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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 00-26363
INTERNET PICTURES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2213841
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State or other jurisdiction (IRS Employer
incorporation or organization Identification No.)
1009 Commerce Park Drive Oak Ridge, Tennessee 37830
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (865) 482-3000
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2001 was $39,397,685 (based on the average bid and
ask price of $0.609.
The number of shares outstanding of the registrant's common stock, $.001 par
value, as of March 1, 2001 was 65,952,645.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Stockholders'
Meeting to be held on or about May 17, 2001, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended, are incorporated by reference into Part III of this report
on Form 10-K. Such Proxy Statement, except for the portions thereof which are
specifically incorporated herein by reference, shall not be deemed "filed" for
purposes of this report on Form 10-K.
PART I
Item 1. Business.
OVERVIEW
Internet Pictures Corporation, or iPIX, is a technology provider and the leader
in the delivery of dynamic imaging. The Company's immersive imaging technologies
and open imaging platform allow businesses to harness the power of imaging to
increase revenues, improve operations and enhance the overall Internet user
experience.
The Company's end-to-end solutions include full-service and self-service options
for the capture, processing, hosting and distribution of immersive, still and
motion pictures. More than 10,000 Web sites feature iPIX dynamic imaging,
including 22 of the top 25 Media Metrix Web sites. In a typical 24-hour period,
iPIX manages over 50 million image views, more than 700,000 image uploads and is
responsible for over one million virtual tours being seen on the Internet.
Our solutions help businesses increase the relevance and enjoyment of users' Web
site visits, resulting in increased traffic, repeat use and customer loyalty.
This, in turn, provides our customers with increased commerce, enterprise
profits and imaging revenue opportunities, without requiring significant
investment in imaging infrastructure.
iPIX combines its people, technology, processes, and partnerships to deliver an
extensive range of full and self-service dynamic imaging solutions worldwide.
From capture, to automated online image preparation and delivery to the Web,
iPIX delivers the necessary imaging solutions so customers can focus on their
core competencies.
Our open imaging platform, Rimfire, allows business to business and business to
consumer sites to quickly and easily capture, manage and distribute images and
other forms of media directly from site viewers via live Web pages. With
Rimfire, site end-users can easily publish still digital media to the Web with
simple drag-and-drop image submission. The iPIX open imaging platform solves the
most common problems associated with user-supplied media by simplifying the
tasks and the process for the user and the Web site. For example, with Rimfire,
eBay is able to allow their users to instantly add photos directly to their
listings from the "Sell Your Item" form online. The photos are automatically
sized, formatted and delivered to the eBay Web site to the standards pre-set by
eBay.
Rimfire can accept multiple media items supplied from users such as text, audio,
photos as well immersive images to deliver fresh and interactive content to web
pages. By eliminating the challenge of content submission for users, and robust
imaging infrastructure for Web sites, the Rimfire platform allows businesses to
increase the use of imaging to leverage its power to drive e-commerce and
enterprise profits.
iPIX has developed patented technology for the creation of 360-degree by
360-degree immersive images which we believe offer the most compelling visual
content for the Internet. iPIX immersive images capture the world as we see it,
providing a complete field of view -- from ground to sky, floor to ceiling, and
horizon to horizon. iPIX also offers live and pre-recorded streaming immersive
video that will capitalize on the
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increasing availability of broadband networks and off-line use of mobile devices
and entertainment centers.
iPIX leverages their patented technologies and processes through relationships
with vendors such as Cisco, Compaq, Exodus, Network Appliance, and Navisite to
seamlessly distribute hundreds of terabytes of dynamic imaging to many of the
Internet's most trafficked sites. eBay, Yahoo!, AOL, Homestore.com, Microsoft
HomeAdvisor and Discovery.com are all customers of iPIX solutions. iPIX has
established an industry leading performance record in delivering dynamic imaging
with 99.98% reliability. In addition, iPIX ViewAlways technology enables users
to view images on multiple platforms from personal computers to wireless,
handheld devices.
iPIX also captures content in over 90 of the top 100 metropolitan areas across
the United States and Canada utilizing Imaging Services Corporation, or ISC, a
wholly-owned subsidiary of iPIX, managing an extensive network of trained
photographers. The content captured by ISC is prepared for distribution at our
high volume processing centers or through use of iPIX image processing software.
Our scaleable hosting and distribution infrastructure is designed to rapidly
deploy digital media across the Internet. We can seamlessly distribute digital
media to our expanding network of over 150 affiliate Web sites maintained by
AOL, Cendant, Microsoft CarPoint, and REALTOR.com. We generate revenues when we
deliver our end-to-end imaging solutions or when a customer uses our technology
to create an iPIX immersive image. In addition, we generate revenues when we
manage and distribute digital media created by our customers.
Our customers include Avis Rent-a-car, Carnival Cruise Line, Cendant, CNN,
Discovery Channel Online, eBay, Excite@Home, Expedia.com, General Motors, GTE,
Hyatt Hotels, Move.com, MTV, Polaroid, Saab, Starwood Hotels, The Walt Disney
Company TicketMaster Online, Travelocity.com and Warner Brothers.
INDUSTRY BACKGROUND
Growth of E-Commerce
The Internet has become a critical component of every business strategy. It
offers a highly efficient medium for providing information, conducting business
transactions, and bringing together groups of people with an interest in a
common subject or activity. Forrester Research estimates e-commerce revenues
will grow from approximately $657 billion worldwide in 1999 to $6.8 trillion
worldwide by 2004. There has also been substantial growth in the number and
types of Web sites, which are estimated to grow from 2.2 billion in 1999 to 4.3
billion in 2000 according to International Data Corporation.
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Value of Imaging
The effectiveness of the Internet as an informational and transactional medium
depends on the quality of the content presented. We believe content can be
greatly enhanced with the addition of user-supplied video, audio, and photos and
that e-business sites benefit from increases in frequency and duration of visits
when their offerings include the use of photos and other digital media. In
commercial transactions on the Internet, imaging can result in increased sales,
increased efficiency in the sales cycle, clearer selection among choices, and
higher realized prices. Future Image estimates that the number of images whose
posting on the Web is related to a commercial transaction is expected to exceed
1 billion in 2000 and approach 10 billion by 2003. We believe that e-commerce
providers will increasingly seek cost effective solutions that provide
high-resolution, compelling images to their customers.
According to a Jupiter Consumer Survey, better information and presentation of
products would drive 37 percent of consumers to make more purchases online.
Although images continue to have the largest impact on online users' experience,
Jupiter Research reports that few sites deploy images effectively, let alone
streaming media. In addition, a study conducted by Paine Webber found that the
second biggest obstacle to buying over the Internet is the inability to clearly
view products prior to purchase. The study states that "Robust imaging must be a
part of every e-commerce site where image detail is essential to the buyer."
Growth of E-commerce Infrastructure and Services
Forrester Research estimates that U.S. spending on e-commerce infrastructure
software will grow from $3.1 billion in 1999 to $14.5 billion in 2003. In a
Jupiter Executive Survey, 50 percent of site executives reported that
professional services firms provide more than 10 percent of their staff, and one
respondent in seven respondents reported outsourcing 50 percent or more of Web
development. According to Jupiter Communications, as Web ventures progress
through the Cost of Scaling Curves zones, they should expect to increase the
role that external professional services play in their organizations.
Gistics Research estimates the current potential market for digital asset
management services to be about $2 billion, made up of the top 2000 media and
entertainment sites spending approximately $250,000 per year, and 16,000
corporate enterprise sites spending approximately $100,000 per year. Chase
Hambrecht & Quist has stated, "We believe there will be significant demand for
infrastructure services for the complete end-to-end management of rich Internet
Media."
THE iPIX SOLUTION
Internet Pictures Corporation is an imaging technology provider and the leader
in the delivery of dynamic imaging. The Company's immersive imaging technologies
and open imaging platform allow businesses to harness the power of imaging to
increase revenues, improve operations and enhance the overall Internet user
experience.
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Our end-to-end solutions include full and self-service options for the capture,
processing, hosting and distribution of immersive, still and motion pictures.
Our solutions are based on patented technologies for the creation and deployment
of interactive imaging including still photos, immersive images, streaming
media, audio and other forms of digital media.
iPIX Immersive Imaging
Our patented technology creates iPIX immersive images by combining two 185
degree film or digital photographs taken with a fisheye lens into one 360 degree
by 360 degree spherical image. Our technology automatically compensates for any
minor error in camera placement and corrects the distortion inherent in these
photographs. The resulting immersive image can be viewed in any direction,
up-down, left-right, and horizon to horizon. The viewer can easily navigate the
image by moving a cursor inside the image or using the iPIX navigation bar.
We believe that iPIX immersive images, alone or combined with other digital
media such as audio, video and animation, can provide businesses with more
compelling content in order to attract and retain Web site visitors. Our hosting
and distribution infrastructure with ViewAlways technology seamlessly delivers
digital media content to Web sites accessed from a variety of platforms,
including personal computers and wireless devices.
Current iPIX immersive imaging solutions and applications include:
IPIX Immersive Images and Virtual Tours
iPIX provides the leading immersive, 360-degree virtual tours for real
estate, e-commerce, travel and hospitality, entertainment and new media
sites. iPIX immersive images offer viewers the opportunity to navigate
a scene on their own terms, looking in any direction, and zooming in
and out as they choose. This interactive imaging experience increases
buyer confidence and immerses the viewer in the photographed scene.
IPIX Camera Solutions
Partnering with the leading camera manufacturers including Nikon, iPIX
offers complete camera solutions for the self-service capture of iPIX
immersive images. Photographers, Web developers and designers may
purchase complete camera solutions including a digital camera, 180
degree fisheye lens, iPIX software, camera rotator and tripod. Users
may also purchase partial kits to use with their existing digital
camera equipment.
IPIX Immersive Imaging Software
iPIX offers complete immersive imaging software to allow users the
ability to create their own 360 degree by 360 degree immersive images.
The software offers automatic de-warping of fisheye images and seamless
generation of 360-degree by 360-degree immersive images from two
185-degree images. iPIX software
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creates an iPIX immersive image that has a small file size, typically
between 25 and 160 kilobytes, and can be quickly delivered, even across
low bandwidth systems.
An iPIX Image Key is an encryption tool that enables the user to save a
single iPIX immersive image captured using iPIX software. One iPIX Key
enables the user to save one iPIX image, just as one film negative
enables the creation of one film photograph. iPIX kit owners can
purchase additional keys through our online store or through our
toll-free order system. iPIX Keys are sold on a pay-per-use or
unlimited use subscription basis.
iPIX Immersive Video
One of the latest developments leveraging iPIX technology is our
immersive, interactive video, iPIX Movies. iPIX Movies employ unique
technology to capture all 180 degrees to 360-degrees of a scene,
resulting in users being able to choose their own perspective in a
streaming video environment. The number of simultaneous viewpoints is
limitless, giving each individual online user a unique experience. iPIX
Movies can be delivered in multiple formats including traditional and
streaming video.
With the increasing availability of broadband networks, we believe iPIX
Movies will become a standard for streaming video content over the
Internet. Multiple streams of iPIX Movies could be delivered to a home
using a digital cable network, satellite or other broadband network. In
addition to entertainment markets, iPIX Movies could be used in
commercial applications such as the security, teleconferencing and
surveillance industries. Our goal is to become the leader in the field
of full-motion immersive video by aggressively pursuing and developing
these commercial market applications.
iPIX Imaging Platform
iPIX has developed an open imaging platform, Rimfire, that allows business and
consumer sites to quickly and easily capture, manage, and distribute media from
site viewers to live Web pages. Rimfire is an end-to-end, fully automated
imaging management solution that addresses the preparation, submission and
management of digital media. With Rimfire, users can easily publish still photos
and other digital media to the Web with simple drag-and-drop image submission.
Through processes that are instantaneous and invisible to the user, Rimfire
automatically sizes the images to the target Web site's specifications. At the
same time, on behalf of the target Web site, Rimfire can handle all of the data
and image management, storage and serving requirements associated with that
image. We believe that availability of our open imaging platform will allow
businesses to outsource their imaging tasks in much the same way that search and
email functions are outsourced today.
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The iPIX open imaging platform solves the most common problems associated with
user-supplied digital media by automating the tasks and simplifying the process
for the user and the Web site.
Digital Media Preparation
Rimfire allows Web sites to attract and retain users regardless of
their technical skill. Rimfire's drag-and-drop technology allows users
to quickly and easily submit their own media content to the Web without
the need to prepare it with desktop software ahead of time. Challenging
tasks such as formatting, sizing and cropping, are easily and
automatically accomplished through Rimfire's integrated and intuitive
tools. Instant previews of the media supplied prevent incorrect
submissions.
Digital Media Submission
Rimfire accepts a wide and growing variety of file formats and converts
the files to customer specifications automatically, with no user or
site intervention. Rimfire's smartsizing feature allows the user to
supply files of any size without worry about upload times for
submission, or viewing times. Like file formats, Rimfire automatically
prepares the media for transmission by optimizing its size to the
requirements of the site. In addition, Rimfire supports the submission
of multiple files and associated data to save time for the user and the
site.
Media Deployment
Once media is received by Rimfire, it is processed to customer
specifications again. This includes database management, further
processing such as creating multiple files of varying sizes or quality,
and distribution to the appropriate storage facility. Rimfire's
"layered" architecture enables services such as the transformation of
still images into PhotoMovies, interactive advertisements, slide shows,
images watermarked with text or graphics, or new capabilities created
by iPIX or our third party developers. Rimfire technology was designed
to be scalable and fault tolerant to handle high volumes of user
submissions and our clients' rapid pace of growth. Built on industry
standard hardware and software platforms, Rimfire allows for rapid
expansion of rich media acquisition, processing, transformation and
delivery.
Our Rimfire imaging platform was designed to integrate easily with a variety of
architectures, shortening our customers' time to market for their media enabled
offerings. Rimfire integration can be accomplished quickly, using
well-documented software tools.
iPIX generates direct and indirect revenue opportunities for Web sites by
incorporating imaging into their e-commerce and community offerings. Rimfire's
media processing capabilities include the mechanism to take different media
items supplied from users such as text, audio, and images and transform them
into one new rich media item. iPIX can then serve the media directly from iPIX
servers or send the media to a remote database to be served directly from the
Web site customer's services.
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By offering an outsourced infrastructure solution, we offer our customers an
alternative to building costly infrastructure, enabling them to utilize scarce
technical resources in other mission critical capacities, to eliminate expensive
media processing tasks, to decrease customer support expenses, and to optimize
storage and bandwidth resources.
IMAGING SERVICES
Custom Imaging Application Development -Professional Services
iPIXs' Professional Services Group serves two primary functions; (i)
assist customers with imaging platform integration and (ii) provide a
broad range of engineering services to help customers with any of their
media needs.
The Professional Services Group provides media expertise and services
for customers including imaging application design, engineering,
quality assurance, documentation, network architecture and management,
project management and customer research. The Professional Services
Group researches, designs, develops, deploys and manages imaging Web
sites for customers. The Professional Services Group also creates
imaging enabled Web applications to enhance existing Web sites or
creates new imaging-based services for Web sites. The Professional
Services Group offers Rimfire customers significant time to market
benefits and the valued skills of a team specializing in rich media on
the Internet by using rapid development and deployment techniques.
Imaging technologies developed by the Professional Services Group are
built on the iPIX imaging platform using Rimfire API's and support
Rimfire's open standards architecture. These new imaging technologies
therefore become part of Rimfire's core functionality.
Image Capture Services
For our end-to-end solutions, we utilize a nationwide managed network
of photographers enabling us to capture content in over 90 of the top
100 metropolitan areas across the United States and Canada. This
network is available through Imaging Services Corporation, a
wholly-owned subsidiary of iPIX. iPIX created ISC to capture 360-degree
iPIX Virtual Tours and still photographs for channel partners including
Homestore.com, Cendant, and Starwood, as well as for iPIX customers in
the travel and hospitality, entertainment and other markets. ISC's
image-capture business manages a network of over 800 photographers in
North America. Once the content has been captured, customers who use
our end-to-end solutions have their images prepared for distribution at
our high volume processing centers.
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THE iPIX STRATEGY
Establish iPIX as the Standard for Online Imaging Technology
We believe iPIX imaging solutions deliver the highest level of interactivity,
reliability and quality imaging content available on the Internet. Our solutions
result in more frequent and longer site visits, increased revenue and higher
profits. Because iPIX offers end-to-end imaging solutions, we are able to
deliver multi-dimensional and exponential value to online businesses. As a
result, we believe we are poised to be the standard for online imaging
technology. We will focus all business, sales and marketing strategies to
support this position. We will continue research and development efforts to
ensure that our technology remains at the forefront of innovation, yet open for
easy integration with other technologies. We will concentrate on developing
partnerships with leading network integrators and business consultancies to make
iPIX imaging a standard component of every e-business solution and drive to have
iPIX imaging solutions specified in all e-business and e-commerce solution bids.
With these combined efforts, we believe the value proposition of iPIX imaging
solutions will become well known and we will earn the reputation as the standard
and extensible platform for all online imaging.
Build Indirect Sales & Marketing Channels
iPIX has adopted a strategy that will leverage relationships with business
partners and major market leaders in order to increase market penetration and
revenue while reducing operating expenses. This strategy will develop multiple
sales and marketing channels for iPIX products and services including:
Vertical Market Leaders
iPIX has partnered with major customers such as eBay and Homestore.com
to leverage their leading sales channels to penetrate the online
residential real estate, travel and hospitality, auction and classified
markets with iPIX products and services. Through these relationships,
eBay and Homestore market and sell imaging products and services,
powered by iPIX, along with their existing services directly to their
customers. iPIX benefits from the brand equity and buying
recommendation provided by the channel partner to increase sales and
market penetration while maintaining the ability to focus on iPIX
technology support and enhancements. We will continue to target and
partner with additional vertical market leaders to serve as indirect
channels for the promotion and sale of iPIX products and services.
Partner with e-Business Consultancies and Integration Leaders
The iPIX indirect channel strategy also includes the establishment of
business relationships and alliances with the leading e-business
consultancies for the purpose of building additional channels for the
sales and marketing of iPIX products and services across multiple
markets. This strategy involves integrating iPIX products and services
to the standard e-business solutions and toolkits of the
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leading business consultancies and integration organizations such as
IBM, CommerceOne and KPMG.
The first of these relationships was established with IBM in December
2000. The IBM/iPIX relationship is aimed at leveraging the two
companies' offerings to provide a comprehensive imaging infrastructure.
By simplifying the integration of dynamic imaging into e-commerce
platforms, joint IBM/iPIX product offerings will create even greater
market adoption of both company's products and services. Through our
relationship with IBM, iPIX will integrate IBM's hardware, software,
Web hosting, and consulting services into our dynamic imaging product
and service offerings. We also will develop joint strategies to promote
and sell current and future dynamic imaging solutions to the companies'
combined customer bases, as well as utilize each others' sales force
and Web consultants in both the private and public sectors. Through
relationships with business consultancies and integration leaders, iPIX
will explore new opportunities to accelerate the creation and
deployment of iPIX imaging solutions across next-generation
technologies.
Partner with Web Developers
We will leverage the community of Web developers currently building and
designing Web sites to drive the use and adoption of iPIX dynamic
imaging. We will also generate revenue through the purchase of iPIX
camera kits and iPIX Keys by Web developers and their customers. In
March 2001, iPIX introduced the iPIX Developer Network program. This
dedicated program was specifically designed to increase
iPIX-to-developer and developer-to-developer interactivity and will
provide Web developers a competitive advantage through availability of
increased resources, technical support and special pricing for iPIX
offerings.
Partner Internationally
We intend to capitalize on what we believe to be a significant
opportunity for our visual content and digital media solutions in
international markets. We have established a European subsidiary in
London, England, and we plan to expand our content capture network in
Europe and to offer our end-to-end solutions in these markets. In
addition, we have established a subsidiary in Japan and China where we
will form strategic alliances with local partners in our effort to
service the growing wireless, real estate, travel and hospitality and
entertainment markets in these regions. We intend to develop local
sales and technical support capabilities in these regions. In addition,
we have entered into reseller arrangements with strategic partners in
Australia.
Business Development and Strategic Direct Sales
In addition to our indirect sales channels, iPIX employs a team of
sales professionals focused on new business development opportunities
and strategic direct sales across multiple markets including
automotive, auctions and classifieds, commercial real estate,
entertainment, government, insurance, law enforcement and travel and
hospitality. These sales professionals sell our full suite
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of iPIX imaging solutions including immersive imaging, our open imaging
platform and end-to-end imaging solutions.
Proliferation of iPIX Immersive Imaging Across The Internet
A primary goal of the iPIX business strategy is to increase the adoption and use
of iPIX immersive imaging across the Internet and to secure iPIX as the premier
technology and immersive imaging of choice. To drive the adoption and market
share of iPIX immersive imaging, we will focus on ensuring that our technology
is compatible with current and new Internet technologies. We will continue to
provide professional training and customer support to make iPIX immersive
imaging easy to use. We recently adopted a new pricing model making iPIX
immersive imaging more affordable and accessible to all levels of users. In
addition, we will maintain research and development efforts to develop new forms
of iPIX immersive imaging, integrate partner technologies into our immersive
solutions and make iPIX immersive content available to many through affordable
content syndication.
New Initiatives
In the year 2001, iPIX intends to execute several new initiatives to support our
overall business strategies. These new initiatives will include:
Indirect Channel Support
iPIX will institute sales and marketing programs to support our
indirect channel partners. These programs will be designed to educate
our partners on how to sell our solutions and provide them with the
tools to do so. We will also work together with our partners to jointly
develop tools and materials in support of the channel.
iPIX is also committed to support indirect channels through technology
development and enhancement to meet channel-specific business
requirements, including partnering with complementary technologies.
iPIX Licensing
In an effort to make iPIX imaging easier to use, more affordable and
accessible to a larger audience, we will adopt a new image key pricing
model that allows users to purchase an annual, unlimited subscription
for the creation of iPIX immersive images. In addition, we will begin
licensing collections of syndicated iPIX immersive content to
businesses that will benefit from its use on their Web sites. For
example, a collection of iPIX immersive tours of major US cities may be
licensed to travel portals.
Third Party Solution Integration
Leveraging our open imaging platform, we intend to enhance the iPIX
solutions offering through the integration of third party solutions.
These initiatives will be pursued based upon value to our customers and
potential long-term revenue opportunity.
MARKETS
We have directed our sales efforts and channel strategies toward the industry
leaders as service providers within the following markets.
CUSTOMERS/CHANNEL PARTNERS
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Ecommerce
Auctions & Classified............................................eBay
Automotive.....................AutoVantage, General Motors, Microsoft
CarPoint, Saab, Toyota
e-Retail...............................Ticketmaster Online-Citysearch
Real Estate.............................................Homestore.com
Travel and Hospitality.........Carnival Cruise Lines, Disney Vacation
Club, Expedia, Hilton Hotels, Holiday Inn,
Hyatt Hotels, Marriott, Swissotel,
Starwood Hotels, Travelocity
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Ebusiness.................................................IBM, CommerceOne, KPMG
Education and Entertainment.............ABC, Discovery.com, Dreamworks SKG, Duke
University, E! Online, Fox, HGTV, IBM Worldbook, MGM, MTV, NBA, NBC, NFL,
National Geographic, PBS, Paramount Parks, The Walt Disney Company, Warner
Brothers
Government and Public Sector............................. IBM, CommerceOne, KPMG
E-COMMERCE
Automotive. Automobile companies use iPIX immersive images to create virtual
showrooms and highlight differences between different models and their
respective option packages. Consumers can experience a realistic perspective of
both the interior and exterior of a car while receiving on-screen descriptions
of particular features.
Auctions and Classifieds: As the primary mechanism for ecommerce, auction and
classified sites and portals such as eBay rely heavily upon imaging to drive
sales of new and used consumer items. Sellers require an easy to use method for
uploading images to accompany their item listing and buyers can have confidence
in items they can view and inspect online. Images result in more bids and higher
final sale amounts. With Rimfire, auction and classified sites can offer photo
services that make adding images to web sites easy, affordable and efficient.
e-Retail: Online retailers and other e-commerce sites utilize iPIX images to
advertise their product and service offerings and accelerate electronic
commerce. For example, when Ticketmaster launched the My Ticketmaster web site,
they used iPIX images of stadium and concert venues to allow customers to view
their seat location before purchasing a ticket online. Our e-retail customers
either purchase iPIX kits to create their own iPIX images or utilize our
end-to-end solutions to create iPIX images for them.
Real estate: Residential and commercial real estate companies and professionals
use our solutions to provide online iPIX immersive images of properties
including existing homes, new homes, rental apartments and office buildings and
their surrounding areas. Our imaging solutions allow real estate companies and
professionals offering real estate for sale or lease to use the Internet to
provide more visual information about the property to prospective buyers. Our
solutions enable real estate professionals to cost-effectively market properties
to a wide audience, thereby providing a value-added service to both buyers and
sellers.
Travel and Hospitality: Hotel chains, vacation resorts, cruise lines, golf
courses, restaurants, theme parks, major tourist attractions and tourism bureaus
use our digital media content solutions to enhance their online marketing. iPIX
immersive images provide a prospective visitor the opportunity to take online
tours of rooms, meeting and conference facilities and attractions. Our visual
content and digital media solutions enable consumers to more effectively
research, plan and reserve travel arrangements over the Internet. Further,
online tours allow destination operators to feature premier packages as well as
showcase specific destinations. We distribute our customer's digital media
content to their own web sites and to selected travel destination affiliate web
sites.
EDUCATION AND ENTERTAINMENT
Education and Entertainment. Education and entertainment industry leaders use
iPIX images to enhance the appeal and functionality of their products and web
sites. We have created iPIX online tours of movie sets to help promote the
release of feature films and campus tours to recruit new students to college
campuses. Our education and entertainment clients can choose between our full
service solution and purchase iPIX kits and iPIX keys to create their own iPIX
images.
SALES AND MARKETING
Our marketing efforts focus on supporting our sales force with marketing
materials and sales tools that help generate and close new business for iPIX.
Using this strategy, we intend to acquire new customers for our end-to-end
solutions, increase purchases of iPIX kits and iPIX keys and develop new sales
opportunities. We also intend to
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continue utilizing distributors and resellers to penetrate indirect markets. Our
marketing efforts include traditional and Internet advertising as well as direct
mailings, participation in trade shows, co-marketing with strategic partners and
public relations campaigns.
Our various sales and marketing groups focus on direct and indirect sales
partners. As of March 1, 2001, the direct sales team consisted of eight
employees who operate out of our headquarters and our multiple national and
international sales offices. We also have established a telesales team that
targets potential business customers. Our telesales team also provides support
for the direct sales teams and fields inquiries from our web site and toll-free
customer service number. As of March 1, 2001, we had seven employees on our
telesales team.
We maintain a customer relations department with 11 employees as of March 1,
2001. Our customer relations personnel answer inquiries regarding our
offerings and respond to technical questions. Our service personnel also perform
quality assurance checks on each component included in an iPIX kit prior to
shipping and process customer service inquiries concerning order status,
shipping information, returns and exchanges.
Our business development team, based in San Ramon, California, is focused on
developing strategic relationships and opening sales channels with potential
partners and customers in our targeted vertical markets. As of March 1, 2001, we
had three employees on our business development team.
RESEARCH AND DEVELOPMENT
iPIX has made substantial investments in research and development. We continue
to develop enhancements to our technology and pursue new offerings. Our
technology development is focused on creating new products and services that
compliment our existing customer base and back-end infrastructure - especially
those that offer increased user interactivity across new growth markets. We have
successfully created technologies compatible with the increasing availability of
broadband networks and higher resolution cameras and are pursuing the next
generation of these technologies.
COMPETITION
The market for visual content and other digital media solutions is new and
rapidly evolving. As the demand for visual content solutions increases, we
expect competition to intensify. We currently compete with other providers of
immersive imaging technology including Be Here Corp. and MGI Software. We do not
believe any of our competitors are dominant in this industry. We compete with
these companies on the basis of ease of use, reliability, end user experience
and price.
We also currently compete with imaging platforms and interactive imaging
technology from Equilibrium, Kodak, and TrueSpectra. These companies offer only
components of the iPIX comprehensive imaging solution and do not currently
address how their technology successfully integrates with others to deliver an
end-to-end solution (capture, process, host, distribute) to compete with iPIX.
Some of our competitors may have greater financial, marketing, distribution and
technical resources than we have. Our success will be dependent on our ability
to compete with these and any other competitors on the quality of our solutions,
cost-effectiveness and how they can improve a customer's business.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trade secret and trademark laws
and contractual restrictions to establish and protect proprietary rights in our
products. Our patents are intended to protect and support current and future
development of our technology. In the United States, we have ten issued patents
and 11 patent applications pending. We also have recently been issued a patent
in Japan and have 20 international patent applications pending. In addition, we
license related patents and associated international filings from Motorola under
the terms of a non-royalty bearing license agreement. Motorola has a limited
right to license our patents, and Motorola's consent must be obtained before we
can execute any grant of an exclusive license to our patents in excess of one
year. We also license technology owned by Sarnoff Corporation.
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We believe that the ownership of patents is presently a significant factor in
our business. However, our success depends primarily on the innovative skills,
technical competence and marketing abilities of our personnel. In addition,
there can be no assurance that our current and future patent applications will
be granted, or, if granted, that the claims covered by the patents will not be
reduced from those included in our applications. We have entered into
confidentiality and invention assignment agreements with substantially all of
our employees and entered into non-disclosure agreements with our suppliers,
distributors and appropriate customers to limit access to and disclosure of our
proprietary information. We must also guard against the unauthorized use or
misappropriation of our technology by third parties. We have experienced
wrongful use in the past, and although we have taken steps to stop that use, we
expect to experience more attempts in the future. There can be no assurance that
the statutory and contractual arrangements we currently depend upon will provide
sufficient protection to prevent misappropriation of our technology or deter
independent third-party development of competing technologies.
We pursue the protection of our trademarks in the United States and, based upon
anticipated use, internationally. The laws of some foreign countries might not
protect our products or intellectual property rights to the same extent as the
laws of the United States. Effective patent, trade secret and trademark
protection may not be available in every country in which we market or license
our products.
Claims by third parties that our current or future products infringe upon their
intellectual property rights may have a material adverse effect on us.
Intellectual property litigation is complex and expensive, and the outcome of
this litigation is difficult to predict. We have been involved in litigation
relating to the protection of our intellectual property rights. Any future
litigation, regardless of outcome, may result in substantial expense to us and
significant diversion of our management and technical personnel. An adverse
determination in any litigation may subject us to significant liabilities to
third parties, require us to license disputed rights from other parties, if
licenses to these rights could be obtained, or require us to cease using the
technology.
EMPLOYEES
In October, 2000, we began a focused process of streamlining our organization to
meet our new business model and revenue goals. As of March 1, 2001, iPIX
employed 175 full-time employees in the United States, a total of 231 full-time
equivalent employees in Canada, 20 full-time employees in the Europe, Middle
East and Asia region and 16 full-time employees in Asia Pacific and Latin
America. Imaging Services Corporation, a wholly owned subsidiary of iPIX,
employs 102 full-time employees and 8 full-time equivalent independent
contractors.
We believe our employee relations are good.
Item 2. Properties.
We lease approximately 44,043 square feet of space in Oak Ridge, Tennessee for
our corporate office and operations and 18,693 square feet in San Ramon,
California for our co-headquarters. The Oak Ridge lease expires October 8, 2002.
The San Ramon lease expires on October 31, 2003. We also occupy office space in
Palo Alto, California, 10,365 square feet with a lease that expires on February
28, 2002 and an additional 3,831 square feet with a lease that expires on
September 28, 2003.
We also lease office space in Toronto, Canada for our processing center. Our
Toronto lease expires in April, 2008. We lease space in Japan, the United
Kingdom, Chicago, Fort Lauderdale, Marshfield, Massachusetts, Naples, Florida,
New York City, San Diego and San Jose for our field sales offices.
Item 3. Legal Proceedings.
On October 28, 1998, Minds-Eye-View, Inc. and Mr. Ford Oxaal filed a lawsuit
against us in the United States District Court for the Northern District of New
York. Minds-Eye alleged in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
alleged that our technology wrongfully incorporated trade secrets and other
know-how gained from them in breach of various duties.
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The court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Mr. Oxaal filed a motion to dismiss the suit, and the court
dismissed the lawsuit on May 19, 1999. Although the lawsuit was dismissed, we
intend to proceed with the arbitration in Knoxville, Tennessee.
On May 20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant
in the same court alleging that our technology infringes upon a patent claim for
360 degrees spherical visual technology held by him. Mr. Oxaal claims that this
alleged infringement is deliberate and willful and is seeking treble damages
against us in an unspecified amount plus interest, an accounting by us, costs
and attorney's fees, in addition to a permanent injunction prohibiting the
alleged infringement of his patent by us. We have asserted defenses to Mr.
Oxaal's claims as we believe we did not infringe any valid claims of his patent.
We believe that Mr. Oxaal's claims are without merit and we intend to vigorously
defend against his claims. However, if Mr. Oxaal were to prevail in this
lawsuit, our financial condition, results of operations and cash flows could be
materially adversely affected.
Mr. Oxaal filed an additional complaint on December 5, 2000 in the United States
District Court for the Northern District of New York, naming us as the sole
defendant. The compliant states a single claim for relief, alleging infringement
of U.S. Patent No. 6,157,385, which issued on December 5, 2000. This patent
encompasses a method of seamlessly combining at least two images into a
spherical image. We have been served with this complaint, but no other action
has been taken.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to Vote of Security Holders
No matters where submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal year 2000.
Item 4A. Executive Officers of Registrant
The following sets forth information with respect to our executive officers as
of March 15, 2001:
Directors and Officers
NAME AGE TITLE
- -------- --- -----
James M. Phillips ..................................... 49 Chairman of the Board and Chief Executive Officer
Donald W. Strickland .................................. 51 President and Chief Operating Officer
John J. Kalec ......................................... 50 Chief Financial Officer and Executive Vice President
Matthew S. Heiter ..................................... 40 Executive Vice President, General Counsel and Secretary
Steven Hicks .......................................... 51 Chief Knowledge Officer and Executive Vice President
JAMES M. PHILLIPS has been the chairman and chief executive officer if iPIX
since January 2000. Mr. Phillips served as the chairman and chief executive
officer of Interactive Pictures from March 1997 to January 2000 and was a member
of Interactive Pictures' board of directors from 1995 until January 2000. From
June 1995 to March 1997, Mr. Phillips was corporate vice president of Motorola,
Inc.'s multimedia markets division, a division that manufactures, markets and
sells cable modems and other advanced telecommunications products and systems.
From June 1994 to June 1995, Mr. Phillips was vice president and general manager
for Motorola's personal communication systems division, a division that designs,
manufactures, markets and distributes PCS subscriber and infrastructure systems
and equipment and other intelligent devices. Mr. Phillips also serves on the
Fogelman School of Business board of advisors at the University of Memphis and
on the Chancellor's advisory council for
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enhancement for the University of Tennessee, and as a director of Tennessee
Technology, Inc. and the East Tennessee Economic Council. Mr. Phillips holds a
bachelor's degree and a master's degree in business administration from the
University of Memphis.
DONALD W. STRICKLAND has been the president and chief operating officer of iPIX
since October 2000. Mr. Strickland joined iPIX in April 2000 and served as
executive vice president until his appointment as president and chief operating
officer. Prior to joining us, Mr. Strickland was president and chief executive
officer of PictureWorks Technology, Inc. from March 1996 until March 2000. From
June 1993 until March 1996, Mr. Strickland held the position of vice president,
Imaging and Publishing at Apple Computer. Prior to joining Apple in June 1993,
Mr. Strickland spent twenty years at Eastman Kodak Company where he held a
succession of positions in engineering, sales, marketing and executive
management. Mr. Strickland holds several degrees including a bachelor's degree
in physics from Virginia Tech, a master's degree in physics from the University
of Notre Dame, a master's degree in optics from the University of Rochester, a
master's degree in management from the Stanford Sloan School of Management and a
law degree from George Washington University.
JOHN J. KALEC has been the chief financial officer and executive vice president
of iPIX since January 2000. Mr. Kalec joined Interactive Pictures in August 1998
and served as vice president and chief financial officer until January 2000.
From August 1996 to August 1998, Mr. Kalec was chief financial officer of
Clayton Homes, Inc., a company specializing in manufactured housing
headquartered in Knoxville, Tennessee. From January 1996 to August 1996, Mr.
Kalec served as senior vice president of Philips Lighting Americas. From July
1992 to December 1995, he served as managing director, finance and accounting
for Philips Components International B.V., located in Eindhoven, the
Netherlands. Mr. Kalec holds a bachelor's degree in business administration from
Lewis University and a master's degree in accountancy from DePaul University.
Mr. Kalec is a director of Clayton Homes, Inc.
MATTHEW S. HEITER has been the executive vice president, general counsel and
secretary of iPIX since January 2000. Mr. Heiter served as vice president,
secretary and general counsel of Interactive Pictures from October 1999 until
January 2000. Mr. Heiter was a shareholder in the law firm of Baker, Donelson,
Bearman & Caldwell, P.C. from May 1996 to October 1999. Prior to this time, Mr.
Heiter was a partner in the law firm of Waring Cox, P.L.L.C. Mr. Heiter holds a
bachelor's degree in political science from the University of Mississippi and a
juris doctor from Vanderbilt University Law School.
STEVEN L. HICKS has been the chief knowledge officer and executive vice
president of iPIX since February 2000. From March 1997 until February 2000, Mr.
Hicks was chief technology officer of E.W. Scripps where he was responsible for
the company's web infrastructure. From May 1995 until March 1997, Mr. Hicks
served as president and founder of Interactive Solutions where he developed
business plans for Internet startups to secure funding. Mr. Hicks has served on
the board of directors of Tech 2020 and the Jones/Taylor Venture Fund. Mr. Hicks
holds a bachelor's degree in accounting and finance from Ohio State University
and is a certified public accountant.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is traded on the Nasdaq National Market (symbol: IPIX). Prior
to August 26, 1999, there was no public market for our common stock. As of March
1, 2001, there were 376 stockholders of record.
The following table reflects the range of the high and low bid information for
our common stock for the periods indicated.
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FISCAL 2000 High Low
---- -------
Fourth Quarter 5.625 0.969
Third Quarter 17.125 5.125
Second Quarter 28.875 9.375
First Quarter 45.000 16.500
FISCAL 1999
Fourth Quarter 19.500 13.438
Third Quarter (August 26 - September 30, 1999) 25.375 17.250
We currently intend to retain all future earnings to finance the continuing
development of our business and do not anticipate paying cash dividends on our
common stock in the foreseeable future. Any payment of cash dividends in the
future will depend upon our financial condition, future loan covenants, capital
spending requirements and earnings, as well as other factors the board of
directors may deem relevant.
Item 6. Selected Financial Data.
Selected Historical Financial Information
The statement of operations data presented below for the years ended December
31, 1998, 1999 and 2000 and the balance sheet data as of December 31, 1999 and
2000 have been derived from our consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, that are included
elsewhere in this report. The report of PricewaterhouseCoopers LLP which also
appears herein contains an explanatory paragraph relating to the Company's
ability to continue as a going concern as described in Note 1 to such financial
statements. The statement of operations data for the years ended December 31,
1996 and 1997 and the balance sheet data as of December 31, 1996, 1997 and 1998
are derived from audited consolidated financial statements that are not
included in this report. These results are not necessarily indicative of
results to be expected for any future period. You should read the data
presented below together with our consolidated financial statements and related
notes to those statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this report.
STATEMENT OF OPERATIONS DATA
Fiscal Years Ended December 31,
In thousands, except per share data 1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Revenues
Products $1,337 $2,174 $ 2,789 $ 12,523 $ 48,943
Services 208 318 329 -- 4,730
------ ------ -------- -------- ---------
1,545 2,492 3,118 12,523 53,673
Cost of revenues
Products 543 461 1,274 7,262 25,442
Services 108 316 241 -- 2,464
------ ------- -------- -------- ---------
651 777 1,515 7,262 27,906
------ ------- -------- -------- ---------
Gross profit 894 1,715 1,603 5,261 25,767
------ ------- -------- -------- ---------
Operating expenses:
Sales and marketing 912 2,839 8,783 37,785 80,026
Research and development 413 1,213 2,885 5,359 13,202
General and administrative 983 2,720 3,939 13,906 22,306
Amortization of product development and
patent costs 71 858 -- -- --
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Stock-based compensation expense -- -- 1,162 20,675 5,127
Impairment and amortization of intangible
assets -- -- -- -- 234,024
Merger expenses -- -- -- -- 15,175
Restructuring charges -- -- -- -- 4,161
------- ------- -------- -------- ---------
Total operating expenses 2,379 7,630 16,769 77,725 374,021
------- ------- -------- -------- ---------
Loss from operations (1,485) (5,915) (15,166) (72,464) (348,254)
Interest expense -- (42) (202) (6,684) (436)
Other income (expense), net 201 236 303 2,545 2,095
------- ------- -------- -------- ---------
Net loss (1,284) (5,721) (15,065) (76,603) (346,595)
Dividend relative to beneficial conversion
feature of Series B convertible preferred stock -- -- -- 1,000 --
------- ------- -------- -------- ---------
Net loss attributable to common stockholders $(1,284) $(5,721) $(15,065) $(77,603) $(346,595)
======= ======= ======== ======== =========
Net loss per common share - basic and diluted $ (0.16) $ (0.50) $ (1.22) $ (3.01) $ (6.16)
======== ======== ======== ======== =========
Weighted average common shares - basic and
diluted 7,970 11,425 12,334 25,757 56,307
======= ======= ======== ======== =========
As of December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Balance Sheet Data
Cash, cash equivalents and securities available
for sale $5,238 $2,830 $1,494 $ 73,366 $ 11,035
Working capital (deficit) 4,981 (157) (371) 58,617 1,174
Total Assets 6,930 4,599 4,769 95,803 60,614
Long-term liabilities -- 29 21 387 957
Total stockholders' equity 6,216 510 1,310 81,041 28,213
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. Historical results and percentage relationships set forth in the
statement of operations, including trends which might appear, are not
necessarily indicative of future operations.
RECENT DEVELOPMENTS
On January 16, 2001, we announced that a subsidiary of Homestore.com has
purchased certain assets from us pursuant to the terms of an acquisition
agreement dated January 12, 2001. Under the terms of the acquisition agreement,
the subsidiary of Homestore.com purchased certain computers, furniture, fixtures
and equipment, and certain sales contracts with residential real estate brokers
and agents. We used these assets in our operations involving providing virtual
tours of residential real estate properties. As part of the acquisition,
Homestore.com's subsidiary hired certain sales force and customer service
personnel. The purchase price for these assets was $12 million in cash, of which
$155,000 was paid directly to a lessor for certain capital lease obligations,
$7,454,000 was deposited into control accounts for deferred revenue obligations
and the remainder paid to the company. We also granted Homestore.com's
subsidiary an exclusive domestic license of certain of iPIX's virtual tour
technology for the residential real estate market.
STATEMENT OF OPERATIONS DATA
-------------------------------------------
Fiscal Years Ended December 31,
-------------------------------------------
In thousands, except per share data 1998 1999 2000
---- ---- ----
Revenues
Products $ 2,789 $ 12,523 $ 48,943
Services 329 -- 4,730
-------- -------- ---------
3,118 12,523 53,673
Cost of revenues
Products 1,274 7,262 25,442
Services 241 -- 2,464
-------- -------- ---------
1,515 7,262 27,906
-------- -------- ---------
Gross profit 1,603 5,261 25,767
-------- -------- ---------
Operating expenses:
Sales and marketing 8,783 37,785 80,026
Research and development 2,885 5,359 13,202
General and administrative 3,939 13,906 22,306
Stock-based compensation expense 1,162 20,675 5,127
Impairment and amortization of intangible assets -- -- 234,024
Merger expenses -- -- 15,175
Restructuring charges -- -- 4,161
-------- -------- ---------
Total operating expenses 16,769 77,725 374,021
-------- -------- ---------
Loss from operations (15,166) (72,464) (348,254)
Interest expense (202) (6,684) (436)
Other income (expense), net 303 2,545 2,095
-------- -------- ---------
Net loss (15,065) (76,603) (346,595)
Dividend relative to beneficial conversion feature
of Series B convertible preferred stock -- 1,000 --
-------- -------- ---------
Net loss attributable to common stockholders $(15,065) $(77,603) $(346,595)
======== ======== =========
Net loss per common share - basic and diluted $ (1.22) $ (3.01) $ (6.16)
======== ======== =========
Weighted average common shares - basic and
diluted 12,334 25,757 56,307
======== ======== =========
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STATEMENT OF OPERATIONS DATA
---------------------------------------
Fiscal Years Ended December 31,
---------------------------------------
In thousands, except per share data 1998 1999 2000
---- ---- ----
Revenues
Products 89.4% 100.0% 91.2%
Services 10.6 -- 8.8
------ ------ ------
100.0 100.0 100.0
Cost of Revenues
Products 40.9 58.0 47.4
Services 7.7 -- 4.6
------ ------ ------
48.6 58.0 52.0
------ ------ ------
Gross Profit 51.4 42.0 48.0
------ ------ ------
Operating Expenses:
Sales and marketing 281.7 301.7 149.1
Research and development 92.5 42.8 24.6
General and administrative 126.3 111.0 41.6
Stock-based compensation expense 37.3 165.1 9.6
Impairment and amortization of intangible assets -- -- 436.0
Merger expenses -- -- 28.3
Restructuring charges -- -- 7.7
------ ------ ------
Total operating expenses 537.8 620.6 696.9
------ ------ ------
Loss from operations (486.4) (578.6) (648.9)
Interest expense (6.5) (53.4) (0.8)
Other income (expense), net 9.7 20.3 3.9
------ ------ ------
Net loss (483.2) (611.7) (645.8)
Beneficial conversion of Series B convertible
preferred stock -- (8.0) --
------ ------ ------
Net loss attributable to common stockholders (483.2)% (619.7)% (645.8)%
====== ====== ======
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues. Total revenues increased to $53,673,000 in 2000, compared to
$12,523,000 in 1999, an increase of $41,150,000. Product revenues increased to
$48,943,000 in 2000, compared to $12,523,000 in 1999, an increase of
$36,420,000. This increase was due primarily to an increase of $20,104,000 in
sales of virtual tours and an increase of $3,883,000 in sales of iPIX kits and
iPIX keys, primarily to e-commerce and real estate customers. Services revenues
from our professional services and Rimfire technology were $4,730,000 in 2000.
We did not have services revenues in 1999.
Cost of Revenues. Cost of revenues consists of our direct expenses associated
with the capture, processing, hosting and distribution of virtual tours and the
costs of the digital camera and related components included in an iPIX kit. In
addition, cost of revenues include transaction fees paid to affiliates who
display our virtual tours on their web sites and fees paid to distributors of
our virtual tours. Cost of product revenues increased to $25,442,000 in 2000,
compared to $7,262,000 in 1999, an increase of $18,180,000. This increase was
due primarily to the sale of a higher volume of virtual tours. Cost of product
revenues as a percentage of product revenues decreased from 58.0% in 1999 to
52.0% in 2000. This decrease was primarily related to productivity improvements
in the virtual tours and a favorable product mix toward higher margin products.
Cost of service revenues were $2,464,000 in 2000. We did not incur any cost of
services revenues in 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales, business development and field operations personnel. Sales
and marketing expenses also include commissions and related benefits for sales
personnel and consultants, traditional advertising and promotional expenses,
trademark licensing and technology access and sponsorship fees paid to
affiliates in order to facilitate availability of our tours on their web sites.
Sales and marketing expenses increased to $80,026,000 in 2000, compared to
$37,785,000 in 1999, an
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increase of $42,241,000, or 111.8%. This increase was due primarily to a
significant increase in our sales force, increased costs relating to technology
access and sponsorship fees and increased advertising and branding expenses.
Sales and marketing expenses also increased due to the acquisitions in the
second quarter of 2000.
Research and Development. Research and development expenses consist primarily of
personnel costs and fees paid to third party developers. Research and
development expenses increased to $13,202,000 in 2000, compared to $5,359,000 in
1999, an increase of $7,843,000, or 146.4%. This increase was due primarily to
increased staffing associated with expanding our research and development
efforts to build and enhance our digital media infrastructure.
General and Administrative Expenses. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for professional services and general office and occupancy expenses.
General and administrative expenses increased to $22,306,000 in 2000, compared
to $13,906,000 in 1999, an increase of $8,400,000, or 60.4%. This increase was
due primarily to an increase in personnel and related expenses required to
support our growth, professional services, expansion of our leased facilities
and other costs associated with being a public company.
Stock-based Compensation Expense. Stock-based compensation expense consists of
the amortization of deferred compensation related to stock options granted to
employees and others prior to our initial public offering with an exercise price
below the deemed fair market value of our common stock on the date of grant and
to the amortization of fair value of warrants issued to non-employees. The
related compensation is amortized over the vesting period of the options.
Expense related to the warrants is amortized over the term of the agreements to
which they relate. Stock-based compensation expense decreased to $5,127,000 in
2000, compared to $20,675,000 in 1999. This change is due to a decrease in
expense related to stock options issued in previous years offset by an increase
in expense related to warrants issued during 2000.
Impairment and Amortization of Intangible Assets. Amortization of intangible
assets was $57,193,000 in 2000. The amortization was a result of acquisitions
during the second quarter of 2000. During the fourth quarter of 2000, we
recorded an impairment of goodwill of $176,831,000. Certain events occurred
during the fourth quarter including the decline of our stock price and market
capitalization that led us to reevaluate expected future cash flows from
acquired businesses which indicated a need to record the impairment charge.
Merger Expenses. Merger expenses consist of costs incurred as a result of the
merger of Interactive Pictures and bamboo.com that occurred on January 19, 2000.
Restructuring Charges. During the fourth quarter of 2000, we recorded a
restructuring charge of $4,161,000 primarily associated with a reduction of our
workforce, the consolidation of certain offices and a write-off of abandoned
computer equipment.
Interest Expense. In June 1999, we entered into an agreement to sell 1,100
shares of our Series C mandatorily redeemable preferred stock and 1,251,830
shares of our common stock for total gross proceeds of $11,000,000. The
$11,000,000 of proceeds was allocated $4,394,000 to the Series C mandatorily
redeemable preferred stock and $6,606,000 to the common stock, based on their
relative fair values. The shares of the Series C mandatorily redeemable
preferred stock were redeemed in accordance with their original terms after
completion of our initial public offering by payment of their face value of
$11,000,000. Consequently we recorded interest expense of $6,606,000, which
represented primarily the original discount on the Series C mandatorily
redeemable preferred stock. The Company also incurred interest expense of
$166,000 in 2000 related to of debt incurred from an acquisition.
Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments. Other income (expense) decreased from $2,545,000
in 1999 to $2,095,000 in 2000. This decrease was due primarily to relatively
higher average cash and investment balances in 1999 reflecting the receipt of
proceeds from our equity offerings. The decrease was also due to the write-off
of investments during 2000.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues. Total revenues increased to $12,523,000 in 1999, compared to
$3,118,000 in 1998, an increase of $9,405,000. Product revenues increased to
$12,523,000 in 1999, compared to $2,789,000 in 1998, an increase of $9,734,000.
This increase was due primarily to an increase of $4,820,000 in sales of virtual
tours and an increase of
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$4,779,000 in sales of iPIX kits and iPIX keys, primarily to e-commerce and real
estate customers. We did not have research and development services revenues in
1999, compared to $329,000 in 1998.
Cost of Revenues. Cost of product revenues increased to $7,262,000 in 1999,
compared to $1,274,000 in 1998, an increase of $5,988,000. This increase was the
result of the sale of a higher volume of virtual tours, the expansion of our
processing and hosting capacity and the cost of iPIX kits. We did not incur any
cost of research and development services revenue in 1999 compared to $241,000
in 1998.
Sales and Marketing. Sales and marketing expenses increased to $37,785,000 in
1999, compared to $8,783,000 in 1998, an increase of $29,002,000. This increase
is due primarily to a significant increase in our sales force, increased costs
relating to technology access and sponsorship fees and increased advertising and
branding expenses.
Research and Development. Research and development expenses increased to
$5,359,000 in 1999, compared to $2,885,000 in 1998, an increase of $2,474,000.
This increase was due primarily to increased staffing associated with expanding
our research and development efforts to build and enhance our digital media
infrastructure.
General and Administrative Expenses. General and administrative expenses
increased to $13,906,000 in 1999, compared to $3,939,000 in 1998, an increase of
$9,967,000. This increase was due primarily to an increase in personnel and
related costs, professional services expenses and expansion of our leased
facilities.
Stock-based Compensation Expense. The related compensation is amortized over the
vesting period of the options. Stock-based compensation expense increased to
$20,675,000 in 1999, compared to $1,162,000 in 1998.
Interest Expense. In June 1999, we entered into an agreement to sell 1,100
shares of our Series C mandatorily redeemable preferred stock and 1,251,830
shares of our common stock for total gross proceeds of $11,000,000. The
$11,000,000 of proceeds was allocated $4,394,000 to the Series C mandatorily
redeemable preferred stock and $6,606,000 to the common stock, based on their
relative fair values. The shares of the Series C mandatorily redeemable
preferred stock were redeemed in accordance with their original terms after
completion of our initial public offering by payment of their face value of
$11,000,000. Consequently we recorded interest expense of $6,606,000, which
represented primarily the original discount on the Series C mandatorily
redeemable preferred stock.
Other Income (Expense). Other income (expense) increased to $2,545,000 in 1999,
compared to $303,000 in 1998. This increase was due primarily to relatively
higher average cash and investment balances in 1999 reflecting the receipt of
proceeds from our equity offerings.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through our registered
public offerings, the private placements of capital stock and a convertible
debenture. At December 31, 2000, we had $5,322,000 of cash and cash equivalents
compared to $18,627,000 at December 31, 1999.
Net cash used in operating activities was $13,093,000 in the year ended December
31, 1998, $46,786,000 in the year ended December 31, 1999, and $99,894,000 in
the year ended December 31, 2000. Net cash used for operating activities in each
of these periods is primarily a result of net losses and changes in net
operating assets. In addition, net loss included $234,024,000 for the impairment
and amortization of goodwill in 2000.
Net cash provided by/(used in) investment activities was $35,000 in the year
ended December 31, 1998, $(63,096,000) in the year ended December 31, 1999 and
$26,568,000 in the year ended December 31, 2000. Net cash provided by/(used in)
investing activities was related to the net purchases and maturities of
short-term investments and the purchase of computer software, hardware and other
equipment. In addition, cash was used in the second quarter of 2000 for
acquisitions.
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Net cash provided by financing activities was $12,741,000 in the year ended
December 31, 1998, $127,009,000 in the year ended December 31, 1999 and
$61,655,000 in the year ended December 31, 2000. The net cash provided by
financing activities in 1998 was due primarily to the private sale of shares of
our preferred stock. The net cash provided by financing activities in 1999 was
due primarily to the private and public sale of shares of our common and
preferred stock and the issuance of convertible subordinated promissory notes of
$1,800,000 that converted into preferred stock during the first quarter of 1999.
The net cash provided by financing activities in 2000 was due primarily to the
public sale of our common stock and exercise of stock options, offset by
repayments of capital leases and notes payable, and retirement of debt assumed
in an acquisition.
In order to comply with certain underwriting compensation rules of the National
Association of Securities Dealers, Inc., Interactive Pictures repurchased an
aggregate of 484,367 shares of its common stock upon the consummation of its
initial public offering for an aggregate repurchase price of $3,730,000. This
repurchase transaction was completed in September 1999.
Although we have no material commitments for capital expenditures, we anticipate
that the rate of capital expenditures and other expenses consistent with our
operations, personnel and marketing activities will be a material use of our
cash resources for the foreseeable future. We may also use our cash resources to
acquire or license technology, products or business related to our current
business.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
until April 30, 2001. We are in the process of securing additional funds to
support our working capital requirements and may seek to raise these funds
through public or private equity financing, bank debt financing or from other
sources. Any of the equity securities may result in additional dilution to our
stockholders. There can be no assurance that our capital requirements will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to raise the needed funds, we may be forced to sell assets or discontinue
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities. "SFAS 133 is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if so, the type of hedge
transaction. We do not expect that the adoption of SFAS No. 133 will have a
material effect on our financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101 or SAB
101 "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Commission. SAB 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that the impact of SAB 101 will not have a
material effect on our financial position or results of operations.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), which clarifies the application of Accounting
Principles Board Opinion 25 for certain transactions. The interpretation
addresses many issues related to granting or modifying stock options including
changes in accounting for modifications of awards (increased life, reduction of
exercise price, etc.). It became effective July 1, 2000 but certain conclusions
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The effects of applying the interpretation have been recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 has not had a
material impact on the Company.
INFLATION
Inflation has not had a significant impact on our operations to date.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
None.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company, together with the report
thereon of PricewaterhouseCoopers, LLP, independent auditors, are set forth on
the pages indicated in item 14(a) below of this Annual Report on Form 10-K.
This Form 10-K contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution
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investors that future financial and operating results may differ materially from
those projected in forward-looking statements made by, or on behalf of, us. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, performance, or achievements to
be materially different form any future results, performance, or achievements
expressed or implied by such forward-looking statements.
RISK FACTORS
Risk Factors Relating To Our Business, Finances and Operations:
DUE TO OUR LIMITED CASH RESOURCES, WE WILL BE FORCED TO CEASE OPERATIONS UNLESS
WE ARE SUCCESSFUL IN OBTAINING ADDITIONAL CAPITAL OR IN PURSUING STRATEGIC
ALTERNATIVES
We anticipate that our current cash, cash equivalents and cash generated from
operations will only be sufficient to meet our anticipated cash needs to
approximately April 30, 2001, although there can be no assurance in this regard.
Accordingly, we will require an additional, substantial capital infusion to
continue our operations. There can be no assurance that any additional capital
will be available to us. If we are unsuccessful in completing a financing
transaction, we may be required to cease operations, and our common stock will
have no value. In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a financing
transaction, our common stock may nonetheless have no value.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND OUR EXPENSES CONTINUE TO INCREASE; THUS
WE MAY NEVER BECOME PROFITABLE
We have incurred substantial net losses and experienced negative cash flow, and
we expect our operating losses and negative cash flow to continue. Although our
revenues have increased over the past years, we may not be able to sustain
future revenue growth. In addition, our expenses continue to increase as we
expand our sales and marketing efforts, increase the number of employees and
invest in an expansion of services and product development. Further, as of
December 31, 2000, we had an accumulated deficit of $450 million. Accordingly,
we cannot offer any assurances that revenues will ever exceed expenses or that
we will become profitable.
Our current cash, cash equivalents and cash generated from operations will only
be sufficient to meet our anticipated cash needs to approximately April 30,
2001, although there can be no assurance in this regard. Accordingly, we will
require an additional, substantial capital infusion to continue our operations.
We do not believe that additional capital will be available to us. In addition,
we have engaged a financial advisor to explore strategic alternatives for us,
which may include a merger, asset sale, or another comparable transaction, or a
financial restructuring. If we are unsuccessful in completing a strategic
transaction, we will be required to cease operations, and our common stock will
have no value. In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a strategic
transaction, our common stock may nonetheless have no value.
OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DROP
We believe that our quarterly operating results could vary significantly in the
future and that quarter-to-quarter comparisons should not be relied upon as
indications of future performance. In some future quarterly periods the
operating results may fall below the expectations of securities analysts and
investors, which could significantly harm or depress the trading price of our
common stock. Among the factors which could significantly affect our future
performance are:
- the uncertainty of market acceptance of our products or
services;
- the introduction of new or enhanced products and services, or
changes in pricing policies by us or our competitors;
- cyclical economic swings in the real estate market that are
caused by various factors, including changes in interest
rates, changes in economic conditions and seasonal changes in
geographic regions;
- the rate at which we can recruit, train and integrate
employees;
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- our ability to manage multiple relationships among various
customers and strategic partners;
- our ability to expand sales, marketing and customer service
operations;
- our ability to maintain our research and development
activities; and
- economic conditions specific to the Internet or all or a
portion of the technology sector.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET
We received a notice from the Nasdaq National Market on March 19, 2001 that our
common stock has been trading at below $1.00 per share for more than thirty
consecutive days. As such, we are in danger of being delisted by the Nasdaq
National Market. If a delisting were to occur, our common stock would trade on
the OTC Bulletin Board or in the "pink sheets" maintained by the National
Quotation Bureau, Inc. Such alternatives are generally considered to be less
efficient markets, and our stock price, as well as the liquidity of our common
stock, may be adversely impacted as a result.
OUR FUTURE SUCCESS IS DEPENDENT UPON KEY DISTRIBUTION AFFILIATES
The ability to broadly distribute digital media content over the Internet is
vital to our business. Through agreements between our affiliates and third
parties, our online tours may also be viewed on AOL, Excite@Home Network, GO
Network/Infoseek, Homestore.com, MSN and Yahoo! We must continue to have access
to these sites and maintain existing relationships in order to maintain a
competitive advantage for our business. If we lose any of our distribution
affiliates or if any of our distribution affiliates loses its relationship with
any major Internet portal, it could have a material adverse effect on our
business.
WE DEPEND UPON THIRD-PARTY RELATIONSHIPS FOR ASSISTANCE IN MARKETING AND HOSTING
DIGITAL MEDIA CONTENT
We depend upon a third party Internet service provider to host and maintain our
production servers for all of our digital media content. As part of our
end-to-end solutions, our servers host digital media content for some of our
customers. The performance of our web hosting facility systems is critical to
our business and reputation. Any system failure, including network, software or
hardware failure, that causes an interruption in the delivery of digital media
content or a decrease in responsiveness of web site service could result in
reduced revenue, and could be harmful to our reputation and brand. Our Internet
service provider does not guarantee that its Internet access will be
uninterrupted, error free or secure. Any disruption or decreased response time
in Internet access by our provider could significantly harm our business.
Further, our insurance may not adequately compensate us for any losses that may
occur due to any failures in the system or interruptions in the service.
IF OUR OFFERINGS ARE NOT ACCEPTED BY THE BUSINESS AND CONSUMER MARKETS, OUR
FUTURE GROWTH WOULD BE LIMITED
We currently sell the overwhelming majority of our offerings to the business
market. We are dependent upon the continued and expanded use of our offerings by
the business market and the acceptance of our offerings by individual consumers.
We have only made limited sales to individual consumers and cannot assure that
they will be willing to purchase and use our offerings. Thus, both the timing
and growth of market acceptance for our offerings are subject to a high level of
uncertainty. Acceptance of our offerings is highly dependent on a number of
factors, including:
- the availability, quality and price of competing products and
services;
- the development of technologies that will facilitate the use
of our offerings by businesses and consumers;
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- the ease-of-use and performance of our offerings; and
- the success of our marketing efforts.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND THESE RIGHTS
MAY BE CHALLENGED BY OTHERS, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR
DAMAGES AND INVALIDATION OF OUR INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of patent, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to protect our
intellectual property rights. Our success is heavily dependent upon our ability
to enforce and protect these rights, and we cannot assure you that we will be
successful in protecting these rights. Also, our patents, service marks or
trademarks may be challenged and invalidated or circumvented. In addition, we
are exposed to infringement of our intellectual property in foreign markets
because our intellectual property is protected under United States laws that may
not extend to foreign uses.
We have been involved in litigation relating to the protection of intellectual
property rights and could be involved in future litigation as third parties
develop products that we believe infringe on our patents and other intellectual
property rights. We have experienced attempts to misappropriate our technology,
and we expect those attempts may continue. We are currently involved in
litigation in which our rights to technology have been challenged. A
determination against us in this lawsuit would have a material adverse effect on
our business.
OUR MARKET IS HIGHLY COMPETITIVE, AND OUR BUSINESS MAY FAIL IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY
The market for visual content and other digital media solutions is new and
rapidly evolving. We currently compete with other providers of immersive imaging
technology, including Be Here Corp. and MGI Software. Each of these companies
develops and markets imaging products and services that provide a panoramic
image experience.
We cannot assure you that others will not develop technologies that are similar
or superior to our technologies, duplicate our technologies or design around our
patents. To compete effectively, we must:
- introduce new versions of, and enhancements to, our products
and services;
- price our products and services at appropriate and competitive
levels; and
- provide strong marketing support to promote our products and
services.
Some of our competitors have greater financial, marketing, distribution and
technical resources than we do. In addition, we compete with other companies in
the traditional two-dimensional photography industry. Traditional photographs
have significant and established customer acceptance. Our success will be
dependent on our ability to compete with companies offering similar immersive
imaging products and with companies in the traditional photography industry. If
we are unable to compete effectively, our business may fail.
IF OUR VISUAL CONTENT SOLUTIONS AND IMMERSIVE IMAGES FOR E-COMMERCE DO NOT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS WILL NOT GROW
Our success will depend in large part on widespread market acceptance of
immersive imaging for e-commerce. If the online market for these products
develops more slowly than expected, or if our visual content solutions do not
achieve widespread market acceptance, our business will grow more slowly than
expected.
Our future growth, if any, will depend on the following critical factors:
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- the growth of the Internet as a tool used in the process of
buying and selling products marketed with the help of
immersive imaging, including residential real estate;
- our ability to successfully and cost-effectively market our
visual content products and services to a sufficiently large
number of web sites, including e-commerce web sites and new
media sites; and
- our ability to consistently deliver high quality products and
fast and convenient service at competitive prices.
IF WE LOSE KEY MEMBERS OF OUR PERSONNEL, OUR FUTURE SUCCESS COULD BE LIMITED
Our future success depends on our ability to attract and retain key management,
scientific, technical and other personnel. In addition, we must recruit
additional qualified management, scientific, technical, marketing and sales and
support personnel for our operations. Competition for this type of personnel is
intense, and there can be no assurances that we will be successful in attracting
or retaining personnel. In addition, some members of our management team are not
bound by non-compete agreements if they are no longer employed by us. The loss
of the services of one or more members of our management group or other key
employees or the inability to hire additional qualified personnel will limit our
ability to grow our business.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES, AND
IF WE FAIL TO ADAPT TO TECHNOLOGICAL CHANGES, OUR OFFERINGS MAY BECOME OBSOLETE
We compete in a market characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. These market
characteristics are intensified by the emerging nature of the Internet and the
multitude of companies offering Internet-based products and services. Thus, our
success depends on our ability to adapt to rapidly changing technologies, to
adapt our offerings to evolving industry standards and to continually improve
the performance, features and reliability of our offerings in response to
competitive products and shifting demands of the marketplace. In addition,
widespread changes in Internet, networking or telecommunications technologies or
other technological alterations could require substantial expenditures to modify
our products, services or infrastructure. Failure to adapt to new technology in
any of these areas could have a material adverse effect on our business, results
of operations and financial condition.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR VISUAL CONTENT SOLUTIONS INTO
INTERNATIONAL MARKETS
A part of our long-term strategy is to expand into international markets. The
success of any additional foreign operations will be substantially dependent
upon our entering and succeeding in those markets. We may experience difficulty
in managing international operations as a result of competition, technical
problems, distance, language or cultural differences.
As we expand our international efforts, we will be subject to a number of risks,
including the following:
- failure of foreign countries to rapidly adopt the Internet and
digital imaging;
- unexpected changes in regulatory requirements, especially
regarding the Internet;
- slower payment and collection of accounts receivable than in
our domestic market; and
- political and economic instability.
We can not assure you that we will be able to successfully market our products
in foreign markets.
WE ARE SUSCEPTIBLE TO BREACHES OF ONLINE COMMERCE SECURITY
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A party able to circumvent our security measures could misappropriate
proprietary database information or cause interruptions in operations. As a
result, we may need to expend significant capital and other resources to protect
against security breaches or to alleviate problems caused by security breaches.
This additional expense could harm our business, financial condition and results
of operation.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS
THAT MAY MAKE IT MORE DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE FUTURE, WHICH
COULD NEGATIVELY AFFECT OUR STOCK PRICE
Our amended and restated certificate of incorporation and amended and restated
bylaws and applicable provisions of Delaware law contain several provisions that
may make it more difficult for a third party to acquire control of us without
the approval of our board of directors. In addition, in October of 2000, our
board of directors approved a shareholder rights plan that has the effect of
making an acquisition of us prohibitively expensive unless our board of
directors approves of the acquisition. The provisions of our certificate and
bylaws and the Delaware General Corporation Law may make it more difficult or
expensive for a third party to acquire a majority of our outstanding voting
common stock or delay, prevent or deter a merger, acquisition, tender offer or
proxy contest, which may negatively effect our stock price.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this item with respect to the directors of iPIX is
incorporated herein by reference to iPIX's Proxy Statement for its Annual
Meeting of Stockholders to be held on or about May 17, 2001, to be filed with
the SEC pursuant to Regulations 14A under the Securities Exchange Act of 1934,
as amended.
Item 11. Executive Compensation
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholders to be held on or
about May 17, 2001, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholders to be held on or
about May 17, 2001, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholder to be held on or
about May 17, 2001, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on form 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
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PAGE
----
Internet Pictures Corporation Supplemental Pooled Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 2000............................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1998,
1999 and 2000......................................................................................... F-3
Consolidated Statements of Stockholders' Equity for the period from
January 1, 1998 to December 31, 2000...................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1999 and 2000........................................................................................F-7
Notes to Consolidated Financial Statements.............................................................F-8
All other schedules have been omitted because of the absence of conditions under
which they are required or because the required information is given in the
above-listed financial statements or notes thereto.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K filed for an event dated October
26, 2000, announcing the adoption of a Rights Agreement.
(c) Exhibits.
The following exhibits are filed herewith or incorporated by reference:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant (incorporated herein by reference to Form S-1
as declared effective on August 25, 1999 (File No.
333-80639)).
3.1(a) Form of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to
Form S-1 as filed with the Commission on March 17, 2000).
3.2 Form of Amended and Restated Bylaws of the Registrant
(incorporated herein by reference to Form 10-Q as filed with
the Commission on November 14, 2000).
3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated herein by reference to Form 8-A,
as filed with the Commission on November 2, 2000).
4.1 Form of certificate representing the common stock, $.001 par
value per share of Internet Pictures Corporation (incorporated
by reference to Form 10-K filed with the Commission on March
30, 2000).
4.2 Rights Agreement dated October 31, 2000 between Internet
Pictures Corporation and EquiServe (incorporated herein by
reference to Form 8-A as filed with the Commission on November
2, 2000).
4.3 Amended and Restated Registration Rights Agreement dated
December 23, 1996, between Interactive Pictures Corporation,
Motorola, Inc. and Discovery Communications, Inc.
(incorporated herein by reference to Form S-1 as declared
effective on August 4, 1999 (File No. 333-78983)).
4.4 Form of Rights Agreement dated March 31, 2000 between Internet
Pictures Corporation and the stockholders of PictureWorks
Technology, Inc. (incorporated herein by reference to Form 8-K
as filed with the Commission on March 6, 2000).
10.1* Executive Employment Agreement dated January 24, 1997, between
Interactive Pictures Corporation and James M. Phillips, as
amended (incorporated herein by reference to Form S-1 as
declared effective on August 4, 1999 (File No. 333-78983)) as
further amended by amendment number 3 on February 22, 2001
(incorporated herein by reference to Form 10-K filed with the
Commission on March 30, 2000).
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10.2* Separation Agreement dated September 14, 2000, between
Internet Pictures Corporation and Jeffrey D. Peters
(incorporated herein by reference to Form 10-Q as filed with
the Commission on November 14, 2000).
10.3* Employment Agreement dated August 24, 2000, between Internet
Pictures Corporation and John J. Kalec
10.4* Employment Agreement dated May 31, 2000, between Internet
Pictures Corporation and Matthew S. Heiter.
10.5* Employment Agreement dated March 7, 1996, between Picture
Works, Inc. and Donald W. Stickland.
10.6* Employment Agreement dated January 7, 2000, between Internet
Pictures Corporation and Steven Hicks.
10.7 Amended and Restated 1997 Equity Compensation Plan
(incorporated herein by reference to Form S-4 as declared
effective on December 16, 1999 (File No. 91139))
10.8 Amended and Restated 1998 Employee, Director and Consultant
Stock Plan (incorporated herein by reference to Form S-4 as
declared effective on December 16, 1999 (File No. 91139))
10.9 1999 Employee Stock Purchase Plan(incorporated herein by
reference to Form S-4 as declared effective on December 16,
1999 (File No. 91139))
10.10 2000 Equity Incentive Plan (incorporated herein by reference
to Form S-8 as declared effective on June 27, 2000 (File No.
333-40160).
10.11 PictureWorks Technology, Inc. 1994 Stock Option Plan
(incorporated herein by reference to Form S-8 as declared
effective on May 2, 2000 (File No. 333-36068))
10.12 PictureWorks Technology, Inc. 1996 Stock Option Plan
(incorporated herein by reference to Form S-8 as declared
effective on May 2, 2000 (File No. 333-36068))
10.13 PictureWorks Technology, Inc. 1997 Stock Option Plan
(incorporated herein by reference to Form S-8 as declared
effective on May 2, 2000 (File No. 333-36068))
10.14 Form of Indemnification Agreement between the Registrant and
each of its directors and officers (incorporated herein by
reference to Form S-1 as declared effective on
August 25, 1999 (File No.333-80639)).
10.15 Acquisition Agreement dated January 12, 2001 between Internet
Pictures Corporation and Homestore Virtual Tours, Inc.
(incorporated herein by reference to Form 8-K filed on January
29, 2001).
10.16** License Agreement dated January 12, 2001 between Internet
Pictures Corporation and Homestore Virtual Tours, Inc.
10.17 License Agreement dated January 17, 1997, between Interactive
Pictures Corporation and Discovery Communications, Inc.
(incorporated herein by reference to Form S-1 as declared
effective on August 4, 1999 (File No. 333-78983)).
10.18 Patent License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Motorola, Inc.
(incorporated herein by reference to Form S-1 as declared
effective on August 4, 1999 (File No. 333-78983)).
10.19 Agreement and Plan of Merger dated as of October 25, 1999
among Interactive Pictures Corporation, bamboo.com, Inc. and
Mergersub (incorporated by reference to Form S-4 as declared
effective on December 16, 1999 (File No. 91139)).
10.20 Agreement and Plan of Merger dated as of March 6, 2000 among
Internet Pictures Corporation, PictureWorks Technology, Inc.
and PurpleSub, Inc. (incorporated by reference to report on
Form 8-K filed on March 14, 2000)
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included on page 28)
- ------------- ------------------------------
* Executive Compensation Plan or Agreement
** Portions of the exhibit have been omitted pursuant to a
request for confidential treatment.
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(d) Financial Statement Schedules.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNET PICTURES CORPORATION
By: /s/ James M. Phillips
----------------------------------------------
James M. Phillips
Chairman of the Board and Chief Executive Officer
Date: March 30, 2001
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints James M. Phillips,
Donald W. Strickland and Matthew S. Heiter, or any of them, as such person's
true and lawful attorney-in-fact, with full power of substitution or
resubstitution for such person and in such person's name, place and stead, in
any and all capacities, to sign on such person's behalf, individually and in
each capacity stated below, any and all amendments to this Report on Form 10-K,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, full
power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James M. Phillips
- --------------------------- Chairman of the Board and Chief Executive Officer 4/02/01
James M. Phillips -------------------------
/s/ John J. Kalec 4/02/01
- --------------------------- Chief Financial Officer (Chief Accounting Officer) -------------------------
John J. Kalec
/s/ Michael D. Easterly 4/02/01
- --------------------------- Director -------------------------
Michael D. Easterly
/s/ John S. Hendricks 4/02/01
- --------------------------- Director -------------------------
John S. Hendricks
/s/ Laban P. Jackson, Jr. 4/02/01
- --------------------------- Director -------------------------
Laban P. Jackson, Jr.
/s/ John Moragne 4/02/01
- --------------------------- Director -------------------------
John Moragne
/s/ John H. Trezevant 3/30/01
- --------------------------- Director -------------------------
John H. Trezevant
32
33
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Internet Pictures Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Internet Pictures Corporation and its subsidiaries (the "Company") at December
31, 1999 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger with Interactive Pictures Corporation on January 19, 2000 in a
transaction accounted for as a pooling of interests, as described in Note 3 to
the consolidated financial statements. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
February 17, 2001
F-1
34
INTERNET PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1999 2000
----------- -----------
(In thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 18,627 $ 5,322
Securities available-for-sale .................................................. 42,739 5,713
Accounts receivable, net of allowance for doubtful accounts of
$198 in 1999 and $4,617 in 2000 ............................................ 3,356 13,732
Inventory, net of reserve for obsolescence of $55 in 1999 and $203 in 2000 ..... 1,059 1,061
Prepaid expenses and other current assets ...................................... 7,211 6,790
----------- -----------
Total current assets .................................................... 72,992 32,618
Long-term securities available-for-sale ........................................ 12,000 --
Property and equipment, net .................................................... 9,135 20,965
Other assets ................................................................... 1,676 1,555
Goodwill and other intangible assets ........................................... -- 5,476
----------- -----------
Total assets ............................................................ $ 95,803 $ 60,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 2,711 $ 4,077
Accrued liabilities ............................................................ 6,203 16,682
Deferred revenue ............................................................... 5,262 9,077
Current portion of promissory note and obligations under capital leases ........ 199 1,608
----------- -----------
Total current liabilities ............................................... 14,375 31,444
----------- -----------
Promissory note and obligations under capital leases, net of current portion ... 387 957
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value: ............................................. -- --
Authorized: 5,001,100 in 1999 and 2000
No shares issued or outstanding in 1999 and 2000
Class B common stock, $0.0001 par value: ....................................... 1 --
Authorized: 7,421,536 in 1999 and 2000
Issued and outstanding: 7,012,736 in 1999 and 4,041,725 in 2000
Common stock, $0.001 par value: ................................................ 38 59
Authorized: 150,000,000 in 1999 and 2000
Issued and outstanding: 38,231,581 in 1999 and 59,464,024 in 2000
Additional paid-in capital ..................................................... 187,829 484,098
Notes receivable from stockholders ............................................. (181) (2,349)
Unearned stock-based compensation .............................................. (2,955) (3,361)
Accumulated deficit ............................................................ (103,701) (450,296)
Accumulated other comprehensive income ......................................... 10 62
----------- -----------
Total stockholders' equity .............................................. 81,041 28,213
----------- -----------
Total liabilities and stockholders' equity .............................. $ 95,803 $ 60,614
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
35
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000
--------- ----------- -----------
(In thousands, except per share amounts)
REVENUES:
Products ................................................... $ 2,789 $ 12,523 $ 48,943
Services ................................................... 329 -- 4,730
--------- ----------- -----------
3,118 12,523 53,673
--------- ----------- -----------
COST OF REVENUES:
Products (excludes stock-based compensation of $0, $398
and $113) .............................................. 1,274 7,262 25,442
Services (excludes stock-based compensation of
$0, $0 and $52) ........................................ 241 -- 2,464
--------- ----------- -----------
1,515 7,262 27,906
--------- ----------- -----------
Gross profit ............................................... 1,603 5,261 25,767
--------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing (excludes stock-based
compensation of $583, $13,353 and $3,038) .............. 8,783 37,785 80,026
Research and development (excludes stock-based
compensation of $133, $1,331 and $1,380) ............... 2,885 5,359 13,202
General and administrative (excludes stock-based
compensation of $446, $5,593 and $544) ................. 3,939 13,906 22,306
Stock-based compensation expense ........................... 1,162 20,675 5,127
Impairment and amortization of intangible assets ........... -- -- 234,024
Merger expenses ............................................ -- -- 15,175
Restructuring charges ...................................... -- -- 4,161
--------- ----------- -----------
Total operating expenses ........................... 16,769 77,725 374,021
--------- ----------- -----------
Loss from operations ....................................... (15,166) (72,464) (348,254)
OTHER INCOME (EXPENSE):
Interest expense ........................................... (202) (6,684) (436)
Other income (expense), net ................................ 303 2,545 2,095
--------- ----------- -----------
Net loss ................................................... 15,065 (76,603) (346,595)
--------- ----------- -----------
Beneficial conversion related to issuance of Series B
convertible preferred stock ............................ -- (1,000) --
--------- ----------- -----------
Net loss attributable to common stockholders ............... $ (15,065) $ (77,603) $ (346,595)
========== =========== ===========
Basic and diluted loss per common share .................... $ (1.22) $ (3.01) $ (6.16)
========== =========== ===========
Weighted average common shares - basic and diluted........... 12,334 25,757 56,307
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
36
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 2000
--------------------------------------------------------------------------------------------
CLASS B COMMON NOTES
PREFERRED STOCK STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- ------------------ ------------------- PAID IN FROM
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT CAPITAL STOCKHOLDERS
----------- ------- --------- ------ ---------- ------ ---------- ------------
In thousands, except share and per
share amounts
Balances -- January 1, 1998........ -- $ -- 2,845,025 $ -- 8,606,307 $ 9 $ 10,140 $ --
Issuance of Series A convertible
preferred stock in October and
December 1998................... 231,250 -- -- -- -- -- 925 --
Common stock issued for cash
through March to September
1998............................ -- -- 1,342,231 -- -- -- 432 --
Common stock issued for services
through February to May 1998.... -- -- 1,027,600 -- -- -- 326 --
Issuance of options to purchase
common stock in exchange for
services........................ -- -- -- -- -- -- 536 --
Shares issued upon exercise of
options for common stock........ -- -- 2,206,680 1 -- -- 83 (78)
Warrants for common stock
issued.......................... -- -- -- -- -- -- 23 --
Issuance of warrant for common
stock for services.............. -- -- -- -- -- -- 168 --
Settlement of note receivable as
offset to note payable.......... -- -- -- -- -- -- -- 24
Conversion of common stock into
Series A & B preferred stock.... 3,174,841 3 -- -- (3,174,841) (3) 15 --
Proceeds from issuance of Series C
preferred stock and warrants,
net of related costs............ 2,996,327 3 -- -- -- -- 12,526 --
Conversion of $1,000 debenture
into Series C preferred stock... 230,486 -- -- -- -- -- 1,000 --
Proceeds from issuance of common
stock and warrants, net of
related costs................... -- -- -- -- 314,269 -- 1,281 --
Exchange of common for preferred
shares and related repurchase
and retirement of Series C
preferred stock................. -- -- -- -- (232,792) -- -- --
Repurchase and retirement of
Series B preferred stock........ (202,528) -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options....... -- -- -- -- 102,429 -- 3 --
Net loss.......................... -- -- -- -- -- -- -- --
Other comprehensive loss.......... -- -- -- -- -- -- -- --
----------- ------- --------- -- ---------- --- -------- -----
Balances -- December 31, 1998...... 6,430,376 6 7,421,536 1 5,615,372 6 27,458 (54)
Issuance of Series B preferred
stock, net...................... 2,324,780 2 -- -- -- -- 13,403 --
Conversion of Series A and Series
B preferred stock into common
stock........................... (2,556,030) (1) -- -- 7,156,870 7 (6) --
Issuance of common stock with
Series C mandatorily redeemable
preferred stock in June 1999.... -- -- 1,250,830 1 6,605 --
Issuance of common stock on
IPOs............................ -- -- -- -- 9,646,650 10 90,076 --
Conversion of Class B common stock
to common stock................. -- -- (408,800) 408,800 -- --
Issuance of common stock upon
exercise of warrants............ -- -- -- -- 1,034,684 1 723 --
Stock options granted for services
in 1999......................... -- -- -- -- -- -- 5,610 --
Unearned stock-based
compensation.................... -- -- -- -- -- -- 16,750 --
Amortization of stock-based
compensation.................... -- -- -- -- -- -- -- --
Restricted common stock issued to
service provider in January
1999............................ -- -- -- -- 120,400 -- 1,270 --
Amortization of stock-based
compensation for service
provider........................ -- -- -- -- -- -- -- --
Stock issued on exercise of stock
options......................... -- -- -- -- 1,899,561 2 418 (127)
Dividend relative to beneficial
conversion feature related to
issuance of Series B preferred
stock........................... -- -- -- -- -- -- 1,000 --
-----------------------------------------------------
ACCUMULATED
UNEARNED OTHER
STOCK-BASED COMPREHENSIVE ACCUMULATED
COMPENSATION INCOME (LOSS) DEFICIT TOTAL
------------ ------------- ----------- --------
Balances -- January 1, 1998........ -- -- (9,640) $ 509
Issuance of Series A convertible
preferred stock in October and
December 1998................... -- -- -- 925
Common stock issued for cash
through March to September
1998............................ -- -- -- 432
Common stock issued for services
through February to May 1998.... -- -- -- 326
Issuance of options to purchase
common stock in exchange for
services........................ -- -- -- 536
Shares issued upon exercise of
options for common stock........ -- -- -- 6
Warrants for common stock
issued.......................... -- -- -- 23
Issuance of warrant for common
stock for services.............. -- -- -- 168
Settlement of note receivable as
offset to note payable.......... -- -- -- 24
Conversion of common stock into
Series A & B preferred stock.... -- -- (15) --
Proceeds from issuance of Series C
preferred stock and warrants,
net of related costs............ -- -- -- 12,529
Conversion of $1,000 debenture
into Series C preferred stock... -- -- -- 1,000
Proceeds from issuance of common
stock and warrants, net of
related costs................... -- -- -- 1,281
Exchange of common for preferred
shares and related repurchase
and retirement of Series C
preferred stock................. -- -- (500) (500)
Repurchase and retirement of
Series B preferred stock........ -- -- (878) (878)
Issuance of common stock upon
exercise of stock options....... -- -- -- 3
Net loss.......................... -- -- (15,065) (15,065)
Other comprehensive loss.......... -- (9) -- (9)
------- --- --------- --------
Balances -- December 31, 1998...... -- (9) (26,098) 1,310
Issuance of Series B preferred
stock, net...................... -- -- -- 13,405
Conversion of Series A and Series
B preferred stock into common
stock........................... -- -- -- --
Issuance of common stock with
Series C mandatorily redeemable
preferred stock in June 1999.... -- -- -- 6,606
Issuance of common stock on
IPOs............................ -- -- -- 90,086
Conversion of Class B common stock
to common stock................. -- -- -- --
Issuance of common stock upon
exercise of warrants............ -- -- -- 724
Stock options granted for services
in 1999......................... -- -- -- 5,610
Unearned stock-based
compensation.................... (16,750) -- -- --
Amortization of stock-based
compensation.................... 13,795 -- -- 13,795
Restricted common stock issued to
service provider in January
1999............................ (1,270) -- -- --
Amortization of stock-based
compensation for service
provider........................ 1,270 -- -- 1,270
Stock issued on exercise of stock
options......................... -- -- -- 293
Dividend relative to beneficial
conversion feature related to
issuance of Series B preferred
stock........................... -- -- (1,000) --
F-4
37
--------------------------------------------------------------------------------------------
CLASS B COMMON NOTES
PREFERRED STOCK STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- ------------------ ------------------- PAID IN FROM
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT CAPITAL STOCKHOLDERS
----------- ------- --------- ------ ---------- ------ ---------- ------------
Proceeds from issuance of Series D
preferred stock and warrants,
net of related costs............ 4,264,885 4 -- -- -- -- 22,080 --
Issuance of common stock upon
exercise of stock options....... -- -- -- -- 305,457 -- 326 --
Conversion of $1,000 debenture and
interest into Series C preferred
stock........................... 238,939 -- -- -- -- -- 1,036 --
Conversion of preferred stock to
common stock.................... (10,702,950) (11) -- -- 10,702,950 11 -- --
Conversion of redeemable common
stock to common stock........... -- -- -- -- 13,951 -- 80 --
Issuance of common stock for
advertising fees................ -- -- -- -- 76,056 -- 1,000 --
Net loss.......................... -- -- -- -- -- -- -- --
Other comprehensive income........ -- -- -- -- -- -- -- --
----------- ------- --------- -- ---------- --- -------- -----
Balances -- December 31, 1999...... -- $ -- 7,012,736 $1 38,231,581 $38 $187,829 $(181)
=========== ======= ========= == ========== === ======== =====
-----------------------------------------------------
ACCUMULATED
UNEARNED OTHER
STOCK-BASED COMPREHENSIVE ACCUMULATED
COMPENSATION INCOME (LOSS) DEFICIT TOTAL
------------ ------------- ----------- --------
Proceeds from issuance of Series D
preferred stock and warrants,
net of related costs............ -- -- -- 22,084
Issuance of common stock upon
exercise of stock options....... -- -- -- 326
Conversion of $1,000 debenture and
interest into Series C preferred
stock........................... -- -- -- 1,036
Conversion of preferred stock to
common stock.................... -- -- -- --
Conversion of redeemable common
stock to common stock........... -- -- -- 80
Issuance of common stock for
advertising fees................ -- -- -- 1,000
Net loss.......................... -- -- (76,603) (76,603)
Other comprehensive income........ -- 19 -- 19
------- --- --------- --------
Balances -- December 31, 1999...... $(2,955) $10 $(103,701) $ 81,041
======= === ========= ========
F-5
38
Class B Additional
Common Stock Common Stock Paid-in
Number Amount Number Amount Capital
----------------------------------------------------------------
Balances, December 31, 1999 7,012,736 $ 1 38,231,581 $38 $ 187,829
Issuance of common stock from secondary offering -- -- 6,115,000 6 68,768
Issuance of common stock from acquisitions -- -- 4,866,566 5 218,473
Stock issued on exercise of stock options -- -- 4,332,664 4 2,113
Conversion of Class B common stock into common stock (2,971,011) (1) 2,971,011 3 (2)
Stock issued from ESPP -- -- 495,390 -- 1,387
Stock issued from option exchange program -- -- 2,451,812 3 3,197
Notes receivable from shareholders -- -- -- -- --
Repayment of notes from shareholders -- -- -- -- --
Unearned stock-based compensation -- -- -- -- 2,333
Amortization of stock-based compensation
Net loss -- -- -- -- --
Other comprehensive income -- -- -- -- --
--------- ------- ---------- --- ---------
Balances, December 31, 2000 4,041,725 $ -- 59,464,024 $59 $ 484,098
========= ======= ========== === =========
Notes Accumulated
Receivable Unearned Other
From Stock-Based Comprehensive Accumulated
Shareholders Compensation Income (Loss) Deficit Total
--------------------------------------------------------------------
Balances, December 31, 1999 $ (181) $(2,955) $10 $(103,701) $ 81,041
Issuance of common stock from secondary offering -- -- -- -- 68,774
Issuance of common stock from acquisitions -- -- -- -- 218,478
Stock issued on exercise of stock options -- -- -- -- 2,117
Conversion of Class B common stock into common stock -- -- -- -- --
Stock issued from ESPP 1,387
Stock issued from option exchange program -- (3,200) -- -- --
Notes receivable from shareholders (2,349) -- -- -- (2,349)
Repayment of notes from shareholders 181 -- -- -- 181
Unearned stock-based compensation -- (2,333) -- --
Amortization of stock-based compensation 5,127 -- 5,127
Net loss -- -- -- (346,595) (346,595)
Other comprehensive income -- -- 52 -- 52
------- ------- --- --------- ---------
Balances, December 31, 2000 $(2,349) $(3,361) $62 $(450,296) $ 28,213
======= ======= === ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
39
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1999 2000
--------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................... $ (15,065) $ (76,603) $ (346,595)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 256 1,325 63,047
Impairment of goodwill ................................................... -- -- 176,831
Provision for doubtful accounts receivable ............................... (20) 27 4,419
Provision for inventory obsolescence ..................................... 100 195 145
Amortization of discounts on securities available-for-sale ............... (167) (177) 141
Interest charge on redemption of Series C mandatorily redeemable
preferred stock ...................................................... -- 6,606 --
Non-cash compensation expense related to issuance of options and warrants -- 13,821 5,127
Issuance of common stock, options and warrant in exchange for services ..... 1,074 6,880 --
Other, net ................................................................. -- 2 --
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (298) (2,522) (13,731)
Inventory ......................................... ...................... (196) (926) (147)
Prepaid expenses and other current assets ................................ (255) (5,826) 804
Other assets ............................................................. 45 (1,383) 64
Accounts payable ......................................................... 202 2,189 (2,219)
Accrued liabilities ...................................................... 1,176 4,462 8,818
Deferred revenue ......................................................... 55 5,144 3,402
--------- ----------- -----------
Net cash used in operating activities ................................ (13,093) (46,786) (99,894)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment ....................................... (1,132) (8,426) (13,745)
Acquisitions, net of cash received ......................................... -- -- (8,290)
Purchases of securities available-for-sale ................................. (7,832) (113,328) (44,766)
Maturities of securities available-for-sale ................................ 8,999 58,766 93,369
Proceeds from disposal of equipment ........................................ -- 42 --
Notes receivable from stockholders ......................................... -- -- (2,000)
Repayments of notes receivable from stockholders ........................... -- -- 32
Purchase of intangible asset ............................................... -- (150) --
--------- ----------- -----------
Net cash provided by (used in) investing activities .................. 35 (63,096) 24,600
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................................. 1,700 97,474 70,161
Net proceeds from issuance of preferred stock .............................. 13,454 41,075 --
Repurchase of preferred and common stock ................................... (1,378) (3,730) --
Proceeds from exercise of stock options and warrants ....................... -- 1,343 2,117
Proceeds from obligation under capital lease ............................... -- 204 --
Repayments of capital lease obligations and notes payable ................. (8) (149) (10,623)
Repayment of Series C mandatorily redeemable convertible preferred stock ... -- (11,000) --
Issuance (repayment) of convertible debenture .............................. (1,000) 1,800 --
Notes payable to stockholders .............................................. (27) (8) --
--------- ----------- -----------
Net cash provided by financing activities ............................ 12,741 127,009 61,655
--------- ----------- -----------
Effect of exchange rate changes on cash .................................... (19) 6 334
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ....................... (336) 17,133 (13,305)
Cash and cash equivalents, beginning of year ............................... 1,830 1,494 18,627
--------- ----------- -----------
Cash and cash equivalents, end of year ..................................... $ 1,494 $ 18,627 $ 5,322
========= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
40
INTERNET PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
On January 19, 2000, bamboo.com, Inc. (bamboo) merged with Interactive Pictures
Corporation (Interactive) in a transaction accounted for using the pooling of
interests method of accounting (Note 3). Concurrent with the merger, bamboo
changed its name to Internet Pictures Corporation ("iPIX"). For financial
reporting purposes, bamboo is considered the successor business to Jutvision
Corporation, a Canadian corporation (Note 17).
iPIX is an Internet infrastructure company that provides visual content and
other digital media solutions to facilitate commerce, communication and
entertainment. The Company offers complete end-to-end solutions that include the
capture, processing, hosting and distribution of visual content and other
digital media for the Internet. iPIX solutions are designed for many types of
digital media content, including still images, 360 by 360 immersive images,
slide shows, video, animation and audio.
The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company has had recurring
losses and continues to suffer cash flow and working capital shortages.
Additionally, the lack of a significant financing commitment raises substantial
doubt about the Company's ability to continue as a going concern.
The Company had cash, cash equivalents and short-term investments on hand of
approximately $7,700 as of December 31, 2000, which have been used for working
capital purposes in 2001. Since year-end, the Company has also generated cash to
use in operations through the sale of certain assets to Homestore.com (Note 19).
The current cash, cash equivalents and cash generated from operations will only
be sufficient to meet the Company's needs until April 30, 2001. The Company
continues to seek additional financing which will be required in order to
continue operations beyond April 30, 2001. In addition, the Company is exploring
alternatives including a merger, asset sale, or another comparable transaction,
or a financial restructuring. If the Company is unsuccessful in such efforts, it
will be required to cease operations. There can be no assurance, however, that
the Company will obtain such additional financing or complete a strategic
transaction under terms favorable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of Internet Pictures Corporation and its
wholly-owned subsidiaries, Interactive Pictures Corporation, Interactive
Pictures UK Limited, Internet Pictures (Canada), PW Technology, Inc., TBI
Imaging, Inc., and Opticom Imaging Corporation. The consolidation of these
entities will collectively be referred to as the Company. All significant
intercompany balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's Canadian
and United Kingdom subsidiaries is the Canadian dollar and British pound,
respectively. Monetary assets and liabilities denominated in foreign currencies
are translated into the Company's functional currency, U.S. dollars, at the
exchange rate prevailing at the balance sheet date. Non-monetary assets and
liabilities and transactions are translated at exchange rates prevailing at the
respective transaction dates. Revenue and expenses are translated at the average
rates of exchange during the year. Translation gains and losses are recorded in
accumulated other comprehensive income. Transaction exchange gains and losses
are included in the statement of operations.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments with an original maturity or remaining maturity at date of purchase
of three months or less to be cash equivalents. All other liquid investments are
classified as either short-term or long-term investments.
Management determines the appropriate classification of investment securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 2000, all investment securities are designated as
available-for-sale. Available-for-sale securities are carried at fair value,
using available market information and appropriate valuation methodologies, with
unrealized gains and losses reported in accumulated other comprehensive income
(loss).
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in the
statement of operations. There have been no such transactions in the year ended
December 31, 2000.
F-8
41
Interest income includes interest, amortization of purchase premiums and
discounts, and realized gains and losses on sales of securities. The cost of
securities sold is based on the specific identification method.
CERTAIN RISKS AND CONCENTRATIONS. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents, and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from clients located in the U.S. and
abroad. The Company performs ongoing credit evaluations of its clients'
financial condition and generally requires no collateral from its clients. To
date, the Company has not experienced any material losses.
During 1998, one customer accounted for 13% of revenue. No customer represented
in excess of 10% of the Company's revenues or accounts receivable in 1999. At
December 31, 2000, one customer accounted for 20% and an additional customer
accounted for 12% of accounts receivable. No customer represented in excess of
10% of the Company's revenues in 2000.
INVENTORY. Inventory, which consists primarily of digital cameras and related
hardware, is stated at the lower of cost or market, with costs determined using
standard costs (which approximate first-in, first-out costs). The Company
records a provision for obsolete inventory whenever an impairment has been
identified.
PREPAID EXPENSES. Prepaid expenses consist primarily of insurance, rent, real
estate commitments and trade shows, which will be reflected as an expense during
the period benefited.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost and are
depreciated primarily using the straight-line method over estimated useful
lives, which range from two to ten years. Leasehold improvements are amortized
over the term of the lease or estimated useful life, whichever is shorter.
Routine maintenance and repair costs are expensed as incurred. The costs of
major additions, replacements, and improvements are capitalized. Gains and
losses from disposals are included in operations as incurred.
ACCOUNTING FOR LONG-LIVED ASSETS. The carrying value of intangible assets,
property and equipment, and other long-lived assets is reviewed on a regular
basis for the existence of facts, both internally and externally, that may
suggest impairment. The Company recognizes impairment losses whenever events or
circumstances result in the carrying amount of the assets exceeding the sum of
the expected future cash flows associated with such assets. The measurement of
the impairment losses to be recognized is based on the difference between the
discounted cash flows from such assets and the carrying amounts of the assets.
During 2000 the Company recorded an impairment of goodwill (Note 4).
INCOME TAXES. The Company uses the asset and liability method of accounting for
income taxes, which requires the recognition of deferred tax liabilities and
assets for expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. A valuation
allowance against deferred tax assets is recorded if, based upon available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. Tax credits are accounted for as a reduction of tax
expense in the year in which the credits reduce taxes payable.
The Company does not recognize deferred income taxes for temporary differences
associated with its investment in the foreign subsidiaries because the
differences are essentially permanent in duration.
Interactive Pictures UK Limited is not included in the tax filing of its parent,
Internet Pictures Corporation. As a result, Interactive Pictures UK Limited
files a separate return with the United Kingdom tax authorities. Internet
Pictures (Canada), Inc. is not included in the tax filing of its parent,
Internet Pictures Corporation. As a result, Internet Pictures (Canada), Inc.
files a separate return with Canadian tax authorities.
REVENUE RECOGNITION. Product revenue is recognized upon shipment or delivery to
distributors and end users provided there are no uncertainties surrounding
product acceptance, there are no significant vendor obligations, the fees are
fixed and determinable, and collection is considered probable. Revenue from the
sale of the Company's virtual tour product is recognized upon distribution to
the website designated by the customer. The Company provides an allowance for
returns upon recognizing revenue as deemed necessary based on historical
experience. Returns were insignificant for all years presented. Payments
received in advance are initially recorded as deferred revenue and recognized
ratably as obligations are fulfilled.
During 1998, the Company derived service revenues from research and development
activities performed under fixed-price contracts with certain U.S. government
agencies and other third parties. Such revenues were recognized using the
percentage-of-completion method of accounting (based on the ratio of costs
incurred to total estimated costs, or as certain targets in the development
process are met, as appropriate under the contract). Provisions for estimated
losses on uncompleted contracts were made on a contract-by-contract basis and
recognized in the period in which such losses became probable and can be
reasonably estimated. Such losses were
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42
insignificant. Unbilled fees and services on contracts were comprised of costs
plus estimated earnings on certain contracts in excess of contractual billings
on such contracts. Advanced billings and billings in excess of costs plus
estimated earnings were classified as deferred revenue.
During 2000, service revenues from the Company's professional services and
Rimfire technology were recognized over the term of the software license to the
customer provided there was persuasive evidence of an arrangement, the license
fee was fixed and determinable and collection of the resulting receivable was
probable. Royalties derived from desktop imaging products were recognized as
revenues upon receipt of the royalty sell-through reports from customers, which
are generally in the quarter following the quarter in which the sale by the
customer took place.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Commission. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. No cumulative
effect adjustment was required as a result of the adoption of SAB 101 and there
would have been no impact on prior years presented had SAB 101 been
retroactively applied.
BARTER REVENUES. Barter revenues come from barter sales of the Company's
products, which are similar in nature to the Company's cash sales for the same
products. Barter revenues have resulted from the exchange by the Company of
certain products for advertising. Barter revenues are recognized in accordance
with APB 29, "Accounting for Nonmonetary Transactions." The Company records
barter revenue at fair value of the products exchanged for advertising.
Revenues and sales and marketing expenses arising from these transactions are
recorded at fair value as the Company has an established historical practice of
receiving cash for similar sales. The Company recorded no barter revenue or
related expense in 1998. The Company recorded barter revenues of $229 and $3,060
in 1999 and 2000, respectively, which represented approximately 2% and 6% of
total revenues for 1999 and 2000, respectively. Sales and marketing expense
arising from these barter transactions is recognized when the advertising takes
place, which is typically the same period in which the products are delivered.
RESEARCH AND DEVELOPMENT COSTS. Research and development expenditures are
expensed as incurred except for certain software development costs. Costs
incurred under contracts to perform research and development for others,
excluding contracts with government agencies, are accounted for under Statement
of Financial Accounting Standards (SFAS) No. 68, Research and Development
Arrangements.
ADVERTISING EXPENSES. All advertising expenditures are expensed as incurred.
Advertising expenses for 1998, 1999 and 2000, were $1,149, $8,513 and $24,186,
respectively. The Company recognizes expenditures under cooperative advertising
arrangements net of reimbursements received from participants.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123. "Accounting for Stock-based Compensation." The
Company has elected to continue accounting for stock-based compensation issued
to employees using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, pro forma
disclosures required under SFAS No. 123 have been presented (see Note 11). Under
APB 25, compensation expense is based on the difference, if any, on the date of
grant, between the fair value of the Company's stock and exercise price of the
option. Stock and other equity instruments issued to non-employees have been
accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods, or Services,"
and valued using the Black-Scholes model.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), which clarifies the application of Accounting
Principles Board Opinion 25 for certain transactions. The interpretation
addresses many issues related to granting or modifying stock options including
changes in accounting for modifications of awards (increased life, reduction of
exercise price, etc.). It became effective July 1, 2000 but certain conclusions
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The effects of applying the interpretation are to be recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 has not had a
material impact on the Company.
In connection with certain employee and non-employee stock option and restricted
stock grants, the Company amortizes unearned stock-based compensation over the
vesting period of the related grant using the method prescribed in FASB
Interpretation No. 28. Under this method, each vested tranche of options is
accounted for as a separate grant awarded for past services. Accordingly, the
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43
compensation expense is recognized over the period in which the services have
been provided. This method results in higher compensation expense in the earlier
vesting periods of the related grants.
The company presents stock-based compensation expense as a separate line item in
its consolidated statements of operations.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Examples of
items affected by certain significant estimates made by management are
long-lived assets, including goodwill, patents and product development costs,
certain accruals, receivables and inventory.
SEGMENT REPORTING. The Company uses a "management" approach, which designates
the internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's reportable
segments. Segment reporting includes disclosures about products and services,
geographic areas, and major customers.
NET LOSS PER SHARE. The Company computes net loss per share in accordance with
SFAS No. 128, Earnings Per Share. Basic and diluted net loss per share is
computed by dividing the net loss available to common shareholders for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of incremental shares of common stock issuable upon the exercise of
potentially dilutive stock options and warrants and upon conversion of the
Company's preferred stock and convertible debenture.
The following table sets forth common stock equivalents that are not included in
the diluted net loss per share calculation above because to do so would be
antidilutive for the periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1999 2000
--------- ---------- ----------
Weighted average effect of common stock
Equivalents
Preferred Stocks:
Series A ................................................. 1,670,444 1,488,868 --
Series B ................................................. 595,292 1,460,197 --
Series C ................................................. 2,068,592 1,918,406 --
Series D ................................................. -- 2,082,783 --
Employee stock options ..................................... 905,196 5,517,884 2,553,001
Warrants to purchase common stock .......................... -- 685,512 1,517,477
Unvested common stock subject to repurchase ................ -- 19,242 --
Convertible debenture ...................................... 604,387 51,781 --
--------- ---------- ----------
5,843,911 13,224,673 4,070,478
========= ========== ==========
COMPREHENSIVE INCOME (LOSS). The Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"), which establishes requirements for reporting
and displaying the comprehensive income (loss) and its components. The adoption
of SFAS 130 has no impact on the Company's net loss or total stockholders'
equity. This new accounting standard requires net unrealized gains or losses on
the Company's available-for-sale securities and cumulative foreign currency
translation adjustments to be reported as accumulated other comprehensive income
(loss).
The components of comprehensive income (loss) are as follows:
Years Ended December 31,
---------------------------------------------------
1998 1999 2000
--------- ----------- -----------
Net loss $ (15,065) $ (76,603) $ (346,595)
Foreign currency translation adjustment (9) 19 334
Fair market value adjustment of investments -- -- (282)
--------- ----------- -----------
$ (15,074) $ (76,584) $ (346,543)
========= =========== ===========
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RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities ("SFAS 133"). SFAS 133 is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if so, the type of hedge
transaction. We do not expect that the adoption of SFAS No. 133 will have a
material impact on our financial statements.
3. POOLING OF INTERESTS
Interactive and iPIX received shareholder approval and executed an Agreement and
Plan of Merger ("the merger agreement") in January 2000. Pursuant to the merger
agreement, Interactive became a wholly-owned subsidiary of iPIX and iPIX issued
1.369 shares of its common stock for every share of Interactive common stock
outstanding immediately prior to the Effective Time (as defined in the merger
agreement) of the merger. The transaction was accounted for as a pooling of
interests. Accordingly, prior period financial statements have been restated to
reflect the exchange ratio and to include the results of operations, financial
position and cash flows of Interactive as though it had always been a part of
the Company.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements are as follows:
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
1998 1999
---------- ----------
Total revenue
Internet Pictures Corporation ......................... $ 77 $ 3,756
Interactive ........................................... 3,041 8,767
---------- ----------
Combined .............................................. $ 3,118 $ 12,523
---------- ----------
Net loss attributable to common stockholders
Internet Pictures Corporation ......................... $ (1,840) $ (53,645)
Interactive ........................................... (13,225) (23,958)
---------- ----------
Combined .............................................. $ (15,065) $ (77,603)
---------- ----------
Immaterial adjustments were made to conform the Company's and Interactive
Pictures Corporation's accounting policies.
The Company recorded a charge of approximately $15,175 in operating expenses for
costs incurred related to the merger. These merger costs consisted primarily of
investment banking fees and costs of attorneys, accountants, and other directly
related external costs.
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4. ACQUISITIONS
During April 2000, the Company acquired all of the capital stock of both TBI
Imaging, Inc. and Opticom Corporation. Consideration consisted of an aggregate
of 222,232 shares with an aggregate value of $8,120 and $2,130 in cash
consideration. The Company accounted for these transactions under the purchase
method of accounting and recorded goodwill of $9,446.
On April 3, 2000, iPIX acquired all of the capital stock of PictureWorks
Technology, Inc. The Company issued 4,644,334 shares to the stockholders of
PictureWorks with an aggregate value of $173,234. The Company accounted for this
transaction under the purchase method of accounting and accordingly, allocated
the purchase price to cash, accounts receivable, prepaid expenses, fixed assets
and intangibles including goodwill of $205,879. The following pro forma
information presents the results of operations of the Company as if the
acquisition of PictureWorks had been completed as of January 1, 1999 and 2000,
respectively:
1999 2000
--------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Revenue .......................................... $ 12,523 $ 16,346 $ 53,673 $ 55,101
Net loss ......................................... $(76,603) $(153,819) $(346,595) $(370,958)
Basis and diluted net
loss per share ............................... $ (3.01) $ (5.20) $ (6.16) $ (6.46)
The net assets of businesses acquired, which are accounted for as purchases,
have been reflected at their fair values at dates of acquisition. The excess of
acquisition costs over such net assets (goodwill) is reflected in the
consolidated balance sheets as intangible assets. Goodwill, net of amortization,
at December 31, 2000 was $5,476, and is being amortized on a straight-line
method over three years from the date of acquisition. Amortization expense for
the year ended December 31, 2000 was $57,193.
It is the Company's policy to periodically review the net realizable value of
its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. The Company determines
whether future cash flows over the remaining estimated useful lives of the
assets provide for recovery of the assets. During the fourth quarter of 2000,
certain events, including the decline in the Company's stock price and market
capitalization, led the Company to perform an impairment review of goodwill in
accordance with the requirements of SFAS No. 121. This review indicated that
goodwill was being carried at amounts in excess of the Company's revised
estimates of undiscounted future cash flows of the acquired businesses, which
resulted in a charge of $176,831 to expense.
5. RESTRUCTURING
During the fourth quarter 2000, the Company recorded a restructuring charge of
$4,161 which consists of expenses associated with a reduction in our workforce,
the consolidation of certain offices, principally lease obligations for vacated
offices, as well as a write down of abandoned office equipment to its net
realizable values.
6. BALANCE SHEET ACCOUNTS
SECURITIES AVAILABLE-FOR SALE:
Securities available-for-sale at December 31, 2000 consists of corporate notes
with a cost of $5,995 and a fair market value of $5,713.
PROPERTY AND EQUIPMENT:
1999 2000
----------- -----------
Furniture and equipment .................................... $ 10,118 $ 26,798
Leasehold improvements ..................................... 751 1,542
----------- -----------
10,869 28,340
Accumulated depreciation and amortization .................. (1,734) (7,375)
----------- -----------
Property and equipment, net ................................ $ 9,135 $ 20,965
----------- -----------
Property and equipment includes $706 and $3,469 of assets held under capital
lease and related accumulated amortization of $165 and $844 at December 31, 1999
and 2000, respectively.
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ACCRUED LIABILITIES:
1999 2000
--------- ---------
Accrued liabilities - trade ................................ $ 1,192 $ 1,284
Accrued salaries and benefits .............................. 382 1,352
Employee share purchase plan ............................... 515 1,047
Accrued legal fees ......................................... 1,140 1,688
Accrued vacation ........................................... 625 1,355
Accrued advertising ........................................ 649 3,904
Accrued restructuring ...................................... -- 1,928
Other liabilities .......................................... 1,700 4,124
--------- ---------
$ 6,203 $ 16,682
========= =========
7. INCOME TAXES
The components of the Company's net deferred tax asset (liability) as of
December 31, 1999 and 2000, are as follows:
1999 2000
---------- ----------
DEFERRED TAX ASSETS (LIABILITIES)
CURRENT:
Financial reserves ....................................... $ 106 $ 4,561
Stock based compensation ................................. 96 280
Accrued expenses and deferred revenue .................... 1,514 4,792
Other..................................................... -- 8
---------- ----------
1,716 9,641
Valuation allowance ...................................... (1,716) (9,641)
---------- ----------
Net current deferred tax asset (liability) ......... $ -- $ --
========== ==========
LONG-TERM:
Foreign net operating loss carryforwards ................. $ 1,087 $ 1,087
Net operating loss carryforwards ......................... 27,637 161,496
Research and development credits ......................... 45 45
Intangible assets ........................................ 221 175
Depreciation ............................................. 31 (255)
---------- ----------
29,021 162,548
Valuation allowance ...................................... (29,021) (162,548)
---------- ----------
Net long-term deferred tax asset (liability) ........ $ -- $ --
========== ==========
At December 31,1999, the Company had accumulated income tax losses of $1,944
available in Canada for carry-forward to reduce taxable income of future years,
the benefit of which has not been recorded in these financial statements. The
income tax losses expire beginning in 2002.
For Canadian federal and Ontario provincial tax purposes, bamboo.com Canada
Inc. net operating loss carryforwards are subject to certain limitations on
utilization in the event of changes in ownership.
At December 31, 2000, the Company has approximately $425,000 and $289,000 of
federal and state, respectively net operating loss carryforwards which it may
use to offset future taxable income. The net operating loss carryforwards, if
not utilized, will begin to expire in 2002. To the extent that net operating
loss carryforwards, when realized, relate to stock option deductions, the
resulting benefits will be credited to stockholders' equity. The Company has
available research and development credits of approximately $45 that will expire
in 2010.
The Company has recorded a full valuation allowance against its deferred tax
assets because it believes it is more likely than not that sufficient taxable
income will not be realized during the carryforward period to utilize the
deferred tax asset. The valuation allowance increased by $21,311 and $ 141,452
during 1999 and 2000, respectively. Realization of the future tax benefits
related to the deferred tax assets is dependent upon many factors, including the
Company's ability to generate taxable income in the respective tax jurisdiction
within the loss carryforward periods.
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The Company's 1998, 1999 and 2000 income tax provision differs from that
obtained by using the statutory rate of 44.5% in 1998 and the US statutory rate
of 34% in 1999 and 2000 due to the following:
1998 1999 2000
-------- -------- ------
Computed "expected" tax benefit ............... $(6,704) $(26,045) $(129,865)
State income taxes, net of U.S. federal benefit -- (949) (16,174)
U.S. losses taxed at lower rate ............... 865 -- --
Valuation allowance changes affecting the .... 5,784 19,613 141,452
provision for income taxes
Permanent differences ......................... 55 7,381 4,587
-------- -------- ---------
$ -- $ -- $ --
======== ========= =========
Internal Revenue Code Section 382 stipulates an annual limitation on the amount
of Federal net operating losses incurred prior to a change in
ownership, which can be utilized to offset the Company's future taxable income.
An ownership change occurred as a result of the consummation of the Company's
initial public offering as well as the merger between iPIX and
Interactive.
8. DEBT
The Company entered into a $40 non-interest bearing promissory note payable
during August 1997;due in monthly installments of $1, including principal and
imputed interest, through August 2002. The note is collateralized by certain
furniture and equipment of the Company.
On October 29,1997, the Company issued a $3,000, 8% convertible debenture due
September 30,1998 (the Debenture). The debenture was convertible into Series C
preferred stock. Effective October 23,1998, $1,000 of the Debenture was assigned
by the investor to a group of private investors who converted such portion of
the Debenture into shares of Series C preferred stock. The Company paid off
$1,000 of the Debenture in October 1998, and converted the remaining $1,000 into
Series C preferred stock in March 1999. The Series C preferred stock was
converted into common stock in connection with the Company's initial public
offering in August 1999.
On February 2,1999, the Company issued convertible subordinated promissory notes
of $1,800, which bore interest at a rate of 10% per annum. On March 12,1999, the
entire principal balance of $1,800 plus accrued interest of $8 was converted
into shares of Series B convertible preferred stock of the Company.
9. STOCKHOLDERS' EQUITY
General
The Company's amended and restated certificate of incorporation authorizes the
issuance of up to 150,000,000 shares of common stock, par value $0.001 per
share, 7,421,536 shares of Class B common stock, par value $0.0001 per share and
5,001,100 shares of preferred stock, par value $0.001 per share. The board of
directors is authorized, without stockholder approval, to issue up to an
aggregate of 5,001,100 shares of preferred stock, $0.001 par value per share, in
one or more series. Included in this amount are 1,100 shares of Series C
redeemable preferred stock. Each series of preferred stock may have the rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences that the board of directors
determines. There was no preferred stock outstanding at December 31, 2000.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the shareholders, and there are no cumulative voting
rights. Holders of common stock may receive dividends after all dividends that
are owed have been paid to holders of preferred stock.
Each holder of Class B common stock is entitled to one vote for each share on
all matters to be voted upon by the stockholders and, except as required by law,
shall have voting rights and powers equal to the voting rights and powers of the
common stock. There are no cumulative voting rights. Holders of Class B common
stock are not entitled to dividends and are not entitled to receive any assets
of the corporation upon dissolution or liquidation. Under the terms of a pairing
agreement with the Canadian subsidiary, bamboo.com Canada, Inc., (""bamboo
Canada") holders of Class B common stock must also hold an equal number of
shares of Series C preferred stock of bamboo Canada. These holders may elect at
any time and for no cost to convert their bamboo Canada Series C preferred stock
into shares of common stock. Upon such a conversion, the Company is required to
redeem the Class B common stock for $0.0001 per share.
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Common Stock
In June 1998, the Company issued common share units for total proceeds of $76,
net of issuance costs. Each unit consisted of common shares and a warrant to
purchase common shares. The fair value of the warrants was established at $23,
using the Black-Scholes method with the following assumptions, no annual
dividend, volatility of 55%, risk free interest rate of 5.35% and term of one
year. Based on the fair value of the underlying instruments within the common
share unit, $53, of the total proceeds was allocated to common shares and the
balance of $23, was allocated to the warrants to purchase common shares. In
December 1998, the warrants were exercised to purchase common shares for net
proceeds of $78.
At various times throughout the year ended December 31, 1998, common shares were
issued to certain individuals, for services rendered. The fair market value of
the stock issued of $326, was charged to results of operations.
Additionally, the Company recorded unearned stock-based compensation for
restricted common stock granted to service providers of approximately $1,270
including the effect of the accelerated vesting on the effective date of the
Company's IPO, during the year ended December 31, 1999.
On September 15, 1998, the Company's board of directors authorized a 1,000:1
common stock split and on July 19, 1999, the Company authorized a 2.8:1 forward
common stock split, which was effected prior to the closing of the public
offering on August 25,1999. The effect of these stock splits has been
retroactively reflected throughout the financial statements.
In August 1999, the Company completed an initial public offering. Proceeds of
the offering, net of underwriting discount and other direct costs of the
offering, were approximately $87,637. On September 7, 1999, under the terms of
the underwriting agreement covering the initial public offering, the
underwriters exercised their over allotment for shares of the common stock of
the Company. Proceeds received, net of underwriting discount, from exercise of
the over allotment option were approximately $2,448.
In connection with the Company's initial public offering, all outstanding
preferred stock converted one-for-one into common stock and all outstanding
warrants were exercised.
In May 2000, the Company raised net proceeds of $67,500 from a follow-on
offering of 6,000,000 shares of its common stock.
Preferred Stock
During 1998, the Company issued shares of Series C preferred stock, as well as
warrants for net proceeds of $12,529.
In February 1999, the Company issued shares of its common stock on exercise of
stock purchase rights granted in exchange for services under restricted purchase
agreements. In accordance with the term of the grant, the repurchase provision
expired on the effective date of the Company's IPO.
During January and March 1999, the Company issued shares of Series D preferred
stock for gross proceeds of $24,000. In connection with the Series D issuance,
warrants to purchase preferred stock and common stock were issued.
In March 1999, the Company issued Series B preferred stock for total cash
proceeds of $10,687 and for conversion of notes payable and settlement of
accrued interest of $1,808.
In May 1999, the Company issued additional Series B convertible preferred stock
for total cash proceeds of $1,000. In connection with this issuance, the Company
recorded a charge of $1,000 representing a beneficial conversion feature limited
to the proceeds received.
In June 1999, the Company entered into an agreement to sell shares of its Series
C mandatorily redeemable preferred stock and shares of its common stock for
total gross proceeds of $11,000. The $11,000 of proceeds from issuance was
allocated to the Series C mandatorily redeemable preferred stock and the common
stock based on their relative fair values. Accordingly, $4,394 was allocated to
the Series C redeemable preferred stock and $6,606 was allocated to the common
stock. Upon completion of the initial public offering in August 1999, the
Company repaid the $11,000. As a result, the Company recognized the entire
discount of $6,606 as an interest charge in the year ended December 31,1999.
In June 1999, the NASD informed the Company that it would consider a portion of
its redeemable convertible preferred stock and redeemable common stock to be
underwriting compensation received in connection with the proposed initial
public offering in excess of the amounts allowable under the NASD's Conduct
Rules. In order to comply with the NASD's Conduct Rules, the Company repurchased
shares of stock, including shares representing the redeemable convertible
preferred stock and the redeemable common stock, for $3,730.
F-16
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10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments have been estimated using data which the
Company considered the best available. The following estimation methodologies
were used:
CASH AND CASH EQUIVALENTS. Cash and cash equivalents are reflected at carrying
value, which is considered fair value due to the short-term nature of these
instruments.
ACCOUNTS RECEIVABLE. Accounts receivable consists primarily of trade
receivables. The Company has estimated their fair value to be the carrying
value.
SECURITIES AVAILABLE-FOR-SALE. The estimated fair value of securities
available-for-sale is based on the quoted market prices for those or similar
investments. Amortized costs approximate fair value.
CONVERTIBLE DEBENTURE AND PROMISSORY NOTE. Fair values are based on quoted
market prices for the same or similar issues, or the carrying value is used
where a market price is unavailable. The carrying value is assumed to be the
fair value for these liabilities as no market price for a comparable instrument
was available.
11. EMPLOYEE STOCK AND BENEFIT PLANS
2000 Equity Compensation Plan.
In January 2000, the Company authorized the 2000 Equity Compensation Plan (the
"2000 Plan"). The 2000 Plan authorizes the granting of options and restricted
stock awards to acquire up to 3,500,000 shares of our common stock. As of
December 31, 2000, 1,774,450 options and 2,451,812 restricted stock awards are
outstanding under the 2000 Plan. The exercise price of all options granted is
the fair value of the Company's common stock at the date of grant. The options
generally vest over a two-year period and expire ten years from the grant date.
1998 Employee, Director and Consultant Stock Option Plan
During 1998, the Company authorized an Employee, Director and Consultant Stock
Option Plan for a total of 2,380,000 common shares. This plan became effective
on January 1,1999 once the Company was reorganized. During 1999 and 2000, an
additional 5,799,394 and 1,124,029, respectively, common shares were authorized
under the Plan. As of December 31, 2000, 2,755,347 options are outstanding under
the Employee, Director and Consultant Stock Option Plan. Each option under the
incentive plan allows for the purchase of common stock of the Company and
expires not later than five or ten years from the date of grant, depending on
the ownership of the option participants. The vesting terms of the stock options
will be determined on each grant date and are generally two or three years;
however, the amount of options that can be exercised per participant in any
calendar year will be restricted to an aggregate fair market value of $100 of
the underlying common stock. No further options will be granted under this plan.
Remaining options not granted under this plan were transferred to the 2000
Equity Compensation Plan.
1997 Equity Compensation Plan
The Company authorized the 1997 Equity Compensation Plan, under which 4,105,027
shares of common stock are authorized and reserved for issuance to selected
employees, officers, directors, consultants and advisors. The Company reserved a
sufficient number of shares of common stock for issuance pursuant to the
authorized options. As of December 31, 2000, 1,680,788 options are outstanding
under the 1997 plan. In addition, the Company granted certain options to
purchase shares of the Company's common stock to employees not under the 1997
plan; these options were primarily granted prior to the authorization of the
1997 plan. The exercise price of all options granted is the fair value of the
Company's common stock at the date of grant as estimated by common stock and
convertible preferred stock transactions with third parties at or near grant
dates. The options generally vest over one to
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50
three-year periods and expire five years after the respective vesting dates. No
further options will be granted under this plan. Remaining options not granted
under this plan were transferred to the 2000 Equity Compensation Plan.
Other Stock Option Plans
The 1994 Stock Option Plan (the "1994 Plan"), the 1996 Stock Option Plan (the
"1996 Plan"), and the 1997 Stock Option Plan (the "1997 Plan") were originally
adopted by PictureWorks, Inc., a wholly-owned subsidiary of iPIX, in November
1994, May 1996 and November 1996, respectively. Under the 1994 Plan, eligible
employees, directors and consultants could receive options to purchase shares of
the Company's common stock at a price not less than 100% and 50% of the fair
value on the date of the grant for incentive stock options and nonqualified
stock options, respectively. Under the 1996 and 1997 Plans, eligible employees,
directors, and consultants who owned less than 10% of all voting classes of
stock could receive options to purchase shares of the Company's common stock at
a price not less than 110% and 85% of fair value on the date of grant of
incentive stock options and nonqualified stock options, respectively. Employees
owning greater than 10% of all voting classes of stock could receive options to
purchase shares at a price not less than 110% of the fair market value for both
incentive and nonqualified stock options. As of December 31, 2000, 408,922
options are outstanding under these plans. The options granted under the Plans
are exercisable over a maximum term of ten years from the date of grant and
generally vest in various installments over a five-year period under the 1994
Plan and a four-year period under the 1996 and 1997 Plans. No further options or
restricted stock awards will be granted under the 1994, 1996 and 1997 Plans.
A summary of the Company's stock option activity is as follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE STOCK AVERAGE
OF EXERCISE GRANT DATE OPTIONS EXERCISE
SHARES PRICES FAIR VALUE EXERCISABLE PRICE
----------- ----------- ---------- ----------- -------
Under option at January 1,
1998................................ 1,883,512
Options granted in 1998............... 733,876 $4.38 $1.21
Options exercised in 1998............. (102,429) 0.02
Options cancelled in 1998............. (15,520) 4.73
---------
Under option at December 31,
1998................................ 2,499,439 1,143,378 1.80
Options granted in 1999............... 9,490,319 3.64
Options exercised in 1999............. (2,205,017) 0.34
Options cancelled in 1999............. (256,922) 4.92
Stock purchase rights granted......... 120,400 0.18
Stock purchase rights
exercised............................. (120,400) 0.18
---------
Under option at December 31,
1999................................ 9,527,819 4,579,244 2.03
Options granted in 2000............... 8,789,924 22.38 14.31
Options exercised is 2000............. (4,332,664) 0.49
Options cancelled in 2000............. (6,972,991) 17.58
Options through acquisitions.......... 733,997 3.68 2,875,198 6.84
---------
Under option at December 31,
2000................................ 7,746,085
=========
The following table summarizes information about stock options at December 31,
2000:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING -----------------------------
------------------------------------------------ NUMBER
NUMBER WEIGHTED-AVERAGE EXERCISABLE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.02-0.75 471,209 7.85 $ 0.28 437,896 $ 0.26
$ 1.41-9.81 2,714,969 8.06 $ 4.06 1,934,143 $ 3.37
$10.94-19.00 2,264,002 9.20 $13.54 240,715 $15.39
$21.25-43.00 2,295,905 9.14 $29.71 353,711 $30.36
Stock-Based Compensation Related to Options
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51
In connection with certain stock options granted to employees during the year
ended December 31, 1999, the Company recorded unearned stock-based compensation
totaling $16,750, which is being amortized over the vesting periods of the
related options which is generally two to three years. Amortization of this
stock-based compensation recognized during the year ended December 31,1999 and
2000 totaled approximately $13,795 and $2,110, respectively. The total unearned
stock-based compensation recorded to date will be amortized as follows: $700 in
2001 and $145 in 2002.
In accordance with the terms of the original option grants, upon completion of
the initial public offering, options to purchase 1,921,409 shares of the
Company's common stock became fully vested. As a result, additional compensation
expense of $2,622 was recorded in the year ended December 31, 1999.
Options to acquire 1,870,680 and 715,553 shares of common stock under the 1998
Employee, Director and Consultant Stock Option Plan, were issued to
non-employees of the Company during the year ended December 31, 1998 and 1999,
respectively. The fair value of the common stock options was determined to be
$536 and $5,610 for 1998 and 1999 respectively, using the Black-Scholes pricing
model. Stock-based compensation related to stock options granted to
non-employees was recognized as earned.
For all other option grants, because the exercise price of the Company's stock
options equal the deemed fair value of the underlying stock on the date of the
grant, no compensation cost has been recognized in the accompanying financial
statements. Pro forma information regarding net loss is required by Statement
123, and has been determined as if the Company had accounted for its stock
options under the fair value method of Statement 123. The Company had determined
that the difference between historical results and such pro forma information
would have been to increase the net loss by $301, $1,541 and $26,509 in 1998,
1999 and 2000, respectively, and to increase the net loss per share to $(2.91),
$(3.07) and $(6.63) in 1998, 1999 and 2000, respectively.
The minimum fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected lives of five years in 1998 and three to
four years in 1999 and 2000; risk free interest rate of 4.59% in 1998, 5% to 6%
in 1999, 6.01% to 6.83% in 2000; expected dividends of zero in 1998, 1999 and
2000; and volatility of zero in 1998, 55% to 68.5% in 1999, and 82.9% to 112.8%
in 2000.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Purchase Plan"). Under the
Purchase Plan, employees meeting certain specific employment qualifications are
eligible to participate and can purchase shares of common stock semi-annually
through payroll deductions at the lower of 85% of the fair market value of the
stock on the enrollment date or the fair market value of the stock at the end of
the offering period. The purchase plan permits eligible employees to purchase
common stock through payroll deductions for up to 15% of qualified compensation.
As of December 31, 2000, 1,262,015 shares were reserved under the plan. As of
December 31, 2000, 495,390 shares had been issued and 766,625 shares were
available for issuance under the purchase plan.
401(k) Plan
The Company has a 401(k) profit sharing plan, which is available to all
full-time employees after six months of service and those part-time employees
who have completed one thousand hours of employment during twelve consecutive
months. The Company will match sixty-five cents per dollar up to 6.15% of the
employee's annual salary. The Company made contributions of $116, $201 and $500
in 1998, 1999 and 2000, respectively.
12. SEGMENT INFORMATION
The Company has two reportable segments: 1) products, and 2) services. The
accounting policies of the segments are the same as those of the Company. The
Company evaluates the performance of its segments and allocates resources to
them based solely on evaluation of gross profit. There are no inter-segment
revenues. The Company does not make allocations of corporate costs to the
individual segments and does not identify separate assets of the segments in
making decisions regarding performance or allocation of resources to them.
Management believes the Company's future growth will occur in the products
segment.
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52
Information about reported segments is as follows:
PRODUCTS SERVICES TOTAL
-------- -------- -----
YEARS ENDED DECEMBER 31:
1998
Revenues......................... $ 2,789 $ 329 $ 3,118
Gross profit..................... 1,515 88 1,603
1999
Revenues......................... $12,523 $ -- $12,523
Gross profit..................... 5,261 -- 5,261
2000
Revenues......................... $48,943 $4,730 $53,673
Gross profit..................... 23,501 2,266 25,767
Revenue and long-lived asset information by geographic area is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
------ ------- ---------
REVENUES:
United States.... $2,404 $10,092 $ 45,535
Canada........... 77 249 1,608
Japan............ 352 135 390
Europe........... 41 1,131 4,630
Other foreign
countries...... 244 916 1,510
------ ------- --------
$3,118 $12,523 $ 53,673
====== ======= ========
LONG-LIVED ASSETS:
Foreign.......... $ 65 $ 2,626 $ 3,285
United States.... 1,500 6,509 17,680
------ ------- --------
$1,565 $ 9,135 $ 20,965
====== ======= ========
Foreign revenues include all sales made to customers outside the United States,
including those generated by the United Kingdom and Canadian subsidiaries.
13. COMMITMENTS AND CONTINGENCIES
During April 2000, the Company entered into an agreement to provide visual
content services under which the Company is required to pay $16,000 over a
two-year period. As of December 31, 2000, the Company had paid $6,000 of the
$16,000 commitment. The Company leases various equipment, office furniture and
other equipment including computer hardware and software under capital lease
arrangements.
At December 31, 2000, the future minimum payments under these and other capital
lease agreements are as follows:
2001............................................................................ $1,831
2002............................................................................ 951
------
Minimum lease payments.......................................................... 2,782
Less: amount representing interest............................................. 266
------
Principal amount of minimum lease payments...................................... 2,516
Less current portion............................................................ 1,600
------
Long-term portion $ 916
======
The Company leases certain office space under noncancelable operating leases.
Future minimum lease payments are as follows:
2001............................................................................ $2,669
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53
2002............................................................................ 1,995
2003............................................................................ 529
2004............................................................................ 212
2005............................................................................ 216
Rental expense for operating leases was $469, $1,669 and $3,882 for 1998, 1999
and 2000, respectively.
The Company is subject to claims in the ordinary course of business. Management
believes the ultimate resolution of these matters will have no material impact
on the financial condition, results of operations or cash flows of the Company.
On October 28, 1998, Mr. Ford Oxaal (d/b/a Minds-Eye-View, Inc.) filed a lawsuit
against us in the United States District Court for the Northern District of New
York. The plaintiffs, Mr. Oxaal and Minds-Eye-View, alleged that we breached a
duty of confidence to them, made misrepresentations and misappropriated trade
secrets. The court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims against Mr. Oxaal, including
trade secret theft. The plaintiffs filed a motion to dismiss the suit, and the
court dismissed the lawsuit on May 19, 1999. Although the lawsuit was dismissed,
we are continuing to prosecute our affirmative claims against Mr. Oxaal. The
arbitration has been stayed pending resolution of the following lawsuit. On May
20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant in the
same court alleging that our technology infringes patent number 5,903,782. On
December 5, 2000, Mr. Oxaal filed a lawsuit against us in the same court
alleging that our technology infringes patent number 6,157,385. In both cases,
the plaintiffs are seeking an unspecified amount of damages, interest, an
accounting by us, costs and attorney's fees, in addition to a permanent
injunction prohibiting the alleged infringement. In the first case, the
plaintiffs claim that the alleged infringement is deliberate and willful and is
seeking treble damages. In both cases we have asserted defenses and
counterclaims that we did not infringe any valid claims of the patents, that the
patents are invalid, and that the patents are unenforceable. We believe that Mr.
Oxaal's claims are without merit and we intend to vigorously defend against his
claims. If Mr. Oxaal were to prevail in either lawsuit, however, our financial
condition, results of operations and cash flows could be materially adversely
affected. We are not currently a party to any other legal proceedings the
adverse outcome of which, individually or in the aggregate, we believe could
have a material adverse effect on our business, financial condition or results
of operations.
14. WARRANTS
Pursuant to a marketing and distribution agreement entered into in November
1998, the Company agreed to issue a stock purchase warrant to purchase shares of
common stock which was to expire on December 31, 1999. The warrant was recorded
at its fair value of $168 with the costs charged to the statement of operations
and comprehensive income (loss) in the year ended December 31, 1998. The fair
value of the warrant was estimated using the Black-Scholes option-pricing model.
The following assumptions were used in the model: no annual dividend, expected
volatility of 55%, risk-free interest rate of 5.35%; and an expected life of 1.2
years. This warrant was exercised in December 1999.
On January 6, 2000, the Company issued warrants to purchase a total of 200,000
shares of common stock at an exercise price of $15.47. The warrants vest as
follows: 100,000 six months after the incorporation of immoeuro B.V., 50,000 on
September 30, 2000 and 50,000 on December 31, 2000. The fair value of warrants
was calculated to be approximately $2,700, which is being recognized as expense
over the two-year term of the related agreement. The non-cash charge for these
warrants totaled approximately $98 during 2000.
On April 17, 2000, the Company granted a warrant to purchase 3,397 shares of
common stock at an exercise price of $4.00. The warrant is fully vested and
exercisable. The non-cash charge for the warrant totaled approximately $96,
which is being recognized as expense over the 15-month term of the related
agreement. The non-cash charge for the warrant totaled approximately $48 during
2000.
On April 19, 2000, the Company issued a warrant to purchase 600,000 shares of
common stock at an exercise price of $20.38. The warrant vests and becomes
exercisable at a rate of 66,667 at the end of each of the following nine
quarters. The fair value of the warrant was calculated to be approximately
$9,700, which is being recognized as expense over the 3.5-year term of the
related agreement. The non-cash charge for the warrant totaled approximately
$146 during 2000.
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
25,000 on June 30, 2000, 25,000 on September 30, 2000, 25,000 on December 31,
2000, 25,000 on March 31, 2001 and 100,000 on the date the warrant holder is a
publicly traded company. The fair value of the warrant was calculated to be
approximately $1,500, which is being recognized as expense over the 25-month
term of the related agreement. The non-cash charge for the warrant totaled
approximately $94 during 2000.
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54
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
50,000 on June 30, 2000, 50,000 on September 30, 2000, 50,000 on December 31,
2000, and 50,000 on March 31, 2001. The fair value of the warrant was calculated
to be approximately $1,500, which is being recognized as expense over the
11-month term of the related agreement. The non-cash charge for the warrant
totaled approximately $172 during 2000.
As most of the shares subject to these warrants are unvested, the unvested
shares will be revalued at each reporting date, and the revised fair value will
be expensed upon the vesting of the remaining shares. As a result, the charge is
subject to substantial increase or decrease based on future changes in the fair
value of the underlying common stock.
15. RELATED PARTY TRANSACTIONS
Notes payable issued to stockholders in 1998 were repaid during 1999.
In October 1999, the Company issued shares of common stock to an executive
officer in exchange for a note receivable. The note was repaid during 2000.
During 2000, the Company's CEO obtained a $2,000 loan under a line of credit
made available through his employment agreement dated February 22, 2000.
Interest accrued at a rate of 9.5% during 2000. The loan is collateralized by
the Company stock owned by the CEO and the stock options granted pursuant to his
employment agreement. The line of credit is made available through the term of
the employment agreement ending December 31, 2004. The $2,000 principal amount
plus $130 accrued interest is reflected as contra equity in the accompanying
balance sheet.
In September 1996, PictureWorks' President exercised the right to purchase
393,393 shares in exchange for a full recourse promissory note issued to the
Company in the amount of $126. Interest accrues semiannually at a 6.74% annual
rate. The note and accrued interest are due and payable upon the earliest to
occur of any of the following: (i) the termination of the President's employment
relationship with the Company, (ii) upon the sale of certain shares purchased
whereby proceeds from the sale are greater than or equal to the other
outstanding amount owing on the note or (iii) September 2002. The principal
amount of $126 plus accrued interest of $41 is reflected as contra equity in
the accompanying balance sheet.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
Supplemental disclosures:
Unearned stock-based compensation related to stock option grants and warrants $--- $16,750 $5,127
Property and equipment acquired under capital leases --- 502 2,744
Conversion of notes payable to Series B convertible preferred stock --- 1,800 ---
Issuance of Series B convertible preferred stock --- 8 ---
Beneficial conversion related to issuance of Series B convertible preferred stock --- 1,000 ---
Exercise of common stock options and warrants in exchange for note receivable 78 127 ---
Interest paid --- 66 407
Income taxes paid --- 1 ---
Notes receivable settled as offset of note payable 24 --- ---
Common stock issued below fair value 45 --- ---
Issuance of common stock for services 326 1,270 ---
Issuance of warrant for common stock for services 168 --- ---
Issuance of options for common stock for services 536 5,610 ---
Conversion of debenture into Series C preferred stock 1,000 1,000 ---
Common stock exchanged for Series A and B preferred stock in 1998 --- --- ---
Issuance of common stock for portion of placement fee in connection with
issuance of Series D preferred stock --- 786 ---
Issuance of common stock for advertising alliance fee --- 1,000 ---
F-22
55
Conversion of 13,951 shares of redeemable common stock into 13,951 shares of
common stock in 1999 --- --- ---
Conversion of 408,800 and 2,971,011 shares of Class B common stock into
408,800 and 2,971,011 shares of common stock in 1999 and 2000, respectively --- --- ---
17. PREDECESSOR BUSINESS
The Company was incorporated in 1998 as Jutvision Corporation under the laws of
the state of Delaware. The Company has a wholly-owned subsidiary, bamboo.com
Canada Inc. ("bamboo Canada"), a company also incorporated in 1998 under the
laws of the province of Ontario, Canada as Jutvision Canada Inc. The business of
the Company was previously operated as Jutvision Corporation, a company
incorporated in 1995 under the laws of the Province of Ontario, Canada.
On January 1, 1999, the Board of Directors authorized a corporate
reorganization. Through a series of share exchange agreements, bamboo Delaware,
emerged as the parent company of bamboo Canada and Jutvision Corporation was
merged with bamboo Canada. Prior to the reorganization, bamboo did not have any
operations, assets or liabilities.
Under the terms of the reorganization, there was no change in ownership and,
therefore, Jutvision Corporation, has been treated as a predecessor business and
its results presented as the historic results of the Company. The predecessor
business's financial information reflected herein includes the results of
operations and cash flows for the period ended December 31, 1998 and the balance
sheets as of December 31, 1998.
On April 23, 1999, Jutvision Canada, Inc. changed its name to bamboo.com Canada,
Inc. and Jutvision Corporation changed its name to bamboo.
BAMBOO SHARE EXCHANGE AGREEMENTS. Each Board of Directors approved a
reorganization for Jutvision Corporation, bamboo Canada and bamboo Delaware
effective January 1, 1999 through the following share exchange arrangements:
(a) EXCHANGE OF COMMON STOCK. The common stockholders of Jutvision Corporation
agreed to exchange the outstanding 7,421,536 common shares on a one-for-one
basis for Series B convertible preferred shares of bamboo Canada. In addition,
holders of the outstanding common stock of Jutvision Corporation also agreed to
purchase on a pro-rata basis 7,421,536 Class B common shares of bamboo Delaware
on a one-for-one basis for $0.0001 per share.
Under the charters of the respective companies and under a Conversion and
Pairing Agreement, between bamboo Delaware and bamboo Canada, the holders of
the Series B convertible preferred stock of bamboo Canada may exchange their
shares at any time on a one-for-one basis for common stock of bamboo Delaware,
and the shares of the Series B will be redeemed at par value of $0.0001 per
share. Common stock and Class B common stock of bamboo Delaware have identical
rights and privileges with regard to voting. The Series B convertible preferred
stock has voting privileges only where a separate class vote is required by law.
The Series B convertible preferred stock may not be transferred without either a
two-thirds vote of the existing common stockholders of bamboo Canada or approval
of the Board of Directors of bamboo Canada. The Series B convertible preferred
stock of bamboo Canada automatically converted into common stock of bamboo
Delaware if:
- - the net proceeds of an initial public offering of bamboo Delaware
common stock exceeds $15,000,000; or,
- - there is written election by not less than two-thirds majority of the
Series B holders; or
- - there is a liquidation, dissolution or winding-up of bamboo Canada.
One June 7, 1999, bamboo Canada amended its articles of incorporation and the
Conversion and Pairing Agreement to reflect the creation of Series C convertible
preferred shares ("Series C shares"). Effective June 11, 1999, the outstanding
Series B convertible preferred shares were converted to Series C convertible
preferred shares. The Series C shares have substantially all of the same rights
and preferences as the Series B convertible preferred shares, except that the
Series C shares do not automatically convert in the event that the parent
company, bamboo.com, completes an initial public offering of its stock. Under
the amended conversion and pairing agreement, the Series C shares are
exchangeable on a one for one basis for common stock of the parent company,
bamboo.com, and the shares of the Series C will be redeemed at par value of
$0.0001 per share.
F-23
56
Due to the terms of the Conversion and Pairing Agreement, the equity interest of
the Series B convertible preferred shareholders of bamboo Canada is inseparable
from and substantively represents an equivalent equity interest in bamboo
Delaware. Accordingly, these shares are presented as equity in the parent
company in the consolidated financial statements.
(b) EXCHANGE OF PREFERRED STOCK. In connection with the reorganization, holders
of the 231,250 outstanding Series A convertible preferred shares of Jutvision
Corporation agreed to exchange their shares on a one-for-one basis for Series A
convertible preferred stock of bamboo Delaware.
On December 23,1998, 500,000 shares of the undesignated preferred stock in
bamboo Delaware were designated as Series A convertible preferred stock, having
the same rights and characteristics as the Series A convertible preferred shares
of Jutvision Corporation.
18. QUARTERLY INFORMATION (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
QUARTER ENDED
---------------------------------------------------------------------------------
TOTAL MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----- -------- ------- ------------ -----------
Fiscal Year 2000:
Net sales $53,673 $8,283 $15,489 $17,218 $12,683
Gross profit $25,767 $3,517 $7,471 $9,078 $5,701
Net loss $(346,595) $(36,890) $(47,934) $(37,712) $(224,059)
Net loss per share, basic and diluted (1) $ (6.16) $(0.79) $(0.84) $(0.62) $(3.66)
Fiscal Year 1999:
Net sales $12,523 $1,318 $2,224 $3,663 $5,318
Gross profit $5,261 $657 $949 $1,453 $2,202
Net loss $(77,603) $(9,731) $(16,298) $(28,181) $(23,393)
Net loss per share, basic and diluted (1) $(3.01) $(1.15) $(1.17) $(1.08) $(0.52)
(1) The sum of the quarterly earnings per share amounts may differ from annual
earnings per share because of the differences in the weighted average number of
common shares and dilutive potential shares used in the quarterly and annual
computations.
19. SUBSEQUENT EVENTS
On January 12, 2001, a subsidiary of Homestore.com purchased certain assets from
the Company pursuant to the terms of an acquisition agreement dated January 12,
2001. Under the terms of the acquisition agreement, the subsidiary of
Homestore.com purchased certain computer,s furniture, fixtures and equipment
with a recorded book value of approximately $255,000. The Subsidiary of
Homestore.com also assumed certain obligations for undelivered tours under
certain sales contracts with residential real estate brokers and agents. The
accounts receivable and deferred revenue recorded by iPIX associated with such
tours is still being finalized but is within a range of $7.0 million to
$7.5 million. We used these assets in our operations involving providing
virtual tours of residential real estate properties. As part of the
acquisition, Homestore.com's subsidiary hired certain sales force and customer
service personnel. The purchase price for these assets was $12 million in cash
of which $155,000 was paid directly to a lessor for certain capital lease
obligations, $7,454,000 was deposited into control accounts for deferred
revenue obligations and the remainder paid to the company. We also granted
Homestore.com's subsidiary an exclusive domestic license of certain of IPIX's
virtual tour technology for the residential real estate market. The gain on the
sale of these assets will be recorded as an extraordinary gain in the first
quarter of 2001.
F-24