<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, 2000
[ ] 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) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant 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
November 2, 2000 was 10,061,423.
<PAGE> 2
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 June 30
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,018,078 $ 8,388,148
Restricted securities held to maturity 60,847 60,847
Trade accounts receivable 879,345 829,329
License rights 600,000 600,000
Available for sale securities 687,369 846,167
Other current assets 265,454 198,568
------------ ------------
Total current assets 8,511,093 10,923,059
Property and equipment, net 3,455,394 3,685,068
Intangible assets, net 607,330 587,486
Other assets 322,894 529,195
------------ ------------
Total assets $ 12,896,711 $15,724,808
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,343,530 $ 4,135,060
Unearned revenue 284,153 293,819
------------ ------------
Total current liabilities 4,627,683 4,428,879
Unearned revenue 560,378 630,033
Other liabilities 42,246 45,150
------------ ------------
Total liabilities 5,230,307 5,104,062
------------ ------------
Commitments and contingencies
Redeemable preferred stock:
Cumulative, Series A, conditionally redeemable, $4.50 par value,
authorized 167,000 shares; issued and outstanding 11,363 and
67,600 shares at September 30, 2000 and June 30, 2000, respectively,
redemption value equal to carrying value (par plus all accrued
but unpaid dividends) 74,916 439,950
Cumulative, Series B, conditionally redeemable, $5.00 par value,
authorized 93,900 shares; issued and outstanding 12,834 and
86,041 shares at September 30, 2000 and June 30, 2000, respectively,
redemption value equal to carrying value (par plus all accrued
but unpaid dividends) 90,150 595,817
------------ ------------
Total redeemable preferred stock 165,066 1,035,767
Minority interest 271,501 311,583
Shareholders' Equity:
Common stock, no par value; $.005 stated value; authorized
40,000,000 shares; 10,061,423 and 8,216,305 shares issued and
outstanding at September 30, 2000 and June 30, 2000, respectively 50,305 49,395
Additional paid-in capital 61,503,214 60,575,678
Less: Related party note receivable (947,622) (973,322)
Other comprehensive income 211,644 346,167
Accumulated deficit (53,587,704) (50,724,522)
------------ ------------
Total shareholders' equity 7,229,837 9,273,396
------------ ------------
Total liabilities, redeemable preferred stock
and shareholders' equity $ 12,896,711 $ 15,724,808
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Royalties and license fees $ 584,910 $ 216,672
Advertising and contract revenue 734,347 291,271
----------- -----------
Total revenue 1,319,257 507,943
Costs and expenses:
Sales and marketing 855,061 933,586
Product development 712,856 581,543
Field operations and support 1,450,003 1,243,070
General and administrative 1,324,528 911,150
----------- -----------
Total costs and expenses 4,342,448 3,669,349
Operating loss (3,023,191) (3,161,406)
Interest and other income 119,927 137,807
----------- -----------
Loss before tax benefit and minority interest (2,903,264) (3,023,599)
Tax benefit -- --
Minority interest 40,082 --
----------- -----------
Net loss (2,863,182) (3,023,599)
Accretion of preferred stock dividends (6,611) (11,013)
----------- -----------
Net loss applicable to common stock $(2,869,793) $(3,034,612)
=========== ===========
Basic and diluted net loss per share
applicable to common stock ($0.29) ($0.37)
=========== ===========
Weighted average number of
shares of common stock outstanding 9,975,258 8,213,484
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
September 30
------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,863,182) $ (3,023,599)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of unearned income (79,321) (116,672)
Depreciation expense 493,244 443,462
Amortization of intangibles/license rights 177,143 475,756
Charges associated with stock, warrant and option
grants and related party note receivable 87,268 85,069
Minority interest (40,082) --
Increase (decrease) in cash resulting
from changes in:
Trade accounts receivable (50,016) (158,932)
Other current assets (66,883) 30,719
Security deposits 53,743 (6,482)
Accounts payable and accrued expenses 497,452 (733,170)
Miscellaneous other 9,901 4,247
------------ ------------
Net cash used in operating activities (1,780,733) (2,999,602)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (268,048) (754,146)
Purchases of license rights (300,000) (600,000)
(Increase) decrease in intangible assets (46,988) 25,265
------------ ------------
Net cash used in investing activities (615,036) (1,328,881)
------------ ------------
Cash flows from financing activities:
Proceeds from sales of common stock, net -- 568
Cash received from related party notes receivable 25,699 --
Change in minority interest
------------ ------------
Net cash provided by financing activities 25,699 568
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,370,070) (4,327,915)
Cash and cash equivalents at beginning of period 8,388,148 12,494,373
------------ ------------
Cash and cash equivalents at end of period $ 6,018,078 $ 8,166,458
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
PRINCETON VIDEO IMAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Business and Basis of Presentation
Princeton Video Image, Inc., ("PVI", "we", "us") has developed and is
marketing a real-time video insertion system that, through patented computer
vision technology, places computer-generated electronic images into live and
pre-recorded television broadcasts of sports and entertainment programming.
These electronic images range from simple corporate names or logos to
sophisticated multi-media 3-D animated productions. The Live Video Insertion
System (the "L-VIS(TM) System") has been used to insert images and program
enhancements, into both live and pre-recorded television broadcasts. We are
also developing a series of products to allow viewers to interact with live
or recorded video programming delivered to the home via the Internet or
through interactive television. We are marketing our systems on a worldwide
basis through licensing and royalty agreements and through our
majority-owned subsidiary, Princeton Video Image Europe, N.V. ("PVI
Europe"), which is headquartered in Belgium.
The consolidated financial statements presented herein have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X and are unaudited. Reference should be made to our audited
financial statements for the fiscal year ended June 30, 2000 including the
footnotes thereto, included in our Annual Report on Form 10-K for the same
fiscal year end. In the opinion of our management, the financial statements
reflect all adjustments (which consist of normal recurring accruals)
necessary for a fair statement of the results of the interim periods
presented.
We are subject to a number of risks common to companies in similar stages of
operations including, but not limited to, the lack of assurance of the
marketability of our product, intense competition, including entry of new
competitors and products into the market, the risk of technological
obsolescence, the limited source of supply of certain components of the
L-VIS System, and the need to raise additional funds to support our business
operations. We believe that our existing available cash, cash equivalents
and short-term investments will be sufficient to meet our operating and
capital needs for a period of twelve months, although there can be no
assurance that we will not require additional funds sooner. Our actual
working capital requirements will depend on numerous factors, including the
progress of our research and development programs, our ability to maintain
our customer base and attract new customers to use the L-VIS System, the
level of resources we are able to allocate to the development of greater
marketing and sales capabilities, technological advances, our ability to
protect our patent portfolio and the status of our competitors. We expect to
incur costs and expenses in excess of expected revenues during the ensuing
fiscal year as we continue to execute our business strategy by continuing to
search for new markets in which to market our technology, both domestically
and abroad, and to strengthen existing relationships with rights holders,
broadcasters and advertisers.
<PAGE> 6
There is no assurance that we will generate sufficient cash flow from
operations to liquidate liabilities as they become due. Accordingly, we may
require additional funds to meet planned obligations through June 30, 2001
and may seek to raise such amounts through a variety of options. These
include future cash from operations, proceeds from equity financings, and
the potential sale of tax benefits relating to our net operating losses.
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,
planned operations will be scaled back resulting in the delay or reduction
of personnel and planned expenditures. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
2. Per Share Data
Statement of Financial Accounting Standards 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 number of common shares outstanding plus the
dilutive effect of common share equivalents.
Since we incurred net losses for all periods presented, both basic and
diluted per share calculations are the same. Accordingly, options and
warrants to purchase 3,729,737 and 3,436,854 shares of common stock that
were outstanding at September 30, 2000 and 1999, respectively, were not
included in diluted per share calculations, as their effect would be
antidilutive.
3. New Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." The SEC delayed the effective
date of this SAB in June 2000, so that the SAB must now be adopted by
December 31, 2000. We will adopt SAB No. 101 during our second fiscal
quarter but do not expect SAB No. 101 to have a material impact on our
results of operations or financial position.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as an amendment to
SFAS No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges. We do
not expect SFAS No. 138 to have a material impact on our results of
operations or financial position.
4. Related Party Transactions
A member of our Board of Directors is a Managing Director and Executive Vice
President of Allen & Company, Incorporated ("Allen & Co.") which is one of
our shareholders. On June 14, 2000, we entered into an agreement with Allen
& Co. which expires on December 14, 2000, pursuant to which Allen & Co. will
act as one of our financial advisors. No transactions have
<PAGE> 7
been consummated and no amounts have been paid to Allen & Co. pursuant to
the agreement to date.
5. Marketable Securities
At September 30, 2000, certain marketable securities have been categorized
as available for sale and, as a result, are stated at fair value in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Unrealized gains and losses are included in shareholders' equity as other
comprehensive income.
6. Preferred Stock
On July 13, 2000, we offered all holders of our Series A preferred stock and
Series B preferred stock the opportunity to exchange their shares of
preferred stock for shares of our common stock. Under the terms of the
exchange, the shares of preferred stock were exchanged for a number of
shares of our common stock equal to the par value of our preferred stock
plus accrued but unpaid dividends, divided by the average of the closing
sales price of the common stock as quoted on the NASDAQ National Market for
the ten (10) business days immediately preceding the closing date of the
transaction. The transaction closed on August 17, 2000. Of the 67,600 shares
of Series A preferred stock which were outstanding at the date of the offer,
56,237 shares were exchanged for 70,256 shares of common stock. Of the
86,041 shares of Series B preferred stock which were outstanding at the date
of the offer, 73,207 shares were exchanged for 97,313 shares of common
stock.
7. Industry Segment, Geographic and Customer Information
We currently operate in one industry segment, real-time video imaging.
Our L-VIS System is marketed on a worldwide basis through licensing and
royalty agreements, as well as through our majority-owned subsidiary, PVI
Europe. One licensee, Publicidad Virtual S.A. de C.V. accounted for 35% and
36% of net sales for the three months ended September 30, 2000 and 1999,
respectively.
Geographic information is as follows:
<TABLE>
<CAPTION>
U.S. Latin America Other Total
---- ------------- ----- -----
<S> <C> <C> <C> <C>
Three months ended September 30, 2000
Advertising and production revenue $ 734,347 $ -- $ -- $ 734,347
License and royalty fees -- 564,620 20,290 584,910
---------- ---------- ---------- ----------
Total $ 734,347 $ 564,620 $ 20,290 $1,319,257
========== ========== ========== ==========
Three months ended September 30, 1999
Advertising and production revenue $ 291,271 $ -- $ -- $ 291,271
License and royalty fees -- 171,672 45,000 216,672
---------- ---------- ---------- ----------
Total $ 291,271 $ 171,672 $ 45,000 $ 507,943
========== ========== ========== ==========
</TABLE>
<PAGE> 8
All of our assets are based in the United States with the exception of
certain L-VIS system units and related equipment which are being used by our
licensees in connection with foreign operations. The approximate value of
these L-VIS Systems located in foreign countries is as follows:
<TABLE>
<CAPTION>
L-VIS Systems Year U.S. Latin America Canada Belgium Total
------------- ---- ---- ------------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
2000 $2,358,099 $ 269,531 $ 135,000 $ 664,269 $3,426,899
1999 2,319,550 620,634 135,000 -- 3,075,184
</TABLE>
8. Concentration of Sales
Sales to four customers accounted for approximately 75% and 36% of revenues
for the quarters ended September 30, 2000 and September 30, 1999,
respectively.
9. Subsequent Events
On October 12, 2000, we issued 14,286 shares of our common stock to the
Sarnoff Corporation (formerly the David Sarnoff Research Center) as a
royalty payment for the fiscal quarter ended June 30, 2000, pursuant to the
terms of a Research Agreement between us and the David Sarnoff Research
Center, dated June 1995, as amended.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our unaudited
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report and in our June 30, 2000
Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Overview
Since our inception in 1990, we have devoted substantially all of our
resources to developing and marketing the L-VIS(TM) System, an electronic
video insertion system based on patented proprietary technology designed to
modify broadcasts to television viewers by inserting electronic video
images, primarily advertisements and program enhancements. We have incurred
substantial operating losses since our inception and as of September 30,
2000, we had an accumulated deficit of approximately $53,587,704. 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, our sales and
marketing activities, and general administrative costs. We expect to incur
losses in the next fiscal year as we continue to execute our business
strategy of developing new products and increasing our penetration of both
the domestic and international markets in the field of real-time virtual
image insertion.
We intend to focus our efforts on increasing market acceptance of the L-VIS
System by continuing to develop software applications, such as animated
insertions in event video streams, the virtual first-down line in football,
virtual product placement in pre-recorded
<PAGE> 9
programming and Internet applications which will allow television viewers to
interact with live or recorded video programming. In order to increase our
revenue generating user base and to expand into national and international
markets, we continue to transition from a technology company to an
international marketing company. Our sales and marketing staff is
responsible not only for reaching agreements with teams, leagues and
broadcasters, but also for promoting the L-VIS System to advertisers in
order to create market awareness and acceptance and to negotiate with
potential licensees in yet untapped markets worldwide. While purchases of
advertising will typically be done through the rights holder or the
broadcaster, we hope to create advertiser interest and demand by promoting
the L-VIS System directly to potential advertisers as well as third party
licensees. Therefore, we expect to incur substantial additional losses and
to experience substantial negative cash flow from operating activities
through the next 12 months or until such later time as we achieve revenues
sufficient to finance our ongoing capital expenditures and operating
expenses. Our ability to produce positive cash flow will be determined by
numerous factors, including our ability to reach agreements with, and
retain, customers for use of the L-VIS System, as well as various factors
outside of our control.
We expect 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, we will need to enter into agreements with rights holders.
The agreements can take various forms, including revenue sharing agreements
under which we receive a percentage of the fee paid by the advertisers and
contractual arrangements whereby we receive an agreed upon fee for our
services. We realize revenues when the advertisement runs over the air or
the contractual services are provided. Due to the seasonal nature of
sporting events, the revenue generated from the insertion of advertising or
program enhancements in sports programming will fluctuate seasonally. This
seasonality is moderated by the multi-sport capabilities of the L-VIS System
and its increasing use in entertainment and other non-sports related
programming.
In addition to the revenue arising from advertising and contractual
arrangements, a second revenue source is the strategic licensing of 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 we share in the business through one or more means
including royalties, license fees, and/or equity participation in the
licensee. In the case of individual events, we receive a flat fee or a fee
based on revenues generated by the licensee, depending on the nature of the
license.
A third revenue source are the services provided by the L-VIS System which
support the electronic insertion of visual aids in live sports and
entertainment programming, such as a virtual first-down line in football
games, and the use of logo and name branding during live weekday news
programming. We also offer an advanced post-production product whereby the
L-VIS System technology can place products or logos within existing,
pre-recorded television programs, movie scenes or live television
broadcasts. We realize revenues through contractual arrangements to provide
these visual enhancement services.
Because our operations relate to the continuing development and marketing of
the L-VIS System, we work to convince advertisers, broadcasters and
broadcast rights
<PAGE> 10
holders of the value of the L-VIS System. If we do not generate enough
revenues, we will have to either raise additional money or substantially
reduce the scale of our operations. We may not be able to obtain additional
financing on acceptable terms, or at all. If we cannot raise money, our
business, financial condition and the results of our operations will be
adversely affected.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2000 Compared To The Quarter Ended September 30,
1999
REVENUES. Revenues include receipts from advertising use of the L-VIS
System, contractual arrangements made with customers for visual program
enhancements, and license and royalty fees earned from use of the L-VIS
System outside the United States. Total revenue increased 160% to $1,319,257
during the quarter ended September 30, 2000 from $507,943 for the quarter
ended September 30, 1999. Of this total, advertising and production revenue
increased 152% to $734,347 for the quarter ended September 30, 2000 from
$291,271 for the quarter ended September 30, 1999 primarily as a result of
the increased use of our L-VIS System by ESPN during the broadcast of Sunday
Night Baseball games during the 2000 MLB season, revenues earned from CBS
Sports for the insertion of the virtual first down line in the national
broadcast of 2000-2001 NFL regular season games, and contractual revenues we
earned for program enhancement services provided to CBS News in the live
television broadcast of its CBS Early Show. Royalties and license fees
increased 170% to $584,910 for the quarter ended September 30, 2000 from
$216,672 for the quarter ended September 30, 1999 as a result of a
significant increase in the royalties we received from our Latin American
licensee, Publicidad Virtual S.A. de C.V.
SALES AND MARKETING. Sales and marketing expenses include salaries and
travel expenses of our sales and marketing personnel, sales commissions,
public relations, promotion, support personnel and allocated operating
costs. Total sales and marketing expenses decreased 8% to $855,061 during
the quarter ended September 30, 2000 from $933,586 for the quarter ended
September 30, 1999. This decrease resulted primarily from a reduction in the
fees we are being charged to obtain certain international broadcast and
programming rights. This decrease was partially offset by our institution of
a commission program for sales and marketing executives and increased
international travel in connection with the build up of operations in PVI
Europe.
PRODUCT DEVELOPMENT COSTS. Product development expenses include the costs
associated with the materials, contract personnel and our own personnel
engaged in research and development activities aimed at increasing the
capabilities of the L-VIS System hardware platforms, as well as creating
improved software programs for individual sports and program enhancement
services. Total product development expenses increased 23% to $712,856 for
the quarter ended September 30, 2000 from $581,543 for the quarter ended
September 30, 1999 due primarily to the costs associated with the ongoing
development of our iPoint product which will allow television viewers to
interact with live or recorded video programming delivered to the home via
the Internet or interactive television.
<PAGE> 11
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include
the costs associated with the material production, depreciation and
operational support of our 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 17% for the quarter ended September 30, 2000 to
$1,450,003 from $1,243,070 for the quarter ended September 30, 1999
primarily as a result of costs associated with the use of the L-VIS System
by ESPN in their broadcast of Sunday Night Baseball games during the 2000
MLB season, and by CBS Sports for the insertion of the virtual first-down
marker in NFL regular season football games.
GENERAL AND ADMINISTRATIVE. Total general and administrative costs increased
45% to $1,324,528 for the quarter ended September 30, 2000 from $911,150 for
the quarter ended September 30, 1999 primarily as a result of the increased
legal fees we are paying to increase our patent portfolio and protect our
patent property. Other factors contributing to the increase included
expenses related to the operation of PVI Europe, and increased investor
relations activity relating to our continuing effort to increase market
awareness of the L-VIS System technology.
INTEREST AND OTHER INCOME. Interest and other income decreased 13% to
$119,927 for the quarter ended September 30, 2000 from $137,807 for the
quarter ended September 30, 1999 as a result of the lower cash balances we
had available for investment.
MINORITY INTEREST. Minority interest increased to $40,082 for the quarter
ended September 30, 2000 from $0 for the quarter ended September 30, 1999
due to the formation of PVI Europe in June 2000.
NET LOSS. As a result of the foregoing factors, our net loss decreased 5% to
$2,863,182 for the quarter ended September 30, 2000 from $3,023,599 for the
quarter ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses and negative cash flows in
each year since we commenced operations, due primarily to the costs of
developing, testing and building L-VIS Systems, and operating expenses
relating to our sales and marketing activities. Since our inception, we have
primarily financed our operations from (i) the net proceeds of approximately
$27,900,000 from private placements of common stock, warrants and redeemable
preferred stock, (ii) the payment of a $2,000,000 licensing fee by Presencia
en Medios, S.A. de C.V. in consideration of the license we granted to
Publicidad Virtual, S.A. de C.V., (iii) the proceeds of a bridge loan
financing which closed in October 1997, (iv) the proceeds from the initial
public offering of our common stock which closed in December 1997, (v)
revenues and license fees relating to use of the L-VIS System, (vi)
investment income earned on cash balances and short term investments, and
(vii) the sale of a portion of our state net operating loss and research and
development tax credits.
As of September 30, 2000, we had cash and cash equivalents of $6,018,078, a
decrease of $2,370,070 from the balance at June 30, 2000. Net cash used in
operating activities decreased 41% to $1,780,733 for the quarter ended
September 30,
<PAGE> 12
2000 from $2,999,602 for the quarter ended September 30, 1999 due in large
part to the increase in accounts payable and accrued expenses resulting from
increased legal activity. This was partially offset by a decrease in
non-cash expenses including the amortization of certain international
programming and license rights over their term.
Net cash used in investing activities decreased 54% to $615,036 for the
quarter ended September 30, 2000 from $1,328,881 for the quarter ended
September 30, 1999 primarily as a result of decreased capital spending as
our efforts focused on completing the outfitting of several mobile
production trucks, rather than increasing our inventory of L-VIS system
units. Also contributing to the decrease was a reduction in the amount of
periodic payments made during the September 30, 2000 quarter for certain
electronic imaging license rights.
Net cash proceeds from financing activities increased to $25,699 for the
quarter ended September 30, 2000 from $568 for the quarter ended September
30, 1999, as a result of the receipt of payments received from related
parties for outstanding notes.
We believe that our existing available cash, cash equivalents and short-term
investments will be sufficient to meet our operating and capital needs
through June 30, 2000, although there can be no assurance that we will not
require additional funds sooner. Our actual working capital requirements
will depend on numerous factors, including the progress of our research and
development programs, our ability to maintain our customer base and attract
new customers to use the L-VIS System, the level of resources we are able to
allocate to the development of greater marketing and sales capabilities,
technological advances, and the status of our competitors. We expect to
incur costs and expenses in excess of expected revenues during the ensuing
fiscal year as we continue to execute our business strategy by adding to our
sales and marketing management force in order to strengthen our
relationships with rights holders, broadcasters and advertisers.
There is no assurance that we will generate sufficient cash flow from our
operations to liquidate liabilities as they become due. Accordingly, we may
require additional funds to meet our planned obligations through June 30,
2001 and may seek to raise such amounts through a variety of options. These
include future cash from operations, proceeds from equity financings, and
the potential sale of tax benefits relating to our net operating losses.
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,
planned operations will be scaled back resulting in the delay or reduction
of personnel and planned expenditures. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
As of June 30, 2000, we had net operating loss carryforwards for federal
income tax purposes of approximately $39,480,000 which expire in the years
2006 through 2020. Based upon our initial public offering of common stock in
December 1997, we have undergone an additional "ownership change" within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"). Under Section 382 of the Code, upon undergoing an ownership change,
our right to use our then existing net operating loss carryforwards as of
the date of the ownership change is limited during each future year to a
percentage of the fair market value of our then outstanding capital
<PAGE> 13
stock immediately before the ownership change. In addition, if other
ownership changes have occurred prior to this ownership change, the
utilization of such losses may be further limited. The timing and manner in
which we may utilize the net operating loss carryforwards in any year will
be limited by Section 382 of the Code.
EFFECT OF INFLATION
Domestic inflation has not had a significant impact on our sales or
operating results. However, inflation may have an impact upon business in a
number of international markets.
Cautionary Statement on Forward-Looking Statements
Some of the information in this Quarterly Report, including Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contain forward-looking statements. Such statements can be identified by the
use of forward-looking words such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss
future expectations and projections of results of operations or of financial
conditions. When considering such forward-looking statements, you should
keep in mind that certain risks may cause actual results to differ from any
projections contained in forward-looking statements. These risks include:
- adverse economic conditions;
- 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;
- 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;
- the possible fluctuation and volatility of our operating results and
financial condition;
- adverse publicity and news coverage; and
- loss of key employees.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We do not have material exposure to market risk from market risk sensitive
instruments. Our exposure to market risk for changes in interest rates
relates to the increase or decrease in the amount of interest income we can
earn on our investment portfolio. Under our current policies, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. We ensure the safety and preservation of invested principal funds by
limiting default risk, market risk and reinvestment risk. We reduce
<PAGE> 14
default risk by investing in investment grade securities. A hypothetical 100
basis point drop in interest rates along the entire interest rate yield
curve would not significantly affect the fair value of our interest
sensitive financial instruments at September 30, 2000 or September 30, 1999.
Declines in interest rates over time will, however, reduce our interest
income.
Part II
Item 1 Legal Proceedings
In October 1999, we filed a request with the United States Patent and
Trademark Office ("USPTO") to correct the ownership of US Patent 5,917,553,
licensed to Sportvision, Inc. We believe that the basic subject matter of
this patent belongs to PVI. After we filed this action, Sportvision, Inc.
filed a lawsuit against us in US District Court for the Northern District in
California for infringement of the disputed US Patent 5,917,553.
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. Subsequent to their original filing, Sportvision filed a motion for
a Preliminary Injunction, which was heard on September 22, 2000. By
agreement of the parties, a six-week stay on all activity in the lawsuit was
entered, which expires on November 17, 2000. As a result of the stay, the
Court has not yet decided the preliminary injunction motion.
Item 2 Changes in Securities and Use of Proceeds
On each of July 14, 2000, and October 12, 2000 we issued 14,286 shares of
common stock to the Sarnoff Corporation (formerly, the David Sarnoff
Research Center) as royalty payments for the fiscal quarters ended June 30,
2000 and September 30, 2000, pursuant to the terms of a Research Agreement
between us 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 our business.
In July 2000, we offered all shareholders of the Series A preferred stock
and Series B preferred stock the opportunity to exchange their shares of
preferred stock for shares of our common stock. The transaction closed on
August 17, 2000 and 56,237 shares of the Series A preferred and 73,207
shares of the Series B preferred stock were exchanged for 70,256 and 97,313
shares, respectively, of our common stock. The issuance of the common stock
was exempt from registration under the Securities Act by virtue of Section
3(a)(9). No commission or other remuneration was paid or given directly or
indirectly for soliciting such exchange. (See Note 6 of Notes to
Consolidated Financial Statements).
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
<PAGE> 15
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-Q
for the quarter ended December 31, 1999, filed on February
14, 2000).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 2000.
Signatures
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Princeton Video Image, Inc.
November 13, 2000 By:/s/ Dennis P. Wilkinson
------------------------------
Dennis P. Wilkinson,
President and
Chief Executive Officer
November 13, 2000 By:/s/ Lawrence L. Epstein
------------------------------
Lawrence L. Epstein,
Chief Financial Officer
