, that
any partners or licensees will establish a market for the L-VIS System, that any
relationships will generate any revenue for the Company, or that any partners or
licensees will act in good faith and perform their obligations to the Company.
Furthermore, the Company has entered into exclusive arrangements, and expects
that prospective strategic partners and other key licensees will request
exclusive arrangements, for use of the L-VIS System in a specific geographic
area or with respect to a specific sport. To the extent the Company enters into
an exclusive arrangement, such partners or licensees' failure to generate
revenues for the Company could preclude the Company from generating any revenues
in such geographical area or with respect to a specific sport, as the case may
be. Depending upon the scope of the arrangement, such failure could also have a
material adverse effect on the Company's business, financial condition and
results of operations.
Furthermore, there are certain risks inherent in doing business in
international markets, such as unexpected changes in regulatory requirements,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, political instability, fluctuations in currency exchange rates,
reduced protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax consequences, any of which
could have a material adverse impact upon the success of the Company's
international operations.
10
<PAGE>
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations, if
any, and, consequently, on its business, financial condition and results of
operations. See "Business--International Business Strategy."
POTENTIAL SEASONALITY FLUCTUATIONS
In the event the Company is unsuccessful in expanding the market for use of
the L-VIS System beyond a limited number of sports, its revenues will be subject
to seasonal fluctuation based upon the game schedules associated with each such
sport. See "Business--Strategy."
TECHNICAL UNCERTAINTIES
The L-VIS System has been used commercially on a limited basis during live
television transmissions of certain sporting events, where images inserted
through use of the L-VIS System have been broadcast to viewers. However, the
circumstances in which the L-VIS System can be used are limited, and cooperation
of the broadcaster is required to obtain acceptable results. To date, the L-VIS
System has been operated primarily by Company personnel, and its over-the-air
use has been successfully demonstrated only for use in certain kinds of sporting
events. Broader use of the L-VIS System will require the development of
additional software and the training of personnel, and may require the
enhancement of the hardware. Accordingly, no assurance can be given that the
L-VIS System will not experience operational problems as a result of wide-spread
commercial application that could delay or defeat its ability to generate
revenues or operating profits. Future operational difficulties of the L-VIS
System could increase the cost of, or delay, implementation of the Company's
business plan which, in turn, could materially adversely affect the success of
the Company. See "Business--Research and Development."
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The Company operates in a rapidly evolving commercial and technological
environment. The video, electronics, data processing, broadcast television and
cable television industries are changing rapidly due to, among other things,
technological improvements, consolidations and changes in consumer preferences
and customs. In particular, the live video image insertion market is new and
undeveloped. As such, the Company anticipates that as the market matures, it
will be affected by technological change and product improvements. There can be
no assurance that future technological advances by competing systems or changes
in industry broadcast standards will not adversely affect the Company's
competitive position. Accordingly, the Company's success will depend in part
upon its ability to develop product enhancements that keep pace with continuing
changes in technology and customer preferences. There can be no assurance that
the Company will be successful in developing product enhancements to keep
abreast of changing technologies and customer preferences or that its products
or enhancements will be successful in the marketplace. The Company's failure to
develop technological improvements or to adapt its products to technological
change on a timely basis would, over time, have a material adverse effect on its
business, financial condition and results of operations. See "Business--Research
and Development."
MANUFACTURING AND COST UNCERTAINTIES
The Company has only limited experience in manufacturing L-VIS Units for
commercial purposes and does not have well established manufacturing facilities.
The Company believes that the eventual manufacturing cost of L-VIS Units will be
primarily determined by the cost of the digital signal processing circuits used
to perform identification, recognition and insertion functions. Any
manufacturing difficulties and any cost increases, including an increase in the
cost of digital signal processing circuits, may materially adversely affect the
Company's profit margin, if any, on the sale or lease or use of future L-VIS
Units and its ability to develop and deliver L-VIS Units on a timely basis. See
"Business--Manufacturing and Supply."
11
<PAGE>
DEPENDENCE ON SOLE SOURCE OF SUPPLY
The Company has been dependent upon a single supplier, Lucent Technologies
("Lucent"), for certain hardware components used in the manufacture of L-VIS
Units. Although such hardware components are stock items which are readily
available to the public, there can be no assurance that Lucent will continue to
manufacture and sell the components. The Company is not a party to any agreement
with Lucent. The Company's business, financial condition and results of
operations will be materially adversely affected in the event it is unable to
manufacture L-VIS Units due to an inability to acquire hardware components on a
timely basis or if it is forced to purchase such hardware components at a price
substantially higher than the current price of such components. See
"Business--Manufacturing and Supply."
COMPETITION
The market for electronic video insertion technology is new and evolving.
The Company is aware of three competitors, Symah Vision-SA ("Symah"), Orad Hi
Tech Systems, Ltd. and Scidel Technologies, Ltd. ("SciDel"), that are currently
working on video insertion technologies. In the event the market for electronic
video insertion technology proves lucrative, the Company also expects
substantial competition from established broadcast business participants that
have significantly more extensive financial, technical, marketing and other
resources and a greater number of highly skilled individuals than does the
Company. Many potential competitors have greater name recognition and extensive
customer bases that could be utilized to gain significant market share to the
Company's detriment. Such competitors may be able to produce a superior product,
undertake more extensive promotional activities, offer more attractive terms to
customers and adopt more aggressive pricing policies than the Company. There is
no assurance that the Company will be able to compete effectively with current
or future competitors or that the competitive pressures faced by the Company
will not have a material adverse effect on its business, financial condition and
results of operations.
In addition to competing with other video insertion technologies, the L-VIS
System will compete with advertisers' use of traditional 30-second advertising
spots, which remain the standard in the television advertising industry. The
L-VIS System will also compete with advertisers' use of conventional billboard
products including advertising placed on playing surfaces (such as outfield
walls, football fields and ice hockey rinks) and scrolling billboards,
physically located at the site of an event, which can display sequentially a
series of static advertisements. Scrolling billboards can achieve an effect
similar to that achieved by the L-VIS System for the television viewing audience
in certain circumstances. The availability of scrolling billboards in the
marketplace may adversely affect the marketability of the L-VIS System.
The Company expects that it will generate revenue primarily by causing
existing advertisers and sponsors to switch to use of the L-VIS System and by
attracting new advertisers and sponsors to the sports advertising and
sponsorship market. However, existing advertisers may be reluctant to utilize a
new technology. There can be no assurance that total advertising and sponsorship
expenditures will increase as a result of use of the Company's technology. To
the extent that the Company is competing for television advertising and
sponsorship dollars that are currently allocated to traditional media, such as
30-second spots or rolling billboards, the competition is likely to be more
intense. The Company will only be able to compete effectively with existing
advertising and sponsorship alternatives with the cooperation of broadcasters
and the advertising sales departments of team owners, other rights holders and
broadcasters, on whom the Company will rely for sales of its products to
advertisers. Certain of such rights holders may have incentives, in some cases,
to sell alternative advertising inventory or sponsorship in lieu of the
Company's services which, as a result, will have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Competition."
12
<PAGE>
POSSIBLE ADVERSE REGULATIONS
The Company believes that no federal or state regulations currently directly
relate to or restrict the use of the L-VIS System. There are existing
regulations imposed on broadcasters which may require disclosure that the L-VIS
System is being used in a particular broadcast. The Company does not, however,
believe that such regulations will materially adversely affect the use of the
L-VIS System as currently contemplated. However, there can be no assurance that
there will not be any regulations or restrictions in the future, which either
directly, or indirectly through broadcaster regulations, adversely affect the
use of the L-VIS System. Such regulations or restrictions could have a material
adverse effect on the Company's business, financial condition and results of
operation.
There can be no assurance that regulatory agencies in foreign jurisdictions
have not adopted, or will not adopt in the future, regulations or restrictions
affecting the use of the L-VIS System. The adoption of such regulations or
restrictions may reduce or eliminate the market for the Company's products in
any country where such regulations or restrictions are adopted, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.
BROAD DISCRETION AS TO USE OF PROCEEDS; REPAYMENT OF BRIDGE NOTES
Management will have broad discretion with respect to the expenditure of the
net proceeds of the Offering. In addition, the Company's estimated allocations
of the uses of the net proceeds of the Offering are subject to reapportionment
among the purposes set forth under "Use of Proceeds" or to other general
corporate purposes, including working capital. An estimated $8,310,000, or 33.0%
of the net proceeds of the Offering, and any additional net proceeds resulting
from the exercise of the Over-Allotment Option, have been allocated to working
capital and general corporate purposes and will be used for such specific
purposes as management of the Company may determine. The amount and timing of
expenditures will vary depending upon a number of factors, including the
progress of the Company's product development and marketing efforts, changing
competitive conditions and general economic conditions. Further, approximately
$3,250,000, or 12.9% of the net proceeds of the Offering will be used to repay
the Bridge Notes. See "Use of Proceeds."
NEED FOR ADDITIONAL FINANCING
The Company anticipates that the net proceeds of the Offering, together with
its existing capital resources, will be adequate to satisfy its operating and
capital requirements through the next 18 months, assuming that it performs
substantially in accordance with its current business plan. There can be no
assurance that the Company will be able to, or will wish to, follow the current
business plan. Thereafter, depending on revenues actually generated during such
18 month period, the Company may be required to obtain additional capital in
order to finance its development programs, to continue the expansion of its
operations, and to market the L-VIS System worldwide. The Company intends to use
the net proceeds of the Offering, cash flow from operations and borrowings to
support its continued growth. Changes in the market in which the Company
operates, in the Company's business, or in its business plan could affect its
capital requirements, which may require it to raise additional funds earlier
than expected in order to fund its operations, fund expansion, develop new or
enhanced products, respond to competitive pressures or acquire complementary
businesses. The Company's future capital requirements will depend on many
factors, including the size of its research and development programs, the cost
of manufacturing and marketing activities, the ability of the Company to market
products successfully, the length of time required to collect accounts
receivable, and the need to address competing technological and market
developments. If the Company were to raise additional funds through the issuance
of equity or convertible debt securities, shareholders could experience
substantial additional dilution and such securities could have rights,
preferences and privileges senior to those of the holders of the Common Stock.
There can be no assurance that the Company will be able to raise any additional
required funds, or that any such funds will be available on terms favorable to,
or acceptable to, the Company. The lack of availability of adequate
13
<PAGE>
funds, or the lack of availability of funds on terms acceptable to it, will have
a material adverse effect on the Company's business, financial condition and
results of operations.
Whether or when the Company can achieve cash flow levels sufficient to
support its anticipated growth cannot be accurately predicted. Unless such cash
flow levels are achieved, the Company will be required to borrow money or to
sell debt or equity securities, or a combination thereof, to provide funding for
growth or, alternatively, will be required to reduce growth to a level that can
be supported by internally generated cash flow. The Company can give no
assurances with respect to the impact on its financial condition and results of
operations if it is required to reduce growth to a level that can be supported
by internally generated cash flow. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend, in part, on its
ability to assert and maintain the proprietary nature of its technology.
Although the Company has been assigned three issued United States and one
allowed European patent, has licensed several other patented technologies from
third parties and has filed applications for a number of additional patents in
the United States and abroad, there can be no assurance as to the degree of
protection offered by these patents, or as to the likelihood that pending
patents will be issued. Any patents issued to the Company or its licensors under
the laws of a foreign country may afford a lesser degree of protection than that
enjoyed in the United States, due to the nature or scope of such country's
patent laws. There can be no assurance that competitors in both the United
States and foreign countries, many of which have greater resources than the
Company and have made substantial investments in competing technologies, do not
have or will not obtain patents that will prevent, limit or interfere with its
ability to make L-VIS Units and market the L-VIS System or that intentionally
infringe its patents. There can be no assurance that competitors or strategic
partners will not copy, reverse engineer, I.E., isolate the components of a
complete system to learn how to construct a similar system, or independently
develop technologies that are the same or similar to the Company's patented
technologies. See "Business--Intellectual Property--Patents."
Further, the validity and/or breadth of the Company's owned and licensed
patents generally may be tested in post-allowance court proceedings. There has
been no court test of any of the issued patents, the allowed patent or any of
the pending applications or foreign counterparts of the Company. The Company is
aware of other companies that have patents or patent applications in the field
of electronic video insertion technology. These companies or others may claim
that the Company infringes the patents or rights of such third parties, or these
third parties may infringe the Company's patents. In either event, if the
Company's patents or rights are brought before a court, litigation would involve
complex legal and factual issues, and the outcome, consequently, would be highly
uncertain. Furthermore, any patent litigation would entail considerable cost to
the Company, which would divert resources that otherwise could be used for its
operations and might be resolved in a manner that is unfavorable to the Company.
No assurance can be given that the Company or its licensors would be successful
in enforcing such rights, or that the Company's products or processes do not or
will not infringe the patent or intellectual property rights of a third party.
An adverse outcome in the defense of a patent infringement action could subject
the Company to significant liabilities to third parties, require the Company to
license disputed technology from third parties, if possible, or require it to
cease selling its products. In the event the Company's owned or licensed patents
were successfully challenged in court, its business, financial condition and
results of operations would be materially adversely affected.
It is possible that one or more products developed by a competitor may be
marketed or used in a territory where the Company has patent protection. Because
an image inserted through use of video insertion technology often appears as if
it exists as a physical advertisement at the site of a sporting event, it may be
difficult to know whether, and which, video insertion technology is being used
with respect to any televised sporting event. Thus, infringement of the
Company's patents may be difficult to monitor. The Company's failure to detect
such an infringement may have a material adverse effect on its business,
14
<PAGE>
financial condition and results of operations. In the event the Company becomes
aware of a potential patent infringement, it may be forced to litigate to
enforce its patent rights. Engaging in an enforcement action may be protracted
and expensive and may have a material adverse effect on the Company's business,
financial condition and results of operations.
Apart from the patents and patent applications that the Company owns or
licenses, the only patents or patent applications of which it is aware relating
to real-time video insertion are owned or controlled by its competitors, Symah
and SciDel. Although the Company has no cause for belief that use of the L-VIS
System would infringe the United States or other patents of third parties, there
can be no assurance that competitors will not initiate a patent infringement
action against the Company. Gerencia de Medios, S.A. ("GDM"), a Spanish media
company that licensed the L-VIS System for use in broadcasts in Spain and
Portugal during a trial period which ended December 1996, received a letter from
a Symah affiliate asserting that use of the L-VIS System in Spain would infringe
one of Symah's patents. Although the Company and GDM have been advised that use
of the L-VIS System would not infringe Symah's patent, there can be no assurance
that Symah will not assert infringement claims against the Company or its
European licensees in the future.
One of the patents of which the Company is aware is U.S. Patent 5,353,392
(the "'392 Patent"). The '392 Patent derives from the same patent application as
does the patent asserted by the Symah affiliate against the L-VIS System in
Spain. The '392 patent has not been asserted against the Company. The Company
believes that the L-VIS System does not infringe the '392 Patent. However, the
Company has not received during the past two years an opinion as to the
non-infringement of the '392 Patent. There can be no assurance that changes in
the L-VIS System, changes in applicable patent law or rulings by the U.S. Patent
and Trademark Office or the courts would not cause the L-VIS System to be found
to infringe the '392 Patent, which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the L-VIS
System were found to infringe the '392 Patent or any other patent, the Company
may be required to modify the L-VIS System or enter into an arrangement to
license such patent, if possible. There can be no assurance that the Company
would be able, under such circumstances, to modify the L-VIS System or enter
into a license arrangement.
The Company also relies in large part on unpatented trade secrets,
improvements and proprietary technology and there can be no assurance that
others, including strategic partners, will not copy, reverse engineer or
independently develop the same or similar technology or otherwise obtain access
to its proprietary technology. To protect its rights in these areas, the Company
currently requires its employees and certain third parties to enter into
confidentiality agreements and, to the extent appropriate, utilizes copyright,
trademark and trade secret protection. There can be no assurance, however, that
these steps will provide meaningful protection for the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure thereof. See "Business-- Intellectual Property."
UNCERTAINTIES RELATED TO OWNERSHIP OF VIDEO INSERTION RIGHTS
Ownership of the copyright of the broadcast of a sporting event is governed
by agreements among the applicable teams, leagues, broadcasters and the sports
federation, if any. In many instances, these agreements provide that different
persons shall control the copyrights to the broadcasts in differing
circumstances (for instance, regular season play versus playoffs). These
agreements often govern permitted forms of advertising and permitted
modifications to the broadcast. Because live video insertion is a newly evolving
technology, use of such technology is not specifically discussed under the terms
of many existing agreements, and it is often not clear whose permission must be
obtained to use the L-VIS System. In the event the L-VIS System is utilized
without the consent of applicable broadcast copyright holders, there can be no
assurance that such broadcast copyright holders will not challenge the use of
the L-VIS System under current agreements. The defense and prosecution of
copyright suits is both costly and time-consuming, even if the outcome is
favorable to the Company. Furthermore, there can be no assurance that
15
<PAGE>
broadcast copyright holders will be willing to enter into amendments of current
agreements, or if willing, will do so on terms acceptable to the Company. See
"Business--Strategy."
IMMEDIATE DILUTION
The initial public offering price per share of Common Stock exceeds the
current book value per share of the Common Stock. Investors in the Offering
will, therefore, incur immediate and substantial dilution of $3.84 per share of
Common Stock, representing 55% of the initial public offering price per share of
$7.00. Additional dilution to public investors may result to the extent that the
Representatives' Options and/or outstanding warrants or options are exercised at
a time when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities. See "Dilution," "Description of
Securities" and "Underwriting."
ABSENCE OF PUBLIC MARKET; NEGOTIATED OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that a trading market will develop or, if any such
market develops, that it will be maintained or that the market price of the
Common Stock will not decline below the initial public offering price.
Accordingly, purchasers of shares of Common Stock may experience difficulty
selling or otherwise disposing of their Common Stock. The initial public
offering price of the Common Stock has been established by negotiation among the
Company and the Representatives, consistent with the rules of the National
Association of Securities Dealers (the "NASD"), of which the Representatives are
members, and may not bear any relationship to the Company's book value, assets,
past operating results, financial condition or other established criteria of
value. See "Underwriting."
The Company has issued securities to the following officers, directors or
their affiliates in exchange for promissory notes in favor of the Company: Brown
F Williams, Samuel A. McCleery, John B. Torkelsen, Princeton Venture Research,
Inc., a corporation wholly owned by Mr. Torkelsen, and Pamela R. Torkelsen, the
wife of Mr. Torkelsen. The total number of shares and warrants issued to such
individuals, in exchange for notes payable to the Company which are outstanding
as of the date of this Prospectus is 274,400 shares of Common Stock (or 8.3% of
the shares of Common Stock outstanding immediately prior to the Offering), 6,200
shares of Series B Preferred Stock and 12,400 warrants to purchase 12,400 shares
of Common Stock. The individuals holding such securities have significant
influence over the affairs of the Company. See "Management." Among other
effects, this control could result in a delay of payment by such persons to the
Company. See "Certain Transactions."
POSSIBILITY OF NASDAQ NATIONAL MARKET DELISTING; RISKS OF LOW-PRICED STOCKS
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance. The continued listing of the Common Stock
on the Nasdaq National Market will be conditioned upon the Company's meeting
certain asset, stock price and other criteria set forth by such quotation
system. The Company believes that upon completion of the Offering and the
receipt of the net proceeds therefrom, it will continue to meet the criteria
required by the Nasdaq National Market. If the Company fails any of the tests
after the Offering, the Common Stock may be delisted from quotation on such
system. In the event the Common Stock is delisted from the Nasdaq National
Market, it may be listed on the Nasdaq SmallCap Market if its listing criteria
are met. The effects of delisting include the limited release of the market
prices of the Company's securities and limited news coverage of the Company.
Delisting may restrict investors' interest in the Common Stock and materially
adversely affect the trading market and prices for the Common Stock and the
Company's ability to issue additional securities or to secure additional
financing.
In addition to the risk of possible delisting, low price stocks are subject
to the additional risks of federal and state regulatory requirements and the
potential loss of effective trading markets. In particular, if the Common Stock
were delisted from trading on an appropriate market, including the Nasdaq
National Market or Nasdaq SmallCap Market, and the trading price of the Common
Stock were less than $5.00 per
16
<PAGE>
share, the Common Stock could be subject to Rule 15g-9 under the Exchange Act,
which requires that broker-dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and receiving
any purchaser's written consent, prior to any transaction. In such event, the
additional burdens imposed upon broker-dealers may discourage broker-dealers
from effecting transactions in the Common Stock, which would reduce the
liquidity of the Common Stock. These rules, if they became applicable to the
Common Stock, could then have a material adverse effect on the trading market
for the Common Stock. In addition, the Common Stock could be deemed "penny
stock" under the Securities Enforcement and Penny Stock Reform Act of 1990. If
this were to occur, additional disclosure would be required in connection with
trades in the Common Stock, including the delivery of a disclosure schedule
explaining the nature and risks of the penny stock market. Such requirements
could severely limit the liquidity of the Common Stock and the ability of
purchasers in the Offering to sell their Common Stock in the secondary market.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of the Offering, the Company will have 7,308,472 shares of
Common Stock outstanding (7,908,472 shares if the Representatives'
Over-Allotment Option is exercised in full). Of such shares, all of the
4,000,000 shares sold in the Offering (4,600,000 shares if the Representatives'
Over-Allotment Option is exercised in full) will be freely transferable (except
those purchased by affiliates of the Company) without restriction or further
registration under the Securities Act. In addition, the 400,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrants and 300,000 shares
of Common Stock issuable upon exercise of the Bridge Warrants, all of which also
are being registered under the Securities Act pursuant to the Registration
Statement of which this Prospectus constitutes a part, will be freely
transferable under the Securities Act, subject to restrictions on
transferability for up to one year.
The 3,308,472 shares of Common Stock outstanding prior to this Offering are,
and the 777,130 shares of Common Stock issuable upon exercise of outstanding
warrants will be, "restricted securities" under Rule 144 under the Securities
Act and may not be sold other than in accordance with Rule 144, or pursuant to
an effective registration statement under the Securities Act or an exemption
from such registration requirement. Furthermore, under Rule 144 generally, there
will be 2,240,480, 2,240,480, 2,977,594 and 3,018,002 shares eligible for resale
as of March 1, 1998, June 1, 1998, September 1, 1998 and December 1, 1998,
respectively. Under Rule 144(k), there will be 1,423,850, 1,593,788, 1,593,788
and 1,615,988 shares eligible for resale as of March 1, 1998, June 1, 1998,
September 1, 1998 and December 1, 1998, respectively. In addition to the holding
period requirements imposed by the Rule 144 safe harbor, all holders of
outstanding Common Stock prior to the Offering are subject to a one-year lock-up
following the effective date of this Offering, subject to the ability of Allen
to waive such lock-up restrictions on behalf of the Representatives. At the
request of The Nasdaq National Market, Inc., Allen has agreed not to consent to
the transfer of shares of Common Stock issuable upon exercise of the Bridge
Warrants for such one-year period. See "Shares Eligible for Future Sale--Lock-up
Agreements."
Additionally, the Company has granted certain demand and "piggyback"
registration rights to the holders of 3,308,472 shares of Common Stock and to
the holders of warrants exercisable for an aggregate of 703,332 shares of Common
Stock, to require the Company to register under the Securities Act those shares
of Common Stock and the shares issuable upon exercise of the warrants. If such
holders, by exercising their registration rights, cause a large number of shares
to be registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock.
The sale of a substantial number of shares of Common Stock or the
availability of Common Stock for sale could adversely affect the market price of
the Common Stock prevailing from time to time. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
the Securities Act and a lock-up provision under the Second Amended and Restated
Registration Rights Agreement, as amended, among the Company and its
shareholders pursuant to which the parties to such agreement have agreed not to
sell or otherwise dispose of any of their shares of Common Stock for certain
specified periods after the date on which the Offering closes, except in certain
limited circumstances,
17
<PAGE>
without the prior written consent of the Representatives. See "Principal
Shareholders," "Description of Securities," "Shares Eligible for Future Sale"
and "Underwriting."
EFFECT OF OPTIONS, WARRANTS AND REPRESENTATIVES' OPTIONS ON STOCK PRICE
The Company has reserved 1,560,000 shares of Common Stock for issuance to
employees, officers and consultants upon the exercise of options granted, or to
be granted, under the Stock Option Plan. The Company also has reserved 300,000
shares of Common Stock for issuance upon exercise of the Bridge Warrants and
777,130 shares of Common Stock for issuance upon exercise of other outstanding
warrants. The Company also will sell to the Representatives, in connection with
the Offering, the Representatives' Warrants to purchase an aggregate of 400,000
shares, subject to adjustment as provided therein. The existence of the Bridge
Warrants, the other outstanding warrants, the Representatives' Warrants and the
outstanding options issued under the Stock Option could hinder future
financings. In addition, certain holders of such securities have certain
registration rights, and the sale of shares of Common Stock upon exercise of
such rights or the availability of such shares for sale could adversely affect
the market price of the Common Stock. See "Description of Securities" and
"Underwriting."
VOLATILITY OF STOCK PRICES
The market prices of equity securities of technology companies have
experienced substantial price volatility in recent years for reasons both
related and unrelated to the individual performance of specific companies.
Accordingly, the market price of the Common Stock following the Offering may be
highly volatile. Factors such as announcements by the Company or its competitors
concerning products, patents and technology, governmental regulatory actions,
events affecting technology companies generally and general market conditions
may have a significant impact on the market price of the Common Stock and could
cause it to fluctuate substantially. In addition, it is expected that there will
be a relatively small number of shares of Common Stock trading publicly
following the Offering. Accordingly, shareholders may experience difficulty
selling or otherwise disposing of shares of Common Stock at favorable prices, or
at all. See "Shares Eligible for Future Sale" and "Underwriting."
NO DIVIDENDS
The Company has not paid dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. The Company plans to
retain any earnings to finance the development and expansion of its business.
Pursuant to the Company's Restated Certificate of Incorporation, it is
prohibited from paying any dividends on the Common Stock until all accumulated
dividends in respect of the Series A Redeemable Preferred Stock (the "Series A
Preferred Stock") and Series B Redeemable Preferred Stock (the "Series B
Preferred Stock") have been paid. See "Dividend Policy."
CONTINUED CONTROL BY OFFICERS, DIRECTORS AND EXISTING 5% SHAREHOLDERS
Following the Offering, the Company's executive officers and directors,
together with entities affiliated with such individuals, and other holders of
five percent or more of the Company's outstanding capital stock will
beneficially own over 35% of the Common Stock (assuming the exercise of all
vested stock options and warrants). Effectively, these shareholders will be able
to elect a majority of the Company's directors, will have the voting power to
approve all matters requiring shareholder approval and will continue to have
significant influence over the affairs of the Company. Among other effects, this
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company. Allen, a Representative, is the beneficial
owner of 18.8% of the Company's Common Stock, and Enrique F. Senior, an
Executive Vice President and Managing Director of Allen, is a director of the
Company and as such may be deemed to be the beneficial owner of 19.2% of the
Company's Common Stock (which includes the shares of Common Stock beneficially
owned by Allen). These factors could give rise to conflicts of interest between
the Company, on the one hand, and Allen and/or Mr. Senior, on the other hand. In
the event any conflict of interest may arise between the Company and Allen or
Mr. Senior
18
<PAGE>
in the future, the Company intends that any such issue will be resolved by a
majority of directors who do not have a personal interest in the transaction. In
connection with the Offering, because of the relationship between the Company
and Allen, and consistent with the rules of the NASD, of which Allen is a
member, the price of the shares being sold in the Offering is no higher than
that recommended by Barington Capital Group as "qualified independent
underwriter" as defined in, and in compliance with, the applicable provisions of
the rules of the NASD. See "Management," "Principal Shareholders" and
"Underwriting."
LIMITATION ON UTILIZATION OF INCOME TAX LOSS CARRYFORWARDS
Upon the consummation of the sale of the Shares, the Company will undergo 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, the Company's right to use its 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
the Company's then outstanding capital stock immediately before the ownership
change and if other ownership changes have occurred prior to this ownership
change, the utilization of such losses may be further limited. The Company
expects that its ability to utilize its net operating loss carryforwards to
offset future taxable income will be severely limited annually in the future.
See Note 8 to Notes to Financial Statements.
EFFECTS OF CERTAIN CHARTER, BYLAW AND STATE LAW PROVISIONS
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the Company's shareholders. The Company is currently authorized to
issue up to 167,000 and 93,300 shares of the Preferred Stock that have been
designated as the Series A Preferred Stock, par value $4.50 per share, and the
Series B Preferred Stock, par value $5.00 per share, respectively. As of the
date of this Prospectus, there were 67,600 and 86,041 shares of Series A
Preferred Stock and Series B Preferred Stock outstanding, respectively. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of Preferred Stock. While the Company has
no present intention to issue additional shares of Preferred Stock, such
issuance, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company and entrenching
existing management. In addition, such Preferred Stock may have other rights,
including economic rights, senior to the Common Stock, and, as a result, the
issuance thereof could have a material adverse effect on the value of the Common
Stock. The Company is also subject to the anti-takeover provisions of the New
Jersey Shareholder Protection Act, which restrict certain "business
combinations" with "interested shareholders" for five years following the date
the person becomes an interested shareholder, unless the Board of Directors
approves the business combination. By delaying and deterring unsolicited
takeover attempts, these provisions could adversely affect the value of the
Common Stock. See "Description of Capital Stock--Preferred Stock."
19
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby, at the initial
public offering price of $7.00 per share, and after deducting underwriting
discounts and commissions and other expenses of the Offering estimated to be
$2,865,000, will be approximately $25,135,000 ($29,041,000 if the Over-Allotment
Option is exercised in full).
The Company intends to use the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENT OF
AMOUNT NET PROCEEDS
------------- -------------
<S> <C> <C>
L-VIS System manufacturing and deployment........................................... $ 4,850,000 19.3%
Research and development............................................................ 4,225,000 16.8%
Repayment of debt................................................................... 3,250,000 12.9%
Capital expenditures................................................................ 2,400,000 9.6%
Sales and marketing................................................................. 2,100,000 8.4%
Working capital and general corporate purposes...................................... 8,310,000 33.0%
------------- -----
Total........................................................................... $ 25,135,000 100.0%
------------- -----
------------- -----
</TABLE>
The Company intends to use approximately $4.9 million of the net proceeds of
the Offering to manufacture and deploy additional L-VIS Units. This amount
includes the capital cost of the equipment and facilities, and the personnel
costs associated with fabrication, testing and service of L-VIS Units. The cost
of customer training, end-user support and equipment service are also included.
The Company intends to spend approximately $4.2 million of the net proceeds
of the Offering to fund its research and development activities, including
enhancement of the L-VIS System. Such costs will also include personnel costs
associated with quality assurance, software engineering and hardware
engineering. The Company also plans to continue to seek intellectual property
protection through trademarks and patents. The Company intends to continue to
retain outside consultants as necessary in order to address specific research
and development needs when it is cost effective to do so.
Approximately $3.3 million of the net proceeds of the Offering will be used
to repay the Bridge Notes in full, including accrued and unpaid interest thereon
and payment of a five percent fee to Barington. The Bridge Notes have an
outstanding principal amount of $3,000,000, mature upon the consummation of the
Offering and bear interest at a fixed rate of 10% per annum. See "Description of
Securities--Debt Securities."
The Company anticipates using approximately $2.4 million of the net proceeds
of the Offering for capital expenditures. These expenditures will include the
acquisition of test equipment to support the research and development efforts,
as well as furniture, fixtures and other personal property to support expanded
staff at the Company's new facilities in Lawrenceville, New Jersey and New York
City.
A significant increase in personnel is projected in the marketing and
customer relations areas. Approximately $2.1 million of the net proceeds of the
Offering will be spent to enhance sales and marketing capabilities and to
establish additional channels for the use of the L-VIS System in sports markets.
The Company plans to support increased travel, and participation in trade shows
and conventions to showcase the L-VIS System to an increased potential customer
base.
The remaining net proceeds of approximately $8.3 million, and any additional
net proceeds resulting from the exercise of the Over-Allotment Option, will be
employed for working capital and general corporate purposes.
The table above represents the Company's best estimate of its allocation of
the uses of the net proceeds of the Offering based upon the current state of its
business operations, its current business plan and strategy, and current
economic and industry conditions. The amount and timing of expenditures will
20
<PAGE>
vary depending upon a number of factors, including, among others, the progress
of the Company's market demand for the L-VIS System, if any, management's
determination as to how to satisfy any such demand, progress of the Company's
research and development activities, technological changes, changing competitive
conditions, and general economic conditions. The allocations of the uses of the
net proceeds of the Offering are subject to reapportionment among the purposes
listed above, and to other general corporate purposes, including working
capital. The actual amount of the uses of proceeds cannot be predicted with any
degree of certainty. See "Risk Factors--Broad Discretion as to Use of Proceeds;
Repayment of Bridge Notes."
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, interest-bearing, investment
grade debt securities, money market accounts, certificates of deposit, or direct
or guaranteed obligations of the United States government.
21
<PAGE>
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock since
its inception. The Company expects that it will retain all earnings, if any,
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends to its shareholders in the
foreseeable future. The payment of future dividends on the Common Stock and the
rate of such dividends, if any, will be determined in light of any applicable
contractual restrictions limiting the Company's ability to pay dividends, the
Company's earnings, financial condition, capital requirements and other factors
deemed relevant by the Board of Directors. Furthermore, pursuant to its Restated
Certificate of Incorporation, the Company is prohibited from paying any
dividends on the Common Stock until all accumulated dividends in respect of the
Series A Preferred Stock and Series B Preferred Stock have been paid. As of
September 30, 1997, the accrued dividends with respect to the shares of Series A
Preferred Stock and Series B Preferred Stock totaled $85,562 and $94,600,
respectively.
The Company is required to redeem the Series A Preferred Stock on a pro rata
basis, at a price of $4.50 per share plus all accrued but unpaid dividends, out
of 30% of the amount, if any, by which the Company's annual net income after
taxes in any year exceeds $5 million, as shown on its audited financial
statements. Subject to the prior redemption of all of the Series A Preferred
Stock, the Company is required to redeem the Series B Preferred Stock, on a pro
rata basis, at a price of $5.00 per share plus all accrued but unpaid dividends
out of 20% of the amount, if any, by which the Company's annual net income after
taxes in any year exceeds $5 million, as shown on its audited financial
statements. See "Description of Securities--Preferred Stock."
22
<PAGE>
DILUTION
As of September 30, 1997, after giving pro forma effect to the Bridge
Financing, which was completed in October 1997, the Company had a pro forma net
tangible book value of approximately $(51,838) or $(0.02) per share of Common
Stock. Without taking into account any other changes in the pro forma net
tangible book value of the Company after September 30, 1997, other than to give
effect to the sale by the Company of the 4,000,000 Shares offered hereby at the
initial offering price of $7.00 per Share and receipt of the net proceeds
therefrom and the application of a portion of the net proceeds of the Offering
to repay certain outstanding indebtedness as set forth under "Use of Proceeds,"
and the write-off of debt issuance costs and interest associated with the
indebtedness to be repaid and the write-off of the unamortized discounts related
to the estimated fair value of warrants to purchase common stock issued in
connection with the Bridge Financing, the Company's pro forma net tangible book
value, as adjusted at September 30, 1997, would have been approximately
$23,060,662 or $3.16 per Share. See "Description of Securities" and the Notes to
Financial Statements. This represents an immediate increase in the pro forma net
tangible book value of $3.18 per share of Common Stock to present shareholders
and an immediate dilution of $3.84 or 55% per Share to new investors. The
following table illustrates this dilution (2):
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share (1).......................... $ 7.00
Pro forma net tangible book value (deficit) per Share at September 30,
1997 (3)................................................................. $ (0.02)
Increase per Share attributable to new investors......................... 3.18
---------
Pro forma net tangible book value per Share after the Offering............... 3.16
---------
Dilution per Share to new investors.......................................... $ 3.84
---------
---------
</TABLE>
- ------------------------
(1) Represents the assumed initial public offering price per Share, before
deducting underwriting discounts and offering expenses payable by the
Company.
(2) The figures set forth in the table and the paragraph above do not take into
account the Over-Allotment Option. Assuming all of the shares underlying the
Over-Allotment Option are included in the Offering, the Pro-forma net
tangible book value per share would be $3.41 per share and thus the dilution
to new investors would be $3.59 per share or 51%.
(3) As of September 30, 1997, the Company's actual net tangible book value
(deficit) was ($1,701,838) or ($0.51) per share.
The following table summarizes, immediately prior to the Offering, the
differences between existing shareholders and investors in the Offering with
respect to the number and percentage of shares of Common Stock purchased from
the Company, the amount and percentage of cash consideration paid, and the
average price per share of Common Stock, before deduction of offering expenses
and underwriting discounts:
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders......................... 3,308,472 45.3% $ 20,452,787 42.2% $ 6.18
New Investors................................. 4,000,000 54.7% 28,000,000 57.8% $ 7.00
---------- ----- ------------- -----
Total..................................... 7,308,472 100.0% $ 48,452,787 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
23
<PAGE>
The foregoing table does not include (i) 300,000 shares of Common Stock
issuable upon exercise of the Bridge Warrants; (ii) 400,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrants; (iii) 777,130
shares issuable upon the exercise of other outstanding warrants to purchase
shares of Common Stock; (iv) 1,560,000 shares of Common Stock reserved for
issuance upon exercise of options granted to executive officers, employees and
consultants under the Stock Option Plan, including 1,210,724 shares of Common
Stock issuable upon exercise of options outstanding as of the date of this
Prospectus; and (v) 600,000 shares issuable upon exercise of the Over-Allotment
Option. The exercise of any such options and warrants will have a dilutive
effect upon investors in the Offering. See "Management--Stock Option Plan,"
"Certain Transactions," "Description of Securities" and Notes to Financial
Statements.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1997; (ii) as of September 30, 1997, on a pro forma basis, to
reflect the Bridge Financing, which was completed in October 1997; and (iii) as
of September 30, 1997, on a pro forma, as adjusted basis, to reflect (a) the
sale by the Company of the 4,000,000 shares of Common Stock offered hereby at
the initial public offering price of $7.00 per share and the receipt of the net
proceeds therefrom; and (b) the application of a portion of the net proceeds of
the Offering to repay certain outstanding indebtedness, as set forth under "Use
of Proceeds," and the write-off of the debt issuance costs and interest
associated with the indebtedness to be repaid and the write-off of the
unamortized discounts related to the estimated fair value of the Bridge
Warrants. See "Use of Proceeds," "Certain Transactions," "Description of
Securities" and Notes to Financial Statements. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------
<S> <C> <C> <C>
PRO-FORMA
ACTUAL PRO FORMA AS ADJUSTED
9/30/97 (1)(3) (2)(3)
------------ ------------ ------------
Long term debt.................................................................. $ 0 $ 0 $ 0
------------ ------------ ------------
Redeemable preferred stock:
Series A Redeemable Preferred Stock; $4.50 par value, 167,000 shares
authorized;
67,600 shares issued and outstanding.......................................... 389,762 389,762 389,762
Series B Redeemable Preferred Stock, $5.00 par value, 93,300 shares
authorized;
86,041 shares issued and outstanding.......................................... 524,805 524,805 524,805
------------ ------------ ------------
Total redeemable preferred stock................................................ 914,567 914,567 914,567
Shareholders' (deficit)/equity
Common Stock, no par value; $.005 stated value; 40,000,000 shares authorized;
3,308,472 shares issued and outstanding 7,308,472 shares issued and
outstanding, pro forma,
as adjusted (3)............................................................... 16,542 16,542 36,542
Additional paid-in capital...................................................... 21,197,302 22,847,302 47,962,302
Less: Related party note receivable............................................. (839,263) (839,263) (839,263)
Stock subscription receivable.............................................. (6,945) (6,945) (6,945)
Deferred costs associated with planned initial public offering............. (192,289) (192,289) (192,289)
Deficit accumulated during the development stage................................ (21,478,916) (21,478,916) (23,501,416)
------------ ------------ ------------
Total shareholders' (deficit)/equity............................................ (1,303,569) 346,431 23,458,931
------------ ------------ ------------
Total capitalization.......................................................... $ (389,002) $ 1,260,998 $ 24,373,498
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
(1) Pro forma gives effect to the Bridge Financing, which was completed in
October 1997. Under the Bridge Financing, the Company issued 30 units, each
unit consisting of one Bridge Note in the principal amount of $100,000 and
bearing interest at 10%, and Bridge Warrants to 10,000 shares of Common
Stock at an exercise price of $.01 per share. The promissory notes are due
and payable upon consummation of the Offering, and, accordingly, have been
recorded as short term debt on a pro-forma basis, as the note has a term of
the shorter of 12 months or the close of the Offering. Additionally,
$1,650,000 of the Bridge Financing was recorded as additional paid in
capital to reflect the estimated fair market value of warrants issued in the
transaction. See "Description of Securities--Warrants" and "--Debt
Securities."
(2) Pro forma, as adjusted, gives effect to (i) the sale by the Company of the
4,000,000 shares of Common Stock offered hereby at the initial public
offering price of $7.00 per share and the receipt of the net proceeds
therefrom; and (ii) the application of a portion of the net proceeds of the
Offering to repay certain outstanding indebtedness (including the Bridge
Note), as set forth under "Use of Proceeds," and the write-off of the debt
issuance costs and interest associated with the indebtedness to be repaid.
(3) Does not include (i) 300,000 shares of Common Stock issuable upon exercise
of the Bridge Warrants; (ii) 400,000 shares of Common Stock issuable upon
exercise of the Representatives' Warrants; (iii) 777,130 shares of Common
Stock issuable upon exercise of other outstanding warrants to purchase
shares of Common Stock; (iv) 1,560,000 shares of Common Stock issuable upon
exercise of options granted under the Stock Option Plan as of September 30,
1997, including 1,210,724 shares of Common Stock issuable upon exercise of
options outstanding as of September 30, 1997; and (v) 600,000 shares of
Common Stock issuable upon exercise of the Over-Allotment Option. See
"Management-- Stock Option Plan" and "Description of Securities."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
AUDITED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Since its inception in 1990, the Company has devoted substantially all of
its resources to the development of the L-VIS System, an electronic video
insertion system that was designed to modify broadcasts to television viewers by
inserting electronic video images, primarily advertisements. As of September
1997, the L-VIS System had been used to insert advertising images into more than
300 live television broadcasts of baseball games, soccer matches, football games
and tennis matches, including (i) the 1997 NFL pre-season games of the Baltimore
Ravens, Pittsburgh Steelers, San Diego Chargers, San Francisco 49ers, Minnesota
Vikings and Washington Redskins, (ii) several college football regular season
and bowl games, and (iii) the 1997 MLB home games of the San Francisco Giants
and the San Diego Padres. In addition, the Company has entered into a joint
venture for use of the L-VIS System in Mexico, Latin America and the
Spanish-speaking Caribbean and has signed a letter of intent for use of the
L-VIS System in the Benelux countries.
The Company has incurred substantial operating losses since its inception.
As of September 30, 1997, the Company had an accumulated deficit of
approximately $21,500,000 and expects to incur substantial additional losses for
the foreseeable future. This deficit is the result of research and development
expenses incurred in the development and commercialization of the L-VIS System,
expenses related to field testing of the L-VIS System and its deployment
pursuant to customer contracts, operating expenses relating to manufacturing,
sales and marketing activities of the Company, and general administrative costs.
The Company intends to devote substantial resources to enhance the L-VIS
System and develop additional software applications. In order to increase its
revenue generating user base, the Company has planned a substantial increase in
its sales and marketing staff. The sales and marketing staff is responsible not
only for agreements with teams, leagues and broadcasters, but also for promoting
the L-VIS System to advertisers in order to create market pull. While any
purchase of advertising will be done through the rights holder or the
broadcaster, the Company intends to create advertiser interest and demand by
promoting the L-VIS System directly to potential advertisers. Therefore, the
Company expects to incur substantial additional losses and to experience
substantial negative cash flow from operating activities through at least the
next 12 months or until such later time as it achieves revenues sufficient to
finance its ongoing capital expenditures and operating expenses. The Company's
ability to produce positive cash flow will be determined by numerous factors,
including its ability to reach agreements with, and retain, customers for use of
the L-VIS System, as well as various factors outside of its control. See "Risk
Factors."
The Company expects to generate revenue from ads sold by rights holders that
use the L-VIS System. These revenues are expected to be shared with the rights
holders. Accordingly, in order to generate revenues from the use of the L-VIS
System, the Company will need to enter into agreements with rights holders. The
agreements can take various forms, although the agreements to date in the United
States have been revenue sharing agreements under which the Company received a
percentage of the fee paid by the advertisers. The Company realizes revenue when
the advertisement runs over the air. Due to the seasonal nature of the sporting
events themselves, the Company's revenue will fluctuate seasonally. However,
this seasonality may be moderated by the multi-sport capabilities of the L-VIS
System and its use in non-sporting events.
In addition to the revenue arising from advertising, a second revenue source
is the strategic licensing of the L-VIS System to third parties. These licenses
may be territorial, such as the Company's agreement with Publicidad Virtual,
S.A. de C.V. ("Publicidad"), the joint venture formed by the Company and
Presencia to market the L-VIS System in Mexico, Central and South America and
the Spanish-speaking
26
<PAGE>
Caribbean, or they may cover individual major broadcast events, such as the Rose
Bowl. In the case of a territorial license, the licensee is responsible for
generating business within the territory and the Company will share in the
business through one or more means including royalties, license fees, and/or
equity participation in the licensee. In the case of individual events, the
Company may receive a flat fee or a fee based on revenues generated by the
licensee, depending on the nature of the license.
The Company has not generated any significant revenue with the exception of
a $2,000,000 license fee paid for an L-VIS System license. The Company
recognized $1,000,000 of this fee as revenue during the fiscal year ended June
30, 1996 ("Fiscal 1996"). The remaining $1,000,000 will be recognized into
income over a 10-year period which commenced on July 1, 1996. See Note 5 to
Notes to Financial Statements.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1997 AND FISCAL YEAR ENDED JUNE 30,
1996
REVENUES. Revenues include receipts from advertising use of the L-VIS
System as well as from license fees for use of the L-VIS System outside of the
United States. Total revenue decreased 79% to $211,634 for the fiscal year ended
June 30, 1997 ("Fiscal 1997") from $1,009,600 in Fiscal 1996. Of this total,
advertising revenue increased 745% to $81,108 in Fiscal 1997 from $9,600 in
Fiscal 1996, and license fees decreased 87% to $130,526 in Fiscal 1997 from
$1,000,000 in Fiscal 1996, as a result of the recognition of a non-recurring
$1,000,000 license fee in Fiscal 1996.
L-VIS SYSTEM COSTS. L-VIS System costs include the costs associated with the
material production, depreciation and operational support of the L-VIS Units,
including training costs for operators. L-VIS System costs increased 34% to
$1,274,890 in Fiscal 1997 from $949,804 in Fiscal 1996, due to increased
production of L-VIS Units for U.S. customers and foreign licensees and the fact
that the Company began, for the first time, to train outside operators to run
the L-VIS System.
RESEARCH AND DEVELOPMENT. Research and development expenses include the
costs associated with all personnel, materials and contract personnel engaged in
research and development activities to increase the capabilities of the L-VIS
System hardware platforms, including platforms for overseas use, and to create
and improve software programs for individual sports. Research and development
expenses increased 7% to $1,722,598 in Fiscal 1997 from $1,604,455 in Fiscal
1996 as a result of the Company's ongoing enhancement of the L-VIS System.
The Company's research and development staff is working to reduce its
reliance on outside suppliers by creating custom-designed circuit boards for the
second generation L-VIS Units that will replace and improve upon the functions
now performed by standard video processors that the Company purchases. The
Company expects to continue to incur substantial research and development
expenses as it further enhances the L-VIS System. The Company's research and
development program also includes the preparation of software to enable use of
the L-VIS System with additional sports and other events.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses include selling and marketing expenses, including salaries of sales and
marketing personnel, their travel expenses, advertising and expenses associated
with customer support, and general and administrative expenses, including
salaries of support personnel, allocated rent and office operating costs and
legal and accounting fees. Selling, general and administrative expenses
increased 16% to $3,028,895 in Fiscal 1997 from $2,602,928 in Fiscal 1996,
primarily due to hiring additional management and marketing personnel.
Upon completion of the Offering, the Company intends to hire additional
personnel to expand its financial, marketing and sales personnel, including
customer support and, to a lesser extent, administrative staff personnel to
support accounting and personnel management. See "Risk Factors--Risks Associated
with Expansion and Growth" and "Business--Marketing Strategy." Additionally, the
Company expects
27
<PAGE>
general and administrative expenses to increase in future periods as it incurs
additional costs related to being a public company and the expansion of its
facilities, including its production facilities.
INTEREST AND OTHER INCOME. Interest income from marketable securities
decreased as expenses of the Company's operations caused cash and marketable
securities to decrease 81% to $852,013 at June 30,1997 from $4,517,657 at June
30, 1996.
NET LOSS. As a result of the foregoing factors, the Company's net loss
increased 47% to $5,730,661 in Fiscal 1997 from $3,910,524 in Fiscal 1996.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Total revenue increased to $132,803 for the three months ended
September 30, 1997 from $54,198 for the three months ended September 30, 1996.
Advertising revenue increased from $29,198 to $75,177 as a result of increased
usage of the L-VIS System during the baseball season, specifically by the San
Francisco Giants and by the San Diego Padres for the first time. In addition,
the L-VIS System was used during preseason NFL games, where it generated revenue
for the first time. License revenue increased 131% to $57,626 for the three
months ended September 30, 1997 from $25,000 for the three months ended
September 30, 1996 as a result of additional L-VIS systems being sub-licensed.
L-VIS SYSTEM COSTS. L-VIS system costs increased 118% to $416,732 in the
quarter ended September 30, 1997 from $190,836 for the quarter ended September
30, 1996. The costs increased due to increased usage of the L-VIS system during
the baseball season, the use of outside operators to run the L-VIS systems and
expenses related to the NFL preseason which were not present in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 28%
to $445,994 for the three months ended September 30, 1997 from $349,161 for the
three months ended September 30, 1996 as a result of an increase in software
development personnel working on the development of a new integrated system and
other ongoing research and development projects.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 66% to $1,223,811 for the three months ended September 30,
1997 from $738,130 for the three months ended September 30, 1996. This increase
was a result of several factors, including: the hiring of outside marketing
consultants to market the L-VIS System to various NFL teams and to explore
potential expansion in certain European markets; non cash compensation charges
incurred related to the issuance of nonrecourse notes to certain officers used
for the purchase of stock; and the addition of several marketing and
administrative personnel in order to staff the New York office, which opened in
July 1997.
INTEREST AND OTHER INCOME. Interest income from marketable securities
decreased 55% to $16,372 for the three months ended September 30, 1997 from
$36,527 for the three months ended September 30, 1996, as operational expenses
caused a decrease in cash available for investment.
NET LOSS. As a result of the foregoing factors, the Company's net loss
increased 63% to $1,937,362 for the three months ended September 30, 1997 from
$1,187,402 for the three months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses and negative cash
flows in each year since it commenced operations, due primarily to start-up
costs, the costs of developing the L-VIS System and the cost of building L-VIS
Units. As a result of operating losses, net cash used in operating activities
amounted to $4,095,264 and $3,652,972 in Fiscal 1997 and Fiscal 1996 and
$1,605,205 and $877,833 for the three month periods ended September 30, 1997 and
1996, respectively. Net cash provided by/(used in) investing activities totaled
$2,313,612 and $(1,915,353) in Fiscal 1997 and Fiscal 1996 and $(244,243) and
$2,430,363
28
<PAGE>
for the three month periods ended September 30, 1997 and 1996, respectively.
Proceeds from the maturity of the Company's investments provided cash of
$3,000,000 and $2,200,000 in Fiscal 1997 and Fiscal 1996 and $0 and $3,000,000
in the three month periods ended September 30, 1997 and 1996, respectively. In
Fiscal 1997, the Company invested $75,535 in marketable securities as compared
to $3,027,826 in Fiscal 1996. This decrease in investments can be attributed to
the decline in the Company's cash balance from Fiscal 1996 to Fiscal 1997,
resulting in the Company having less cash available to invest. The Company has
historically financed its cash requirements for operations primarily through
private sales of equity and debt securities. Net cash proceeds from the sale of
equity securities was $1,050,636 and $5,657,695 in Fiscal 1997 and Fiscal 1996
and $1,304,722 and $30,000 for the three month periods ended September 30, 1997
and 1996, respectively. The decrease from fiscal 1996 to fiscal 1997 is due
directly to the decrease in the amount of private sales of stock and warrants.
The increase for the three months ended September 30, 1997 as compared to the
three months ended September 30, 1996 is due primarily to the receipt of stock
subscriptions from the May 1997 Rights Offering. At June 30, 1997 and September
30, 1997, the Company had a working capital deficit of approximately $855,605
and $1,266,043, respectively. During the period from June 30, 1997 through the
date of this Prospectus, cash proceeds from the private sale of Common Stock was
approximately $1,300,000, primarily from the receipt of stock subscriptions
receivable as of June 30, 1997. In October 1997, the Company closed on the
Bridge Financing, pursuant to which the Company issued Bridge Notes in the
aggregate principal amount of $3,000,000 and Bridge Warrants to purchase 300,000
shares of Common Stock for an exercise price of $0.01 per share. The gross
proceeds realized by the Company in connection with the Bridge Financing were
$3,000,000. See "Description of Securities-- Debt Securities" and the footnotes
to the Capitalization table.
Since inception, the Company has financed its operations from: (i) the net
proceeds of approximately $19,700,000 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 granted by the
Company to Publicidad and (iii) the proceeds of the Bridge Financing which
closed in October 1997.
The Company currently expects to continue to incur significant capital
expenditures to expand its operations, the amount of such expenditures being
dependent in part on the number of arrangements entered into with rights holders
for the use of the L-VIS System and the pace of technological advancements.
Following the consummation of the Offering, the Company plans to undertake a
significant expansion of its marketing efforts. Furthermore, the Company has
recently reached an agreement with Gerencia de Medios ("GDM"), a former licensee
of the L-VIS System, concerning a refund to GDM of $365,000 GDM previously paid
in connection with its license and the return of equipment by GDM. See Note 11
to Notes to Financial Statements and "Risk Factors--Patents and Protection of
Proprietary Technology." Depending on the level of revenues generated, the
Company may be required to raise substantial additional capital to fund the
Company's liquidity needs through issuances of debt or equity by the Company
(either through public offerings, investments by existing stockholders or
investments by third parties). See "Risk Factors."
The Company expects to invest the proceeds of the Offering in short-term,
interest-bearing investment grade securities until such funds are applied to the
capital investments and operating needs of the Company as well as the repayment
of existing obligations. See "Use of Proceeds."
The report of the independent accountants contains an explanatory paragraph
with respect to the Company's ability to continue as a going concern. See
"Financial Statements". The Company has suffered recurring losses from
operations and has an accumulated deficit that raises substantial doubt about
its ability to continue as a going concern. The Company also has significant
liquidity requirements to fund the continuation of operations. The Company has
required substantial funding through debt and equity financings since its
inception to complete its development plans and commence full scale operations.
The Company's management has historically been successful in obtaining outside
financing to meet obligations and fund working capital requirements as they come
due. Recently, the Company's Board of Directors approved the filing of the
registration statement of which this Prospectus is a part. The anticipated
29
<PAGE>
proceeds from this Offering would be used for L-VIS System manufacturing and
deployment, research and development, repayment of debt, capital expenditures,
sales and marketing, and working capital and general corporate purposes. See
"Use of Proceeds." If the Offering is consummated on the currently expected time
schedule and generates the anticipated proceeds, or if the Company is successful
in completing comparable fund raising activities on a similar time schedule, the
Company believes that it will continue as a going concern. Should the Offering
not be successfully completed, the Company would pursue other debt and equity
financing alternatives. The Company also intends to continue its marketing
efforts aimed at generating revenues. However, there can be no assurance that
the Company will be successful in its attempt to consummate the aforementioned
plans. Further, there can be no assurance, assuming the Company successfully
raises additional funds, that the Company will achieve profitability or positive
cash flow.
The Company believes that the net proceeds from the Offering, together with
its existing resources, will be sufficient to meet its capital needs for
approximately the next 18 months, although there can be no assurance that the
Company will not require additional funds sooner. The Company's actual working
capital requirements will depend on numerous factors, including the progress of
the Company's research and development programs, the Company's (and its
marketing partners', if any) ability to attract customers to use the L-VIS
System, the level of resources the Company is able to allocate to the
development of greater marketing and sales capabilities, technological advances
and the status of competitors. The Company may require substantial funds in
addition to the proceeds of this Offering to market the L-VIS System and
otherwise to meet its business objectives. The Company has no commitments to
obtain any additional funds, and there can be no assurance that such funds will
be available on commercially reasonable terms, or at all.
As of September 30, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $7,800,000, which expire in the
years 2006 through 2012. The available net operating losses are based on the
assumption that the Company has gone through a change in ownership pursuant to
Internal Revenue Code ("IRC") Section 382 during the fiscal year ended June 30,
1997 as a result of the May 1997 Rights Offering. Under IRC Section 382, the
amount of the net operating loss carryforwards that are available to offset
taxable income in any particular year is severely limited.
Although the Company has determined its net operating losses as if it had
undergone a change of ownership pursuant to IRC Section 382, the Company has not
yet finalized the analysis to make an actual determination of whether such a
change has occurred. Therefore, if such a change has not occurred during the
Fiscal 1997, the amount of net operating loss carryforwards available in total
and on an annual basis may be increased.
EFFECT OF INFLATION
Domestic inflation has not had a significant impact on the Company's sales
or operating results. However, inflation may have an impact upon business in a
number of international markets.
30
<PAGE>
BUSINESS
GENERAL
Princeton Video Image, Inc. ("PVI" or the "Company") developed and is
marketing a real-time video insertion system that, through patented pattern
recognition technology, places computer-generated electronic advertising images
into live television broadcasts of sporting and other events. These electronic
images range from simple corporate names or logos to sophisticated multi-media
3-D animated productions. During the broadcast of a sporting event, for example,
these images can be placed to appear to be physically located in various high
visibility locations in a stadium or even on a playing field. The Company
believes that its Live Video Insertion System (the "L-VIS System"), which is an
integrated hardware and software system, transcends limitations of traditional
television broadcast advertising mechanisms and can expand the television
broadcast advertising paradigm by placing images into live, as well as
pre-recorded, television broadcasts.
PVI believes that the L-VIS System can substantially benefit (i)
advertisers, through the placement of their ads in new, high visibility
locations and the ability to "narrow cast" by region and brand; (ii)
broadcasters, through a new revenue stream from additional inventory of
advertising space; and (iii) teams and leagues, through increased revenue
streams and greater flexibility and control over in-stadium advertising. As of
September 1997, the L-VIS System had been used to insert advertising images into
more than 300 live television broadcasts of baseball games, soccer matches,
football games and tennis matches. Advertisers who have run ads using the L-VIS
System include: The Coca-Cola Company, Gateway 2000, Inc., GTE Corporation,
Staples, Inc., Toyota Motor Corporation, Kellogg Company, Southwest Airlines
Co., National Car Rental Systems, PepsiCo, Inc., Nissan Motor Company, Ltd., and
Pacific Bell.
The Company's objective is to become the leading provider of electronic
advertising to the sports television advertising market worldwide. The key
elements of the Company's strategy include (i) developing relationships with
rights owners such as the National Football League ("NFL"), National Basketball
Association ("NBA"), Major League Baseball ("MLB"), FIFA (soccer's international
governing body) and specific teams and or other sports governing bodies; (ii)
developing relationships with national network broadcasters such as NBC, CBS,
ABC, ESPN, and FOX; (iii) working with high-profile advertisers to assist them
in understanding and capitalizing on the use of the L-VIS System; and (iv)
developing L-VIS System software for additional sporting and other events.
OVERVIEW OF THE TELEVISION ADVERTISING AND SPONSORSHIP MARKET
Sports advertising and sponsorship is a significant market both inside and
outside the United States. Advertisers in the United States spent an aggregate
of approximately $8.7 billion to purchase television advertising and sponsorship
rights with respect to sporting events in 1996, according to information from
the following industry sources. The 1996 network and cable television sports
advertising markets in the United States were reported by Paul Kagan Associates,
Inc. ("Kagan Associates") to be approximately $3.7 billion and $1.1 billion,
respectively. The December 1995 IEG Sponsorship Report, a sports newsletter
published biweekly by the International Event Group, projected that $3.9 billion
would be spent to sponsor specific teams, stadium locations and sporting events
in 1996. The Company estimates that approximately $9 billion was spent on
various forms of television sports advertising and sponsorship outside the
United States.
The cost of a television commercial spot is normally a function of the
nature and size of the expected audience of the event to be broadcast. A spot in
a national broadcast of a major sporting event, such as the Super Bowl or a
World Series game, sells for a price many times that of a spot in a regular
season game broadcasted only locally or regionally. For example, the costs of a
30-second spot in the broadcast of a local 1997 regular season San Francisco
Giants baseball game, a 1997 nationally broadcast Monday night NFL football game
and the 1997 Super Bowl are approximately $5,000, $350,000 and $1,200,000,
respectively. Television broadcasters (including national television and cable
networks, regional cable networks, and
31
<PAGE>
local television and cable operators) purchase television broadcast rights to
sporting events from the holders of those rights, which include individual teams
as well as various leagues, federations, associations and other organizations
representing both professional and amateur sports. Rights to specific games or
events may be held by teams, leagues, associations, or any combination thereof,
depending on the arrangements under which each sport is organized.
The Company believes that, with the advent of cable and satellite
television, the resulting increase in broadcasting channels, and the ease with
which viewers can change or "surf" among these channels, the effectiveness of
the traditional 30-second advertising spot may diminish. The Company further
believes that the growth of sports sponsorship is largely driven by the desire
on the part of advertisers to be "in the game" by having their brands and
products visible during the broadcast of televised live events. The development
of video insertion technology has created a new method of advertising in which
the electronically inserted brand or message can appear, to the television
viewer, to be a part of the stadium where the event is taking place. The L-VIS
System can increase the signage capacity of the stadium or venue from the
television viewer's perspective. By exposing the television viewer to the brand
or message during the event, the advertiser is "in the game" and can be more
confident that its message will actually be seen by the viewer, as the
advertisement can be placed strategically to appear on the television screen
where traditional signage may not be practical or available.
Sponsorship generally entails associating the sponsor's name with the event
or stadium as well as "signage rights," i.e., the prominent display of the
sponsor's name and products in specified locations in the stadium or broadcast.
Sponsors purchase sponsorship rights from the holders of those rights. Like
broadcast rights, the ownership of sponsorship rights depends on the specific
sport and the event or location. In some cases, the owner of the venue at which
an event is staged holds the sponsorship rights to the event. In other cases,
the team owner may own the sponsorship rights, including signage. Advertisers or
their representatives negotiate sponsorship arrangements directly with
sponsorship rights holders and not with broadcasters. Since broadcasters
historically have not shared in sponsorship revenue, they traditionally have not
assisted sponsorship programs and, in many cases, try to avoid broadcasting
images of in-stadium signs and other promotions.
ADVANTAGES OF THE L-VIS SYSTEM
The development of video insertion technology has created a new method of
advertising in which the electronically inserted brand or message can appear to
the television viewer to be a part of the stadium where the event is taking
place. By exposing the television viewer to the brand or message during the
event, the advertiser is "in the game" and can be more confident that its
message will actually be seen by viewers.
The Company believes that the L-VIS System can be used to provide additional
revenue to advertising rights holders and broadcasters and provide substantial
advantages when compared to traditional 30-second advertising spots and other
forms of advertising because the L-VIS System:
- ALLOWS FOR "IN THE GAME" ADVERTISING. The L-VIS System allows an
advertiser to be "in the game" by having their brands and products visible
during the broadcast of televised live events;
- REDUCES THE EFFECT OF CHANNEL SURFING AND VIEWER MUTING. Because the L-VIS
System allows for "in the game" advertising, the negative effect of
"channel surfing," which often occurs during traditional 30-second
advertising spots, may be reduced. Similarly, an image inserted using the
L-VIS System is unaffected by viewer muting;
- ALLOWS PLACEMENT OF ADVERTISING IN HIGH VISIBILITY LOCATIONS. The L-VIS
System allows for the insertion of images without affecting the actual
playing surface or other areas where advertising is inserted;
- CREATES NEW INVENTORY FOR ADVERTISING RIGHTS HOLDERS. The L-VIS Systems
allows for new advertising by providing for the insertion of images in
locations that are unavailable for conventional billboards, such as the
space in the vicinity of football goal posts;
32
<PAGE>
- ALLOWS "NARROW CASTING" OF SPECIFIC ADVERTISING TO SPECIFIC GEOGRAPHICAL
REGIONS. The L-VIS System also allows for "narrow casting" specific
advertising to specific geographical regions. Thus, where desired, a
rights holder can sell the same advertising space to different advertisers
in different markets; for instance, the New York broadcast of a San
Francisco Giants-New York Mets MLB game can include a different inserted
advertisement than the San Francisco broadcast;
- PROVIDES FOR ANIMATION AND AUDIO-VIDEO ADVERTISING. The L-VIS System may
be used, when appropriate, to insert animation and audio-video advertising
within the program to enhance the impact of the advertising;
- ALLOWS BRANDING OF AN EVENT. Insertions made during a live broadcast will
be captured, or branded, on recordings of the event and may then be shown
around the world in re-broadcasts and highlight films of the event. An
advertiser will benefit from every re-broadcast, such as re-broadcasts
which occur during the sports segment of most news programs; and
- PROVIDES ADVERTISING INTO OTHERWISE ADVERTISING-FREE ENVIRONMENTS. The
Company's technology can be used to insert advertising into otherwise
advertising-free environments, e.g., pay-per-view sports events. To date,
the L-VIS System has not been used for such purpose, and there can be no
assurance that it will ever be so used.
THE L-VIS SYSTEM TECHNOLOGY
The L-VIS System, which achieved technological feasibility in January 1995,
is a system of proprietary hardware and software which has been designed by the
Company to insert electronic images into live televised sports broadcast. The
inserted images may be two or three dimensional, static or animated, opaque or
semi-transparent and may be placed so that the inserted images appear to exist
on the playing field or in the stadium or venue where the game or event is being
played. If a player or other object moves in front of an image that is inserted
on a wall or a playing field, the L-VIS System is programmed so that the passing
object occludes that portion of the inserted image. The L-VIS System can also be
used to insert a free standing image so that the image will occlude a player or
other object which "passes behind" it.
The Company's L-VIS System is based upon state of the art, patented pattern
recognition technology. The Company believes that the L-VIS System is the only
video insertion technology that can reliably insert stable broadcast quality
images in outdoor live sporting events and provide for practical occlusion in
stadium environments. The L-VIS System may also be located anywhere in the
television distribution chain, including the stadium where a broadcast typically
originates, the television studio to which a broadcast is relayed and the
microwave links or satellite ground stations where the broadcast is relayed for
distribution to the viewing public. It is the Company's belief that all of these
attributes are necessary for commercial success.
The L-VIS System and its operator may be located at the site of the event,
at the network studios of the broadcaster or at an individual station or cable
system head-end carrying the broadcast. Before the broadcast, the advertising
images to be inserted are prepared, the operator identifies the location in the
broadcast scene where the images will be inserted, and then "trains" the L-VIS
System to recognize such broadcast scene. The L-VIS System is designed to
recognize the broadcast scene in real time during the broadcast and to insert
the image as instructed each time the broadcast scene containing the insert
location appears. The operator controls which image is selected and when it will
be inserted.
The Company has designed software that allows for the live use of the L-VIS
System in football, baseball, soccer and tennis broadcasts. In football, the
L-VIS System software has been designed to insert images in the vicinity of the
goal posts. In baseball, the Company's software allows images to be inserted on
the wall behind home plate, the outfield wall or the area above the outfield
wall. To the television viewer, an advertisement inserted with the L-VIS System
on the wall behind home plate or the outfield wall appears to be part of the
original scene, in proper perspective and fixed in the scene as the camera pans,
33
<PAGE>
tilts and zooms, and as players move in front of the image. Furthermore, because
the inserted image is not present at the actual site of the baseball game, any
distraction caused to the players by other advertising such as scrolling
billboards will not be present. In soccer, the L-VIS System allows for the
insertion of an image within the field's center circle. See "Risk
Factors--Technical Uncertainties."
STRATEGY
The Company's objective is to become the leading provider of electronic
advertising to the sports television advertising market worldwide. The key
elements of the Company's strategy include:
- DEVELOPING RELATIONSHIPS WITH RIGHTS OWNERS. The Company intends to
develop relationships with rights owners such as the NFL, MLB, NBA, FIFA,
and specific teams and or other sports governing bodies;
- DEVELOPING RELATIONSHIPS WITH BROADCASTERS. The Company is currently in
discussions with several broadcasters and intends to develop relationships
with national network broadcasters such as NBC, CBS, ABC, ESPN and FOX;
- WORKING WITH HIGH-PROFILE ADVERTISERS. To promote acceptance of the L-VIS
System, the Company has actively discussed the L-VIS System's benefits and
unique uses with a limited number of high-profile sporting event
advertisers and plans to expand this effort significantly; and
- ENHANCING AND DEVELOPING ADDITIONAL L-VIS SYSTEM SOFTWARE. In addition to
enhancing existing software for use of the L-VIS System during football
games, baseball games, soccer and tennis matches, the Company is
developing, or intends to develop, software to permit use of the L-VIS
System during the broadcast of additional sports and other events,
including basketball games, motor sports and golf.
OWNERSHIP OF VIDEO INSERTION RIGHTS IN THE NFL, COLLEGE FOOTBALL AND MLB
In the NFL, all television, video insertion and national sponsorship rights
are controlled by the league for all regular season games, the playoffs, the
Super Bowl and the Pro-Bowl. Such rights are controlled by individual NFL teams
with respect to all pre-season games. In 1996, the NFL was under contract with
ABC, NBC, FOX, TNT and ESPN for the rights to broadcast various NFL football
games. Kagan Associates estimated that NBC generated approximately $392 million
through the sale of television advertisements with respect to its broadcast of
regular season AFC games, playoff games and the 1996 Super Bowl, and that ABC
and FOX generated approximately $363 million and $409 million, respectively, in
revenues from the sale of advertising relating to their 1996 regular season and
post-season NFL broadcast rights. Following the end of the 1997 NFL season, the
existing contracts between the NFL and ABC, NBC, FOX, TNT and ESPN,
respectively, will expire. Interested broadcasters will be required to enter
into a bidding process with the NFL for the right to broadcast games following
the 1997 season.
In college football, the television advertising, sponsorship and video
insertion rights to regular season games are held by various college football
conferences. The rights to the various college bowl games are owned by bowl
committees which are often non-profit corporations established to host a bowl
game. Both the conferences and the committees, like other rights holders,
contract with broadcasters for the national or local broadcast of their games.
Kagan Associates estimated that in 1996, ABC, NBC and CBS generated
approximately $124 million, $16 million and $88 million, respectively, in
advertising revenues relating to their regular season and college bowl game
broadcast rights.
MLB holds all television, sponsorship and video insertion advertising rights
with respect to regular season nationally broadcast games, the All Star Game,
playoff games, the World Series and the international distribution of regular
season games. Kagan Associates estimated that the advertising revenues received
by the four major over-the-air broadcast networks with respect to MLB totaled
approximately $223 million in 1993, $37 million in 1994 (a strike shortened
season), $150 million in 1995 and $303 million
34
<PAGE>
in 1996. Generally, the local television rights, video insertion and sponsorship
rights to regular season baseball games are held individually by each of the 30
MLB teams. Typically, each team sells to over-the-air and cable broadcasters the
broadcast and television advertising rights to individual games or packages of
multiple games for a fixed fee and solicits potential sponsors using a media
sales group. The broadcasters earn revenues through the sale of 30-second spots
to local and national advertisers.
SALES AND MARKETING
The Company expects to generate revenues from the sharing of advertising
revenue among the Company, rights holders and broadcasters and, in certain
circumstances, through the licensing of the Company's technology. As discussed
above, the right to insert electronic images for advertising purposes into a
live broadcast, and hence the right to sell advertising using the L-VIS System,
is held by different groups depending, in most cases, on the sport involved and
the status of the game, i.e., pre-season, regular season or post-season, and
whether the game is to be broadcast internationally, nationally or locally.
These rights may be sold for specific games and/or entire seasons to another
party, most notably a broadcaster who pays the rights holder an up-front fee for
such rights. In each case, the Company must negotiate for the use of the L-VIS
System with the rights holder or holders, typically in exchange for a percentage
of the advertising revenue generated using the L-VIS System. Because the L-VIS
System uses the live feed from the broadcaster to insert its electronic images,
such broadcaster must also approve the use of the L-VIS System. Accordingly,
arrangements with several parties including the rights holder and the
broadcaster must be established. See "Risk Factors--Copyright Uncertainties."
The Company has been successful in establishing such relationships with respect
to various major sporting events. As of August 1997, the L-VIS System has been
used to broadcast, among other events, (i) the 1997 NFL pre-season games of the
Baltimore Ravens, Pittsburgh Steelers, San Diego Chargers, San Francisco 49ers,
Minnesota Vikings and Washington Redskins, (ii) several college bowl games and
regular season football games, and (iii) the 1997 MLB home games of the San
Francisco Giants and the San Diego Padres. PVI is currently in discussion with
several major broadcasters, including ABC, NBC and ESPN regarding the use of the
L-VIS System with respect to several high-profile sporting events. There can be
no assurance, however, that the Company will be successful in establishing or
maintaining a relationship with any party.
The ultimate customers of the Company's L-VIS System are expected to be
sports advertisers and sponsors. Revenues are expected to flow from the
advertisers and sponsors to the rights holders who will pay a share of those
revenues to the Company. Set forth below is a simple diagram showing the
anticipated general flow of services and revenues in connection with the
Company's intended use of the L-VIS System. The diagram is intended to be
illustrative; actual revenue flow may differ from that shown below.
[LOGO]
[GRAPHIC: INDICATED THE FLOW OF SERVICES/TECHNOLOGY, PROMOTIONAL ACTIVITIES AND
REVENUES AMONG THE COMPANY, THE RIGHTS HOLDER/BROADCASTER AND ADVERTISERS]
35
<PAGE>
Because the right to use video insertion technology and, thus, the right to
sell advertising using the L-VIS System, is held, in most cases, by the sports
teams or their governing leagues, the Company expects that these rights holders
will be its contract partners. The Company expects to provide the L-VIS System
and support services to the rights holders and to be paid by the rights holders
a percentage of the advertising revenues derived from use of the L-VIS System.
The Company further expects that the rights holders will enter into agreements
with broadcasters to provide the services necessary for use of the L-VIS System.
The Company expects that advertising space using the L-VIS System will be sold
either by the rights owner or by the broadcaster, depending on the specific
arrangement between such parties, and that advertising revenues will be shared
among the rights owner, the broadcaster and the Company. As a result, the
Company relies, and will continue to rely, upon the marketing and advertising
staffs of the teams, leagues and broadcasters, which typically target the
manufacturers or producers of nationally distributed products. See "Risk
Factors--Dependence on Third Party Sales Forces."
In addition to relying upon the sales forces of the broadcasters and/or the
rights holders, the Company also promotes the advantages of the L-VIS System
directly to major advertisers. The Company believes that promotion is important
in influencing market acceptance of the L-VIS System among potential
advertisers. Certain press coverage of electronic image insertion technology has
raised concerns about its desirability and potential misuse. For instance, an
article has described inserted advertising as subliminal and the technology has
been described as tampering with the television picture in a manner which may
not be ethical. A danger of overcommercialization has also been voiced. See
"Risk Factors--Dependence on Market Acceptance" and "--Risks Associated with
Expansion and Growth."
The Company has initially focused its sales and marketing efforts on those
sports that account for a significant amount of the United States or worldwide
advertising and sponsorship expenditures. Following is an explanation of the
Company's sales and marketing strategy for several of its target markets:
FOOTBALL
In football, the L-VIS System software has been designed to insert images in
the vicinity of the goal posts either as a lead-in to commercial breaks or
during field goal and extra-point attempts. The Company expects these insertions
to account for substantially all of the Company's football revenue. Insertions
in the vicinity of the goal posts offer rights holders the ability to sell
advertising for a high visibility location where advertising was not previously
located.
During NFL pre-season games in August 1997, the Baltimore Ravens, Minnesota
Vikings, Pittsburgh Steelers, San Diego Chargers, San Francisco 49ers and
Washington Redskins used the L-VIS System to insert promotional material and
advertising in broadcasts of their games.
The ESPN sports network first used the L-VIS System in the broadcast of
football games during the 1995 fall college football season. The most prominent
uses by ESPN were in its December 1995 broadcasts of the Holiday Bowl and the
Peach Bowl. ABC used the L-VIS System to insert ABC logos into its New Year's
Eve 1995 broadcast of the Sugar Bowl from New Orleans. Since then, ESPN and
ESPN2 have used the L-VIS System to make insertions in more than a dozen college
football broadcasts. During the 1996 college football season, ESPN used the
L-VIS System in approximately 80% of its Western Athletic Conference football
broadcasts.
The Company and ESPN have arranged to use the L-VIS System during several
college bowl games in December 1997 and January 1998, including the Holiday
Bowl, Liberty Bowl, Alamo Bowl and Peach Bowl. The Company intends to pursue
additional arrangements for the use of the L-VIS System with respect to the
broadcast of NFL and college football games. However, there can be no assurance
that the Company will be successful in creating greater interest for use of the
L-VIS System with respect to the broadcast of either NFL or college football
games. See "Risk Factors--Dependence on Market Acceptance."
36
<PAGE>
BASEBALL
The Company focused its initial marketing efforts on the local MLB market
because the advertising rights in each local market are typically held by the
individual teams in that market. This provides a greater number of potential
customers than are available in many other sports. Because a normal baseball
game is divided into 18 half-innings, static advertisements can be sold by the
rightsholder using a half-inning advertising unit, which enables the rights
holder to know exactly how many advertising units may be sold and what its
revenues will be from the sale of such advertising. The Company has negotiated
and intends to continue negotiating for the right to consent to any pricing
model before its implementation.
In 1995, the Company introduced the L-VIS System to broadcast television,
inserting advertisements into broadcasts of the Trenton Thunder minor league
baseball games broadcast by Comcast Cable of New Jersey. In 1996, the Company
contracted with the San Francisco Giants for use of the L-VIS System for
broadcasts of Giants home games on San Francisco station KTVU and SportsChannel.
In addition, FOX carried one of the Giants home games on its "Game of the Week"
program during which the L-VIS System was used. The Giants pay a fee to the
broadcaster for use of the video feed required by the L-VIS System and to
facilitate its utilization.
Through the use of the L-VIS System by the San Francisco Giants, the Company
gained access to other MLB teams. The Giants and the San Diego Padres used the
L-VIS System throughout the 1997 MLB season. In order to interest more teams in
the Company's technology, PVI installed a second system in San Diego for use by
visiting teams in broadcasts to their home cities. The Company believes that
this exposure to the L-VIS System by the visiting teams and their broadcasters
will lead to increased use of the L-VIS System in 1998. However, there can be no
assurance that the Company will be successful in creating greater interest for
use of the L-VIS System in MLB. See "Risk Factors--Dependence on Market
Acceptance."
SOCCER
Although revenues from soccer television advertising in the United States
historically have been very small, the Company has marketed, and intends to
continue marketing, the L-VIS System for use in soccer matches in Europe, Latin
America and Asia, where the popularity of soccer is significantly greater than
in the United States. PVI believes that use of the L-VIS system in soccer may
ultimately become a significant worldwide source of revenue for the Company.
The L-VIS System has been designed to insert an image onto the center circle
of a soccer field. The Company first used the L-VIS System to insert advertising
logos onto the center circle during live international broadcasts of the
Parmalat Cup soccer tournament in August 1995. RTBF, the French language
national broadcaster in Belgium, successfully used the L-VIS System in May 1996
to insert three dimensional images into the broadcast of the Belgian Cup. The
Company also used the L-VIS System to insert logos during the December 1996
World Cup qualifying match between the Dutch and Belgian national teams and,
through Publicidad, to insert advertisements in more than 100 soccer matches in
Mexico.
FIFA currently opposes the insertion of advertising on to the field of play.
The L-VIS System has not been used in FIFA-sanctioned matches to insert images
on the field of play while a match is in progress. Instead, the L-VIS System has
been used before and after a match. The Company continues to explore ways to
encourage FIFA to grant permission to use the L-VIS System in FIFA-sanctioned
matches. For example, the Company has discussed using the L-VIS System to insert
advertising on sideboards during FIFA-sanctioned matches. Without this
permission, the Company's potential revenue from soccer will be substantially
reduced. There can be no assurance that FIFA will give such permission. See
"Risk Factors-- Dependence on Market Acceptance."
37
<PAGE>
OTHER SPORTS
Kagan Associates estimated that in 1996, 18% and 6% of the combined sports
advertising revenues generated by ABC, CBS, NBC and FOX were for basketball and
golf, respectively. Motor sports have also generated significant revenues
worldwide. The Company intends to develop software to use the L-VIS System for
broadcasts of motor sports, basketball and golf during 1998-1999. ESPN used the
L-VIS System in international broadcasts of the X-Games, which were taped in San
Diego in 1997. There can be no assurance that the Company will be successful in
developing software that allows use of the L-VIS System with motor sports,
basketball or golf, or if successful, will be able to gain market acceptance
with respect to such sports. See "Risk Factors--Technical Uncertainties,"
"--Risks Associated with Rapidly Changing Industry," and "--Dependence on Market
Acceptance."
INTERNATIONAL BUSINESS STRATEGY
In the near term, the Company's strategy with respect to sporting and other
events originating outside of the United States is to enter into joint ventures
and licensing transactions principally with foreign broadcast and sports
marketing experts. Initially, the Company expects the L-VIS System to be used
internationally for soccer matches and motor sports. See "Risk Factors--Risks
Associated with International Strategy."
In 1993, the Company entered into a 50/50 joint venture with Presencia en
Medios, pursuant to which the parties formed Publicidad Virtual, S.A. de C.V., a
Mexican limited liability company ("Publicidad"), which was granted an
exclusive, royalty-free license to use, market and sub-license the L-VIS System
throughout Mexico, Central and South America and the Spanish-speaking markets in
the Caribbean basin. The L-VIS System has been used to place insertions into
broadcasts of more than 100 soccer matches, plus tennis matches and bullfighting
on behalf of clients of Publicidad.
The Company has executed a letter of intent with a Belgian company, D&D
Entertainment Group, pursuant to which the Company intends to grant an exclusive
license to use the L-VIS System for domestic transmissions within the Benelux
countries.
RESEARCH AND DEVELOPMENT
The Company recently began integrating the L-VIS System operating software
into a new "Flex-Card" hardware platform. This platform is more powerful than
the platform the Company is currently using and allows re-configuration, which
PVI believes will permit it to meet rapidly changing industry requirements. The
Company has designed the Flex-Card L-VIS System to provide multiple insertion
capability, multiple camera capability, an expanded zoom range, live video
inserts, and has created a simplified graphical user-based interface. The
Company currently intends to introduce the Flex-Card L-VIS System during 1998.
There can be no assurance that the Flex-Card L-VIS System will be available
during 1998, or any time, or that, if available, it will permit each of the
intended advanced features. See "Risk Factors--Technical Uncertainties" and
"--Risks Associated with Rapidly Changing Industry."
The Company is continuing to improve existing software for use of the L-VIS
System during the broadcast of football games, baseball games, soccer and tennis
matches. Further, the Company is developing, or intends to develop, software to
permit use of the L-VIS System during the broadcast of basketball games, motor
sports and golf. The Company also intends to make the L-VIS System available for
use with other events such as pay-per-view boxing and concerts and award shows
such as the Oscars and the Grammys. There can be no assurance that the Company
will be able to prepare such software. See "Risk Factors--Technical
Uncertainties" and "--Risks Associated with Rapidly Changing Industry."
38
<PAGE>
COMPETITION
PVI knows of three other organizations that it believes are developing
processes and equipment to pursue a business similar to the Company's. These
organizations are Symah Vision-SA ("Symah"), Orad Hi Tech Systems Ltd. ("Orad")
and SciDel Technologies Ltd. ("SciDel"). Symah is owned by the LaGardere Group,
which controls Matra-Hachette, a large French defense and publishing company.
Symah has demonstrated its system publicly and is actively marketing its system
in France, Italy and Spain, among other regions. Orad was founded in 1992 as
part of the ORMAT Group, an Israeli company originally established to create
alternative energy power stations. The Company is unaware of any actual live
broadcast use of the Orad system. SciDel is a subsidiary of Scitex, a large
Israeli corporation that provides services in the electronic imaging area
primarily for the printing and publishing industries. The Company believes that
the SciDel system has been used to insert advertising images into three U.S.
cable broadcasts of tennis tournaments. Apart from the patents or patent
applications that the Company owns or licenses, the only patents or patent
appplications of which it is aware relating to real-time video insertion are
owned or controlled by Symah and SciDel. Although the Company believes that use
of the L-VIS System does not infringe the United States or other patents of
third parties, there can be no assurance that competitors will not initiate a
patent infringement action against the Company. PVI is currently evaluating
whether use of the SciDel system infringes the Company's patents. See "Risk
Factors--Patents and Protection of Proprietary Technology" and "--Intellectual
Property--Patents."
In addition to these known competitors, the Company also expects substantial
competition from established broadcast business participants, if the market for
the L-VIS System proves successful. These potential competitors will likely have
substantially greater financial, technical, marketing and other resources and
many more highly skilled individuals than does the Company. Furthermore, such
potential competitors may have greater name recognition and extensive customer
bases that could be utilized to gain significant market share, to the Company's
detriment.
The Company believes that, to date, Orad and Symah have pursued camera head
technology, which is based on electro-mechanical sensors located on the camera.
The Company believes that, although camera head technology may be used to
achieve a result similar to that achieved through the use of the L-VIS System,
such technology alone is not as accurate as that used in the L-VIS System
because, to date, camera head technology has not been capable of compensating
for the vibrations inherent in any broadcast venue (such as a stadium). As a
result of this failure, a viewer is given the subjective impression that the
image inserted using camera head technology is bouncing up and down on the
television screen.
In addition to the products of these competitors, the L-VIS System will
compete with advertisers' use of traditional 30-second advertising spots, which
remain the standard in the television advertising industry, and traditional
signage and sponsorship programs. The Company's revenues will be partially
dependent upon television sports advertisers allocating a portion of their
advertising budgets to use the L-VIS System. There can be no assurance that
advertisers will allocate their advertising expenses in the manner currently
anticipated by the Company.
The L-VIS System will also compete with advertisers' use of conventional
billboard products, including advertising placed on playing surfaces (such as
outfield walls, football fields and ice hockey rinks) and scrolling billboards,
physically located at the site of an event, which can display sequentially a
series of static advertisements. These scrolling billboards are currently
marketed and used in professional baseball, basketball and other sports. These
products achieve an effect that is similar to those L-VIS System insertions that
are static and two-dimensional, and their use generally does not require
broadcaster participation.
Approximately 17 MLB teams had scrolling billboards located behind home
plate in 1997. The existence of these scrolling billboards and other advertising
behind home plate currently limits the marketability of the L-VIS System in
baseball. The Company believes that the typical term of the arrangements between
baseball teams and scrolling billboard advertisers or producers is one to three
years.
39
<PAGE>
After establishing the utility of the L-VIS System with a number of individual
teams that do not have scrolling billboards, the Company intends to take steps
to form a relationship with additional teams and with MLB for national games and
post-season play, and to sell use of the L-VIS System to these rights holders as
their contract obligations for scrolling billboards expire.
The Company expects to generate revenue primarily by attracting new
advertisers and sponsors to the sports advertising and sponsorship market and by
causing existing advertisers and sponsors to switch to use of the L-VIS System.
There can be no assurance, however, that total advertising and sponsorship
expenditures will increase as a result of the availability of the L-VIS System.
To the extent that the Company is competing for television advertising and
sponsorship dollars that are currently allocated to traditional media, such as
30-second spots or rolling billboards, the competition is likely to become more
intense. The Company will be able to compete effectively with existing
advertising and sponsorship alternatives only with the cooperation of
broadcasters and the advertising sales departments of team owners and
broadcasters, on which the Company will rely for sales to advertisers. Because
certain L-VIS System rights holders may also own traditional television
advertising rights or sponsorship rights, which may provide such rights holders
with a greater percentage of the revenues received from the sale of such
advertising or sponsorship rights than does the sale of L-VIS System
advertisements, incentives may exist in some cases to sell alternative
advertising or sponsorship inventory prior to the sale of L-VIS System
advertising.
The Company's customers have expressed interest in new features, such as
automatic training for new venues, expanded use of the Company's proprietary
search and tracking boards, live video inserts, free roaming animation and
multiple insertion capability. The Company believes that implementation of such
improvements and enhancements will be important factors in enabling it to remain
competitive. The Company's competitors may be able to produce superior products,
including products with these features, undertake more extensive promotional
activities, offer more attractive terms to customers and adopt more aggressive
pricing policies than the Company. There is no assurance that the Company will
be able to compete effectively with current or future competitors. See "Risk
Factors--Competition."
MANUFACTURING AND SUPPLY
The Company has built 11 L-VIS System units (each, an "L-VIS Unit"), of
which approximately 4-9 are being used from time-to-time by customers, potential
customers or foreign marketing partners. An L-VIS Unit consists of standard
electronic equipment racks, containing both standard purchased components and
the Company's proprietary circuit boards, assembled and tested by Company
personnel. The Company is dependent upon a sole supplier, Lucent Technologies,
for certain of the hardware components. Although such hardware components are
stock items which are readily available to the public, there can be no assurance
that Lucent will continue to manufacture and sell the components. The Company is
not a party to any agreement with Lucent. See "Risk Factors--Risks Associated
with Expansion and Growth" and "--Dependence on Sole Source of Supply."
INTELLECTUAL PROPERTY
PATENTS
The Company has been assigned three issued U.S. patents. Patent No.
5,264,933, which relates to the Company's basic pattern recognition video
insertion technology, was issued on November 23, 1993, will expire on November
23, 2010 and was assigned to the Company on January 22, 1992. Patent No.
5,543,856, which relates to the use of remote insertion of images that might be
useful in a narrow casting application, was issued on August 6, 1996, will
expire on August 6, 2013 and was assigned to the Company on October 22, 1993.
Patent No. 5,627,915, which relates to a pattern recognition system using
templates, was issued on May 6, 1997 and will expire on January 31, 2015 and was
assigned to the Company on January 30, 1995. The Company owns all right, title
and interest in each of the patents.
40
<PAGE>
The Company has filed counterpart patent applications for the three issued
U.S. patents in the European Patent Office and in various non-European countries
around the world where it expects to do business. One patent has been allowed by
the European Patent Office. Four new patent applications are pending in various
countries, including the United States, and two more patent applications are in
preparation.
The Company believes its patents will be important in its future business
dealings, since it believes that any system that is able to deliver the
technical capabilities of the L-VIS System will depend on pattern recognition
technology and will, therefore, fall within the scope of PVI's issued patents.
Although the Company has no cause for belief that use of the L-VIS System
would infringe the United States or other patents of third parties, there can be
no assurance that any patents from pending patent applications or from any
future patent applications will be issued, that any of the Company's patents
will be held valid if subsequently challenged or that others will not claim
rights in, or ownership of, the patents and other proprietary rights held by the
Company. Any patent litigation would entail considerable cost to the Company,
which would divert resources that otherwise could be used for its operations,
and might terminate in a manner that is unfavorable to the Company. In addition,
if the L-VIS System were found to infringe any patent, the Company may be
required to modify the L-VIS System or enter into an arrangement to license such
patent, if possible. There can be no assurance that the Company would be able,
under such circumstance, to modify the L-VIS System or enter into a license
arrangement. Despite the Company's efforts to safeguard and maintain its
proprietary rights, there can be no assurance that it will be successful in
doing so or that its competitors will not independently develop, reverse
engineer or patent technologies that are substantially equivalent or superior to
its technologies. See "Risk Factors-- Patents and Protection of Proprietary
Technology."
LICENSE GRANTS
The Company has entered into the following license agreements relating to
the L-VIS System:
DAVID SARNOFF RESEARCH CENTER, INC. David Sarnoff Research Center, Inc.
("Sarnoff") has granted the Company a worldwide license to practice Sarnoff's
proprietary technology related to the electronic recognition of landmarks,
including an exclusive license covering the specific fields of television
advertising and television sports. The Company has also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising, including video production, local video
insertion, private networks, medical and scientific applications and uses by the
United States Department of Defense or any other United States government
agency. The Sarnoff license will remain in effect until terminated by the
Company, provided that the Company remains current with respect to its royalty
obligations to Sarnoff. The Company may terminate the license at any time.
During the term of the exclusive license for television advertising and
television sports applications, the Company is obligated to pay Sarnoff
royalties based upon a percentage of the Company's gross revenues. Royalties
accrue as earned, but the Company is not required to make any royalty payments
until the earlier of the date on which its cumulative gross revenues reach $20
million or January 1, 1999. In any event, commencing on January 1, 1999, the
Company will be required to pay minimum royalties each quarter. Royalties have
begun to accrue under the Sarnoff license (less than $100,000) but have not been
paid.
GENERAL ELECTRIC COMPANY. General Electric Company ("GE") granted the
Company a five-year non-exclusive, worldwide license relating to all GE patents
on equipment for electronic recognition of selected landmarks; altering images
in television programs for advertising purposes; or any purpose in television
programs the principal focus of which is sports, as of July 1991 and July 1996.
THESEUS RESEARCH, INC. Theseus Research, Inc. ("Theseus") has granted the
Company a non-exclusive, worldwide license to use and sell Theseus' patented
technology for the warping of images in real
41
<PAGE>
time. During the term of the Theseus license, the Company is required to pay
Theseus a royalty on net sales of products, if any, that incorporate the Theseus
technology. The Company has paid Theseus an up front license fee of $50,000,
which is creditable against future obligations. The Company may terminate the
Theseus license at any time.
TRADEMARKS
L-VIS-TM- is a trademark of the Company. The Company has filed a U.S.
trademark registration application for L-VIS, the mark under which the Company
is marketing its live video insertion products. This mark has been published for
opposition in the Official Gazette of the United States Patent and Trademark
Office. Following publication, a notice of opposition was filed and the Company
is currently in discussions with the filer of such notice. The Company believes
that its trademark position is adequately protected. However, there can be no
assurance that the Company will be able to resolve matters favorably with the
filer of such notice.
COPYRIGHT AND TRADE SECRET
The Company relies upon copyright and trade secret protection to maintain
the proprietary nature of the computer software it develops that is not
patented.
EMPLOYEES
As of the date of this Prospectus, the Company has 36 full-time employees,
19 of whom are engaged in, or directly support, the Company's hardware and
software research, development and product engineering activities, 6 of whom
assemble and operate L-VIS Systems for potential customers, 7 of whom are
engaged in marketing activities and 4 of whom are engaged in administrative
activities. In addition, the Company utilizes part-time employees and outside
contractors and consultants as needed. None of the Company's employees is
represented by a labor union, and the Company believes that its relations with
its employees are good. See "Risk Factors--Dependence on Key Personnel."
Currently, each of the Company's employees is required to execute an
agreement pursuant to which he or she assigns to the Company all patent rights
and technical or other information which pertain to the Company's business and
are developed by the employee during his or her employment with the Company, and
agrees not to disclose any trade secret or confidential information without the
prior consent of the Company.
FACILITIES AND EQUIPMENT
The Company leases 16,000 square feet of office space in Lawrenceville, New
Jersey, and 4,300 square feet of office space in New York City. The
Lawrenceville facility is the main operations center of the Company, including
product, hardware and software design, manufacturing and product assembly,
product test and documentation, customer training and customer technical
support. The New York City office is the corporate marketing center, interfacing
with the sports leagues, broadcasters and advertisers. The lease in
Lawrenceville expires in September 2002, and the New York City lease expires in
May 2000.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of the date of this
Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Brown F Williams..................................... 56 Chairman of the Board and Treasurer
Douglas J. Greenlaw.................................. 53 President, Chief Executive Officer and Director
Samuel A. McCleery................................... 47 Vice President of Marketing and Sales
Lawrence Lucchino.................................... 52 Director
Jerome J. Pomerance.................................. 57 Director
Enrique F. Senior.................................... 54 Director
Eduardo Sitt......................................... 66 Director
John B. Torkelsen.................................... 52 Director
</TABLE>
Following are brief descriptions of the current executive officers and
directors of the Company:
BROWN F WILLIAMS is a co-founder of the Company, its Chairman of the Board
and Treasurer. Prior to his election as Chairman of the Board in January 1997,
Mr. Williams served the Company as its President and Chief Executive Officer,
and he has been a director of the Company since its organization in July 1990.
Mr. Williams is a senior executive with more than 25 years experience in the
development of high technology products, primarily during his 20 years with RCA
Laboratories, Inc. Until 1987, Mr. Williams was a Vice President of David
Sarnoff Research Center, Inc. with responsibility for both hardware and software
contract research businesses. Between 1987 and 1991, Mr. Williams was active in
a number of start-up companies, either as a consultant on behalf of the funding
groups or as an executive employee on behalf of the managements of such
companies. Mr. Williams has had significant experience in product development,
product introduction and licensing in Europe and Japan, as well as in the United
States.
DOUGLAS J. GREENLAW joined the Company in January 1997, when he was elected
President and Chief Executive Officer. Mr. Greenlaw was elected to the Board of
Directors of the Company in October 1997. From 1994 through 1996, Mr. Greenlaw
was President and Chief Operating Officer of Multimedia, Inc., a publicly traded
corporation. Mr. Greenlaw also served on the board of directors of Multimedia
and was Chairman of its Executive Committee. Multimedia is a diversified media
company owning radio and television stations, cable systems, newspapers and an
entertainment division responsible for television talk show programming
(DONAHUE, SALLY JESSE RAPHAEL AND JERRY SPRINGER). In a joint effort, with Mr.
Greenlaw overseeing operations, Multimedia was recently sold to Gannett, Inc.
Before joining Multimedia, Mr. Greenlaw had been Chairman and Chief Executive
Officer of Whittle Communications' Venture Division from 1991 through 1994.
Previously, Mr. Greenlaw had been Executive Vice President of Sales and
Marketing for the MTV Networks, a division of Viacom. Mr. Greenlaw was a member
of the Executive Committee of MTV Networks and was in a senior leadership
position with MTV, VH-1, Nickelodeon, Nick at Nite and MTV Networks
International, which involved the planning for MTV Europe, Latin America and
Asia.
SAMUEL A. MCCLEERY has been the Company's Vice President of Marketing and
Sales since November 1991. Prior to November 1991, Mr. McCleery was President of
his own sports marketing and events company with clients that included the
Reagan Foundation. From 1981 to 1989, Mr. McCleery served as the director of
sports marketing for Prince Manufacturing, the world's largest marketer of
tennis racquets. Prior to 1981, Mr. McCleery was a Director of New Business for
Le Coq Sportif, a division of Adidas (France).
LAWRENCE LUCCHINO has been a director of the Company since October 1994. Mr.
Lucchino enjoys a wide variety of connections with the professional sports
industry. In addition to his prior service as a member of the board of directors
of the Washington Redskins, an NFL team, Mr. Lucchino was also a member of the
MLB Operations Committee. He has served as President and Chief Executive Officer
of
43
<PAGE>
the ownership group of the San Diego Padres since December 1994. Prior to his
service with the Padres, Mr. Lucchino was a partner at the Washington, D.C. law
firm of Williams & Connolly from October 1993 to December 1994. Mr. Lucchino
also served as President of the Baltimore Orioles from May 1988 until October
1993.
JEROME J. POMERANCE was elected to the Board of Directors of the Company in
1992. He has served as the President of J.J. Pomerance & Co., Inc., a firm
providing strategic international business advice for product development and
applications, since November 1991. Prior to his founding of that firm, Mr.
Pomerance was Chief Operating Officer and Vice-Chairman of Kroll Associates,
Inc., a leading corporate investigation, due diligence and crisis management
firm. Before joining Kroll in 1983, he was Treasurer, and later President and
Chief Executive Officer, of a group of privately held international ophthalmic
companies and a director of the Optical Manufacturers Association over a period
of 20 years.
ENRIQUE F. SENIOR has been a director of the Company since October 1994. He
has been a Managing Director of Allen & Company Incorporated since 1982 and
Executive Vice President since 1973. Mr. Senior has been a director of Dick
Clark Productions, Inc., a publicly held company, for over five years and on
behalf of Allen & Company Incorporated he is, or has recently been, financial
advisor to several corporations, including The Coca-Cola Company, Tri-Star
Pictures, Columbia Pictures and QVC Network.
EDUARDO SITT has been a director of the Company since October 1993. From
1964 until 1993, he was the principal shareholder and Chief Executive Officer of
Hilaturas de Michoacon, S.A., a Mexican textile manufacturer. Mr. Sitt is a
shareholder and, during the past five years, has served as a director of Grupo
Financiero BBV--Probursa, a publicly held financial corporation and parent
company of Mexico's fifth largest bank (Banco Bilbao Vizcaya, S.A.), a full
service stock brokerage house (Casa de Bolsa BBV-Probursa) and several other
financial firms. Mr. Sitt is the President and principal shareholder of, and the
individual designated to serve on the Board of Directors of the Company by,
Presencia en Medios, S.A. de C.V., a principal shareholder of the Company.
JOHN B. TORKELSEN has been a director of the Company since October 1995.
Since 1984, he has been President of Princeton Venture Research, Inc., a
50-person investment banking, consulting and venture capital firm that he
founded. He is also President of its affiliate, PVR Securities, Inc., formed in
1987. Mr. Torkelsen is the Manager of the General Partner of Acorn Technology
Fund, L.P., a venture capital fund specializing in early stage, high technology
investing. PVR is the Investment Advisor to Acorn Technology Fund. He is
currently a director of three publicly held companies, Objective Communications,
Inc. of Portsmouth, New Hampshire, Voice Control Systems, Inc. of Dallas, Texas,
and Mikros Systems Corporation of Princeton, New Jersey.
44
<PAGE>
KEY EMPLOYEES
Other key employees of the Company are as follows:
HOWARD J. KENNEDY, 48 years old, joined the Company in March 1995 and
currently serves as its Director of Software Development and is responsible for
evaluating and directing the technical design of all software products with
emphasis on consistency and ease of implementation across product lines. Prior
to joining the Company, Mr. Kennedy worked at Intel Corporation from October
1988, where he was Architect and Principal Engineer in the Multimedia Systems
Technology Group. Prior to working at Intel Corp., Mr. Kennedy was co-owner of
Syntex Computer Systems and was instrumental in the development of digital video
interactive technology for clients including Sarnoff, Dow Jones News Retrieval
and Educational Testing Service.
LOUIS A. LIPPINCOTT, 44 years old, joined the Company in August 1995 and
currently serves as its Director of Hardware Development. Mr. Lippincott is
responsible for all hardware design and prototype implementation with special
focus on reliability, speed of implementation and the integration of hardware
and software strategies. Prior to joining the Company, Mr. Lippincott worked at
Intel Corporation from 1988 to 1994, during which period he served as the
Systems Architecture Leader in the Video Products Division and as the Team
Leader and Architect of Intel's Action Media Product. From 1994 through July
1995, Mr. Lippincott worked as a consultant with respect to hardware development
of PC-based digital video products.
ROY J. ROSSER, 44 years old, is a co-founder of PVI and currently serves as
its Director of Special Projects. As well as being one of the inventors of the
technology that is the basis for the L-VIS System, Dr. Rosser is responsible for
coining the "L-VIS" name. Actively involved in both field operations and
software development, Dr. Rosser's special focus is devising more compelling
applications of the L-VIS technology. Prior to joining PVI as a full-time
employee in November 1993, Dr. Rosser served as a scientific and management
consultant in the United Kingdom during 1992 and 1993. Dr. Rosser holds three US
patents. Before inventing L-VIS, Dr. Rosser was a research physicist at the
Princeton Plasma Physics Laboratory and a consultant to Laser Division,
Rutherford-Appleton Laboratories, Oxford, England.
DIRECTOR COMPENSATION
Directors do not receive cash compensation for services on the Board of
Directors or any committee thereof. The Company has granted, subject to certain
conditions (including, without limitation, conditions relating to vesting and
retention), to Mr. Pomerance, options to purchase 50,000 shares (at exercise
prices ranging from $8.00 to $17.50 per share), to Mr. Sitt, options to purchase
40,000 shares (at exercise prices ranging from $8.00 to $17.50 per share), to
each of Messrs. Lucchino, Senior and Torkelsen, options to purchase 30,000
shares (at exercise prices ranging from $8.00 to $17.50 per share), and to Mr.
Williams, options to purchase 20,000 shares (at an exercise price of $17.50 per
share) for their participation on the Board of Directors. All directors are
reimbursed for expenses incurred in connection with attendance at Board of
Directors and committee meetings.
STOCK OPTION PLAN
The Company established the Amended 1993 Stock Option Plan (the "Stock
Option Plan") for the purposes of attracting and retaining the best available
personnel, to provide additional incentive to the Company's employees and
consultants and to promote the success of the Company. The Stock Option Plan
provides for the grant of incentive stock options to employees and the grant of
non-qualified stock options to employees and consultants of the Company on such
terms and conditions as may be determined by the Board of Directors of the
Company or a committee thereof. The powers of the Board of Directors or such
committee, as the case may be, include the determination of which employees and
consultants are to receive stock option grants, the exercise price, number of
shares and the vesting schedule of the grants.
45
<PAGE>
The total number of shares of Common Stock authorized for issuance under the
Stock Option Plan is 1,560,000. As of October 1, 1997, options to purchase
1,210,724 shares of Common Stock are outstanding, of which options to purchase
630,008 shares were exercisable. The exercise prices of the outstanding options
range from $2.50 to $20.00 per share.
The exercise price per share for incentive stock options may not be less
than 100% of the fair market value of the Common Stock underlying the option on
the date of grant; provided, however, in the case of an incentive stock option
granted to an individual who owns at least 10% of the total combined voting
power of all classes of stock of the Company, the Stock Option Plan provides
that the exercise price shall be no less than 110% of the fair market value per
share on the date of grant. The aggregate fair market value of shares which may
be purchased for the first time during any calendar year pursuant to an
incentive stock option granted under the Stock Option Plan, or any other
incentive stock option plan of the Company, may not exceed $100,000.
BOARD COMMITTEES
The Board of Directors has created a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company; an Audit Committee, which reviews the results
and scope of the audit and other services provided by the Company's independent
auditors; a Finance Committee, which manages the Company's investment funds,
oversees the Company's capital fundraising and reviews the performance of
licensees of the Company's technology; a Standards and Practices Committee,
which develops and maintains standards for customers' use of the Company's
technology and oversees such use; and a Nominating Committee, which nominates
candidates for election to the Board of Directors and to serve on committees of
the Board.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for the fiscal year ended June 30, 1997 of (i) the
Company's chief executive officer, and (ii) the Company's other executive
officers as of June 30, 1997 whose salary and bonus earned during the fiscal
year ended June 30, 1997 exceeded $100,000 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1997 LONG TERM
FISCAL YEAR COMPENSATION
COMPENSATION -------------------
------------- STOCK OPTION AWARDS
NAME AND PRINCIPAL POSITION SALARY (NUMBER OF SHARES)
- ----------------------------------------------------------------------------- ------------- -------------------
<S> <C> <C>
Brown F Williams............................................................. $ 225,000 150,000
Chairman of the Board
and Treasurer
Douglas J. Greenlaw(1)....................................................... $ 106,725 210,000
President and
Chief Executive Officer
Samuel A. McCleery........................................................... $ 150,000 50,000
Vice President-Marketing
and Sales
</TABLE>
- ------------------------
(1) Mr. Greenlaw joined the Company in January 1997, when he was elected
President and Chief Executive Officer. See "--Employment Agreements."
46
<PAGE>
The following table sets forth certain information concerning grants of
stock options to the Named Officers during the fiscal year ended June 30, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED FISCAL 1997 PER SHARE EXPIRATION DATE
- ------------------------------------------------------- ----------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
Brown F Williams....................................... 150,000(1) 24% $ 20.00 January 2007
Douglas J. Greenlaw.................................... 210,000(2) 33% $ 20.00 February 2007
Samuel A. McCleery..................................... 50,000(3) 8% $ 20.00 March 2007
</TABLE>
- ------------------------
(1) Such options vest in 36 equal monthly installments over a period of three
years commencing in January 1997.
(2) Such options vest in 48 equal monthly installments over a period of four
years commencing in February 1997.
(3) Such options vest in 36 equal monthly installments over a period of three
years commencing in March 1997.
In addition, in September 1997, the Company granted Mr. McCleery 10-year
stock options to purchase 20,000 shares of Common Stock for a purchase price of
$2.50 per share. Such options vested immediately and were granted to replace
warrants to purchase 20,000 shares of Common Stock that had been granted to Mr.
McCleery when he joined the Company in November 1991 and subsequently expired,
unexercised. Assuming the fair market value of such options to be equal to the
initial public offering price of $7.00 per share, the aggregate value of such
unexercised options is $90,000.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Officers as of June 30, 1997.
FISCAL YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY OPTIONS
OPTIONS AT AT FISCAL
FISCAL YEAR-END YEAR-END
---------------- -----------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Brown F Williams............................................................... 29,164/140,836 $ 0/0
Douglas J. Greenlaw............................................................ 17,500/192,500 0/0
Samuel A. McCleery............................................................. 4,166/65,834 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1997, the Company and Mr. Williams entered into an employment
agreement that provides for automatic annual renewal and permits the Company to
terminate the agreement upon 90 days' prior notice; provided, however, that Mr.
Williams' term of employment will be automatically extended for a
47
<PAGE>
period of three years following a change in control of the Company. Pursuant to
such agreement, Mr. Williams' base salary will be $225,000 per year, subject to
increases at the discretion of the Board of Directors. Mr. Williams is eligible
for an annual bonus based on performance measures determined by the Compensation
Committee. In the event Mr. Williams' employment is terminated by the Company
without cause or in the event Mr. Williams terminates his employment due to a
detrimental change in the nature or scope of his employment or duties, he is
entitled to receive his then current salary for a period equal to the greater of
two years or the remainder of his current term of employment.
In January 1997, the Company and Mr. Greenlaw entered into an employment
agreement that provides for automatic annual renewal and permits the Company to
terminate the agreement upon 90 days' prior notice. Pursuant to the employment
agreement, Mr. Greenlaw's base salary will be $225,000 per year, subject to
increases at the discretion of the Board of Directors. Mr. Greenlaw will also be
eligible for an annual bonus based on performance measures determined by the
Compensation Committee. In the event Mr. Greenlaw's employment is terminated by
the Company without cause, he is entitled to receive his then current salary for
a period of six months, or three months in the event his employment is
terminated in his first year of employment. In February 1997, Mr. Greenlaw was
granted a 10-year option to purchase 210,000 shares of Common Stock. In
addition, Mr. Greenlaw shall be granted, within 30 days of the first anniversary
of the date of his employment agreement, a 10-year option to purchase 42,000
shares of Common Stock at an exercise price equal to the fair market value of
the Common Stock as determined by the Board of Directors pursuant to the Stock
Option Plan. Such option shall vest over a three year period in equal monthly
increments.
In March 1997, the Company and Mr. McCleery entered into an employment
agreement that provides for automatic annual renewal and permits the Company to
terminate the agreement upon 90 days' prior notice; provided, however, that Mr.
McCleery's term of employment will be automatically extended for a period of
three years following a change in control of the Company. Pursuant to such
agreement, Mr. McCleery's base salary will be $150,000 per year, subject to
increases at the discretion of the Board of Directors. Mr. McCleery is eligible
for an annual bonus based on performance measures determined by the Compensation
Committee. In the event Mr. McCleery's employment is terminated by the Company
without cause or in the event Mr. McCleery terminates his employment due to a
detrimental change in the nature or scope of his employment or duties, he is
entitled to receive his then current salary for a period equal to the greater of
two years or the remainder of his current term of employment.
48
<PAGE>
CERTAIN TRANSACTIONS
John B. Torkelsen, a director of the Company, is the sole shareholder and
President of Princeton Venture Research, Inc. ("PVR"), a shareholder of the
Company. PVR entered into an arrangement with the Company regarding the services
of a consultant that PVR provided to the Company for several months in 1995. In
connection with such arrangement, in September 1997 the Company granted PVR
warrants to purchase 20,000 shares of Common Stock at an exercise price of $4.50
per share. Commencing in July 1997, PVR furnished the Company with extensive
consulting services in connection with financial structuring, negotiations with
various major shareholders and preparation of the Bridge Financing. In
connection with such services, the Company has paid PVR a fee of $100,000. In
consideration for financial advisory services rendered to the Company in
connection with the Bridge Financing, the Company paid PVR Securities, Inc., an
affiliate of PVR, a fee of $70,000, or five percent of the gross proceeds of the
Bridge Financing obtained from investors introduced to the Company by PVR
Securities, Inc. In connection with the exercise of warrants to purchase Common
Stock in May 1995, Mr. Torkelsen, Pamela R. Torkelsen, Mr. Torkelsen's wife, and
PVR executed promissory notes in favor of the Company in the amounts of $80,000,
$20,000 and $24,000, respectively. Such notes, as subsequently amended, will
become due on May 31, 1998, and bear interest at a rate of nine percent per
annum. In connection with the purchase of Common Stock under the Company's 1997
rights offering, Mrs. Torkelsen and PVR executed promissory notes in favor of
the Company in the amounts of $9,720 and $50,542.50, respectively. Such notes
were subsequently paid in full by Mrs. Torkelsen and PVR. Mr. Torkelsen is the
Manager and a member of Acorn Technology Partners, L.L.C., the general partner
of Acorn Technology Fund, L.P., which purchased 1.5 units in the Bridge
Financing in October 1997. Each unit consists of one Bridge Note in the
principal amount of $100,000 and Bridge Warrants to purchase 10,000 shares of
Common Stock at an exercise price of $0.01 per share. The purchase price of each
unit was $100,000. See "Description of Securities--Debt Securities."
Enrique F. Senior, a director of the Company, is a Managing Director and
Executive Vice President of Allen & Company Incorporated ("Allen"), which is a
principal shareholder of the Company, furnishes general financial advisory
services to the Company from time to time and is a Representative. Except as
described herein, no fees have been paid to Allen or to Mr. Senior in connection
with such services and there are no arrangements providing for the payment of
fees for such services. Pursuant to a placement agent agreement, Allen was paid
a fee of $247,000 plus expenses, and received warrants to purchase 28,226 shares
of Common Stock at an exercise price of $19.25 per share, for raising funds for
the Company in a financing that closed in February 1996. Allen, as a
Representative, will receive underwriting discounts and commissions in the
aggregate amount of approximately $1,306,666.67, as well as Representatives'
Warrants initially exercisable for 380,000 shares of Common Stock, with respect
to services rendered on behalf of the Company with respect to the Offering. See
the front cover page of this Prospectus, "Principal Shareholders" and
"Underwriting." Allen may, after the Offering, serve as a market maker for the
Common Stock.
Presencia, a principal shareholder of the Company, was granted warrants to
purchase 24,000 shares of Common Stock at an exercise price of $15.00 per share
in March 1996, in consideration of Presencia's efforts on behalf of the Company
and expenses incurred by Presencia in connection with Publicidad. Such warrants
expire in March 2001. Presencia purchased three units in the Bridge Financing
that closed in October 1997. Following the closing of the Bridge Financing, a
Bridge Financing investor assigned an additional 100,000 Bridge Warrants to
Presencia.
Brown F Williams, Chairman of the Board and Treasurer of the Company,
exercised a warrant to purchase 190,000 shares of Common Stock in July 1997 in
exchange for his non-recourse promissory note in the principal amount of
$475,000, the aggregate exercise price of such warrants. Such note bears an
annual interest rate of 8.5% and has a term of five years. However, the note
will become payable in full when all of the shares issued upon the exercise of
such warrants become freely transferable under applicable securities laws. Mr.
Williams' obligations under the note are secured by a pledge of such shares, and
Mr. Williams is required to assign to the Company any cash or marketable
securities received with
49
<PAGE>
respect to such shares. In connection with the exercise of the warrant in
exchange for a non-recourse note, the Company recorded a compensation charge of
$261,250 in the first quarter of Fiscal 1998.
Samuel A. McCleery, Vice President of Marketing and Sales of the Company,
exercised a warrant to purchase 72,000 shares of Common Stock in July 1997 in
exchange for his promissory note in the principal amount of $180,000, the
aggregate purchase price of such warrants. The terms of such note, and of the
pledge of such shares that secures Mr. McCleery's obligations under the note,
are identical to those of Mr. Williams' note and pledge. In connection with the
exercise of the warrant in exchange for a non-recourse note, the Company
recorded a compensation charge of $99,000 in the first quarter of Fiscal 1998.
Douglas J. Greenlaw, Chief Executive Officer and President of the Company,
purchased one unit in the Bridge Financing that closed in October 1997.
The total number of shares and warrants issued to Brown F Williams, Samuel
A. McCleery, John B. Torkelsen, Pamela R. Torkelsen, Mr. Torkelsen's wife, and
PVR, in exchange for notes payable to the Company which are outstanding as of
the date of this Prospectus is 274,400 shares of Common Stock (or 8.3% of the
shares of Common Stock outstanding immediately prior to the Offering), 6,200
shares of Series B Preferred Stock and warrants to purchase 12,400 shares of
Common Stock. Specifically, Mr. Williams received 190,000 shares of Common Stock
in exchange for a note in the amount of $475,000; Mr. McCleery received 72,000
Shares of Common Stock in exchange for a note in the amount of $180,000; Mr.
Torkelsen received 8,000 shares of Common Stock, 4,000 shares of Series B
Preferred Stock, and warrants to purchase 8,000 shares of Common Stock in
exchange for a note in the amount of $80,000; Ms. Torkelsen received 2,000
shares of Common Stock, 1,000 shares of Series B Preferred Stock and warrants to
purchase 2,000 shares of Common Stock in exchange for a note in the amount of
$20,000 and PVR received 2,400 shares of Common Stock, 1,200 shares of Series B
Preferred Stock and warrants to purchase 2,400 shares of Common Stock in
exchange for a note in the amount of $24,000.
50
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 15, 1997, and as of such
date, as adjusted to give effect to the Offering, by (i) each person who is
known to the Company to own beneficially more than 5% of the Common Stock, (ii)
each of the Named Officers and the current directors of the Company, and (iii)
all of the directors and Named Officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK NUMBER OF SHARES OF
BENEFICIALLY OWNED COMMON STOCK
PRIOR TO THE BENEFICIALLY OWNED
OFFERING(1) AFTER THE OFFERING(1)
----------------------- -----------------------
<S> <C> <C> <C> <C>
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- ----------- ---------- -----------
Enrique F. Senior (2)................................................ 725,764 19.2% 1,105,764 13.5%
c/o Allen & Company Incorporated
711 Fifth Avenue
New York, NY 10020
Allen & Company Incorporated (3)..................................... 712,430 18.8% 1,092,430 13.4%
711 Fifth Avenue
New York, NY 10020
Eduardo Sitt (4)..................................................... 507,642 15.1% 637,642 8.5%
c/o Presencia en Medios, S.A. de C.V.
Montes Urales 739A
Lomas de Chapultepec
11000 Mexico, D.F.
Mexico
Presencia en Medios, S.A. de C.V. (5)................................ 484,308 14.5% 614,308 8.2%
Montes Urales 739A
Lomas de Chapultepec
11000 Mexico, D.F.
Mexico
Brown F Williams (6)................................................. 458,860 13.6% 458,860 6.2%
c/o Princeton Video Image, Inc.
15 Princess Road
Lawrenceville, NJ 08648
Blockbuster Entertainment Group (7).................................. 210,000 6.2% 210,000 2.8%
One Blockbuster Plaza
200 South Andrews Avenue
Ft. Lauderdale, FL 33301
Jerome J. Pomerance (8).............................................. 183,176 5.5% 183,176 2.5%
c/o J.J. Pomerance & Co.
780 Third Avenue
New York, NY 10017
Samuel A. McCleery (9)............................................... 159,089 4.7% 159,089 2.2%
John B. Torkelsen (10)............................................... 115,604 3.4% 130,604 1.8%
Lawrence Lucchino (11)............................................... 93,334 2.7% 93,334 1.3%
Douglas J. Greenlaw (12)............................................. 48,125 1.4% 58,125 *
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK NUMBER OF SHARES OF
BENEFICIALLY OWNED COMMON STOCK
PRIOR TO THE BENEFICIALLY OWNED
OFFERING(1) AFTER THE OFFERING(1)
----------------------- -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
All directors and Named Officers as a
group (8 persons) (13)............................................... 2,291,594 54.0% 2,826,594 32.2%
</TABLE>
- ------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to stock options and warrants currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage ownership of the
person holding such options and the percentage ownership of any group of
which the holder is a member, but are not deemed outstanding for computing
the percentage ownership of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Applicable percentage of ownership is based on 3,308,472 shares of Common
Stock outstanding on the date of this Prospectus and on 7,308,472 shares of
Common Stock outstanding after the Offering. Shares of Series A and Series B
Preferred Stock outstanding before the Offering are not reflected above
because such Preferred Stock has no voting rights and is not convertible.
See "Description of Capital Stock--Preferred Stock."
(2) Includes 234,204 shares of Common Stock and 478,226 shares of Common Stock
underlying warrants owned of record by Allen, of which Mr. Senior is a
Managing Director and Executive Vice President. Shares owned after the
Offering also include 380,000 shares of Common Stock underlying the
Representatives' Warrants to be received by Allen as partial consideration
for services rendered on behalf of the Company with respect to the Offering.
See "Underwriting." (See Note 3.) The Company has been informed by Allen
that the shares of Common Stock owned of record by Allen reflects ownership
of such shares on behalf of Allen and certain of its officers, directors and
employees. By virtue of his positions with Allen, Mr. Senior may, under
certain circumstances derive economic benefit from such securities. Includes
13,334 shares of Common Stock underlying options that were exercisable
within 60 days of November 15, 1997. Does not include 6,436 shares of Common
Stock held directly by certain officers, directors or employees of Allen.
(3) Includes 478,226 shares of Common Stock underlying warrants. Shares owned
after the Offering also include 380,000 shares of Common Stock underlying
the Representatives' Warrants to be received by Allen as partial
consideration for services rendered on behalf of the Company with respect to
the Offering. See "Underwriting." Does not include shares of Common Stock
underlying options owned by Enrique F. Senior, a Managing Director and
Executive Vice President of Allen and a director of the Company. Does not
include 6,436 shares of Common Stock held directly by certain officers,
directors or employees of Allen. See prior footnote.
(4) Includes 449,376 shares of Common Stock and 34,932 shares of Common Stock
underlying warrants owned by Presencia, of which Mr. Sitt is President and a
principal shareholder. (See Note 5.) Includes 23,334 shares of Common Stock
underlying options that were exercisable within 60 days of November 15,
1997. Shares owned after the Offering also include 130,000 of Common Stock
underlying Bridge Warrants owned by Presencia. (See Note 5.)
(5) Includes 34,932 shares of Common Stock underlying warrants. Shares owned
after the Offering also include 130,000 shares of Common Stock underlying
Bridge Warrants. Does not include shares of Common Stock underlying options
owned by Eduardo Sitt, the President and a principal shareholder of
Presencia and a director of the Company.
52
<PAGE>
(6) Includes 1,933 shares of Common Stock owned by Sandra Williams, as custodian
for Bronwyn Williams, Mr. and Mrs. Williams' minor daughter, and 1,933
shares owned by Sandra Williams, Mr. Williams' wife. Also includes 62,222
shares of Common Stock underlying options that were exercisable within 60
days of November 15, 1997. Does not include 4,000 and 2,200 shares of Common
Stock owned by Mr. Williams' brother and a trust of which Mr. Williams'
mother is a beneficiary, respectively. Mr. Williams disclaims beneficial
ownership of the shares of Common Stock that are owned by Sandra Williams,
individually and as custodian for Bronwyn Williams.
(7) Includes 70,000 shares of Common Stock underlying warrants. Does not include
an additional 70,000 shares of Common Stock underlying a second warrant that
the Company has issued to Blockbuster but that has not vested. The second
warrant will vest upon Blockbuster's providing material consulting services
to the Company or entering into a joint venture with the Company, or the
Miami Dolphins' being the first NFL team to support use of the L-VIS System
during the broadcast of its games.
(8) Includes 20,000 shares of Common Stock owned by J.J. Pomerance & Co., Inc.
of which Mr. Pomerance is the President. Also includes 33,334 shares of
Common Stock underlying options that were exercisable within 60 days of
November 15, 1997.
(9) Includes 47,200 shares of Common Stock underlying warrants. Also includes
33,889 shares of Common Stock underlying options that were exercisable
within 60 days of November 15, 1997.
(10) Includes 7,592 shares of Common Stock owned by Pamela R. Torkelsen, Mr.
Torkelsen's wife, and 39,478 shares of Common Stock and 55,200 shares of
Common Stock underlying warrants owned by PVR, a company of which Mr.
Torkelsen is the sole shareholder. Shares owned after the Offering also
includes 15,000 shares of Common Stock underlying Bridge Warrants owned by
Acorn Technology Fund, L.P., a limited partnership of which Acorn Technology
Partners, L.L.C. is the general partner. Mr. Torkelsen is the Manager of
Acorn Technology Partners. Includes 13,334 shares of Common Stock underlying
options that were exercisable within 60 days of November 15, 1997. Mr.
Torkelsen disclaims beneficial ownership of the shares of Common Stock and
the warrants to purchase Common Stock that are owned by Mrs. Torkelsen.
(11) Includes 80,000 shares of Common Stock underlying options owned by LL
Sports Inc. that were exercisable within 60 days of the date of this
Prospectus. Mr. Lucchino controls LL Sports Inc. Also includes 13,334 shares
of Common Stock underlying options that were exercisable within 60 days of
November 15, 1997.
(12) Includes 48,125 shares of Common Stock underlying options that were
exercisable within 60 days of November 15, 1997. Shares owned after the
Offering also include 10,000 shares of Common Stock underlying Bridge
Warrants.
(13) Includes 615,558 shares of Common Stock underlying warrants. Includes
320,906 shares of Common Stock underlying options that were exercisable
within 60 days of November 15, 1997. Shares owned after the Offering also
include 155,000 shares of Common Stock underlying Bridge Warrants and
380,000 shares of Common Stock underlying the Representatives' Warrants.
As of November 15, 1997, the only Named Officer or current director of the
Company who beneficially owned shares of Series A Preferred Stock was Brown F
Williams, who held 700 shares of Series A Preferred Stock, or 1.0% of the
outstanding Series A Preferred Stock. (The foregoing does not include the
holdings of a trust of which Mr. Williams' mother is a beneficiary.)
As of November 15, 1997, the Named Officers and current directors of the
Company who beneficially owned shares of Series B Preferred Stock were John B.
Torkelsen, who beneficially owned 6,200 shares of Series B Preferred Stock (of
which 1,000 shares were owned by Pamela R. Torkelsen, Mr. Torkelsen's wife, and
5,200 shares were owned by PVR, a company of which Mr. Torkelsen is the sole
shareholder), and Eduardo Sitt, who beneficially owned 6,041 shares of Series B
Preferred Stock (all of which was owned by Presencia, a company of which Mr.
Sitt is President and a principal shareholder). Mr. Torkelsen and Mr. Sitt
beneficially own 7.2% and 7.0% of the outstanding Series B Preferred Stock,
respectively, and 14.2% of the outstanding Series B Preferred Stock,
collectively.
53
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 41,000,000 shares,
of which 40,000,000 shares are Common Stock, no par value, and 1,000,000 shares
are Preferred Stock (the "Preferred Stock"), which the Board of Directors has
the power and authority to designate into classes or series. Of the Preferred
Stock, the Board of Directors has designated 167,000 shares as Series A
Preferred Stock and 93,300 shares as Series B Preferred Stock, each with such
relative rights, preferences and limitations as set forth in the Restated
Certificate of Incorporation, which are summarized below.
The following summary of the respective rights of the Common Stock, the
Series A Preferred Stock and the Series B Preferred Stock is qualified in its
entirety by reference to the Restated Certificate of Incorporation, where such
rights are set forth in full.
COMMON STOCK
As of the date of this Prospectus there are 3,308,472 shares of Common Stock
issued and outstanding and held of record by 183 shareholders, plus 300,000
shares reserved for issuance upon the exercise of the Bridge Warrants, 777,130
shares reserved for issuance upon the exercise of other outstanding warrants and
1,560,000 shares reserved for issuance upon the exercise of options under the
Stock Option Plan, including 1,210,724 shares reserved for issuance upon the
exercise of outstanding options. Upon completion of the Offering, there will be
7,308,472 shares of Common Stock issued and outstanding. In addition, there were
400,000 shares reserved for issuance upon the exercise of the Representatives'
Warrants, plus 600,000 shares reserved for issuance upon the exercise of the
Over-Allotment Option. See "Shares Eligible for Future Sale" and "Underwriting."
Holders of shares of Common Stock are entitled to one vote at all meetings
of shareholders for each share held by them. Under the terms of the Restated
Certificate of Incorporation, holders of shares of Common Stock have no
preemptive rights and have no other rights to subscribe for additional shares or
any conversion right or right of redemption. Subject to the rights of the
holders of the Series A Preferred Stock and the Series B Preferred Stock,
holders of the Common Stock are entitled to receive such dividends as, when and
if declared by the Board of Directors out of funds legally available therefor.
The Company has not paid dividends on the Common Stock. The payment of
dividends, if any, in the future with respect to the Common Stock is within the
discretion of the Board of Directors and will depend on the Company's earnings,
capital requirements, financial condition and other relevant factors. At
present, the Board of Directors does not intend to declare any dividend on the
Common Stock in the foreseeable future.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of the Preferred
Stock in one or more series. The Company's Board of Directors is authorized to
fix the relative rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences, the number of
shares constituting any series and the designation of such series. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of the Series A Preferred Stock, the Series B
Preferred Stock and Common Stock, including the loss of voting control. Other
than the shares of Series A Preferred Stock and Series B Preferred Stock
described below, there are no shares of Preferred Stock currently issued and
outstanding.
SERIES A PREFERRED STOCK
The Company is authorized to issue up to 167,000 shares of the Preferred
Stock that have been designated as the Series A Preferred Stock, par value $4.50
per share. As of the date of this Prospectus, there were 67,600 shares of Series
A Preferred Stock outstanding, which were sold for $4.50 per share.
54
<PAGE>
Series A Preferred Stock has no voting rights, other than as required by
applicable law. The holders of Series A Preferred Stock are entitled to a
dividend of six percent per annum, in cash or Common Stock at the option of the
Company, on a cumulative basis. The failure of the Company to pay dividends on a
current basis does not create any special rights for the holders of Series A
Preferred Stock, except that no dividends may be paid with respect to Common
Stock or Series B Preferred Stock until all cumulated dividends in respect of
Series A Preferred Stock have been paid. As of June 30, 1997, accrued dividends
on the Series A Preferred Stock totaled $81,000, or $1.20 per Share, none of
which has been paid. See Note 9 to Financial Statements.
The Company has the right at any time after the date of original issuance of
the Series A Preferred Stock to redeem the Series A Preferred Stock in whole or
in part at a price of $4.50 per share plus all accrued but unpaid dividends. The
Company is required to redeem the Series A Preferred Stock, on a pro rata basis,
at a price of $4.50 per share plus all accrued but unpaid dividends, out of 30%
of the amount, if any, by which the Company's annual net income after taxes in
any year exceeds $5 million, as shown on its audited financial statements.
The Series A Preferred Stock has no liquidation preference, no conversion
rights and no registration rights.
SERIES B PREFERRED STOCK
The Company is authorized to issue up to 93,300 shares of the Preferred
Stock that have been designated as Series B Preferred Stock, par value $5.00 per
share. As of the date of this Prospectus, there were 86,041 shares of Series B
Preferred Stock outstanding, which were sold for $5.00 per share. Series B
Preferred Stock has no voting rights, other than as required by applicable law.
The holders of Series B Preferred Stock are entitled to a dividend of six
percent per annum, in cash or Common Stock at the option of the Company, on a
cumulative basis. The failure of the Company to pay dividends on a current basis
does not create any special rights for the holders of Series B Preferred Stock,
except that no dividends may be paid with respect to Common Stock until all
cumulated dividends in respect of Series B Preferred Stock have been paid. No
dividends may be paid with respect to Series B Preferred Stock until all
cumulated dividends in respect of Series A Preferred Stock have been paid. As of
June 30, 1997, accrued dividends on the Series B Preferred Stock totaled
$88,150, or $1.02 per share, none of which has been paid. See Note 9 to Note to
Financial Statements.
The Company has the right at any time after the date of original issuance of
the Series B Preferred Stock, but subject to the prior redemption of all of the
Series A Preferred Stock, to redeem the Series B Preferred Stock in whole or in
part at a price of $5.00 per share plus all accrued but unpaid dividends.
Subject to the prior redemption of all of the Series A Preferred Stock, the
Company is required to redeem the Series B Preferred Stock, on a pro rata basis,
at a price of $5.00 per share plus all accrued but unpaid dividends out of 20%
of the amount, if any, by which the Company's annual net income after taxes in
any year exceeds $5 million, as shown on its audited financial statements.
The Series B Preferred Stock has no liquidation preference, no conversion
rights and no registration rights.
WARRANTS
Upon completion of the Offering, the following warrants (excluding the
Representatives' Warrants, described below) to purchase an aggregate of
1,090,730 shares of Common Stock will be outstanding: the Bridge Warrants to
purchase 300,000 shares of Common Stock at an exercise price of $0.01 per share,
which are exercisable for a period of five years following the earlier of the
consummation of the Offering or the one-year anniversary of the issuance
thereof; warrants to purchase 47,200 shares of Common Stock at an exercise price
of $2.50 per share which are currently exercisable and expire between September
1998 and November 1999; warrants to purchase 20,000 shares of Common Stock at an
exercise price of $4.50
55
<PAGE>
per share which are currently exercisable and expire in September 2000; warrants
to purchase 460,932 shares of Common Stock at $12.50 per share which are
currently exercisable and expire in April 1999; warrants to purchase 29,200
shares of Common Stock at an exercise price of $13.75 per share which are
currently exercisable and expire in February 1999; warrants to purchase 115,572
shares of Common Stock at an exercise price of $15.00 per share which are
currently exercisable and expire between August 1999 and November 2001; warrants
to purchase 6,000 shares of Common Stock at an exercise price of $16.50 per
share which are currently exercisable and expire in April 1999; warrants to
purchase 28,226 shares of Common Stock at an exercise price of $19.25 per share
which are currently exercisable and expire in February 2001; and warrants to
purchase 70,000 shares of Common Stock at an exercise price of $20.00 per share
which will vest upon the occurrence of a milestone controlled by the warrant
holder and will be exercisable for a period of three years following vesting. In
each case, the exercise price of, and the number of shares of Common Stock
underlying, the warrants is subject to adjustment based upon anti-dilution
provisions.
The following discussion of the material terms and provisions of the
warrants is qualified in its entirety by reference to the detailed provisions of
the agreements relating to the issuance of the warrants and the forms of
warrants. Forms of the Bridge Warrants, the Representatives' Warrants and the
other warrants issued by the Company have been filed as exhibits to the
Registration Statement of which this Prospectus constitutes a part. The number
of shares of Common Stock issuable upon exercise of the warrants (including the
Bridge Warrants and the Representatives' Warrants) is subject to adjustment in
certain circumstances, including stock dividends, stock splits, combinations or
reclassifications involving or in respect of the Common Stock. With respect to
the Bridge Warrants only, if the Company elects to extend the maturity date of
the Bridge Notes for a period of up to six months, the number of shares issuable
upon the exercise of Bridge Warrants shall automatically increase by 10% of the
number of shares for which the Bridge Warrants were originally exercisable for
each month that the Bridge Notes continue to remain outstanding during such
extension period. The Bridge Warrant Shares are being registered in the Offering
and are subject to a 12-month lock-up arrangement with the Underwriters. See
"Certain Transactions," "Shares Eligible for Future Sale" and "Underwriting."
REPRESENTATIVES' WARRANTS
The Company also has agreed to sell to the Representatives, or their
designees, Representatives' Warrants to purchase 400,000 shares of Common Stock
at a price of $0.001 per warrant. The Representatives' Warrant will be
exercisable for a period of five years, commencing on the closing date of the
Offering, at an initial per share exercise price equal to 120% of the initial
public offering price per share. The Representatives' Warrants are being
registered in the Offering and cannot be transferred, assigned or hypothecated
for one year from the date of issuance, except that they may be assigned, in
whole or in part, to any successor, officer or partner of the Representatives
(or to officers or partners of any such successor or partner). The
Representatives' Warrants may be exercised as to all or a lesser number of
shares covered by the warrants and will contain certain registration rights and
anti-dilution provisions providing for appropriate adjustment of the exercise
price and number of shares which may be purchased upon exercise, upon the
occurrence of certain events. See "Risk Factors--Shares Eligible for Future
Sale, Registration Rights" and "Underwriting."
DEBT SECURITIES
In connection with the Bridge Financing, the Company issued 30 Bridge Units.
Each Bridge Unit consists of a Bridge Note issued by the Company in the
principal amount of $100,000 and a Bridge Warrant to purchase up to 10,000
shares of Common Stock at an exercise price equal to $0.01 per share. The Bridge
Notes and the Bridge Warrants are separately transferable, subject to certain
restrictions upon transferability.
56
<PAGE>
The Bridge Notes bear interest at the rate of 10% per annum, with interest
accruing from the date of issuance and payable in four quarterly installments on
the first day of January, April, July and October, commencing on January 1,
1998, and at maturity. The principal of, and any accrued and unpaid interest on,
the Bridge Notes are due and payable in full on the earliest of (i) the
consummation of the Offering, (ii) one year from the date on which the Bridge
Notes were issued, or (iii) the date of the closing of a sale (or the closing of
the last of a series of sales) of securities (other than the Bridge Notes and
Bridge Warrants) by the Company or any subsidiary or affiliate thereof, the net
proceeds of which, in the aggregate, equal or exceed the principal amount of the
Bridge Notes. The Company intends to use a portion of the net proceeds of the
Offering to repay in full the principal balance of the Bridge Notes, and accrued
and unpaid interest thereon. See "Use of Proceeds."
The Company has the right, at its option, to extend the maturity date of the
Bridge Notes for up to six months. In the event that the Company elects to
extend such maturity date, then the number of shares issuable upon the exercise
of each Bridge Warrant will automatically increase by 10% of the number of
shares for which the Bridge Warrants were originally exercisable for each month
that the Bridge Notes continue to remain outstanding during such extension
period.
The Bridge Notes will rank senior in right of payment to all future
indebtedness of the Company. The Bridge Notes are secured by a lien on the fixed
assets of the Company. See Note 14 to Notes to Financial Statements.
ANTI-TAKEOVER PROVISIONS
Use of the Preferred Stock could have the effect of delaying, deferring or
preventing a change in control by granting rights and preferences greater than
those held by the shareholders of Common Stock. To the extent that use of the
Preferred Stock has such effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, such use may
have an adverse impact on the ability of shareholders of the Company to
participate, if applicable, in a tender offer or exchange offer for the Common
Stock and in so doing diminish the value of the Common Stock. See "Risk
Factors--Effects of Certain Charter and Bylaw Provisions" and "Description of
Capital Stock--Preferred Stock."
The Company is also subject to the anti-takeover provisions of the New
Jersey Shareholder Protection Act which restrict certain "business combinations"
with "interested shareholders" for five years following the date the person
becomes an interested shareholder (as defined by such act), unless the Board of
Directors approves the business combination. By delaying and deterring
unsolicited takeover attempts, these provisions could adversely affect the value
of the Common Stock. See "Risk Factors--Effects of Certain Charter and Bylaw
Provisions."
TRANSFER AGENT AND REGISTRAR
The Company has retained American Stock Transfer & Trust Company as transfer
agent and registrar for the Common Stock and the Preferred Stock.
INDEMNIFICATION
The Company has agreed to indemnify the Underwriters (including Allen, which
may be deemed to be an affiliate or control person of the Company) and each
person who controls any Underwriter (including Enrique F. Senior, a director of
the Company who is an Executive Vice President and Managing Director of Allen)
against certain liabilities in connection with the Registration Statement,
including liabilities under the Securities Act. See "Underwriting."
The By-Laws of the Company provide that a director of the Company shall not
be personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director.
57
<PAGE>
However, such By-Laws do not eliminate or limit the liability of a director: (i)
for any breach of the director's duty of loyalty to the Company or its
shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) under Section
14A:6-12 of the New Jersey Business Corporation Act; or (iv) for any transaction
from which the director derived an improper personal benefit.
The Company currently carries liability insurance for the benefit of its
directors and officers which provides coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the Company (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission or
act done by such directors and officers, except as prohibited by law. The total
coverage under the insurance policy is $1,000,000, with a deductible of $35,000.
The Company's current policy specifically excludes coverage for any claim made
against the directors and officers based upon (i) the purchase, sale or offer of
any security of the Company, or (ii) any claim brought by a security holder of
the Company. Such exclusion includes claims which allege a violation of the
Securities Act and the Securities Exchange Act of 1934, as amended. The Company
has also purchased additional directors' and officers liability insurance
policies which provide coverage with respect to various securities related
matters.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of the Offering, there will be 7,308,472 shares of Common
Stock outstanding (7,908,472 if the Over-Allotment Option is exercised in full).
Of such shares, all of the 4,000,000 shares sold in the Offering (4,600,000 if
the Over-Allotment Option is exercised in full) will be freely transferable
(other than those purchased by affiliates of the Company) without restriction or
further registration under the Securities Act. In addition, the 400,000 shares
of Common Stock issuable upon exercise of the Representatives' Warrants and
300,000 shares of Common Stock issuable upon exercise of the Bridge Warrants,
all of which also are being registered under the Securities Act pursuant to the
Registration Statement of which this Prospectus constitutes a part, will be
freely transferable under the Securities Act without restriction or further
registration, subject to the limitation that the Representatives may not
transfer, assign, or hypothecate the Representatives' Warrants or the underlying
shares of Common Stock for a period of one year, with certain limited
exceptions. See "Underwriting."
Subject to certain limited exceptions, the holders of all of the remaining
shares of Common Stock and the holders of certain of the warrants to purchase
shares of Common Stock have agreed not to transfer or otherwise dispose of any
securities of the Company for a one-year period following the closing of the
Offering, without the prior written consent of Allen. At the request of The
Nasdaq National Market, Inc., Allen has agreed not to consent to the transfer of
shares of Common Stock issuable upon exercise of the Bridge Warrants for such
one-year period. See "--Lock-up Agreements" below.
The 3,308,472 shares of Common Stock outstanding prior to this Offering are
"restricted securities" within the meaning of Rule 144 and may not be sold other
than in accordance with Rule 144 or pursuant to an effective registration
statement under the Securities Act or an exemption from such registration
requirement. In general, Rule 144 provides that any person (or persons whose
shares are aggregated) to whom Rule 144 is applicable, including an affiliate,
who has beneficially owned shares for at least a one-year period (as computed
under Rule 144) is entitled to sell within any three-month period the number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Common Stock (approximately 73,335 shares after giving
effect to the Offering, if the Over-Allotment Option is exercised in full) and
(ii) the reported average weekly trading volume of the then outstanding shares
of Common Stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Commission. Sales under Rule 144 also
are subject to certain provisions relating to the manner and notice of sale and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned shares for at least a two-year period (as computed under Rule
144) is entitled to sell such shares under Rule 144(k) without regard to the
volume limitation and other conditions described above. As of December 1, 1997,
2,240,596 of the shares of Common Stock outstanding prior to the Offering will
be eligible for sale under Rule 144 generally 90 days after the date on which
the Registration Statement of which this Prospectus constitutes a part becomes
effective. Of these shares, 1,048,260 shares are also eligible for sale without
regard to the volume limitation and other conditions pursuant to Rule 144(k) as
of the date of this Prospectus.
Furthermore, under Rule 144 generally, there will be 2,240,480, 2,240,480,
2,977,594 and 3,018,002 shares eligible for resale as of March 1, 1998, June 1,
1998, September 1, 1998 and December 1, 1998, respectively. Under Rule 144(k),
there will be 1,423,850, 1,593,788, 1,593,788 and 1,615,988 shares eligible for
resale as of March 1, 1998, June 1, 1998, September 1, 1998 and December 1,
1998, respectively. In addition to the holding period requirements imposed by
the Rule 144 safe harbor, all holders of outstanding Common Stock prior to the
Offering are subject to a one-year lock-up following the effective date of this
Offering, subject to the ability of Allen to waive such lockup restrictions on
behalf of the Representatives. See "--Lock-up Agreements."
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Common Stock is expected to commence following
the completion of the Offering. No prediction
59
<PAGE>
can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock and the Company's ability to raise capital in the
future through the sale of additional securities.
Up to 400,000 additional shares of Common Stock may be purchased by the
Representatives through the exercise of the Representatives' Warrants during the
period commencing on the closing of the Offering and ending on the fifth
anniversary of such date. The holders of the Representatives' Warrants will have
certain demand and "piggyback" registration rights with respect to the shares of
Common Stock underlying such options. Such shares of Common Stock issuable upon
exercise of the Representatives' Warrants may be freely tradable, provided that
the Company satisfies certain securities registration and qualification
requirements in accordance with the terms of the Representatives' Warrants. See
"--Registration Rights" and "--Lock-up Agreements" below and "Underwriting."
Up to 777,130 shares of Common Stock may be purchased by the holders of
outstanding warrants other than the Representatives' Warrants and the Bridge
Warrants. The holders of the Bridge Warrants and certain of such other warrants
are entitled to certain demand and "piggyback" registration rights as to such
shares commencing 12 months after the closing of the Offering. Such shares will
be freely tradable upon such registration. See "--Registration Rights" and
"--Lock-up Agreements" below.
REGISTRATION RIGHTS
Subject to the lock-up arrangements described below, the Company has granted
certain demand and "piggyback" registration rights with respect to 3,308,472
outstanding shares of Common Stock, the 400,000 shares of Common Stock issuable
upon exercise of the Representatives' Warrants, and 703,332 of the shares of
Common Stock issuable upon exercise of other outstanding warrants. Subject to
certain conditions and limitations, the registration rights granted to such
holders give them the right to require the Company to register all or any
portion of the Common Stock held by them or issuable upon the exercise of
warrants held by them that are not transferable in a three-month period pursuant
to Rule 144 (collectively, the "Registrable Securities") in connection with any
registration by the Company of its securities on certain registration statements
under the Securities Act. In addition, commencing one year after the Offering,
but not more than once during any 12-month period, such holders who hold at
least 200,000 shares of the Registrable Securities may request registration on
Form S-3, if such registration is available to the Company at the time of such
request, of the Registrable Securities held by the holders of Registrable
Securities, provided the Registrable Securities for which registration is sought
constitute at least two percent of the Common Stock (calculated on a fully
diluted basis). Following such a request, all holders of Registrable Securities
will be given an opportunity to participate in such registration. The
registration rights described herein are subject to certain notice requirements,
timing restrictions and volume limitations which may be imposed by the
underwriters of an offering. The Company is required to bear the expenses of all
such registrations, except for the underwriting discounts and commissions
relating to the sale of the shares of Common Stock held by such investors.
LOCK-UP AGREEMENTS
Pursuant to the Underwriting Agreement, the Company, all of the existing
shareholders of the Company and certain of the existing warrantholders of the
Company as of the effective date of the Registration Statement, have agreed not
to offer, issue, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any securities of the Company for a period of 12 months
from the date of closing of the Offering, without the prior written consent of
Allen. At the request of The Nasdaq National Market, Inc., Allen has agreed not
to consent to the transfer of shares of Common Stock issuable upon exercise of
the Bridge Warrants for such one-year period.
60
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives, Allen
and Barington (collectively, the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Allen & Company Incorporated................................................................... 1,840,000
Barington Capital Group, L.P................................................................... 920,000
Cowen & Company................................................................................ 90,000
Credit Lyonnais Securities (USA) Inc........................................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation............................................ 90,000
A.G. Edwards & Sons, Inc....................................................................... 90,000
Lazard Freres & Co. LLC........................................................................ 90,000
Paribas Corporation............................................................................ 90,000
Cruttenden Roth Incorporated................................................................... 70,000
Ladenburg Thalmann & Co. Inc................................................................... 70,000
MacDonald & Company Securities, Inc............................................................ 70,000
Needham & Company, Inc......................................................................... 70,000
Stephens Inc................................................................................... 70,000
C.E. Unterberg, Towbin......................................................................... 70,000
Wedbush Morgan Securities Inc.................................................................. 70,000
Burnham Securities Inc......................................................................... 35,000
Chatsworth Securities LLC...................................................................... 35,000
L.H. Friend, Weinress, Frankson & Presson, Inc................................................. 35,000
Oscar Gruss & Son Incorporated................................................................. 35,000
Mesirow Financial, Inc......................................................................... 35,000
Morgan Fuller Capital Group.................................................................... 35,000
-----------------
Total...................................................................................... 4,000,000
-----------------
-----------------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public at the offering price set forth on the cover
page of this Prospectus and that the Underwriters may allow to certain dealers
who are members of the National Association of Securities Dealers, Inc. (the
"NASD") concessions of not in excess of $0.29 per share of Common Stock, of
which not in excess of $0.10 may be reallowed to other dealers who are members
of the NASD. After the commencement of this Offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
In connection with the Offering and after the Offering, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of Common Stock in the open market. In addition, the Underwriters may bid
for and purchase shares of Common Stock in the open market to stabilize the
price of the Common Stock. These activities may stabilize, maintain or otherwise
affect the market price of the Common Stock above independent market levels. The
Underwriters are not required to engage in these activities and may end these
activities at any time.
The Company has granted to the Underwriters the Over-Allotment Option,
exercisable during the 45-day period after the closing date of the Offering, to
purchase up to an aggregate of 600,000 additional
61
<PAGE>
shares of Common Stock at the initial public offering price, less underwriting
discounts and commissions. The Underwriters may exercise such option only for
the purpose of covering over-allotments made in connection with the sale of the
Common Stock offered hereby.
As is customary for such arrangements the Company has agreed to indemnify
the Underwriters and each person who controls any Underwriter (including Enrique
F. Senior, a director of the Company who is an Executive Vice President and
Managing Director of Allen) against certain liabilities in connection with the
Registration Statement, including liabilities under the Securities Act,
including for material misstatements or omissions contained in the Registration
Statement. In addition, the Underwriters have agreed to indemnify the Company
for such liabilities arising from material misstatements or omissions in
connection with disclosure for which the underwriters are responsible. Insofar
as indemnification for liabilities arising under the Securities Act maybe
permitted to the Underwriters, the Underwriters have been advised that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore unenforceable.
The Company has agreed to reimburse the Representatives their out-of-pocket
expenses incurred in connection with the Offering, which are estimated to be
$300,000.
The Company also has agreed to sell to the Representatives, or their
designees, Representatives' Warrants to purchase 400,000 shares of Common Stock
at a price of $0.001 per warrant. The Representatives' Warrants will be
exercisable for a period of five years, commencing on the effective date of the
Offering, at an initial per share exercise price equal to 120% of the initial
public offering price per share. The Representatives' Warrants cannot be
transferred, assigned or hypothecated for one year from the date of issuance,
except that they may be assigned, in whole or in part, to any successor, officer
or partner of the Representatives (or to officers or partners of any such
successor or partner). The Representatives' Warrants may be exercised as to all
or a lesser number of shares covered by the options and will contain certain
registration rights and anti-dilution provisions providing for appropriate
adjustment of the exercise price and number of shares which may be purchased
upon exercise, upon the occurrence of certain events. See "Risk Factors--Shares
Eligible for Future Sale; Registration Rights" and "Certain Transactions."
The Company has registered on behalf of the Representatives, under the
Registration Statement of which this Prospectus is a part, the shares of Common
Stock underlying the Representatives' Warrants.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement, the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Company, all of the existing shareholders of the Company and certain
existing warrantholders of the Company (including holders of the Bridge
Warrants) have executed agreements pursuant to which they have agreed not to
offer, pledge, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any of the Company's securities held by them for a period
of 12 months from the date of closing of the Offering, without the prior written
consent of Allen, subject to certain limited exceptions. See "Shares Eligible
for Future Sale--Lock-up Agreements."
Allen and certain of its affiliates beneficially own an aggregate of 712,430
shares of the Company. Enrique F. Senior, an Executive Vice President and
Managing Director of Allen, is an optionholder of the Company and serves as a
Director of the Company. See "Principal Shareholders" and "Certain
Transactions." Consistent with the rules of the NASD, of which Allen is a
member, the Company may be deemed to be an affiliate of Allen, and this Offering
is therefore being made in conformity with the applicable provisions of such
rules, including Rule 2720 of the NASD Conduct Rules. Accordingly, the price of
the Shares being offered hereby is no higher than that recommended by Barington
Capital Group as "qualified independent underwriter" as defined in the
applicable provisions of the rules of the NASD; in connection with serving in
such capacity, Barington is assuming the responsibilities of acting as qualified
independent underwriter in pricing the Offering and in exercising the usual
standards of due diligence in respect
62
<PAGE>
thereto. As compensation for serving as a Representative, Barington will receive
33.3% of the underwriting discounts and commissions set forth on the front cover
page of this Prospectus, as well as 5% of the Representatives' Warrants.
Barington will not receive any additional compensation for serving as qualified
independent underwriter. As compensation for its participation in the Bridge
Financing, Barington will receive a commission equal to 5% of the gross proceeds
to the Company of such Bridge Financing, which commission shall be paid to
Barington only upon closing of the Offering.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price of the shares of Common Stock
offered and sold in the Offering will be determined by negotiation among the
Company and the Representative and will not necessarily bear any relationship to
the Company's book value, assets, past operating results, financial condition,
or other established criteria of value. Factors to be considered in determining
such price, which will also be used as the basis for the exercise price for the
Representatives' Warrants, include the nature of the Company's business, its
history and present state of development, an assessment of the Company's recent
financial results and current financial condition, future prospects of the
Company, the qualifications of the Company's management, the general condition
of the securities markets at the time of the Offering, the recommendation of
Barington as qualified independent underwriter and other relevant factors. Allen
may, after the Offering, serve as a market maker for the Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby and legal matters will be
passed upon for the Company by Smith, Stratton, Wise, Heher & Brennan,
Princeton, New Jersey. A member of Smith, Stratton, Wise, Heher & Brennan serves
as the Secretary of the Company, for which services such member is not
compensated. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Werbel & Carnelutti, a Professional
Corporation, New York, New York.
EXPERTS
The consolidated balance sheet as of June 30, 1997 and the consolidated
statements of operations, changes in shareholders' (deficit)/equity and cash
flows for each of the two years in the period ended June 30, 1997 and for the
period July 23, 1990 to June 30, 1997, included in this Prospectus, have been
included herein in reliance on the report, which includes an explanatory
paragraph with respect to the Company's ability to continue as a going concern,
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (together
with all amendments, schedules and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain terms of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
which may be inspected without charge, at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the public reference section of the
Commission, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed
rates. The Registration Statement is also publicly available through the
Commission's web site located at http://www.sec.gov.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-2
Financial Statements:
Balance Sheet...................................................................... F-3
Statements of Operations........................................................... F-4
Statements of Changes in Shareholders' (Deficit)/Equity............................ F-5
Statements of Cash Flows........................................................... F-10
Notes to Financial Statements........................................................ F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
Princeton Video Image, Inc.:
We have audited the balance sheet of Princeton Video Image, Inc., a
development stage company, (the "Company"), as of June 30, 1997, and the related
statements of operations, changes in shareholders' (deficit)/equity, and cash
flows for each of the two years in the period ended June 30, 1997 and for the
period July 23, 1990 (date of inception) to June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Princeton Video Image, Inc.
as of June 30, 1997, and the results of its operations and its cash flows for
each of the two years in the period ended June 30, 1997 and for the period July
23, 1990 (date of inception) to June 30, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
September 11, 1997, except for
Note 14 for which
the date is October 1, 1997
F-2
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
JUNE 30, 1997 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 775,693 $ 230,967
Restricted marketable securities held to maturity................................. 76,320 133,209
Trade accounts receivable......................................................... 86,993 162,775
Other current assets.............................................................. 37,532 72,474
------------- -------------
Total current assets.......................................................... 976,538 599,425
Property and equipment, net......................................................... 1,266,806 1,286,154
Intangible assets, net.............................................................. 388,754 398,269
Other assets........................................................................ 129,118 165,461
------------- -------------
Total assets.................................................................. $ 2,761,216 $ 2,449,309
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' (DEFICIT)/EQUITY
Current Liabilities:
Accounts payable and accrued expenses............................................. $ 976,646 $ 1,009,971
Unearned revenue.................................................................. 430,497 430,497
Customer deposits................................................................. 425,000 425,000
------------- -------------
Total current liabilities..................................................... 1,832,143 1,865,468
Unearned revenue.................................................................... 1,030,469 972,843
------------- -------------
Total liabilities............................................................. 2,862,612 2,838,311
------------- -------------
Commitments and contingencies....................................................... -- --
Redeemable preferred stock:
Cumulative, Series A, conditionally redeemable, $4.50 par value, authorized
167,000 shares; issued and outstanding 67,600 shares at June 30, 1997 and
September 30, 1997, redemption value equal to carrying value (par plus all
accrued but unpaid dividends)................................................... 385,200 389,762
Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized 93,300
shares; issued and outstanding 86,041 shares at June 30, 1997 and September 30,
1997, redemption value equal to carrying value (par plus all accrued but unpaid
dividends)...................................................................... 518,355 524,805
------------- -------------
Total redeemable preferred stock.............................................. 903,555 914,567
Shareholders' (Deficit)/Equity:
Common stock, no par value; $.005 stated value; authorized 40,000,000 shares;
2,646,684 shares issued and outstanding and 291,756 shares subscribed at June
30, 1997; 3,308,472 shares issued and outstanding as of September 30, 1997...... 14,692 16,542
Additional paid-in capital........................................................ 19,910,396 21,197,302
Less: Related party note receivable............................................... (124,000) (839,263)
Deferred costs associated with planned initial public offering............... -- (192,289)
Stock subscription receivable................................................ (1,264,485) (6,945)
Deficit accumulated during the development stage.................................. (19,541,554) (21,478,916)
------------- -------------
Total shareholders' (deficit)/equity.......................................... (1,004,951) (1,303,569)
------------- -------------
Total liabilities, redeemable preferred stock and shareholders'
(deficit)/equity.......................................................... $ 2,761,216 $ 2,449,309
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 23, 1990 FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, (DATE OF SEPTEMBER 30,
---------------------------- INCEPTION) TO ----------------------------
1997 1996 JUNE 30, 1997 1997 1996
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
License fee................................ $ 130,526 $ 1,000,000 $ 1,130,526 $ 57,626 $ 25,000
Advertising revenue........................ 81,108 9,600 90,708 75,177 29,198
------------- ------------- -------------- ------------- -------------
Total revenue........................ 211,634 1,009,600 1,221,234 132,803 54,198
Costs and expenses:
Selling, general and administrative...... 3,028,895 2,602,928 9,284,704 1,223,811 738,130
Research and development................. 1,722,598 1,604,455 9,563,941 445,994 349,161
L-VIS System costs....................... 1,274,890 949,804 2,453,313 416,732 190,836
------------- ------------- -------------- ------------- -------------
Total costs and expenses............. 6,026,383 5,157,187 21,301,958 2,086,537 1,278,127
Operating loss............................. (5,814,749) (4,147,587) (20,080,724) (1,953,734) (1,223,929)
Interest and other income.................. (84,088) (237,063) (539,170) (16,372) (36,527)
------------- ------------- -------------- ------------- -------------
Net loss................................... (5,730,661) (3,910,524) (19,541,554) (1,937,362) (1,187,402)
Accretion of preferred stock dividends..... (44,050) (44,050) (169,150) (11,012) (11,012)
------------- ------------- -------------- ------------- -------------
Net loss applicable to common stock........ $ (5,774,711) $ (3,954,574) $ (19,710,704) $ (1,948,374) $ (1,198,414)
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
Net loss per share applicable to common
stock (see Note 2)..................... $ (2.18) $ (1.74) $ (0.60) $ (0.46)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of shares of
common stock outstanding............... 2,653,546 2,266,973 3,260,991 2,579,440
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
JULY 23, 1990
(DATE OF
INCEPTION) TO
SEPTEMBER 30,
1997
--------------
<S> <C>
License fee................................ $ 1,188,152
Advertising revenue........................ 165,885
--------------
Total revenue........................ 1,354,037
Costs and expenses:
Selling, general and administrative...... 10,508,515
Research and development................. 10,009,935
L-VIS System costs....................... 2,870,045
--------------
Total costs and expenses............. 23,388,495
Operating loss............................. (22,034,458)
Interest and other income.................. (555,542)
--------------
Net loss................................... (20,478,916)
Accretion of preferred stock dividends..... (180,162)
--------------
Net loss applicable to common stock........ $ (21,659,078)
--------------
--------------
Net loss per share applicable to common
stock (see Note 2).....................
Weighted average number of shares of
common stock outstanding...............
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY
FOR THE PERIOD JULY 23, 1990 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
RELATED PARTY TREASURY
COMMON STOCK NOTE AND STOCK
------------------------ ADDITIONAL* STOCK -----------
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED NUMBER OF
SHARES AMOUNT CAPITAL RECEIVABLE IPO COSTS SHARES
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock for patent rights
and cash, July 1990, $.0025 per share... 400,000 $ 2,000 (1,000)
Issuance of common stock for services and
cash.................................... 52,000 260 $ 71,240
Issuance of units consisting of 2 shares
of common stock and warrants to purchase
6 shares of stock at $6.25 per share,
May 1991, $2.50 per unit................ 64,000 320 159,630
Net loss from July 23, 1990 through June
30, 1992................................
----------- ----------- ----------- ------------- ----------- -----------
Balance at June 30, 1992.................. 516,000 2,580 229,870
Return of common stock to treasury, April
1992 at no cost......................... (41,200)
Reissuance of treasury shares for
technology, April 1992.................. 103,000 41,200
Issuance of 32,000 warrants for
technology, July 1992, exercise price of
$2.50 per share......................... 32,000
Issuance of units consisting of 200 shares
of common stock and warrants to purchase
134 shares of common stock at $1.13 per
share, August 1992, $225.00 per unit.... 308,000 1,540 344,960
Issuance of 480 units consisting of 200
shares of common stock and 100 shares of
Conditionally Redeemable Series A
Preferred Stock, December 1992, $900.00
per unit................................ 96,000 480 215,520
Issuance of 196 units consisting of 200
shares of common stock and 100 shares of
conditionally Redeemable Series A
Preferred Stock, March 1993 $900.00 per
unit.................................... 39,200 196 88,004
Payments related to issuance of common
stock................................... (102,908)
Accretion of preferred stock dividends.... (8,000)
Net loss..................................
----------- ----------- ----------- ------------- ----------- -----------
Balance at June 30, 1993.................. 959,200 4,796 902,446
----------- ----------- ----------- ------------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
UNEARNED DEVELOPMENT SHAREHOLDERS'
AMOUNT COMPENSATION STAGE EQUITY/(DEFICIT)
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Issuance of common stock for patent rights
and cash, July 1990, $.0025 per share... $ 1,000
Issuance of common stock for services and
cash.................................... 71,500
Issuance of units consisting of 2 shares
of common stock and warrants to purchase
6 shares of stock at $6.25 per share,
May 1991, $2.50 per unit................ 159,950
Net loss from July 23, 1990 through June
30, 1992................................ $ (375,669) (375,669)
----- ------------- ------------ --------------
Balance at June 30, 1992.................. (375,669) (143,219)
Return of common stock to treasury, April
1992 at no cost......................... $ (206) (206)
Reissuance of treasury shares for
technology, April 1992.................. 206 103,206
Issuance of 32,000 warrants for
technology, July 1992, exercise price of
$2.50 per share......................... 32,000
Issuance of units consisting of 200 shares
of common stock and warrants to purchase
134 shares of common stock at $1.13 per
share, August 1992, $225.00 per unit.... 346,500
Issuance of 480 units consisting of 200
shares of common stock and 100 shares of
Conditionally Redeemable Series A
Preferred Stock, December 1992, $900.00
per unit................................ 216,000
Issuance of 196 units consisting of 200
shares of common stock and 100 shares of
conditionally Redeemable Series A
Preferred Stock, March 1993 $900.00 per
unit.................................... 88,200
Payments related to issuance of common
stock................................... (102,908)
Accretion of preferred stock dividends.... (8,000)
Net loss.................................. (1,819,277) (1,819,277)
----- ------------- ------------ --------------
Balance at June 30, 1993.................. (2,194,946) (1,287,704)
----- ------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY
FOR THE PERIOD JULY 23, 1990 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
RELATED
PARTY
COMMON STOCK NOTE AND TREASURY STOCK
---------------------- ADDITIONAL STOCK ------------------------
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED NUMBER OF
SHARES AMOUNT CAPITAL RECEIVABLE IPO COSTS SHARES AMOUNT
----------- --------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993............... 959,200 4,796 902,446
Issuance of common stock and warrants
to purchase 132,074 shares of common
stock at $12.12 per share, August
1993................................. 61,906 309 658,309
Exercise of warrants at $12.12 per
share, January 1994.................. 82,542 413 949,587
Issuance of 86 units consisting of
2,000 shares of common stock, 1,000
shares of Conditionally Redeemable
Series B Preferred Stock and warrants
to purchase 2,000 shares of common
stock at $12.50 per share, February
1994, $30,000.00 per unit............ 172,000 860 1,970,381
Unearned compensation related to
issuance of 80,000 options, February
1994, exercise price of $11.25 per
share................................ 360,000
Issuance of common stock on account,
March 1994, $12.50 per share......... 48,000 240 598,328 (598,568)
Issuance of common stock and warrants
to purchase 450,000 shares of common
stock at $12.50 per share, April
1994................................. 120,000 600 1,445,015
Issuance of common stock, April 1994,
$12.50 per share..................... 24,000 120 299,880
Issuance of common stock, June 1994,
$15.00 per share..................... 60,000 300 830,022
Amortization of unearned compensation
related to issuance of options.......
Accretion of preferred stock
dividends............................ (29,000)
Net loss...............................
----------- --------- ----------- ------------ ----------- ----------- -----
Balance at June 30, 1994............... 1,527,648 7,638 7,984,968 (598,568)
----------- --------- ----------- ------------ ----------- ----------- -----
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
UNEARNED DEVELOPMENT SHAREHOLDERS'
COMPENSATION STAGE EQUITY/(DEFICIT)
------------- ------------ --------------
<S> <C> <C> <C>
Balance at June 30, 1993............... (2,194,946) (1,287,704)
Issuance of common stock and warrants
to purchase 132,074 shares of common
stock at $12.12 per share, August
1993................................. 658,618
Exercise of warrants at $12.12 per
share, January 1994.................. 950,000
Issuance of 86 units consisting of
2,000 shares of common stock, 1,000
shares of Conditionally Redeemable
Series B Preferred Stock and warrants
to purchase 2,000 shares of common
stock at $12.50 per share, February
1994, $30,000.00 per unit............ 1,971,241
Unearned compensation related to
issuance of 80,000 options, February
1994, exercise price of $11.25 per
share................................ (360,000) 0
Issuance of common stock on account,
March 1994, $12.50 per share......... 0
Issuance of common stock and warrants
to purchase 450,000 shares of common
stock at $12.50 per share, April
1994................................. 1,445,615
Issuance of common stock, April 1994,
$12.50 per share..................... 300,000
Issuance of common stock, June 1994,
$15.00 per share..................... 830,322
Amortization of unearned compensation
related to issuance of options....... 60,000 60,000
Accretion of preferred stock
dividends............................ (29,000)
Net loss............................... (4,263,754) (4,263,754)
------------- ------------ --------------
Balance at June 30, 1994............... (300,000) (6,458,700) 635,338
------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY
FOR THE PERIOD JULY 23, 1990 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK RELATED PARTY TREASURY STOCK
------------------------ ADDITIONAL NOTE AND STOCK ------------------------
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED NUMBER OF
SHARES AMOUNT CAPITAL RECEIVABLE IPO COSTS SHARES AMOUNT
----------- ----------- ---------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994............ 1,527,648 7,638 7,984,968 (598,568)
Issuance of common stock, warrants
to purchase 70,000 shares of
common stock at $15.00 per share
and warrants to purchase 70,000
shares of common stock at $20.00
per share, July 1994.............. 140,000 700 2,082,600
Issuance of common stock, April
1995, $12.50 per share............ 11,746 59 146,767
Exercise of warrants at $12.50 per
share, May 1995................... 105,300 527 1,298,231 (124,000)
Compensation expense in connection
with note receivable, May 1995.... 24,800
Unearned compensation related to
issuance 20,000 options, June
1995, exercise price of $15.00 per
share............................. 120,000
Receipt of stock subscription
receivable........................ 598,568
Amortization of unearned
compensation related to issuance
of options........................
Accretion of preferred stock
dividends......................... (44,050)
Net loss............................
----------- ----------- ---------- -------- ---------- ----------- -----
Balance at June 30, 1995............ 1,784,694 8,924 11,613,316 (124,000)
----------- ----------- ---------- -------- ---------- ----------- -----
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
UNEARNED DEVELOPMENT SHAREHOLDERS'
COMPENSATION STAGE EQUITY/(DEFICIT)
------------- ------------ --------------
<S> <C> <C> <C>
Balance at June 30, 1994............ (300,000) (6,458,700) 635,338
Issuance of common stock, warrants
to purchase 70,000 shares of
common stock at $15.00 per share
and warrants to purchase 70,000
shares of common stock at $20.00
per share, July 1994.............. 2,083,300
Issuance of common stock, April
1995, $12.50 per share............ 146,826
Exercise of warrants at $12.50 per
share, May 1995................... 1,174,758
Compensation expense in connection
with note receivable, May 1995.... 24,800
Unearned compensation related to
issuance 20,000 options, June
1995, exercise price of $15.00 per
share............................. (120,000) 0
Receipt of stock subscription
receivable........................ 598,568
Amortization of unearned
compensation related to issuance
of options........................ 180,000 180,000
Accretion of preferred stock
dividends......................... (44,050)
Net loss............................ (3,441,669) (3,441,669)
------------- ------------ --------------
Balance at June 30, 1995............ (240,000) (9,900,369) 1,357,871
------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY
FOR THE PERIOD JULY 23, 1990 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK RELATED PARTY TREASURY STOCK
------------------ ADDITIONAL NOTE AND STOCK ------------------
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED NUMBER OF
SHARES AMOUNT CAPITAL RECEIVABLE IPO COSTS SHARES AMOUNT
--------- ------- ----------- -------------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995................ 1,784,694 8,924 11,613,316 (124,000)
Issuance of .041 units consisting of
2,000 shares of common stock, 1,000
shares of Conditionally Redeemable
Series B Preferred Stock and warrants
to purchase 2,000 shares of common
stock at $12.50 per share, October
1995, $30,000.00 per unit............. 82 0.5 1,025
Issuance of common stock, October 1995,
$12.50 per share...................... 128 0.5 1,600
Issuance of common stock and warrants to
purchase 10,932 shares of common stock
at $12.50 per share, October 1995..... 888 4 11,096
Exercise of warrants at $12.50 per
share, October 1995................... 2,000 10 19,990
Issuance of common stock, February 1996,
$17.50 per share...................... 282,266 1,411 4,558,798
Issuance of 24,000 warrants to joint
venture partner March 1996, exercise
price of $15.00 per share............. 120,000
Exercise of warrants at $1.13 per share,
April 1996............................ 938 5 1,050
Exercise of warrants at $6.25 per share,
May 1996.............................. 170,000 850 1,061,650
Issuance of 15,794 warrants for services
performed during 1996, exercise price
of $15.00 per share................... 71,075
Amortization of unearned compensation
related to issuance of options........
Accretion of preferred stock
dividends............................. (44,050)
Net loss................................
--------- ------- ----------- -------------- --------- --------- ------
Balance at June 30, 1996................ 2,240,996 $11,205 $17,415,550 $(124,000)
--------- ------- ----------- -------------- --------- --------- ------
--------- ------- ----------- -------------- --------- --------- ------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
UNEARNED DEVELOPMENT SHAREHOLDERS'
COMPENSATION STAGE EQUITY/(DEFICIT)
------------ ------------- ----------------
<S> <C> <C> <C>
Balance at June 30, 1995................ (240,000) (9,900,369) 1,357,871
Issuance of .041 units consisting of
2,000 shares of common stock, 1,000
shares of Conditionally Redeemable
Series B Preferred Stock and warrants
to purchase 2,000 shares of common
stock at $12.50 per share, October
1995, $30,000.00 per unit............. 1,025.5
Issuance of common stock, October 1995,
$12.50 per share...................... 1,600.5
Issuance of common stock and warrants to
purchase 10,932 shares of common stock
at $12.50 per share, October 1995..... 11,100
Exercise of warrants at $12.50 per
share, October 1995................... 20,000
Issuance of common stock, February 1996,
$17.50 per share...................... 4,560,209
Issuance of 24,000 warrants to joint
venture partner March 1996, exercise
price of $15.00 per share............. 120,000
Exercise of warrants at $1.13 per share,
April 1996............................ 1,055
Exercise of warrants at $6.25 per share,
May 1996.............................. 1,062,500
Issuance of 15,794 warrants for services
performed during 1996, exercise price
of $15.00 per share................... 71,075
Amortization of unearned compensation
related to issuance of options........ 240,000 240,000
Accretion of preferred stock
dividends............................. (44,050)
Net loss................................ (3,910,524) (3,910,524)
------------ ------------- ----------------
Balance at June 30, 1996................ $(13,810,893) $ 3,491,862
------------ ------------- ----------------
------------ ------------- ----------------
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY
FOR THE PERIOD JULY 23, 1990 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
RELATED PARTY
COMMON STOCK NOTE AND
------------------ ADDITIONAL STOCK
NUMBER OF PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT CAPITAL RECEIVABLE IPO COSTS
--------- ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996.................................. 2,240,996 11,205 17,415,550 (124,000)
Exercise of warrants at $2.50 per share, August 1996...... 8,000 40 19,960
Exercise of warrants at $2.50 per share, September 1996... 4,000 20 9,980
Exercise of warrants at $1.13 per share, May 1997......... 97,930 490 109,681
Issuance of common stock on account, May 1997, $3.75 per
share................................................... 587,514 2,937 2,172,013 (1,264,485)
Issuance of 4,206 warrants for services performed during
1997, exercise price of $15.00 per share................ 18,927
Accretion of preferred stock dividends.................... (44,050)
Compensation expense associated with extension of employee
stock options........................................... 208,335
Net loss..................................................
--------- ------- ----------- ------------- -------------
Balance at June 30, 1997.................................. 2,938,440 $14,692 $19,910,396 $(1,388,485)
Exercise of warrants at $1.13 per share (unaudited)....... 51,062 255 57,189
Exercise of warrants at $2.50 per share July 1997
(unaudited)............................................. 282,000 1,410 703,590 (655,000)
Compensation expense in connection with notes receivable,
July 1997 (unaudited)................................... 360,250
Issuance of 36,970 shares with respect to anti-dilution
rights in July 1997 (unaudited)......................... 36,970 185 (185)
Compensation expense related to issuance of 20,000
options, September 30, 1997, exercise price of $2.50 per
share (unaudited)....................................... 80,000
Issuance of 20,000 warrants in settlement of obligation
accrued, September 1997, exercise price $4.50 per share
(unaudited)............................................. 90,000
Issuance of 1,572 warrants in settlement of obligation
accrued, September 1997, exercise price $15.00 per share
(unaudited)............................................. 7,074
Collection of stock subscriptions receivable
(unaudited)............................................. 1,197,277
Deferred costs associated with planned initial public
offering (unaudited).................................... (192,289)
Accretion of preferred stock dividends (unaudited)........ (11,012)
Net loss (unaudited)......................................
--------- ------- ----------- ------------- -------------
Balance at September 30, 1997 (unaudited)................. 3,308,472 $16,542 $21,197,302 $ (846,208) (192,289)
--------- ------- ----------- ------------- -------------
--------- ------- ----------- ------------- -------------
<CAPTION>
DEFICIT
TREASURY STOCK ACCUMULATED
NUMBER OF DURING THE TOTAL
--------------- UNEARNED DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT COMPENSATION STAGE EQUITY/(DEFICIT)
------ ------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996.................................. (13,810,893) 3,491,862
Exercise of warrants at $2.50 per share, August 1996...... 20,000
Exercise of warrants at $2.50 per share, September 1996... 10,000
Exercise of warrants at $1.13 per share, May 1997......... 110,171
Issuance of common stock on account, May 1997, $3.75 per
share................................................... 910,465
Issuance of 4,206 warrants for services performed during
1997, exercise price of $15.00 per share................ 18,927
Accretion of preferred stock dividends.................... (44,050)
Compensation expense associated with extension of employee
stock options........................................... 208,335
Net loss.................................................. (5,730,661) (5,730,661)
------ ------ ----- ------------ ----------------
Balance at June 30, 1997.................................. $(19,541,554) $(1,004,951)
Exercise of warrants at $1.13 per share (unaudited)....... 57,444
Exercise of warrants at $2.50 per share July 1997
(unaudited)............................................. 50,000
Compensation expense in connection with notes receivable,
July 1997 (unaudited)................................... 360,250
Issuance of 36,970 shares with respect to anti-dilution
rights in July 1997 (unaudited)......................... --
Compensation expense related to issuance of 20,000
options, September 30, 1997, exercise price of $2.50 per
share (unaudited)....................................... 80,000
Issuance of 20,000 warrants in settlement of obligation
accrued, September 1997, exercise price $4.50 per share
(unaudited)............................................. 90,000
Issuance of 1,572 warrants in settlement of obligation
accrued, September 1997, exercise price $15.00 per share
(unaudited)............................................. 7,074
Collection of stock subscriptions receivable
(unaudited)............................................. 1,197,277
Deferred costs associated with planned initial public
offering (unaudited).................................... (192,289)
Accretion of preferred stock dividends (unaudited)........ (11,012)
Net loss (unaudited)...................................... (1,937,362) (1,937,362)
------ ------ ----- ------------ ----------------
Balance at September 30, 1997 (unaudited)................. $ 0 $ 0 $ 0 $(21,478,916) $(1,303,569)
------ ------ ----- ------------ ----------------
------ ------ ----- ------------ ----------------
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) JULY 23, 1990
FOR THE YEARS ENDED JULY 23, 1990 FOR THE THREE MONTHS (DATE OF
JUNE 30, (DATE OF ENDED SEPTEMBER 30, INCEPTION)
---------------------- INCEPTION) ---------------------- TO SEPTEMBER 30,
1997 1996 TO JUNE 30, 1997 1997 1996 1997
---------- ---------- ----------------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(5,730,661) $(3,910,524) $ (19,541,554) $(1,937,362) $(1,187,402) $ (21,478,916)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of unearned income... (130,526) -- (130,526) (57,626) (25,000) (188,152)
Depreciation expense.............. 478,982 294,765 999,600 146,646 103,141 1,146,246
Amortization of intangibles....... 57,490 10,871 112,347 16,734 14,372 129,081
Charges associated with option and
warrant grants and related party
note receivable................. 227,262 431,075 1,058,137 440,250 169,167 1,498,387
Equity in net loss of affiliate... -- -- 9,048 -- -- 9,048
Increase (decrease) in cash
resulting from changes in:
Trade accounts receivable..... (78,293) (8,700) (86,993) (75,782) (40,200) (162,775)
Current assets................ 77,244 (73,288) (37,532) (23,231) 93,796 (60,763)
Other assets.................. (572) (66,080) (129,118) (36,343) (80) (165,461)
Accounts payable and accrued
expenses.................... 379,044 149,597 976,646 (85,312) (80,102) 891,334
Unearned revenue.............. 391,492 (800,000) 1,591,492 -- 40,000 1,591,492
Customer deposits............. 125,000 300,000 425,000 -- -- 425,000
Miscellaneous other........... 108,274 19,312 119,354 6,821 34,475 126,175
---------- ---------- ----------------- ---------- ---------- -----------------
Net cash used in operating
activities.................. (4,095,264) (3,652,972) (14,634,099) (1,605,205) (877,833) (16,239,304)
---------- ---------- ----------------- ---------- ---------- -----------------
Cash flows from investing activities:
Purchase of held-to-maturity
investments......................... (75,535) (3,027,826) (5,289,558) (52,000) (501,878) (5,341,558)
Proceeds from held-to-maturity
investments......................... 3,000,000 2,200,000 5,200,000 0 3,000,000 5,200,000
Purchases of property and equipment... (523,221) (879,958) (2,278,414) (165,994) (41,137) (2,444,408)
Increase in intangible assets......... (87,632) (207,569) (595,209) (26,249) (26,622) (621,458)
Investments in joint venture.......... -- -- (9,048) -- -- (9,048)
---------- ---------- ----------------- ---------- ---------- -----------------
Net cash provided by (used in)
investing activities.......... 2,313,612 (1,915,353) (2,972,229) (244,243) 2,430,363 (3,216,472)
---------- ---------- ----------------- ---------- ---------- -----------------
Cash flows from financing activities:
Proceeds from issuances of preferred
stock............................... -- 205 734,405 0 0 734,405
Proceeds from issuances of common
stock............................... 1,050,636 5,657,490 17,647,616 1,304,722 30,000 18,952,338
---------- ---------- ----------------- ---------- ---------- -----------------
Net cash provided by financing
activities.................... 1,050,636 5,657,695 18,382,021 1,304,722 30,000 19,686,743
---------- ---------- ----------------- ---------- ---------- -----------------
Net increase (decrease) in cash
and cash equivalents.......... (731,016) 89,370 775,693 (544,726) 1,582,530 230,967
Cash and cash equivalents at beginning
of period............................. 1,506,709 1,417,339 0 775,693 1,506,709 0
---------- ---------- ----------------- ---------- ---------- -----------------
---------- ---------- ----------------- ---------- ---------- -----------------
Cash and cash equivalents at end of
period................................ $ 775,693 $1,506,709 $ 775,693 $ 230,967 $3,089,239 $ 230,967
---------- ---------- ----------------- ---------- ---------- -----------------
---------- ---------- ----------------- ---------- ---------- -----------------
Supplemental cash flow information:
Subscriptions received in connection
with issuance of stock.............. $1,264,485
Deferred costs associated with planned
initial public offering
(unaudited)......................... $ 192,289
Deferred debt issuance costs
(unaudited)......................... 11,711
Fair value of warrants issued in
settlement of accrued obligation
(unaudited)......................... 97,074
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
1. ORGANIZATION:
Princeton Video Image, Inc., formerly known as Princeton Electronic
Billboard, Inc. ("the Company"), was incorporated on July 23, 1990 in the State
of New Jersey. The Company has developed a Live Video Insertion System (the
"L-VIS System") which utilizes proprietary software and hardware to insert
images into a live television sports broadcast so that the images appear to
actually exist in the stadium where the game is being played. The Company is
marketing this system to advertisers for use in real time insertion of an image
into television transmissions of a live sporting event. The Company intends to
market its systems on a worldwide basis through licensing agreements or the
formation of joint ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern and contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
Therefore, the financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
The Company has generated minimal revenues to date, incurred recurring
losses since inception and has an accumulated deficit of approximately $19.5
million at June 30, 1997 and $21.5 million as of September 30, 1997. The Company
also has significant liquidity requirements to fund the continuation of
operations. As a result, continuation of the business is dependent on the
ability of the Company to successfully market its technology and obtain
sufficient working capital to finance the continuation of operations.
Management's plans include the continuation of marketing efforts aimed at
generating revenue and to obtain additional funds for working capital
requirements through a public or private placement of debt or equity
instruments. There can be no assurance that the Company will be successful in
its attempt to consummate the aforementioned plans. Further, there can be no
assurance, assuming the Company successfully raises additional funds, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate additional financing, management will be required to
substantially curtail the Company's research and development programs and to
curtail certain other of its operations.
DEVELOPMENT STAGE COMPANY
The accompanying financial statements have been prepared in accordance with
the provisions of Statement of Financial Accounting Standard No. 7, "Accounting
and Reporting by Development Stage Enterprises."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of petty cash on hand, checking accounts,
money market funds, and all highly liquid debt instruments purchased with a
maturity of three months or less.
F-11
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENTS
Investments in and the operating results of joint ventures in which the
Company has a 50% interest or otherwise exercises significant influence are
accounted for on the basis of the equity method of accounting.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, principally three to seven years. Gains
or losses on depreciable assets retired or sold are recognized in the statement
of operations in the year of disposal.
INTANGIBLE ASSETS
Legal costs incurred to apply for patents are capitalized. Effective July 1,
1996, the Company began amortizing these costs using the straight line method
over an estimated useful life of 7 years, which is shorter than the legal life.
Prior to that date, these costs were amortized over 14 years.
INCOME TAXES
The Company accounts for income taxes by recognizing deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the years in which the differences are expected
to reverse.
REVENUE
Non-refundable license fees are recognized as revenue when earned, which is
when all related commitments have been satisfied (see Note 5). Additionally,
under the terms of certain existing agreements, the Company retains title to the
L-VIS System and receives a non-refundable fee which reflects reimbursement for
the construction cost of the system delivered to the licensee. These fees are
recorded as license revenue on a straight-line basis over the shorter of the
license term or useful life of the equipment.
Advertising revenue is recognized when earned, which is when the respective
advertisements are inserted into a television broadcast.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Costs associated
with the development of the Company's proprietary computer system which are
incurred prior to technological feasibility are recorded as research and
development expenses.
PER SHARE DATA
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4-D, certain issuances of common stock and stock options and warrants
granted by the Company during the twelve months preceding the Company's initial
public offering have been included in the calculation of net loss
F-12
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
per share applicable to common stock as if they were outstanding for all periods
presented, using the treasury stock method at an assumed public offering price
of $7.00 per share.
Net loss per share applicable to common stock calculated in accordance with
APB Opinion No. 15 ("APB 15") is shown below. The weighted average number of
shares outstanding excludes the number of common shares issuable upon the
exercise of outstanding stock options and warrants since such inclusion would be
antidilutive.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED FOR THE THREE MONTHS
JUNE 30 ENDED SEPTEMBER 30
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss per share applicable to common stock................. $(2.43) $(2.05) $(0.60) (0.53)
Weighted average number of common shares outstanding.......... 2,372,065 1,933,196 3,240,991 2,245,663
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which supercedes APB 15. SFAS 128 replaces the presentation of primary earnings
per share with a presentation of basic earnings per share which excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period. SFAS
128 also requires dual presentation of basic earnings per share and diluted
earnings per share on the face of the income statement for all periods
presented. Diluted earnings per share is computed similarly to full diluted
earnings per share pursuant to APB 15, with some modifications. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company will present earnings per share in
accordance with SFAS 128 commencing in fiscal year 1998.
RISK AND UNCERTAINTIES
The Company is subject to a number of risks common to companies in similar
stages of development including, but not limited to, the lack of assurance of
the marketability of the product, the need to raise substantial additional
funds, the risk of technological obsolescence and limited source of supply of
certain components of the L-VIS System.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.
F-13
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTERIM FINANCIAL INFORMATION
The financial information presented as of September 30, 1997 and for the
three months ended September 30, 1997 and 1996 and for the period July 23, 1990
(date of inception) to September 30, 1997, in the opinion of management,
reflects all adjustments (which consist of normal accruals) necessary for a fair
presentation of such financial information.
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130") in June 1997.
Comprehensive income represents the change in net assets of a business
enterprise as a result of nonowner transactions. Management does not believe
that the future adoption of SFAS 130 will have a material effect on the
Company's financial position and results of operations. The Company will adopt
SFAS 130 for the year ending June 30, 1998.
Also in June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires that a business enterprise
report certain information about operating segments, products and services,
geographic areas of operation, and major customers in complete sets of financial
statements and in condensed financial statements for interim periods. The
Company will adopt SFAS 131 in 1998.
3. RESTRICTED MARKETABLE SECURITIES HELD TO MATURITY:
At June 30, 1997, the Company had investments in U.S. Treasury Notes which,
at the time of purchase, had a maturity greater than three months but less than
one year and are restricted as to use under the terms of an existing letter of
credit. The Company intends to hold to these debt instruments to maturity and
has accordingly classified them as marketable securities held to maturity at
their amortized cost basis. Unrealized holding losses totaled $206 at June 30,
1997.
4. INVESTMENTS IN JOINT VENTURES:
In 1993, the Company formed a joint venture, Publicidad Virtual S.A. de
C.V., ("Publicidad"), with Presencia en Medios, S.A. de C.V. ("Presencia"), a
Mexican corporation, for purposes of marketing the Company's technology in Latin
America and the Spanish language markets in the Caribbean basin. The Company and
Presencia each own 50% of the voting shares and share equally in the net
earnings of Publicidad. At June 30, 1997, the Company's investment in Publicidad
amounted to $0, reflecting the Company's equity in Publicidad. The Company has
not recognized losses in excess of its investment in Publicidad as it has no
commitment to fund Publicidad's operations.
Under the terms of the joint venture agreement, Presencia manages the
day-to-day operations of Publicidad and is obligated to make such loans or
additional contributions as are necessary to carry out the business. The Company
has no further obligation to the joint venture. In 1994, Publicidad, through
additional contributions made by Presencia, paid the Company $2,000,000 for an
exclusive, royalty-free license granting Publicidad the right to commercially
market the Company's technology in Latin America and the Spanish-speaking
Caribbean. (See Note 5).
F-14
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
5. LICENSE FEES:
In connection with the joint venture noted above, the Company received a
non-refundable fee of $2,000,000. The Company recognized 50% of this fee
($1,000,000 based upon its percentage ownership in Publicidad) in 1996 when all
the deliverables as defined in the agreement were met. The Company recognized
$100,000 of license fees as revenue relating to the amortization of unearned
revenue in 1997. The remaining $900,000 of unearned revenue, of which $100,000
is included in current liabilities and the remainder in long-term at June 30,
1997, is being amortized into income over a 10 year period commencing July 1,
1996.
Under the terms of certain existing agreements, the Company retains title to
the L-VIS System and receives a non-refundable fee which reflects reimbursement
for the construction cost of the system delivered to the licensee. These fees
are recorded as license revenue on a straight-line basis over the shorter of the
license term or the useful life of the equipment. During 1997, the Company
received $391,492 of such fees, of which $30,526 was recognized as license fee
revenue. The remaining $360,966 is included in unearned revenue, of which
$130,497 is current.
6. PROPERTY AND EQUIPMENT:
The costs and accumulated depreciation of property and equipment at June 30,
1997 are summarized as follows:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Furniture and fixtures.............................................................................. $ 61,281
Leasehold improvements.............................................................................. 22,583
Office equipment.................................................................................... 802,856
L-VIS Systems....................................................................................... 566,292
Research and development equipment and software..................................................... 417,645
Spare parts......................................................................................... 319,296
------------
Total property and equipment.................................................................. 2,189,953
Less: accumulated depreciation.................................................................... (923,147)
------------
Property and equipment, net......................................................................... $ 1,266,806
------------
------------
</TABLE>
Depreciation expense amounted to $478,982 and $294,765 for the years ended
June 30, 1997 and 1996, respectively.
F-15
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
7. INTANGIBLE ASSETS:
The costs and accumulated amortization at June 30, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Patents............................................................................................... $ 182,358
Patent Applications in Progress....................................................................... 273,084
----------
Total Intangible Assets......................................................................... 455,442
Less: Accumulated amortization.................................................................. (66,688)
----------
Intangible Assets, net.......................................................................... $ 388,754
----------
----------
</TABLE>
Amortization expense amounted to $57,490 and $10,871 for the years ended
June 30, 1997 and 1996, respectively. On May 6, 1997 and August 6, 1996,
respectively, the Company was granted patents relating to a pattern recognition
system to detect specific objects in a video field and a system and method for a
downstream application and control electronic billboard system.
8. INCOME TAXES:
Temporary differences which give rise to significant deferred tax assets and
liabilities at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Deferred tax assets:
Capitalized start-up costs....................................................................... $ 798,000
Fixed assets..................................................................................... 176,000
Deferred revenue and other....................................................................... 484,000
Net operating loss carryforwards................................................................. 2,176,000
State taxes...................................................................................... 1,456,000
Valuation allowance--Federal..................................................................... (3,479,000)
Valuation allowance--State....................................................................... (1,456,000)
-------------
Total deferred tax assets.................................................................... $ 155,000
Deferred tax liabilities:
Intangibles...................................................................................... 155,000
-------------
Total deferred tax liabilities............................................................... 155,000
-------------
Net deferred taxes......................................................................... $ 0
-------------
-------------
</TABLE>
Due to the uncertainty of the realization of the deferred tax assets, a full
valuation allowance has been provided.
As of June 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $6,400,000, which expire in the
years 2006 through 2012. At September 30, 1997, the Company had available net
operating loss carryforwards of approximately $7,800,000. The available net
operating losses are based on the assumption that the Company has gone through a
change in ownership pursuant to Internal Revenue Code ("IRC") Section 382 during
the fiscal year ended June 30, 1997 as a result of the May 1997 Rights Offering.
Under IRC Section 382, the amount of the net operating loss carryforwards that
are available to offset taxable income in any particular year is severely
limited.
F-16
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
8. INCOME TAXES: (CONTINUED)
Although the Company has determined its net operating losses as if it had
undergone a change of ownership pursuant to IRC Section 382, the Company has not
yet finalized the analysis to make an actual determination of whether such a
change has occurred. Therefore, if such a change has not occurred during the
fiscal year ended June 30, 1997, the amount of net operating loss carryforwards
available in total and on an annual basis may be increased.
9. COMMON AND PREFERRED STOCK:
COMMON STOCK
Pursuant to its Restated Certificate of Incorporation, the Company is
prohibited from paying any dividends on the Common Stock until all accumulated
dividends in respect of the Series A Preferred Stock and Series B Preferred
Stock have been paid.
In May 1995, certain investors in the Company, which included a member of
the Company's current Board of Directors, signed notes ("the Notes") for
$124,000 in consideration for amounts owed under a stock subscription agreement.
The underlying shares of common stock are being held by the transfer agent until
the proceeds from the Notes are received by the Company. These Notes, which bear
interest at a rate of 9%, contain no recourse provisions by which the Company
can enforce collection. Accordingly, a $24,800 charge to general and
administrative expense was recorded in fiscal year 1995 for the excess of the
fair value of the Company's common stock in May 1995 over the purchase price of
the common stock associated with the underlying subscription agreement.
Additionally, the Company did not receive amounts owed upon the maturity of the
Notes in May 1997 and has granted a one year extension of these Notes through
May 1998. However, no charge was recorded in fiscal year 1997, as the fair value
of the Company's common stock in May 1997 was less than the purchase price of
the common stock associated with the underlying subscription agreement.
In February 1996, the Company issued 282,266 shares of common stock in a
private placement offering ("the February 1996 Offering") for $17.50 per share
and received proceeds of $4,560,209.
In May 1997, in order to raise funds to meet current obligations, the
Company issued 587,514 shares of common stock in a special rights offering ("the
Rights Offering") whereby existing shareholders could purchase one share of
common stock at $3.75 per share for every four shares of common stock held. The
Company received proceeds of $910,465 and stock subscriptions receivable
totaling $1,264,485. Prior to the Rights Offering, warrantholders exercised
97,930 warrants at $1.13 per share in order to increase their participation in
the Rights Offering.
In July 1997, certain investors in the Company, which included a member of
the Company's current Board of Directors signed notes ("the July Notes") for
$60,263 in consideration for amount owed under the Rights Offering stock
subscription agreement. The July Notes, which bear interest at a rate of 9%,
contain no recourse provisions by which the Company can enforce collection and
mature in July 1998. However, no charge was recorded in July 1997, as the fair
value of the Company's common stock in July 1997 approximated the purchase price
of the common stock associated with the Rights Offering subscription agreement.
In July 1997, two employees of the Company signed notes ("the Employee
Notes") for $655,000 as consideration for the exercise of warrants to purchase
262,000 shares of common stock at an exercise price of $2.50 per share.
Accordingly, a $360,250 charge to general and administrative expense was
recorded in July 1997 for the excess of the fair value of the Company's stock in
July 1997 over the exercise price of the
F-17
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
9. COMMON AND PREFERRED STOCK: (CONTINUED)
underlying warrants. The Employee Notes, which bear interest at a rate of 8.5%,
contain no recourse provisions by which the Company can enforce collection and
mature in July 2002.
On September 3, 1997, in preparation for the planned initial public offering
of the Company's common stock, the Board of Directors of the Company declared a
2 for 1 stock split of the Company's common stock. All references in the
financial statements to share and per share numbers and amounts and warrant and
option data have been restated to give retroactive effect to the stock split.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of the preferred
stock in one or more series. The Company's Board of Directors is authorized to
fix the relative rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, terms of
redemption, redemption prices, liquidation preferences, the number of shares
constituting any series and the designation of such series. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of the Company's Series A Preferred Stock, Series B
Preferred Stock and Common Stock, including the loss of voting control. Other
than the shares of Series A Preferred Stock and Series B Preferred Stock, there
are no shares of preferred stock currently issued and outstanding.
SERIES A PREFERRED STOCK
The Company has issued a total of 67,600 shares of Series A Redeemable
Preferred Stock with a par value of $4.50 per share and a six percent per annum
dividend rate. Dividends shall be paid either in cash or common stock of the
Company. The Company has the right at any time after the date of original
issuance of the Series A Preferred Stock to redeem the Series A Preferred Stock
in whole or in part at a price of $4.50 per share plus all accrued but unpaid
dividends. The Company is required to redeem this preferred stock in cash at par
plus all accrued but unpaid dividends from thirty percent of the amount by which
the Company's annual net income after taxes exceeds $5,000,000.
Dividends on the shares of Series A Preferred Stock are cumulative and must
be paid in the event of liquidation and before any distribution to holders of
common stock. Cumulative dividends in arrears at June 30, 1997 totaled $81,000
(or $1.20 per share).
The Series A Preferred Stock has no liquidation preference, no conversion
rights and no registration rights.
SERIES B PREFERRED STOCK
The Company has issued a total of 86,041 shares of Series B Redeemable
Preferred Stock with a par value of $5.00 per share and a six percent per annum
dividend rate. Dividends shall be paid either in cash or common stock of the
Company. The Company has the right at any time after the date of original
issuance of the Series B Preferred Stock, but subject to the prior redemption of
all of the Series A Preferred Stock, to redeem the Series B Preferred Stock in
whole or in part at a price of $5.00 per share plus all accrued but unpaid
dividends. The Company is required, subject to the prior redemption of all of
the Series A Preferred Stock, to redeem this preferred stock in cash at par plus
all accrued but unpaid dividends from twenty percent of the amount by which the
Company's annual net income after taxes in any year exceeds $5,000,000.
F-18
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
9. COMMON AND PREFERRED STOCK: (CONTINUED)
Dividends on the shares of Series B Preferred Stock are cumulative and must
be paid in the event of liquidation and before any distribution to holders of
common stock. No dividends may be paid with respect to this stock until all
cumulative dividends in respect of Series A Preferred Stock have been paid.
Cumulative dividends in arrears at June 30, 1997 totaled $88,150 (or $1.02 per
share).
The Series B Preferred Stock has no liquidation preference, no conversion
rights and no registration rights.
Changes in the preferred stock accounts were as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B
----------------------- -----------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT TOTAL
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1992
Stock issued for cash, December 1992................. 48,000 $ 216,000 $ 216,000
Stock issued for cash, March 1993.................... 19,600 88,200 88,200
Accretion of preferred stock dividends............... 8,000 8,000
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1993......................... 67,600 312,200 312,200
----------- ---------- ----------- ---------- ----------
Stock issued for cash, February 1994................. 86,000 $ 430,000 430,000
Accretion of preferred stock dividends............... 18,250 10,750 29,000
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1994......................... 67,600 330,450 86,000 440,750 771,200
----------- ---------- ----------- ---------- ----------
Accretion of preferred stock dividends............... 18,250 25,800 44,050
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1995......................... 67,600 348,700 86,000 466,550 815,250
----------- ---------- ----------- ---------- ----------
Stock issued for cash, September 1995................ 41 205 205
Accretion of preferred stock dividends............... 18,250 25,800 44,050
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1996......................... 67,600 366,950 86,041 492,555 859,505
----------- ---------- ----------- ---------- ----------
Accretion of preferred stock dividends............... 18,250 25,800 44,050
----------- ---------- ----------- ---------- ----------
Balance at June 30, 1997......................... 67,600 385,200 86,041 518,355 903,555
----------- ---------- ----------- ---------- ----------
Accretion of preferred stock dividends (unaudited)... 4,562 6,450 11,012
----------- ---------- ----------- ---------- ----------
Balance at September 30, 1997 (unaudited)........ 67,600 $ 389,762 86,041 $ 524,805 $ 914,567
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ---------- ----------
</TABLE>
CO-INVESTMENT RIGHTS, ANTI-DILUTION RIGHTS AND RIGHT OF FIRST REFUSAL
In connection with the August 1993 offering of common stock and warrants to
Presencia ("the August 1993 Offering"), the Company granted co-investment rights
to Presencia with respect to certain offerings of securities by the Company
which are offered at a price equal to or greater than the per share purchase
price paid by Presencia in the August 1993 Offering. Such rights allow Presencia
to purchase, on terms at least as favorable as those on which the offered
securities are to be sold, a sufficient number of the offered securities to
allow Presencia to maintain its percentage ownership interest in the Company.
This co-investment right terminates upon an initial public offering of the
Company's securities.
F-19
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
9. COMMON AND PREFERRED STOCK: (CONTINUED)
Additionally, in connection with the August 1993 Offering, the Company
granted anti-dilution rights to Presencia with respect to any offering of common
stock issued at a price less than the per share purchase price paid by Presencia
in the August 1993 Offering. Such rights allow Presencia to receive a sufficient
number of shares of common stock to allow Presencia to maintain its percentage
ownership interest in the Company for no additional consideration. This
anti-dilution right terminates upon an initial public offering of the Company's
common stock. Pursuant to these anti-dilution rights and the Rights Offering in
May 1997, Presencia was entitled to be issued an additional 36,970 shares of
common stock for no additional consideration. These shares were issued to
Precensia in July 1997 and were accounted for as a cost of the Rights Offering.
In connection with the July 1994 offering of common stock and warrants to
Blockbuster Entertainment Corporation ("Blockbuster"), the Company granted
co-investment rights to Blockbuster with respect to certain offerings of
securities by the Company. Such rights allow Blockbuster to purchase, on terms
at least as favorable as those on which the offered securities are to be sold, a
sufficient number of the offered securities to allow Blockbuster to maintain its
percentage ownership interest in the Company. This co-investment right
terminates upon an initial public offering of the Company's securities.
Additionally, pursuant to the July 1994 offering of Common Stock and
warrants to Blockbuster, the Company granted Blockbuster the right to purchase
all, but not less than all, of certain securities offered to a third party or
parties for the purchase price at which the securities are offered to the third
party or parties. This right does not apply to certain offers of securities by
the Company, including offers which the Company makes for strategic business
purposes relating to the Company's business, technology or products. This right
of first refusal terminates upon an initial public offering of the Company's
securities.
10. WARRANTS AND OPTIONS:
WARRANTS
The Company had outstanding a total of 790,730 and 1,220,650 warrants to
purchase common stock at September 30, 1997, and June 30, 1997, respectively.
The exercise prices range from $1.13 to $20.00 per share and the expiration of
such warrants range from 1997 to 2002. The following is a description of warrant
activity to date:
In connection with the May 1991 issuance of common stock, the Company issued
warrants with a five year term to purchase 192,000 shares of common stock at an
exercise price of $6.25 per share. In May 1996, warrants for 170,000 shares of
common stock were exercised and the remainder expired.
In August 1991, warrants with a five year term to purchase 8,000 shares of
common stock at an exercise price of $2.50 per share were granted as
consideration for consulting services provided to the Company. These warrants
were exercised in August 1996.
In September 1991, warrants with a five year term to purchase 4,000 shares
of common at an exercise price of $2.50 per share were granted to an outside
director. These warrants vested ratably over the period September 1991 through
September 1993 and expire five years after the vesting date. These warrants were
exercised in September 1996.
In November 1991, warrants with a five year term to purchase 80,800 shares
of common stock at an exercise price of $2.50 per share were granted to an
employee of the Company. These warrants vested as
F-20
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
10. WARRANTS AND OPTIONS: (CONTINUED)
follows: (i) 20,000 in November 1991, (ii) 13,600 each in November 1992,
November 1993 and November 1994 and (iii) 20,000 in September 1993. Each series
of warrants expires five years after the applicable vesting date. In November
1996, 20,000 of these warrants expired.
In July 1992, warrants with a five year term to purchase 262,000 shares of
common stock at an exercise price of $2.50 per share were issued to two
employees of the Company. These warrants were exercised in July 1997 (see Note
9).
In July 1992, warrants with a five year term to purchase 32,000 shares of
common stock at an exercise price of $2.50 per share were issued to David
Sarnoff Research Center, Inc. The estimated fair value of the warrants of
$32,000 was recorded as research and development expense in fiscal year 1993.
These warrants expired in July 1997.
In July 1992, warrants with a five year term to purchase 20,000 shares of
common stock at an exercise price of $2.50 per share were issued to a financial
advisor in connection with the August 1992 and December 1992 equity offerings.
These warrants were exercised in July 1997.
In July 1992, warrants with a five year term to purchase 30,000 shares of
common stock at an exercise price of $1.13 per share were issued to a financial
advisor in connection with August and December 1992 equity offerings. In May
1997 and July 1997, respectively, warrants for 14,850 and 15,150 shares of
common stock were exercised.
In connection with the August 1992 issuance of common stock, the Company
issued warrants with a five year term to purchase 206,360 shares of common stock
at an exercise price of $1.13 per share. In August 1997, May 1997 and April
1996, respectively, warrants for 35,912, 83,080 and 938 shares of common stock
were exercised. The remaining warrants expired in August 1997.
In connection with the August 1993 issuance of common stock, the Company
issued warrants with a one year term to purchase 132,074 shares of common stock
at an exercise price of $12.12 per share. In January 1994, respectively,
warrants for 82,542 shares of common stock were exercised. The remaining
warrants expired in August 1994.
In connection with the February 1994 issuance of common stock and Series B
Preferred Stock, the Company issued warrants to purchase 172,000 shares of
common stock at an exercise price of $12.50 per share. In May 1995 and October
1995, warrants for 105,300 and 2,000 shares of common stock were exercised,
respectively. The remaining warrants for 64,700 shares of common stock have
expired.
In connection with the April 1994 issuance of common stock, the Company
issued warrants with a five year term to purchase 450,000 shares of common stock
at an exercise price of $12.50 per share.
F-21
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
10. WARRANTS AND OPTIONS: (CONTINUED)
In connection with the July 1994 issuance of common stock to Blockbuster,
the Company issued warrants with a five year term to purchase 70,000 shares of
common stock at an exercise price of $15.00 per share. Additionally, the Company
granted warrants to purchase 70,000 shares of common stock at an exercise price
of $20.00 per share. These warrants vest upon the future occurrence of any of
the following events: (i) Blockbuster provides consulting services to the
Company which materially enhances the Company's technology relating to real time
insertion; (ii) Blockbuster and the Company enter into a joint venture for the
purpose of exploiting the Company's system in the entertainment industry for
non-television applications; or (iii) the Miami Dolphins are the first National
Football League team to support the use of the Company's system in connection
with broadcast of its games. These warrants expire three years after the vesting
date.
In April 1995, warrants with a five year term to purchase 29,200 shares of
common stock at an exercise price of $13.75 per share were issued to a financial
advisor in connection with the February 1994 equity offering. Additionally,
warrants with a five year term to purchase 6,000 shares of common stock at an
exercise price of $16.50 per share were issued to the same financial advisor in
connection with the April 1994 equity offering. These warrants expire five years
after the closing date of the related offering.
In October 1995, in connection with the exercise of Presencia's
co-investment rights in common stock and Series B Preferred Stock, the Company
issued to Presencia warrants with a one year term to purchase 82 shares of
common stock at an exercise price of $12.50 per share. These warrants expired in
fiscal year 1996. Additionally, the Company issued to Presencia warrants with a
five year term to purchase 10,932 shares of common stock at an exercise price of
$12.50 per share. These warrants expire in April 1999.
In February 1996, warrants with a five year term to purchase 28,226 shares
of common stock at an exercise price of $19.25 per share were issued to
consultants with respect to the February 1996 equity offering.
In March 1996, warrants with a five year term to purchase 24,000 shares of
common stock at an exercise price of $15.00 were issued to Presencia as
consideration for costs incurred by Presencia relating to the License Agreement
between the Company and Presencia. The estimated fair value of the warrants of
$120,000 was recorded as general and administrative expenses in fiscal year
1996.
During 1997 and 1996, respectively, the Company issued warrants with a five
year term to purchase 4,206 and 15,794 shares of common stock at an exercise
price of $15.00 as consideration for consulting services provided to the
Company. The estimated fair value of the warrants of $18,927 and $71,075 was
recorded as general and administrative expense in fiscal year 1997 and 1996,
respectively.
In September 1997, warrants with a five year term to purchase 1,572 shares
of common stock at an exercise price of $15.00 per share were issued in
settlement of an obligation of $7,074 accrued at June 30, 1997 relating to
consulting services provided to the Company.
In September 1997, warrants with a three year term to purchase 20,000 shares
of common stock at an exercise price of $4.50 per share were issued in
settlement of an obligation of $90,000 accrued during 1996, when the consulting
services were provided to the Company.
F-22
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
10. WARRANTS AND OPTIONS: (CONTINUED)
STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") in July 1993 for
employees, officers, directors, consultants and independent contractors of the
Company. The Plan initially reserved 360,000 shares of common stock for issuance
upon the exercise of stock options. The Plan was amended in 1995, 1996 and 1997
to reserve additional shares. As of June 30, 1997, 1,560,000 shares were
reserved for the Plan.
The Plan is administered by the Board of Directors, which determines the
distribution of all options. The Plan provides for the granting of options
intended to qualify as "incentive stock options" ("ISOs") as defined in Section
422A of the Internal Revenue Code of 1986, as amended, and non-qualified stock
options ("NQSOs") to key employees of the Company as well as NQSOs to
non-employee directors, independent contractors and consultants who perform
services for the Company. The exercise price of all ISOs granted under the Plan
may not be less than the fair market value of the shares at the time the option
is granted. Options may be for a period of not more than ten years from the date
of grant and generally vest ratably over a three year period. Options are not
assignable or otherwise transferable except by will or the laws of descent and
distribution.
Information with respect to options under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR VALUE
AVAILABLE OPTIONS OPTION PRICE PRICE PER PER OPTION
FOR GRANT OUTSTANDING RANGE SHARE GRANTED
---------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995....................... -- 388,850 $ 10.00-$15.00 $ 11.96
---------- -----------
Authorized..................................... 271,150
Granted........................................ (258,784) 258,784 $ 16.59 $ 9.84
Exercised...................................... -- -- --
Forfeitures.................................... 23,000 (23,000) $ 15.00
---------- -----------
Balance at June 30, 1996....................... 35,366 624,634 $ 10.00-$17.50 $ 13.77
---------- -----------
Authorized..................................... 900,000
Granted........................................ (638,040) 638,040 $ 18.85 $ 16.57
Exercised...................................... -- -- --
Forfeitures.................................... 161,750 (161,750) $ 15.90
---------- -----------
Balance at June 30, 1997....................... 459,076 1,100,924 $ 10.00-$20.00 $ 16.38
---------- -----------
Authorized (unaudited)......................... -- --
Granted (unaudited)............................ (109,800) (109,800) $ 8.29
Exercised (unaudited).......................... -- --
Forfeitures (unaudited)........................ -- --
---------- -----------
Balance at September 30, 1997 (unaudited)...... 349,276 1,210,724 $ 2.50-$20.00 $ 15.65
---------- -----------
---------- -----------
Exercisable at September 30, 1997
(unaudited).................................. 630,008
Exercisable at June 30, 1997................... 559,788 $ 13.93
Exercisable at June 30, 1996................... 337,510 $ 12.19
</TABLE>
F-23
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
10. WARRANTS AND OPTIONS: (CONTINUED)
The weighted average remaining contractual lives of outstanding options at
June 30, 1997 was 7.3 years.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
has been recognized in the financial statements with respect to options and
warrants issued with an exercise price at or above the fair market value of the
stock on the grant date. Had compensation costs for such options and warrants
been determined based on the fair value approach promulgated by Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation", the Company's net loss applicable to Common Stock would have been
increased as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Pro forma net loss applicable to common stock....................................... $ (6,739,553) $ (4,123,850)
Pro forma net loss per share applicable to common shares............................ $ (2.84) $ (2.13)
</TABLE>
The pro forma compensation expense of $964,842 and $169,276 for the years
ended June 30, 1997 and 1996, respectively, was calculated on the fair value of
each option using the minimum value method, with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Risk free interest rate............................................... 6.5% 6.2%
Expected option lives................................................. 9.5 years 6.7 years
</TABLE>
In connection with certain options granted in February 1994 relating to a
consulting services agreement with a member of the Company's current Board of
Directors, the Company recorded unearned compensation expense in the amount of
$360,000. This unearned compensation was amortized over the 24 month vesting
period. In connection with certain options granted in June 1995 relating to a
consulting services agreement, the Company recorded unearned compensation in the
amount of $120,000, which was expensed when the service was provided in 1996.
During 1997, the Company extended the terms of certain options issued to
employees. As a result, the Company recorded a charge of $208,335, which
represents the fair value of the Company's common stock at the new measurement
date in excess of the exercise price of the underlying option. In September
1997, the Company granted 20,000 fully vested options with an exercise price of
$2.50 per share to an employee to replace certain warrants which had expired in
1996. As a result, the Company recorded a change of $80,000 in September 1997
which represents the fair value of the stock in excess of the exercise price of
the options.
F-24
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES:
GE AGREEMENT
In July 1991, the Company entered into a license agreement with General
Electric Company ("GE") granting to the Company a non-exclusive license for use
of certain of GE's intellectual property. This agreement expired in July 1996
and management is presently attempting to renegotiate this agreement. In the
event that the Company is not able to negotiate such an extension, and is still
using such technology, the Company might be forced to modify its products to
exclude use of such technology, which may cause the Company to incur additional
costs or experience delays in the further manufacturing and marketing of its
products. Even in the event that the Company is not able to negotiate such an
extension, the license will not terminate with respect to any of the Company's
products that had been manufactured prior to the expiration of the license.
Under the terms of the license, the Company would pay royalties to GE based
upon the Company's gross revenues. All royalties accrue as earned, but no
payments are required to be made until the earlier of the date on which
cumulative gross revenues reach twenty million dollars or the termination of the
agreement. As of June 30, 1997, the amount accrued under this agreement was not
material.
In November 1997, the company negotiated a new agreement with GE which
provides that the Company will pay GE a royalty based on the gross revenues
earned. This agreement which is retroactive to July 1996, has a five-year term.
The amounts owed to GE under this agreement are not material for the year ended
June 30, 1997 or the quarter ended September 30, 1997.
SARNOFF AGREEMENT
The Company entered into an agreement with David Sarnoff Research Center,
Inc. ("Sarnoff") in November 1990, which was amended in August 1991 and June
1995, granting the Company an exclusive, worldwide license for use of the
proprietary Pyramid Image Processing technology developed by Sarnoff in the
fields of television advertising and for any purpose for television programming
involving sports. The Company may terminate this agreement at any time after the
earlier of the date on which the Company's cumulative gross revenues reach
$20,000,000 or January 1, 1999.
Under terms of this agreement, the Company will pay royalties to Sarnoff
based upon the Company's gross revenues. All royalties shall accrue as earned,
but no payments are required to be made until the earlier of the date on which
cumulative gross revenues reach twenty million dollars or January 1, 1999.
Commencing on January 1, 1999, minimum quarterly royalties of $100,000 shall be
paid by the Company to Sarnoff. As of June 30, 1997, the amount accrued under
this agreement was not material.
THESEUS AGREEMENT
In December 1995, the Company entered into a license agreement with Theseus
Research, Inc. ("Theseus") whereby the Company was granted a non-exclusive
worldwide license, without the right of sublicense, to use Theseus technology in
its system. During the term of the license, the Company will pay royalties based
upon a percentage of net sales on a quarterly basis. The agreement terminates
with the expiration of the last of the patents included in the licensed
technology. As of June 30, 1997, the amount accrued under this agreement was not
material.
F-25
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
GDM AGREEMENT
In December 1995, the Company entered into a license and association
agreement with Gerencia de Medios, S.A., ("GDM"), a subsidiary of Prisa, a
Spanish media company. The purpose of this association was to allow GDM to
market and use the Company's system in sports broadcasts in Spain and Portugal
throughout a trial period, which expired in December 1996.
Under the terms of the association, GDM paid the Company $500,000 in license
and royalty fees, $200,000 of which was refundable if GDM was unable to use the
Company's system during the trial period because of patent infringement on third
parties. The remaining $300,000 was a deposit paid by GDM for use of the
Company's system which must be refunded to GDM. GDM is seeking a refund of the
license and royalty fee it previously paid to the Company asserting, as one
reason, its receipt of a letter from an affiliate of Symah Vision-SA ("Symah"),
a competitor of the Company, asserting that use of the L-VIS System in Spain
would infringe one of Symah's patents. Although the Company and GDM have been
advised by European patent counsel that use of the L-VIS System would not
infringe Symah's patent, there can be no assurance that the Company will be able
to resolve the issue with GDM satisfactorily or that Symah will not assert
infringement claims against the Company or its European licensees in the future.
Therefore, because of the uncertainties regarding the ultimate amount to be
refunded, the Company has not recognized any portion of the $500,000 fee as
revenue. Accordingly, these amounts are reflected in unearned revenue and
customer deposits at June 30, 1997.
In November 1997 the Company settled its dispute with GDM concerning amounts
owed by the Company to GDM under the terms of their association agreement. GDM
will return the L-VIS system equipment to the Company in exchange for a $365,000
payment to GDM from the Company. The remaining $135,000 will be recorded as
income by the Company in the second quarter 1998.
D&D ENTERTAINMENT LETTER OF INTENT
In May 1997, the Company signed a non-binding letter of intent with D&D
Entertainment for purposes of marketing the Company's technology in the Benelux
region of Europe. Under the terms of this letter of intent, the Company received
$125,000 of advanced licensing fees. Because no legally binding agreement has
been executed, these proceeds are reflected in customer deposits at June 30,
1997.
LEASES
The Company leases its primary office space under operating leases. The
leases on the Company's headquarters expire on October 20, 1997. The Company has
executed a new lease agreement for its headquarters commencing October 1, 1997.
Rent and equipment lease expense for the years ended June 30, 1997 and 1996 was
$141,415 and $155,352, respectively.
F-26
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum rent and lease payments are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 347,961
1999............................................................ 342,632
2000............................................................ 331,322
2001............................................................ 205,032
2002............................................................ 205,032
Thereafter...................................................... 34,827
---------
Total minimum lease payments.................................... $1,466,806
---------
---------
</TABLE>
Under the terms of a three year lease signed in 1997 for an administrative
facility, the Company is required to maintain an irrevocable, unconditional
$70,000 letter of credit throughout the term of the lease. Under the terms of
another lease, the Company is required to maintain an irrevocable, unconditional
$52,000 letter of credit throughout the lease.
12. RELATED PARTY TRANSACTIONS:
A member of the Board of Directors of the Company is also the President of
J.J. Pomerance & Co., Inc., a corporation that has furnished consulting services
to the Company from time to time.
A member of the Board of Directors of the Company is also a principal
shareholder and the President of the Board of Directors of Presencia, which has
made several equity investments in the Company and is the Company's joint
venture partner in Publicidad.
A member of the Board of Directors of the Company is also the sole
shareholder and President of Princeton Venture Research, Inc. ("PVR"), a
shareholder of the Company. PVR entered into an arrangement with the Company
regarding the services of a consultant that PVR provided to the Company for
several months in 1995. In connection with such arrangement, in September 1997,
the Company granted PVR a warrant to purchase 20,000 shares of common stock at
an exercise price of $4.50 per share. Additionally, of the $124,000 of Notes
received in consideration for amounts owed under a stock subscription agreement
(see Note 9), $80,000 relates to the member of the Board of Directors, $20,000
relates to the wife of the member of the Board of Directors and $24,000 relates
to PVR. Commencing in July 1997, PVR furnished the Company with extensive
consulting services in connection with financial structuring, negotiations with
various major shareholders and preparation of the Bridge Financing. In
connection with such services, the Company has paid PVR a fee of $100,000. In
consideration for financial advisory services rendered to the Company in
connection with the Bridge Financing, the Company paid PVR Securities, Inc., an
affiliate of PVR, a fee of $70,000, or five percent of the gross proceeds of the
Bridge Financing obtained from investors introduced to the Company by PVR
Securities, Inc. In connection with the purchase of Common Stock under the
Company's 1997 rights offering, the wife of the member of the Board of Directors
and PVR executed promissory notes in favor of the Company in the amounts of
$9,720 and $50,543, respectively. Such notes will become due on July 15, 1998,
and bear interest at a rate of nine percent per annum. The member of the Board
of Directors of the Company is also the Manager and a member of Acorn Technology
Partners, L.L.C., the general partner of Acorn Technology Fund, L.P., which
purchased 1.5 units in the Bridge Financing in October 1997. Each unit consists
of one Bridge Note in the principal amount of $100,000 and Bridge Warrants to
purchase 10,000
F-27
<PAGE>
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS
UNAUDITED)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
shares of Common Stock at an exercise price of $0.01 per share. The purchase
price of each unit was $100,000.
A member of the Board of Directors of the Company is also a Managing
Director and Executive Vice President of Allen & Company Incorporated ("Allen &
Co."), which is a principal shareholder of the Company and furnishes financial
advisory services to the Company from time to time. In connection with the
February 1996 Offering, Allen & Co. received a financial advisory fee of
$247,000, plus expenses, as well as a five-year warrants to purchase 28,226
shares of common stock at an exercise price of $19.25 per share. Allen, as a
Representative, will receive underwriting discounts and commissions, as well as
Representatives' Warrants initially exercisable for 380,000 shares of Common
Stock, with respect to services rendered on behalf of the Company with respect
to its planned initial public offering.
A member of the Board of Directors of the Company has been retained as a
consultant to the Company.
The Chief Executive Officer and President of the Company purchased one unit
in the Bridge Financing that closed in October 1997.
13. CONCENTRATION OF CREDIT RISK:
The Company maintains its cash and cash equivalents with major financial
institutions. Held to maturity securities consist of U.S. government Treasury
securities.
14. SUBSEQUENT EVENTS:
In connection with the planned initial public offering of common stock, the
Board of Directors of the Company approved a $3,000,000 Bridge Financing. Under
the terms of the Bridge Financing, which closed in October 1997 the Company
issued 30 units, each unit consisting of i) one promissory note payable with a
principal amount of $100,000 and bearing interest at 10% and ii) warrants with a
five year term to purchase 10,000 shares of common stock at an exercise price of
$.01 per share. The promissory notes mature upon the earlier of i) the
commencement of the planned initial public offering, ii) the first anniversary
of their issuance, subject to a six month extension at the Company's discretion
or iii) the closing of an offering of securities of the Company with aggregate
net proceeds equal to or in excess of the principal amount of the promissory
notes issued. The promissory notes are senior to all other indebtedness of the
Company and are secured by a first lien on the Company's fixed assets. The
warrants will vest upon the earlier of the commencement of the planned initial
offering or the first anniversary of their issuance. In the event the maturity
of the promissory notes is extended, the warrants will become exercisable for an
additional 1/10 share of common stock of the first day of the extension period
and on every thirtieth day thereafter. The fair value of the warrants, which
approximated $1,650,000 at the closing date, will be recorded as an increase to
additional paid-in capital in October 1997. Upon maturity of the promissory
notes, the Company will remit the $3,000,000 principal balance and all accrued
interest on the promissory notes. The difference between the $3,000,000 of
proceeds received from the Bridge Financing and the $1,350,000 of the proceeds
allocated to the promissory notes will be amortized to interest expense over the
estimated three month term of the promissory notes. Additionally, the Company
expects to incur $227,500 of commissions and fees in connection with the Bridge
Financing. These fees will be deferred and amortized over the expected three
month term of the promissory notes.
On October 1, 1997, the Board of Directors of the Company approved a
modification of the terms of all stock options held by individuals who, as of
that date, are currently employees of the Company. The modification, which
affected approximately 320,380 options, reduced the exercise price of such
options to $8.00 per share.
F-28
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH
INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 20
Dividend Policy................................ 22
Dilution....................................... 23
Capitalization................................. 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 26
Business....................................... 31
Management..................................... 43
Certain Transactions........................... 49
Principal Shareholders......................... 51
Description of Securities...................... 54
Shares Eligible for Future Sale................ 59
Underwriting................................... 61
Legal Matters.................................. 63
Experts........................................ 63
Available Information.......................... 63
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL JANUARY 10, 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,000,000 SHARES
PRINCETON
VIDEO IMAGE, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ALLEN & COMPANY
INCORPORATED
BARINGTON CAPITAL
GROUP
DECEMBER 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
2,700,000 SHARES
PRINCETON VIDEO IMAGE, INC.
COMMON STOCK
----------------
This Prospectus relates to the Offering (the "Offering") by certain selling
shareholders (the "Selling Shareholders") of 700,000 shares (the "Selling
Shareholders Shares") of Common Stock, no par value (the "Common Stock"), of
Princeton Video Image, Inc. (the "Company") which may be sold from time to time
by the Selling Shareholders, or by transferees, on or after the date of this
Prospectus, subject to certain lock-up arrangements which provide that the
Shares may not be sold for a period of 12 months from the date of closing of the
Company Offering (defined below). In addition, this Prospectus relates to
2,000,000 shares of Common Stock and such indeterminate number of additional
shares of Common Stock (collectively, the "Market Maker Shares" and, together
with the Selling Shareholder Shares, the "Shares") as may be sold solely in
connection with the market mating activities of Allen & Company Incorporated
("Allen"), as a registered securities broker-dealer. See "Risk Factors--Shares
Eligible for Future Sale," "Certain Transactions," "Description of Securities,"
"Shares Eligible For Future Sale," "Selling Shareholders" and "Concurrent Sales
By Selling Shareholders."
No underwriting arrangements have been entered into by the Selling
Shareholders. The distribution of the Selling Shareholders Shares by the Selling
Shareholders may be effected from time to time in transactions on the Nasdaq
National Market, in negotiated transactions, through the writing of options on
the Selling Shareholders Shares, or a combination of such methods of sale, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. The Selling Shareholders may effect such transactions by the sale of the
Selling Shareholders Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Selling
Shareholders Shares for whom such broker-dealers may act as agent or to whom
they may sell as principal, or both. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Shareholders
in connection with sales of the Selling Shareholders Shares.
The Selling Shareholders and intermediaries through whom the Selling
Shareholders Shares are sold may be deemed "underwriters" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities offered and any profits realized or commissions received may be
deemed underwriting compensation.
The Company will not receive any proceeds from sales of the Shares. See
"Selling Shareholders" and "Plan of Distribution."
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission with respect to an underwritten public
offering (the "Company Offering") on behalf of the Company of 4,000,000 shares
of Common Stock, plus up to 600,000 shares which may be offered pursuant to the
exercise of an over-allotment option (the "Over-Allotment Option") held by the
underwriters of the Company Offering (the "Underwriters"). The Shares offered
hereunder include shares of common stock underlying warrants entitling the
representatives of the Underwriters to purchase from the Company, for a period
of five years from the date of this Prospectus, up to 400,000 shares of Common
Stock at an exercise price equal to 120% of the initial public offering price
(the "Representatives' Warrants"). See "Concurrent Sales By Company."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 16, 1997.
Alt-1
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the name of each person who is a Selling
Shareholder, the number of Shares owned by each Selling Shareholder's account,
the percentage of outstanding shares of Common Stock of the Company owned by
such person prior to this Offering, the number of shares being sold by such
person, the number of shares of Common Stock such person will own after the
completion of this Offering, and the percentage of outstanding shares of Common
Stock of the Company owned by such person after the completion of this Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF NUMBER OF OUTSTANDING
SHARES MAXIMUM SHARES COMMON STOCK
BENEFICIALLY NUMBER OF BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES BEING OWNED AFTER OWNED AFTER
NAME OF SELLING SHAREHOLDER TO OFFERING OFFERED OFFERING OFFERING
- -------------------------------------------------------- ----------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Acorn Technology Fund, L.P.............................. 15,000 15,000 0 *
Bader M. Al-Humaidhi.................................... 8,540 5,000 3,540 *
Allen & Company Incorporated............................ 1,092,430 380,000 772,430 8.0%
Al-Mal Kuwaiti Company.................................. 7,500 7,500 0 *
Fahad Al-Rajaan......................................... 8,540 5,000 3,540 *
Taleb A. Ali............................................ 10,000 10,000 0 *
Peder A. Arneson........................................ 2,500 2,500 0 *
Aus. Per. No. 1, Inc.................................... 32,250 7,500 24,750 *
Stephen D. Baksa........................................ 7,000 1,250 8,250 *
Barington Capital Group, L.P............................ 20,000 20,000 0 *
Leonard Barrack......................................... 21,500 21,500 0 *
C.A.L.M. Venture Partners, L.P.......................... 6,296 2,500 3,796 *
Nicholas E. Chimicles................................... 2,500 2,500 0 *
Patrick Coughlin........................................ 8,500 2,500 6,000 *
Jonathan W. Cuneo....................................... 1,000 1,000 0 *
Falah Partners.......................................... 4,586 2,500 2,086 *
Matthew A. Gohd......................................... 3,750 3,750 0 *
Matthew A. Gohd, as Trustee for Toricelli Trust......... 3,750 3,750 0 *
Gary J. and Miriam I. Greenberg......................... 5,500 2,500 3,000 *
Douglas J. Greenlaw..................................... 58,125 10,000 48,125 *
Industrial Investments Company.......................... 30,000 30,000 0 *
William S. Lerach....................................... 25,000 10,000 15,000 *
Dennis Mensch........................................... 10,092 2,500 7,592 *
Presencia en Medios, S.A. de C.V........................ 614,308 130,000 484,308 5.9%
Richard Y. Roberts...................................... 5,000 5,000 0 *
Gerald J. Rodos......................................... 14,500 2,500 12,000 *
Paula P. Runnells....................................... 7,250 1,250 6,000 *
John T. Shea............................................ 5,582 2,500 3,082 *
The M and B Weiss Family Limited Partnership of 1996.... 25,000 10,000 15,000 *
</TABLE>
Mr. Douglas J. Greenlaw is the President and Chief Executive Office of the
Company. Mr. John B. Torkelsen, a director of the Company, is the Manager and a
member of Acorn Technology Partners, L.L.C., the general partner of Acorn
Technology Fund., L.P. Mr. Eduardo Sitt, a director of the Company, is the
President of Presencia en Medios, S.A. de C.V., a principal shareholder of the
Company. Mr. Enrique F. Senior, a director of the Company, is an Executive Vice
President and Managing Director of Allen, a
Alt-2
<PAGE>
principal shareholder of the Company. See "Management--Executive Officers and
Directors," "Certain Transactions," "Principal Shareholders" and "Plan of
Distribution."
LOCK-UP ARRANGEMENTS
The Selling Shareholders Shares consist of 400,000 shares of Common Stock
underlying the Representatives' Warrants and 300,000 shares of Common Stock
issuable upon exercise of the Bridge Warrants.
Pursuant to the Underwriting Agreement, each of the holders of Bridge
Warrants as of the effective date of the Registration Statement, has agreed not
to offer, issue, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any securities of the Company for a period of 12 months
from the date of closing of the Offering, without the prior written consent of
Allen. At the request of The Nasdaq National Market, Inc., Allen has agreed not
to consent to the transfer of shares of Common Stock issuable upon exercise of
the Bridge Warrants for such one-year period.
Pursuant to the terms of such Underwriting Agreement, neither the
Representatives' Warrants nor the underlying shares of Common Stock may be
transferred, assigned or hypothecated for a period of one year, except that they
may be assigned in whole or in part, to any successor, officer or partner of
Allen or Barington Capital Group, L.P., as the case may be, or to officers or
partners of any such successor or partner. See "Risk Factors--Shares Eligible
for Future Sale," "Certain Transactions," and "Description of Securities."
PLAN OF DISTRIBUTION
The distribution of the Selling Shareholders Shares by the Selling
Shareholders may be effected from time to time in transactions on the Nasdaq
National Market, in negotiated transactions, through the writing of options on
the Selling Shareholders Shares, or a combination of such methods of sale, at
fixed prices that may be changed, at market prices prevailing at the time of the
sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Shareholders may effect such transactions by the sale of the
Selling Shareholders Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Selling
Shareholders Shares for whom such broker-dealers may act as agent or to whom
they may sell as principal, or both. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Shareholders
in connection with sales of the Selling Shareholders Shares. No underwriting
arrangements have been entered into by the Selling Shareholders.
The Market Maker Shares are shares of Common Stock that Allen (which may be
deemed to be an affiliate of the Company) may sell from time to time solely as a
market maker. Allen and certain of its affiliates beneficially own an aggregate
of 712,430 shares of Common Stock of the Company. Enrique F. Senior, an
Executive Vice President and Managing Director of Allen, is an optionholder of
the Company and serves as a Director of the Company. See "Principal
Shareholders" and "Certain Transactions." For these reasons, Allen may be deemed
to have an ability to influence the policies of the Company and thus may be
deemed to be an "affiliate" of the Company under prevailing interpretations of
what constitutes an affiliate relationship. Any sales of the Selling Shareholder
Shares or the Market Maker Shares pursuant to this Registration Statement will
be made in conformity with the applicable provisions of the rules of the
National Association of Securities Dealers, Inc. ("NASD"), including rule 2720
of the NASD Conduct Rules. The Company will not receive any proceeds from sales
of the Market Maker Shares.
The Selling Shareholders and intermediaries through whom the Selling
Shareholders Shares are sold may be deemed "underwriters" within the meaning of
the Act with respect to the securities offered and any profits realized or
commissions received may be deemed underwriting compensation. The Company has
agreed to indemnify the Selling Shareholders against certain liabilities,
including liabilities under the Securities Act.
Alt-3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling
Shareholders............................... 2,700,000 shares of Common Stock
Common Stock Outstanding Immediately Prior to
the Offering (1)........................... 7,308,472 shares of Common Stock
Common Stock to be Outstanding Following the
Offering (1)(2)............................ 8,008,472 shares of Common Stock
Risk Factors................................. The shares of Common Stock offered hereby
involve a high degree of risk and should be
purchased only by persons who can afford to
sustain a total loss of their investment. See
"Risk Factors" and "Dilution."
Use of Proceeds.............................. The Company will not receive any proceeds
from the sale of the Shares
Nasdaq National Market Trading Symbol (3).... PVII
</TABLE>
- ------------------------
(1) Does not include (i) 777,130 shares issuable upon exercise of other
outstanding warrants to purchase shares of Common Stock; and (ii) 1,560,000
shares of Common Stock reserved for issuance upon exercise of options
granted to executive officers, employees and consultants under the Company's
Amended 1993 Stock Option Plan (the "Stock Option Plan"), including
1,210,724 shares exercisable pursuant to outstanding options. See
"Management--Stock Option Plan," "Certain Transactions" and "Description of
Securities."
(2) Does not include up to 600,000 shares of Common Stock issuable upon exercise
of the Over-Allotment Option in the Company Offering.
(3) There is currently no market for the Common Stock and there can be no
assurance that a market for the Common Stock will develop after the
Offering. The Common Stock has been approved for quotation on the Nasdaq
National Market, subject to notice of issuance. There can be no assurance,
however, that the Company will be able to maintain listing of the Common
Stock on such market. See "Risk Factors--Absence of Public Market;
Negotiated Offering Price."
Alt-4
<PAGE>
CONCURRENT SALES BY COMPANY
A registration statement under the Securities Act has been filed by the
Company with the Securities and Exchange Commission with respect to an
underwritten public offering by the Company of 4,000,000 shares of Common Stock,
plus 600,000 shares which may be offered pursuant to exercise of the Over-
Allotment Option.
Concurrent sales of securities by both the Company and by the Selling
Shareholders would likely have an adverse effect on the market price of the
Common Stock. The Selling Shareholders Shares are subject to contractual
restrictions upon resale with Barington. See "Selling Shareholders--Lock-up
Arrangements," "Risk Factors--Shares Eligible for Future Sale" and "Description
of Securities."
Alt-5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS LAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS
FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................
Risk Factors...................................
Dividend Policy................................
Dilution.......................................
Capitalization.................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................
Business.......................................
Management.....................................
Certain Transactions...........................
Concurrent Sales by Company....................
Selling Shareholders...........................
Principal Shareholders.........................
Description of Securities......................
Shares Eligible for Future Sale................
Legal Matters..................................
Experts........................................
Available Information..........................
Index to Financial Statements..................
</TABLE>
------------------------
UNTIL JANUARY 10, 1998 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,700,000 SHARES
PRINCETON
VIDEO IMAGE, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DECEMBER 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Alt-6
