<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER 000-23415
PRINCETON VIDEO IMAGE, INC.
(Exact name of small business issuer as specified in its charter)
New Jersey 22-3062052
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
15 Princess Road, Lawrenceville, New Jersey, 08648
(Address of Principal Executive Offices)
609-912-9400
(Issuer's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
The aggregate number of shares of the Issuer's common stock outstanding on April
30, 1999 was 8,197,838.
Transitional Small Business Disclosure Format:
Yes _____ No X
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
1999
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,456,318
Restricted marketable securities held to maturity 138,000
Trade accounts receivable 171,651
License Rights 1,666,667
Other current assets 163,673
------------
Total current assets 17,596,309
Property and equipment, net 2,404,430
Intangible assets, net 477,450
Other assets 204,585
------------
Total assets $ 20,682,774
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,236,043
Unearned revenue 338,713
------------
Total current liabilities 3,574,756
Unearned revenue 860,596
------------
Total liabilities 4,435,352
------------
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 March 31, 1999,
redemption value equal to carrying value
(par plus all accrued but unpaid dividends) 417,137
Cumulative, Series B, conditionally redeemable, $5.00 par value,
authorized 93,300 shares; issued and outstanding 86,041 shares at March 31,
1999, redemption value equal to carrying value
(par plus all accrued but unpaid dividends) 563,505
------------
Total redeemable preferred stock 980,642
Shareholders' Equity:
Common stock, no par value; $.005 stated value; authorized 40,000,000
shares; 8,183,552 shares issued and outstanding at March 31, 1999 40,917
Additional paid-in capital 51,432,493
Less: Related party note receivable (824,498)
Deficit accumulated during the development stage (35,382,132)
------------
Total shareholders' equity 15,266,780
------------
Total liabilities, redeemable preferred stock and
shareholders' equity $ 20,682,774
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended Cumulative from
March 31, March 31, inception to
------------------------------ ------------------------------ March 31,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
License fees $ 172,975 $ 57,625 $ 318,242 $ 310,376 $ 1,819,991
Advertising and production revenue 181,165 100,000 478,136 182,027 893,633
------------------------------ ------------------------------ ------------
Total revenue 354,140 157,625 796,378 492,403 2,713,624
Costs and expenses:
Selling, general and administrative 1,742,068 1,391,984 4,083,824 3,621,047 18,020,912
Research and development 374,290 392,074 1,201,044 1,268,856 12,484,688
L-VIS System costs 1,235,448 687,349 3,081,798 1,499,764 7,991,130
------------------------------ ------------------------------ ------------
Total costs and expenses 3,351,806 2,471,407 8,366,666 6,389,667 38,496,730
Operating loss (2,997,666) (2,313,782) (7,570,288) (5,897,264) (35,783,106)
Interest and other financial (expense) -- -- -- (1,814,178) (1,814,178)
Interest and other income 293,176 380,679 814,034 477,749 2,215,152
------------------------------ ------------------------------ ------------
Net loss (2,704,490) (1,933,103) (6,756,254) (7,233,693) (35,382,132)
Accretion of preferred stock
dividends (11,013) (11,013) (33,038) (33,037) (246,238)
============================== ============================== ============
Net loss applicable to common stock $ (2,715,503) $ (1,944,116) $ (6,789,292) $ (7,266,730) $(35,628,370)
============================== ============================== ============
Basic and diluted net loss per share
applicable to common stock $ (0.33) $ (0.24) $ (0.83) $ (1.42)
============================== ==============================
Weighted average number of
shares of common stock
outstanding 8,183,552 8,122,472 8,182,996 5,128,972
============================== ==============================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended Cumulative from
March 31, inception to
------------------------------ March 31,
1999 1998 1999
------------------------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,756,254) $ (7,233,693) $(35,382,132)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of unearned income (230,742) (310,376) (732,491)
Depreciation expense 901,248 489,207 2,693,891
Amortization of intangibles 385,710 54,886 574,200
Charges associated with option and warrant
grants and related party note receivable 21,625 473,562 1,553,324
Equity in net loss of affiliate -- -- 9,048
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable 21,611 31,453 (171,651)
Other current assets 66,574 (286,811) (163,673)
Other assets 66,606 (14,227) (204,586)
Accounts payable and accrued expenses 343,692 (7,355) 1,738,678
Unearned revenue 278,200 -- 1,923,192
Customer deposits -- (237,500)
Miscellaneous other (684) 2,575 141,909
------------------------------------------------
Net cash used in operating activities (4,902,414) (7,038,279) (28,020,291)
------------------------------------------------
Cash flows from investing activities:
Purchase of held-to-maturity investments -- (52,000) (5,351,555)
Proceeds from held-to-maturity investments -- -- 5,200,000
Purchases of property and equipment (757,404) (1,427,881) (5,129,520)
Purchases of license rights (400,000) -- (400,000)
Increase in intangible assets (36,591) (132,782) (812,425)
Investments in joint venture -- -- (9,048)
------------------------------------------------
Net cash provided by (used in)
investing activities (1,193,995) (1,612,663) (6,502,548)
------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
PRINCETON VIDEO IMAGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended Cumulative from
March 31, inception to
------------------------------ March 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Case flows from financing activities:
Proceeds from Bridge Financing promissory notes -- 1,353,000 1,353,000
Repayments of Bridge Financing promissory notes -- (1,353,000) (1,353,000)
Proceeds from sale of Bridge Financing warrants, net -- 1,479,822 1,479,822
Proceeds from sales of preferred stock -- -- 734,405
Proceeds from sales of common stock, net 100 29,022,227 46,669,943
Cash advanced for related party notes receivable -- (169,498) (169,498)
Collections of stock subscriptions receivable -- 1,264,485 1,264,485
------------------------------------------------
Net cash provided by
financing activities 100 31,597,036 49,979,157
------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (6,096,309) 22,946,094 15,456,318
Cash and cash equivalents at beginning of
period 21,552,627 775,693 --
------------------------------------------------
Cash and cash equivalents at end of period $ 15,456,318 $ 23,721,787 $ 15,456,318
================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
Princeton Video Image, Inc.
(A Development Stage Company)
Notes to Financial Statements
(Unaudited)
1. Nature of Business and Basis of Presentation
Princeton Video Image, Inc., (the "Company"), was incorporated on July 23,
1990 in the State of New Jersey. The Company has developed and is
marketing a real-time video insertion system (the "L-VIS(TM) System") that
through patented pattern recognition technology places computer-generated
electronic 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. The L-VIS System has
been used to insert images, including advertising images and visual aids,
into live and pre-recorded television broadcasts. The Company is also
marketing its systems on a worldwide basis through licensing agreements or
the formation of joint ventures.
The condensed financial statements presented herein have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article
10 of Regulation S-X and are unaudited. Reference should be made to the
Company's audited financial statements for the fiscal year ended June 30,
1998 including the footnotes thereto, included in the Company's Annual
Report on Form 10-KSB for the same fiscal year end. In the opinion of
management, the financial statements reflect all adjustments (which
consist of normal recurring accruals) necessary for a fair statement of
the results of the interim periods presented.
2. Per Share Data
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS 128") requires the calculation of net loss per share applicable to
common stock and the presentation of both basic and diluted per share
amounts. Basic per share amounts are computed by dividing net loss
applicable to common stock by the weighted average number of common shares
outstanding during the period. Diluted per share amounts are computed by
dividing net loss applicable to common stock by the weighted average
number of common shares outstanding plus the dilutive effect of common
share equivalents.
Since the Company incurred net losses for all periods presented, both
basic and diluted per share calculations are the same. Accordingly,
options and warrants to purchase 2,732,608 and 2,587,104 shares of common
stock that were outstanding at March 31, 1999 and 1998, respectively, were
not included in diluted per share calculations, as their effect would be
antidilutive.
3. New Agreements
In January 1999, the Company signed a binding letter of intent with NFL
International whereby the Company was named the exclusive provider of
electronic imaging services for worldwide, non-U.S. telecasts of Super
Bowl XXXIII and XXXIV, as well
<PAGE> 7
as international telecasts of 1999 NFL regular season and playoff games
and the 1999 NFL Europe League season. The Company is obligated to pay
certain rights fees in connection with these rights. In January 1999 the
Company recorded an intangible asset and a corresponding liability on its
balance sheet for the acquisition of the license rights. These rights
will be amortized on a straight line basis and payments will be made over
the term of the license (one year) according to a pre-determined payment
schedule. For the nine months ended March 31, 1999, the amortization of
intangibles included $333,333 of these license rights, and a total of
$400,000 in cash payments had been made.
In January 1999 the Company entered into an exclusive licensing agreement
with Sasani Limited, one of South Africa's leading companies in the
entertainment, media and communication industries. Under the terms of the
agreement, the Company received an up-front, nonrefundable licensing fee
and will receive annual royalties from Sasani Limited based on use of the
L-VIS System in South Africa. The initial term of the license is five
years.
In March 1999 the Company entered into an Amendment Agreement, dated as of
January 1, 1999, with Publicidad Virtual S.A. de C.V. ("Publicidad") which
amended the terms of the License Agreement, dated March 1, 1994, between
the parties. Under the terms of the amended License Agreement, Publicidad
maintained its exclusive license to use, market and sub-license the
Company's L-VIS System throughout Mexico, Central America, South America
and the Spanish speaking markets in the Caribbean basin and will pay to
the Company a royalty on annual net revenues as follows: (i) a 17% royalty
on net revenues of up to $3,000,000, (ii) a 25% royalty on incremental
annual net revenues exceeding $3,000,000 and up to $6,000,000, and (iii) a
20% royalty on incremental annual net revenues exceeding $6,000,000. The
Company also entered into a Stock Purchase Agreement, dated as of January
1, 1999, with Presencia en Medios, S.A. de C.V. ("Presencia"), a principal
shareholder of the Company, and Eduardo Sitt, the President and a
principal shareholder of Presencia and a director of the Company. Under
the terms of the Stock Purchase Agreement, the Company sold its interest
in Publicidad to Presencia and Eduardo Sitt for an aggregate purchase
price of $121,000. The proceeds received by the Company, net of Mexican
withholding tax, was $96,800.
4. New Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") during the quarter ended
September 30, 1998. SFAS 130 establishes standards for reporting and
display of an alternative income statement and its components (revenue,
expenses, gains and losses) in a full set of general purpose financial
statements. For the three month periods ended March 31, 1999 and 1998, the
Company had no items of other comprehensive income.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") during the quarter ended September 30, 1998. 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. Currently, there are
no disclosures required to be made under SFAS 131.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions
<PAGE> 8
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 changes current
financial disclosure requirements for pension and other postretirement
benefit plans. SFAS 132 does not, however, change the measurement or
recognition provisions of existing accounting standards. Currently, there
are no disclosures required to be made under SFAS 132.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Since its inception in 1990, the Company has devoted substantially all of
its resources to the development and marketing of the L-VIS(TM) System, an
electronic video insertion system that was designed to modify broadcasts
to television viewers by inserting electronic images, primarily
advertisements. The Company has incurred substantial operating losses
since its inception. As of March 31, 1999, the Company had an accumulated
deficit of approximately $35.4 million 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 continue its efforts to enhance the L-VIS System
and develop additional software applications. In order to increase its
revenue generating user base and to expand into national and international
markets, the Company plans to increase its sales and marketing resources.
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 awareness. While any purchase of
advertising will be done through the rights holder or the broadcaster, the
Company hopes to create advertiser interest and demand by promoting the
L-VIS System directly to potential advertisers. Therefore, the Company
expects to incur additional losses and to experience substantial negative
cash flow from operating activities through 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.
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 typically been revenue
sharing agreements under which the Company received a percentage of the
fee paid by the advertisers. The Company realizes revenues 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 mitigated by the multi-sport
capabilities of the L-
<PAGE> 9
VIS System and its use in non-sporting events. During the quarters ended
December 31, 1998 and March 31, 1999, the Company expanded the services
provided by the L-VIS System to include the electronic insertion of visual
aids in live sporting events, such as a virtual first-down line in
football games, a virtual finish-line in horse races and animated graphics
in the broadcast of Super Bowl XXXIII. The Company expects to realize this
type of production revenue from fees paid by the broadcasters for such
visual enhancements of sporting and other events.
In addition to production and advertising revenue, an additional revenue
source is the strategic licensing of the L-VIS System to third parties.
These licenses may be territorial in nature or they may cover individual
major broadcast events. In the case of a territorial license, the licensee
is responsible for generating business within the territory and 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.
Under the terms of a binding letter of intent between the Company and NFL
International, signed in January 1999, the Company was selected by NFL
International to become the exclusive provider of electronic imaging
services for certain international telecasts in exchange for the payment
of certain rights fees over the period of the agreement. With the
execution of this binding letter of intent, the Company is actively
pursuing advertisers and sponsors for the broadcasts covered, in
cooperation with the sales forces of the rightsholders.
Results of Operations
QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER ENDED MARCH 31, 1998
Revenue
Revenues include receipts from advertising and production use of the L-VIS
System as well as from license fees and leasing fees for use of the L-VIS
System outside the United States. Total revenue increased 125% to $354,140
for the quarter ended March 31, 1999 from $157,625 for the quarter ended
March 31, 1998. Advertising and production revenue increased 81% to
$181,165 for the quarter ended March 31, 1999 from $100,000 for the
quarter ended March 31, 1998, as a result of the initial use of the L-VIS
System for the electronic insertion of the virtual first-down marker in
various National Football League ("NFL") games broadcast live by CBS
Sports and the virtual finish-line in several National Thorobred Racing
Association ("NTRA") horse races. The use of the L-VIS System to insert
electronic images into taped programming, or post-production activities
also increased in the quarter ended March 31, 1999 over the prior year
period. License fees increased as a result of the growth in international
activity.
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
<PAGE> 10
administrative expenses, including salaries of support personnel,
allocated rent and operating costs, and legal and accounting fees. Total
selling, general and administrative expenses increased 25% to $1,742,068
for the quarter ended March 31, 1999, from $1,391,984 for the quarter
ended March 31, 1998. This increase was the result of numerous factors
including (i) hiring of executive, accounting and marketing personnel,
(ii) costs of the termination of a consulting agreement (iii) increased
market research activity, (iv) the hiring of both investor and public
relations firms in an effort to increase market awareness with respect to
the L-VIS System as well as interface with the public market and, (v)
increased legal and accounting fees.
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
improved software programs for individual sports. Total research and
development expenses decreased 5% to $374,290 for the quarter ended March
31, 1999 from $392,074 for the quarter ended March 31, 1998 as a result of
the continued shift in spending from research and development into product
costs.
L-VIS System Costs
L-VIS System costs include the costs associated with the material
production, depreciation and operational support of the L-VIS System
units, including training costs for operators and the shipping of L-VIS
System units to international and domestic venues. Total L-VIS System
costs increased 80% to $1,235,448 for the quarter ended March 31, 1999
from $687,349 for the quarter ended March 31, 1998. This increase resulted
from increased costs due to the development, testing and use of the L-VIS
System for the electronic insertion of the virtual first-down marker in
various NFL football games broadcast by CBS Sports and the virtual
finish-line in several NTRA events, as well as use of the L-VIS System in
both the international and domestic broadcasts of Super Bowl XXXIII.
Increased salaries attributable to personnel shifts from research and
development into product costs as a result of more L-VIS Systems being
used in the field, and increased depreciation expense due to the increased
number of L-VIS Systems, also contributed to the increase. Finally,
license fees which the Company has to pay based on revenues earned, or
contractual minimums, have increased.
Interest and Other Income
Interest and other income decreased 23% to $293,176 for the quarter ended
March 31, 1999 from $380,679 for the quarter ended March 31, 1998. This
resulted from a decrease in funds available for investment from the
proceeds of the initial public offering of the Company's common stock in
December 1997 as cash is expended on operations. This decrease was
partially offset by the net proceeds of $96,800 received in conjunction
with the Stock Purchase Agreement settlement between the Company,
Presencia en Medios, S.A. de C.V. and Eduardo Sitt.
<PAGE> 11
Net Loss
As a result of the foregoing factors, the Company's net loss increased 40%
to $2,704,490 for the quarter ended March 31, 1999 from $1,933,103 for the
quarter ended March 31, 1998.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTHS ENDED MARCH
31, 1998
Revenue
The total revenue increased 62% to $796,378 for the nine months ended
March 31, 1999 from $492,403 for the nine months ended March 31, 1998 as a
result of several factors including (1) the increased usage of the L-VIS
System in the broadcast of various games during the 1998 Major League
Baseball season, (ii) the initial use of the L-VIS System for the
electronic insertion of the virtual first-down marker in various NFL
football games broadcast live by CBS Sports and the virtual finish-line in
several NTRA events, (iii) increased usage of the L-VIS System to insert
electronic images into taped programming, or post-production activities,
and, (iii) the growth in international activity.
Selling, General and Administrative
Selling, general and administrative expenses increased 13% to $4,083,824
for the nine months ended March 31, 1999 from $3,621,047 for the nine
months ended March 31, 1998. This increase was the result of numerous
factors including (i) hiring of executive, accounting and marketing
personnel, (ii) costs of the termination of a consulting agreement, (iii)
increased market research activity, (iv) fees paid to investor and public
relations firms hired to support the Company's increased focus on the
sales and marketing of the L-VIS System, (v) increased legal and
accounting fees, and, (vi) the increase in directors' and officers'
liability insurance costs incurred in relation to the Company's initial
public offering.
Research and Development
Research and development expenses decreased 5% to $1,201,044 for the nine
months ended March 31, 1999 from $1,268,856 for the nine months ended
March 31, 1998, as a result of the continued shift in spending from
research and development into product costs. Research and development
expenses for the nine months ended March 31, 1999 also reflect the
Company's efforts to develop new software and hardware platforms for the
L-VIS System through the integration of newly available technologies
including High Definition Television or HDTV.
L-VIS System Costs
L-VIS System costs increased 105% to $3,081,798 for the nine months ended
March 31, 1999 from $1,499,764 for the nine months ended March 31, 1998 as
a result of numerous factors. These included (i) an increase in
depreciation expense associated with the purchase of L-VIS System
components for system upgrades and newly constructed systems to be used in
football and by international licensees, (ii) an increase in personnel and
related expenses as well as higher insurance, rent and
<PAGE> 12
utility costs, (iii) a shift in workload from selling, general and
administrative expense to L-VIS System costs as more time was spent
operating the L-VIS System, (iv) expenses related to the initial testing
of the L-VIS System in the broadcast of the Indianapolis Motor Speedway
Corporation's Brickyard 400 race in July 1998 and the August 1998 off-line
demonstration of the L-VIS System for cricket, (v) costs associated with
the development, testing and initial use of the L-VIS System for the
electronic insertion of the virtual first-down marker in various NFL games
broadcast by CBS Sports and the virtual finish-line in several NTRA
events, and (vi) use of the L-VIS System in both the international and
domestic broadcast of Super Bowl XXXIII. Finally, license fees which the
Company has to pay based on revenues earned, or contractual minimums,
have increased.
Interest and Other Financial Expense
Interest and other financial expense decreased to $0 for the nine months
ended March 31, 1999 from $1,814,178 for the nine months ended March 31,
1998 as the interest costs incurred in connection with the bridge loan
financing were paid in full in December 1997.
Interest and Other Income
Total interest and other income increased 70% to $814,034 for the nine
months ended March 31, 1999 from $477,749 for the nine months ended March
31, 1998 as a result of the increase in funds available for investment
from the proceeds of the initial public offering and net proceeds of
$96,800 received in conjunction with the Stock Purchase Agreement
settlement between the Company, Presencia and Eduardo Sitt.
Net Loss
As a result of the foregoing factors, the Company's net loss decreased 7%
to $6,756,254 for the nine months ended March 31, 1999 from $7,233,693 for
the nine months ended March 31, 1998.
Year 2000 Risk Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields need to recognize four digit entries in
order to identify correctly dates in the 21st century. If not corrected,
many computer applications could fail or create erroneous results at the
year 2000. This potential problem has been termed "Y2K".
The Company realizes that Y2K planning is essential to its continued
success. A plan has been formulated (the "Plan") to identify, correct,
implement and test all internal and external systems for full Y2K
compliance. This plan encompasses all computer hardware and software
systems, electrical and communication systems and any system or service
that may be affected by the Y2K event. In addition, the Plan covers all
external dependencies on services provided by third parties to the Company
as well as services that the Company provides to its customers.
<PAGE> 13
As part of the Plan, the Company assigned a member of the information
systems department to act as project leader, with personnel from each of
the other Company departments assisting. The Plan was divided into the
following six phases:
1) Identification of systems and services affected by the Y2K event and
submission of such a list to the Y2K project leader. This includes
communication and satellite lines, computers manufactured by third
parties as well as specialized and embedded hardware designed by the
Company as well as all building systems (i.e. electric, heating,
telephone, and security systems). All software used by the Company
including third party operating systems, office automation software,
accounting software, connectivity software and all software produced
by the Company both internally and for use by our customers.
2) Development of a testing, checking and certification mechanism for
all systems and services identified in phase 1 above. If testing by
Company personnel is not possible, written certification will be
requested from the manufacturer of the system or provider of the
services as to their state of readiness for the year 2000.
3) Testing of systems and services according to a time line prepared by
the project leader and documentation of the results. Any system that
is identified as being non-compliant with the Y2K event will be
earmarked for additional work.
4) Development and implementation of remedial plans for all systems
and/or services that were identified as non-compliant in phase 3
above.
5) Ongoing reporting of the progression of the Y2K compliance project
until full Y2K compliance is achieved.
6) Issuance of a final compliance report when all phases of the Plan
have been completed.
As of March 31, 1999, a comprehensive list of all systems and services
affected by the Y2K event had been prepared and reviewed by the project
leader and Company department heads, completing Phase 1.
A diagnostic software package, as described in Phase 2 above, designed to
analyze Y2K compliance problems has been selected and is in the process of
being installed on all in-house computer systems. This application will
enable the Company to determine both hardware and software Y2K compliance.
A procedure has also been established for distributing this software, and
the resulting corrections required, to all remote L-VIS locations. In
order to be labeled "Y2K Certified" the following processes are being
carried out:
1. BIOS Certification: to ensure computer hardware is capable of
handling year 2000 dates as well as leap years through the
year 2015.
2. OS Certification: to ensure Y2K compliance of the computer's
operating system.
3. Application and Data Certification: To ensure specific
application and data compliance. This includes internally
developed software as well as vendor-supplied software.
As of the date of this report, approximately 35% of all computers have
been tested and certified as Y2K compliant. Several computer systems have
been classified as "non-upgradable" and have been replaced.
Based on the work that has been done to date relative to Phase 3, numerous
software packages currently used by the Company which had been identified
as Y2K
<PAGE> 14
non-compliant have been upgraded and certified by their manufacturers as
being Y2K compliant, as required under Phase 4 of the compliance project.
This includes all accounting and administrative software products.
Further, the Company has not identified, nor does it anticipate, any
internal Y2K issues arising from the use of its own internal information
systems, databases or programs.
Based on the work performed to date on the identification of systems and
services subject to the Y2K problem, the project leader and management of
the Company have estimated that future costs related to Y2K compliance for
internal software, information systems, databases or programs are expected
to be less than $100,000. This includes the costs incurred to date for
replacement of non-upgradable computer systems, as well as the upgrade of
accounting and administrative software referenced above. With respect to
the status of other Company systems, the communication systems of the
Company have been certified Y2K compliant and verification of all building
mechanical systems has been requested.
The Company's proprietary L-VIS System relies on time (i.e. hour and
minute) sensitive software coding, but it is not date sensitive and is,
therefore, not believed by the management of the Company to be subject to
Y2K problems. The manufacture and use of the L-VIS System, however,
requires the cooperation of external suppliers and outside broadcasters.
As part of the Company's formal review process of the Y2K readiness of
these external suppliers and broadcasters, a standard letter has been sent
to all significant third party providers of goods and services to
determine whether they have undertaken the necessary steps to meet their
Y2K obligations. We are continuing to collect information from and assess
the Y2K status of these third parties. Based on the responses to date, we
do not anticipate any significant operational problems or disruptions. To
the extent that it is determined that the Company's suppliers and
broadcasters are not Year 2000 compliant, however, the planned operations
of the Company could be significantly disrupted. This could have a
material adverse effect on the Company's business, financial condition and
planned results of operations. Management is currently unable to quantify
the impact of this potential disruption on its future earnings.
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 and building L-VIS Systems, and
operating expenses relating to sales and marketing activities of the
Company. The net cash used in operating activities decreased to $4,902,414
for the nine months ended March 31, 1999 from $7,038,279 for the nine
months ended March 31, 1998, as a result of the lower net loss recorded
for the nine months ended March 31, 1999 as compared to the same period in
1998. This resulted primarily because the interest costs incurred in
connection with the bridge loan financing were paid in full in December
1997. Depreciation expense, however, was significantly higher, increasing
to $901,248 for the nine months ended March 31, 1999 from $489,207 for the
nine months ended March 31, 1998, due to the increased number of L-VIS
Systems built and deployed both domestically and in the international
market. Offsetting these increased expenses was a decrease in charges
associated with option and warrant grants which dropped to $21,625 for the
nine months ended March 31, 1999 from $473,562 for the same prior year
period.
<PAGE> 15
Net cash used in investing activities decreased to $1,193,995 for the nine
months ended March 31, 1999 from $1,612,663 for the nine months ended
March 31, 1998 as the result of several factors. The total spent on the
purchase of property and equipment includes purchases of both components
used in the building of additional L-VIS Systems and the upgrade of
existing systems to the second generation flex-based L-VIS System. This
amount decreased to $757,404 for the nine months ended March 31, 1999 from
$1,427,881 for the nine months ended March 31, 1998, as the upgrades were
completed in 1998. For the same nine month period, the totals spent on
purchases of investments and intangibles decreased by $52,000 and $96,191,
respectively. In addition, the Company is required to make periodic
payments during fiscal years ending June 30, 1999 and 2000 totalling
approximately $2,000,000 as payment for certain electronic imaging rights.
$400,000 of this total was paid during the quarter ended March 31, 1999.
Net cash provided by financing activities for the nine months ended March
31, 1999 decreased to $100 from $31,597,036 for the year ago period. The
cash provided during the nine months ended March 31, 1998 was the result
of the exercise of warrants issued in connection with a bridge financing
and the proceeds from the Company's initial public offering of Common
Stock in December 1997.
The net decrease in cash and cash equivalents was $6,096,309 for the nine
months ended March 31, 1999 compared to a net increase of $22,946,094 for
the nine months ended March 31, 1998 as a direct result of the receipt of
proceeds from the Company's initial public offering.
Since inception, the Company has financed its operations from (i) the net
proceeds of the 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, (iii) the proceeds of a bridge loan financing
which closed in October 1997, (iv) the net proceeds of approximately
$25,050,000 from the initial public offering of its Common Stock in
December 1997, (v) revenues and license fees relating to use of the L-VIS
System, and (vi) investment income earned on cash balances and short term
investments. The Company believes that the net proceeds of its initial
public offering, and the income earned from the investment of those
proceeds, will be sufficient to meet its capital requirements for at least
18 months. Such capital requirements will depend on a number of factors
including the results of its research and development programs, the
Company's ability to maintain its current customer base and attract new
customers to use the L-VIS System, acceptance of the L-VIS System
technology by rightsholders, technological advances and the status of its
competitors, and the level of resources the Company is able to allocate to
the development of greater marketing and sales capabilities. If the
Company does not generate adequate revenues, there is no assurance that it
will be able to raise additional capital as necessary to fund its
operations. The Company would, thus, be forced to substantially reduce the
scale of its operations.
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.
<PAGE> 16
Cautionary Statement on Forward-Looking Statements
Some of the information in this Quarterly Report, including Management's
Discussion and Analysis of Financial Condition, contain forward-looking
statements. Such statements can be identified by the use of
forward-looking words such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss
future expectations and projections of results of operations or of
financial conditions. When considering such forward-looking statements,
you should keep in mind that certain risks may cause actual results to
differ from any projections contained in forward-looking statements. These
risks include:
- adverse economic conditions;
- intense competition, including entry of new competitors and
products;
- adverse federal, state, local and foreign government regulation;
- inadequate capital to operate our business;
- unexpected costs and operating deficits;
- lower revenues than forecast;
- inability to successfully market the L-VIS (TM) System to television
viewers, advertisers, broadcasters and sporting events rights
holders;
- inability of third party sales forces to sell L-VIS System
advertising;
- contractual restrictions on use of video insertion technology;
- risks associated with doing business in international markets;
- seasonal fluctuations based upon the game schedules of each sport;
- manufacturing inexperience;
- challenges to our patent and proprietary technology;
- technological obsolescence of the L-VIS System;
- inability to upgrade and develop software for use of the L-VIS
System with new sports and other new uses;
- dependence on a sole source of supply for certain hardware
components;
- the possible fluctuation and volatility of our operating results and
financial condition;
- adverse publicity and news coverage;
- loss of key employees; and
- Year 2000 compliance problems.
We do not promise to update forward-looking information or any other
information to reflect actual results or changes in assumptions or other
factors that could affect those statements.
Part II Other Information
Item 2 Changes in Securities and Use of Proceeds
(c) On April 8, 1999, the Company issued 14,286 shares of its common stock
to the Sarnoff Corporation (formerly the David Sarnoff Research Center) as
a royalty payment, for the fiscal quarter ended March 31, 1999, pursuant
to the terms of a Research Agreement between the Company and the David
Sarnoff Research Center, dated June 1995, as amended. The issuance of the
common stock to the Sarnoff Corporation was deemed to be exempt from
registration under the Securities
<PAGE> 17
Act by virtue of Section 4(2) and Regulation D as a transaction not
involving a public offering. The common stock was issued for investment
only and not for purposes of distribution. A legend to such effect was
affixed to the stock certificate issued. The Sarnoff Corporation received
adequate information about the Company.
(d) The Company commenced an initial public offering of its common stock,
no par value on December 16, 1997 pursuant to a registration statement on
Form SB-2 (Registration No. 333-37725) (the "Registration Statement"),
which was declared effective by the Securities and Exchange Commission on
December 16, 1997. From the effective date of the Registration Statement
to March 31, 1999, the approximate amount of net offering proceeds used
was $3,210,000 for repayment of indebtedness and expenses related thereto,
$5,393,000 for the manufacture of L-VIS(TM) Systems, $1,713,000 for
research and development, $1,944,000 for sales and marketing, and
approximately $2,050,000 for working capital and general corporate
purposes.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-37725)
which became effective on December 16, 1997).
3.2 Restated Bylaws, as amended (Incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 1998, filed on
February 12, 1999.
10.1* Binding Letter of Intent between NFL International, a
division of NFL Enterprises L.P., and the Company
executed on January 6, 1999 (Incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1998,
filed on February 12, 1999).
10.2* System License Agreement dated January 19, 1999 between
Sasani Limited and the Company (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December 31,
1998, filed on February 12, 1999).
10.3 Amendment Agreement, dated as of January 1, 1999, by and
between the Registrant and Publicidad Virtual S.A. de
C.V., amending the License Agreement, dated as of March
1, 1994. (Incorporate by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on April
4, 1999).
<PAGE> 18
10.4 Stock Purchase Agreement, dated as of January 1, 1999,
by and between the Registrant, Presencia en Medios, S.A.
de C.V. and Eduardo Sitt. (Incorporate by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on April 4, 1999).
27.1 Financial Data Schedule
----------
* Confidential treatment has been granted with respect to a portion
of this exhibit.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated March 3, 1999 which
reported the terms of an Amendment Agreement dated January 1, 1999 entered
into with Publicidad Virtual, S.A. de C.V. which amended the terms of the
License Agreement, dated March 1, 1994, between the parties. Also reported
were the terms of a Stock Purchase Agreement, dated as of January 1, 1999,
with Presencia en Medios, S.A. de C.V., Eduardo Sitt and the Company.
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized,
Princeton Video Image, Inc.
May 17, 1999 /s/ Dennis P. Wilkinson
- ------------------------ ---------------------------------
Date By: Dennis P. Wilkinson,
President and
Chief Executive Officer
May 17, 1999 /s/ Lawrence L. Epstein
- ------------------------ ---------------------------------
Date By: Lawrence L. Epstein,
Chief Financial Officer
<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-37725) which became effective on December 16,
1997).
3.2 Restated Bylaws, as amended (Incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998, filed on February 12, 1999.
10.1* Binding Letter of Intent between NFL International, a division of
NFL Enterprises L.P., and the Company executed on January 6, 1999
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31,
1998, filed on February 12, 1999).
10.2* System License Agreement dated January 19, 1999 between Sasani
Limited and the Company (Incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998, filed on February 12, 1999).
10.3 Amendment agreement, dated as of January 1, 1999, by and between the
Registrant and Publicidad Virtual S.A. de C.V., amending the License
Agreement, dated as of March 1, 1994. (Incorporate by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
April 4, 1999).
10.4 Stock Purchase Agreement, dated as of January 1, 1999, by and
between the Registrant, Presencia en Medios, S.A. de C.V. and
Eduardo Sitt. (Incorporate by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on April 4, 1999).
27.1 Financial Data Schedule
- ----------
* Confidential treatment has been granted with respect to a portion of this
exhibit.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOW FILED AS PART OF
PRINCETON VIDEO IMAGE, INC'S QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT ON FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,456,318
<SECURITIES> 138,000
<RECEIVABLES> 171,651
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,596,309
<PP&E> 4,943,393
<DEPRECIATION> 2,538,963
<TOTAL-ASSETS> 20,682,774
<CURRENT-LIABILITIES> 3,574,756
<BONDS> 0
980,642
0
<COMMON> 40,917
<OTHER-SE> 15,225,863
<TOTAL-LIABILITY-AND-EQUITY> 20,682,774
<SALES> 0
<TOTAL-REVENUES> 796,378
<CGS> 0
<TOTAL-COSTS> 8,366,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,756,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,756,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,756,254)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
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