<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934.
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER 000-23415
PRINCETON VIDEO IMAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or such shorter period that the registrant is 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
October 31, 1999 was 8,230,591.
<PAGE> 2
Item 1. Financial Statements
PRINCETON VIDEO IMAGE, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,166,458 $ 12,494,373
Restricted marketable securities held to maturity 137,801 138,000
Trade accounts receivable 537,584 378,652
License rights 666,667 1,166,667
Other current assets 146,577 177,097
------------ ------------
Total current assets 9,655,087 14,354,789
Property and equipment, net 4,117,401 3,806,718
Intangible assets, net 546,524 547,546
Other assets 188,546 182,065
------------ ------------
Total assets $ 14,507,558 $ 18,891,118
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,918,200 $ 4,300,499
Unearned revenue 403,538 436,162
------------ ------------
Total current liabilities 3,321,738 4,736,661
Unearned revenue 935,424 1,019,472
Other liabilities 52,510 --
------------ ------------
Total liabilities 4,309,672 5,756,133
------------ ------------
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
September 30, 1999, redemption value equal to carrying value
(par plus all accrued but unpaid dividends) 426,262 421,700
Cumulative, Series B, conditionally redeemable, $5.00 par value,
authorized 93,300 shares; issued and outstanding 86,041 shares at
September 30, 1999, redemption value equal to carrying value
(par plus all accrued but unpaid dividends) 576,405 569,955
------------ ------------
Total redeemable preferred stock 1,002,667 991,655
Shareholders' Equity:
Common stock, no par value; $.005 stated value; authorized 40,000,000
shares; 8,216,305 shares issued and outstanding at September 30, 1999 41,621 40,996
Additional paid-in capital 51,577,343 51,535,488
Less: Related party note receivable (1,120,274) (1,153,278)
Accumulated deficit (41,303,471) (38,279,876)
------------ ------------
Total shareholders' equity 9,195,219 12,143,330
------------ ------------
Total liabilities, redeemable preferred stock and
shareholders' equity $ 14,507,558 $ 18,891,118
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
PRINCETON VIDEO IMAGE, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30,
----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Royalties and license fees $216,672 $67,292
Advertising and contract revenue 291,271 210,654
----------- -----------
Total revenue 507,943 277,946
Costs and expenses:
Sales and marketing 933,586 474,493
Product development 581,543 443,792
Field operations and support 1,243,070 882,877
General and administrative 911,150 689,337
----------- -----------
Total costs and expenses 3,669,349 2,490,499
Operating loss (3,161,406) (2,212,553)
Interest and other income 137,807 278,763
----------- -----------
Net loss (3,023,599) (1,933,790)
Accretion of preferred stock
dividends (11,013) (11,013)
----------- -----------
Net loss applicable to common stock $(3,034,612) $(1,944,803)
=========== ===========
Basic and diluted net loss per share
applicable to common stock ($0.37) ($0.24)
=========== ===========
Weighted average number of
shares of common stock
outstanding 8,213,484 8,181,885
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
PRINCETON VIDEO IMAGE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,023,599) $(1,933,790)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of unearned income (116,672) (67,292)
Depreciation expense 443,462 294,024
Amortization of intangibles/license rights 475,756 21,568
Charges associated with stock, warrant and option
grants and related party note receivable 85,069 --
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable (158,932) (169,974)
Other current assets 30,719 (15,464)
Other assets (6,482) 21,669
Accounts payable and accrued expenses (733,170) (221,694)
Unearned revenue -- 128,200
Miscellaneous other 4,247 1,465
---------- ----------
Net cash used in operating activities (2,999,602) (1,941,288)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (754,146) (201,219)
Purchases of license rights (600,000) --
Increase in intangible assets 25,265 --
---------- ----------
Net cash provided by (used in)
investing activities (1,328,881) (201,219)
---------- ----------
Cash flows from financing activities:
Proceeds from sales of common stock, net 568 100
---------- ----------
Net cash provided by
financing activities 568 100
---------- ----------
Net increase (decrease) in cash and
cash equivalents (4,327,915) (2,142,407)
Cash and cash equivalents at beginning of
period 12,494,373 21,552,627
---------- ----------
Cash and cash equivalents at end of period $8,166,458 $19,410,220
========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PRINCETON VIDEO IMAGE, INC.
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 Live Video Insertion System (the "L-VIS(TM) 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. The L-VIS
System has been used to insert advertising images into live and
pre-recorded television broadcasts. The Company is developing a series of
products for the Internet and interactive television to allow viewers to
interact with live or recorded video programming. 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-Q 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,
1999 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.
Beginning with the quarter ended September 30, 1999, the Company changed
the presentation of the revenue and expense categories on the Statement of
Operations in order to provide a better description of the contents of each
category. Selling, general and administrative ("SG&A") expenses have been
broken out into two categories: Sales and marketing and General and
administrative. Research and development has been renamed Product
development and L-VIS System costs has been renamed Field operations and
support. With the exception of the increased detail for the SG&A expenses,
the accounting for each category has not changed.
For the quarters ended September 30, 1999 and 1998 the Company had no items
of other comprehensive income.
2. Per Share Data
Statement of Financial Accounting Standards No. 128 requires the
presentation of basic and diluted per share amounts. Basic per share
amounts are computed by dividing net loss applicable to common stock by the
weighted average number of common shares outstanding during the period.
Diluted per share amounts are computed by dividing net loss applicable to
common stock by the weighted average
5
<PAGE> 6
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 2,802,438 and 2,509,637 shares of common stock that
were outstanding at September 30, 1999 and 1998, respectively, were not
included in diluted per share calculations, as their effect would be
antidilutive.
3. New Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. If certain conditions are
met, a derivative may be designated specifically as: (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
an unrecognized asset or firm commitment (a fair value hedge); (b) a hedge
of the exposure to variable cash flows of a forecasted transaction (a cash
flow hedge); or (c) a hedge of the foreign currency exposure of net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated-transactions.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2001. The effect of adopting SFAS No. 133 is not
expected to be material.
4. Related Party Transactions
In September 1999, the Board of Directors approved a resolution authorizing
management of the Company to retain Allen & Company, Inc. to provide
services with respect to an offering to issue and sell up to 2,000,000
shares of Common Stock. A member of the Board of Directors of the Company is
a Managing Director and Executive Vice President of Allen & Co., Inc.
("Allen & Co."), which is a shareholder of the Company. Allen & Co. received
commissions in the aggregate amount of approximately $438,000, as well as
warrants initially exercisable for 200,000 shares of common stock for its
services rendered on behalf of the Company in relation to such offering,
which closed in October 1999.
5. Employee Benefits
Effective July 1, 1999, the Company implemented a Company match under its
401(k) retirement plan (the "Plan") whereby the Company will match employee
contributions with Company stock at the rate of 50% of the amount an
employee contributes, up to 5% of salary. The contribution of stock will be
made on a monthly basis and matching contributions will vest over three
years. The Company recorded an expense of $16,113 for the quarter ended
September 30, 1999.
6
<PAGE> 7
6. Warrants and Options
The Company established the Amended 1993 Stock Option Plan (the "Stock
Option Plan") for the purpose 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. In
September 1999, the Board of Directors approved an amendment to the Stock
Option Plan to authorize automatic annual stock option grants to the
members of the Board of Directors. The options will vest, with respect to
each director, based on their attendance at board meetings. This amendment,
subject to shareholder approval and ratification, is being voted upon at
the Annual Meeting of Shareholders to be held on December 3, 1999.
On September 30, 1999, the Board of Directors of the Company awarded stock
options to purchase 10,000 shares of Common Stock to each of its current
members. The exercise price of these options is $4.688, the fair market
value on the date of grant, the options have a term of ten years and are
fully vested.
7. Industry Segment, Geographic and Customer Information
The Company operates in one industry segment, real-time video imaging.
The Company markets its L-VIS System worldwide through licensing
agreements. One licensee, Publicidad Virtual S.A. de C.V. accounted
for 34% and 24% of net sales for the quarter ended September 30, 1999
and 1998, respectively.
Geographic information is as follows:
<TABLE>
<CAPTION>
U.S. Mexico Other
-------- ------- ---------
<S> <C> <C> <C>
Three months ended September 30, 1999
Advertising and production revenue $291,271 - -
License and royalty fees 171,672 45,000
-------- ------- --------
Total $291,271 171,672 45,000
======== ======= ========
Three months ended September 30, 1998
Advertising and production revenue $210,654 - -
License and royalty fees
67,292 --
-------- ------- --------
Total $210,654 $67,292 -
======== ======= ========
</TABLE>
All Company assets are based in the US with the exception of certain
L-VIS Systems which are being used by the Company's licensees in connection with
foreign operations. The approximate value of these L-VIS Systems located in
foreign countries is as follows:
<TABLE>
<CAPTION>
9/30/99 Mexico Other Total
<S> <C> <C> <C>
L-VIS Systems $508,404 $125,000 $633,404
-------- -------- --------
9/30/98
L-VIS Systems $300,952 0 $300,952
-------- -------- --------
</TABLE>
8. Subsequent Events
In October 1999, the Company filed a request with the United States Patent
and Trademark Office ("USPTO") to correct the ownership of US Patent
5,917,553,
7
<PAGE> 8
licensed to Sportvision, Inc. The Company believes that the basic subject
matter of this patent belongs to PVI. After the Company filed this action,
Sportvision, Inc. filed a lawsuit against the Company for infringement of
the disputed '533 patent. Sportvision, Inc. is seeking injunctive relief
and compensation including damages. Based upon our preliminary assessment
of the claim, we believe that we are the owner of the basic subject matter
of the disputed patent and that the claim lacks merit. We plan to
vigorously defend our ownership of the patent.
Patent litigation involves complex legal and factual issues. The outcome
of such actions are highly uncertain. In addition, patent litigation
involves considerable costs. We cannot assure you that we do not or will
not infringe the patent or intellectual property rights of another
company. If we lose a patent infringement action, we may be required to
pay a significant amount of money or to stop selling our products. We
may also need to license disputed technology from another company, if
possible. If our patents are successfully challenged, our business,
financial condition and the results of our operations will be adversely
affected.
In October 1999, the Company completed a private equity placement of
approximately 1.6 million shares of its common stock yielding net proceeds
of approximately $8,200,000. The Company has filed a Registration Statement
on Form S-3 with the Securities and Exchange Commission to register the
common stock issued in this private placement.
On October 18, 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 September 30, 1999, pursuant
to the terms of a Research Agreement between the Company and the David
Sarnoff Research Center, dated June 1995, as amended.
In October 1999, the Company received notice from the European Patent
Office that its patent application number EPO792068 which covers the
Company's right to send insertion information downstream along with a
broadcast or webcast and allows the Company to insert advertisements or
program enhancements from remote locations, was granted. The patent is
expected to issue on November 14, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
unaudited financial statements, the notes thereto and the other financial
information included elsewhere in this report and in the Company's June 30,
1999 Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission.
Overview
Since its inception in 1990, the Company has devoted substantially all of
its resources to the development of the L-VIS(TM) System, an electronic
video insertion system based on patented proprietary technology that was
designed to modify broadcasts to television viewers by inserting electronic
images, both advertisements and program enhancements. The Company has
incurred substantial operating losses since its inception. As of September
30, 1999, the Company had an accumulated deficit of approximately
$41,303,000. This deficit is the result of research and development
expenses incurred in the development and commercialization of the L-VIS
System and
8
<PAGE> 9
its deployment pursuant to customer contracts, operating expenses relating
to manufacturing, sales and marketing activities of the Company, and
general administrative costs. The Company expects to incur losses during
fiscal year 2000 as it executes its business strategy of developing new
products, increasing its penetration of both the domestic and international
markets in the field of real-time virtual image insertion, developing new
products, and building upon and protecting its proprietary patent
portfolio.
The Company intends to focus its efforts on increasing market acceptance of
the L-VIS System and developing additional software applications. In
September 1999, the Company increased its sales and marketing staff which
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 it is anticipated that any purchase
of advertising will be done through the rights holder or the broadcaster,
the Company is attempting to increase 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 continue generating revenue from ads sold by rights
holders that use the L-VIS System. These revenues are expected to be shared
with the rights holders. Accordingly, in order to 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, including
revenue sharing agreements under which the Company receives a percentage of
the fee paid by the advertisers and contractual arrangements whereby the
Company receives an agreed upon fee for its services. The Company realizes
revenues when the advertisement runs over the air. Due to the seasonal
nature of sporting events themselves, the Company's revenue is subject to
seasonal fluctuations. However, this seasonality may be mitigated 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 and contractual
arrangements, a second revenue source is the strategic licensing of the
L-VIS System to third parties. These licenses may be territorial in nature
or they may cover individual major broadcast events. In the case of a
territorial license, the licensee is responsible for generating business
within the territory and 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.
A third revenue source for the Company includes 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 and animated graphics in
football games, and a virtual finish-line in horse races. The Company also
offers an advanced post-production product whereby the L-VIS System
technology can place products or logos within existing, pre-recorded
television programs or movie scenes as well as live television broadcasts.
9
<PAGE> 10
The Company realizes revenues through contractual arrangements to provide
these visual enhancements.
Results of Operations
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE QUARTER ENDED SEPTEMBER
30, 1998
Revenue
Revenues include receipts from advertising use of the L-VIS System,
contractual arrangements made with customers for visual aids and program
enhancements, and license and royalty fees earned from use of the L-VIS
System outside the United States. Total revenue increased 83% to $507,943
for the quarter ended September 30, 1999 from $277,946 for the quarter
ended September 30, 1998. Of this total, royalty and license fees increased
222% to $216,672 from $67,292 for the quarters ended September 30, 1999 and
1998, respectively, primarily as a result of the addition of Sasani Limited
as our exclusive licensee in South Africa and an increase in royalties from
Publicidad Virtual due to the restructuring of our licensing agreement
allowing the Company to share in revenues generated by Publicidad.
Advertising and contract revenue increased 38% to $291,271 from $210,654
for the quarters ended September 30, 1999 and 1998, respectively as a
result of increased use of the L-VIS System by MLB during the 1999 baseball
season, and contractual revenues earned from CBS Sports for the insertion
of the virtual first down line in the national broadcast of 1999-2000 NFL
regular season games.
Sales and Marketing
Sales and marketing expenses include salaries of sales and marketing
personnel, their travel expenses, public relations, promotion, support
personnel and allocated operating costs. Total sales and marketing expenses
increased 97% to $933,586 for the quarter ended September 30, 1999 from
$474,493 for the quarter ended September 30, 1998 as a result of increased
public relations activity to support the Company's continuing focus on the
sales and marketing of the L-VIS System as well as license fees paid to
obtain certain international broadcast and programming rights.
Product Development
Product 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, program enhancements.
Also included are costs related to the development of a new series of
products which will allow viewers to interact with live or recorded video
programming via the Internet or through interactive television.
Product development expenses increased 31% to $581,543 for the quarter
ended September 30, 1999 from $443,792 for the quarter ended September 30,
1998 resulting from (i) a shift in the allocation of new and existing
engineering and management personnel to deployment of new applications of
our core technology, including our post production product for use in
entertainment programming and
10
<PAGE> 11
development work on products for the Internet and interactive television,
and (ii) increased depreciation resulting from additional systems being
used for in-house development.
Field Operations and Support
Field operations and support expenses include the costs associated with the
material production, depreciation and operational support of the L-VIS
System units, including training costs for operators, the shipping of L-VIS
System units to international and domestic venues and support of the L-VIS
Systems in the field. Field operations and support expenses increased 41%
to $1,243,070 for the quarter ended September 30, 1999 from $882,877 for
the quarter ended September 30, 1998. This increase was the result of
several factors including (i) an increase in expenses associated with the
purchase of L-VIS System components for newly constructed Systems, built
for use in both domestic and international venues, (ii) depreciation
expense related to these systems, (iii) costs associated with increased
activity in Europe, and (iv) costs associated with the use of the L-VIS
System in pre-recorded television broadcasts, or post production, and auto
racing.
General and Administrative
General and administrative costs include salaries of management, financial
and support personnel, allocated rent and operating costs and legal and
accounting fees. General and administrative costs increased 32% to $911,150
for the quarter ended September 30, 1999 from $689,337 for the quarter
ended September 30, 1998, primarily as a result of professional fees
associated with newly awarded patents and the defense of the Company's
existing intellectual property.
Interest and Other Income
Interest and other income decreased 51% to $137,807 for the quarter ended
September 30, 1999 from $278,763 for the quarter ended September 30, as a
result of the decrease in funds available to invest from the proceeds of
the Company's initial public offering of stock in December 1997.
Net Loss
As a result of the foregoing factors, the Company's net loss increased 56%
to $3,023,599 for the quarter ended September 30, 1999 from $1,933,790 for
the quarter ended September 30, 1998.
Year 2000 Risk Compliance
Many currently installed computer systems have been programmed to use a
two-digit number to represent the year (e.g., "99" for "1999"). To ensure
that automated processes will correctly identify "00" as the year "2000"
rather than "1900", all 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".
11
<PAGE> 12
The Company has completed its Y2K project plan and assessment (the
"Project") to identify, correct and test all internal and external computer
systems as well as identify potential problem areas relative to the Y2K
readiness of the Company's suppliers, vendors, customers and business
partners. The Company plans to use the remainder of 1999 to continue
performing quality assurance checks on all internal systems and check with
suppliers, customers and key business partners as to any potential problem
areas which need to be addressed.
The Company has requested and has been reviewing assurances on the status
of the Y2K compliance readiness of all critical suppliers and business
partners. Based upon the representations received to date, the Company does
not anticipate significant disruptions in service. However, there is no
assurance that noncompliance by key suppliers or customers will not have a
material effect on our operations.
Given the information available at this time, the Company estimates that
total costs related to Y2K compliance are still expected to be less than
$100,000. The Company does not expect to encounter serious Y2K
non-compliance problems with internal systems. To the extent that the
Company's suppliers and broadcast partners prove to have Y2K compliance
problems, however, the planned operations of the Company could be
significantly disrupted. The Company may not be able to provide customers
with the services requested. This could have a material adverse effect on
the Company's business, financial condition and planned results of
operations. Although management is currently unable to quantify the impact
of this potential disruption on its future earnings, the Company is making
its best effort to minimize the risks associated with Y2K problems.
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 (i)
start-up costs, (ii) the costs of developing, testing and building L-VIS
Systems, and, (iii) operating expenses relating to sales and marketing
activities of the Company. Since its inception, the Company has primarily
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, (iii) the proceeds of a bridge loan financing which closed in
October 1997, (iv) the proceeds from the initial public offering of its
Common Stock which closed 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.
As of September 30, 1999, the Company's cash and cash equivalents decreased
to $8,166,458 from $12,494,373 at June 30, 1999. Net cash used in operating
activities increased to $2,999,602 from $1,941,288 for the quarters ended
September 30, 1999 and 1998, respectively, due in large part to increased
losses for the quarter. Depreciation expense increased 51% to $443,462 from
$294,024 for the quarters ended September 30, 1999 and 1998, respectively,
as a direct result of the increased number of L-VIS Systems built for both
domestic and international use.
Net cash used in investing activities increased to $1,328,881 from $201,219
for the quarters ended September 30, 1999 and 1998, respectively. This
significant use of
12
<PAGE> 13
cash was primarily the result of increased capital expenditures for the
purchase of components used in the building of additional L-VIS Systems and
the purchase of certain electronic imaging license rights.
Amortization of intangibles increased to $475,756 from $21,568 for the
quarters ended September 30, 1999 and 1998, respectively, due to the
purchase by the Company of certain electronic imaging license rights which
are being amortized over their term. Unearned revenue increased due to
increased international activity in Latin America and South Africa and
charges associated with option and warrant grants increased to $85,069 from
$0 for the quarters ended September 30, 1999 and 1998, respectively, as the
result of the Company's decision to issue stock for royalties due under the
terms of a licensing agreement with the Sarnoff Corporation.
Net cash proceeds from financing activities for the quarters ended
September 30, 1999 and 1998 were the proceeds from the exercise of
outstanding options.
In October 1999, the Company received net proceeds of approximately $8.2
million from a private equity offering of its common stock. The Company
believes that its existing available cash, cash equivalents and short-term
investments, as well as the proceeds of this private placement, will be
sufficient to meet its capital needs for a period of at least 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 ability to maintain its
customer base and attract new 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
its competitors. The Company expects to incur costs and expenses in excess
of expected revenues during the ensuing fiscal year as the Company
continues to execute its business strategy by adding to its sales and
marketing management force in its efforts to strengthen relationships with
rights holders, broadcasters and advertisers.
There is no assurance the Company will generate sufficient cash flow from
product sales to liquidate liabilities as they become due. Accordingly, the
Company may require additional funds to meet planned obligations through
June 30, 2000 and may seek to raise such amounts through a variety of
options. These include future cash from operations, proceeds from equity
financings, proceeds from equipment financing lease arrangements and the
potential sale of tax benefits relating to the Company's net operating
losses. In the event the Company is unable to liquidate its liabilities,
planned operations may be scaled back. Additional funding may not be
available when needed or on terms acceptable to us, which could have a
material adverse effect on our business, financial condition and results of
operations. If adequate funds are not available we may delay or eliminate
some expenditures. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As of June 30, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $30,311,000 which expire in
the years 2006 through 2019. Based upon the Company's initial public
offering of Common Stock in December 1997, the Company has undergone an
additional "ownership change" within the meaning of Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). Under Section 382
of the Code, upon undergoing an ownership change, the
13
<PAGE> 14
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 timing and manner in
which the net operating loss carryforwards may be utilized in any year by
the Company will be limited by Section 382 of the Code.
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.
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.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
14
<PAGE> 15
The Company does not have material exposure to market risk from market risk
sensitive instruments.
Part II
Item 1 Legal Proceedings
In September 1999, the Company filed a request with the United States
Patent and Trademark Office to reject certain claims and to assert the
Company's ownership of the other claims contained in US Patent 5,197,553,
which had recently been issued to Fox Sports Productions, Inc. On October
4, 1999, Fox Sports Productions, Inc. and Sportvision, Inc., its licensee,
filed a complaint in the United States District Court for the Northern
District of California that alleges infringement of the patent by the
Company. In the complaint, Sportvision and Fox Sports Productions seek
remedies that include injunctive relief, monetary damages, attorneys fees
and costs of the suit.
Item 2 Changes in Securities and Use of Proceeds
On October 18, 1999, the Company issued 14,286 shares of common stock to
the Sarnoff Corporation (formerly, the David Sarnoff Research Center) as a
royalty payment for the fiscal quarter ended September 30, 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 was exempt from registration under the Securities 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.
On October 20, 1999, the Company sold 1,592,727 shares of common stock to
several accredited investors at an aggregate purchase price of $8,759,998.
The issuance of the common stock was exempt from registration under the
Securities Act by virtue of Rule 506 under Regulation D. Each investor
represented to the Company that it was an accredited investor (as defined
under Regulation D) and that it was acquiring the common stock for
investment only and not for purposes of distribution. A legend to such
effect was affixed to the stock certificates issued. All of the investors
received adequate information about the Company. Allen & Company
Incorporated, a shareholder of the Company, provided placement services
with respect to the offering. See Note 4 - Related Party Transactions, of
Notes to Financial Statements.
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
September 30, 1999, the approximate amount of net offering proceeds used
was $3,210,000 for repayment of indebtedness and expenses related thereto,
$6,078,000 for the manufacture and deployment of L-VIS(TM) Systems,
$2,575,000 for research and development, $3,280,000 for sales and
marketing, $3,773,000 for capital expenditures, and approximately
$2,684,000 for working capital and general corporate purposes.
15
<PAGE> 16
Item 5 Other Information
On August 31, 1999, the Company granted Sistemas de Publicidad Virtual,
S.L. of Madrid an exclusive license to use the Company's L-VIS technology
in Portugal and Spain.
Paul Slagle joined the Company as its Vice President of Sales and Marketing
as of September 30, 1999. Sam McCleery, the Company's prior Vice President
of Sales and Marketing since 1991, was named Vice President of Business
Development.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
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
3.1 to Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 11, 1998).
10.1* Letter Agreement, dated July 19, 1999, between the Company and
CanWest Global Communications Corporation (Incorporated by
reference to Exhibit 10.1 to Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 22,
1999).
10.2* Agreement, dated August 9, 1999, between the Company and CBS
Sports, a division of CBS Corporation (Incorporated by reference
to Exhibit 10.1 to Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 9, 1999).
10.3* Agreement, dated August 31, 1999 between the Company and Sistemas
de Publicidad Virtual, S.L.
10.4 Employment Agreement, dated September 30, 1999, between the
Company and Paul Slagle.
27.1 Financial Data Schedule
* Confidential treatment has been requested with respect to portions of the
exhibit.
(b) Reports on Form 8-K.
On August 18, 1999, the Company filed a current report on Form 8-K dated
July 22, 1999 which reported an agreement with CanWest Global
Communications Corporation regarding the use of the Company's technology
to insert electronic images into live sports events and entertainment
programming into certain Canadian telecasts.
16
<PAGE> 17
On October 28, 1999, the Company filed a current report on Form 8-K dated
August 9, 1999 which reported a multi-year agreement with CBS Sports, a
division of CBS Corporation, regarding the use of the Company's
technology to electronically insert a first-down line in national
broadcasts of certain National Football League games.
17
<PAGE> 18
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.
November 12, 1999 By: /s/ Dennis P. Wilkinson
------------------------ ---------------------------
Date Dennis P. Wilkinson,
President and
Chief Executive Officer
November 12, 1999 By: /s/ Lawrence L. Epstein
------------------------- ---------------------------
Date Lawrence L. Epstein,
Chief Financial Officer
18
<PAGE> 1
Exhibit 10.3
[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT
CONFIDENTIALITY HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THE
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION]
PRINCETON VIDEO IMAGE, INC.
15 Princess Road
Lawrenceville, NJ 08648
August 16, 1999
Sistemas De Publicidad Virtual S.L.
Alcala Galiano, 4
28010 Madrid
Spain
Attn: Patricio Pande Soraluce
Re: L-VIS System License Agreement
Gentlemen:
This letter will memorialize the agreement of Princeton Video Image,
Inc. ("PVI") and your company (or an affiliate to be designated by you) ("you"
or "Licensee") with regard to the use of the product, including the computer
hardware, software and documentation, developed by PVI (the "L-VIS System") to
permit the real-time electronic insertion of electronic advertising into
television broadcasts. While the parties intend to enter into a more definitive
agreement ("System License Agreement") and will use all reasonable efforts to do
so, the terms and conditions of this letter, (subject to the standard terms and
conditions that are generally applicable to licensees of the L-VIS System, as
may be in effect from time to time, a copy of which will be attached to the
System License Agreement), will prevail and be binding upon each of the parties
until, if at all, the System License Agreement is executed by both parties.
The principal business terms of our agreement are as follows:
Territory You will have exclusive rights to exploit commercial
use of the L-VIS System for the Licensed Event(s)
defined below in the following countries: Spain and
Portugal.
Licensed Events Licensee events are television broadcasts which
originate
<PAGE> 2
and are intended for telecast solely within the
Territory. Events and programming which are telecast
both within and outside the Territory are not
included unless they are specifically licensed to
Licensee, under a separate agreement, by PVI or a
PVI event licensee. PVI reserves the right to grant
licenses in connection with use of the
L-VIS System by others for specific individual
events which are telecast internationally, including
within the Territory.
Term The license will commence as soon as the definitive
agreement is signed and equipment can be delivered.
The license will extend for 5 years.
Assuming you are not in default of your obligations,
you will have the right at the end of the initial
term to extend it for an additional 5 years.
Licensee You will have an exclusive, non-transferable license
Rights and to exploit commercially the L-VIS System for
Obligations Licensed Events in your Territory during the Term.
You will have editorial control over use of the
L-VIS System, subject to compliance with general
ethical standards and guidelines developed by PVI
for all licensees to promote public acceptance of
the technology.
You will agree to use diligent commercial efforts to
generate revenue from the sale of advertising making
use of the L-VIS System for Licensed Events. In this
regard you agree to commit significant resources to
market and sell use of the L-VIS System including
hiring appropriate sales, operations and marketing
personnel.
You will be responsible for negotiating for and
obtaining any arrangements with television stations
and broadcast rights-holders needed to allow you to
use the L-VIS System in connection with the telecast
of any event, including obtaining all rights and
permissions which may be needed.
<PAGE> 3
Training and Support PVI will train two members of your technical staff
and provide technical assistance as may be needed.
There will be no charge for training or telephone
technical assistance, except for travel related
costs. On site technical assistance will be subject
to PVI's reasonable standard charges for such
services.
From time to time, when you request, PVI will seek
to make PVI Europe-based personnel and L-VIS systems
available for your use for special projects,
provided such are reasonably available and such
assistance is then practicable. You must pay PVI's
then reasonable standard charges, and out-of-pocket
expenses, associated with such assistance.
Improvements PVI will provide you with any general technical
improvements it may develop to the L-VIS System from
time to time, with training. There will be no charge
for this except, where necessary, for additional or
replacement equipment.
If PVI develops a non-exclusive special custom
enhancement for the L-VIS System which it generally
licenses and charges for separately, it will offer
you the opportunity to purchase a license for the
enhancement.
Equipment At the initiation of the definitive agreement, one
complete L-VIS System unit will be provided.
Units shall be delivered F.O.B. PVI's U.S. facility
and Licensee shall bear all costs for freight,
delivery, and import taxes or duties, if any,
imposed by the country where delivery is made.
PVI will warrant that the Equipment will be provided
in working order. Licensee will be responsible for
maintaining the L-VIS System during the Term, and
will insure the equipment against loss, naming PVI
as loss payee.
<PAGE> 4
PVI will retain all ownership rights to any L-VIS
System unit provided, subject to the rights of use
granted to Licensee. Licensee will return all
equipment to PVI at the end of the Term.
License Fees In consideration for the rights and license grant,
Licensee will pay PVI running royalties as described
below, which will be reportable and payable
quarterly during the Term.
Royalties Licensee will pay PVI running royalties equal to
[CONFIDENTIAL TREATMENT REQUESTED] of Revenues
generated from exploitation of the L-VIS System. For
this purpose, "Revenues" will mean all money or
other consideration received by Licensee from use of
the L-VIS System, including from the sale of
advertising, whether as lump sum or up-front
payments, periodic payments, or otherwise; provided,
however, that Licensee must pay a minimum equal to
[CONFIDENTIAL TREATMENT REQUESTED] of fees actually
paid by advertisers for insertion of electronic
images in Licensed Events using the L-VIS System,
regardless of the form of arrangements Licensee may
choose to make with event rights holders,
advertisers, or others.
In cases where PVI has paid for video insertion
rights for the benefit of PVI and PVI licensees,
such as rights related to the international telecast
of an event, PVI may impose an additional or higher
royalty rate applicable to your Revenues associated
with such event, as a condition for the grant of a
license to you for such event.
In order to keep the license in effect, Licensee
also agrees to meet reasonable performance criteria
and revenue targets to be established by mutual
agreement of the parties from time to time over the
course of the Term.
After each 6 months of the Term, PVI and Licensee
will conduct a performance review of their
respective efforts in connection with the license
and agree upon reasonable future performance
criteria and revenue targets. Performance criteria
and revenue targets may be based upon PVI's
experience in other territories and special
circumstances for Licensee within the Territory. If
the
<PAGE> 5
parties cannot in good faith reach prompt agreement
on such matters for any 6 month period, they will
submit the matter to expedited non-binding mediation
with a neutral third party. The costs of such
mediation will be borne by Licensee. If after the
mediation the parties still cannot reach agreement,
either party may then terminate the license.
Security for Inasmuch as PVI has elected to offer you a license
Performance relationship because of the status and
creditworthiness of your business, if you elect to
have a subsidiary or new business entity serve as
Licensee, you or your existing parent company must
agree to guarantee performance and payments by such
designated affiliate.
If you agree with the terms and conditions set forth in this letter of
intent, please sign the enclosed copy of this letter where indicated below and
return it to me. The terms set forth above will expire on the thirtieth day
after your receipt of this letter if you have not signed and returned it to me
before then. Subject to the preceding sentence, this letter will become
effective on the date on which you sign this letter.
We look forward to a productive relationship.
Sincerely,
Princeton Video Image, Inc.
By: /s/ Dennis P. Wilkinson
-----------------------------------------------
Dennis P. Wilkinson
President and Chief Executive Officer
Agreed to and accepted this
31st day of August, 1999
Sistemas De Publicidad Virtual, S.L.
By: /s/ Patricio Pan De Soraluce
-----------------------------------------------
Name: Patricio Pan De Soraluce
Title: General Manager
<PAGE> 1
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of September 30,
1999, by and between Princeton Video Image, Inc., a New Jersey corporation (the
"Company"), and Paul Slagle (the "Employee").
WHEREAS, the Company and the Employee wish to enter into an agreement
whereby the Employee shall be employed by the Company as its Vice President,
Sales and Marketing, as set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto hereby agree as follows:
1. Term of Employment. Subject to the terms and conditions hereof, the
Company will employ the Employee, and the Employee will serve the Company, as
Vice President, Sales and Marketing, or such other senior executive position or
positions as the Company may request from time to time, for a period beginning
on September 30 , 1999 (the "Date of Hire") and terminating on the first
anniversary of such date (the "Initial Term"). Following the expiration of the
Initial Term and of each extension period referred to in this sentence, the term
of this Agreement automatically shall be extended for a period of one (1) year
thereafter (such term, as it may be shortened by termination of the Employee's
employment hereunder pursuant to the provisions hereof or extended, the "Term of
Employment").
2. Duties. During the Term of Employment, the Employee will serve as
Vice President, Sales and Marketing, subject to the terms of this Agreement and
the direction and control of the President of the Company and its Chairman. The
primary location of the Employee's employment hereunder shall be the offices of
the Company in New York City, New York. The Employee will hold, in addition to
the office of Vice President, Sales and Marketing the Company, such other
offices in the Company to which he may be appointed or assigned from time to
time by the Board of Directors of the Company and will discharge such duties in
connection therewith. The Employee shall devote all of his business time to the
performance of his duties hereunder, provided, that the Employee shall not be
precluded from serving as a member of up to two boards of directors or advisory
boards of companies or organizations so long as such service does not violate
the provisions of Section 9 of this Agreement or interfere with the performance
of the Employee's duties hereunder.
3. Compensation. The Company will, during the Term of Employment, pay
to the Employee as compensation for the performance of his duties and
obligations hereunder an initial base salary at the rate of $175,000 per annum
("Salary"), payable in equal semi-monthly installments. Such Salary shall be
reviewed annually by the Board of Directors of the Company in accordance with
the Company's compensation program solely for the purpose of determining
increases. During the Term of Employment, the Employee shall be eligible to
receive a bonus, to be awarded at the sole discretion of the Board of Directors
of the Company, upon the attainment of stated goals and objectives for the
Employee to be set by the Chairman, the President, or the
<PAGE> 2
Compensation Committee of the Board after consultation with the Employee;
provided, however, that the Employee shall receive a bonus of no less than
$75,000 upon the satisfactory completion of the Initial Term.
4. Other Benefits. During the Term of Employment:
(a) The Employee shall be entitled to participate in employee
benefit plans and programs of the Company to the extent that his position,
tenure, salary, age, health and other qualifications make him eligible to
participate. The Company does not guarantee the adoption or continuance of any
particular employee benefit plan or program during the Term of Employment, and
the Employee's participation in any such plan or program shall be subject to the
provisions, rules, regulations and laws applicable thereto; provided, however,
that the Employee shall be entitled to health and hospital insurance benefits
consistent with the past practices of the Company in effect with respect to
Company personnel generally.
(b) While employed hereunder, the Employee shall be entitled
to vacation benefits consistent with the past practices of the Company in effect
with respect to Company personnel generally, plus one additional week per year.
Such vacation may be taken by the Employee at such times as do not unreasonably
interfere with the business of the Company. The accumulation of annual vacation
time earned but not taken will be in accordance with the Company policy
guidelines. Additional vacation will be earned in accordance with Company
policy.
(c) Within thirty days of the date of this Agreement, the
Company shall grant to the Employee a stock option, pursuant to the Company's
1993 Stock Option Plan (the "Plan"), to purchase 65,000 shares of Common Stock
of the Company ("Common Stock") with an exercise price equal to the fair market
value of the shares on the Date of Hire. Such option shall be for a term of ten
years, subject to earlier termination ninety days after termination of
Employee's employment (or such later date after such termination as is as
provided in the Plan or Stock Option Grant Agreement), and shall be in the form
of, and on such terms and conditions as provided in, the Company's standard form
of Stock Option Grant Agreement in effect as of the date of this Agreement. Such
option grant shall provide, on condition that the Employee is employed by the
Company on the relevant vesting dates, that such options shall vest and become
exercisable over a three year period at the rate of 1/36 for each calendar month
of Employee's employment with the Company.
(d) The stock option grant agreement for the options described
in Section 4(c) of this Agreement will also provide that the applicable number
of all unvested options will become exercisable immediately upon a merger,
consolidation, acquisition of property or stock, reorganization (other than a
mere reincorporation or the creation of a holding company) or liquidation of the
Company, as a result of which the shareholders of the Company receive cash,
stock or other property in exchange for or in connection with their shares of
the Company's Common Stock. In addition, the applicable number of all unvested
options shall become immediately exercisable in the event of a change in control
of the Company. A change in control of the Company shall be deemed to occur if
(a) the Company is merged with or into or consolidated with another
2
<PAGE> 3
corporation or other entity under circumstances where the shareholders of the
Company immediately prior to such merger or consolidation do not own after such
merger or consolidation shares representing at least fifty percent (50%) of the
voting power of the Company or the surviving or resulting corporation or other
entity, as the case may be, or (b) if the Company is liquidated or sells or
otherwise disposes of substantially all of its assets to another corporation or
entity, or (c) if any person (as such term is used in Sections 13(d) and 14 (d)
(2) of the Securities Exchange Act of 1934) shall become the beneficial owner
(within the meaning of Rule 13d-3 under such Act) of forty (40%) percent or more
of the Common Stock of the Company other than pursuant to a plan or arrangement
entered into by such person and the Company or otherwise approved by the Board
of Directors, or (d) during any period of two (2) consecutive years, individuals
who at the beginning of such period constitute the entire Board of Directors
shall cease for any reason to constitute a majority of the Board unless the
election or nomination for election by the Company's shareholders of each new
director was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who were directors at the beginning of the period. For the
purpose of this Section 4(d), the "applicable number" of all unvested options
shall mean: (i) at commencement of the first twelve (12) months of the
Employee's employment, fifty percent (50%) of such unvested options, such number
to increase linearly during such twelve-month period to one hundred percent
(100%), and (ii) following such twelve-month period, one hundred percent (100%)
of such unvested options.
(e) In the event that the acceleration, as set forth in
Section 4(d) of this Agreement, of any option to be granted to the Employee
pursuant to the Plan which causes the option to be exercisable immediately (such
options, the "Accelerated Options") (i) constitutes a "parachute payment" within
the meaning of section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) but for this Section 4(e), would be subject to the excise
tax imposed by section 4999 of the Code (the "Excise Tax"), then the amount of
the Accelerated Options may be reduced to the largest amount which the Employee,
in his sole discretion, determines would result in no portion of the Accelerated
Options (or only such portion thereof as is acceptable to the Employee) being
subject to the Excise Tax. The determination by the Employee of any reduction
shall be conclusive and binding upon the Company. The Company shall reduce such
Accelerated Options only upon written notice by the Employee indicating the
amount of such reduction.
(f) The Employee will receive a signing bonus in the amount of
$70,000, which shall be paid as follows: (i) $35,000 thirty days after the Date
of Hire; and (ii) $35,000 thirty days after the first anniversary of the Date of
Hire.
5. Expenses. During the Term of Employment, all travel and other
reasonable business expenses incident to the rendering of services by the
Employee under this Agreement will be paid or reimbursed by the Company subject
to the submission of appropriate vouchers and receipts in accordance with the
Company's policy from time to time in effect.
6. Death or Disability.
(a) The Employee's employment under this Agreement shall be
terminated by the death of the Employee. In addition, the Employee's employment
under this Agreement may be
3
<PAGE> 4
terminated by the Board of Directors of the Company if the Employee shall be
rendered incapable by illness or any other disability from complying with the
terms, conditions and provisions on his part to be kept, observed and performed
for a period in excess of 180 days (whether or not consecutive) or 90 days
consecutively, as the case may be, during a 12-month period during the Term of
Employment ("Disability"). If the Employee's employment under this Agreement is
terminated by reason of Disability of the Employee, the Company shall give
notice to that effect to the Employee in the manner provided herein. In the
event that the Employee receives disability insurance benefits for which payment
was made by the Company after the date of this Agreement and prior to
termination of the Employee's employment under this Agreement pursuant to this
Section 6(a), the Employee's Salary shall be reduced by an amount equal to such
disability insurance benefits during such period.
(b) In addition to and not in substitution for any other
benefits which may be payable by the Company in respect of the death of the
Employee, in the event of such death after the Employee's employment has begun,
the Salary payable hereunder shall continue to be paid at the then current rate
for three (3) months after the termination of employment, and any bonus to which
the Employee would have been entitled for the year in which his death occurs
shall be pro rated to the date of his death and paid not later than three (3)
months after the termination of employment. All sums payable pursuant to this
Section 6(b) shall be paid to the Employee's personal representative.
(c) In addition to and not in substitution for any other
benefits which may be payable by the Company in respect of the Disability of the
Employee, in the event of the termination of the Employee's employment hereunder
due to such Disability pursuant to Section 6(a) after the Employee's employment
has begun, the Company shall pay the Employee, in six (6) equal semi-monthly
installments, an aggregate amount equal to three (3) months' Salary at the rate
in effect on the effective date of such termination; provided, however, that the
Company shall deduct from such payments the amount of any and all disability
insurance benefits paid during such three-month period with respect to the
Employee that were paid for by the Company during any period for which payment
was made by the Company after the date of this Agreement and prior to the
termination of the Employee's employment. In addition, any bonus to which the
Employee would have been entitled for the year in which such termination of
employment occurs shall be pro rated to the date of such termination and paid
not later than twelve (12) months after such termination.
7. Disclosure of Information, Inventions and Discoveries. The Employee
shall promptly disclose to the Company all processes, trademarks, inventions,
improvements discoveries and other information related to the business of the
Company (collectively, "Developments") conceived, developed or acquired by him
alone or with others during the Term of Employment or during any earlier period
of employment by the Company or any predecessor of the Company, whether or not
during regular working hours or through the use of materials or facilities of
the Company. All such Developments shall be the sole and exclusive property of
the Company, and, upon request, the Employee shall promptly deliver to the
Company all drawings, sketches, models and other data and records relating to
such Developments. In the event any such Development shall be deemed by the
Company to be patentable, the Employee shall, at the expense of the Company,
assist the Company
4
<PAGE> 5
in obtaining a patent or patents thereon and execute all documents and do all
such other acts and things necessary or proper to obtain letters patent and to
invest in the Company full right, title and interest in and to such
Developments.
8. Non-Disclosure. The Employee shall not, at any time during or after
the Term of Employment or any earlier period of employment by the Company or any
predecessor of the Company, divulge, furnish or make accessible to anyone
(otherwise than in the regular course of business of the Company) or use for his
own account or for the account of any other person any knowledge or information
with respect to confidential or secret processes, inventions, discoveries,
improvements, formulae, plans, materials, devices or ideas or other know-how,
whether patentable or not, with respect to any confidential or secret
development or research work or with respect to any other confidential or secret
aspects of the Company's business (including, without limitation, customer
lists, supplier lists and pricing arrangements with customers or suppliers)
(collectively, the "Confidential Information"). This Section 8 shall not apply
to any information which (i) is or becomes generally available to the public
other than as a result of a disclosure directly or indirectly by the Employee,
or (ii) is or becomes available to the Employee on a non-confidential basis from
a person other than the Company or its officers, directors or agents who, to the
Employee's knowledge after due inquiry, is not and was not bound by a
confidentiality obligation to the Company and was not otherwise prohibited from
transmitting such information to the Employee.
9. Non-Competition. The Company and the Employee agree that the
services rendered by the Employee are unique and irreplaceable. In addition to
and in furtherance of Section 8 of this Agreement, the Company and the Employee
agree that the Employee has had, and will continue to have, unlimited access to
the Confidential Information and that preserving the proprietary nature of the
Confidential Information is of utmost importance to the Company. By giving the
Employee an opportunity or incentive to breach his obligations to the Company
under Section 8 of the Agreement, any relationship between the Employee and a
competitor of the Company during or following the Term of Employment will
potentially cause the Company irreparable injury, regardless (in the event of
termination or expiration of the Term of Employment) of the circumstances under
which the Term of Employment ends, and even if the Employee is terminated by the
Company for cause. Therefore, in light of the foregoing, the Employee agrees
that during the Term of Employment and for a period of two (2) years thereafter,
the Employee shall not, directly or indirectly, through any other person, firm,
corporation or other entity (whether as an officer, director, employee, partner,
consultant, holder of equity or debt investment, lender or in any other manner
or capacity):
(a) in any geographical area in the United States or in those
foreign countries where the Company, during the Term of Employment, conducts or
has undertaken activities to begin to conduct business or initiate activities,
design, manufacture, sell, market, offer to sell or supply video or television
technology similar to that being developed or sold by the Company on the date of
the termination of Employee's employment under this Agreement for any reason;
(b) initiate conversations to solicit, induce, encourage or
attempt to induce or encourage any employee of the Company to terminate his or
her employment with the Company or to breach any other obligation to the
Company;
5
<PAGE> 6
(c) solicit, interfere with, disrupt, alter or attempt to
disrupt or alter the relationship, contractual or otherwise, between the Company
and any customer, potential customer, or supplier of the Company; or
(d) engage in or participate in any business conducted under
any name that shall be the same as or similar to the name of the Company or any
trade name used by it,
provided, however, that in the event the Employee's employment is terminated by
the Company for cause pursuant to Section 11 of this Agreement, then following
such termination Employee shall have no further obligations under this Section 9
unless the Company, in its sole discretion, elects to make additional payments
to Employee as provided under Section 12.
The Employee acknowledges that the foregoing geographic, activity and
time limitations contained in this Section 9 are reasonable and properly
required for the adequate protection of the Company's business. In the event
that any such geographic, activity or time limitation is deemed to be
unreasonable by a court, the Employee shall submit to the reduction of either
said activity or time limitation to such activity or period as the court shall
deem reasonable. In the event that the Employee is in violation of the
restrictive covenants set forth in this Section 9, then the time limitation for
such covenants shall be extended for a period of time equal to the pendency of
any proceedings brought to enforce such covenants, including any appeals.
10. Remedies.
(a) The Employee acknowledges that irreparable injury would
result to the Company if the provisions of Section 7, 8, 9 or 14 of this
Agreement were not specifically enforced and agrees that the Company shall be
entitled to any appropriate legal, equitable or other remedy, including
injunctive relief, in respect to any failure to comply with the provisions of
Section 7, 8, 9 or 14, as determined by a court of competent jurisdiction.
(b) In furtherance of and not in limitation of Section 10(a),
in the event that, subsequent to the Term of Employment, the Employee breaches
any of his obligations to the Company under Section 7, 8, 9 or 14 of this
Agreement, then the Company's obligation to make further payments to the
Employee pursuant to this Agreement shall terminate. Any such termination shall
not limit or affect the Company's right to pursue any other remedy available to
the Company at law or in equity.
11. Termination for Cause. In addition to any other remedy available to
the Company, either at law or in equity, the Employee's employment with the
Company may be terminated by the Board of Directors for cause, which shall
include (i) the Employee's conviction from which no further appeal may be taken
for, or plea of nolo contendere to, a felony or a crime involving moral
turpitude, (ii) the Employee's commission of a breach of fiduciary duty
involving personal profit in connection with the Employee's employment by the
Company, (iii) the Employee's commission of an act which the Board of Directors
shall reasonably have found to have involved willful misconduct
6
<PAGE> 7
or gross negligence on the part of the Employee, in the conduct of his duties
under this Agreement, (iv) habitual absenteeism, (v) the Employee's material
breach of any material provision of this Agreement which remains uncured for a
period of thirty (30) days following notice by the Company, or (vi) the willful
and continued failure by the Employee to perform substantially his duties with
the Company (other than any such failure resulting from his incapacity due to
physical or mental illness). With respect to the matters set forth in
subsections (iii), (iv), (v) and (vi) of this Section 11, the Company may not
terminate the Employee's employment unless the Employee has first been given
notice of the conduct forming the cause for such termination and an opportunity
to explain such conduct to the Company. In the event of termination under this
Section 11, the Company's obligations under this Agreement shall cease, and the
Employee shall forfeit all rights to receive any future compensation under this
Agreement. Notwithstanding any termination of this Agreement pursuant to this
Section 11, the Employee, in consideration of his employment hereunder to the
date of such termination, shall remain bound by the provisions of Section 7, 8,
9 and 14 hereof following any such termination.
12. Termination Without Cause.
(a) Each of the Company and the Employee may terminate the
Employee's employment under this Agreement at any time for any reason
whatsoever, without any further liability or obligation of the Company to the
Employee or of the Employee to the Company from and after the date of such
termination (other than liabilities or obligations accrued but unsatisfied on,
or surviving, the date of such termination), by sending prior notice to the
other party. In the event the Company elects to terminate the Employee's
employment under this Agreement pursuant to this Section 12, the Company shall
continue to pay the Employee, in equal semi-monthly installments, the full
Salary (inclusive of paid medical plan, but exclusive of bonuses, if any) as
such Salary otherwise would have accrued for a period equal to three (3) months.
In the event the Employee terminates his employment hereunder within ninety (90)
days after a Detrimental Change (as hereinafter defined), the Company shall
continue to pay the Employee, in equal semi-monthly installments, the full
Salary (inclusive of paid medical plan, but exclusive of bonuses, if any) as
such Salary otherwise would have accrued for a period equal to three (3) months.
In the event the Employee elects to terminate the Employee's employment under
this Agreement, other than as set forth in the immediately preceding sentence,
prior to the end of the Term of Employment, the Company's obligation to pay
Salary shall cease as of the effective date of termination. Any termination of
the Employee's employment under this Agreement by the Company as provided in
this Section 12 shall be in addition to, and not in substitution for, any rights
with respect to termination of the Employee which the Company may have pursuant
to Section 11. Notwithstanding any termination of the Employee's employment
under this Agreement pursuant to this Section 12, the Employee, in consideration
of his employment hereunder to the date of such termination, shall remain bound
by the provisions of Section 7, 8, 9 and 14 hereof following any such
termination.
7
<PAGE> 8
(b) As used in this Agreement, "Detrimental Change" shall mean
a detrimental change in the nature or scope of the Employee's employment or
duties which is inconsistent with those duties customarily performed by a
company's Vice President, Sales and Marketing. Detrimental Change shall include,
without limitation, the assignment of the Employee to any duties substantially
inconsistent with those of senior executive management, a reduction in Salary or
other employee benefits, the failure by the Company to continue to provide the
Employee with substantially similar bonus opportunities, the relocation of the
Employee's primary office of employment to a location other than Lawrenceville,
New Jersey and more than fifty (50) miles from the location of such office prior
to the relocation, and substantially increased travel requirements.
13. Resignation. In the event that the Employee's services under this
Agreement are terminated under any of the provisions of this Agreement (except
by death), the Employee agrees that he will deliver to the Board of Directors
his written resignation from all positions held with the Company, such
resignation to become effective immediately; provided, however, that nothing
herein shall be deemed to affect the provisions of Section 7, 8, 9 and 14 hereof
relating to the survival thereof following termination of the Employee's
services hereunder; and provided, further, that except as expressly provided in
this Agreement, the Employee shall be entitled to no further compensation
hereunder.
14. Data. Upon expiration or termination of the Term of Employment or
termination pursuant to Section 1, 6, 11 or 12 hereof, the Employee or his
personal representative shall promptly deliver to the Company all books,
memoranda plans, records and written data of every kind relating to the business
and affairs of the Company which are then in his possession or control.
15. Insurance. The Company shall have the right, at its own cost and
expense to apply for and to secure in its own name, or otherwise, life, health
or accident insurance or any or all of them covering the Employee, and the
Employee agrees to submit to usual and customary medical examinations and
otherwise to cooperate with the Company in connection with the procurement of
any such insurance and any claims thereunder.
16. Waiver of Breach. Any waiver of any breach of this Agreement shall
not be construed to be a continuing waiver or consent to any subsequent breach
on the part either of the Employee or the Company.
17. Assignment. This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of the Company upon any sale of all or
substantially all of the Company's assets, or upon any merger or consolidation
of the Company with or into any other entity (including, without limitation, any
change in control of the Company), all as though such successors and assigns of
the Company and their respective successors and assigns were the Company.
Insofar as the Employee is concerned, this Agreement, being personal, may not be
assigned, and any such purported assignment shall be void and of no effect.
8
<PAGE> 9
18. Severability. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom, and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect. In furtherance and not in limitation of the
foregoing, should the duration or geographical extent of, or business activities
covered by, any provision of this Agreement be in excess of that which is valid
and enforceable under applicable law, then such provision shall be construed to
cover only that duration, extent or activities which may be validly and
enforceably covered.
19. Notices. All notices, requests and other communications pursuant to
this Agreement shall be in writing and shall be deemed to have been duly given,
if delivered in person or by courier, telegraphed, telexed or by facsimile
transmission (receipt confirmed) or five (5) business days after being sent by
registered or certified mail, return receipt requested, postage paid, addressed
as follows:
(a) If to the Employee:
Paul Slagle
18 Jeffrey Rd.
Greenwich, CT 06830
Fax No.:
(b) If to the Company:
Princeton Video Image, Inc.
15 Princess Road
Lawrenceville, NJ 08648
Fax No.: (609) 912-0044
Attn: President & CEO
with a copy to:
Richard J. Pinto, Esq.
Smith, Stratton, Wise, Heher & Brennan
600 College Road East
Princeton, NJ 08540
Fax No.: (609) 987-6651
Any party may, by written notice to the other in accordance with this Section
19, change the address to which notices to such party are to be delivered or
mailed.
9
<PAGE> 10
20. General. Except as otherwise provided herein, the terms and
provisions of this Agreement shall constitute the entire agreement by the
Company and the Employee with respect to the subject matter hereof and shall
supersede any and all prior agreements or understandings between the Employee
and the Company, whether written or oral. This Agreement shall be construed and
enforced in accordance with the laws of the State of New Jersey. This Agreement
may be amended or modified only by a written instrument executed by the Employee
and the Company. The headings of the sections of this Agreement are for
convenience of reference only and do not constitute part of this Agreement. This
Agreement may be executed in any number of counterparts, each of which, when
executed, shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties have executed or caused to be
executed by its duly authorized representative this Employment Agreement as of
the day and year first above written.
PRINCETON VIDEO IMAGE, INC.
By: /s/ Dennis P. Wilkinson
------------------------------
Dennis P. Wilkinson, President
and Chief Executive Officer
/s/ Paul Slagle
------------------------------
PAUL SLAGLE
10
<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-Q for the quarter
ended September 30, 1999 and is qualified in its entirety by reference to such
quarterly report on Form 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 8,166,458
<SECURITIES> 137,801
<RECEIVABLES> 537,584
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,655,087
<PP&E> 7,394,838
<DEPRECIATION> 3,277,437
<TOTAL-ASSETS> 14,507,558
<CURRENT-LIABILITIES> 3,321,738
<BONDS> 0
1,002,337
0
<COMMON> 41,621
<OTHER-SE> 9,153,598
<TOTAL-LIABILITY-AND-EQUITY> 14,507,558
<SALES> 0
<TOTAL-REVENUES> 507,943
<CGS> 0
<TOTAL-COSTS> 3,669,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,023,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,023,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,023,599)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
