UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission File No. 000-26363
Internet Pictures Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2213841
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3160 Crow Canyon Road
San Ramon, California 94583
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (925) 242-4002
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 [ ]
6,798,418 shares of $0.001 par value common stock outstanding as of July 15,
2002
Page 1 of 28
INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PART I--FINANCIAL INFORMATION................................................................................3
Item 1. Condensed Consolidated Financial Statements...................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................24
PART II -- OTHER INFORMATION................................................................................25
Item 1. Legal Proceedings............................................................................25
Item 2. Changes In Securities And Use Of Proceeds....................................................26
Item 3. Defaults Upon Senior Securities..............................................................26
Item 4. Submission Of Matters To A Vote Of Security Holders..........................................26
Item 5. Other Information........................................................................... 27
Item 6. Exhibits And Reports On Form 8-K.............................................................27
Signatures..................................................................................................27
Exhibit Index...............................................................................................28
2
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2002
----------- ------------
(1) (unaudited)
(In thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents....................................................... $ 11,103 $ 4,659
Restricted cash ................................................................ 2,298 2,513
Short term investments ......................................................... -- 1,400
Accounts receivable, net ....................................................... 921 1,555
Inventory, net ................................................................. 219 104
Prepaid expenses and other current assets ...................................... 881 864
----------- -----------
Total current assets .................................................... 15,422 11,095
Property and equipment, net .................................................... 4,614 6,200
Other long term assets ......................................................... -- 165
Goodwill ....................................................................... 3,042 3,042
----------- -----------
Total assets ............................................................ $ 23,078 $ 20,502
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable ............................................................... $ 1,500 $ 1,211
Accrued liabilities ............................................................ 7,557 6,783
Deferred revenue ............................................................... 1,592 490
Current portion of obligations under capital leases ............................ 1,267 2,342
----------- -----------
Total current liabilities ............................................... 11,916 10,826
----------- -----------
Obligations under capital leases, net of current portion ....................... 1,277 1,841
----------- -----------
Other long term liabilities..................................................... 1,115 595
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value: ............................................. 1 1
Authorized: 5,001,100 at December 31, 2001 and June 30, 2002 (unaudited)
Issued and outstanding: 1,115,080 at December 31, 2001 and
June 30, 2002(unaudited)
Class B common stock, $0.0001 par value: ....................................... -- --
Authorized: 742,154 at December 31, 2001 and June 30, 2002 (unaudited)
Issued and outstanding: 179,480 at December 31, 2001 and
June 30, 2002(unaudited)
Common stock, $0.001 par value: ................................................ 66 66
Authorized: 150,000,000 at December 31, 2001 and 50,000,000 at June 30, 2002
(unaudited)
Issued and outstanding: 6,568,337 at December 31, 2001 and
6,618,938 at June 30, 2002 (unaudited)
Additional paid-in capital ..................................................... 513,467 513,922
Note receivable from stockholder ............................................... (179) --
Unearned stock-based compensation .............................................. (142) (81)
Accumulated deficit ............................................................ (503,974) (506,178)
Accumulated other comprehensive loss............................................ (469) (490)
----------- -----------
Total stockholders' equity............................................... 8,770 7,240
----------- -----------
Total liabilities and stockholders' equity............................... $ 23,078 $ 20,502
=========== ===========
(1) The December 31, 2001 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements.
3
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
In thousands, except per share data 2001 2002 2001 2002
------- ------- ------- -------
(unaudited) (unaudited)
Revenues:
Transaction services....................................... $3,761 $3,802 $5,652 $7,377
Immersive solutions........................................ 2,046 1,959 4,763 3,178
Full service real estate tours............................. 2,157 -- 7,071 --
-------- ------- -------- -------
Total revenues............................................. 7,964 5,761 17,486 10,555
-------- ------- -------- -------
Cost of revenues:
Transaction services....................................... 1,504 1,831 3,149 3,500
Immersive solutions........................................ 915 355 1,666 811
Full service real estate tours............................. 1,018 -- 3,456
- --
-------- ------- -------- -------
Total cost of revenues..................................... 3,437 2,186 8,271 4,311
-------- ------- -------- -------
Gross profit............................................... 4,527 3,575 9,215 6,244
-------- ------- -------- -------
Operating expenses:
Sales and marketing........................................ 5,848 2,153 16,284 4,193
Research and development................................... 1,766 1,230 4,526 2,511
General and administrative................................. 7,696 893 11,633 1,797
Goodwill amortization...................................... 608 -- 1,216 --
Restructuring and impairment............................... 7,193 -- 10,193 --
Loss on disposal of assets................................. -- -- 1,769 --
-------- ------- -------- -------
Total operating expenses................................... 23,111 4,276 45,621 8,501
-------- ------- -------- -------
Loss from operations....................................... (18,584) (701) (36,406) (2,257)
Other income(expense):
Interest expense........................................... (938) (14) (1,005) (31)
Interest income............................................ 61 25 174 80
Other...................................................... (154) (1) (387) 4
-------- ------- -------- -------
Loss before extraordinary gain............................. (19,615) (691) (37,624) (2,204)
Extraordinary gain......................................... -- -- 901 --
-------- ------- -------- -------
Net loss................................................... $(19,615) $ (691) $(36,723) $(2,204)
======== ======= ======== =======
Basic and diluted net loss per common share:
Loss before extraordinary gain............................. $ (3.00) $ (0.10) $ (5.83) $ (0.32)
Extraordinary gain......................................... -- -- 0.14 --
-------- ------- -------- -------
Net loss per common share.................................. $ (3.00) $ (0.10) $ (5.69) $ (0.32)
======== ======= ======== =======
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30,
--------------------
2001 2002
-------- --------
In thousands (unaudited)
Cash flows from operating activities:
Net loss.................................................................. $(36,723) $(2,204)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................................. 3,146 1,496
Provision for doubtful accounts receivable................................ 1,827 (100)
Provision for inventory obsolescence...................................... 201 --
Loss on disposal of assets................................................ 1,769 --
Accretion of available-for-sale securities................................ (5) --
Interest charge for amortization of discount on convertible debt.......... 805 --
Non-cash compensation expense............................................. 6,161 91
Impairment loss........................................................... 1,122 --
Extraordinary gain........................................................ (901) --
Changes in operating assets and liabilities:
Accounts receivable.................................................... 507 (534)
Inventory.............................................................. 499 114
Prepaid expenses and other current assets.............................. (990) 18
Other long term assets................................................. 1,019 (165)
Accounts payable....................................................... (210) (289)
Accrued expenses....................................................... 1,779 (1,199)
Deferred revenue....................................................... (545) (1,102)
-------- -------
Net cash used in operating activities............................... (20,539) (3,874)
-------- -------
Cash flows from investing activities:
Purchases of equipment and furniture...................................... (154) (3,174)
Purchase of short term investments........................................ -- (1,400)
Proceeds from sale of assets.............................................. 8,577 --
Maturities of securities available-for-sale............................... 6,000 --
-------- -------
Net cash provided by (used in) investing activities................. 14,423 (4,574)
-------- -------
Cash flow from financing activities:
Proceeds from obligations under capital lease............................. -- 2,494
Repayments of capital lease obligation and notes payable.................. (849) (763)
Net proceeds from convertible promissory note and warrants................ 9,277 --
Proceeds from issuance of common stock.................................... 25 115
Distribution to stockholders.............................................. (839) --
Proceeds from notes receivable from stockholders.......................... -- 179
-------- -------
Net cash provided by financing activities........................... 7,614 2,025
-------- -------
Effect of exchange rate changes on cash................................... (1,200) (21)
-------- -------
Net increase (decrease) in cash and cash equivalents...................... 298 (6,444)
Cash and cash equivalents, beginning of period............................ 5,322 11,103
-------- -------
Cash and cash equivalents, end of period.................................. $ 5,620 $ 4,659
======== =======
No income tax payments were made in either period presented. Interest paid for
the six months ending June 30, 2001 and 2002 was $119 and $55, respectively.
See accompanying notes to the unaudited condensed consolidated financial
statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in
thousands)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements include
the accounts of Internet Pictures Corporation and its wholly-owned subsidiaries,
Interactive Pictures Corporation, Interactive Pictures UK Limited, Internet
Pictures (Canada), Inc. and PW Technology, Inc. The consolidation of these
entities will collectively be referred to as the Company or iPIX. All
significant intercompany balances and transactions have been eliminated. We have
prepared these financial statements, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our audited financial statements as of and for the year ended
December 31, 2001. The information furnished reflects all adjustments which
management believes are necessary for a fair presentation of our financial
position as of June 30, 2002 and the results of our operations and our cash
flows for the three and six month periods ended June 30, 2001 and 2002. All such
adjustments are of a normal recurring nature. The results of operations for the
three and six month periods ended June 30, 2001 and 2002 are not necessarily
indicative of the results to be expected for the respective full years.
2. RECLASSIFICATIONS
Certain amounts reported in the previous period have been reclassified to
conform to the current period presentation. The reclassifications did not affect
the previously reported total revenue, operating loss, net loss, total current
assets, total assets or stockholders' equity.
3. CASH EQUIVALENTS, RESTRICTED CASH AND SHORT TERM INVESTMENTS
We consider all highly liquid debt instruments with a remaining maturity at date
of purchase of three months or less to be cash equivalents. Restricted cash
consists primarily of deposits related to certain accrued expenses. All other
liquid investments are classified as either short term or long term investments.
We determine the appropriate classification of investment securities at the time
of purchase and reevaluate such designation as of each balance sheet date. At
June 30, 2002, we had $1,400 of investments with a remaining maturity of three
to twelve months and accordingly classified as short term investments.
4. LOSS PER SHARE
We compute net loss per share in accordance with SFAS No.128, Earnings Per
Share. Under the provisions of SFAS No. 128, basic and diluted net loss per
share is computed by dividing the net loss for the period by the weighted
average number of shares of common stock outstanding during
6
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 conversion or
exercise of potentially dilutive convertible preferred stock, stock options and
warrants.
The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:
In thousands, except per share data
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
---- ---- ---- ----
(unaudited)
NUMERATOR:
Loss before extraordinary gain $(19,615) $(691) $(37,624) $(2,204)
DENOMINATOR:
Weighted average shares outstanding 6,535 6,792 6,455 6,785
LOSS PER SHARE BEFORE EXTRAORDINARY GAIN:
Basic and diluted $(3.00) $(0.10) $(5.83) $(0.32)
In accordance with SFAS No. 142, the results for the prior year periods have not
been restated. A reconciliation of reported net loss and net loss per common
share as if SFAS No. 142 had been in effect for 2001 is presented as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
In thousands, except per share 2001 2002 2001 2002
---- ---- ---- ----
(unaudited)
Net loss before extraordinary gain $(19,615) $ (691) $(37,624) $ (2,204)
Extraordinary gain - - 901 -
--------- ------- --------- ---------
Net loss (19,615) (691) (36,723) (2,204)
Goodwill amortization 608 - 1,216 -
--------- ------- --------- ---------
Adjusted net loss $(19,007) $ (691) $(35,507) $ (2,204)
========= ======= ========= =========
Basic and diluted net loss per common share:
Net loss before extraordinary gain $ (3.00) $ (0.10) $ (5.83) $ ( 0.32)
- - 0.14 -
--------- ------- --------- ---------
Net loss (3.00) (0.10) (5.69) (0.32)
Goodwill amortization 0.10 - 0.19 -
--------- ------- --------- ---------
Adjusted basic and diluted net loss per common share $ (2.90) $ (0.10) $ (5.50) $ (0.32)
========= ======= ========= =========
7
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 three month period ended June 30, 2002:
In thousands, except per share data
Shares Range of Exercise Prices
------ ------------------------
Stock options 336 $1.42 - $2.02
Convertible preferred stock 10,267
5. CAPITAL STOCK
Reverse Stock Split
On August 22, 2001 our shareholders approved a one-for-ten reverse stock split
of all of our outstanding $0.001 par value common stock and our $0.0001 par
value Class B common stock. No fractional shares of common stock were issued in
connection with the reverse stock split, and cash was issued in lieu of any
fractional shares. The reverse stock split was effective as of the close of
market on August 22, 2001, and our common stock began trading on a reverse split
basis on August 23, 2001. All share and per share data is presented to give
effect to the retroactive application of the reverse stock split. Preferred
Stock Effective March 26, 2002, each share of the Series B Preferred Stock is
convertible into approximately 9.2 shares of the our common stock and is
entitled to vote on matters submitted to holders of common stock on an
as-converted basis. At any time that the holders of the Series B Preferred Stock
hold more than 50% of our voting stock, a voluntary liquidation, dissolution or
winding up of the Company must be approved by at least five of the seven members
of our board of directors.
6. RESTRUCTURING AND IMPAIRMENT
During the first quarter of 2001, we recorded a restructuring charge of $1,878
consisting of expenses associated with a reduction in our workforce, lease
obligations for vacated offices and a $1,122 write down of abandoned office
equipment to its net realizable value.
During the second quarter of 2001, we recorded a restructuring charge of $7,193
consisting of expenses associated with a reduction in our workforce, lease
obligations for vacated offices and a write down of abandoned office equipment
to its net realizable value. Additional restructuring accruals were recorded
during 2001. As of June 30, 2002, $1,690 remained in these restructuring
accruals, primarily associated with abandoned lease obligations and long term
severance agreements.
Included in the second quarter 2001 restructuring is $1,300 related to a
severance liability for our former Chief Executive Officer, James M. Phillips.
At June 30, 2002, the unpaid liability is $500, which is to be paid in
installments ending in September of 2003. As further consideration for Mr.
Phillips' separation agreement, we
8
forgave a loan from the Company to Mr. Phillips and the related interest
aggregating $2,193, which is also included in the second quarter of 2001
restructuring expense.
7. DISPOSAL OF ASSETS
A subsidiary of Homestore.com 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 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 $12,000
in cash, of which $155 was paid directly to a lessor for certain capital lease
obligations, $7,454 was deposited into control accounts for deferred revenue
obligations and the remainder, $4,391, was paid to us. We also granted
Homestore.com's subsidiary an exclusive domestic license of certain of our
virtual tour technology for the residential real estate market.
In accordance with the January 12, 2001 purchase transaction, we agreed to
negotiate one remaining residential real estate contract with RETT f/k/a
National Reality Trust. Homestore.com's subsidiary, RETT and we settled on March
3, 2001 the remaining obligation of the contract for which we received $1,936.
We recorded an extraordinary gain of $901 from the cash received from the
January 12, 2001 agreement, resulting in the disposal of assets used to provide
tours of residential real estate properties that were related to the 2000
pooling of Interactive Pictures Corporation and bamboo.com.
The $1,769 loss on the 2001 sale of the remaining residential real estate
related assets that were unrelated to the pooling of Interactive Pictures
Corporation and bamboo.com was included in loss on the disposal of assets in the
accompanying statement of operations.
8. STOCK-BASED COMPENSATION
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, to the amortization of the fair
value of warrants and options issued to non-employees and to the amortization of
the fair value of restricted stock granted to employees. The related
compensation is amortized over the vesting period of the options or stock
grants. Expenses related to the warrants are amortized over the term of the
agreements to which they relate.
9
The following presents, for the periods indicated, the charges that have been
included in the following captions:
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
In thousands 2001 2002 2001 2002
------- ------- ------- -------
(unaudited)
Cost of revenues $ 15 $ -- $ 104 $ --
Sales and marketing 641 38 1,358 91
Research and development 251 -- 539 --
General and administrative 1,912 -- 2,035 --
------- ------- ------- -------
$2,819 $ 38 $4,037 $ 91
======= ======= ======= =======
9. COMMITMENTS AND CONTINGENCIES
On October 28, 1998, Minds-Eye-View, Inc. ("Minds-Eye") and Mr. Ford Oxaal
("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 court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court dismissed
the lawsuit on May 19, 1999. Although the lawsuit was dismissed, we proceeded
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.
On May 20, 1999, Oxaal filed a lawsuit against us and certain of our customers
in the same court alleging that our technology infringes upon a patent claim for
360 degree spherical visual technology held by him. 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 complaint
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.
On June 11, 2002, we reached an out of court settlement with Oxaal and
Minds-Eye. As a result of the settlement, each of the lawsuits and the
arbitration proceeding described above were dismissed and mutual releases have
been executed. Pursuant to the settlement agreement, neither party admitted
liability or any wrong doing. We were granted a non-exclusive license under
patents and pending patents conceived by Oxaal or in which Oxaal has an
interest. The license rights inure to the benefit of our customers with respect
to their purchases from us and also inure to the benefit of our business
partners with respect to their business relations with us. We included the cost
of the license in property and equipment on the accompanying balance sheet. We
do not believe that the cost of the license in the current period or the future,
will have a material effect on our financial condition, results of operations or
cash flows.
10
During the quarter ending September 30, 2002, we expect to receive approximately
$1,400 in cash from a previously disclosed favorable jury verdict against
Infinite Pictures that found the defendants liable for infringement of our
patents under the doctrine of equivalents and awarding us $1,000 in damages,
plus interest and court costs. We will record these proceeds as a one-time gain
in the quarter ending September 30, 2002. The defendants have filed for a writ
of certiorari with the United States Supreme Court in an effort to reverse the
lower court's findings in our favor. We believe the defendants' claims are
without merit, and we intend to vigorously defend against these claims. We
believe the ultimate resolution of the Supreme Court filings will not have a
material impact on our financial condition, results of operations or cash flows.
We are subject to claims in the ordinary course of business. We believe the
ultimate resolution of these matters will not have a material impact on our
financial condition, results of operations or cash flows.
Please reference Legal Proceedings in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 for disclosures regarding a case undergoing
discovery. If the plaintiffs in this case were to prevail in their action, our
financial condition, results of operations and cash flows could be materially
adversely affected.
10. SEGMENTS
We currently have two reportable segments. The accounting policies of the
segments are the same as those of the Company. Management evaluates the
performance of the segments and allocates resources to them based on evaluations
of the segment's gross profit. There are no inter-segment revenues. We do not
make allocations of corporate costs to the individual segments and do not
identify separate assets of the segments in making decisions regarding the
performance or the allocation of resources to them.
Information about the reported segments is as follows:
In thousands
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
------- ------- ------- ------
(unaudited)
Revenues:
Transaction services $ 3,761 $ 3,802 $ 5,652 $ 7,377
Immersive solutions 2,046 1,959 4,763 3,178
Full service real estate 2,157 -- 7,071 --
------- ------- ------- -------
Total . $ 7,964 $ 5,761 $17,486 $10,555
======= ======= ======= =======
Cost of revenues:
Transaction services $ 1,504 $ 1,831 $ 3,149 $ 3,500
Immersive solutions 915 355 1,666 811
Full service real estate 1,018 -- 3,456 --
------- ------- ------- -------
Total $ 3,437 $ 2,186 $ 8,271 $ 4,311
======= ======= ======= =======
In fiscal year 2001, we organized into two primary business units: Transaction
Services and Immersive Solutions. In addition, as part of the sale of assets to
Homestore.com during the first
11
quarter of 2001, we no longer directly sell full service virtual real estate
tours or iPIX keys to customers in the U.S. residential real estate market. We
have not generated full service virtual tour revenues since the quarter ended
September 30, 2001 and we expect to generate minimal future revenues from the
sale of full service virtual real estate tours in the U.S. residential real
estate markets. Full service real estate is presented as a segment in 2001.
Immersive solution revenues include $489 and $487 from the sale of camera kits
for the quarters ended June 30, 2002 and June 30, 2001, respectively, with a
cost of $240 and $315. Immersive solution revenues include $955 and $825 from
the sale of camera kits for the six months ended June 30, 2002 and June 30,
2001, respectively, with a cost of $583 and $565.
11. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"(FAS 142), effective January 1, 2002. Under FAS 142, goodwill
is no longer amortized, but reviewed for impairment annually, or more frequently
if certain indicators arise. Under the transitional requirements, we completed
an impairment test and no impairment loss resulted. See Note 4.
We also adopted FAS 144, effective January 1, 2002. In August 2001, the FASB
issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." FAS 144 replaces FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The FASB issued FAS 144 to
establish a single accounting model, based on the framework established in FAS
121, as FAS 121 did not address the accounting for a segment of a business
accounted for as a discontinued operation under APB 30, "Reporting The Results
of Operations -- Reporting The Effects of Disposal of a Segment of a Business
and Extraordinary Unusual and Infrequently Occurring Events and Transactions."
FAS 144 also resolves significant implementation issues related to FAS 121. We
determined that the adoption of FAS 144 did not have a material impact on our
reported results of operations, financial position or cash flows.
In February 2002, the EITF issued Topic Number D-103, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred," which is effective for financial statements beginning after December
31, 2001. Topic Number D-103 requires that reimbursements received for
out-of-pocket expenses incurred, generally, be characterized as revenue in the
statement of operations. We adopted Topic Number D-103 in the quarter ended
March 31, 2002. The adoption of Topic Number D-103 had no material effect on our
reported results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities'" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 will be effective
12
for exit or disposal activities that are initiated after December 31, 2002 and
early application is encouraged. We will adopt SFAS 146 during the first quarter
ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to a concentration of credit
risk consist of cash and cash equivalents, short term investments and accounts
receivable. Cash and cash equivalents and short term investments are deposited
with high quality financial institutions. Our accounts receivable are derived
from revenue earned from clients located in the U.S. and abroad. We perform
ongoing credit evaluations of our clients' financial condition and we do not
require collateral from our clients.
The following table summarizes the revenue from customers in excess of 10% of
total revenues:
Three months ended Six months ended
June 30, 2002 June 30, 2002
------------- -----------------
Customer A 23% 22%
Customer B 51% 53%
During the three months and six months ended June 30, 2001, there were no
customers which represented in excess of 10% of total revenues. At June 30,
2002, Customer A holds a warrant for 16,134 shares of our common stock. At June
30, 2002, Customer B represents 53% of accounts receivable and holds 100,000
shares of our Series B Preferred Stock and a warrant for 60,000 shares of our
common stock. All amounts due from Customer B as of June 30, 2002, were
collected during July 2002. Our principal agreements with Customer A and
Customer B, expire on September 30, 2002 and September 30, 2003, respectively.
These agreements are subject to extension, amendment and re-negotiation from
time to time.
13. CONVERTIBLE PROMISSORY NOTE AND WARRANTS
On May 14, 2001, we entered into a definitive agreement with Image Investor
Portfolio, a separate series of Memphis Angels, LLC ("Image") for an investment
by Image in the Company. Pursuant to the terms of a securities purchase
agreement with Image dated as of May 14, 2001, Image purchased our $10,000
convertible senior secured note (the "Note") and received Tranche A and Tranche
B warrants to purchase up to $20,000 of our Series B Preferred Stock.
The warrants were issued in conjunction with the convertible promissory note,
and accordingly, based on APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants" and EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features", the entire proceeds from the
convertible promissory note, $10,000, were allocated to the warrants and the
beneficial conversion feature based on a calculation using the Black-Scholes
model. During the second quarter of 2001, we recorded $805 as interest expense
related to the accretion of the convertible promissory note to its face value
over the fifteen month period of the
13
Note. During the third quarter of 2001, the $10,000 Note and the Tranche B
warrants were converted to preferred stock and accordingly we recorded $9,195 as
interest expense related to the accretion of the convertible promissory note to
its face value.
At June 30, 2002, there are two Tranche A warrants ("Warrant 1" and "Warrant
2"), issued to Paradigm Capital Partners and Memphis Angels, LLC, which are
outstanding. Warrant 1 entitles the holder to purchase 150,000 shares of Series
B Preferred Stock at $20 per share and is exercisable at any time before the
expiration date of May 14, 2006. Warrant 2 entitles the holder to purchase
100,000 shares of Series B Preferred Stock at $40 per share and is exercisable
at any time before the expiration date of May 14, 2006.
14. PURCHASE AGREEMENT-LEASEBACK
On May 31, 2002, we sold certain assets totaling $2,494 to a stockholder and
agreed to leaseback those assets over a three-year period from that stockholder.
The net book value and the fair value of the assets equaled the sale price,
resulting in no gain or loss on the sale of the assets. The monthly lease
payments are $94 in years one and two and $21 in year three. The lease is
accounted for as a capital lease in accordance with SFAS No. 13, "Accounting for
Leases."
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in our Annual
Report filed 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.
OVERVIEW
In 2001, we restructured the Company around our higher gross margin businesses.
The result is that we are focused on two businesses: (1) providing outsourced
imaging services to facilitate online transactions in the auction, classifieds
and real estate markets and (2) providing immersive imaging solutions for the
real estate, security and observation and visual documentation markets. Our
products and services include the capture, processing, management and
distribution of images and related data. Revenues from online auctions and
classifieds are primarily transaction based. Our transaction services involve
designing, building and managing an image management infrastructure as well as
leasing spaces from state-of-the-art co-location facilities with access to
telecommunications bandwidth. Since these services are capital intensive, a high
percentage of the costs associated with transaction services are fixed and
accordingly the margins from transaction services are highly dependent upon
asset utilization.
Our immersive technology primarily generates revenues in two ways: licenses of
software and re-sale of camera equipment. We utilize iPIX keys to license our
still immersive technology to capture and save a single immersive image. We also
offer time-based seat or user licenses which
14
permit an unlimited number of immersive images to be captured and saved within a
specific time period, usually a year. Our video immersive technology, which may
be off-line or online, may be purchased on a per-unit basis or a per-year
license. We sell our immersive products and services primarily into the real
estate, security and observation and visual documentation markets. The cost of
sales for our licenses is very low. The cost of sales for the sale of camera
equipment can be 50% to 75% of related revenues.
We also provide professional services to customers that request specific
customizations or integrations of our products and services. Providing
professional services is labor intensive, and our cost of sales for professional
service tends to be 50% to 60% of revenues.
Our real estate business has changed over the past few years. In 2000, our real
estate focused revenues were generated from four primary sources: full service
virtual tours; image management services; camera kits and immersive keys; and
professional services. We offered full service virtual tours through January
2001. A full service tour includes the capture, processing, management and
distribution of real estate images and related data for one price. As part of
the sale of assets to a subsidiary of Homestore.com in January 2001, we no
longer directly sell full service virtual tours to customers in the U.S.
residential real estate market.
Throughout 2001, our real estate focused revenues were generated from three
primary sources: image management services; camera kits and immersive keys; and
other services. Our image management products and services were used in the real
estate industry primarily to associate online still images with for-sale
listings. This service is offered to customers under license agreements,
transaction based agreements and revenue share agreements for real estate
properties around the world. Through January 12, 2002, we provided Homestore.com
with processing, hosting and distribution services and received transaction
fees.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60 issued by the Securities and Exchange
Commission ("SEC"), requires all registrants to discuss critical accounting
policies or methods used in the preparation of the financial statements. The
notes to the consolidated financial statements included in our Annual Report
filed on Form 10-K include a summary of the significant accounting policies and
methods used in the preparation of our consolidated financial statements.
Further, we have made a number of estimates and assumptions that affect reported
amounts of assets, liabilities, revenues and expenses and actual results may
differ from those estimates. Those areas that require the greatest degree of
management judgment include adequacy of the allowance for doubtful accounts,
reserves for obsolete inventory, valuations of intangible assets and the
estimated costs for excess facilities related to lease terminations and
non-cancelable lease costs utilized in satisfaction of outstanding lease
obligations.
We believe that full consideration has been given to all relevant circumstances
that we may be subject to, and our financial statements accurately reflect
management's best estimate of the results of operations, financial position and
cash flows for the periods presented.
We believe the following represent our critical accounting policies:
Revenue Recognition
We recognize revenue in accordance with SOP 97-2, "Software Revenue
Recognition," and SAB
15
No. 101, "Revenue Recognition in Financial Statements."
Transaction hosting revenues are recognized as transactions are performed
provided there was persuasive evidence of an arrangement, the fee was fixed and
determinable and collection of the resulting receivable was probable.
Initial license fees are recognized when a contract exists, the fee is fixed and
determinable, software delivery has occurred and collection of the receivable is
deemed probable. If there are continuing obligations, then we recognize revenue
ratably over the life of the contract.
Product revenue is recognized upon shipment or delivery provided there are no
uncertainties surrounding product acceptance or significant vendor obligations,
the fees are fixed and determinable and collection is considered probable.
Royalties derived from desktop imaging products are 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.
Revenues from the sale of our virtual tour products are recognized upon
distribution to the Website designated by the customer.
Revenues generated from professional services are recognized as the related
services are performed. When such professional services are combined with
on-going transaction services or are deemed to be essential to the functionality
of the delivered software product, revenue from the entire arrangement is
recognized while the transaction services are performed, on a percentage of
completion method or not until the contract is completed in accordance with SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and ARB No. 45, "Long-Term Construction-Type
Contracts."
Allowances for Doubtful Accounts
Significant management judgments and estimates must be made and used in
connection with establishing the doubtful account allowances in any accounting
period. Management specifically analyzes accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the
amount and timing of expense recorded if management had different judgment or
utilized different estimates.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.
16
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
------ ------ ------ ------
(unaudited)
Revenues:
Transaction services 47.2% 66.0% 32.3% 69.9%
Immersive solutions 25.7 34.0 27.2 30.1
Full service real estate tours 27.1 -- 40.4 --
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenues:
Transaction services 18.9 31.8 18.0 30.1
Immersive solutions 11.5 6.2 9.5 7.7
Full service real estate tours 12.8 -- 19.8 --
------ ------ ------ ------
Total cost of revenues 43.2 37.9 47.3 40.8
------ ------ ------ ------
Gross profit 56.8 62.1 52.7 59.2
------ ------ ------ ------
Operating expenses:
Sales and marketing 73.4 37.4 93.1 39.7
Research and development 22.2 21.4 25.9 23.8
General and administrative 96.6 15.5 66.5 17.0
Goodwill amortization 7.6 -- 7.0 --
Restructuring and impairment 90.3 -- 58.3 --
Loss on disposal of assets -- -- 10.1 --
------ ------ ------ ------
Total operating expenses 290.1 74.3 260.9 80.5
------ ------ ------ ------
Loss from operations (233.3) (12.2) (208.2) (21.4)
Other income(expense), net (12.9) 0.2 (7.0) 0.5
------ ------ ------ ------
Loss before extraordinary gain (246.2) (12.0) (215.2) (20.9)
Extraordinary gain -- -- (5.2) --
------ ------ ------ ------
Net loss (246.2)% (12.0)% (210.0)% (20.9)%
====== ====== ====== ======
17
Quarter Ended June 30, 2002 Compared to the Quarter Ended June 30, 2001
Revenues. Total revenues decreased to $5.8 million in the quarter ended June 30,
2002, compared to $8.0 million in quarter ended June 30, 2001, a decrease of
$2.2 million or 28%. This decrease was due to the elimination of full service
virtual tour revenues, which were $2.2 million during the quarter ended June 30,
2001 and zero during the quarter ended June 20, 2002.
As part of the sale of assets to Homestore.com during the first quarter of 2001,
we no longer directly sell full service virtual tours or iPIX keys to customers
in the U.S. residential real estate market. Instead, through January 12, 2002,
we provided Homstore.com certain processing, hosting and distribution services
and received transaction fees and royalties. Throughout 2001, other than full
service virtual tours, our real estate focused revenues were generated from
three primary sources: image management services; camera kits and immersive
keys; and other services.
For the quarter ended June 30, 2001, revenues included $5.8 million from the
sale of our technology products and services and $2.2 million related to full
service virtual real estate tours. We did not generate full service virtual tour
revenues after September 30, 2001 and expect to generate minimal future revenues
from the sale of full service virtual real estate tours in the U.S. residential
markets.
Cost of Revenues. Cost of revenues consists of our direct expenses associated
with the processing, hosting and distribution of digital content and the costs
of the digital camera and related components included in an iPIX kit. Cost of
revenues decreased to $2.2 million in the quarter ended June 30, 2002, compared
to $3.4 million in the quarter ended June 30, 2001, a decrease of $1.2 million
or 36%. Cost of revenues as a percentage of total revenues decreased to 38% in
the quarter ended June 30, 2002 from 43% in the quarter ended June 30, 2001.
$1.0 million of the decrease was the result of our exit from the full service
virtual tour real estate business and $0.5 million of the decrease was related
to a change in the product mix of immersive services, software and hardware,
offset partially by an increase of $0.3 million in the cost of providing
transaction services.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales and business development personnel. Sales and marketing
expenses also include commissions and related benefits for sales personnel and
consultants, traditional advertising and promotional expenses. Sales and
marketing expenses decreased to $2.2 million in the quarter ended June 30, 2002,
compared to $5.8 million in the quarter ended June 30, 2001, a decrease of $3.6
million or 63%. $2.6 million of this decrease was due primarily to our decision
to sell more of our products and services through third parties and become less
reliant upon a worldwide direct sales force. As a result, we significantly
decreased our sales force and eliminated our field operations personnel. We also
eliminated $0.4 million of costs relating to sponsorship fees, advertising and
branding expenses. In addition, stock-based expenses recorded to sales and
marketing expense, decreased from $0.6 million in the quarter ended June 30,
2001, to $38 thousand in the quarter ended June 30, 2002.
18
Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media
infrastructure and immersive imaging technology. Research and development
expenses decreased to $1.2 million in the quarter ended June 30, 2002, compared
to $1.8 million in the quarter ended June 30, 2001, a decrease of $0.6 million
or 30%. This decrease was due primarily to decreased personnel and related costs
as a result of our reduction in work force and our exit from the full service
virtual tour real estate business.
General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services, bad debt expenses and other costs
associated with being a public company. General and administrative expenses
decreased to $0.9 million in the quarter ended June 30, 2002, compared to $7.7
million in the quarter ended June 30, 2001, a decrease of $6.8 million or 88%.
This decrease was due primarily to decreased bad debt expense ($3.1 million), a
decrease in personnel and related costs ($1.1 million), reduced fees related to
professional services ($0.6 million) and our exit from the full service virtual
tour real estate business ($0.1 million). In addition, stock-based expenses
recorded to general and administrative expense, decreased from $1.9 million in
the quarter ended June 30, 2001, to zero in the quarter ended June 30, 2002.
Goodwill Amortization. Goodwill amortization in 2001 was the result of goodwill
associated with corporate acquisitions during 2000. Amortization of goodwill was
$0.6 million in the quarter ended June 30, 2001. We adopted FAS 142 as of
January 1, 2002 and as a result we no longer amortize goodwill.
Restructuring and Impairment. There were no restructuring and impairment charges
in the quarter ended June 30, 2002, compared to $7.2 million in the quarter
ended June 30, 2001. Restructuring charges were primarily associated with
reductions of our workforce, outstanding obligations under non-productive leases
resulting from the consolidation of certain offices and write-offs of abandoned
computers, office furniture and equipment. Included in the restructuring is $1.3
million related to a severance liability with our former Chief Executive
Officer, James M. Phillips. At June 30, 2002 the unpaid liability is $0.5
million, which is to be paid in installments ending in September of 2003. As
further consideration for Mr. Phillips' separation agreement, in 2001 we forgave
a loan from the Company to Mr. Phillips and the related interest aggregating
$2.2 million.
Interest Expense. Interest expense was $14 thousand in the quarter ended June
30, 2002, compared to interest expense of $0.9 million in the quarter ended June
30, 2001. This decrease is primarily related to the 2001 non-cash expense of
$0.8 million related to the accretion of the promissory note issued to Image to
its face value and the weighted average amount of debt in each period. During
May 2001, we borrowed $10 million which was repaid in full in September 2001 as
part of our sale of preferred stock.
Interest Income. Interest income consists primarily of interest earned on cash
and investments. Interest income decreased to $25 thousand in the quarter ended
June 30, 2002, compared to $61 thousand in the quarter ended June 30, 2001. The
decrease is primarily due to lower average cash and investment balances.
19
Other Income (Expense). Other expense decreased to $1 thousand in the quarter
ended June 30, 2002, compared to $154 thousand in the quarter ended June 30,
2001. The loss in the quarter ended June 30, 2001 is primarily due to realized
losses on investments sold during the quarter.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenues. Total revenues decreased to $10.6 million in the six months ended June
30, 2002, compared to $17.5 million in the six months ended June 30, 2001, a
decrease of $6.9 million or 40%. This decrease was due to a decrease of $7.1
million in sales of full service virtual tours. For the six months ended June
30, 2001, revenues of $17.5 million included $10.4 million from the sale of our
technology products and services and $7.1 million related to full service
virtual real estate tours. We did not generate full service virtual tour
revenues after September 30, 2001 and expect to generate minimal future revenues
from the sale of full service virtual real estate tours in the U.S. residential
markets. Transaction services revenues increased 30% or $1.7 million during the
first half of 2002 relative to the first half of 2001 and represent 70% of total
revenues for the six months ended June 30, 2002, primarily as a result of
increased services related to on-line auctions. Immersive solutions revenues
decreased 33% or $1.6 million during the first half of 2002 relative to the
first half of 2001, primarily as a result of a decreased focus on certain lower
operating margin sales opportunities.
Cost of Revenues. Cost of revenues decreased to $4.3 million in the first half
of 2002, compared to $8.3 million in the first half of 2001, a decrease of $4.0
million or 48%. Cost of revenues as a percentage of total revenues decreased to
41% in the six months ended June 30, 2002 from 47% in the six months ended June
30, 2001. $3.5 million of the decrease was the result of our exit from the full
service virtual tour real estate business and $0.8 million of the decrease was
related to a change in the product mix of immersive software and hardware sales,
offset partially by an increase of $0.3 million in the cost of providing
transaction services.
Sales and Marketing. Sales and marketing expenses decreased to $4.2 million in
the six months ended June 30, 2002, compared to $16.3 million in the six months
ended June 30, 2001, a decrease of $12.1 million, or 74%. $8.8 million of this
decrease was due primarily to our decision to sell more of our products and
services through third parties and become less reliant upon a worldwide direct
sales force. As a result, we significantly decreased our sales force and
eliminated our field operations personnel. We also eliminated $2.0 million of
costs relating to sponsorship fees, advertising and branding expenses. In
addition, stock-based expenses recorded to sales and marketing expense,
decreased from $1.4 million in the six months ended June 30, 2001, to $91
thousand in the six months ended June 30, 2002.
Research and Development. Research and development expenses decreased to $2.5
million in the first half of 2002, compared to $4.5 million in the first half of
2001, a decrease of $2.0 million, or 45%. This decrease was due primarily to
decreased personnel and related costs as a result of our reduction in work force
and the exit of the full service real estate business.
General and Administrative. General and administrative expenses decreased to
$1.8 million in the six months ended June 30, 2002, compared to $11.6 million in
the six months ended June 30,
20
2001, a decrease of $9.8 million or 85%. This decrease was due primarily to
decreased bad debt expense ($3.2 million), a decrease in personnel and related
costs ($2.8 million), reduced fees paid for professional services ($1.4 million)
and our exit from the full service virtual tour real estate business ($0.4
million). In addition, stock-based expenses recorded to general and
administrative expense, decreased from $2.0 million in the six months ended June
30, 2001, to zero in the six months ended June 30, 2002.
Goodwill Amortization. Goodwill amortization in 2001 was the result of goodwill
associated with corporate acquisitions during 2000. Amortization of goodwill was
$1.2 million in the six months ended June 30, 2001. We adopted FAS 142 as of
January 1, 2002 and as a result we no longer amortize goodwill.
Extraordinary Gain. The extraordinary gain during the first six months of 2001
of $0.9 million resulted from the sale of assets used to provide residential
real estate virtual tours that were related to the 2000 pooling of Interactive
Pictures Corporation and bamboo.com. The sale transaction took place within a
year of the 2000 pooling transaction.
Loss on Disposal of Assets. The loss during the first six months of 2001 on the
disposal of assets of $1.8 million is primarily the result of the sale of assets
used to provide residential real estate virtual tours that consisted of the
remaining residential real estate assets that were unrelated to the 2000 pooling
of Interactive Pictures Corporation and bamboo.com.
Restructuring and Impairment. During the first half of 2001, we recorded a
restructuring charge of $9.1 million consisting of expenses associated with a
reduction in our workforce, lease obligations for vacated office and other
contractual obligations. In addition to the restructuring, we wrote down
abandoned office equipment of $1.1 million to its net realizable value.
Included in the restructuring is $1.3 million related to a severance liability
with our former Chief Executive Officer, James M. Phillips. At June 30, 2002 the
unpaid liability is $0.5 million, which is to be paid in installments ending in
September of 2003. As further consideration for Mr. Phillips' separation
agreement, in 2001 we forgave a loan from the Company to Mr. Phillips and the
related interest aggregating $2.2 million.
Interest Expense. Interest expense decreased to $31 thousand in the six months
ended June 30, 2002, compared to $1.0 million in the six months ended June 30,
2001. In the first half of 2001, we recorded a non-cash interest expense of $0.8
million related to the accretion of the promissory note to its face value.
Interest Income. Interest income consists primarily of interest earned on cash
and investments. Interest income decreased to $80 thousand in the six months
ended June 30, 2002, compared to $174 thousand in the six months ended June 30,
2001. The decrease is primarily due to a lower cash and investment balances.
Other Income (Expense). Other income increased to $4 thousand in the six months
ended June 30, 2002, compared to other expense of $387 thousand in the six
months ended June 30, 2001. The expense in the quarter ended June 30, 2001 is
primarily due to realized losses on investments sold during the period.
21
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture, a
convertible promissory note and warrant and option exercises. At June 30, 2002,
we had $8.6 million of cash, restricted cash and short term investments.
Summary Consolidated Statement of Cash Flows
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
------- ------- ------- -------
In thousands (unaudited)
Net cash used in operating activities......................... $(9,123) $ (754) $(20,539) $(3,874)
Net cash provided by (used in)investing activities............ 32 (4,052) 14,423 (4,574)
Net cash provided by financing activities..................... 8,013 2,037 7,614 2,025
Effect of exchange rate changes on cash....................... (20) 28 (1,200) (21)
------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents.......... (1,098) (2,741) 298 (6,444)
Cash and cash equivalents, beginning of period................ 6,718 7,400 5,322 11,103
------- ------- -------- -------
Cash and cash equivalents, end of period...................... $ 5,620 $ 4,659 $ 5,620 $ 4,659
======= ======= ======== =======
Net cash used in operating activities was $3.9 million for the six months ended
June 30, 2002 and $20.5 million for the six months ended June 30, 2001. Net cash
used for operating activities in each of these periods is primarily a result of
net losses. Our net loss for the six months ended June 30, 2002 and 2001
included non-cash charges for $1.5 million and $3.1 million, respectively, of
depreciation and amortization and $0.1 million and $6.2 million, respectively,
of non-cash stock based and other compensation. Our net losses for the six
months ended June 30, 2002 and 2001 also included non-cash amortization of
deferred revenues of $1.1 million and $0.5 million, respectively. Net of these
non-cash amounts, our net losses reduced cash by $1.7 million in the six months
ended June 30, 2002, an improvement from $27.9 million in cash used in the six
months ended June 30, 2001.
Also included in net cash used in operating activities for the six months ended
June 30, 2002, were the following:
- - an increase in receivables due primarily to increased services to
on-line auction clients ($0.6 million);
- - a decrease in accounts payable primarily related to payments of
year-end accruals from 2001 ($0.3 million); and
- - a decrease in accrued expenses primarily related to payments of
restructuring accruals from 2001 and payments of prior obligations
under extended terms ($1.2 million).
Net cash used in operating activities was $0.8 million for the quarter ended
June 30, 2002. Net cash used for operating activities in the quarter is
primarily a result of the $0.7 million in net losses. Our net loss for the
quarter ended June 30, 2002 included non-cash charges for $0.8 million of
depreciation partially offset by non-cash deferred revenues of $0.5 million. Net
of these non-cash amounts, our net losses reduced cash by $0.5 million in the
quarter ended June 30, 2002, a sequential improvement from $1.3 million used in
the quarter ended March 31, 2002.
Net cash provided by (used in) investment activities was ($4.6) million for the
six months ended June 30, 2002 and $14.4 million for the six months ended June
30, 2001. Net cash provided by
22
(used in) investing activities in the first half of 2002 was primarily related
to the acquisition of computer software and hardware and the purchase of short
term investments. On July 24, 2002, we received $1.4 million in cash from a sale
lease-back transaction of assets acquired in the first half of 2002. We do not
currently expect any significant acquisitions of computer hardware and software
throughout the remainder of 2002.
Net cash provided by financing activities was $2.0 million for the six months
ended June 30, 2002 and $7.6 million for the six months ended June 30, 2001. The
cash provided by financing activities in the first half of 2002 was primarily
related to capital lease obligations. The net cash provided by financing
activities for the first half of 2001 was due primarily to the proceeds from the
convertible note, which was converted into preferred stock in the quarter ended
September 30, 2001.
Management believes we have sufficient cash resources to meet our funding needs
for at least the next twelve months. We finished the quarter ended June 30, 2002
with $8.6 million in cash, restricted cash and short term investments.
Management's focus in 2002 is to reduce our cash requirements to manageable
levels and focus our operations on profitability. Our operating expenses,
however, are primarily based on anticipated revenue levels. Since a high
percentage of those expenses are relatively fixed, a delay in revenue from
licenses or transactions could cause significant variations in operating results
from quarter to quarter, and we may continue to sustain losses as a result.
Our long term strategy remains unchanged. We will continue to make necessary
capital investments as well as investments in research and development for all
segments and will invest in the expansion of the online auction and classified
businesses and in the development of new security and observation products and
services during this economic downturn.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Accounting Standards No. 142, "Goodwill and Other
Intangible Assets"(FAS 142), effective January 1, 2002. Under FAS 142, goodwill
is no longer amortized, but reviewed for impairment annually, or more frequently
if certain indicators arise. Under the transitional requirements, we completed
an impairment test and no impairment loss resulted.
23
We also adopted FAS 144, effective January 1, 2002. In August 2001, the FASB
issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." FAS 144 replaces FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The FASB issued FAS 144 to
establish a single accounting model, based on the framework established in FAS
121, as FAS 121 did not address the accounting for a segment of a business
accounted for as a discontinued operation under APB 30, "Reporting The Results
of Operations -- Reporting The Effects of Disposal of a Segment of a Business
and Extraordinary Unusual and Infrequently Occurring Events and Transactions."
FAS 144 also resolves significant implementation issues related to FAS 121. We
determined that the adoption of FAS 144 did not have a material impact on our
reported results of operations, financial position or cash flows.
In February 2002, the EITF issued Topic Number D-103, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred," which is effective for financial statements beginning after December
31, 2001. Topic Number D-103 requires that reimbursements received for
out-of-pocket expenses incurred, generally, be characterized as revenue in the
statement of operations. We adopted Topic Number D-103 in the quarter ended
March 31, 2002. The adoption of Topic Number D-103 had no material effect on our
reported results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities'" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002 and early
application is encouraged. We will adopt SFAS 146 during the first quarter
ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.
INFLATION
Inflation has not had a significant impact on our operations to date.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk sensitive instruments do not subject us to material market risk
exposures.
24
FORWARD-LOOKING STATEMENTS
This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our management's beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may cause
our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Factors that
could contribute to these differences include those discussed in "Risk Factors"
of our annual report on Form 10-K filed with the SEC on March 29, 2002.
The words "believe", "may", "will", "should", "anticipate", "estimate",
"expect", "intends", "objective" or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 28, 1998, Minds-Eye-View, Inc. ("Minds-Eye") and Mr. Ford Oxaal
("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 court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court dismissed
the lawsuit on May 19, 1999. Although the lawsuit was dismissed, we proceeded
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.
On May 20, 1999, Oxaal filed a lawsuit against us and certain of our customers
in the same court alleging that our technology infringes upon a patent claim for
360 degree spherical visual technology held by him. 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 complaint
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.
On June 11, 2002, we reached an out of court settlement with Oxaal and
Minds-Eye. As a result of the settlement, each of the lawsuits and the
arbitration proceeding described above were dismissed and mutual releases have
been executed. Pursuant to the settlement agreement, neither party admitted
liability or any wrong doing. We were granted a non-exclusive license under
patents and pending patents conceived by Oxaal or in which Oxaal has an
interest. The license rights inure to the benefit of our customers with respect
to their purchases from us and also inure to the benefit of our business
partners with respect to their business relations with us. We included the cost
of the license in property and equipment on the accompanying balance sheet. We
do not believe that the cost of the license in the current period or the future,
will have a material effect on our financial condition, results of operations or
cash flows.
During the quarter ending September 30, 2002, we expect to receive approximately
$1,400 in cash from a previously disclosed favorable jury verdict against
Infinite Pictures that found the
25
defendants liable for infringement of our patents under the doctrine of
equivalents and awarding us $1,000 in damages, plus interest and court costs. We
will record these proceeds as a one-time gain in the quarter ending September
30, 2002. The defendants have filed for a writ of certiorari with the United
States Supreme Court in an effort to reverse the lower court's findings in our
favor. We believe the defendants' claims are without merit, and we intend to
vigorously defend against these claims. We believe the ultimate resolution of
the Supreme Court filings will not have a material impact on our financial
condition, results of operations or cash flows.
We are subject to claims in the ordinary course of business. We believe the
ultimate resolution of these matters will not have a material impact on our
financial condition, results of operations or cash flows.
Please reference Legal Proceedings in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 for disclosures regarding a case undergoing
discovery. If the plaintiffs in this case were to prevail in their action, our
financial condition, results of operations and cash flows could be materially
adversely affected.
Item 2. Changes In Securities And Use Of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
On May 30, 2002 we held the annual meeting of our stockholders to vote upon the
following proposals. First, the stockholders voted to elect two directors to
serve until the 2005 annual meeting of stockholders. Our common stockholders
elected Michael D. Easterly to the Board of Directors by a vote of 5,120,983
for, 0 against, and 66,893 abstentions and broker non-votes. Thomas M. Garrott
was elected to the Board of Directors by our Series B Preferred stockholders by
a vote of 10,163,523, as-converted common shares for, 0 against and 0
abstentions and broker non-votes.
Laban P. Jackson, Andrew P. Seamons and Donald W. Strickland continue to serve
as members of the board of directors until their terms expire at the annual
meeting of stockholders in 2004. Gregory S. Daily and David M. Wilds continue to
serve as members of the board of directors until their terms expire at the
annual meeting of stockholders in 2003.
Second, the stockholders approved and adopted the amendment to the restated
certificate of incorporation to reduce the number of shares of common stock that
iPIX is authorized to issue from 150 million to 50 million by a vote of
15,301,858 as-converted common shares for, 42,299 against and 7,254 abstentions
and broker non-votes.
Finally, the stockholders ratified the 2001 Equity Incentive Plan by a vote of
11,549,296 as-converted common shares for, 336,756 against and 25,426
abstentions and broker non-votes.
26
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
a) Exhibits
Exhibit 10.1 Purchase Agreement No. 3 between the Company
and eBay Inc. dated May 31, 2002
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
b) Reports On Form 8-K
None.
INTERNET PICTURES CORPORATION
SIGNATURES
Pursuant to the requirements 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.
DATE: August 13, 2002 INTERNET PICTURES CORPORATION
(Registrant)
/s/ Paul Farmer
---------------------------
Paul Farmer
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer
27
INTERNET PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2002
EXHIBIT NO. EXHIBIT DESCRIPTION
Exhibit 10.1 Purchase Agreement No. 3 between the Company
and eBay Inc. dated May 31, 2002
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
28
EXHIBIT 10.1
PURCHASE AGREEMENT No. 3 - Leaseback
THIS AGREEMENT dated as of May 31, 2002 by and between INTERNET
PICTURES CORPORATION, a Delaware corporation, having its principal place of
business at 1009 Commerce Park Drive, Oak Ridge, Tennessee 37830, hereinafter
called SELLER and EBAY INC. a Delaware corporation, having its principal place
of business at 2145 Hamilton Avenue, San Jose, California, 95125, hereinafter
called BUYER.
All capitalized terms used in this Agreement shall have the meanings
ascribed to them in the Visual Content Services Agreement, effective as of
September 7, 2001, Amendment No. 1 to the Visual Content Services Agreement,
effective January 1, 2001, and Amendment No. 2 to the Visual Content Services
Agreement, effective as of the date hereof, in each case by and between the
SELLER and BUYER (collectively, the "VCSA Agreement").
WITNESSETH, that in consideration of the mutual undertaking herein
contained, the parties agree as follows:
1. SALE.
SELLER agrees to sell and BUYER agrees to purchase from SELLER the
equipment listed on Schedule A-1 attached hereto and incorporated by reference
herein together with all additions, attachments, parts or accessories
incorporated or attached therein or associated therewith (referred to as the
"Equipment") in accordance with the terms and conditions specified herein.
2. PURCHASE PRICE.
BUYER shall purchase the Equipment for an amount equivalent to Two
Million, Four Hundred Ninety-four Thousand, One Hundred Twenty-Eight Dollars and
Twenty Cents ($2,494,128.20). SELLER shall provide BUYER with all of the
purchase documentation associated with SELLER's purchase of the Equipment from
the vendor(s) (the "Equipment Vendor(s)"), including but not limited to the
purchase documentation, invoices, and bill of sale provided to SELLER. If SELLER
has not yet paid the Equipment Vendor(s) from whom SELLER is purchasing the
Equipment, BUYER shall pay said Purchase Price directly to the Equipment
Vendor(s), unless otherwise agreed.
3. DELIVERY.
SELLER shall deliver and BUYER shall accept delivery of the Equipment
on the Closing Date at a location designated by BUYER prior to or on the Closing
Date. Irrespective of any other provision hereof, SELLER shall bear all risk of
damage from fire, the elements or otherwise until the full payment of the
purchase price is paid.
4. CLOSING DATE.
The Closing shall take place on May 31, 2002.
5. LEASEBACK.
This Agreement is contingent upon SELLER leasing the Equipment from
BUYER pursuant to Lease Schedule No. 3 to the Master Lease Agreement dated as of
the date hereof between SELLER, as Lessee, and BUYER, as Lessor (collectively,
the "Lease").
SELLER represents and warrants to BUYER that the Equipment has been
installed, tested, inspected and accepted by SELLER from the Equipment Vendor(s)
and that the Equipment is in good working order.
6. MAINTENANCE/WARRANTIES.
(a) SELLER warrants that either (i) the Equipment is under "new"
equipment warranty from the manufacturer or (ii) the Equipment has been
continuously under a maintenance contract and will be eligible for the
manufacturer's maintenance agreement as of the Closing Date and all Equipment is
at current manufacturer release, revision and/or engineering change levels.
(b) SELLER shall and hereby does assign to BUYER the benefit of all
rights applicable to the Equipment in connection with warranties, servicing,
training, patent and copyright indemnities and the like, including the right to
use and possess licensed products associated with the Equipment provided by the
manufacturer or Equipment Vendor(s).
7. SELLER REPRESENTATIONS.
(a) SELLER is a corporation duly existing and in good standing under the laws of
the state of its incorporation and qualified and licensed to do business in, and
is in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
(b) SELLER is duly authorized to execute, deliver and perform its obligations
under this Agreement and all corporate actions required on its part for the due
execution, delivery and performance of the transaction contemplated herein have
been duly and effectively taken.
(c) SELLER's execution, delivery, and performance of its obligations under this
Agreement are not in conflict with nor constitute a breach of any provision
contained in SELLER's Certificate of Incorporation or Bylaws, nor will they
constitute an event of default under any agreement to which SELLER is a party or
by which SELLER is bound.
(d) Each item of Equipment is owned by SELLER free and clear of any liens and
encumbrances of any kind or description. Upon purchase of the Equipment
hereunder, BUYER will acquire good and marketable title in and to the Equipment.
Each item of Equipment (i) is currently located in the State of California and
(ii) has at all times been located in the State of California during SELLER's
ownership of the Equipment. The Equipment purchased hereunder is intended to be
used solely to provide the Services. The SELLER has paid in full the Equipment
Vendor(s) from whom SELLER purchased the Equipment. At the time of SELLER's
purchase of the Equipment, SELLER paid in full all California sales or use
taxes, as applicable, associated with the Equipment.
(e) Each item of Equipment is in good condition and repair (ordinary
wear and tear excepted) and is adequate and appropriate for the uses to which it
is currently being put by SELLER.
All representations and warranties herein shall survive the execution of this
Agreement and the purchase of the Equipment.
8. TITLE.
Title shall pass from SELLER to BUYER on the date BUYER tenders payment
of the purchase price. SELLER shall provide BUYER with a Bill of Sale in the
form of Schedule B attached hereto and incorporated by reference herein upon
payment of the full Purchase Price to evidence passage of title to the Equipment
from SELLER to BUYER free and clear of all claims, liens and encumbrances.
9. TAXES AND TAX BENEFITS.
SELLER hereby indemnifies and holds BUYER harmless for any sales or
other tax arising from the transaction between the Equipment Vendor and SELLER.
BUYER hereby agrees that with respect to Equipment, SELLER shall be entitled to
all the tax benefits that are afforded to an owner of equipment under the
Internal Revenue Code of 1986 (the "Code").
10. NOTICES.
Any notice provided for herein shall be in writing and sent by
registered or certified mail, postage prepaid, addressed to the party for which
it is intended at the address set forth in the first paragraph of this Agreement
or to such other address as either party shall from time to time indicate in
writing, and said notice shall be effective upon receipt or three days from the
date of mailing, whichever occurs first.
11. COVENANTS.
(a) Upon request by BUYER, SELLER shall assist BUYER in obtaining all
licenses necessary or useful to operate the Services (including
but not limited to executing any consents and/or assignments to
transfer and/or effectuate such license(s) to BUYER for no
additional incremental fees.
(b) BUYER covenants that it shall pay any applicable California sales
taxes arising from the sale of the Equipment to BUYER pursuant to
this Agreement.
12. MISCELLANEOUS.
(a) This constitutes the entire Agreement between SELLER and BUYER
solely with respect to the purchase and sale of the Equipment and no
representation or statement not contained herein shall be binding upon SELLER or
BUYER as a warranty or otherwise, unless in writing and executed by the party to
be bound thereby.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of California, including all matters of construction,
validity, performance and enforcement. Any disputes arising under this Agreement
may be brought in the state courts and the federal courts located in San Jose,
California, and the parties hereby consent to the personal jurisdiction and
venue of these courts.
(d) This Agreement is subject to acceptance by BUYER at its offices in
San Jose, California, and shall only become effective on the date thereof.
(e) This Agreement may be executed in multiple counterparts, each of
which shall be deemed to be an original and of equal force and effect.
(f) SELLER agrees to and shall indemnify and hold BUYER harmless from
and against all claims, liens, costs, loss, expenses or damages arising out of
the breach by SELLER of its obligations or out of any misrepresentation by
SELLER, hereunder.
(g) THE PARTIES HERETO EACH HEREBY WAIVE TO THE FULLEST EXTENT
PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT.
[Remainder of page intentionally left blank.]
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and do each hereby warrant and represent that its respective signatory
whose signature appears below has been and is on the date of this Agreement duly
authorized by all necessary and appropriate corporate action to execute this
Agreement.
INTERNET PICTURES CORPORATION EBAY INC.,
as Seller as Buyer
By: /s/ Paul Farmer By: /s/Thomas Keevan
---------------------------- -----------------------
Title: Chief Financial Officer Title: Vice President
-------------------------- --------------------
Date: May 31, 2002 Date: May 31, 2002
--------------------------- ---------------------
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Internet Pictures Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Donald Strickland, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and (2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the
Company.
/s/ Donald Strickland
---------------------
Donald Strickland
Chief Executive Officer
August 13, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Internet Pictures Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Paul Farmer, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and (2) The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the
Company.
/s/ Paul Farmer
---------------
Paul Farmer
Chief Financial Officer
August 13, 2002