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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended ____________
OR
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from July 1, 2001 to December 31, 2001.
Commission File Number 000-23415
Princeton Video Image, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3062052
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15 Princess Road, Lawrenceville, New Jersey 08648
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(Address of Principal Executive Offices) (Zip Code)
609-912-9400
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Title of Each Class
Indicate by check mark 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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant computed by reference to the price at
which the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days: $20,237,424,
based upon the last sales price on March 28, 2002.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 18,418,865 shares of
Common Stock, .001 par value per share, were outstanding on March 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 2002 Annual Meeting of Stockholders
is incorporated by reference in Part III of this Form.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Princeton Video Image, Inc. ("PVI", "we", "us") is a Delaware corporation
with principal offices located in Lawrenceville, New Jersey. PVI was founded in
1990 to develop and market a real-time video insertion system. Through our
patented computer vision technology and proprietary hardware and software
system, known as the Live Video Insertion System (L-VIS(R)), we are able to
place 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. During the broadcast of a sports or entertainment program,
for example, an image can be placed to appear in various high visibility
locations in the stadium, on the playing field, or as part of the natural
landscape of the scene. The L-VIS(R) System has been used to insert images,
including advertising images and program enhancements, into both live and
pre-recorded television broadcasts.
We believe that our L-VIS(R) System, which is an integrated hardware and
software system, can benefit (i) advertisers, through the placement of their ads
in high visibility, in-program locations and by the ability to provide specific
advertising to specific geographical regions; (ii) broadcasters and program
producers, through a new revenue stream from additional inventory of advertising
space or program enhancements; and (iii) teams and leagues, through increased
revenue streams and greater flexibility and control over in-stadium advertising.
PVI has provided video insertion services for thousands of live telecasts
worldwide, including broadcasts of Major League Baseball, National League
Football, professional soccer, motor sports, and other live events. Since 1999,
PVI has been the exclusive virtual advertising provider for NFL International
broadcasts. Beyond sports venues, PVI's virtual imaging technology provides
virtual in program, promotional signage for the Early Show on CBS. These
enhancements, which appear as CBS Early Show logos inserted on blank surfaces in
the television picture, include virtual billboards, building signage and
marquees. The following events and advertisers are representative of PVI's
customer base: CBS, ESPN, MTV, Televisa, TV Azteca, Canal + Belgium, Comcast
Cable, Rainbow Sports, Philadelphia Eagles, Philadelphia Phillies, Minnesota
Vikings, Indy Racing League, Volkswagen, Adidas, Heineken, Nissan, Kodak and
FedEx. We market our L-VIS(R) Systems on a worldwide basis through licensing and
royalty agreements, through our majority-owned subsidiary, Princeton Video Image
Europe, N.V. ("PVI Europe"), which is headquartered in Brussels, Belgium, and
through our wholly-owned subsidiary, Publicidad Virtual, S.A. de C.V.
("Publicidad"), which is headquartered in Mexico City, Mexico.
As part of our product development program, we are 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. These
applications will enable the viewer to influence the on-screen presentation of a
broadcast which utilizes the L-VIS(R) System by using a mouse or other pointer,
for example, to indicate areas of interest. We are also developing other
applications of technology for the sports and entertainment fields.
PVI's objective is to become the leading provider of virtual advertising to
the broadcasters of sports and entertainment programming worldwide.
This document includes certain forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. In some cases, you can identify these so-called "forward-looking
statements" by such words as "may," "will," "should," "expects,"
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"plans," "anticipates," "estimates," "believes," "predicts," "intends,"
"potential," or "continue," or the negative of those words or phrases of similar
expression. You should be aware that these forward-looking statements are only
our predictions and are subject to various assumptions, risks and uncertainties.
Actual events or results may differ materially from those anticipated by the
statements we make. Factors described in this Annual Report on Form 10-K,
including without limitation those identified in this Item 1, "Business" and in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" could cause our actual results to differ materially from those
expressed in any forward-looking statement we make. We do not promise to update
forward-looking information or any other information to reflect actual results
or changes in assumptions or other factors that could affect those statements.
We were incorporated in New Jersey on July 23, 1990 and became a Delaware
corporation on September 13, 2001.
OVERVIEW OF THE TELEVISION ADVERTISING AND SPONSORSHIP MARKET
According to the latest figures from CMR, a member of the Taylor Nelson
Sofres media company group and a leading provider of strategic advertising and
marketing communications information, total advertising expenditure for all
media in 2001 totaled $94.3 billion. Network, spot, cable and syndicated TV
represented half of the total spending with a total of $48.0 billion. In the
2001 IEG Sponsorship Report, an annual newsletter published by IEG, Inc, it is
projected that sponsorship spending worldwide would be $24.6 billion, of which
$6.51 billion would be spent in the sports category for the sponsoring of
specific teams, stadium locations and sporting events.
The cost of a television commercial spot is normally a function of the
nature and size of the expected audience of the event to be broadcast.
Accordingly, a spot in a national broadcast of a major sporting event, such as
the Super Bowl or a World Series game, sells for a price many times that of a
spot in a regular season game broadcast only locally or regionally. Television
broadcasters (including national television and cable networks, regional cable
networks, and local television and cable operators) purchase television
broadcast rights to sporting events from the holders of those rights, which
include individual teams as well as various leagues, federations, associations
and other organizations representing both professional and amateur sports.
Rights to specific games or events may be held by teams, leagues, associations,
or any combination thereof, depending on the arrangements under which each sport
is organized.
We believe that the growth of sports advertising and sponsorship is largely
driven by the desire on the part of advertisers to be "in the game" by having
their brands and products visible during the broadcast of televised live or
pre-recorded sporting events. The L-VIS System enables the advertiser to be "in
the game" by exposing the television viewer to the brand or message during an
event. As the advertisement can be placed strategically to appear on the
television screen where traditional signage may not be available or practical,
the advertiser is more confident that its message will actually be seen by the
viewer and not "zapped" away during a commercial break.
Sponsorship generally entails associating the sponsor's name with the event
or stadium as well as signage rights, i.e., the prominent display of the
sponsor's name and products in specified locations in the stadium or broadcast.
Sponsors purchase sponsorship rights from the holders of those rights. Like
broadcast rights, the ownership of sponsorship rights depends on the specific
sport and the event or location. In some cases, the owner of the venue at which
an event is staged holds the sponsorship rights to the event. In other cases,
the team owner may own the sponsorship rights, including signage. Advertisers
negotiate sponsorship arrangements directly with sponsorship rights holders and
not with broadcasters. Since broadcasters historically have not shared in
sponsorship revenue, they traditionally have not assisted sponsorship programs.
In order to interest broadcasters in the capabilities of the L-VIS System, we
have made program enhancements available, such as the
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virtual first down line in football, the virtual kick circle and distance to
goal in soccer and the speed of the pitch in baseball.
The success of the L-VIS(R) System requires that we enter into satisfactory
commercial arrangements with advertisers, rights holders and broadcasters. To
date, many of the major broadcasters and a limited number of the broadcast
rights holders and advertisers have agreed to use our L-VIS System during live
and pre-recorded sports and entertainment broadcasts. Our continued expansion
will depend on, among other things, our ability to identify markets, to manage
growth, and to hire and retain skilled personnel. Some press coverage of our
technology has raised concerns about its desirability and potential misuse
relating to television tampering, ethics, and over commercialization. There can
be no assurance that the use of our L-VIS System will be accepted by television
viewers or that we will be able to combat effectively potential future negative
publicity regarding ours or similar technology. To the extent that we are unable
to more successfully market the L-VIS System our business might not develop as
quickly or to the extent necessary to support our intended level of operations.
ABILITIES OF THE L-VIS SYSTEM
We believe that the L-VIS(R) System provides advantages when compared to
traditional 30-second advertising spots and other forms of advertising, because
the L-VIS(R) System:
o Allows for in-program advertising. The L-VIS System allows an
advertiser to be "in the game" or broadcast, by having their brands
and products visible within the broadcast of televised live and
pre-recorded sports and entertainment programming;
o Reduces the effect of channel surfing and viewer muting. Because the
L-VIS System allows for "in the game" advertising, the negative effect
of channel surfing, which often occurs during traditional 30-second
advertising spots, may be reduced;
o Allows placement of advertising in high visibility locations. The
L-VIS System allows for the insertion of images into places that might
otherwise not be used and have high impact and recall for television
viewers;
o Creates new inventory for advertising rights holders. The L-VIS System
allows for new advertising by providing for the insertion of images in
locations that are unavailable for conventional billboards, such as
the racetrack in a motor sports event, or the natural landscape or
background during news and other entertainment programming;
o Allows for "narrow casting" of specific advertising to specific
geographical regions. The L-VIS System also allows for specific
advertising to specific geographical regions. Thus, a rights holder
can sell the same advertising space to different advertisers in
different markets; for instance, the Canadian feed of the 2002
broadcast of the Super Bowl included different inserted advertisements
on the field and in the end zone than the Mexican broadcast of the
same game;
o Provides for animation and audio-video advertising. The L-VIS System
may be used, when appropriate, to insert 3-dimensional animation and
audio-video advertising within the program to enhance the impact of
the advertising;
o Allows branding of an event. Insertions made during a live broadcast
will be captured, or branded, on recordings of the event and may then
be shown around the world in re-broadcasts and highlight films of the
event. An advertiser will benefit from every re-broadcast, such as
re-broadcasts which occur during the sports segment of most
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news programs; and
o Provides advertising to otherwise advertising-free environments. Our
technology can be used to insert advertising into otherwise
advertising-free environments, e.g., pay-per-view concerts, sports and
entertainment programming.
THE L-VIS SYSTEM TECHNOLOGY
Our L-VIS(R) System is a system of proprietary hardware and software which
we have designed to insert electronic images into live and pre-recorded
television broadcasts of sports and entertainment programming. The inserted
images may be two or three dimensional, static or animated, opaque or
semi-transparent and may be placed so that the inserted images appear to exist
on the playing field, in the stadium or venue where a game or sporting event is
being played, or in the background or natural landscape in entertainment
programming. If a player or other object moves in front of an image that is
inserted on a wall, in the background, or on a playing field, the L-VIS System
is programmed so that the passing object occludes that portion of the inserted
image. The L-VIS System can also be used to insert a freestanding image so that
the image will occlude a person or other object which "passes behind" it.
The basic L-VIS(R) System, also referred to as the "Vision" system, relies
on computer vision techniques that recognize prominent features in the
television picture and track the motion of the scene. This L-VIS System and its
operator may be located at the site of the event, at the network studios of the
broadcaster or at an individual station or cable system head-end carrying the
broadcast. Before the broadcast, the advertising images to be inserted are
prepared and the operator identifies the location in the broadcast scene where
the images will be inserted. The Vision system is designed to recognize the
broadcast scene in real time during the broadcast and to insert the image as
instructed each time the broadcast scene containing the insert location appears.
The operator controls which of several images is selected for insertion and when
it will be inserted. Since the Vision system can be used at any point in the
distribution path of the broadcast signal, a broadcaster can, by installing a
system in their main broadcast facility, use one system to insert advertising in
broadcasts originating from multiple locations. This makes the system a very
efficient and powerful tool for generating incremental advertising revenue.
We have designed software that allows for the use of the L-VIS(R) System
using this computer vision technology in the live broadcasts of soccer,
football, baseball, golf, auto racing, hockey and entertainment programming. For
instance, in baseball our software allows images to be inserted on the wall
behind home plate, the outfield wall or the area above the outfield wall. To the
television viewer, an advertisement inserted with the L-VIS Vision system, such
as an advertisement on the wall behind home plate, appears to be part of the
original scene, in proper perspective and fixed in the scene as the camera pans,
tilts and zooms, and as players move in front of the image. Furthermore, because
an inserted image is not present at the actual site of a sporting event, any
distraction caused to the players by other types of advertising such as
scrolling billboards will not be present. Because the Vision system must be
powerful and fast enough to insert images in live broadcasts in real-time, it is
also extremely efficient when used to insert advertisers' logos and products in
pre-recorded programming. This permits distributors of pre-recorded
entertainment programming to offer advertisers unique, in-program product
integration that can be targeted by market or changed from year to year without
altering the master recording of the broadcast. A camera sensor enhanced version
of the L-VIS System can be used on almost any live event including basketball
and tennis broadcasts.
Our iPoint(TM) technology enables advertising, promotional material and
program enhancements to be inserted locally - on the television or personal
computer - so the individual viewer will see advertising and features designed
specifically for him or herself. Using digital set top
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box technology that is being developed to run our software, Internet delivered
advertisements and features can be inserted into the individual television
broadcast based on customer preferences. These advertisements and features can
be interactive, as well, allowing the viewer to customize their viewing
experience by selecting particular enhancements or options. An iPoint enhanced
baseball game, for instance, would allow viewers to select such virtual
enhancements as "clickable" player statistics or a virtual strike zone.
Entertainment programs could include interactive objects or virtual products,
giving the user instant pricing, detailed information or the opportunity to make
purchases interactively without leaving the program. In May 2000, we entered
into an agreement with RealNetworks, Inc. ("RealNetworks") in which we agreed to
jointly develop the software necessary to permit insertion of Internet delivered
advertisements and features into streaming media on individual personal
computers. This first phase of development has been completed and the next step
will be the incorporation of the iPoint product into set top boxes used by cable
companies to deliver television programming into households. Our first efforts
in that regard have begun with Cablevision Systems Corporation ("Cablevision"),
PVI's largest stockholder and a major cable system operator serving over 3
million households in the New York metropolitan area.
In January 2001, PVI, the CBS Technology Corporation ("CBS") and Core
Digital Technologies, Inc. ("CDT") organized a limited liability company called
the Revolution Company, LLC whose purpose is to develop, market and render
entertainment technical production services. The Revolution Company has
developed a television production system referred to as "EyeVision" which has
the technological capability to produce three-dimensional replays from
multi-camera angles. For example, using cameras synchronized on a particular
sports player or players on the field of play in football, the EyeVision system
is able to provide views of approximately 270 degrees around the player and has
stop-action capability. The first live uses of the EyeVision system were during
the broadcast of Super Bowl XXXV and the NHL Stanley Cup in 2001.
On September 20, 2001, we entered into a joint collaboration and license
agreement with Cablevision Systems Corporation ("Cablevision") pursuant to which
we will work with Cablevision to develop, market and deploy technological
applications to create virtual, in-content, interactive and targeted advertising
and enhancement products for use with television distribution.
Because we operate in a rapidly developing commercial and technological
environment, our success will depend in part upon our ability to develop
products for the Internet and interactive television as well as product
enhancements that keep pace with continuing changes in technology and customer
preferences. Our failure to develop these products on a timely basis would limit
the growth potential of our business and thus have an adverse effect on our
business, financial condition and the results of our operations. The video,
electronics, data processing, broadcast television and cable television
industries are changing rapidly due to, among other things, technological
improvements, consolidations of companies and changes in consumer preferences.
In particular, the live video image insertion market is relatively new and
continues to adapt to the changing preferences and customs of the broadcasters,
rights holders, and the ultimate television viewer. We anticipate that as the
market develops, we will continue to be affected by technological change and
product improvements as well as changes in industry broadcast standards.
STRATEGY
Our objective is to become the leading provider of electronic advertising
and program enhancements to the broadcasters of sports and entertainment
programming as well as to television advertising markets worldwide. We are
positioning PVI not just as a technology provider, but as a company that
provides media and marketing services for television advertisers and generates
incremental revenue for broadcasters and rightsholders. The key elements of our
strategy are:
o Developing relationships with rights owners. We intend to continue
developing our
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relationships with rights owners such as the National Football League
("NFL"), Major League Baseball ("MLB"), National Basketball
Association ("NBA"), International Federation of Football Associations
(" FIFA"), Indy Racing League (" IRL"), specific teams and other
sports governing bodies as well as the owners of first run and
syndicated entertainment programs;
o Developing relationships with television broadcasters and
distributors. We intend to continue to develop the relationships we
currently have with national network broadcasters such as NBC, CBS,
ABC, ESPN, and FOX and cable operators and programmers such as
Cablevision and their affiliated programming entities;
o Developing relationships with non-sports owners of first run and
syndicated entertainment programming. We intend to continue to develop
software used for virtual product integration in television
programming and to convince television sponsors and broadcasters to
use the L-VIS System in their programming;
o Working with high-profile advertisers. To promote acceptance of the
L-VIS System, our marketing executives are actively discussing the
unique uses and benefits of our L-VIS System with high-profile
advertisers. Our efforts in this area continue to expand because of
the success of this approach in building a profitable business outside
the United States working directly with the advertising community, and
the potential benefits we believe would result from the endorsement of
our technology by the advertising community; and
o Enhancing and developing additional L-VIS System software and
deploying new technology. In addition to enhancing our existing Vision
software for use of the L-VIS System during soccer, football,
baseball, basketball and hockey games, we are developing software
which would allow us to use the L-VIS System during the broadcast of
additional sports and other entertainment programming. Our recent
acquisition of Scidel's patented video insertion technology will also
enable us to offer video insertion to a wider variety of clients. We
are also continuing to develop our iPoint product in cooperation with
Cablevision in order to expand the use of our technology on the
Internet and in interactive television.
OWNERSHIP OF VIDEO INSERTION RIGHTS
The broadcast of soccer, football, baseball, basketball, hockey and any
other type of sporting event is governed by agreements among the applicable
teams, leagues, broadcasters and the sports federation, if any. In the NFL, for
example, all television, video insertion and national sponsorship rights are
controlled by the league for all regular season games, the playoffs, the Super
Bowl and the Pro-Bowl. Such rights are controlled by individual NFL teams with
respect to all pre-season games. In baseball, MLB holds all television,
sponsorship and video insertion advertising rights with respect to regular
season nationally broadcast games, the All Star Game, playoff games, the World
Series and the international distribution of regular season games.
The broadcast of pre-recorded, entertainment programming such as sitcoms,
variety shows and award shows can be controlled by agreements among copyright
holders, production companies, distributors, broadcasters and/or cablecasters,
and sponsors.
Impediments to the use of our L-VIS(R) System during the broadcast of
programs covered by any of these agreements could have a material adverse effect
on our business, financial condition and the results of our operations by
limiting its acceptance and use in television programming. In
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many instances, these agreements provide that different persons control the
copyrights to the broadcasts in differing circumstances, for instance, regular
season play versus playoffs in sports, or first run versus syndication for
situation comedies. Agreements often govern permitted forms of advertising and
modifications to the broadcast. Use of video insertion technology is not
specifically discussed in some existing agreements and under these circumstances
it is not clear whose permission must be obtained to use the L-VIS System. If we
use our L-VIS System without the permission of the appropriate parties, such use
can be challenged in a court of law. The defense and prosecution of copyright
suits is both costly and time-consuming and current broadcast copyright holders
might not agree to amend current agreements to allow for or facilitate the use
of our technology on terms acceptable to us.
SALES AND MARKETING
While our emphasis is to generate increased sales from sharing advertising
revenue with rightsholders and broadcasters, we expect to continue to generate
revenues from royalties received for the licensing of our technology and from
contractual or production revenue earned from fees paid by broadcasters for
program enhancements.
The L-VIS System has been used during the broadcast of, among other events,
(i) hundreds of broadcasts of soccer matches in Latin America and Europe, (ii)
the international broadcast of the Super Bowl every year beginning with Super
Bowl XXXIII in January 1999, (iii) the CBS News' Early Show in its daily weekday
news programming under a multi-year agreement beginning in November 1999, (iv)
2001, 2000 and 1999 MLB home games of the Philadelphia Phillies and the San
Diego Padres, (iv) NFL regular season and playoff games broadcast by CBS Sports
since 1999, (vi) ESPN Sunday Night Baseball games during the 1999, 2000 and 2001
regular seasons, and (vii) IRL national telecasts on ABC and ESPN for their 2000
and 2001 series, including the Indianapolis 500 in May of both years.
On February 14, 2001, we entered into a license agreement with Cablevision
Systems Corporation which grants Cablevision and its affiliates the right to use
our L-VIS System and related proprietary rights in its business in exchange for
license fees and royalties. Since that time, L-VIS Systems have been installed
in two Cablevision properties - Madison Square Garden (MSG) in New York City and
Rainbow Networks Communications (RNC) in Bethpage, New York, which is
Cablevision's programming origination and distribution center. With the
installation of the system at RNC, we have expanded the applications of our
technology to include NCAA college hockey games, where virtual advertising has
been used during the game on the glass panels behind the goal. The system at MSG
has been used to test the insertion of virtual images off-air in six New York
Rangers hockey games and to insert virtual images in one live Rangers broadcast.
Cablevision owns Madison Square Garden and the New York Rangers, as well as the
New York Knicks basketball team. We have also begun providing services to Bravo,
one of Cablevision's many cable programming properties, for insertion of
advertising logos and products in selected Bravo programs.
There can be no assurance, however, that we will be successful in
establishing or maintaining a relationship with any of these parties.
As discussed above, the right to insert electronic images for advertising
purposes into a live or pre-recorded broadcast, and hence the right to sell
advertising using the L-VIS System, is held by different groups depending, in
most cases, on the programming event or sport involved, the status of the game,
i.e., pre-season, regular season or post-season, and whether the programming or
game is to be broadcast internationally, nationally or locally. These rights may
be sold for specific programming events or games and/or entire seasons to
another party, most notably a broadcaster who pays the rights holder an up-front
fee for such rights. In each case, we must negotiate for the use of the L-VIS
System with the rights holder or holders, typically in exchange for a percentage
of the
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advertising revenue generated using the L-VIS System or for a contracted fee.
When the L-VIS System uses the live feed from the broadcaster to insert its
electronic images, such broadcaster must also approve the use of the L-VIS
System. Accordingly, arrangements with several parties including the rights
holder and the broadcaster must be established.
The ultimate customers of our L-VIS System are expected to continue to be
advertisers, sponsors, broadcasters and rights holders. Revenues flow from the
advertisers and sponsors to the rights holders who pay a share of those revenues
or a contracted fee to us. We provide the L-VIS System and support services to
the rights holders and we are paid by the rights holders either a percentage of
the advertising revenues derived from use of the L-VIS System or an agreed upon
fixed fee for services provided. The rights holders enter into agreements with
broadcasters to provide the services necessary for use of our L-VIS System. In
some cases, advertising space using the L-VIS System is then sold either by the
rights owner or by the broadcaster, depending on the specific arrangement
between such parties, and the advertising revenues are shared among the rights
owner, the broadcaster and us. As a result, we often rely upon the marketing and
advertising staffs of these rights holders and broadcasters, which typically
target the manufacturers or producers of nationally distributed products. The
broadcast rights holders have been only moderately successful in selling L-VIS
System advertising. If the broadcast rights holders are unable to enter into
higher paying or a greater number of arrangements with advertisers, this failure
could inhibit the growth in our revenue stream. In order to mitigate this
dependency on third parties, we are actively promoting the advantages of the
L-VIS System directly to major advertisers. We believe that promotion is
important in influencing market acceptance of the L-VIS System among potential
advertisers.
During the past year, we made significant new efforts to increase our focus
on sales and marketing, including increasing our sales staff, opening new
offices in New York City and retaining new sales and marketing advisors,
including a new public relations firm.
Over the past several years, we have focused our sales and marketing
efforts on those sports that account for a significant amount of the United
States or worldwide advertising and sponsorship expenditures and in a growing
number of entertainment programming applications. The following is an
explanation of our sales and marketing strategy for several of our target
markets:
SOCCER
Soccer is the most popular, marketable and widely seen sport in the world.
Although sales from soccer television advertising in the United States
historically have been very small, the majority of our revenues are derived from
this sport worldwide, with Latin America being the leader. We intend to strongly
pursue and continue marketing the L-VIS System for use in soccer matches in
Europe, Asia, and Latin America.
The basic soccer application software was initially designed to insert an
image onto the center circle of a soccer field, but has now evolved to insert
images in the grass near the goal posts, above the billboard signs and
practically anywhere on the field that an advertiser would want, subject to
FIFA's (soccer's governing body) rules. The L-VIS System has been used both
nationally and internationally in soccer broadcasts. In March 2000, our then
Latin American licensee, Publicidad (which became our wholly-owned subsidiary on
September 20, 2001), entered into a multi-year agreement with Televisa and TV
Azteca, Mexico's two largest television networks, for the use of the L-VIS
System. The agreement includes the telecast of World Cup 2002 qualifying games.
In February 2001, PVI Europe entered into an agreement with Canal + Belgium
to produce virtual game enhancements in over sixty games of the Belgian Premier
Soccer League, through June of 2002. Among the enhancements being produced are
club logos, scores in the center circle, distance to the goal and a virtual
off-side line. In July 2001, the L-VIS System was used to insert
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virtual advertising in Major League Soccer's All Star Game played in California
and broadcast by ABC Sports. Logos for Pepsi and Subway were inserted outside of
the playing field throughout the broadcast. PVI and MLS entered into an
Agreement to expand the use of the LVIS system throughout the 2002 season. PVI
has also provided virtual advertising in domestic soccer broadcasts seen on
Telemundo this year.
On March 26, 2002, PVI acquired the assets of Scidel Technologies, Ltd.,
including several key agreements for virtual advertising in European soccer
league broadcasts. PVI intends to utilize the proprietary technology it acquired
from Scidel, along with our own L-VIS technology, to expand the use of virtual
advertising for soccer in Europe and elsewhere.
It is our understanding that FIFA continues to evaluate its position on the
use of virtual imaging. We continue to explore ways to encourage FIFA to grant
permission for its expanded use. There can be no assurance that FIFA will grant
such expanded permission, and without the permission of FIFA, our potential
revenue from soccer would be substantially reduced.
FOOTBALL
PVI has developed several successful commercial and enhancement
applications for professional football. For the preseason games of the
Philadelphia Eagles and the Minnesota Vikings, paid virtual ads are placed in
high impact positions in the crowd, in each end zone and around the goalpost
regions. These ads are animated for greater effect.
During the regular NFL seasons in 2001, 2000 and 1999, we used the L-VIS
technology to insert a first down line in CBS national broadcasts, including
post season playoff games. The first down line appears to be popular with the
viewing audience and similar technology can be used to put advertising on the
field, in the form of a "branded" first down line, for example, when the rights
owner permits it. Although the NFL does not permit signage in the broadcasts of
its regular season games at the present time, we continue to pursue this
possibility. PVI has inserted a branded first down line in domestic broadcasts
of championship games for NFL's Europe League in 2000 and college football's Sun
Bowl in 2001.
PVI also sells advertising in the international feed of the Super Bowl. In
this "feed", PVI and its partners in Canada and Mexico sell advertising intended
for their own market. This "narrowcasting" approach increases revenues and has
featured international advertisers such as FedEx, Charles Schwab, Volkswagen and
Philips Electronics.
In 2001, we entered into a joint venture with CBS Sports and Core Digital
to introduce EyeVision, a technology able to produce three dimensional replays
from multi-camera angles. EyeVision was deployed for the first time in the 2001
Super Bowl.
BASEBALL
Baseball stadiums have perhaps the most valuable piece of real estate in
sports--the wall behind home plate. We believe that this high impact position
has great recall among viewers and is a coveted position for advertisers. Under
agreement with ESPN, PVI has placed virtual ads in their national broadcasts of
Sunday Night Baseball. The virtual ads change every half inning and have
appeared in a minimum of twenty games in each of the last two seasons.
Advertisers that have used the service include Claritin, Century 21, Gateway and
Buick. We provided the same service to MLB for the 2001 All Star Game. The
Philadelphia Phillies and the San Diego Padres have used the system for several
years with advertisers such as Coca-Cola, Toyota and Mobil making use of unique
animated features like "speed of the pitch" in which a logo changes to reveal
the speed of the last pitch.
10
We are continuing our efforts to contract with other baseball teams to use
our technology and to renew existing relationships with the individual teams and
the national broadcasters. We also intend to develop our Internet and
interactive software products for potential use in baseball and other sports.
During a Chicago Cubs broadcast against the San Diego Padres, we provided
virtual advertising insertions behind home plate which were made interactive by
RespondTV, a leading infrastructure provider for interactive television content.
During this broadcast, viewers with internet enabled set-top boxes were able to
interact on their personal computers with the broadcast. Despite our marketing
efforts and development of such innovative products, however, there can be no
assurance that we will be successful in creating greater interest for use of the
L-VIS System in MLB.
MOTOR SPORTS
The IRL was the first major motor sport to utilize virtual advertising
during its broadcasts. Their races are telecast over either ABC or ESPN and
include the broadcast of the Indianapolis 500 in May of each year. The L-VIS
System has been used to insert virtual images into the natural landscape of the
IRL race broadcast, both in the middle of the field and on the race track.
Additionally, during the Indianapolis 500 in May 2001, an expanded package of
virtual enhancements was used including a virtual radar gun registering the
speed of selected cars and a virtual picture of the winning driver on the
start/finish line during the final lap of the race.
OTHER SPORTS AND ENTERTAINMENT PROGRAMMING
In addition to the major sports described above, we have also provided
services using the L-VIS System in other sports and entertainment programming.
The L-VIS System was used for the first time in televised golf during the
telecast of Shell's Wonderful World of Gold broadcast by ESPN in October 2000.
Virtual enhancements, including a virtual flagstick indicating where the cup is
located, and a white circle highlighting the cup when a player is putting, were
inserted onto the golf course. As part of the international broadcast of the NBA
finals in 2001, virtual signage made its debut in basketball with the insertion
of signage on the interior walls of the basketball court as well as on the
scoreboards.
During the 2000, 2001 and 2002 Grammy Awards broadcast on CBS each
February, the L-VIS System was used to insert virtual advertisements on the
walkways into the building prior to the award show. PVI also expanded its work
in entertainment programming in 2001 with the use of the L-VIS System on a daily
basis in MTV's "Total Request Live" and through our work with Comedy Central,
USA Network, and The Hallmark Channel.
Our strategic relationship with Cablevision has also led to many new
opportunities to expand the array of applications of our technology to include
NCAA college hockey games, where virtual advertising has been used during the
game on the glass panels behind the goal. A system recently installed at Madison
Square Garden has been used to test the insertion of virtual images off-air in
six New York Rangers hockey games and to insert virtual images in one live
Rangers broadcast. Cablevision owns Madison Square Garden and the New York
Rangers, as well as the New York Knicks basketball team. We have also begun
providing services to Bravo, one of Cablevision's many cable programming
properties, for insertion of advertising logos and products in selected Bravo
programs.
INTERNATIONAL BUSINESS STRATEGY
Our strategy with respect to sports and entertainment programming
originating outside of the United States is to enter into revenue sharing
agreements either with foreign broadcast and sports marketing experts or by the
formation of foreign subsidiaries either majority or wholly-owned by PVI. We
expect that the largest international market for the L-VIS System will be for
soccer matches and entertainment programming.
11
Publicidad, which has marketed the L-VIS System throughout Mexico, Central
and South America and the Spanish-speaking markets in the Caribbean basin since
1993, has become the largest and most successful virtual advertising company
worldwide. The L-VIS System has been used by the clients of Publicidad to place
insertions into broadcasts of hundreds of soccer matches, tennis matches,
bullfights and entertainment programming including concerts. In September 2001,
we acquired Publicidad, and it is now a wholly-owned subsidiary of PVI.
In June 2000, we formed PVI Europe, a majority-owned subsidiary
headquartered in Belgium, for the purpose of marketing our L-VIS System
throughout all of Europe with the exception of Spain and Portugal. PVI Europe
provided virtual game enhancements in the NFL Europe World Bowl 2000 marking the
first time a branded virtual first-down-line was seen by a worldwide audience.
In February 2001, PVI Europe reached an agreement with Canal + Belgium to
produce virtual game enhancements including club logos, scores in the
center-circle and a virtual offside line, for live broadcasts of the Belgian
Premier Soccer League. This agreement with Canal + Belgium, a pay-tv station and
part of the French based Canal + Group owned by Vivendi Universal, will continue
through June of 2002 and marks the first time a broadcaster in Belgium used
virtual imaging in its broadcasts.
Recently, PVI Europe's operations have been streamlined. Costs have been
reduced substantially, and PVI Europe's focus is now only on those markets in
Europe that offer the most potential.
On March 26, 2002, PVI acquired the assets of SciDel Technologies, Ltd., an
Israeli virtual signage company specializing in downstream applications.
SciDel's downstream technology complements PVI's efforts in moving towards total
vision based applications. In addition, SciDel has ongoing operating
relationships with three of Europe's major soccer leagues.
In South Africa, PVI is in discussions with SABC, the leading public
television channel in South Africa to produce advertising and game enhancements
in live rugby, cricket, soccer, boxing, motor sports, horse racing, golf and
other athletics broadcasts.
In Korea, PVI is represented by Virtual Media Lab, Inc., a subsidiary of
Cybersmart, a multimedia software development company based in Korea, which has
been our licensee since 1999. PVI Korea has been instrumental in working with
the Korean government to change the laws regarding the utilization of virtual
signage, and recently demonstrated our technology to Korean broadcasters for
potential use for Korean broadcasts of the 2002 World Cup.
See Note 22 of Notes to Consolidated Financial Statements for additional
industry segment, geographical and customer information.
There can be no assurance that we will be able to enter into or maintain
favorable relationships with any partners or licensees, that any partners or
licensees will establish a market for the L-VIS System, that any relationships
will generate any revenue for us, or that any partners or licensees will act in
good faith and perform their obligations to us. To the extent that we have
entered into these exclusive arrangements in a particular market, we are
dependent upon these partners or licensees to generate revenues for us. Their
failure could preclude us from generating material revenues in such geographical
area or with respect to a specific sport, as the case may be.
There are certain risks inherent in doing business in international
markets, such as unexpected changes in regulatory requirements, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax
12
consequences. These and other factors, including the failure to integrate into
our operations any foreign businesses such as Publicidad and SciDel Technologies
which we have acquired or may acquire, may prevent us from creating a material
business internationally. We have granted some parties exclusive rights to
territories or specific sporting events, which means that we must rely on their
success in these areas. Their failure could greatly reduce the potential growth
of our international business.
PRODUCT DEVELOPMENT
The L-VIS(R) System is designed using a Flex-Card hardware platform. This
platform is more powerful than previous platforms and allows for software
re-configuration. We have designed the Flex-Card L-VIS(R) System to provide
multiple insertion capability, multiple camera capability and an expanded zoom
range, and we have created a simplified graphical user interface. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Product Development", regarding the costs associated with our
product development during the six months ended December 31, 2001 and in each of
the last three fiscal years.
We are continuing to improve existing software for use of the L-VIS System
during the broadcast of soccer, football, baseball, basketball and hockey games,
as well as golf and motor sports. Further, we are developing software to permit
the use of our L-VIS System during the broadcast of other sports. We have also
made the L-VIS System available for use with other events such as award shows,
pay-per-view boxing and concerts. We intend to continue our development of our
iPoint product as we believe there may be important applications of our
technology as it relates to entertainment and sports programs when viewed with
interactive television and/or the Internet.
The L-VIS System can still only be used for some programs under certain
circumstances. During live events, we often must have the cooperation of the
broadcaster to obtain acceptable results. In the past, the L-VIS System has been
operated mainly by our personnel but increasingly is operated by operators
trained by us. We are working to develop additional software and hardware and
train personnel to achieve a more user-friendly product with wider potential
use.
Recently, development of future versions of L-VIS have been directed toward
vision-only applications. These applications rely primarily on computer vision
and image processing to precisely and rapidly determine the position and
orientation of the virtual insert, and do not require attachment of sensors to
the broadcast lens or tripod. Such applications therefore may be operated
remotely from the event site. When operated in this way, the cost associated
with providing this service is significantly reduced, in part because of the
reduced need to send operators to the event site. In addition, we are beginning
a slow migration of the L-VIS hardware system to a hybrid structure, based in
part on the existing FLEX architecture, and in part on a desktop personal
computer ("PC"). As part of this effort, we are developing a PC based FLEX board
equivalent.
On March 26, 2002, we acquired the assets of SciDel Technologies, Ltd., an
Israeli-based virtual advertising company, including their patent portfolio and
proprietary hardware and software. The acquired technology works in vision mode
by reliably recognizing lines in a television picture - such as lines on a
basketball or tennis court - and derives data therefrom that enables the
positioning of inserted images. The technology cannot, however, store that
information in order to ensure that the insertions continue to be properly
positioned when those lines are not visible. By adapting PVI's tracking
technology for use with this line-finding system, we can overcome this problem
and improve tracking performance in many situations.
COMPETITION
PVI believes four other companies have developed or are trying to develop
processes and
13
equipment to pursue a business similar to our own. These organizations are Symah
Vision-SA ("Symah"), Orad Hi Tech Systems Ltd. ("Orad"), SciDel Technologies
Ltd. ("SciDel") and Sportvision, Inc. ("Sportvision").
Symah is owned by the LaGardere Group, which controls Matra-Hachette, a
large French defense and publishing company. Symah has demonstrated its system
publicly and is actively marketing its system in Europe. We believe that Symah's
system has been used in Europe during the broadcast of over 300 sporting events.
Orad was founded in 1993 as part of the ORMAT Group, an Israeli company
originally established to create alternative energy power stations. Orad's
primary business is selling virtual sets and are responsible for the worldwide
marketing of their virtual advertising system, "ImADgine".
Both the Orad and SciDel systems have been used during some live commercial
broadcasts. We believe Orad has one or more patents or patent applications
relating to real-time video insertion. As described above, we have recently
acquired the assets of SciDel.
Sportvision is using technology similar to our own for inserting viewer
enhancements, such as a first down line in football, into live television
broadcasts. As far as we know, Sportvision has been minimally active in the
advertising part of the business. In February 2002, PVI, FOX and Sportvision
entered into a cross license agreement which relates to the use by each company
of certain patents of the other company. (See Item 3 "Legal Proceedings.")
Although we believe that use of the L-VIS System does not infringe the
United States or other patents of third parties, there can be no assurance that
competitors will not initiate a patent infringement action against us. (See Item
3 "Legal Proceedings").
In addition to these known competitors, we expect substantial competition
from established broadcast business participants, if the market for video
insertion technology, including virtual advertisements, proves successful. These
potential competitors will likely have substantially greater financial,
technical, marketing and other resources and many more highly skilled
individuals than we do. Furthermore, such potential competitors may have greater
name recognition and extensive customer bases that could be utilized to gain
significant market share, to our detriment. Our competitors may be able to
produce superior products, including products with new features, undertake more
extensive promotional activities, offer more attractive terms to customers and
adopt more aggressive pricing policies than we can. There is no assurance that
we will be able to compete effectively with current or future competitors.
In addition to the products of these competitors, the L-VIS(R) System will
compete with advertisers' use of traditional 30-second advertising spots, which
remain the standard in the television advertising industry, and traditional
signage and sponsorship programs. Our revenues will be partially dependent upon
television sports advertisers allocating a portion of their advertising budgets
to use the L-VIS System. There can be no assurance that advertisers will
allocate their advertising expenses in the manner currently anticipated by us.
Existing advertisers may be reluctant to use a new technology. Advertisers may
not believe that their sales will increase as a result of the use of our
technology. The competition is likely to be more intense where we are competing
for television advertising and sponsorship dollars that are currently spent on
traditional media, such as 30-second spots or scrolling billboards. We need the
cooperation of the sponsorship advertising sales departments of team owners,
other rights holders and broadcasters. We rely on these entities for the sale of
our products to advertisers, but they may have incentives to sell alternative
advertising or sponsorship inventory rather than our services. The reluctance by
advertisers and sales forces to embrace our technology and assist in the sale of
virtual advertising could have a material adverse effect on our business,
financial condition and results of operations by stifling the potential growth
of
14
our business.
The L-VIS System will also compete with advertisers' use of conventional
billboard products, including advertising placed on playing surfaces (such as
outfield walls, football fields, ice hockey rinks and soccer fields) and
scrolling billboards, physically located at the site of an event, which can
display sequentially a series of static advertisements. These scrolling
billboards are currently marketed and used in professional baseball, basketball
and other sports. These products achieve an effect that is similar to those
L-VIS System insertions that are static and two-dimensional, and their use
generally does not require broadcaster participation.
During the 2001 MLB season, 26 MLB teams had scrolling billboards located
behind home plate. The existence of these scrolling billboards and other
advertising behind home plate currently limits the marketability of the L-VIS
System in baseball. We believe that one manufacturer of scrolling billboards
used in stadiums has included restraints in its contracts that inhibit or
prohibit the use of video insertion technology in television broadcasts. Other
agreements among advertisers, sponsors, syndicators, promoters, broadcasters and
cable operators may include similar provisions. These restrictions may have a
material adverse effect on our business, financial condition and results of
operations by reducing the number of potential users of the L-VIS(R) System.
In the sports advertising arena, we continue to generate revenue primarily
by attracting new advertisers and sponsors to the sports advertising and
sponsorship market and by causing existing advertisers and sponsors to use the
L-VIS System. There can be no assurance that total advertising and sponsorship
expenditures will increase as a result of the availability of the L-VIS System.
As we continue to compete for television advertising and sponsorship dollars
that are currently allocated to traditional media, such as 30-second spots or
scrolling billboards, the competition is likely to become more intense. We will
be able to compete effectively with existing advertising and sponsorship
alternatives only with the cooperation of broadcasters and the advertising sales
departments of team owners and broadcasters, on which we must sometimes rely for
sales to advertisers. Because certain L-VIS System rights holders may also own
traditional television advertising rights or sponsorship rights, which may
provide such rights holders with a greater percentage of the revenues received
from the sale of such advertising or sponsorship rights than does the sale of
L-VIS System advertisements, incentives may exist in some cases to sell
alternative advertising or sponsorship inventory prior to the sale of L-VIS
System advertising.
With regard to placing images in syndicated and first run television
programs, we have generated revenue through agreements with the program rights
holders and distributors to place advertising logos or products within the
programs themselves, prior to distribution. Advertising imbedded in the program
may create conflicts with the broadcasters of the programs as it may compete
with traditional 30-second spot advertising sold by the broadcasters. This in
turn may affect our ability to develop a more robust business in this area.
In the case of program enhancements, we are making available to the
broadcasters a series of enhancements which the broadcaster can use to increase
the audience appeal of its programs. We typically get a negotiated fixed fee for
each use by the broadcaster of such enhancements. There is no assurance that the
enhancements which we have developed or may develop in the future will be of
sufficient value to the broadcasters to make this a viable business segment for
us. Furthermore, competitors may drive down the fees to levels where we cannot
cover the costs of providing the enhancement services.
Our development of products related to the Internet and potential
interactive television business is an area where a large number of creative new
companies and existing well financed companies have a significant interest. PVI
believes that its intellectual property offers an opportunity to participate
effectively in these new businesses. Under our joint collaboration and license
15
agreement reached with Cablevision Systems Corporation, we will work to develop,
market and deploy innovative digital technological applications across the full
range of Cablevision's media, sports and entertainment properties. Our ability
to play a meaningful role will depend, in part, on our forming and maintaining
appropriate relationships with existing industry players, including Cablevision
Systems Corporation. There is no assurance that our potential products will be
embraced by the industry or that we can utilize and develop the relationships we
have within the sports and media industries to create a successful business.
MANUFACTURING AND SUPPLY
We have built 41 L-VIS(R) System units (each, an "L-VIS Unit"), of which
approximately 30 are being used from time-to-time by customers, potential
customers or foreign marketing partners. An L-VIS Unit consists of standard
electronic equipment racks, containing both standard purchased components and
our proprietary circuit boards, assembled and tested by our own personnel.
REGULATIONS
We do not believe that any federal or state regulations currently directly
relate to or restrict the use of the L-VIS System. There are existing
regulations imposed on broadcasters, which may require disclosure that the L-VIS
System is being used in a particular broadcast. In addition, there can be no
assurance that there will not be any regulations or restrictions in the future,
which either directly, or indirectly through broadcaster regulations, adversely
affect the use of the L-VIS System. Further, there can be no assurance that
regulatory agencies in foreign jurisdictions have not adopted, or will not adopt
in the future, regulations or restrictions affecting the use of the L-VIS
System. If adopted, such regulations or restrictions might reduce or eliminate
the market for our products in any country where these regulations or
restrictions are adopted. This could have a material impact on our ability to
expand into both domestic and international markets if it prevents us from
providing our services in a particular sport, broadcast or entertainment market.
INTELLECTUAL PROPERTY
PATENTS
We own ten issued U.S. patents relating to proprietary technology we use in
our business. These patents expire at various times, commencing in 2012. A
number of new patent applications are pending in the United States.
To date, we have filed patent applications in the European Patent Office
and in various non-European countries around the world where we expect to do
business.
The degree of protection offered by our patents is not certain, and any
patents issued to us or our licensees in a foreign country may provide less
protection than provided in the United States. In addition, it is possible that
our pending patents will not issue.
We believe our patents will be important in our future business dealings,
since we believe that any system that is able to deliver the technical
capabilities of the L-VIS System will depend on image processing technology that
will, therefore, fall within the scope of PVI's issued patents.
The validity and/or breadth of PVI's owned and licensed patents generally
may be tested in post-allowance court proceedings. (See Competition above).
While one court proceeding has been settled and another is underway relating to
PVI's patent property, there has been no completed court test of any of the
issued patents, the allowed patents or any of the pending applications or
foreign
16
counterparts. We are aware of other companies that have patents or patent
applications in the field of electronic video insertion technology. As was the
case with Sportvision, these companies or others may claim that we infringe the
patents or rights of such third parties, or these third parties may infringe our
patents. In either event, patent litigation involves complex legal and factual
issues, and the outcome, consequently, is highly uncertain. Furthermore, patent
litigation entails considerable costs, which could divert resources that
otherwise could be used for our operations. We cannot be certain that PVI or its
licensors will be successful in enforcing our rights, or that our products or
processes do not or will not infringe the patent or intellectual property rights
of a third party. An adverse outcome in the defense of any patent infringement
action could subject PVI to significant liabilities to third parties, require
PVI to license disputed technology from third parties, if possible, force PVI to
try to redesign its products or practices, or require PVI to cease selling its
products. In the event our owned or licensed patents were successfully
challenged in court, our business, financial condition and results of operations
would be materially adversely affected by limiting our ability to do business.
It is possible that one or more products developed by a competitor may be
marketed or used in a territory where we have patent protection. Competitors or
strategic partners may copy or independently develop technologies that are the
same or similar to our technologies. Because an image inserted through use of
video insertion technology often appears as if it exists as a physical
advertisement at the site of a sporting event, it may be difficult to know
whether, and which, video insertion technology is being used with respect to any
televised sporting event. Thus, infringement of our patents may be difficult to
monitor. Our failure to detect such an infringement may have a material adverse
effect on our business, financial condition and results of operations. In the
event we become aware of a potential patent infringement, we may be forced to
litigate to enforce our patent rights. Engaging in such an enforcement action
may be protracted and expensive and, therefore, have a material adverse effect
on our business, financial condition and results of operations.
GDM, a Spanish media company that licensed the L-VIS System for use in
broadcasts in Spain and Portugal during a trial period which ended December
1996, received a letter from a Symah affiliate asserting that use of the L-VIS
System in Spain would infringe one of Symah's patents. Although PVI and GDM were
advised that use of the L-VIS System would not infringe Symah's patent, there
can be no assurance that Symah will not assert infringement claims against PVI
or its European licensees in the future or against PVI in the United States for
infringement of the U.S. counterpart (U.S. Patent 5,353,392) of Symah's patent.
We believe that the L-VIS System does not infringe U.S. Patent 5,353,392 and
infringement of this patent has not been asserted against us.
If the L-VIS System were found to infringe any third party patent, we might
be required to modify the L-VIS System or enter into an arrangement to license
such patent, if possible. There can be no assurance that we would be able, under
such circumstance, to modify the L-VIS System or enter into a license
arrangement. We also rely in large part on un-patented trade secrets,
improvements and proprietary technology. We require our employees and some third
parties to enter into confidentiality agreements. Despite our efforts to
safeguard and maintain our proprietary rights, there can be no assurance that we
will be successful in doing so or that our competitors will not independently
develop similar technology, gain access to our technology, reverse engineer or
patent technologies that are substantially equivalent or superior to our
technologies. We also use copyright, trademark and trade secret protection.
These steps may not protect our trade secrets, know-how or other proprietary
information.
LICENSE GRANTS TO PVI
PVI has entered into the following license agreements relating to the L-VIS
System:
David Sarnoff Research Center, Inc. David Sarnoff Research Center, Inc.
("Sarnoff") has granted PVI a worldwide license to practice Sarnoff's technology
related to the electronic recognition
17
of landmarks, including an exclusive license covering the specific fields of
television advertising and television sports. We have also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising, including video production, local video
insertion, private networks, medical and scientific applications and uses by the
United States Department of Defense or any other United States government
agency. The Sarnoff license will remain in effect until terminated by PVI,
provided that PVI remains current with respect to its royalty obligations to
Sarnoff. We may terminate the license at any time.
During the term of the exclusive license for television advertising and
television sports applications, we are obligated to pay Sarnoff royalties based
upon a percentage of our gross revenues. During the first several years of the
agreement, all royalties were accrued as earned. Payments for all accrued
royalties through December 31, 1998 became due in January 1999 and were paid in
full by December 1999. Commencing in January 1999, minimum quarterly royalties
of $100,000 became due in order to maintain the license. For the calendar years
1999 and 2000 and the first quarter of 2001, we had the option of paying these
minimum royalties in cash or with PVI stock at its last issue price and,
accordingly, elected to issue stock for all royalties due for the years ended
December 31, 1999 and 2000 and the quarter ended March 31, 2001. Royalties
earned subsequent to March 31, 2001 are required to be paid in cash.
Theseus Research, Inc. Theseus Research, Inc. ("Theseus") has granted PVI a
non-exclusive, worldwide license to use and sell Theseus' patented technology
for the warping of images in real time. During the term of the Theseus license,
we are required to pay Theseus a royalty on net sales of products, if any, that
incorporate the Theseus technology. PVI paid Theseus an up front license fee of
$50,000, which is creditable against these future obligations. The license,
which terminates with the expiration of the last of the patents included in the
licensed technology, may be terminated by PVI at any time.
TRADEMARKS
L-VIS(R), the mark under which we are marketing our live video insertion
products is a trademark of PVI which is registered with the U.S. Patent and
Trademark Office.
C-TRAK(TM) is a trademark of PVI. We have filed a U.S. trademark
registration application for C-TRAK, the mark under which we are marketing our
electronic imaging system in which a part of the picture or image in a
prerecorded or live video signal is scanned, digitized, stored and tracked to
thereby maintain the position of one or more inserted images relative to other
parts of the main picture or image. We have filed a Statement of Use with
respect to the C-TRAK mark on July 5, 2001 and it was accepted by the U.S.
Patent and Trademark Office on September 7, 2001. We believe the trademark
registration will issue shortly.
COPYRIGHT AND TRADE SECRET
PVI relies upon copyright and trade secret protection to maintain the
proprietary nature of the computer software it develops that is not patented.
These steps may not protect our trade secrets, know how or other proprietary
information.
EMPLOYEES
As of March 27, 2002, we (together with our wholly-owned subsidiaries) had
101 full-time employees, 54 of whom were engaged in, or directly supported,
PVI's hardware and software research, development and product engineering
activities, 9 of whom assemble and operate our proprietary systems, 17 of whom
were engaged in marketing activities and 21 of whom were engaged
18
in administrative activities. In addition, we utilize part-time and seasonal
employees as well as outside contractors and consultants as needed. None of our
employees are represented by a labor union, and we believe our relations with
our employees are good. Our success depends on our ability to attract and retain
qualified financial, technical, marketing and other management personnel for
which we face competition.
Currently, each of our employees is required to execute an agreement
pursuant to which he or she assigns to PVI all patent rights and technical or
other information which pertain to PVI's business and are developed by the
employee during his or her employment with PVI, and agrees not to disclose any
trade secret or confidential information without the prior consent of PVI.
ITEM 2. DESCRIPTION OF PROPERTY.
We currently lease 21,000 square feet of office space in two neighboring
buildings in Lawrenceville, New Jersey. The Lawrenceville facility is our main
operations center, including product, hardware and software design,
manufacturing and product assembly, product test and documentation, post
production, customer training and customer technical support. The leases in
Lawrenceville expire in September 2002. We are currently in negotiations to
renew our lease on approximately 17,000 square feet in Lawrenceville, New
Jersey. We currently lease 4,300 square feet of office space in New York City
for our sales, marketing and art department personnel. In addition, we currently
lease or sublease approximately 6,000 square feet of office space in Mexico
City, 9,300 square feet of office space in Brussels, Belgium and 3,600 square
feet of office space in Ra-anana, Israel. These offices are the main operations
centers of Publicidad, PVI Europe and Adco Imaging, Ltd. (PVI's Israeli
subsidiary), respectively.
ITEM 3. LEGAL PROCEEDINGS
In October 1999, we filed a request with the United States Patent and
Trademark Office ("USPTO") to correct the ownership of U.S. Patent 5,917,553,
licensed to Sportvision, Inc. on the basis of our belief that the basic subject
matter of this patent belongs to PVI. After we filed this action, Sportvision,
Inc. and Fox Sports Productions, Inc. ("Fox") filed a lawsuit against us in U.S.
District Court for the Northern District in California for infringement of the
disputed U.S. Patent 5,917,553, seeking injunctive relief and compensation
including damages. Plaintiffs subsequently amended their complaint to add claims
for infringement of U.S. Patent Nos. 6,141,060 and 6,229,550. On August 28,
2001, we filed a counterclaim alleging that Sportvision is infringing our U.S.
Patent No. 5,264,933, and seeking injunctive relief and compensation including
damages. As of December 31, 2001, discovery was ongoing and a trial date had
been set for June 2, 2003. On January 29, 2002, the parties entered into a
Settlement Agreement regarding this matter and a dismissal with prejudice as to
all parties was filed on March 9, 2002. Pursuant to the Settlement Agreement,
the parties entered into a patent cross-license agreement.
In June 1999 we filed suit for patent infringement in U.S. District Court
in Delaware against SciDel USA Ltd., the U.S. subsidiary of the Israeli company,
SciDel Technologies Ltd. We contended that SciDel's video imaging system for
electronically inserting advertising into live television broadcasts infringes
on PVI's U.S. Patent No. 5,264,933 and sought a permanent injunction prohibiting
infringement of our patent. The case was tried in late February 2001 and final
briefing was completed in April. As of March 26, 2002, a decision had not been
rendered. On March 26, 2002, we completed the acquisition of certain assets from
SciDel Technologies, Ltd. In connection with that transaction the parties have
agreed to file a dismissal of the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
19
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Our common stock trades on the Nasdaq National Market under the symbol
"PVII." The following table sets forth, for the calendar periods indicated, the
range of high and low sale prices for our common stock on the Nasdaq National
Market:
Period High Low
- ------------------------------- ------ -----
2000 January 1 - March 31 14.500 7.000
April 1 - June 30 8.438 3.876
July 1 - September 30 6.375 4.031
October 1 - December 31 5.031 1.250
2001 January 1 - March 31 6.469 1.438
April 1 - June 30 5.230 3.090
July 1 - September 30 5.100 2.040
October 1 - December 31 2.990 1.910
As of March 14, 2002, there were 355 holders of record of our common stock,
with beneficial shareholders in excess of 400. On March 14, 2002, the last sale
price reported on the Nasdaq National Market for the common stock was $1.78 per
share. The market prices of equity securities of technology companies, such as
PVI, have experienced substantial price volatility in recent years for reasons
both related and unrelated to the individual performance of specific companies.
Future sales of restricted securities (as defined under Rule 144 of the
Securities Act of 1933, as amended), common stock under PVI's Stock Option Plan,
and common stock issued upon the exercise of outstanding warrants, in the public
market could adversely affect the stock price and our ability to raise funds in
new stock offerings. To date, the trading volume of our common stock has
remained relatively small. As a result, shareholders may experience difficulty
selling or otherwise disposing of shares of common stock at favorable prices, or
at all.
The continued listing of our common stock on the Nasdaq National Market
System ("NMS") will be conditioned upon our meeting certain asset, stock price
and other criteria set forth by such quotation system. Effective June 20, 2001,
the SEC approved certain changes the NMS made to its quantitative listing
standards. Among other things, the NMS changed the minimum $4,000,000 net
tangible assets requirement to $10,000,000 in stockholders' equity. As of
December 31, 2001, we were in compliance with all NMS listing criteria. If we
fail to meet any listing criteria, our common stock may be delisted from
quotation on such system. The effects of delisting include limited news coverage
and the limited release of the market prices of our common stock. Delisting may
diminish investors' interest in our common stock, restrict the trading market
and reduce the price for our common stock. Delisting may also restrict us from
issuing additional securities or securing additional financing.
Companies with low price stocks are governed by additional federal and
state regulatory requirements and could lose an effective trading market for
their stock. For instance, if our common stock is delisted from the NMS and the
trading price of our common stock is less than $5.00 per share, our common stock
could be governed by Rule 15g-9 under the Securities Exchange Act of
20
1934. This rule requires that broker-dealers satisfy special sales practice
requirements before any transaction, including suitability determinations and
receiving any purchaser's written consent. The additional burdens imposed upon
broker-dealers may discourage broker-dealers from effecting transactions in our
common stock. This would reduce the liquidity of our common stock. If these
rules become applicable to our common stock, they could have a material adverse
effect on the trading market for our common stock. In addition, our common stock
could be deemed "penny stock" under the Securities Enforcement and Penny Stock
Reform Act of 1990. If this occurs, additional disclosure will be required if
you wish to make a trade in our common stock. The disclosure includes the
delivery of a disclosure schedule explaining the nature and risks of the penny
stock market. These requirements could severely limit the liquidity of our
common stock and the ability of purchasers to sell their shares of our common
stock in the secondary market.
We have neither paid nor declared any dividends on our common stock since
our inception. We expect to retain all earnings, if any, generated by our
operations for the development and growth of our business and do not anticipate
paying any cash dividends to our shareholders in the foreseeable future. The
payment of future dividends on the common stock and the rate of such dividends,
if any, will be determined in light of any applicable contractual restrictions
limiting our ability to pay dividends, our earnings, financial condition,
capital requirements and other factors deemed relevant by our Board of
Directors. Furthermore, pursuant to our Certificate of Incorporation, we are
prohibited from paying any dividends on the common stock until all accumulated
dividends in respect of the Series A preferred stock and Series B preferred
stock have been paid. As of December 31, 2001, the accrued dividends with
respect to the shares of Series A preferred stock and Series B preferred stock
totaled $27,618 and $30,793, respectively.
We are required to redeem the Series A preferred stock on a pro rata basis,
at a price of $4.50 per share plus all accrued but unpaid dividends, out of 30%
of the amount, if any, by which our annual net income after taxes in any year
exceeds $5 million, as shown on our audited financial statements. Subject to the
prior redemption of all of the Series A preferred stock, we are required to
redeem the Series B preferred stock, on a pro rata basis, at a price of $5.00
per share plus all accrued but unpaid dividends out of 20% of the amount, if
any, by which our annual net income after taxes in any year exceeds $5 million,
as shown on our audited financial statements. As of December 31, 2001, 11,363
shares of Series A preferred stock and 12,834 of Series B preferred stock were
outstanding. See Note 19 of Notes to Consolidated Financial Statements.
On November 8, 2001, we sold 615,385 shares of our common stock to
Presencia for an aggregate purchase price of $2,000,001. This sale was exempt
from registration under the Securities Act by virtue of Section 4(2) as a
transaction not involving a public offering. The securities were issued for
investment only and not for purposes of distribution. A legend to such effect
was affixed to the stock certificate issued. The purchaser received adequate
information about our business.
ITEM 6. SELECTED FINANCIAL DATA
In December 2001, our board of directors elected to change our fiscal year
end from June 30 to December 31, commencing with the six month period ended
December 31, 2001.
We have selected the following data derived from our consolidated financial
statements. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with our
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this report.
21
Six months
ended Fiscal Year Ended June 30,
December 31, --------------------------------------------------------
('000s except for loss per share) 2001(1) 2001(2) 2000 1999 1998 1997
- ---------------------------------- ------------ -------- -------- -------- -------- --------
Statement of Operations Data:
Total revenue $ 5,578 $ 4,664 $ 3,046 $ 1,222 $ 696 $ 212
Severance and other charges (3) $ 1,061 $- $- $- $- $-
Total costs and expenses $ 12,353 $ 17,375 $ 16,793 $ 11,852 $ 8,828 $ 6,026
Operating loss $ (6,776) $(12,711) $(13,748) $(10,630) $ (8,132) $ (5,815)
Interest expense $ -- $ -- $ -- $ -- $ (1,814) $ --
Other income, net $ 194 $ 555 $ 681 $ 976 $ 862 $ 84
Net loss applicable to common stock $ (6,994) $(11,692) $(12,489) $ (9,698) $ (9,128) $ (5,775)
Basic and diluted net loss per share $ (0.48) $ (1.09) $ (1.33) $ (1.18) $ (1.55) $ (2.18)
Weighted average number of shares -
basic and diluted 14,721 10,732 9,374 8,186 5,891 2,288
Balance Sheet Data:
Cash and cash equivalents $ 8,360 $ 2,672 $ 8,388 $ 12,494 $ 21,553 $ 776
Accounts receivable $ 2,299 $ 1,308 $ 829 $ 379 $ 193 $ 87
Property and equipment, net $ 2,857 $ 2,996 $ 3,685 $ 3,807 $ 2,547 $ 1,267
Patents, net $ 528 $ 556 $ 587 $ 547 $ 493 $ 389
Identifiable intangibles, net $ 3,024 $ -- $ -- $ -- $ -- $ --
Goodwill $ 5,339 $ -- $ -- $ -- $ -- $ --
Total assets $ 31,220 $ 11,295 $ 15,725 $ 18,891 $ 25,426 $ 2,761
Redeemable preferred stock $ 174 $ 170 $ 1,036 $ 992 $ 948 $ 904
Minority interest $ -- $ 94 $ 312 $ -- $ -- $ --
Total stockholders' (deficit)/equity $ 11,052 $ 3,390 $ 9,273 $ 12,143 $ 22,034 $ (1,005)
Other Data:
Capital expenditures $ 389 $ 1,170 $ 1,495 $ 2,514 $ 2,094 $ 523
- ---------------
(1) Results reflect the acquisition of Publicidad in September 2001 and the
second closing of the Cablevision transaction as described in Note 5 of
the Notes to Consolidated Financial Statements.
(2) Results reflect the first closing of the Cablevision transaction as
described in Note 4 of the Notes to consolidated financial statements.
(3) Reflects severance payment to a former member of management and costs
associated with streamlining our domestic and European operations as
described in Note 6 of the Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
OVERVIEW
22
Since our inception in 1990, we have devoted substantially all of our
resources to developing, testing, building and marketing 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 video images. We have incurred substantial operating losses since our
inception and as of December 31, 2001, June 30, 2001 and 2000, we had an
accumulated deficit of approximately $69,396,000, $62,405,000 and $50,725,000,
respectively. This deficit is the result of product development expenses
incurred in the development and commercialization of the Live Video Insertion
System ("L-VIS(TM) System") and iPoint, an advanced application of PVI's
patented technology that supports state of the art in-program advertising over
the Internet or interactive television, expenses related to field testing of the
L-VIS System and its deployment pursuant to customer contracts, operating
expenses relating to our field operations and sales and marketing activities,
and general administrative costs. We expect to incur additional losses in the
next fiscal year as we strive to evolve into a sports and entertainment focused
global, media services company. We will continue our business strategy of
developing new products and increasing our penetration in both the domestic and
international markets in the field of real-time virtual image insertion.
We 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. Such insertions include the virtual
first-down line in football, the virtual off sides line in soccer, and virtual
product placement in pre-recorded programming. Other software applications being
developed include Internet applications which will allow television viewers to
interact with live or recorded video programming. Under a joint collaboration
and license agreement entered into with Cablevision Systems Corporation, we
intend to work together to develop technology to create virtual, in-content,
interactive and targeted advertising and enhancement products for use with
television distribution. In order to increase our revenue generating user base
and to expand into domestic and international markets, 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") and our wholly-owned subsidiary, Publicidad Virtual, S.A. de C.V.
("Publicidad").
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. Such factors may
include contractual restrictions on the use of video insertion technology,
adverse publicity and news coverage and the inability of third party sales
forces to sell L-VIS(TM) System advertising.
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 grow revenues from the use of the L-VIS
System, we will need to enter into additional 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 recognize revenues when the respective advertisement is inserted into a
television broadcast. 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
23
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. These license fees are
recognized as revenue when all related commitments have been satisfied and the
fee is considered collectible.
A third revenue source is fees paid for the services provided by the L-VIS
System which support the electronic insertion of visual aids in live sports and
entertainment programming, 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 recognize these
revenues when earned, which is when the enhancement or visual aid is inserted
into a live or pre-recorded television broadcast.
Because our operations relate to the continuing development and marketing
of the L-VIS System, we work to convince advertisers, broadcasters and broadcast
rights holders of the value of the L-VIS System. If we do not generate enough
revenues to cover our operating expenses, 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
COMPARISON OF THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001 TO THE SIX MONTH
PERIOD ENDED DECEMBER 31, 2000 (UNAUDITED)
REVENUES. Revenues are earned from both advertisers' use of the L-VIS
System and under the terms of contractual arrangements for visual program
enhancements, as well as by license and royalty fees earned from use of the
L-VIS System outside the United States. Total revenues for the six months ended
December 31, 2001 increased 114% to $5,577,565 from $2,600,808 for the six
months ended December 31, 2000 primarily due to the acquisition of Publicidad
Virtual, S.A. de C.V. in September 2001. Total royalties and license fees
decreased 18% to $1,019,474 from $1,236,929 for the six months ended December
31, 2001 and 2000, respectively. Total advertising and production revenue
increased 234% to $4,558,091 for the six months ended December 31, 2001 from
$1,363,879 for the six months ended December 31, 2000. Due to the acquisition of
Publicidad, we no longer receive royalties on the revenues earned by Publicidad,
but rather consolidate its revenues as a component of our total advertising and
production revenue, thus accounting for these fluctuations. The increases in
revenue resulting from our acquisition of Publicidad were partially offset by
reduced advertising revenue from our Major League Baseball contracts and the
loss of our contract for the NFL Today pre-game show.
TOTAL COSTS AND EXPENSES. Total costs and expenses for the six months ended
December 31, 2001 increased 40% to $12,353,428 from $8,821,890 for the six
months ended December 31, 2000 primarily as a result of increases in our sales
and marketing expenses and costs associated with severance payments to a former
member of management and the streamlining of
24
both our European and domestic operations.
Sales and marketing expenses include salaries and travel expenses of sales
and marketing personnel, sales commissions, public relations, trade shows,
promotion, support personnel and allocated operating costs. Total sales and
marketing expenses for the six months ended December 31, 2001 increased 133% to
$3,970,482 from $1,706,368 for the six months ended December 31, 2000. This
resulted primarily from our consolidation of Publicidad's sales and marketing
expenses which included approximately $1.6 million in payments for the purchase
of television airtime for the use of virtual advertising in both sports and
entertainment programming.
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 and program enhancement services as well as for the
Internet and interactive television. Total product development costs increased
13% to $1,584,834 for the six months ended December 31, 2001 from $1,397,515 for
the six months ended December 31, 2000. This increase represents salaries and
overhead related to our ongoing engineering process to migrate the L-VIS system
to a PC platform as well as the continuing development of the iPoint product.
Field operations and support expenses include the costs associated with the
material production, depreciation and operational support of the L-VIS System
units for both domestic and international use, including training costs for
operators, maintenance of our mobile production units, and support of the L-VIS
Systems in the field. Total field operations and support costs for the six
months ended December 31, 2001 increased 8% to $3,128,220 from $2,885,651 for
the six months ended December 31, 2000 primarily due to the inclusion of
approximately $300,000 for Publicidad's production costs. This increase was
partially offset by approximately $100,000 in savings in our domestic production
costs associated with the insertion of the first down line for CBS during the
2001 NFL season. Experience in streamlining our operations resulted in shorter
on-site setup time required and the ability to provide our services with a
reduced number of personnel.
Total general and administrative expenses decreased 8% to $2,609,060 for
the six months ended December 31, 2001 from $2,832,356 for the six months ended
December 31, 2000. This resulted primarily from a decrease of approximately
$500,000 in legal fees incurred in connection with the protection of our patent
portfolio. Also contributing to the decrease was the reversal of $309,000
related to prior period compensation expense. The original expense was recorded
within the year ended June 30, 2001, relating to the variable accounting for
options which were repriced in February 2001. The expense was reversed in the
six month period ended December 31, 2001 due to the fact that the market value
of the PVI common stock was less than the repriced amount of $4.375 on December
31, 2001. These reductions in expense were offset by the inclusion of
Publicidad's general and administrative expenses of approximately $300,000 and
an increase of approximately $150,000 in consulting fees paid for legal and
administrative services.
During the six months ended December 31, 2001, we recorded severance and
other charges in the amount of $1,060,832. This resulted primarily from the
recording of approximately $980,000 in severance payments due to a former member
of our management team. These payments will be paid over the three year period
November 2001 through October 2004. In addition, we recorded approximately
$80,000 for lease payments due on office space in our New Jersey and Belgium
offices which, due to the streamlining of our operations, will not be used after
January 2002.
25
Total net other income decreased 18% to $193,752 for the six months ended
December 31, 2001 from $237,407 for the six months ended December 31, 2000
primarily as a result of lower cash balances available for investment.
Losses from equity investment were $176,028 for the six months ended
December 31, 2001 as a result of our investment in the Revolution Company, LLC,
which began operations in January 2001. The loss of $176,028 represents our
share of the total net losses of Revolution Company, LLC.
Losses from securities available for sale was $500,000 for the six months
ended December 31, 2001, related to an other-than-temporary impairment loss. The
investment was written down to $0 as of December 31, 2001.
Minority interest increased 35% to $94,280 for the six months ended
December 31, 2001 from $69,646 for the six month ended December 31, 2000 as a
result of increased losses in our majority held subsidiary, PVI Europe.
NET LOSS. As a result of the foregoing factors, our net loss increased 26%
to $6,990,590 for the six months ended December 31, 2001 from $5,542,030 for the
six months ended December 31, 2000.
OPTION REPRICING. On February 2, 2001, the Board of Directors voted to
offer all current employees who held outstanding stock options with an exercise
price greater than $5.00 the opportunity to reprice such options to $4.375. A
total of 1,186,998 options held by employees were repriced. In addition, a total
of 220,000 options held by directors were repriced. In accordance with Financial
Standards Board Interpretation (FIN) No. 44, these repriced options are subject
to variable accounting and thereby have been marked to market at December 31,
2001. We recorded the reversal of a prior period compensation charge in the
amount of $309,087 as the closing price of the stock on December 31, 2001 was
less than the exercise price of $4.375. Future charges relating to this
repricing could have a significant effect on our results of operations in
subsequent periods.
COMPARISON OF THE TWELVE MONTHS ENDED JUNE 30, 2001 TO THE TWELVE MONTHS ENDED
JUNE 30, 2000
REVENUES. Total revenue increased 53% to $4,663,677 for the fiscal year
ended June 30, 2001 ("Fiscal 2001") from $3,045,899 for the fiscal year ended
June 30, 2000 ("Fiscal 2000".) Advertising and contract revenue increased 49% to
$2,242,236 in Fiscal 2001 from $1,508,664 in Fiscal 2000 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 and 2001 MLB season, by CBS Sports for the
insertion of the virtual first down line in the national broadcast of 2000-2001
NFL regular and post-season games and by the Indy Racing League ("IRL")
throughout their 2001 season. Also contributing to the increase was the initial
use of the L-VIS System by CBS on their NFL Today pre-game show for the
2000-2001 season, and by the National Basketball Association in the
international broadcast of the 2000-2001 season finals. Advertising and contract
revenues increased by approximately $370,000 from football broadcasts, $130,000
from auto racing broadcasts and $100,000 each, from baseball broadcasts and from
basketball and post-production activities. Royalties and license fees increased
58% to $2,421,441 in Fiscal 2001 from $1,537,235 in Fiscal 2000. Of this total,
royalties and license fees attributable to Publicidad totaled $2,142,927 and
$1,090,485 in Fiscal 2001 and 2000, respectively, an increase of approximately
$1.1 million year over year. This increase was partially offset by a decrease of
approximately $200,000 in license fees received from Sasani, a former South
African licensee.
26
SALES AND MARKETING. Total sales and marketing expenses decreased 15% to
$3,508,917 in Fiscal 2001 from $4,127,494 in Fiscal 2000 primarily as a result
of a reduction of approximately $800,000 in fees we are being charged to obtain
certain international broadcast and programming rights. In addition, during
Fiscal 2000, approximately $300,000 in non-cash compensation charges were
incurred in relation to the issuance of options for consulting services
associated with promoting the use of PVI's technology in soccer and the
television production community. These reductions were partially offset by an
increase in commission expense due to higher revenues, and increased personnel
and overhead expenses incurred largely as a result of opening our PVI Europe
facility.
PRODUCT DEVELOPMENT. Total product development costs increased 1% to
$2,821,564 in Fiscal 2001 from $2,802,249 in Fiscal 2000 primarily due to the
costs associated with the use of an outside software development consultant and
a shift in the allocation of personnel related to the development of our iPoint
software product, a streaming media product which will allow television viewers
to interact with live or recorded video programming delivered to the home via
the Internet or interactive television.
FIELD OPERATIONS AND SUPPORT. Total field operations and support expenses
decreased 4% to $5,420,065 in Fiscal 2001 from $5,641,355 in Fiscal 2000. This
decrease was primarily the result of our implementation of cost controls,
savings incurred by reduced shipping expenses and shorter on-site setup time
required since the purchase of our mobile production trucks and a reduction in
the number of additional L-VIS Systems being built when all mobile production
trucks became fully operational. In addition, non-cash compensation expense
recorded for the issuance of common stock as payment for license fees decreased
by $120,000 in Fiscal 2001 due to the lower market price of our common stock on
the dates of stock issuance. These costs were partially offset by an increase of
approximately $100,000 for costs associated with the increased use of the L-VIS
System for both golf and soccer demos as well as by the IRL and ESPN during
their 2000-2001 auto racing and Sunday Night Baseball seasons, respectively.
GENERAL AND ADMINISTRATIVE. Total general and administrative expenses
increased 33% to $5,624,064 in Fiscal 2001 from $4,222,364 in Fiscal 2000 due to
an increase of approximately $500,000 in legal fees paid to defend and protect
our patent portfolio. Other factors contributing to the increase included
approximately $307,000 in non-cash compensation charges incurred as a result of
repricing stock options issued to our employees and board of directors,
approximately $240,000 in increased investor relations activity supporting our
efforts to provide current information to the investment community and an
increase of $120,000 in withholding tax payable on international license and
royalty revenue resulting from increased sales.
OPTION REPRICING. On February 2, 2001, the Board of Directors voted to
offer all current employees who held outstanding stock options with an exercise
price greater than $5.00 the opportunity to reprice such options to $4.375. A
total of 1,186,998 options held by employees were repriced. In addition, a total
of 220,000 options held by directors were repriced. In accordance with Financial
Standards Board Interpretation (FIN) No. 44, these repriced options are subject
to variable accounting and thereby have been marked to market at June 30, 2001.
A charge to earnings in the amount of $309,087 was recorded, as the closing
price of the stock on June 30, 2001 was greater than the exercise price of
$4.375. Future charges relating to this repricing could have a significant
effect on our results of operations in subsequent periods.
INTEREST AND OTHER INCOME. Interest and other income decreased 18% to
$555,316 in Fiscal 2001 from $681,185 in Fiscal 2000 primarily as a result of
lower cash reserves available for investment. This decrease was partially offset
by the recording of approximately $250,000 in interest income as a result of the
repayment of non-recourse related party loans. Due to the uncertainty of the
27
collectibility of these non-recourse notes receivable, we did not record
interest income on the transaction until it was settled in March 2001.
TAX BENEFIT. The total tax benefit decreased 38% to $371,999 in Fiscal 2001
from $596,998 in Fiscal 2000. The tax benefit for both years was received from
the sale of a portion of our state net operating loss and research and
development tax credits. The sale was made under a plan developed by the State
of New Jersey Economic Development Authority and the amount received is a
function of the total dollars available under the plan and the number of
companies applying for the tax benefit.
LOSSES FROM EQUITY INVESTMENT. Losses from equity investments increased to
$114,243 in Fiscal 2001 from $0 in Fiscal 2000 as a result of our investment in
the Revolution Company, LLC which began operations in January 2001. The loss of
$114,243 represents our 25% share of total net losses.
MINORITY INTEREST. Total minority interest increased to $217,298 in Fiscal
2001 from $24,734 in Fiscal 2000 as a result of concluding a full year of
operations by PVI Europe which was formed in June 2000.
NET LOSS. As a result of the foregoing factors, our net loss decreased 6%
to $11,680,563 in Fiscal 2001 from $12,444,646 in Fiscal 2000.
COMPARISON OF THE TWELVE MONTHS ENDED JUNE 30, 2000 TO THE TWELVE MONTHS ENDED
JUNE 30, 1999
REVENUES. Total revenue increased 149% to $3,045,899 during the fiscal year
ended June 30, 2000 ("Fiscal 2000") from $1,222,213 for the fiscal year ended
June 30, 1999 ("Fiscal 1999"). Of this total, advertising and production revenue
increased 117% to $1,508,664 in Fiscal 2000 from $694,528 in Fiscal 1999
primarily as a result of the increased use of the L-VIS System by MLB during the
1999 and 2000 baseball seasons, revenues earned from CBS Sports for the
insertion of the virtual first down line in the national broadcast of 1999-2000
and 2000-2001 NFL regular season and playoff games, and contractual revenues
earned for program enhancement services provided to CBS News in the live
television broadcast of its CBS Early Show. Other factors contributing to the
increase included the use of the L-VIS System by the Indy Racing League in the
broadcast of their 2000 series auto races and by Turner Network Television in
its broadcast of the 2000 Winter Goodwill Games. Royalties and license fees
increased 191% to $1,537,235 from $527,685 in fiscal 1999 as a result of a
significant increase in royalties received from Publicidad due to the
restructuring of our license agreement which was then in effect with Publicidad.
In addition, the use by Canwest Global Communications of the L-VIS technology in
Canadian television broadcasts and by Sasani Limited in South Africa contributed
to the increase.
SALES AND MARKETING. Total sales and marketing expenses increased 62% to
$4,127,494 in Fiscal 2000 from $2,545,738 in Fiscal 1999. This increase resulted
from several factors including non-cash compensation charges of approximately
$325,000 incurred in relation to the issuance of options for marketing
consulting services, and increase of $400,000 for license fees paid to obtain
certain international broadcast and programming rights, an increase of
approximately $400,000 for marketing personnel and related overhead in
supporting our continued focus on the sales and marketing of the L-VIS System,
and approximately $150,000 spent on increased trade show activity. During Fiscal
2000 we also instituted a commission program for sales and marketing executives
and recorded related expenses of approximately $130,000.
PRODUCT DEVELOPMENT. Total product development expenses increased 86% in
Fiscal
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2000 to $2,802,249 from $1,508,875 in Fiscal 1999 due primarily to a shift in
the allocation of new and existing engineering and management personnel and
related overhead to deployment of new applications of our core technology,
including our post production product for use in entertainment programming. Also
contributing to the increase were 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. Depreciation expense increased due to
additional L-VIS Systems being used to support in-house development projects.
FIELD OPERATIONS AND SUPPORT. Field operations and support expenses
increased 27% in Fiscal 2000 to $5,641,355 from $4,431,759 in Fiscal 1999 as a
result of several principal factors. Depreciation expense increased
significantly as a result of the manufacture of additional L-VIS Systems and our
purchase of several mobile production trucks. The costs associated with program
enhancement services we provided for the live television broadcast of the CBS
Early Show as well as for the broadcast of the Indy Racing League 2000 auto
racing series, were also significant components of the increased expenses in
Fiscal 2000 over Fiscal 1999. Other cost increases resulted from increased
activity in Europe and our use of the L-VIS System in the ABC broadcast of the
Rose Bowl in January 2000.
GENERAL AND ADMINISTRATIVE. Total general and administrative costs
increased 25% in Fiscal 2000 to $4,222,364 from $3,365,689 in Fiscal 1999
primarily as a result of the increased legal fees we are paying to increase our
patent portfolio and protect our patent property. In addition, we incurred
non-recurring legal, accounting and incorporation fees during the process of
forming PVI Europe, and continued to increase our investor relations activity
relating to our continuing effort to increase investor awareness of the L-VIS
System technology.
INTEREST AND OTHER INCOME. Interest and other income decreased 28% to
$705,919 for Fiscal 2000 from $975,850 for Fiscal 1999 as a result of the lower
cash balances we had available for investment.
TAX BENEFIT. The tax benefit increased to $596,998 from $0 for Fiscal 2000
and 1999, respectively, as a result of the sale of a portion of our state net
operating loss and research and development tax credits. The sale was made under
a plan developed by the New Jersey Economic Development Authority in the latter
part of 1999 and was not available during the year ended June 30, 1999.
NET LOSS. As a result of the foregoing factors, our net loss increased 29%
to $12,444,646 for Fiscal 2000 from $9,653,998 for Fiscal 1999.
SEGMENT REPORTING
We operate on a worldwide basis in only one industry segment, real-time
video imaging which is broken out into geographical regions including the United
States, Latin America, Canada, Europe and all other regions. For the six months
ended December 31, 2001, total revenues were $5,577,565. Of this total,
approximately $4 million was from our Latin American region and $1.3 million was
from the United States, As a result of our acquisition of Publicidad in
September 2001, total revenues increased dramatically between fiscal 1999 and
2001and during the six months ended December 31, 2001 as a result of increased
license and royalty fees received from Publicidad prior to our acquiring their
business in September 2001, and the inclusion of their advertising and
production revenue on our consolidated statement of operations since the date of
acquisition.
License and royalty revenue increased 142% to $1,090,484 in Fiscal 2000
from $450,185 in Fiscal 1999 and an additional 97% to $2,142,927 in Fiscal 2001
over Fiscal 2000. These increases
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were principally the result of more favorable royalty rates negotiated with
Publicidad allowing us to receive a share in their total revenues. A second
contributing factor was an increase in revenues paid to Publicidad by Televisa,
S.A. de C.V., Mexico's largest broadcaster, for their use of the L-VIS system in
soccer and entertainment programming.
License and royalty fees from other geographic locations decreased from
$446,741 in Fiscal 2000 to $102,468 in Fiscal 2001 as a result of the
termination of a license agreement with our South African licensee, Sasani
Limited in June 2000. This decrease was partially offset by the inclusion of
revenues from PVI Europe of approximately $72,000 during their first year of
operations.
CRITICAL ACCOUNTING POLICIES
PVI's discussion and analysis of its financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue and expenses
during the reporting periods. There can be no assurance that actual results will
not differ from those estimates.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations:
REVENUE. Royalty fee revenue relates to the fee received when our licensees
have royalty agreements pursuant to which we earn reve