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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERACTIVE PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 7372 62-1275544
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(423) 482-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JAMES M. PHILLIPS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
INTERACTIVE PICTURES CORPORATION
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(423) 482-3000
(Name and address, including zip code, and telephone number, including area
code, of registrant's agent for service)
COPIES TO:
MATTHEW S. HEITER, ESQ. GERALD S. TANENBAUM, ESQ.
ROGER D. BAILEY, ESQ. CAHILL GORDON & REINDEL
SYLVIA M. REED, ESQ. EIGHTY PINE STREET
BAKER, DONELSON, BEARMAN & CALDWELL NEW YORK, NEW YORK 10005
165 MADISON AVENUE, SUITE 2000 (212) 701-3000 TELEPHONE
MEMPHIS, TENNESSEE 38103 (212) 269-5420 FACSIMILE
(901) 577-8117 TELEPHONE
(901) 577-2303 FACSIMILE
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $.001 par value per share.................... $57,500,000 $16,000
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION
DATED MAY 21, 1999
Shares
(IPIX LOGO Interactive Pictures Corporation)
Common Stock
Interactive Pictures Corporation is offering shares of its common
stock. This is our initial public offering. We estimate that the initial public
offering price will be between $ and $ per share.
We intend to apply to have our common stock listed on the Nasdaq National Market
under the symbol "IPIX."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
INTERACTIVE
PRICE TO UNDERWRITING PICTURES
PUBLIC DISCOUNT CORPORATION
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Per Share $ $ $
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Total $ $ $
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We and two of our shareholders have granted the underwriters a 30-day option to
purchase up to an additional and shares of common stock,
respectively, to cover over-allotments.
J.P. MORGAN & CO.
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
STEPHENS INC.
, 1999
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[INSIDE FRONT COVER]
THE WORLD IS ROUND. WHY ARE YOUR PICTURES STILL FLAT?
[PICTURES]
TECHNOLOGY AND CONTENT PARTNERS
[NAMES AND LOGOS OF PARTNERS]
[PAGE]
E-PUBLISHING
[PICTURES OF WEB SITES]
EDUCATION/ENTERTAINMENT
[PICTURES OF WEB SITES]
[PAGE]
REAL ESTATE
[PICTURES OF WEB SITES]
CORPORATE AND E-COMMERCE
[PICTURES OF WEB SITES]
[PAGE]
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We have not authorized anyone to give you any information that differs from the
information in this prospectus. If you receive any different information, you
should not rely on it. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted.
TABLE OF CONTENTS
PAGE
Prospectus Summary.................. 1
Risk Factors........................ 4
Forward-looking Statements.......... 11
Use of Proceeds..................... 11
Dividend Policy..................... 11
Capitalization...................... 12
Dilution............................ 13
Selected Financial Information...... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 15
PAGE
Business............................ 23
Management.......................... 34
Principal Shareholders.............. 41
Certain Transactions................ 43
Description of Capital Stock........ 44
Shares Eligible For Future Sale..... 48
Underwriting........................ 50
Legal Matters....................... 52
Experts............................. 52
Available Information............... 52
Index to Consolidated Financial
Statements........................ F-1
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Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
We intend to furnish our shareholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
interim financial information for the first three quarters of each fiscal year.
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We own or have rights to various trademarks and trade names used in our
business. These include the IPIX(TM) logo, IPIX(TM), GET THE WHOLE PICTURE(TM),
IPIX On Location(TM), IPIX Teleporter(TM), IPIX LOCATION ON DEMAND-WEBCAM(TM),
OMNIVIEW(TM), THE VIRTUAL EYE(R), V360(TM), IPIX: THE EYES OF THE INTERNET(TM),
IPIX WEBCAM: THE EYES OF THE INTERNET(TM), INTERACTV(TM) and STEP INSIDE THE
PICTURE(TM). This prospectus also includes trademarks, service marks and trade
names of other companies which are the property of their respective owners.
-i-
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PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements and notes.
Except as otherwise indicated, the share information in this prospectus assumes
that the underwriters do not exercise the option granted by us to purchase
additional shares in this offering and assumes, upon consummation of this
offering, the conversion of all of our preferred stock into common stock,
including preferred stock issuable upon the net exercise of all outstanding
preferred stock warrants, and the net exercise of all outstanding common stock
warrants into common stock.
INTERACTIVE PICTURES CORPORATION
As a leader in interactive photography and immersive imaging for the Internet,
our IPIX images allow viewers to "Step Inside the Picture." Our patented
technology changes the way people create and view images, immersing them in a
360(degree) by 360(degree) spherical environment. We believe IPIX images enhance
the key elements of a photograph: memory, information and entertainment. IPIX
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. Viewers can
easily navigate the image on a personal computer screen by moving a cursor
inside the image. In order to accelerate the adoption and enhancement of IPIX
images, we have established strategic relationships with leading camera
manufacturers such as Kodak, Nikon and Olympus as well as technology companies
such as IBM, Intel and RealNetworks. We estimate that over 3,000 commercial Web
sites are utilizing IPIX images.
Leading companies use our technology to create virtual tours and multimedia
content to attract and retain visitors on their Web sites, which enhances their
marketing and e-commerce initiatives. We have targeted the following domestic
and international commercial markets: real estate, travel and hospitality,
electronic publishing, corporate and e-commerce and education and entertainment.
Our customers include Coldwell Banker, Rent.Net, Carnival Cruise Lines,
Swissotel, CNN, Microsoft, Intel, Ticketmaster and Disney. In addition, we have
entered into strategic relationships with leading customers in our commercial
markets such as Homes.com and Microsoft CarPoint to promote the use of IPIX
images to members of our targeted commercial markets.
Our business model benefits from the convergence of several broad industry
trends, including:
- growth of the Internet and e-commerce;
- demand for effective on-line content;
- emergence of broadband capability;
- growth in the use of digital imaging; and
- lack of interactivity and realism with existing digital imaging
technology.
THE IPIX SOLUTION
The key benefits of our immersive imaging solution are as follows:
- IPIX images provide a more powerful viewing experience by creating a 3608
by 3608 immersive viewing environment;
- our technology is easy to use, portable and cost-effective; and
- our technology is compatible with commercially available digital cameras
and different computer platforms and has low bandwidth requirements.
IPIX images enhance the photo viewing experience by permitting a person to view
locations from ground to sky, floor to ceiling and horizon to horizon. We
believe IPIX images, alone or combined with other multimedia such as audio,
video and automation, can provide businesses with more compelling content to
attract and retain visitors to their Web sites and promote e-commerce.
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Our technology is easy to use, portable and cost-effective. Our Wizard software
easily and quickly combines two 1858 photographs taken with a standard digital
camera into one immersive image. After using an IPIX key, a user can post the
IPIX image to a Web site, view it on a personal computer or e-mail it with the
click of a button. IPIX images can be viewed and navigated with the IPIX viewer
or with a viewer using JAVA. We price our IPIX keys to meet the cost
requirements and anticipated use of the IPIX image by the end user, making it a
cost effective alternative to other immersive imaging technologies.
Because our technology can be used with commercially available digital cameras,
IPIX images can be captured in almost any environment. Our technology is
compatible with most major operating systems and Internet browsers. The IPIX
image file size is small (50 to 250 Kbs), which results in quick delivery and
short download on low bandwidth systems. Our technology is also taking advantage
of the pending availability of broadband networks and higher resolution digital
cameras. We currently have in development our IPIX Webcam and steerable video
technology, V360.
OUR GROWTH STRATEGY
Our objective is to become a world leader in interactive photography and
immersive imaging for the Internet. We believe we can achieve this objective by
leveraging our leading position in immersive imaging technology. Our key
strategies to achieve this objective include:
- build awareness of the IPIX brand and experience;
- target commercial markets that can best capitalize on our technology;
- develop approaches to penetrate consumer markets;
- leverage our technology to enhance existing products and create new
product offerings;
- expand strategic relationships; and
- expand internationally.
We were incorporated in 1986 in Tennessee. Our primary business address is 1009
Commerce Park Drive, Oak Ridge, Tennessee, 37830, and our telephone number is
(423) 482-3000. We can be found on the Internet at www.ipix.com. Information on
our Web site is not a part of this prospectus.
THE OFFERING
COMMON STOCK OFFERED.......... shares
COMMON STOCK OUTSTANDING AFTER
THE OFFERING................ shares
USE OF PROCEEDS............... We intend to use the net proceeds we receive
from this offering for general corporate
purposes, including expansion of sales and
marketing activities, enhancement of research
and development activities, possible strategic
acquisitions or investments and working capital
requirements.
PROPOSED NASDAQ NATIONAL
MARKET SYMBOL............... "IPIX"
DIVIDEND POLICY............... We do not anticipate paying any cash dividends
in the foreseeable future.
The table above excludes 7,354,632 shares of common stock issuable upon the
exercise of outstanding stock options, including options outstanding under our
1997 Equity Compensation Plan, of which options to purchase 3,706,387 shares are
currently exercisable and options to purchase 547,917 shares will become
exercisable upon the consummation of this offering. The table also excludes
2,027,893 shares of common stock reserved for future grant or award under our
1997 Equity Compensation Plan.
All references to shares of common stock presented in this prospectus do not
reflect a for reverse stock split which will become effective prior to
the consummation of this offering.
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SUMMARY FINANCIAL INFORMATION
The following table contains our summary financial data which you should read
together with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information found elsewhere in this prospectus. See Note 2
of notes to consolidated financial statements for an explanation of the
determination of the number of shares used in per share calculations. The pro
forma as adjusted consolidated balance sheet data presented below assumes the
conversion of all of our preferred stock into common stock, including preferred
stock issuable upon the net exercise of all outstanding preferred stock
warrants, and the net exercise of all outstanding common stock warrants into
common stock and gives effect to the issuance of shares of common stock
upon the consummation of this offering.
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THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
In thousands, except per share data ------- ------- -------- ------- -------
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenues
Product......................................... $ 1,337 $ 2,128 $ 2,712 $ 319 $ 1,229
Service......................................... 208 318 329 98 --
------- ------- -------- ------- -------
1,545 2,446 3,041 417 1,229
Cost of revenues
Product......................................... 543 446 1,207 72 587
Service......................................... 108 316 241 32 --
------- ------- -------- ------- -------
651 762 1,448 104 587
------- ------- -------- ------- -------
Gross profit...................................... 894 1,684 1,593 313 642
Operating expenses
Sales and marketing............................. 908 2,829 8,387 1,550 2,812
Research and development........................ 389 1,171 2,668 493 736
General and administrative...................... 921 2,598 3,864 887 828
Amortization of product development and patent
costs........................................ 71 858 -- -- --
------- ------- -------- ------- -------
Total operating expenses................ 2,289 7,456 14,919 2,930 4,376
------- ------- -------- ------- -------
Interest and other income (expense), net.......... 201 194 101 (37) 22
------- ------- -------- ------- -------
Net loss................................ $(1,194) $(5,578) $(13,225) $(2,654) $(3,712)
======= ======= ======== ======= =======
Basic and diluted loss per common share........... $ (0.07) $ (0.30) $ (0.96) $ (0.14) $ (0.31)
======= ======= ======== ======= =======
Pro forma basic and diluted loss per common
share........................................... $ $
======== =======
-----------------------------------------
AS OF MARCH 31, 1999
AS OF ---------------------
DECEMBER 31, PRO FORMA
1998 ACTUAL AS ADJUSTED
----------------- ------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and securities
available-for-sale................................... $1,064 $23,799
Working capital........................................ (635) 22,650
Total assets........................................... 3,989 27,369
Long-term debt......................................... 21 19
Total shareholders' equity............................. 793 24,205
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RISK FACTORS
You should carefully consider the risks and uncertainties described below and
all of the other information contained in this prospectus before deciding to
purchase shares of our common stock.
RISKS PARTICULAR TO INTERACTIVE PICTURES CORPORATION
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES, AND WE MAY CONTINUE
TO REALIZE LOSSES IN THE FUTURE
While we began operations in 1986, we did not obtain the first domestic license
of our software until the second quarter of 1997. Thus, we have only a limited
operating history upon which you can evaluate us and our future potential. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies such as ours that operate in new and rapidly evolving
industries. To address these risks and achieve profitability and increased sales
levels, we must, among other things:
- establish widespread market acceptance of our products;
- expand sales and marketing operations;
- introduce new and enhanced products on a timely basis; and
- successfully market and support our products.
As of March 31, 1999, we had an accumulated deficit of $27.7 million. We expect
to continue to incur substantial losses for the foreseeable future as we
significantly expand our sales and marketing efforts, increase the number of our
employees and invest in product development. We cannot assure you that we will
achieve significant revenues or profitability or, if we do, that they can be
sustained or increased on a quarterly or annual basis.
As a result of our limited operating history, we have limited meaningful
historical financial data upon which to base planned operating expenses.
Accordingly, our expense levels are based in part on our expectations as to
future revenues. We cannot assure you that we will be able to accurately predict
our revenues, particularly in light of our limited operating history. Our
failure to accurately make such predictions would have a material adverse effect
on our business, results of operations and financial condition.
OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE SIGNIFICANTLY
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. It is therefore likely that in some future
periods our operating results may fall below the expectations of securities
analysts and investors, which could have a material adverse effect on the
trading price of our common stock. Among the factors that may influence our
operating results are:
- the introduction of new or enhanced products and services by us or our
competitors;
- the timing of our new personnel growth and its rate of expansion;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
- changes in our pricing policy or those of our competitors;
- incurrence of costs relating to any potential future acquisitions; and
- economic conditions specific to the Internet or all or a portion of the
technology sector.
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THE USE OF DIGITAL CAMERAS AND FISHEYE LENSES IS NOT YET WIDESPREAD, AND THE
ADOPTION OF IMMERSIVE IMAGING IS UNCERTAIN
A large part of our future success is dependent upon the prevalent use of
digital photography and fisheye lenses. Generally, digital cameras are more
expensive than film cameras, and digital imaging does not offer the same clarity
and pixel resolution that film-based photographs offer. Although the cost of
digital cameras is declining and picture quality is improving, there can be no
assurance that digital photography will be as widely accepted as film-based
photography.
In addition, immersive imaging is a new concept that may not be accepted by
businesses or consumers. In particular, there can be no assurance that our
concept of immersive imaging will be adopted over other types of immersive
imaging offered by our competition. Further, our future growth will be based
upon both the business and consumer markets adopting our technology, and we can
give no assurance that such adoption will occur. The failure of either the
business or consumer markets to adopt our technology would have a material
adverse effect on our business, results of operations and financial condition.
WE DEPEND ON PROPRIETARY RIGHTS TO PROTECT 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 recognition
and enforcement of these rights. We cannot assure you that any of our patents or
trademarks will not be challenged and invalidated or circumvented, or that any
patents will issue as a result of our pending or future patent applications. We
have been involved in litigation relating to the protection of our intellectual
property rights and could be involved in future litigation as third parties
develop products that we believe infringe on our patent and other intellectual
property rights. Also, we cannot assure you that any claims and issued patents
or pending patent applications will be of sufficient scope or strength. Further,
we cannot assure you that any claims, patents or patent applications will be
issued in all countries where our products can be sold or where our technologies
can be licensed to provide meaningful protection against any commercial damage
to us. In particular, we are exposed to patent infringement in foreign markets
because our patents are protected under United States patent laws that may not
extend to foreign uses.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise use aspects of our processes and devices that we
regard as proprietary. A party who is able to copy or gain unauthorized use of
our processes and devices could misappropriate proprietary information or
circumvent the use of IPIX keys. We have experienced attempts to misappropriate
our technology, and we expect that those attempts may continue. We may be
required to expend significant capital and resources to prevent any further
attempts. Policing unauthorized use of our proprietary information is difficult,
and we cannot assure you that the steps we take will prevent misappropriation of
our technologies. In the event that we are unable to protect our intellectual
property rights, we could face increased competition in the market for our
products and technologies. Any increased competition could have a material
adverse effect on our business, results of operations and financial condition.
WE DEPEND ON A LIMITED NUMBER OF COMMERCIAL MARKETS FOR OUR BUSINESS
Currently, a significant portion of our revenues is derived from businesses in
the real estate and corporate and e-commerce commercial markets. Customers from
these markets represented 62% and 75% of our total revenues for 1998 and the
first quarter of 1999, respectively. In addition, 13% of our total revenues for
1998 were derived from sales of products to Sumitomo Corporation, our Japanese
distributor. Our inability to continue to sell our products to customers in
these commercial markets could result in a significant reduction in our total
revenues and have a material adverse effect on our business, results of
operations and financial condition. The volume of products that we sell to
customers within these and other commercial markets is likely to vary from year
to year.
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WE MAY ENCOUNTER RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT, AND CONSUMERS
MAY NOT ADOPT OUR PRODUCTS
The markets for our products have only recently begun to develop and are rapidly
changing. In addition, our products are new and based on evolving technologies.
We are also dependent upon the continued use of our products by the business
market and the acceptance of our products by the individual consumer. We have
not yet made any sales to individual consumers and cannot assure you that they
will be willing to purchase and use our products. Thus, both the timing and
growth of market acceptance for our products are subject to a high level of
uncertainty. Acceptance of our products will be highly dependent on a number of
factors, including:
- competing products;
- the development of technologies that will facilitate the use of our
products by businesses and consumers;
- the ease-of-use and performance of our products; and
- the success of our marketing efforts.
We cannot assure you that we will be successful in obtaining market acceptance
of our products. Failure to gain market acceptance of our products would have a
material adverse effect on our business, results of operations and financial
condition.
WE MAINTAIN MANY STRATEGIC RELATIONSHIPS THAT ARE NOT SUBJECT TO WRITTEN
AGREEMENTS AND MAY BE TERMINATED AT ANY TIME
Many of our strategic relationships are not governed by written or other formal
agreements and are subject to termination at any time. These relationships
include those with companies that have agreed to manufacture IPIX compatible
digital cameras, technology companies and industry leaders who use our
technology on their Web sites. If any of our strategic relationships are
terminated for any reason, it could have a material adverse effect on our
business, results of operations and financial condition.
OUR FAILURE TO INCREASE THE DISTRIBUTION OF OUR IPIX VIEWER COULD DELAY OR
HINDER OUR FUTURE GROWTH
IPIX images can be viewed and navigated with an IPIX viewer or with a viewer
using JAVA. The IPIX viewer is available as a plug-in for free, but must be
downloaded from our Web site or other participating Web sites. The IPIX viewer
provides greater picture resolution and navigational controls than viewing the
image using JAVA. Although we are working with some of our strategic partners to
develop alternative methods to view an IPIX image without a viewer, we are still
substantially dependent upon the viewer for a competitive advantage.
Often, a Web site visitor is unwilling to, or incapable of, downloading the
viewer and thus does not experience the best available IPIX image. We must
increase the download rates for our viewer, particularly with individual
consumers, or include the viewer with other software or as part of a personal
computer's operating system. If we do not significantly increase distribution of
our viewer, our business, results of operations and financial condition could be
materially adversely affected and our growth could be hindered or delayed.
WE HAVE MANY COMPETITORS, SOME OF WHICH HAVE GREATER FINANCIAL OR TECHNICAL
RESOURCES THAN US
Our primary competitors are Apple Computer, Inc., Bamboo.com, Inc., Be Here
Corporation, Black Diamond, Inc., Cyclovision, Inc., Infinite Pictures
Corporation and Live Picture Corporation. Each of these companies develops and
markets imaging products and services that provide a panoramic image experience.
We compete with these companies on the basis of price, ease of use and picture
resolution. Some of our competitors offer their products at lower prices and
with greater picture resolution than us.
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, among other things:
- establish favorable brand name recognition for our products;
- introduce new versions of and enhancements to our products;
- price our products at appropriate and competitive levels; and
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- provide strong marketing support to promote our products.
Some of our competitors have greater financial, marketing, distribution and
technical resources than us. 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 FAIL TO EFFECTIVELY MANAGE OUR GROWTH, THE PRICE OF OUR COMMON STOCK MAY
DECLINE SIGNIFICANTLY
Due to our recent growth, the number of our employees has grown from 17 as of
December 31, 1995, to 136 as of April 30, 1999. This growth has placed a
significant strain on our management and resources. To manage our growth
successfully, we must:
- manage multiple relationships among various customers, suppliers and
strategic partners;
- expand, train and manage our employees;
- maintain our research and development activities; and
- continue to improve our operational and financial systems.
We cannot assure you that we will be able to manage our growth successfully, and
our failure to do so would have a material adverse effect on our business,
future results of operations and financial condition.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED SERVICE OF OUR KEY EMPLOYEES AND OUR
ABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL
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 such personnel is intense,
and we cannot assure you that we will be successful in attracting or retaining
such personnel. The loss of the services of one or more members of our
management group or our inability to hire additional qualified personnel as
needed may have a material adverse effect on our business, results of operations
and financial condition.
OUR GROWTH STRATEGY OF DEVELOPING AND INCREASING PUBLIC RECOGNITION OF OUR BRAND
AND ATTEMPTING TO INCREASE SALES OF OUR PRODUCTS THROUGH INCREASED SALES AND
MARKETING EFFORTS MAY BE UNSUCCESSFUL
We believe that establishing and maintaining the IPIX brand is important to our
efforts to increase our customer base. We intend to make significant
expenditures in creating and maintaining distinct brand loyalty through
traditional media advertising campaigns such as print, billboards and
television. In addition, we are considering establishing a new Web site through
which we would sell IPIX-compatible digital cameras in an attempt to enhance
IPIX key sales. Establishment of this new Web site could involve significant
expenditures on our part. If customers do not perceive our existing products to
be of high quality, or if we introduce new products or enter into new business
ventures that are not favorably received or ultimately successful, the value of
our brand could be diluted, thereby decreasing the attractiveness of our
products. If we fail to increase our revenue as a result of our branding efforts
or otherwise fail to promote our brand successfully, or if we incur excessive
expenses in an attempt to promote and maintain our brand without a corresponding
increase in sales, our business, results of operations and financial condition
could be materially adversely affected.
WE FACE DIFFERENT RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAN WITH
OUR DOMESTIC OPERATIONS
A part of our strategy is to distribute our products in international markets.
We cannot assure you that our products will become widely accepted in any
international markets. We may experience difficulty in managing
7
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international operations as a result of competition, technical problems,
distance, language or cultural differences, and we cannot assure you that we
will be able to successfully market our products in foreign markets.
Certain risks inherent in doing business on an international level include:
- unexpected changes in regulatory requirements;
- trade barriers;
- difficulties in staffing and managing foreign operations;
- fluctuations in currency exchange rates;
- slower payment and collection of accounts receivable than in our domestic
market;
- difficulty in enforcing contracts;
- political and economic instability;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
We cannot assure you that we will be successful in our international expansion
or that one or more of the above factors will not have a material adverse effect
on our future international operations and, consequently, on our business,
results of operations and financial condition.
INDUSTRY RISKS
ADOPTION OF THE INTERNET AS A COMMERCIAL MEDIUM IS UNCERTAIN, ESPECIALLY DUE TO
SECURITY CONCERNS
Our future success substantially depends on the continued growth in the use of
the Internet for commercial purposes. Continued growth of the Internet could be
slowed by:
- inadequate infrastructure;
- lack of availability of cost-effective, high-speed systems and service;
- failure to develop a reliable network system;
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity; or
- government regulation.
If any one of these factors limits the growth of the Internet as a viable
information medium or commercial marketplace, or if the use of and interest in
the Internet does not continue to grow, our business, results of operations and
financial condition could be materially adversely affected.
Concerns over the security of Internet transactions and user privacy may also
inhibit the growth of the Internet, particularly as a means of conducting
commercial transactions. Since we conduct business over the Internet through our
Web site, security breaches could expose us to a risk of loss or litigation and
possible liability. We cannot assure you that contractual provisions attempting
to limit our liability in such areas will be successful or enforceable, or that
other parties will accept such contractual provisions as part of our agreements,
which could have a material adverse effect on our business, results of
operations and financial condition.
GOVERNMENT REGULATION OF THE INTERNET, AS WELL AS OTHER LEGAL UNCERTAINTIES, MAY
DIMINISH OUR GROWTH
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, a number of
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legislative and regulatory proposals are under consideration by various
governmental organizations. It is possible that a number of laws or regulations
may be adopted to govern the Internet relating to user privacy, taxation,
pricing and the quality of products and services. The adoption of any such laws
or regulations may slow the growth in Internet use, which could in turn decrease
the demand for our product, increase our cost of doing business or otherwise
have a material adverse effect on our business, results of operations and
financial condition.
Moreover, existing laws governing property ownership, copyright, trademark,
trade secret, obscenity, libel and personal privacy may be applied to the
Internet in the future. Any new legislation or regulation, or application or
interpretation of existing laws, could have a material adverse effect on our
business, results of operations and financial condition.
OUR SYSTEMS AND THOSE OF OUR CUSTOMERS OR VENDORS MAY NOT BE YEAR 2000 COMPLIANT
We are reliant on e-commerce transaction systems for the sale of our products
over the Internet. If these systems fail due to Year 2000 problems, our ability
to conduct these transactions may be severely impacted.
The most reasonably likely worst-case scenario is a failure related to one or
several of our external service providers including telecommunications
providers, utilities or Internet commerce systems which we rely upon on a daily
basis. Such failure or failures could cause any of the following:
- protracted interruption of electrical power to our operations and
Internet host servers which could materially adversely impact our ability
to enable online transactions and other services;
- significant or widespread failure of software products and services
provided to us by third-parties; or
- significant or widespread failure of third-party computer systems with
which our systems interface.
We cannot assure you that we will not suffer any losses relating to these or
other Year 2000 problems. Any Year 2000 compliance problems that either we, our
customers or our vendors experience could have a material adverse effect on our
business, results of operations and financial condition.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES AND,
IF WE FAIL TO ADAPT TO THOSE CHANGES, OUR PRODUCTS 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.
Accordingly, our success depends on our ability to adapt to rapidly changing
technologies, to adapt our products to evolving industry standards and to
continually improve the performance, features and reliability of our products in
response to competitive products and shifting demands of the marketplace. In
addition, the widespread adoption of Internet, networking or telecommunications
technologies or other technological changes could require substantial
expenditures to modify our products or infrastructure. Our 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.
RISKS RELATING TO THE OFFERING
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering.
Accordingly, our management will have broad discretion in the application of the
net proceeds. The failure by our management to apply these funds effectively
could have a material adverse effect on our business, results of operations and
financial condition.
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OUR MANAGEMENT, EXISTING SHAREHOLDERS AND AFFILIATED ENTITIES WILL CONTINUE TO
OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK
Upon completion of this offering, our present directors and executive officers
and their affiliates will, in the aggregate, beneficially own approximately
% of our common stock. As a result, these shareholders, acting
together, will have the ability to direct our business affairs, control the
election of our board of directors and approve of significant change-in-control
transactions.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of common stock into the public market
after this offering, or the perception that such sales could occur, could
materially and adversely affect our stock price or could impair our ability to
obtain capital through an offering of equity securities. After this offering, we
will have outstanding shares of common stock, or shares if
the underwriters fully exercise their over-allotment option. In addition,
7,354,632 shares of common stock are issuable upon the exercise of outstanding
stock options, including options outstanding under our 1997 Equity Compensation
Plan, of which options to purchase 3,706,387 shares are currently exercisable
and options to purchase 547,917 shares will become exercisable at the
consummation of this offering, and 2,027,893 shares of common stock are reserved
for future grant or award under our 1997 Equity Compensation Plan. We intend to
register for resale the shares of common stock reserved for issuance under this
plan as soon as practicable following the consummation of this offering.
In addition, our officers, directors and some of our shareholders and option
holders have agreed that, for a period of 180 days from the date of this
prospectus, they will not sell their shares. Accordingly, upon the expiration of
the 180 day lock-up period, shares of our common stock held by those
shareholders will be available for immediate resale (subject to certain volume
restrictions imposed by the securities laws).
We have entered into registration rights agreements with some of our
shareholders. Under circumstances described in the registration rights
agreements, these shareholders can demand that we register their shares for
sales to the public market. In addition, we may be required to include a portion
of their shares if we register additional shares for sale to the public market.
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE COMMON
STOCK IN THIS OFFERING
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
the offering. Any common stock you purchase in this offering will have a
post-offering net tangible book value per share of $ less than the
initial public offering price, assuming an initial public offering price of
$ per share, which is the mid-point of the range set forth on the cover
page of this prospectus.
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, AND OUR STOCK PRICE COULD BE
VOLATILE
Our common stock price is likely to be highly volatile. The stock market in
general has experienced extreme volatility that often has been unrelated to the
operating performance of many technology, emerging growth and developing
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. Since we may be viewed as one of these types of companies, market
fluctuations may adversely affect the market price of our common stock.
OUR CHARTER AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE
DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE FUTURE
Our amended and restated charter and bylaws and applicable provisions of
Tennessee 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, the Tennessee Business Combination Act contains various
other anti-takeover provisions that apply to us even though those provisions
will not be in our charter. These provisions of our
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charter and bylaws and the Tennessee Business Combination Act 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.
FORWARD-LOOKING STATEMENTS
This prospectus 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 such differences include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.
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 such
forward-looking statements entirely by these cautionary factors.
USE OF PROCEEDS
Based on an assumed initial public offering price of $ per share, the
mid-point of the range set forth on the cover page of this prospectus, we
estimate our net proceeds will be approximately $ million from the sale
of shares of common stock in this offering, or approximately $ million if
the underwriters' over-allotment option is exercised in full, after deducting
underwriting discounts and estimated offering expenses payable by us.
We intend to use the net proceeds we receive from this offering for general
corporate purposes, including expansion of sales and marketing activities,
enhancement of research and development activities, possible strategic
acquisitions or investments and working capital requirements. Although we have
not identified any specific businesses, products or technologies that we may
acquire and have not entered into any current agreements with respect to any
such transactions, we from time to time evaluate such opportunities. Pending
such uses, the net proceeds will be invested in government securities and other
short-term, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends on our common stock for the foreseeable
future. Future dividends, if any, will be determined by the board of directors.
We may incur indebtedness in the future which may prohibit or restrict the
payment of dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999, on an
actual basis and on a pro forma as adjusted basis after giving effect to (1) the
issuance of shares of common stock, comprised of (a) 24,133,297
shares of common stock issuable upon the conversion of all of our outstanding
preferred stock, (b) shares of common stock issuable upon the net
exercise and conversion into common stock of all outstanding preferred stock
warrants, and (c) shares of common stock issuable upon the net
exercise of all outstanding common stock warrants into common stock, and (2) the
sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share, the mid-point of the range set
forth on the cover page of this prospectus, after the deduction of underwriting
discounts and estimated offering expenses. The table does not give effect to a
class of preferred stock that will be authorized under our charter prior to the
consummation of this offering.
----------------------
AS OF MARCH 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
Dollars in thousands
Long-term portion of promissory note........................ $ 19 $
Shareholders' equity:
Convertible preferred stock
Series A, 4,836,416 shares authorized, issued and
outstanding, actual................................... 5
Series B, 1,547,648 shares authorized, issued and
outstanding, actual................................... 2
Series C, 9,267,297 shares authorized; 7,443,889 shares
issued and outstanding, actual........................ 7
Series D, 10,955,344 shares authorized; 10,305,344
shares issued and outstanding, actual................. 10
Common Stock, 100,000,000 shares authorized; 12,637,540
shares issued and outstanding, actual; shares
issued and outstanding, pro forma as adjusted.......... 12
Additional paid-in capital................................ 51,904
Accumulated deficit....................................... (27,735)
-------- -------
Total shareholders' equity............................. 24,205
-------- -------
Total capitalization................................... $ 24,224 $
======== =======
The table above excludes 5,135,965 shares of common stock issuable upon the
exercise of outstanding stock options as of March 31, 1999, including options
outstanding under our 1997 Equity Compensation Plan, of which options to
purchase 3,599,055 shares were currently exercisable and options to purchase
591,916 shares will become exercisable upon the consummation of this offering.
The table also excludes 4,246,560 shares of common stock reserved for future
grant or award under our 1997 Equity Compensation Plan.
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DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $ , or
$ per share of common stock, and assumes the conversion of all of our
preferred stock into common stock, including preferred stock issuable upon the
net exercise of all outstanding preferred stock warrants, and the net exercise
of all outstanding common stock warrants into common stock. Pro forma net
tangible book value per share is determined by dividing our net tangible book
value (total tangible assets less total liabilities) by the total number of
shares of common stock outstanding after giving effect to the transactions
described in the previous sentence. After giving effect to the sale of
shares of common stock offered by us at an assumed initial public
offering price of $ per share, the mid-point of the range set forth on the
cover page of this prospectus, and after deducting estimated underwriting
discounts and offering expenses, our adjusted pro forma net tangible book value
as of March 31, 1999 would have been $ , or $ per share. This
represents an immediate increase in the pro forma net tangible book value of
$ per share to existing shareholders and an immediate dilution of $ per
share to new investors. The following table illustrates the per share dilution:
---------------
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of March
31, 1999............................................... $
Increase to present shareholders attributable to new
investors.............................................. $
------
Adjusted pro forma net tangible book value per share after
this offering............................................. $
------
Dilution per share to new investors......................... $
======
The following table summarizes, as of March 31, 1999, the difference between the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid by the existing shareholders and by
the new investors, at an assumed initial public offering price of $ per
share, the mid-point of the range set forth on the cover page of this
prospectus, before deduction of estimated underwriting discounts and offering
expenses:
-----------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- --------- -------- ---------
Existing Shareholders........................... % $ % $
New investors................................... $
-------- ---- -------- ----
Total................................. % $ %
======== ==== ======== ====
The tables above assume no exercise of stock options outstanding as of March 31,
1999. If any of these options are exercised, there will be further dilution to
new investors.
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SELECTED FINANCIAL INFORMATION
The tables that follow present portions of our consolidated financial statements
and are not complete. You should read the following selected consolidated
financial data in conjunction 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 elsewhere in this
prospectus. The statements of operations data set forth below for the years
ended December 31, 1996, 1997 and 1998 and the balance sheet data at December
31, 1997 and 1998, are derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, that are included in this
prospectus. The statements of operations data for the year ended December 31,
1994 and 1995 and the balance sheet data as of December 31, 1994, 1995 and 1996
are derived from audited consolidated financial statements that are not included
in this prospectus. The statements of operations data set forth below for the
three months ended March 31, 1998 and 1999 and the balance sheet data as of
March 31, 1999 are derived from unaudited consolidated financial statements that
are included in this prospectus. The unaudited consolidated financial statements
include all adjustments, consisting of normal recurring accruals, which we
consider necessary for a fair presentation. The pro forma as adjusted
consolidated balance sheet data presented below assumes the conversion of all of
our preferred stock into common stock, including preferred stock issuable upon
the net exercise of all outstanding preferred stock warrants, and the net
exercise of all outstanding common stock warrants into common stock and gives
effect to the issuance of shares of common stock upon the consummation
of this offering.
--------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
In thousands, except per share data ------- ------- ------- ------- -------- ------- -------
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Revenues
Product................................... $ 393 $ 699 $ 1,337 $ 2,128 $ 2,712 $ 319 $ 1,229
Service................................... 492 578 208 318 329 98 --
------- ------- ------- ------- -------- ------- -------
885 1,277 1,545 2,446 3,041 417 1,229
Cost of revenues
Product................................... 246 312 543 446 1,207 72 587
Service................................... 475 347 108 316 241 32 --
------- ------- ------- ------- -------- ------- -------
721 659 651 762 1,448 104 587
------- ------- ------- ------- -------- ------- -------
Gross profit................................ 164 618 894 1,684 1,593 313 642
Operating expenses
Sales and marketing....................... 283 528 908 2,829 8,387 1,550 2,812
Research and development.................. 531 568 389 1,171 2,668 493 736
General and administrative................ 549 1,476 921 2,598 3,864 887 828
Amortization of product development and
patent costs............................ -- -- 71 858 -- -- --
------- ------- ------- ------- -------- ------- -------
Total operating expenses.............. 1,363 2,572 2,289 7,456 14,919 2,930 4,376
------- ------- ------- ------- -------- ------- -------
Interest and other income (expense), net.... 175 189 201 194 101 (37) 22
Income tax benefit.......................... 10 -- -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
Net loss.............................. $(1,014) $(1,765) $(1,194) $(5,578) $(13,225) $(2,654) $(3,712)
======= ======= ======= ======= ======== ======= =======
Basic and diluted loss per common share..... $ (0.06) $ (0.11) $ (0.07) $ (0.30) $ (0.96) $ (0.14) $ (0.31)
======= ======= ======= ======= ======== ======= =======
Pro forma basic and diluted loss per common
share..................................... $ $
======== =======
------------------------------------------------------------------
AS OF
MARCH 31, 1999
AS OF DECEMBER 31, ---------------------
------------------------------------------ PRO FORMA
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED
------ ------ ------ ------ ------ ------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and securities
available-for-sale........................ $3,592 $3,105 $5,107 $2,826 $1,064 $23,799
Working capital............................. 3,396 2,819 4,944 (71) (635) 22,650
Total assets................................ 5,628 3,918 6,780 4,574 3,989 27,369
Long-term debt.............................. -- -- -- 29 21 19
Total shareholders' equity.................. 5,103 3,407 6,160 582 793 24,205
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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 related notes included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
As a leader in interactive photography and immersive imaging for the Internet,
our IPIX images allow viewers to "Step Inside the Picture." Our patented
technology changes the way people create and view images, immersing them in a
360(degree) by 360(degree) spherical environment. IPIX images capture the world
as we see it, providing a complete field of view -- from ground to sky, floor to
ceiling, horizon to horizon. Viewers can easily navigate the image on a personal
computer screen by moving a cursor inside the image.
We were founded in 1986 at the Oak Ridge National Laboratory in Tennessee to
develop remote robotic systems for the United States Department of Defense, the
Department of Energy, NASA and others. Our efforts in this field led us to the
invention of technology which removes the distortion inherent in fisheye
photographic images and corrects the viewing perspective. We obtained a patent
for this technology in 1991 and continued to improve upon it through special
projects for third parties. In 1994, Motorola, Inc. provided equity capital
which permitted us to further refine our technology. In 1996, Motorola and
Discovery Communications, Inc. provided additional equity capital to enable us
to explore potential commercial application of our technology. James M.
Phillips, our Chairman and Chief Executive Officer, joined us in the spring of
1997 to commence commercialization of our technology. Over the next two years,
we obtained additional equity capital, which we used to build an experienced
management team to implement our business model. Since the latter part of 1998,
we have continued to seek new commercial applications for our products by
positioning ourselves to take advantage of the acceleration in the availability
of digital cameras and significant growth in the popularity of the Internet. We
have targeted the following domestic and international commercial markets: real
estate, travel and hospitality, electronic publishing, corporate and e-commerce
and education and entertainment. We have also entered into strategic
relationships with digital camera manufacturers Kodak, Nikon and Olympus and
received favorable outcomes in legal proceedings relating to our patents.
Product revenues are generated by the sale of IPIX keys, IPIX kits and studio
work and the license of archived IPIX images. These revenues are recognized upon
the shipment or delivery of products to our customers. Service revenues
historically were generated by research and development projects, although we
have de-emphasized this business and are currently not engaged in any of these
projects. We intend to focus our initial efforts on establishing an installed
base of IPIX kits as well as building brand recognition through our studio work.
We intend to leverage this installed base to sell IPIX keys and generate
recurring revenue. For the three months ended March 31, 1999, we sold 26,668
keys as compared to 40,902 keys in all of 1998. We continue to examine and
refine our business model and commercial applications to reflect a constantly
changing business environment which includes improving digital cameras, growing
use of the Internet and new product offerings by our competitors.
We sell our IPIX keys at different prices based on the potential number of
viewers, useful life and utility of the IPIX image. For example, an IPIX image
that is likely to be viewed by a large audience, has a lengthy useful life and
contributes significantly to the overall experience, commands a higher price. In
addition, we can further refine our IPIX key pricing through several
modifications. IPIX keys can be modified so that the IPIX image may be displayed
only in a particular file format or resolution, may be incorporated into
multimedia presentations, has a limited creation and viewing lifetime and may be
posted to a specific Web site or distributed via e-mail. For example, an IPIX
key that creates a high resolution IPIX image to be utilized on a widely-viewed
CD-ROM encyclopedia with an unlimited life will command a higher price than an
IPIX key that creates an IPIX image to be posted on a used-auto Web site, where
the IPIX image's lifetime is limited and will
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be viewed only by a select and small audience. We will continue to examine our
pricing strategy for IPIX keys to meet current and changing market conditions.
International sales accounted for 26%, 25% and 21% of our total revenues for
fiscal 1996, 1997 and 1998, respectively, and 36% and 20% for the quarters ended
March 31, 1999 and 1998, respectively. We anticipate that international sales
may continue to account for a significant portion of our revenue in the
foreseeable future. A substantial portion of our international sales are
denominated in U.S. dollars. As a result, changes in the values of foreign
currencies relative to the value of the U.S. dollar can render our products
comparatively more expensive. Although we have not been negatively impacted in
the past by foreign currency changes, such conditions could negatively impact
our international sales in future periods.
In the second half of 1998, we introduced digital camera kits, which resulted in
an increase in our relative cost of revenues. In addition, we made a significant
investment to expand our marketing, distribution and brand awareness in 1998.
Our distribution system includes a direct sales force, a telemarketing group and
an online order fulfillment system. Research and development expenses have also
increased as we continue to enhance our existing products and develop future
applications of our technology, such as our IPIX Webcam and steerable video
product offering, V360. We expect these investments and costs to continue as we
develop additional product offerings and explore new commercial applications.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percent
relationship to total revenues of certain items in our statements of operations.
---------------------------------------------
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ------ ------ ------ ------
Revenues
Product........................................ 86.5% 87.0% 89.2% 76.5% 100.0%
Service........................................ 13.5 13.0 10.8 23.5 --
----- ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0
Cost of revenues
Product........................................ 35.1 18.2 39.7 17.2 47.8
Service........................................ 7.0 12.9 7.9 7.7 --
----- ------ ------ ------ ------
42.1 31.1 47.6 24.9 47.8
----- ------ ------ ------ ------
Operating expenses
Sales and marketing............................ 58.8 115.7 275.8 371.7 228.8
Research and development....................... 25.2 47.9 87.7 118.2 59.9
General and administrative..................... 59.6 106.2 127.1 212.7 67.4
Amortization of product development and patent
costs....................................... 4.6 35.1 -- -- --
----- ------ ------ ------ ------
Total operating expenses.................... 148.2 304.9 490.6 702.6 356.1
----- ------ ------ ------ ------
Interest and other income (expense), net......... 13.0 7.9 3.3 (8.9) 1.8
----- ------ ------ ------ ------
Net loss.................................... (77.3)% (228.1)% (434.9)% (636.4)% (302.1)%
===== ====== ====== ====== ======
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
Revenues. Total revenues increased to $1,229,000 in the first quarter of 1999,
compared to $417,000 in the first quarter of 1998, an increase of $812,000, or
194.7%. Product revenues increased to $1,229,000 from $319,000, an increase of
$910,000. This increase was due primarily to an increase in sales of IPIX keys
and IPIX kits to customers in the corporate and e-commerce and real estate
markets and, to a lesser extent, an increase in international sales. We sold
26,668 IPIX keys in the first quarter of 1999, compared to 3,321 keys in the
first quarter of 1998, an increase of 23,347 keys. We did not have service
revenues in the first quarter of
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1999, compared to $98,000 in the first quarter of 1998. We have de-emphasized
our services business and are not currently performing any research and
development projects for others.
Cost of Revenues. Cost of product revenues consists primarily of the costs of
the studio and the digital camera and related hardware included in our IPIX
kits. Cost of product revenues increased to $587,000 in the first quarter of
1999, compared to $72,000 in the first quarter of 1998, an increase of $515,000.
Cost of product revenues as a percentage of product revenues increased from
22.6% in the first quarter of 1998 to 47.8% in the first quarter of 1999. This
increase was due primarily to the costs of the digital camera and related
hardware included in our kits which were not available in the first half of
1998. Cost of service revenues consists primarily of labor costs associated with
research and development work. In the first quarter of 1998, cost of service
revenues was $32,000, or 32.7% of service revenues. We did not incur any cost of
service revenues in the first quarter of 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions paid to our direct sales, marketing and telemarketing groups,
expenses relating to advertising and public relations and studio expenses
incurred for production of demonstration products. Sales and marketing expenses
increased to $2,812,000 in the first quarter of 1999, compared to $1,550,000 in
the first quarter of 1998, an increase of $1,262,000, or 81.4%. This increase
was due primarily to a significant increase in our sales force.
Research and Development. Research and development expenses consist primarily
of compensation and other expenses related to the ongoing support of existing
product lines and development costs associated with future product
introductions. Research and development expenses increased to $736,000 in the
first quarter of 1999, compared to $493,000 in the first quarter of 1998, an
increase of $243,000, or 49.3%. This increase was due primarily to increased
staffing and associated costs in our research and development department.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs of the executive, finance and
human resource departments and outside professional services fees. General and
administrative expenses decreased to $828,000 in the first quarter of 1999,
compared to $887,000 in the first quarter of 1998, a decrease of $59,000, or
6.7%. This decrease was due primarily to a decrease in legal fees associated
with litigation relating to our patents, which was offset by an increase in
additional salary and related costs.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of interest earned on our investments of cash, net of
interest paid on borrowed funds. Net interest and other income increased to
$22,000 in the first quarter of 1999, compared to $(37,000) in the first quarter
of 1998, a change of $59,000. This change was due primarily to increased
earnings on our cash investments and a reduction in the amount of our
indebtedness.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. Total revenues increased to $3,041,000 in 1998, compared to
$2,446,000 in 1997, an increase of $595,000, or 24.3%. Product revenues
increased to $2,712,000 in 1998, compared to $2,128,000 in 1997, an increase of
$584,000, or 27.4%. The increase in total revenues and product revenues was due
primarily to an increase in the sale of IPIX keys, IPIX kits and studio work to
an expanded base of corporate and e-commerce customers. Service revenues
remained essentially unchanged, increasing to $329,000 in 1998, from $318,000 in
1997.
Cost of Revenues. Cost of product revenues increased to $1,207,000 in 1998,
compared to $446,000 in 1997, an increase of $761,000, or 170.6%. This increase
was due primarily to costs associated with the digital camera and related
hardware included in our kits, which were not introduced until the second half
of 1998, and an increase in sales. Cost of product revenues for 1998 also
included a write-down of obsolete product inventory in the amount of $220,000.
Cost of service revenues decreased to $241,000 in 1998 compared to $316,000 in
1997. This decrease was due primarily to a 1997 contract for which project costs
exceeded associated revenue.
Sales and Marketing. Sales and marketing expenses increased to $8,387,000 in
1998, compared to $2,829,000 in 1997, an increase of $5,558,000, or 196.5%. This
growth principally reflected an increase in salary and
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related expenses directly attributable to the establishment of a direct sales
force and an increase in advertising and public relations expense.
Research and Development. Research and development expenses increased to
$2,668,000 in 1998, compared to $1,171,000 in 1997, an increase of $1,497,000,
or 127.8%. This increase was due primarily to increased staffing and associated
costs relating to the introduction of JAVA based applications in support of the
continued development of new product offerings, including V360 and IPIX Webcam
products.
General and Administrative Expenses. General and administrative expenses
increased to $3,864,000 in 1998, compared to $2,598,000 in 1997, an increase of
$1,266,000, or 48.7%. This increase was due primarily to legal fees associated
with litigation relating to protecting our patents and an increase in salaries
and other expenses as a result of an increase in employees.
Amortization of Product Development and Patent Costs. During 1997, we revised
the estimated economic lives of capitalized product development costs and patent
costs from five years and seventeen years, respectively to one and three years,
respectively. This change resulted in additional amortization expense of
$755,000 in 1997. In 1998, product development and patent costs were
insignificant, and therefore, we did not capitalize such costs.
Interest and Other Income (Expense). Net interest and other income (expense) in
1998 was $101,000, compared to $194,000 in 1997, a decrease of $93,000 or 47.9%.
This decrease was primarily due to increased interest incurred on indebtedness
issued in the fourth quarter of 1997, which more than offset an increase in
interest income.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. Total revenues increased to $2,446,000 in 1997, compared to
$1,545,000 in 1996, an increase of $901,000, or 58.3%. Product revenues
increased to $2,128,000 in 1997, compared to $1,337,000 in 1996, an increase of
$791,000, or 59.2%. This increase resulted primarily from increased sales of
IPIX kits, IPIX keys and studio work in the real estate and international
markets. Service revenues increased to $318,000 in 1997, compared to $208,000 in
1996, an increase of $110,000, or 52.9%. This increase was primarily due to an
increase in research and development services provided to the Department of
Defense.
Cost of Revenues. Cost of product revenues decreased to $446,000 in 1997,
compared to $543,000 in 1996, a decrease of $97,000, or 17.9%. This decrease was
due primarily to a shift in product mix to higher margin IPIX keys and license
revenue. Cost of service revenues increased to $316,000 in 1997, compared to
$109,000 in 1996, an increase of $207,000, or 189.9%. This increase was due
primarily to a 1997 contract for which project costs exceeded associated revenue
and an increase in research and development services provided to the Department
of Defense.
Sales and Marketing. Sales and marketing expenses increased to $2,829,000 in
1997, compared to $908,000 in 1996, an increase of $1,921,000. The increase was
due primarily to increased advertising expenses and salaries and related
expenses resulting from an increase in personnel in the sales and studio
departments.
Research and Development. Research and development expenses increased to
$1,171,000 in 1997, compared to $389,000 in 1996, an increase of $782,000. This
increase was due primarily to salaries and related expenses resulting from an
increase in personnel conducting research and development projects.
General and Administrative Expenses. General and administrative expenses
increased to $2,598,000 in 1997, compared to $921,000 in 1996, an increase of
$1,677,000, or 182.1%. The increase was due primarily to legal fees related to
litigation concerning our patents, an increase in personnel and associated
relocation expense and an increase in our bad debt provisions.
Amortization of Product Development and Patent Costs. The amortization of
product development and patent costs increased to $858,000 in 1997, compared to
$71,000 in 1996, an increase of $787,000. This increase was due primarily to the
change in 1997 of the estimated economic lives of capitalized product
development costs and patent costs from five years and seventeen years,
respectively, to one and three years, respectively.
Interest and Other Income (Expense). Net interest and other income (expense)
decreased to $194,000 in 1997, compared to $201,000 in 1996, a decrease of
$7,000, or 3.5%.
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SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables represent unaudited quarterly consolidated statements of
operations data for each of the nine quarters in the period ended March 31,
1999, as well as such data expressed as a percentage of revenues. In the opinion
of management, this information has been prepared substantially on the same
basis as the consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results. The quarterly information should be read in
conjunction with our consolidated financial statements and the notes thereto
appearing elsewhere in the prospectus. The quarterly information has not been
reviewed by our auditors. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
1997 1998 1999
------------------------------------- ------------------------------------- -------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- ------- ------- ------- ------- ------- -------
In thousands
Revenues..................... $ 418 $ 772 $ 528 $ 728 $ 417 $ 788 $ 783 $ 1,053 $ 1,229
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 303 585 293 503 313 643 399 238 642
Operating expenses
Sales and marketing........ 344 540 859 1,086 1,550 1,837 2,238 2,762 2,812
Research and development... 92 98 530 450 493 655 780 740 736
General and
administrative........... 624 580 506 889 887 845 558 1,574 828
Amortization of product
development and patent
costs.................... 286 286 286 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,346 1,504 2,181 2,425 2,930 3,337 3,576 5,076 4,376
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest and other income
(expense), net............. 43 65 24 63 (37) 75 56 7 22
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................. $(1,000) $ (854) $(1,864) $(1,859) $(2,654) $(2,619) $(3,121) $(4,831) $(3,712)
======= ======= ======= ======= ======= ======= ======= ======= =======
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
1997 1998 1999
------------------------------------- ------------------------------------- -------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- ------- ------- ------- ------- ------- -------
Percentage of revenues
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 72.5 75.8 55.5 69.1 75.1 81.6 51.0 22.6 52.2
Operating expenses
Sales and marketing........ 82.3 70.0 162.7 149.2 371.7 233.1 285.8 262.3 228.8
Research and development... 22.0 12.7 100.4 61.8 118.2 83.1 99.6 70.3 59.9
General and
administrative........... 149.3 75.1 95.8 122.1 212.7 107.2 71.3 149.5 67.4
Amortization of product
development and patent
costs.................... 68.4 37.0 54.2 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 322.0 194.8 413.1 333.1 702.6 423.4 456.7 482.1 356.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest and other income
(expense), net............. 10.3 8.4 4.5 8.6 (8.9) 9.5 7.2 0.7 1.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................. (239.2)% (110.6)% (353.1)% (255.4)% (636.4)% (332.3)% (398.5)% (458.8)% (302.1)%
======= ======= ======= ======= ======= ======= ======= ======= =======
In the second half of 1998, we introduced digital camera kits, which resulted in
an increase in our relative cost of revenues. As a result of the cost of the
digital camera and related hardware included in our IPIX kits, our gross margins
decreased. In the fourth quarter of 1998, we wrote off $220,000 of obsolete
product inventory, which also impacted gross margins.
Our operating results have varied on a quarterly basis during our operating
history and may fluctuate in the future as a result of a variety of factors,
many of which are outside our control. Additionally, as a result of our limited
operating history and the emerging nature of the immersive imaging market in
which we compete, it is
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difficult for us to forecast our revenues or earnings accurately. Our expense
levels are largely based on investment plans and future revenue expectations.
Such expenses are fixed, particularly in the short term, and we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to our
expectations could cause significant declines in our quarterly operating
results. Thus, our quarterly revenues and operating results are difficult to
forecast. 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. It is therefore likely that
in some future periods our operating results may fall below the expectations of
securities analysts and investors. In that event, the trading price of our
common stock would likely decline.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the private
placements of capital stock and a convertible debenture. In the first quarter of
1999, we raised $27,000,000 through the sale of our Series D preferred stock. At
March 31, 1999, we had $7,150,000 of cash and cash equivalents and $16,649,000
in securities available-for-sale.
Net cash used in operating activities in the years ended December 31, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999 was $1,189,000,
$4,825,000, $12,444,000, $2,191,000 and $4,135,000, respectively. Net cash used
for operating activities in each of these periods is primarily a result of net
losses.
Net cash provided by (used in) investment activities in the years ended December
31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999 was
$1,159,000, $(952,000), $253,000, $914,000 and $(16,846,000), respectively. Net
cash provided by (used in) investing activities was related to the acquisition
of computer software and hardware and other equipment, the purchase of
short-term investments and the maturity of acquired investment securities.
Net cash provided by (used in) financing activities in the years ended December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 was
$3,976,000, $2,997,000, $11,428,000, $(2,000) and $27,068,000, respectively. The
net cash provided by (used in) financing activities for these periods was due
primarily to the sale of shares of our common and preferred stock. Net cash also
was provided by the issuance of a $3,000,000 8% convertible debenture in 1997,
$1,000,000 of which was repaid and $2,000,000 of which was converted to
preferred stock.
Although we have no material commitments for capital expenditures, we anticipate
an increase in the rate of capital expenditures and other expenses consistent
with our anticipated growth in personnel, operations and marketing activities.
We anticipate utilizing a portion of the net proceeds of this offering to expand
our sales and marketing activities and enhance our research and development
through the next twelve months. We also may use cash to acquire or license
technology, products or business related to our current business. We anticipate
that our operating expenses will continue to grow in the foreseeable future and
will be a material use of our cash resources.
We believe that the net proceeds from this offering, together with existing cash
and cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
However, we may seek to raise additional capital during that period. The sale of
additional equity or other securities could result in additional dilution to our
shareholders. There can be no assurance that such capital will be available in
amounts or on terms acceptable to us, if at all.
YEAR 2000 READINESS, COSTS OF COMPLIANCE AND EFFECT ON OPERATIONS
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The Year 2000 problem is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two digit year value of 00. The issue is whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or fail.
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State of Readiness
We have completed our Year 2000 compliance assessment plan. Our compliance
assessment plan included testing all of our information and non-information
technology as well as our internally developed studio and operation systems.
Based on our testing and assessment, we believe that our information and
non-information technology, as well as internally developed systems, are Year
2000 compliant.
In addition, we are in the process of seeking verification from our key
suppliers and distributors that they are Year 2000 compliant or, if they are not
presently compliant, to provide a description of their remedial plans. We have
obtained information from various other third-party providers regarding the Year
2000 readiness of their systems and we are continuing to review this
information.
Costs
Our cost of upgrading our systems to become Year 2000 compliant was
approximately $40,000.
Risks
If we fail to solve a Year 2000 compliance problem with one of our systems, the
result could be a failure or interruption of normal business operations.
Although we believe that the potential for significant interruptions to normal
operations should be minimal due to the relative newness of our systems, our
business is exposed to risks associated with the Year 2000 problem.
Our primary risks of Year 2000 failures are those related to external service
providers including telecommunications, electrical power and Internet commerce
systems that we rely upon daily. The most reasonably likely worst-case scenario
is a failure related to one or several of our external service providers
referenced above. Such failure or failures could cause any of the following:
- protracted interruption of electrical power to our operations and
Internet host servers which could materially and adversely impact our
ability to enable online transactions and other services:
- significant or widespread failure of software products and services
provided to us by third parties; or
- significant or widespread failure of third party computer systems with
which our systems interface.
Contingency Plans
We have not established a contingency plan to mitigate the risks associated with
any inaccuracies to our Year 2000 assessment. Although we have found no material
Year 2000 problems with our internal systems, and despite our expectation that
Year 2000 compliance efforts will result in Year 2000 compliant services, there
can be no assurance that our compliance efforts will be successful. Further,
there is no assurance that the various telecommunications and power delivery
systems we rely upon will be Year 2000 compliant or that any contingency plans
they have made will be successful. A failure of any of these systems would have
a material adverse effect on our business, results of operations and financial
condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
SFAS No. 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 reported results of operations, financial
position or cash flows.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires all costs related to the development
of
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26
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. SOP 98-1 is effective for our fiscal
year ending December 31, 1999. We do not expect its adoption to have a material
impact on our reported results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. We do not expect its adoption
to have a material impact on our reported results of operations, financial
position or cash flows.
In December 1998, the AICPA issued Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions"
(SOP 98-9). SOP 98-9 amends certain elements of SOP 97-2, and provides
additional authoritative guidance on software revenue recognition. SOP 97-2 is
effective for fiscal years beginning after March 15, 1999. We do not expect its
adoption to have a material impact on our reported results of operations,
financial position or cash flows.
INFLATION
Inflation has not had a significant impact on our operations to date.
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BUSINESS
OVERVIEW
As a leader in interactive photography and immersive imaging for the Internet,
our IPIX images allow viewers to "Step Inside the Picture." Our patented
technology changes the way people create and view images, immersing them in a
360(degree) by 360(degree) spherical environment. We believe IPIX images enhance
the key elements of a photograph: memory, information and entertainment. IPIX
images capture the world as we see it, providing a complete field of
view -- from ground to sky, floor to ceiling, horizon to horizon. Viewers can
easily navigate the image on a personal computer screen by moving a cursor
inside the image. In order to accelerate the adoption and enhancement of IPIX
images, we have established strategic relationships with leading camera
manufacturers such as Kodak, Nikon and Olympus as well as technology companies
such as IBM, Intel and RealNetworks. We estimate that over 3,000 commercial Web
sites are utilizing IPIX images.
Our patented technology creates IPIX images by combining two film or digital
photographs taken with a fisheye lens into one 360(degree) by 360(degree)
spherical image. Our Wizard software corrects the distortion inherent in such
photographs. A person may view the resulting image in any direction, and, if
desired, save the image utilizing an IPIX key for posting to a Web site,
transmitting via e-mail or saving to a disk. The following diagram demonstrates
the steps to create an IPIX image. IPIX images can be downloaded rapidly and can
be viewed and navigated with the IPIX plug-in or a viewer using JAVA. We are
utilizing our patented technology to develop other immersive imaging products,
such as steerable video and an IPIX-compatible digital camera for the consumer
market.
Leading companies use our technology to create virtual tours and multimedia
content to attract and retain visitors on their Web sites, which enhances their
marketing and e-commerce initiatives. We have targeted the following domestic
and international commercial markets: real estate, travel and hospitality,
electronic publishing, corporate and e-commerce and education and entertainment.
Our customers include Coldwell Banker, Rent.Net, Carnival Cruise Lines,
Swissotel, CNN, Microsoft, Intel, Ticketmaster and Disney. In addition, we have
entered into strategic relationships with leading customers in our commercial
markets such as Homes.com and Microsoft CarPoint to promote the use of IPIX
images to members of our targeted commercial markets.
INDUSTRY BACKGROUND
Growth of the Internet and e-commerce
The Internet has emerged as a global interactive medium enabling millions of
people worldwide to share information, communicate and conduct business
electronically. The Internet differs from traditional media by its lack of
geographic limitations and its ability to provide instantaneous data
communication. International Data Corporation, or IDC, estimates that the number
of Web users will grow from approximately 69 million worldwide in 1997 to
approximately 320 million worldwide by the end of 2002. Growing usage of the
Internet has been driven primarily by the rapid proliferation of personal
computers, easier, faster and affordable access to the Internet, increasingly
robust network architectures and the emergence of compelling content and
applications.
The emergence of the Internet and secure transaction networks has generated
significant opportunities for businesses to conduct electronic commerce. IDC
estimates e-commerce revenues will grow from approximately $12.4 billion
worldwide in 1997 to $237 billion worldwide by 2001. According to Forrester
Research, on-line leisure travel reservations will grow from 1.3 million trips
in 1997 to 65.5 million trips by 2003. With respect to real estate, Yankee Group
reports that the percentage of homebuyers using the Internet to shop for a home
will increase from 4% in 1997, to over 30% in the year 2000. Additionally,
Forrester Research estimates that on-line classified advertising will grow from
$185 million in 1998 to $2.9 billion in 2003. This widespread deployment and
acceptance of the Internet has introduced rapid changes in the way information
is produced, distributed and consumed.
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Demand for effective on-line content
The popularity of the Internet has resulted in substantial growth in the number
and types of Web sites. According to IDC, the number of Web sites is estimated
to grow from 829.4 million in 1998 to 2.7 billion in 2000. New technologies are
allowing Web site operators and advertisers to measure a site's traffic, average
time spent on a site and visit-to-purchase ratios. Advertisers are utilizing
this data to measure the effectiveness of Internet advertisements and to set
advertising rates.
This data is causing businesses to demand content and features that will allow
them to attract visitors, increase the amount of time spent on their Web sites
and promote e-commerce. According to a Forrester Research survey of online
consumers, 75% of those surveyed stated that content was the most important
factor in attracting and retaining visitors to Web sites.
Emergence of broadband capability
The transmission of data intensive content over the Internet has been limited
due to historical bandwidth constraints. Increasing availability of improved
delivery systems, such as digital cable modems, satellite delivery systems and
DSL networks are enabling the use of more feature-rich multimedia content.
Forrester Research predicts that approximately 16 million U.S. households will
have broadband connection by the end of 2002, representing approximately 25% of
the homes connected to the Internet.
Growth in the use of digital imaging
Fundamental changes are occurring in the photography industry with the
introduction of the digital camera. The digital camera allows the user to take
pictures and display them digitally, either on a personal computer or over the
Internet, without the need for traditional film development. Because digital
cameras were initially expensive, early adopters of this technology were
professionals and hobbyists. Recently, sales of digital cameras have grown
substantially due to improved performance and lower unit prices. IDC forecasts
that worldwide digital camera shipments will grow from 2.7 million units in 1997
to 29.5 million units in 2002.
Lack of interactivity and realism with existing digital imaging technology
Companies are increasingly using digital imaging to promote their products and
present information on their Web sites. Digital imaging provides businesses with
a powerful, cost-effective medium to maximize the impact of their Web sites.
However, most of the images remain flat two-dimensional images offering a
limited field of view. Technological innovations that enhance realism and
interactivity and contribute to a viewer's retention to that Web site will
facilitate the success of e-commerce by potentially leading to increased sales
and advertising rates. Webcams and streaming video are some of the technological
innovations businesses are using to attract and retain visitors to their Web
sites.
Specifically, immersive imaging, or the ability to create the viewing
perspective of being inside the image, is becoming increasingly popular with
many Web sites. However, image creation with many of the existing immersive
technologies is labor intensive and requires proprietary hardware. Conditions
such as inadequate lighting, subject motion or lack of portability reduce the
effectiveness of the image. As a result, market acceptance of these technologies
has been limited.
In order for widespread adoption of immersive imaging by businesses and
consumers to occur, new immersive technologies must offer the following
benefits:
- ease of creating and viewing an image;
- ease of distributing and sharing the image;
- portability of the capture device;
- cost effectiveness;
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- use of standardized technology; and
- platform independence.
THE IPIX SOLUTION
We believe that our 3608 by 3608 immersive imaging solution enhances the key
elements of a photograph: memory, information and entertainment. An IPIX image
provides more than just a picture. The key benefits of our immersive imaging
solution are as follows:
- IPIX images provide a more powerful viewing experience by creating a 3608
by 3608 immersive viewing environment;
- our technology is easy to use, portable and cost-effective; and
- our technology is compatible with commercially available digital cameras
and different computer platforms and has low bandwidth requirements.
IPIX images enhance the photo viewing experience by permitting a person to view
locations from ground to sky, floor to ceiling and horizon to horizon. A person
can navigate the image on a personal computer screen by moving the cursor within
the image. We believe IPIX images, alone or combined with other multimedia such
as audio, video and automation, can provide businesses with more compelling
content to attract and retain visitors to their Web sites and promote
e-commerce.
Our technology is easy to use, portable and cost-effective. Our Wizard software
easily and quickly combines two 1858 photographs taken with a standard digital
camera into one immersive image. After using an IPIX key, a user can post the
IPIX image to a Web site, view it on a personal computer or e-mail it with the
click of a button. IPIX images can be viewed and navigated with the IPIX viewer
or with a viewer using JAVA. We price our IPIX keys to meet the cost
requirements and anticipated use of the IPIX image by the end user, making it a
cost effective alternative to other immersive imaging technologies.
Because our technology can be used with commercially available digital cameras,
IPIX images can be captured in almost any environment. Our technology is
compatible with most major operating systems and Internet browsers. The IPIX
image file size is small (50 to 250 Kbs), which results in quick delivery and
short download on low bandwidth systems. Our technology is also taking advantage
of the pending availability of broadband networks and higher resolution digital
cameras. We currently have in development our IPIX Webcam and steerable video
technology, V360.
OUR GROWTH STRATEGY
Our objective is to become a world leader in interactive photography and
immersive imaging for the Internet. We believe we can achieve this objective by
leveraging our leading position in immersive imaging technology. Our key
strategies to achieve this objective include:
Build awareness of the IPIX brand and experience
We have begun to create awareness of the IPIX brand name and experience through
a variety of activities. We are focusing our direct sales and advertising
initiatives on our targeted commercial markets. We have entered into
co-marketing relationships with camera manufacturers, such as Kodak, Nikon and
Olympus, and commercial market leaders such as American Express, CNN and General
Electric. We also participate in industry specific trade shows. In order to
increase our presence on the Internet, we target high-profile, high-traffic Web
sites to use our technology. For example, we provided IPIX images of the space
shuttle to CNN that were used in its special broadcast of John Glenn's return to
space. We intend to use portions of the net proceeds of this offering to expand
our sales and marketing programs and increase our brand awareness.
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Target commercial markets that can best capitalize on our technology
We believe that applications within targeted commercial markets provide the most
immediate revenue opportunities for IPIX images. These markets are characterized
by the need for high visual content in advertising, product information and
entertainment. We initially have targeted the following commercial markets: real
estate, travel and hospitality, electronic publishing, corporate and e-commerce
and education and entertainment. We actively seek customers that are leaders in
each of these markets. For example, we have entered into an agreement with
Cendant Corporation and are the preferred provider of immersive imaging to its
real estate subsidiaries, Coldwell Banker, Century 21 and ERA. We organize our
sales force and customize our product offering to each commercial market to
satisfy the needs of the particular market and customer. In addition, we believe
that opportunities exist for our technology in other commercial markets such as
security, child care, government agencies and architecture.
Develop approaches to penetrate consumer markets
With the availability of IPIX images on retail products such as CD-ROM
encyclopedias and increased usage of IPIX images on Web sites, we believe that
consumers are becoming familiar with immersive imaging and will begin to require
the same immersive imaging technology for their personal use.
By taking advantage of the increasing use and decreasing cost of digital
cameras, we currently are pursuing a number of different product approaches for
the consumer market. The first of these, a personal edition digital camera kit,
is targeted towards the early adopter, as well as the photo enthusiast. We also
seek to partner with leading camera manufacturers to develop a single use "point
and shoot" film camera kit that will create an immersive panoramic image and be
targeted to a broader use market. We believe the consumer will utilize the
services of a third party to process and deliver the IPIX images on a CD-ROM or
via the Internet.
Leverage our technology to enhance existing products and create new product
offerings
We continue research and development efforts to expand the features and
capabilities of our products and services and to develop new product offerings.
In particular, we are pursuing products compatible with the pending availability
of broadband networks and higher resolution digital cameras.
One product in beta test phase is the IPIX Webcam, which we call "the eyes of
the Internet." This technology would permit the remote capture, creation and
transmission of hemispherical IPIX images over the Internet. The IPIX image is
continuously updated and can be viewed on a personal computer or other
Internet-enabled device. In addition to our current targeted commercial markets,
child care, security and entertainment industries are possible commercial market
applications.
Another new product development is our steerable video technology, V360. When
fully developed, V360 will enable multiple viewers to simultaneously and
independently select their own field of view by navigating within a spherical or
hemispherical video image transmitted from a stationary camera. Possible
applications for this technology include the sports broadcasting, tourism and
motion picture industries. V360 research is ongoing with working prototypes
developed in conjunction with Discovery, MediaOne and Motorola currently under
evaluation.
Expand strategic relationships
We have developed strategic relationships with camera manufacturers, technology
companies and content providers. We have established strategic relationships
with leading camera manufacturers such as Kodak, Nikon and Olympus as well as
technology companies such as IBM, Intel and RealNetworks. We believe these
relationships will enable us to achieve rapid adoption of our technology and
penetrate markets quickly. In addition, they will help us to facilitate the
development of compelling content and to expand the range of applications for
IPIX images. We also plan to continue to capitalize on synergies with software
and hardware vendors and distributors possessing complementary technologies. We
plan to expand these relationships and seek additional partners with market and
technology leaders.
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Expand internationally
We intend to increase our presence throughout the world by developing
relationships with strategic partners in select international markets. Through
these relationships, we intend to sell to our targeted commercial markets
internationally. We have established an operating subsidiary in the United
Kingdom to target market opportunities in Europe and have entered into
distributorship arrangements with strategic partners in Japan and Australia. In
Japan, Sumitomo Corporation currently distributes IPIX keys and IPIX kits under
a distribution agreement. We intend to continue to seek new strategic
relationships and organize additional operating subsidiaries as we expand into
new global markets.
PRODUCTS AND SERVICES
Our patented software technology creates IPIX images by combining two film or
digital photographs taken with a fisheye lens into one 360(degree) by
360(degree) spherical image. Our Wizard software corrects the distortion
inherent in such photographs. The resulting image can be viewed in any
direction, up-down, left-right, and horizon to horizon. The user may then view
the IPIX image and, if desired, save the image utilizing an IPIX key for posting
to a Web site, transmitting via e-mail or saving to a disk. The following
demonstrates the steps to create an IPIX image.
[SERIES OF FOUR PICTURES DESCRIBING STEPS TO CREATE AN IPIX IMAGE]
We sell IPIX keys, kits and studio work, license archived IPIX images and
conduct special research and development projects.
Products
IPIX Keys. An IPIX key is an encryption tool that enables the user to save and
distribute an IPIX image and is our digital equivalent to standard film. One
IPIX key enables the saving and distribution of one IPIX image, just as one film
negative enables the creation of one film photograph. We provide an initial
bundle of IPIX keys in our IPIX kits. IPIX kit owners can purchase additional
keys from us through our Web site or through our toll-free order system. We
price IPIX keys based on the potential number of viewers, useful life and
utility of the IPIX image. For example, IPIX images used in a CD-ROM
encyclopedia are viewed by a large audience, have a long life and contribute
significantly to the viewing experience and can command higher prices. In
addition, we offer enhancements to our IPIX keys. IPIX keys can be modified so
that the IPIX image may be displayed only in a particular file format or
resolution, may be incorporated into multimedia presentations, has limited
creation and viewing lifetime and may be posted to a specific Web site or
distributed via e-mail.
IPIX Kits. Our IPIX kit contains all the necessary items to create an IPIX
image, including a digital camera, fisheye lens, rotator, tripod, Wizard
software and an initial amount of IPIX keys. Kit sales are intended primarily to
increase the number of capture devices in the market and to stimulate repeat
purchases of IPIX keys and are not intended to be a significant source of our
future profits. We have established strategic relationships with leading digital
camera manufacturers such as Kodak, Nikon and Olympus in order to increase the
number of IPIX enabled digital cameras in the market. We sell our IPIX kits
through our direct sales force, from an on-line store maintained on our Web site
and through our toll-free telephone order system. We are considering
establishing a new Web site, "eCamera.com," where we would sell a full line of
IPIX enabled digital cameras to also enhance IPIX key sales.
In-house Studio. We maintain an in-house studio capable of creating
high-quality, multimedia-rich IPIX images for our customers. Our in-house studio
serves to introduce our technology to customers and stimulate additional sales.
We provide our studio customers with a complete turnkey solution where we take
the photographs, create the IPIX images and transmit the images to the customer
or directly to their Web site. Prices charged for studio work vary depending on
the number of desired images, type of photograph requested (i.e. film or
digital) and nature of added enhancements.
IPIX Stockhouse. We maintain a growing archive of over 3,300 select IPIX images
from around the world, such as the Grand Canyon, the Great Wall of China and the
Eiffel Tower, which we license to others for a fee.
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These images are submitted by company and freelance photographers. Customers who
license IPIX images from our IPIX Stockhouse include online publishers, CD-ROM
producers, travel companies, multimedia designers and other content creators.
Licensing fees for using our stock IPIX images are determined based on quality,
content, usage and time frame. We intend to expand this business by partnering
with other image stockhouses to provide additional distribution channels for our
archived IPIX images.
Services
Research and Development Projects. We conduct special research and development
projects acting as a subcontractor for the customer who owns the final product.
However, we maintain ownership of our technology incorporated into the project,
including any improvements and enhancements. For example, we are developing an
in-flight entertainment system for a customer which will permit each individual
passenger on an airplane to view live scenes outside the aircraft on their
in-seat video monitor. Our participation in this project has contributed to the
development of our technology.
Multimedia Enhancements
We can add the following multimedia capabilities to an IPIX image with minimal
incremental file size:
Multimedia Software. Our multimedia software can link a series of IPIX images
together and include other multimedia content, such as video, audio and text.
The user can combine the finished product with other digital multimedia features
such as Macromedia Director to provide an attractive interactive product. For
example, in November 1998, PBS and Intel used our multimedia software to
incorporate and link IPIX images into its digital television broadcast of the
Ken Burns documentary on Frank Lloyd Wright.
IPIX-TV. Our multimedia software can create an IPIX image to include automated
viewing and background audio. By adding autoplay with either music or narration,
the user can provide a video-like viewing experience of a still image. For
example, Swissotel used an IPIX image of the exterior of a hotel, with automated
motion and accompanied by background street noise, to make the viewer feel as if
he were watching a video of the front of the hotel. Jupiter Communications, an
Internet marketing research firm, selected IPIX-TV as one of the top five
technologies to watch in 1999.
New Products
We continually make enhancements and improvements to our technology and take
advantage of innovations in image compression and cross platform software
development languages. We believe these efforts have enabled us to explore new
applications for our technology. Described below are several products currently
under development:
V360. Our patented technology has the potential to generate full-motion
steerable video. When fully developed, V360 will enable multiple viewers to
simultaneously and independently select their own field of view within a
spherical video image from a fixed camera source. For example, an IPIX-enabled
V360 video feed from a sporting event would allow viewers to choose their own
camera angle, just as if they were actually in the stadium. V360 was featured at
IDC's Demo '99 conference as one of the forty most innovative technologies of
1999. We are exploring additional potential commercial applications of V360 such
as the security, teleconference and surveillance industries.
We believe V360 will benefit from the deployment of high-speed digital networks.
Multiple V360 streams could be delivered to the home via a digital cable
network, satellite or broadband. We have developed working prototypes in
conjunction with industry leaders such as MediaOne and Motorola. Our goal is to
become the leader in the field of full-motion steerable video by aggressively
pursuing and developing commercial applications for V360.
IPIX Webcam. According to InfoTrends, the number of Webcams in service will
grow from 1.2 million in 1998 to 12 million by 2002. Existing Webcam technology
continuously captures and transmits two-dimensional digital images over the
Internet. We have developed a Webcam which will permit the remote capture,
creation and transmission of 1808 navigable hemispherical IPIX images over the
Internet. The IPIX image is continuously
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updated and viewed on a personal computer or other Internet-enabled device such
as Web-TV. The IPIX Webcam will enable an unlimited number of viewers to view
the IPIX image and independently control their viewpoint. We are currently
engaged in a beta test with some of our customers to further refine this
technology. Potential commercial applications include entertainment, child care
and security industries.
IPIX On-Location. We are developing a "blue screen" application to our
technology in which an IPIX image can be used as a virtual set background. Blue
screens are used to create entire production studios from graphically rendered
images. We believe that our application of this technology, when fully
developed, will provide a cost-effective interactive solution for these virtual
studios.
IPIX Touch Screen. We have incorporated the ability to view an IPIX image with
a touch screen monitor. Viewers may navigate within the IPIX image by touching
the screen in the direction in which they wish to view. This innovation provides
an easy to use method of viewing an IPIX image. Potential opportunities for our
touch screen technology include kiosk manufacturers and airport and tourist
information exhibitors who wish to incorporate IPIX images into their product
offerings.
CUSTOMERS
We have directed our initial sales efforts to industry leaders within targeted
commercial markets. We believe that adoption of our technology by these leaders
will encourage other members of these markets to use IPIX images in order to
stay competitive. The following is a description of our targeted commercial
markets and our representative customers within these segments.
TARGETED COMMERCIAL MARKET REPRESENTATIVE CUSTOMERS
- -------------------------- ---------------------------------------------
Real estate.................................. Century 21, Coldwell Banker, ERA, Prudential,
Rent.Net, Rubloff, Winkworth (London)
Travel and hospitality....................... Carnival Cruise Lines, Disney Vacation Club,
Hilton Hotels, Holiday Inn, Hyatt Hotels,
Marriott, Starwood, Swissotel, Travelocity
Electronic publishing........................ Associated Press, CNN, Chicago Tribune,
CitySearch, Knight-Ridder, New York Times,
Reuters, The Washington Post, The Weather
Channel
Corporate and e-commerce..................... AutoVantage, Bell South, Cablevision, General
Motors, HGTV, Intel, Kodak, MCI Worldcom,
Microsoft CarPoint, Road Runner, Saab,
Ticketmaster, Toyota
Education and entertainment.................. ABC, Discovery Channel, Dreamworks SKG, Duke
University, E! Online, Fox, IBM Worldbook,
MGM, MTV, NBA, NBC, NFL, National Geographic,
PBS, Paramount Parks, The Walt Disney
Company, Warner Brothers
Real Estate
Residential and commercial real estate brokers and agents use IPIX images on
their Web sites to provide online virtual tours of featured properties. This
capability allows brokers to differentiate themselves and gain new listings. In
addition, IPIX images allow brokers to cost-effectively showcase properties to
the widest possible audience as well as allow prospective buyers to quickly
target properties that match their criteria while expending minimal time and
money. We are the preferred provider of virtual tours and immersive imaging to
Cendant Corporation's family of real estate brokers which include Coldwell
Banker, ERA and Century 21. We have entered into an exclusive arrangement with
Rent.Net, an on-line apartment locator service, to provide immersive images of
rental apartments. We have strategic relationships with several real estate
portals, including Homes.com and Microsoft HomeAdvisor, to further penetrate
this market.
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We offer a virtual tour package which includes four IPIX images of a home taken
by an approved photographer for a suggested retail price of $99.95. Our real
estate customers who own their own IPIX kits may create their own four-room
virtual tour for a retail price of $49.95.
Travel and Hospitality
Hotel chains, vacation resorts, cruise lines, theme parks, major tourist
attractions and tourism bureaus use IPIX images to influence travel plans to
targeted destinations, transportation modes and lodging. IPIX images provide a
prospective visitor the opportunity to take virtual tours of rooms, amenities
and attractions prior to making final travel plans.
The majority of our travel and hospitality clients utilize our studio for a
complete turnkey solution. On average, prices for our studio work range from
$2,000 to $4,000 per property.
Electronic Publishing
Broadcasters and publishers incorporate IPIX images on their Web sites to
enhance their reporting and coverage of major news events. Also, local city
guides and online classified advertisers are beginning to use IPIX images to
enhance the information on their Web sites and enhance online advertising. These
companies typically own their own digital cameras and purchase IPIX keys on a
per-key basis. We are exploring the adoption of a subscription service whereby a
customer in this industry can purchase a specific or unlimited number of IPIX
keys for one monthly charge.
Corporate and E-Commerce
Companies utilize IPIX images to advertise their product and service offerings
or provide virtual tours of their corporate facilities. 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 prior
to purchasing a ticket online. Our corporate and e-commerce customers either
purchase kits to create their own IPIX images or utilize our in-house studio to
create IPIX images for them.
Education and Entertainment
Leaders in the education and entertainment industries use IPIX images to enhance
the appeal and functionality of their products and Web sites. In particular,
these customers provide significant exposure for our brand and products. For
example, IBM features IPIX images in their 1998 IBM Worldbook electronic
encyclopedia. Also, an IPIX virtual tour of the set of the movie "Episode I: The
Phantom Menace" posted on the starwars.com Web site helped promote the film's
release. Our education and entertainment clients request studio work and
purchase kits and keys to create their own IPIX images.
INTERNATIONAL
Through our operating subsidiary in the United Kingdom and our strategic
relationships with distributors in Japan and Australia, we market our technology
to international customers. For example, in Japan, Sumitomo Corporation
currently distributes IPIX keys and IPIX kits under a distribution agreement. We
believe that our strategy of targeting commercial markets can be applied on a
global scale as usage of the Internet grows internationally. We intend to
continue to seek new strategic relationships and organize additional operating
subsidiaries as we expand into new global markets.
STRATEGIC RELATIONSHIPS
We are establishing strategic relationships with leading companies to integrate
our technology with other hardware, software and Internet applications, to
continue the development of IPIX enabled digital cameras and to promote and
distribute our products and services to existing and emerging customer bases.
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Technology Relationships
We are working with leading technology companies to increase the multimedia
features of IPIX images and to increase the applications available for viewing
IPIX images. We have entered into an agreement with RealNetworks and have
licensed our viewer software for incorporation into its RealPlayer. Through this
agreement, we intend to integrate our technology into their streaming audio and
video platform, RealPlayer, enabling users to view IPIX images, along with other
multimedia content. We also have entered into an agreement with IBM to
incorporate our technology in IBM's HotMedia software. HotMedia is a JAVA based
software which allows web developers to incorporate multimedia content into
e-commerce applications. One development that may arise out of this relationship
is the ability to include IPIX images within Internet banner ads. We are an
Intel MMX and Pentium technology development partner, and Intel has featured
IPIX images in demonstrations of the capabilities of its multimedia
microprocessor technology.
Digital Camera Manufacturers
We have relationships with leading manufacturers of digital cameras such as
Kodak, Nikon and Olympus. These manufacturers have developed several models of
IPIX-compatible digital cameras. Recently, sales of digital cameras have grown
substantially. IDC forecasts that shipments of digital cameras will grow from
2.7 million units in 1997 to 29.5 million in 2002, although only a small number
of digital cameras currently in circulation are IPIX compatible. We intend to
continue to work with these manufacturers to enhance the IPIX related features
and increase the availability of these cameras. We intend to enhance these
relationships to include joint product development, manufacture of fisheye
lenses that are easily adaptable to the digital camera, co-marketing
arrangements and distribution of our products through the manufacturer's
distribution channels.
Promotion and Distribution Relationships
We have established relationships with companies that provide technology to our
targeted commercial markets in order to accelerate awareness and adoption of our
technology. These companies market IPIX images with their own technology
offerings to members of commercial markets. For example, we have entered into an
agreement with Microsoft HomeAdvisor, a leading real estate portal site, to
promote IPIX virtual tours on its Web site. We have also established
relationships with companies to distribute our products internationally.
Sumitomo Corporation, our distributor in Japan, sells kits and IPIX keys to
businesses and features our company and technology on their Web site. Sales of
products to Sumitomo Corporation represented 13% of total revenues in 1998.
SALES AND MARKETING
Our marketing efforts focus on increasing brand awareness and supporting our
product offerings. Using this strategy, we intend to acquire new customers,
increase repeat purchases of IPIX keys and develop new sales opportunities. Our
marketing efforts include print and Internet advertising, direct mailings,
participation in trade shows, co-marketing with strategic partners and public
relations campaigns. We intend to utilize a portion of the net proceeds of this
offering to expand our sales and marketing organization and efforts. Our sales
and marketing team focuses on commercial markets and targets industry leaders.
In addition, we continue to explore other commercial markets for our technology,
such as government agencies, and we have sold IPIX products to TVA, the General
Services Administration and the Tennessee Department of Education. As of April
30, 1999, our direct sales group consisted of 36 employees who operate out of
our Oak Ridge office and our multiple national and international sales offices.
We also have established a telesales group that targets Web developers and other
potential users of our technology outside of our targeted commercial markets.
Our telesales team also provides support for the direct sales teams and fields
inquiries from our Web site and our toll-free customer service number. As of
April 30, 1999 we had eight employees on our telesales team which is based in
our Oak Ridge office.
We maintain a customer relations department with seven employees as of April 30,
1999. Our customer relations personnel answer telephone and e-mail inquiries
regarding our products and respond to technical questions. Our service personnel
also perform quality assurance checks on each item of equipment included in
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our kits prior to shipment and process customer service inquiries concerning
order status, shipping information, returns and exchanges.
RESEARCH AND PRODUCT DEVELOPMENT
We have made substantial investments in research and product development. We
continue to develop enhancements to our technology and pursue new product
offerings. In particular, we are pursuing products compatible with the pending
availability of broadband networks and higher resolution cameras. One product in
beta test phase is the IPIX Webcam, which we call "the eyes of the Internet."
This technology will permit the remote capture, creation and transmission of
1808 navigable hemispherical IPIX images over the Internet. Another new product
development is our steerable video technology, V360. When fully developed, V360
will enable multiple viewers to independently select their own field of view by
navigating within a spherical video image transmitted by a stationary camera. As
of April 30, 1999, we employed 17 engineers dedicated to research and product
development.
COMPETITION
We compete with companies that offer immersive imaging products and companies
that offer traditional two-dimensional photography. We compete with these
companies on the basis of price, ease of use, picture resolution and end user
experience. Our primary competitors are Apple Computer, Inc., Bamboo.com, Be
Here Corporation, Black Diamond, Inc., Cyclovision, Inc., Infinite Pictures
Corporation, and Live Picture Corporation in the immersive imaging market and
photography development companies in the traditional two-dimensional film
market. Some of our competitors may have greater financial, marketing,
distribution and technical resources than us. Our success will be dependent on
our ability to compete with these competitors on both a quality and
cost-effective basis, and there is no assurance that we will be successful in
that competition.
INTELLECTUAL PROPERTY
We rely on a combination of patent, 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 seven issued
patents and 13 patent applications pending. We have 16 international patent
applications pending. In addition, we license related patents and their
associated international filings from Motorola, pursuant to a non-royalty
bearing license agreement. Motorola has a limited right to license our patents,
and Motorola's consent must be obtained prior to any grant of an exclusive
license to our patents in excess of one year.
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 our employees and
entered into non-disclosure agreements with our suppliers, distributors and
appropriate customers so as 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 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
such litigation is difficult to predict. We have been involved in litigation
relating to the protection of our
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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 such litigation may
subject us to significant liabilities to third parties, require us to license
disputed rights from other parties, if licenses to such rights could be
obtained, or require us to cease using such technology.
LITIGATION
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 alleges in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
allege that our technology wrongfully incorporates trade secrets and other
know-how gained from them in breach of various duties. The lawsuit seeks, among
other things, compensatory damages and a disgorgement of profits. We have
removed this action to arbitration to be held in Knoxville, Tennessee, which is
scheduled to be heard by an arbitrator in the fall of 1999.
We deny all of the allegations of wrongdoing in the complaint and intend to
vigorously defend ourselves against these claims. The ultimate outcome of these
legal proceedings is not presently determinable.
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.
EMPLOYEES
As of April 30, 1999, we employed 136 full-time employees. Our employees are not
covered by any collective bargaining agreements. We believe that our employee
relations are good. There is significant competition for employees with the
managerial, technical, marketing, sales and other skills required to operate our
business. Our success will depend upon our ability to attract, retain and
motivate employees.
FACILITIES
We lease approximately 31,250 square feet of space in Oak Ridge, Tennessee for
our corporate office and operations. The current lease expires October 8, 2002.
We also lease space in Japan, the United Kingdom, New York, Chicago, San Jose
and Fort Lauderdale for sales offices.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth information with respect to our directors and executive
officers as of April 30, 1999:
NAME AGE POSITION
- ---- --- --------
James M. Phillips............ 47 Chairman of the Board of Directors and Chief Executive
Officer
Jeffrey D. Peters............ 47 President and Chief Operating Officer
John J. Kalec................ 48 Vice President and Chief Financial Officer
John M. Murphy............... 44 Vice President and General Manager, Sales
Steven D. Zimmermann......... 40 Vice President and Corporate Fellow
Joseph M. Viglione........... 55 Vice President, Administration
Edmond B. Lewis.............. 29 Vice President, Marketing and Secretary
Michael J. Tourville......... 39 Vice President, Product Engineering
Randall Battat............... 39 Director
John S. Hendricks............ 47 Director
Doug Holmes.................. 38 Director
Laban P. Jackson, Jr......... 55 Director
Tony Pantuso................. 36 Director
- ---------------
JAMES M. PHILLIPS has served as our Chairman and Chief Executive Officer since
March 1997 and has been a member of our board of directors since 1995. 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 Enhancement, and as a director of
Tennessee Technology, Inc. and the East Tennessee Economic Council. Mr. Phillips
holds a Bachelor's degree and an MBA from the University of Memphis.
JEFFREY D. PETERS joined our company in August 1998 and serves as our President
and Chief Operating Officer. From February 1996 to August 1998, Mr. Peters was
Vice President/General Manager of Eastman Kodak Company's Digital Imaging Group.
From September 1991 to February 1996, Mr. Peters was Vice President and General
Manager of the Semiconductor Sector of Harris Corporation. Mr. Peters holds a
Bachelor's degree from the University of Michigan and an MBA from the Florida
Institute of Technology.
JOHN J. KALEC joined our company in August 1998 and serves as Vice President and
Chief Financial Officer. 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.
JOHN M. MURPHY joined our company as Vice President and General Manager, Sales
in July 1997. From June 1995 to June 1997, Mr. Murphy was President of
Coryphaeus Software, Inc., a real time 3-D simulation graphics company. From
March 1993 to June 1995, he was Vice President of Sales and Marketing at Orchid
Technology, Inc., a multimedia graphics company. Mr. Murphy holds a Bachelor's
degree from the University of Oregon.
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STEVEN D. ZIMMERMANN rejoined our company in July 1997 and serves as our
Corporate Fellow and a Vice President. From December 1996 to July 1997, Mr.
Zimmermann served as Senior Engineer of Motorola, Inc. Mr. Zimmermann was an
independent consultant from August 1993 to November 1996 and assisted technology
companies in consumer product development. From June 1988 to August 1993, he was
an engineer and an officer with our company and co-developed the technology on
which our software is based. Mr. Zimmermann holds Bachelor of Science and Master
of Science degrees in Electrical Engineering from The University of Tennessee.
JOSEPH M. VIGLIONE joined our company in May 1998 and serves as our Vice
President, Administration. From January 1992 to May 1998, Mr. Viglione was
Senior Vice President, Human Resources and Total Quality at Anchor Advanced
Products, a manufacturer of injection molded products headquartered in
Knoxville, Tennessee. Mr. Viglione holds a Bachelor's degree and an MBA from
Drexel University.
EDMOND B. LEWIS joined our company in April 1997 as Vice President, Marketing.
Mr. Lewis became Secretary in June 1997. From August 1994 to April 1997, Mr.
Lewis served as Senior Manager of Business Development and Marketing for
Motorola, Inc. From September 1993 to August 1994, he served as Manager of
Corporate Development of Telular Corporation. Mr. Lewis holds a Bachelor's
degree and an MBA from The University of Iowa.
MICHAEL J. TOURVILLE joined our company in September 1993 as a Senior Engineer
and was promoted to Vice President, Product Engineering in December of 1997. Mr.
Tourville holds a Bachelor's degree in Electrical Engineering from Auburn
University.
RANDALL BATTAT was elected a director in January 1999. Since July 1998, Mr.
Battat has served as Senior Vice President and General Manager of Motorola's
Internet and Networking Group. From January 1997 to July 1998, he was Corporate
Vice President and General Manager of the Information Systems Group of Motorola.
From January 1994 to January 1997, Mr. Battat served as Corporate Vice President
and General Manager of the Wireless Data Group, part of Motorola, Inc.'s
Messaging, Information and Media Sector. From January 1993 to January 1994, he
was Vice President of the Macintosh Desktop and Powerbook Division of Apple
Computer, Inc. Mr. Battat holds a Bachelor's degree in Electrical Engineering
from Stanford University. Mr. Battat serves as a director at the designation of
Motorola, Inc.
JOHN S. HENDRICKS has been a director of our company since January 1997. Since
1982, Mr. Hendricks has been Chairman and Chief Executive Officer of Discovery
Communications, Inc., a television broadcasting company. He is also a member of
the boards of directors of Excalibur Technologies Corporation, the National
Museum of Natural History, Smithsonian Institution, the James Madison Council,
the Library of Congress, the National Cable Television Association and the
Academy of Television Arts and Sciences. Mr. Hendricks is also a member of the
advisory board of the Lowell Observatory, Chairman of the Board of Trustees of
the Walter Kaitz Foundation and Co-Chair for the CEO Forum on Education and
Technology. Mr. Hendricks holds a Bachelor's degree and an Honorary Doctorate
from the University of Alabama. Mr. Hendricks serves as a director at the
designation of Discovery Communications, Inc.
DOUG HOLMES has been a director of our company since April 1998. Since May 1998,
Mr. Holmes has served as Executive Vice President-Strategy and Business
Development for MediaOne Group, Inc. From January 1997 to May 1998, he was
Executive Vice President-Finance, Strategy & Business Development for MediaOne.
From January 1995 to January 1997, Mr. Holmes was Vice President and Chief
Financial Officer of US WEST Media Group. From January 1994 to January 1995, Mr.
Holmes was Executive Director-Investor Relations of US WEST. Mr. Holmes is also
a director of Time Warner Telecom, Inc. Mr. Holmes holds a Bachelor's degree and
an MBA from Brigham Young University. Mr. Holmes serves as a director at the
designation of MediaOne Interactive Services, Inc.
LABAN P. JACKSON, JR. has been a director of our company since 1989. Since
January 1989, Mr. Jackson has served as Chairman of Clear Creek Properties, a
real estate development company. Mr. Jackson is a director of BankOne
Corporation, TBN Holdings, Inc. and Gulf Stream Home and Garden, Inc. Mr.
Jackson is a graduate of the United States Military Academy.
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TONY PANTUSO was elected a director in April 1999. Since September 1997, Mr.
Pantuso has served as Senior Vice President for GE Capital Equity Investments,
Inc., a division of General Electric Capital Corporation. From October 1996 to
September 1997, Mr. Pantuso was the Director of Business Development for
MediaOne Communications. From October 1995 to October 1996, Mr. Pantuso served
as Operations Manager for US WEST Export Yellow Pages. Mr. Pantuso is a
Certified Public Accountant and a Certified Financial Planner. Mr. Pantuso holds
a Bachelor's degree in Accounting and Finance from Colorado State University.
Mr. Pantuso serves as a director at the designation of GE Capital Equity
Investments, Inc.
BOARD OF DIRECTORS
Observers
Representatives of Advance Publications, Inc. and Liberty IP, Inc. serve as
observers to our board of directors. Observers are given notice of all board of
directors meetings and copies of materials provided in connection with each
meeting. Observers do not have voting rights. Currently, Steven Newhouse,
President of Advance Publications, represents Advance Publications as an
observer. Mr. Newhouse previously served as a member of our board of directors
and is a director of Third Age Media. In addition, Lee Masters, President and
Chief Executive Officer of Liberty Digital, a wholly owned subsidiary of Liberty
Media Corporation, represents Liberty IP as an observer. Liberty IP is a
subsidiary of Liberty Digital, which primarily invests in new media and music
businesses which emphasize the development of interactive content for broadband
networks. Our observers participate in discussions and matters brought before
the board of directors and provide business and Internet media experience.
Classification of Directors
The board of directors will be divided into three classes under our amended and
restated charter. Class I will consist of two directors who will stand for
election at the annual meeting of shareholders to be held in 1999. Class II will
consist of two directors who will stand for election at the annual meeting of
shareholders to be held in 2000. Class III will consist of two directors who
will stand for election at the annual meeting of shareholders to be held in
2001. After their initial term following this offering, directors in each class
will serve for a term of three years. The charter will provide that directors
can be removed only for cause by a majority of the shareholders or by a majority
of the other directors. Officers are chosen by and serve at the discretion of
the board of directors.
Board Committees
The audit committee has the responsibility to review our audited consolidated
financial statements and accounting practices, and to consider and recommend the
employment of, and approve the fee arrangements with, independent accountants
for both audit functions and for advisory and other consulting services. The
audit committee is currently comprised of Messrs. Jackson, Battat and Holmes.
The compensation committee reviews and approves the compensation and benefits
for our key executive officers, administers our employee benefit plans and makes
recommendations to our board of directors regarding such matters. The
compensation committee is currently comprised of Messrs. Jackson, Hendricks and
Phillips.
Director Compensation
Directors do not receive any cash compensation for their service as members of
the board of directors; however, they are reimbursed for reasonable out-of
pocket expenses incurred in connection with their attendance at meetings of the
board of directors and committee meetings. In March 1998, we adopted our
Non-Employee Stock Option Policy, or the Policy. Under the Policy, non-employee
directors, during their first year of service, receive options to purchase
50,000 shares of common stock and are eligible for additional options annually,
as determined by the compensation committee. Options are granted under our 1997
Equity Compensation Plan and become fully vested in the event of a change of
control, unless the compensation committee determines otherwise. The exercise
price for options granted under the Policy is the fair market value of our
common stock
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on the date of grant, with fair market value to be determined by the
compensation committee. All options granted under the Policy expire 10 years
from the date of the option grant.
Technology Advisory Board
We have established a Technology Advisory Board whose membership includes
leaders in basic fields of science and technology which are relevant to our
future products, as well as other persons experienced in business and
photography. The members of the Technology Advisory Board are: John Battin, who
previously served on our board of directors and was Senior Vice President of
Motorola's Multimedia Division; Dr. Alvin Trivelpiece, Director of the Oak Ridge
National Laboratory and President of Lockhead-Martin Energy Research; Dr.
Deborah Rieman, executive director of CheckPoint Software Technologies, Inc., a
leading provider of secure enterprise networking solutions; Senator Howard H.
Baker, Jr., the former Majority Leader of the Senate and a publisher of a
collection of photographs of the Big South Fork region of Tennessee; and Dr. H.
Lee Martin, a co-founder of our company and the executive director of the
Tennessee Technology Development Corporation. The Technology Advisory Board is
expected to meet with our management and key research and development personnel
at least semi-annually and will provide advice regarding future trends in
business, photography, technology and basic sciences. In consideration of this
service, we granted to each of Messrs. Battin and Baker and Drs. Trivelpiece and
Rieman stock options to purchase 35,000 shares of our common stock pursuant to
the Policy. The option to purchase 15,000 of these shares vested on the date of
the grant, with an additional 10,000 shares vesting on the first and second
anniversary of the date of the grant. Dr. Martin receives a stipend of $2,000
per month for his service on the Technology Advisory Board.
EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth information concerning the total compensation
received for services rendered to us during 1998 by our chief executive officer
and our four other highest paid executive officers who are referred to as the
Named Officers.
----------------------------------
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ------- ------------
James M. Phillips.......................................... $383,438 $ -- $214,989(3)
Chairman and Chief Executive Officer
Jeffrey D. Peters.......................................... 112,692(1) -- 25,000(4)
President and Chief Operating Officer
John J. Kalec.............................................. 62,372(2) -- --
Vice President and Chief Financial Officer
John M. Murphy............................................. 162,700 10,000 --
Vice President and General Manager, Sales
Steven D. Zimmermann....................................... 101,500 16,682 --
Vice President and Corporate Fellow
- ---------------
(1) Annualized salary for 1998 was $300,000.
(2) Annualized salary for 1998 was $175,000.
(3) This amount represents a relocation expense of $190,794 and life insurance
premiums of $24,195 we paid on behalf of Mr. Phillips.
(4) This amount represents a relocation expense for Mr. Peters.
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Option Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted to each of the Named Officers during 1998. We did not grant stock
options to Mr. Phillips or Mr. Zimmermann in 1998. We have never granted stock
appreciation rights.
-----------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED IN 1998 SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- --------- ---------
Jeffrey D. Peters.................. 300,000 19.0% $2.02 (2) $ $
John J. Kalec...................... 125,000 7.9 2.02 (3)
John M. Murphy..................... 50,000 3.2 2.02 03/03/08
- ---------------
(1) Assumes increases in the fair market value of the common stock of 5% and 10%
per year from $ (the mid-point of the range set forth on the cover of
this prospectus) over the ten-year option period as mandated by the rules and
regulations of the Securities and Exchange Commission, and does not represent
our estimate or projection of the future value of the common stock. The actual
value realized may be greater or less than the potential realizable values set
forth in the table.
(2) Mr. Peters' stock options vest in equal amounts over a three year period and
expire in equal amounts on August 17, 2004, 2005 and 2006.
(3) Mr. Kalec's stock options vest in equal amounts over a three year period and
expire in equal amounts on August 24, 2004, 2005 and 2006.
Fiscal Year-End Option Values
The following table sets forth certain information concerning stock option
holdings held by the Named Officers at December 31, 1998.
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
James M. Phillips............................ 1,702,537 567,512 $ $
Jeffrey D. Peters............................ -- 300,000
John J. Kalec................................ -- 125,000
John M. Murphy............................... 58,333 166,667
Employment Agreements
We have entered into employment agreements with the following named officers:
Mr. Phillips. Mr. Phillips' employment agreement expires on December 31,
2001 and is renewable automatically for one year periods unless terminated
by us or Mr. Phillips. Mr. Phillips receives an annual salary of $386,250
and is eligible for a performance based bonus. We may terminate Mr.
Phillips' employment agreement with or without cause; however, if we
terminate the agreement without cause, Mr. Phillips is entitled to a
severance payment of $500,000, which increases to $1,000,000 upon the
consummation of this offering.
Mr. Peters. Mr. Peters' employment agreement continues indefinitely unless
terminated by us or Mr. Peters. Mr. Peters receives an annual salary of
$300,000 and is eligible for a performance based annual bonus. We may
terminate Mr. Peters' employment agreement with or without cause; however,
if we
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terminate the agreement without cause, Mr. Peters is entitled to a
severance payment equal to one year's salary.
Mr. Kalec. Mr. Kalec's employment agreement continues indefinitely unless
terminated by us or Mr. Kalec. Mr. Kalec receives an annual salary of
$175,000 and is eligible for a performance based annual bonus. We may
terminate Mr. Kalec's employment agreement with or without cause; however
if we terminate the agreement without cause prior to August 24, 2000, Mr.
Kalec is entitled to a severance payment of $175,000.
Mr. Murphy. Mr. Murphy's employment agreement continues indefinitely
unless terminated by us or Mr. Murphy. Mr. Murphy receives an annual salary
of $163,600 and is eligible for a performance based annual bonus. We may
terminate Mr. Murphy's employment agreement with or without cause; however,
if we terminate the agreement without cause before the end of the term, Mr.
Murphy is entitled to a severance payment equal to two months' salary.
Mr. Zimmermann. Mr. Zimmermann's employment agreement expires on June 23,
2000. Mr. Zimmermann receives an annual salary of $127,000. We may
terminate Mr. Zimmermann's employment agreement with or without cause;
however, if we terminate the agreement without cause before the end of the
term, Mr. Zimmermann is entitled to a severance payment of equal to one
year's salary.
1997 EQUITY COMPENSATION PLAN
Our 1997 Equity Compensation Plan, or the Plan, was adopted by the board of
directors in November 1997 and approved by the shareholders on December 8, 1997.
The Plan provides for grants of stock options to selected employees, officers,
directors, consultants and advisors. By encouraging stock ownership, we seek to
attract, retain and motivate these persons and to encourage them to devote their
best efforts to our business and financial success.
The Plan authorizes the granting of options to purchase up to 5,876,560 shares
of our common stock (subject to adjustment in certain circumstances). Options to
purchase 3,848,667 shares of common stock had been granted under the Plan.
Considering all options to purchase shares, options to purchase 3,706,387 shares
are currently exercisable and 547,917 shares will be exercisable at the
consummation of this offering. If options expire or are terminated for any
reason without being exercised, the shares of common stock subject to such
options again will be available for grant.
The Plan may be administered by the board of directors or by a committee of the
board of directors. Grants under the Plan may consist of options intended to
qualify as incentive stock options, or ISOs, within the meaning of Section 422
of the Code, or non-qualified stock options, or NQSOs, that are not intended so
to qualify. During any calendar year, a grantee may not receive options to
purchase common stock for more than 25% of the total number of shares of common
stock reserved under the Plan.
The option price of any ISO granted under the Plan will not be less than the
fair market value of the underlying shares of common stock on the date of grant.
The option price of a NQSO will be determined by the committee, in its sole
discretion, and may be greater than, equal to or less than the fair market value
of the underlying shares of common stock on the date of grant. The committee
will determine the term of each option; provided that the exercise period may
not exceed ten years from the date of grant. The price of an ISO granted to a
person who owns more than 10% of our stock must be at least equal to 110% of the
fair market value of common stock on the date of grant, and the ISO's term may
not exceed five years. A grantee may pay the exercise price in cash, by
delivering shares of common stock already owned by the grantee and having a fair
market value on the date of exercise equal to the option price, or by such other
method as the committee may approve. The committee may impose such vesting and
other conditions on options as the committee deems appropriate. Options may be
exercised while the grantee is an employee, officer, director, consultant or
advisor or within a specified period after termination of the grantee's
employment or services.
In the event of a change of control, all outstanding options shall become fully
exercisable, unless the committee determines otherwise. Except as provided
below, unless the committee determines otherwise, in the event of a merger where
we are not the surviving corporation, all outstanding options shall be assumed
by or replaced with
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comparable options by the surviving corporation. The committee may require that
grantees surrender their outstanding options in the event of a change of control
and receive a payment in cash or common stock equal to the amount by which the
fair market value of the shares of common stock subject to the options exceeds
the exercise price of the options.
401(K) PLAN
We have a 401(k) profit sharing plan which is intended to qualify under Sections
401(a) and 401(k) of the Code. Generally, all employees are eligible to
participate in the 401(k) plan after they have completed six months of service
and are fully vested three years from the date of their eligibility.
Eligible employees electing to participate in the 401(k) plan may defer a
portion of their compensation, on a pre-tax basis, by making a contribution to
the 401(k) plan. The maximum contribution is fixed in Section 401(k) of the
Code. The contribution limit for calendar year 1998 was $10,000. We may
contribute an annual discretionary matching contribution equal to 65% of each
participant's deferred compensation. Our matching contribution may not exceed
6.15% of the employee's annual compensation. We contributed to the 401(k) plan
an aggregate of $33,432 in fiscal year 1996, $43,803 in fiscal year 1997 and
$116,071 in fiscal year 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee during the year ended December 31, 1998 consisted of
Messrs. Jackson, Hendricks, Newhouse and Phillips. Mr. Phillips is our Chairman
and Chief Executive Officer. None of our executive officers has served as a
director or member of the compensation committee of any other entity whose
executive officers served on our board of directors or compensation committee.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership of
the common stock as of May 17, 1999, by (1) each person who beneficially owns
more than 5% of our common stock; (2) each of our directors and Named Officers;
and (3) all current executive officers and directors as a group. The table
includes all shares of common stock issuable within 60 days of May 17, 1999 upon
the exercise of options and other rights beneficially owned by the indicated
stockholders on that date. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares beneficially owned. The applicable percent ownership for each shareholder
is based on 36,770,837 shares of common stock outstanding as of May 17, 1999
(which includes 24,133,297 shares of common stock issuable upon the conversion
of all of our outstanding shares of preferred stock), together with applicable
warrants and options for that shareholder. Shares of common stock issuable upon
exercise of warrants and options which are exercisable within 60 days of May 17,
1999 are deemed outstanding for the purpose of computing the percent ownership
of the person holding those warrants and options but are not deemed outstanding
for computing the percent ownership of any other person.
----------------------------------------------
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE
PRINCIPAL SHAREHOLDERS(1) OWNED OFFERING AFTER OFFERING
------------------------- ---------------- -------- --------------
Dr. H. Lee Martin..................................... 7,519,120(2) 20.4% %
11615 S. Monticello Drive
Knoxville, TN 37922
Motorola, Inc......................................... 6,114,445(3) 16.6
1303 East Algonquin Rd.
Schamburg, IL 60196
MediaOne Interactive Services, Inc.................... 4,492,225(4) 11.9
188 Inverness Drive West
Englewood, CO 80112
GE Capital Equity Investments, Inc.................... 3,512,595(5) 9.4
120 Long Ridge Road
Stamford, CT 06927
Advance Publications, Inc............................. 3,094,060(6) 8.3
30 Journal Square
Jersey City, NJ 07306
Liberty IP, Inc....................................... 1,908,397(7) 5.2
8101 East Prentice Avenue
Englewood, CO 80111
James M. Phillips..................................... 2,270,049(8) 5.8
Jeffrey D. Peters..................................... 175,000(9) *
John J. Kalec......................................... 175,000(10) *
John M. Murphy........................................ 191,667(11) *
Steven D. Zimmermann.................................. 1,160,680 3.2
John S. Hendricks..................................... 1,258,113(12) 3.4
Laban P. Jackson, Jr.................................. 451,839(13) 1.2
All directors and executive officers as a group....... 5,974,015(14) 15.1%
- ---------------
* Less than one percent
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(1) Except as otherwise indicated below, the address for each executive officer
and director is 1009 Commerce Park Drive, Oak Ridge, Tennessee, 37830.
(2) Includes 386,100 shares owned by the H. Lee Martin Irrevocable Trust No. 2.
(3) Includes 6,097,778 shares issuable upon the conversion of outstanding shares
of preferred stock and 16,667 shares of common stock issuable upon the exercise
of stock options.
(4) Includes 3,580,446 shares issuable upon the conversion of outstanding shares
of preferred stock and 895,112 and 16,667 shares of common stock issuable upon
the exercise of warrants and stock options, respectively.
(5) Includes 2,862,595 shares issuable upon the conversion of outstanding shares
of preferred stock and 650,000 shares of common stock issuable upon the exercise
of warrants.
(6) Includes 2,475,248 shares issuable upon the conversion of outstanding shares
of preferred stock and 618,812 shares of common stock issuable upon the exercise
of warrants.
(7) Includes 1,908,397 shares issuable upon the conversion of outstanding shares
of preferred stock.
(8) Includes 2,270,049 shares of common stock issuable upon the exercise of
stock options.
(9) Includes 150,000 shares of common stock issuable upon the exercise of stock
options.
(10) Includes 125,000 shares of common stock issuable upon the exercise of stock
options.
(11) Includes 191,667 shares of common stock issuable upon the exercise of stock
options.
(12) Includes 16,667 shares of common stock issuable upon the exercise of stock
options. Also includes 219,182 shares of common stock and 30,940 shares of
common stock issuable upon the conversion of outstanding shares of preferred
stock and the exercise of warrants, respectively, held by Hendricks Family
Investments, LLC. Also includes 991,324 shares of preferred stock of Discovery
Communications, Inc., of which Mr. Hendricks is Chairman and Chief Executive
Officer, to which he disclaims all beneficial ownership.
(13) Includes 422,672 shares issuable upon the conversion of outstanding shares
of preferred stock and 12,500 and 16,667 shares of common stock issuable upon
the exercise of warrants and stock options.
(14) Includes 641,854 shares issuable upon the conversion of outstanding shares
of preferred stock and 43,440 and 2,871,717 shares of common stock issuable upon
the exercise of warrants and stock options and 991,324 shares of preferred stock
of Discovery.
Dr. H. Lee Martin has granted to the underwriters an option to purchase up to
shares of common stock to cover over-allotments. If the underwriters
exercise the over-allotment option in full, Dr. Martin will beneficially own
shares of common stock, or %, of our common stock outstanding
after this option. In addition, Daniel P. Kuban, one of our shareholders, has
granted to the underwriters an option to purchase up to shares of
common stock to cover over-allotments. If the underwriters exercise the
over-allotment option in full, Mr. Kuban will beneficially own
shares of common stock, or %, of our common stock outstanding
after this offering.
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CERTAIN TRANSACTIONS
In December 1996, we issued to each of Motorola, Inc. and Discovery
Communications, Inc., 991,324 shares of common stock for an aggregate purchase
price of $2.0 million each. John S. Hendricks, one of our directors, is the
Chairman and Chief Executive Officer of Discovery. Each of Motorola and
Discovery are entitled to demand and piggyback registration rights with respect
to these shares. In April 1998, Motorola and Discovery exchanged their shares of
common stock for a like number of shares of Series B preferred stock.
We license from Motorola certain patent and patent applications related to our
technology pursuant to a patent license agreement dated January 17, 1997. These
licenses have been granted for the lives of the underlying Motorola patents on a
worldwide, royalty-free, non-exclusive, non-transferrable basis with the right
to sublicense. We may not grant third parties exclusive licenses for our
technology for a term exceeding one year without the prior written consent of
Motorola.
In January 1997, we granted Discovery a world-wide, exclusive license to utilize
our technology in connection with the development of 15 destination-specific
CD-ROM titles. The term of the Discovery license will expire on the expiration
date of the last underlying patent.
In July 1998, we purchased 500,000 shares of stock from Dr. H. Lee Martin, our
founder and beneficial owner of greater than 5% of our common stock, for an
aggregate purchase price of $500,000.
In August 1998, we purchased 435,000 shares of Series B preferred stock from
Motorola for an aggregate purchase price of $878,700.
From April to July 1998, we sold an aggregate of 6,435,643 shares of Series C
preferred stock to a group of private investors for an aggregate purchase price
of $13.0 million. We also issued warrants to these investors to purchase an
aggregate of 1,608,911 shares of Series C preferred stock at an exercise price
of $2.02 per share. Purchasers of our Series C preferred stock included the
following related parties:
---------------------------------------------------
AGGREGATE NUMBER OF WARRANT
NAME NUMBER OF SHARES PURCHASE PRICE SHARES
- ---- ---------------- -------------- -----------------
MediaOne Interactive Services, Inc.......... 3,580,446 $7,233,000 895,112
Advance Publications, Inc................... 2,475,248 5,000,000 618,812
John S. Hendricks........................... 123,762 250,000 30,940
Laban P. Jackson, Jr........................ 50,000 101,000 12,500
From January to March 1999, we sold an aggregate of 10,305,344 shares of Series
D preferred stock to a group of private investors for an aggregate purchase
price of $27.0 million. Purchasers of our Series D preferred stock included the
following related parties:
--------------------------------
AGGREGATE
NAME NUMBER OF SHARES PURCHASE PRICE
- ---- ---------------- --------------
GE Capital Equity Investments, Inc.......................... 2,862,595 $7,500,000
Liberty IP, Inc............................................. 1,908,397 5,000,000
Motorola, Inc............................................... 1,145,038 3,000,000
Laban P. Jackson, Jr........................................ 152,672 400,000
John S. Hendricks........................................... 95,420 250,000
All of our shares of preferred stock will automatically convert into common
stock upon completion of this offering. Each of the purchasers of the Series C
preferred stock and the Series D preferred stock are entitled to demand and
piggyback registration rights with respect to their respective shares of
preferred stock.
In connection with the issuance of the Series D preferred stock to GE Capital,
we entered into a marketing agreement pursuant to which GE Capital will provide
us assistance in developing and implementing a marketing program and an
advertising allowance of $500,000. In addition, we issued a warrant to GE
Capital to purchase 650,000 shares of our Series D preferred stock at an
exercise price of $3.14 per share.
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DESCRIPTION OF CAPITAL STOCK
Our amended and restated charter, which will become effective upon the closing
of this offering, authorizes the issuance of up to 100,000,000 shares of common
stock, and shares of preferred stock, the rights and preferences of
which may be established from time to time by our board of directors. As of May
17, 1999, 12,637,540 shares of common stock were outstanding and 24,133,297
shares of preferred stock convertible into 24,133,297 shares of common stock
upon the completion of this offering were issued and outstanding. As of May 17,
1999, we had 77 shareholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
any dividends that may be declared by the board of directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets
available after the payment of all debts and other liabilities, subject to the
prior rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. All of the issued and
outstanding shares of common stock will be fully paid and non-assessable. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the future.
PREFERRED STOCK
Under the charter, the board of directors will be authorized, subject to certain
limitations prescribed by law, without further shareholder approval, from time
to time to issue up to an aggregate of shares of preferred stock
in one or more series and to fix or alter the designations, preferences and
rights, and any qualifications, limitations or restrictions, of the shares of
each such series, including the number of shares constituting any such series
and the dividend rights, dividend rates, conversion rights, voting rights, terms
of reduction (including sinking fund provisions, if any), redemption price or
prices and liquidation preferences. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change of control. We have no
present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
We have granted registration rights to a number of our preferred shareholders
whose shares will convert into restricted shares of our common stock upon
consummation of this offering. If we propose to register for sale additional
shares of our common stock under the Securities Act after this offering, these
shareholders will be entitled to notice of the registration and inclusion of
their shares in the registration process. The registration rights are not
applicable to registration of securities in connection with employee benefit
plans. In addition, these shareholders may demand that we file a registration
statement for the sale of their shares. In either event, the underwriters for
the proposed offering will have the right to limit the number of shares included
in the registration. Also, these shareholders are entitled, subject to some
limitations, to require us to register their shares on Form S-3 when we are
eligible to use a short form. We have agreed to bear all of the expenses of any
such registration.
TENNESSEE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The directors comprising the board of directors will be divided into three
classes. Two directors will constitute Class I and will stand for election at
the annual meeting of shareholders to be held in 1999. Two directors will
constitute Class II and will stand for election at the annual meeting of
shareholders to be held in 2000. Two directors will constitute Class III and
will stand for election at the annual meeting of shareholders to be held in
2001. After their initial term following the offering, directors in each class
will serve for a term of three years.
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The charter will provide that directors can be removed only for cause by a
majority of the shareholders and only by a majority of the other directors.
Officers are chosen by and serve at the discretion of the board of directors.
The charter will provide that shareholders may not take action by written
consent, but only at duly called annual or special meetings of shareholders. The
charter will also provide that special meetings of shareholders may be called
only by the chairman of the board of directors or by a majority of the board of
directors.
Our bylaws will provide that shareholders must provide timely notice in writing
to bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders. To be
timely notice for an annual meeting, a shareholders's notice must be delivered
to or mailed and received at our principal executive offices at least 120 days
before the first anniversary of the date our notice of annual meeting was
provided for the previous year's annual meeting of shareholders. If no annual
meeting of shareholders was held in the previous year or the date of the annual
meeting of shareholders has been changed to be more than 30 calendar days
earlier than or 60 calendar days after that anniversary, notice by the
shareholder, to be timely, must be received at least 60 days but no more than 90
days before the annual meeting of shareholders or the close of business on the
10th day following the date on which notice of the date of the meeting is given
to shareholders or made public, whichever first occurs. To be timely notice for
a special meeting, a shareholder's notice must be delivered to us by the close
of business 10 days after notice of the meeting is given to shareholders. The
bylaws also specify requirements as to the form and content of a shareholders'
notice. These provisions may prevent shareholders from bringing matters before
an annual meeting of shareholders or from making nominations for directors at an
annual meeting of shareholders.
We are subject to anti-takeover provisions provided under Tennessee law,
including the following:
Business Combination Statute. The Tennessee Business Combination Act, or TBCA,
provides that a party owning 10% or more of stock in a "resident domestic
corporation" (such party is called an "interested shareholder") cannot engage in
a business combination with the resident domestic corporation unless the
combination (1) takes place at least five years after the interested shareholder
first acquired 10% or more of the resident domestic corporation, and (2) either
(A) is approved by at least two-thirds of the non-interested voting shares of
the resident domestic corporation or (B) satisfies certain fairness conditions
specified in the TBCA.
A business combination with an entity can proceed without delay when approved by
the target corporation's board of directors before that entity becomes an
interested shareholder. TBCA does not apply when the resident corporation has
enacted a charter amendment or bylaw removing itself entirely from coverage
under TBCA. Such charter amendment or bylaw must be approved by a majority of
the shareholders who have held shares for more than one year prior to the vote
and may not take effect for at least two years after the vote. We have not
adopted a charter or bylaw amendment removing us from coverage under TBCA.
Under TBCA, officers and directors of resident domestic corporations who do not
approve either (1) proposed business combinations or (2) charter amendments and
bylaws removing their corporations from TBCA's coverage cannot be held liable
for such action as long as they acted in "good faith belief " that the proposed
business combination would adversely affect their corporation's employees,
customers, suppliers, or the communities in which their corporation operates and
such factors are permitted to be considered by the board of directors under the
charter.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act, or
TCSAA, strips an acquiror's shares of voting rights any time an acquisition of
shares in a covered Tennessee corporation brings such acquiror's voting power to
certain prescribed maximum levels. Under TCSAA, such acquiror's voting rights
can be established only by a majority vote of the other shareholders. Such
acquiror may, upon submitting a control share acquisition statement, demand a
meeting of shareholders to conduct such a vote. Such acquiror can demand such a
meeting before acquiring a control share only if it holds at least 10% of
outstanding shares and announces a good faith intention to make the control
share acquisition. Under TCSAA, a target corporation has the option of redeeming
an acquiror's shares if such shares are denied voting rights.
Investor Protection Act. Tennessee's Investor Protection Act, or TIPA applies
to tender offers directed at corporations (called "offeree companies") that have
"substantial assets" in Tennessee and that are either incorporated in or have a
principal office in Tennessee. TIPA requires an offeror making a tender offer
for an
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offeree company to file with the Commissioner of Commerce and Insurance (the
"Commissioner") a registration statement. When the offeror intends to gain
control of the offeree company, the registration statement must indicate any
plans the offeror has for the offeree (among other required information). The
Commissioner may require additional information material to the takeover offer
and may call for hearings. TIPA does not apply to an offer that the offeree
company's board of directors has recommended to its shareholders.
In addition to requiring the offeror to file a registration statement with the
Commissioner, TIPA requires the offeror and the offeree company to deliver to
the Commissioner all solicitation materials used in connection with the tender
offer. TIPA prohibits "fraudulent, deceptive, or manipulative acts or practices"
by either side, and gives the Commissioner standing to apply for equitable
relief to the Chancery Court of Davidson County, Tennessee, or to any other
chancery court having jurisdiction whenever it appears to the Commissioner that
the offeror, the offeree company, or any of its respective affiliates has
engaged in or is about to engage in a violation of TIPA. Upon proper showing,
the Chancery Court may grant injunctive relief. TIPA further provides civil and
criminal penalties for violations.
Greenmail Act. The Tennessee Greenmail Act, or TGA, applies to any corporation
chartered under the laws of Tennessee which has a class of voting stock
registered or traded on a national securities exchange or registered with the
Securities and Exchange Commission pursuant to Section 12(g) of the Exchange
Act. TGA provides that it is unlawful for any corporation to purchase any of its
shares at a price above the market value, as defined in TGA, from any person who
holds more than 3% of such class of securities if such person has held such
shares for less than two years, unless either (1) the purchase is first approved
by the affirmative vote of a majority of the outstanding shares of each class of
voting stock issued or (2) the corporation makes an equivalent offer, on a value
per share basis, to all holders of shares of such class.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by Tennessee law, our amended charter will provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our shareholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
Our charter and bylaws will provide for the indemnification of our directors and
officers to the fullest extent authorized by Tennessee law, except that we will
indemnify a director or officer in connection with an action initiated by that
person only if the action was authorized by our board of directors. The
indemnification provided under our charter and bylaws will include the right to
be paid expenses in advance of any proceeding for which indemnification may be
had, provided that the payment of these expenses incurred by a director or
officer in advance of the final disposition of a proceeding may be made only
upon delivery to us of an undertaking by or on behalf of the director or officer
to repay all amounts paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Under our bylaws, if we
do not pay a claim for indemnification within 60 days after we have received a
written claim, the director or officer may bring an action to recover the unpaid
amount of the claim and, if successful, the director or officer also will be
entitled to be paid the expense of prosecuting the action to recover these
unpaid amounts.
Under our charter and bylaws, we will have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents, or is or was serving at our request as a director, officer,
employee, partner or agent of another corporation or of a partnership, joint
venture, limited liability company, trust or other enterprise, against any
liability asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities.
The insurance
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will also cover any expenses related to the liability. The insurance coverage is
available to these persons whether or not we would have the power to indemnify
the person against the claim under the provisions of Tennessee law. We have
purchased director and officer liability insurance on behalf of our directors
and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is .
LISTING
We intend to apply to have the shares of common stock listed on the Nasdaq
National Market under the symbol "IPIX."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding (assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options under the Plan). The number of shares of
common stock outstanding is also based on the conversion of all of our preferred
stock, including the net exercise of all preferred stock purchase warrants, to
common stock. Of such shares, the shares sold in this offering will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares held by an existing "affiliate" of ours,
as that term is defined by the Securities Act. Any shares held by one of our
affiliates will be subject to the resale limitations of restricted stock as
defined in Rule 144 under the Securities Act. Of such shares, and without
consideration of the contractual restrictions described below, shares
would be available for immediate sale in the public market without restriction
pursuant to Rule 144(k). Beginning 90 days after the date of this prospectus,
and without consideration of the contractual restrictions described below,
shares will become eligible for sale in reliance upon Rule 144 and
shares will become eligible for sale in reliance upon Rule 701
promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after this
offering, a person (or persons whose shares are aggregated) who owns shares that
were purchased from us or any Affiliate at least one year previously, including
a person who may be deemed an Affiliate of ours, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of the common stock or (ii) the average weekly
trading volume of the common stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about us. Any person (or persons whose shares are
aggregated) who is not deemed to have been an Affiliate of ours at any time
during the 90 days preceding a sale, and who owns shares within the definition
of "restricted securities" under Rule 144 under the Securities Act that were
purchased from us (or any Affiliate) at least two years previously, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
Subject to certain limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisors prior to the date the issuer becomes subject to the
reporting requirements of the Exchange Act, pursuant to written compensatory
benefit plans or written contracts relating to compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to the typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this prospectus, may be sold (1) by persons other than Affiliates,
subject only to the manner of sale provisions of Rule 144, and (2) by Affiliates
under Rule 144 without compliance with its one-year holding period requirement.
All of our officers and directors and many of our shareholders have agreed not
to sell any shares of common stock for 180 days after the date of this
prospectus without the prior written consent of J.P. Morgan Securities Inc. As a
result of these contractual restrictions and subject to the provisions of Rules
144 and 701, as applicable, shares subject to restriction will be
eligible for sale upon expiration of these agreements. See "Underwriting."
We have agreed not to offer, sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of J.P.
Morgan Securities Inc., subject to certain limited exceptions. See
"Underwriting."
We intend to file one or more registration statements under the Securities Act
to register all shares of common stock issued, issuable or reserved for issuance
under the Plan. See "Management -- 1997 Equity Compensation
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Plan." Such registration statements are expected to be filed as soon as
practicable after the date of this prospectus and will automatically become
effective upon filing. Following such filing, shares registered under such
registration statements will, subject to the 180-day lock-up agreements
described above and Rule 144 volume limitations applicable to Affiliates be
available for sale in the open market.
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UNDERWRITING
Interactive Pictures Corporation, the selling shareholders and the underwriters
named below have entered into an underwriting agreement covering the common
stock to be offered in this offering. J.P. Morgan Securities Inc., Hambrecht &
Quist LLC, Morgan Keegan & Company, Inc. and Stephens Inc. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase the
number of shares of common stock set forth opposite its name below.
----------------
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
J.P. Morgan Securities Inc..................................
Hambrecht & Quist, LLC......................................
Morgan Keegan & Company, Inc................................
Stephens Inc................................................
--------
Total.............................................
========
The underwriting agreement provides that if the underwriters take any of the
shares set forth in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if such shares are delivered to and accepted by
them. The underwriters will initially offer to sell shares to the public at the
initial public offering price set forth on the cover page of this prospectus.
The underwriters may sell shares to securities dealers at a discount of up to
$ per share from the initial public offering price. Any such securities
dealers may resell shares to certain other brokers or dealers at a discount of
up to $ per share from the initial public offering price. After the
initial public offering, the underwriters may vary the public offering price and
other selling terms.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have the option to buy up to an additional
shares of common stock from Interactive Pictures Corporation and
shares from the selling shareholders to cover such sales. They may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts that
Interactive Pictures Corporation and the selling shareholders will pay to the
underwriters. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
-----------------------------
PAID BY INTERACTIVE PICTURES
CORPORATION
-----------------------------
NO EXERCISE FULL EXERCISE
------------ --------------
Per share................................................... $ $
-------- --------
Total............................................. $ $
======== ========
----------------------------
PAID BY SELLING SHAREHOLDERS
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... -- $
--------
Total............................................. -- $
========
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The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short shares,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or slowing a decline in the market price of the common stock while
the offering is in progress. The underwriters may also impose a penalty bid,
which means that an underwriter must repay to the other underwriters a portion
of the underwriting discount received by it. An underwriter may be subject to a
penalty bid if the representatives of the underwriters, while engaging in
stabilizing or short covering transactions, repurchase shares sold by or for the
account of that underwriter. These activities may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If the underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these transactions on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Interactive Pictures Corporation estimates that the total expenses of this
offering, excluding underwriting discounts and commissions, will be $ .
Interactive Pictures Corporation and the selling shareholders have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. Interactive Pictures Corporation and its
directors, officers and several of its shareholders, including the selling
shareholders, have agreed with the underwriters not to transfer, dispose of or
hedge any of their common stock, or securities convertible into or exchangeable
for shares of common stock, for a period of 180 days after the date of this
prospectus, except with the prior written consent of J.P. Morgan Securities Inc.
This agreement does not apply to any of our employee benefit plans existing on
the date of this prospectus.
At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees and retirees who have expressed an
interest in participating in this offering. Interactive Pictures Corporation
expects these persons to purchase no more than % of the common stock
offered in this offering. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Interactive Pictures Corporation intends to apply to have the common stock
listed on the Nasdaq National Market under the symbol "IPIX."
It is expected that delivery of the shares will be made to investors on or about
, 1999.
There has been no public market for the common stock prior to this offering.
Interactive Pictures Corporation and the underwriters will negotiate the initial
offering price. In determining the price, Interactive Pictures Corporation and
the underwriters expect to consider a number of factors in addition to
prevailing market conditions, including:
- the history of and prospects for the industry and for Internet companies
generally;
- an assessment of Interactive Pictures Corporation's management;
- Interactive Pictures Corporation's present operations;
- Interactive Pictures Corporation's historical results of operations;
- the trend of Interactive Pictures Corporation's revenues and earnings;
and
- Interactive Pictures Corporation's earnings prospects.
Interactive Pictures Corporation and the underwriters will consider these and
other relevant factors in relation to the price of similar securities of
generally comparable companies. Neither Interactive Pictures Corporation nor the
underwriters can assure investors that an active trading market will develop for
the common stock, or that the common stock will trade in the public market at or
above the initial offering price.
From time to time in the ordinary course of their respective businesses, certain
of the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking
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transactions with Interactive Pictures Corporation and its affiliates. J.P.
Morgan Securities Inc. acted as private placement agent in connection with
Interactive Pictures Corporation's Series D preferred stock offering which was
completed in March 1999, for which it received 309,160 shares of common stock as
a portion of its compensation. In connection with the Series D preferred stock
offering, an affiliate of J.P. Morgan Securities Inc. purchased 1,145,038 shares
of Series D preferred stock and an affiliate of Stephens Inc. purchased 381,679
shares of Series D preferred stock. In addition, Morgan Keegan & Company, Inc.
acted as private placement agent in connection with Interactive Pictures
Corporation's Series C preferred stock offering which was completed in July 1998
and a private common stock offering which was completed in August 1998, for
which it received warrants to purchase 183,144 shares of Series C preferred
stock and a warrant to purchase 67,500 shares of common stock, respectively.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Baker, Donelson, Bearman & Caldwell, a professional corporation, Memphis,
Tennessee. Members of Baker, Donelson, Bearman & Caldwell, in the aggregate,
beneficially own more than $50,000 of our common stock. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Cahill
Gordon & Reindel, a partnership including a professional corporation, New York,
New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form S-1 with
respect to the common stock being offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement.
For further information about us and the common stock, reference is made to the
registration statement and its exhibits. Descriptions in this prospectus of any
contract or other document are not necessarily complete and, where the contract
or document is an exhibit to the registration statement, any such description is
qualified in all respects by the exhibit. Copies of the registration statement,
including exhibits, may be examined without charge in the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W. Room
1024, Washington, DC 20549, and the Securities and Exchange Commission's
Regional Offices located at 500 West Madison Street, Suite 1400, Chicago, IL
60601, and Seven World Trade Center, 13th Floor, New York, NY 10048, or on the
Internet at http://www.sec.gov. Information about the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0300.
Copies of all or a portion of the registration statement can be obtained from
the Public Reference Section of the Commission upon payment of prescribed fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Upon approval of the common stock for quotation on the Nasdaq
National Market, such reports, proxy statements and other information may also
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, DC 20006.
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INTERACTIVE PICTURES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
F-1
58
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Interactive Pictures Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Interactive Pictures Corporation and its subsidiary (the "Company") at December
31, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
January 29, 1999, except as to Notes 5 and 6
for which the date is April 12, 1999
F-2
59
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------
MARCH 31,
1999
PRO FORMA
DECEMBER 31, SHAREHOLDERS'
------------------------- MARCH 31, EQUITY
1997 1998 1999 (NOTE 2)
---------- ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $1,825,744 $ 1,063,618 $ 7,150,171
Securities available-for-sale............................... 1,000,000 -- 16,648,861
Accounts receivable, less allowance for doubtful accounts of
$190,000 at December 31, 1997 and $170,000 at both
December 31, 1998 and March 31, 1999 (unaudited).......... 538,304 842,585 1,174,572
Inventory, less reserve for obsolescence of $100,000 at both
December 31, 1998 and March 31, 1999 (unaudited).......... 231,774 328,161 437,525
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 64,458 -- --
Prepaid expenses and other current assets................... 231,398 305,030 383,317
---------- ------------ ------------
Total current assets................................ 3,891,678 2,539,394 25,794,446
---------- ------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and equipment..................................... 771,582 1,666,642 1,854,617
Leasehold improvements...................................... 35,393 53,470 80,416
---------- ------------ ------------
806,975 1,720,112 1,935,033
Less accumulated depreciation and amortization.............. (144,008) (367,570) (444,570)
---------- ------------ ------------
Property and equipment, net............................. 662,967 1,352,542 1,490,463
---------- ------------ ------------
Other assets................................................ 19,273 96,858 83,903
---------- ------------ ------------
Total assets........................................ $4,573,918 $ 3,988,794 $ 27,368,812
========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible debenture....................................... $3,000,000 $ 1,000,000 $ --
Current portion of promissory note.......................... 8,000 8,000 8,000
Accounts payable............................................ 325,302 400,762 265,012
Accrued expenses............................................ 567,036 1,598,214 1,743,295
Accrued placement fees and related expenses................. -- 50,000 981,862
Deferred revenue............................................ 62,700 117,681 146,418
---------- ------------ ------------
Total current liabilities........................... 3,963,038 3,174,657 3,144,587
---------- ------------ ------------
Long-term portion of promissory note........................ 28,667 21,334 19,334
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY:
Convertible preferred stock:
Series A $0.001 par value; 4,836,416 shares authorized,
issued and outstanding at December 31, 1998 and March
31, 1999 (unaudited) ($6,572,689 aggregate liquidation
value at December 31, 1998 and March 31, 1999
(unaudited)); no shares issued and outstanding, pro
forma................................................... -- 4,836 4,836 $
Series B $0.001 par value; 1,982,648 and 1,547,648 shares
authorized at December 31, 1998 and March 31, 1999,
respectively; 1,547,648 shares issued and outstanding at
December 31, 1998 and March 31, 1999 (unaudited),
respectively ($3,124,701 aggregate liquidation value at
December 31, 1998 and March 31, 1999 (unaudited)); no
shares issued and outstanding, pro forma................ -- 1,548 1,548
Series C $0.001 par value; 13,180,936 and 9,267,297 shares
authorized at December 31, 1998 and March 31, 1999,
respectively; 6,930,688 and 7,443,889 shares issued and
outstanding at December 31, 1998 and March 31, 1999
(unaudited), respectively ($13,993,059 and $15,036,656
aggregate liquidation value at December 31, 1998 and
March 31, 1999 (unaudited), respectively); no shares
issued and outstanding, pro forma....................... -- 6,930 7,443
Series D $0.001 par value; 10,955,344 authorized;
10,305,344 shares issued and outstanding at March 31,
1999 ($27,000,000 aggregate liquidation value
(unaudited)) no shares issued and outstanding, pro
forma................................................... -- -- 10,305
Common stock, $0.001 par value, 50,000,000 and 100,000,000
shares authorized at December 31, 1998 and March 31, 1999,
respectively; 18,485,004 and 12,060,940 shares issued and
outstanding at December 31, 1997 and 1998, respectively;
12,637,540 shares issued and outstanding at March 31, 1999
(unaudited); 36,770,837 shares issued and outstanding, pro
forma..................................................... 18,485 12,061 12,638
Additional paid-in capital.................................. 9,969,474 24,791,316 51,903,963
Accumulated deficit......................................... (9,405,746) (24,023,888) (27,735,842)
---------- ------------ ------------ ------------
Total shareholders' equity.......................... 582,213 792,803 24,204,891 $
---------- ------------ ------------ ============
Total liabilities and shareholders' equity.......... $4,573,918 $ 3,988,794 $ 27,368,812
========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
60
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
REVENUES:
Products......................... $ 1,336,686 $ 2,127,872 $ 2,711,947 $ 319,494 $ 1,228,621
Services......................... 208,167 317,898 329,008 97,700 --
----------- ----------- ------------ ----------- -----------
1,544,853 2,445,770 3,040,955 417,194 1,228,621
----------- ----------- ------------ ----------- -----------
COST OF REVENUES:
Products......................... 542,604 445,936 1,207,221 72,250 586,811
Services......................... 108,674 316,034 240,684 31,650 --
----------- ----------- ------------ ----------- -----------
651,278 761,970 1,447,905 103,900 586,811
----------- ----------- ------------ ----------- -----------
Gross profit..................... 893,575 1,683,800 1,593,050 313,294 641,810
----------- ----------- ------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing.............. 908,383 2,828,876 8,387,401 1,549,846 2,811,595
Research and development......... 388,885 1,170,710 2,668,328 493,070 736,149
General and administrative....... 920,838 2,598,526 3,863,534 886,692 828,383
Amortization of product
development and patent costs... 71,040 857,899 -- -- --
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 2,289,146 7,456,011 14,919,263 2,929,608 4,376,127
----------- ----------- ------------ ----------- -----------
Interest income.................. 110,760 181,396 276,681 23,114 30,607
Interest expense................. -- (42,667) (202,333) (60,001) (11,667)
Other income (expense), net...... 90,311 55,453 27,029 -- 2,923
----------- ----------- ------------ ----------- -----------
Net loss............... $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
=========== =========== ============ =========== ===========
Basic and diluted loss per common
share (Note 2)................. $ (0.07) $ (0.30) $ (0.96) $ (0.14) $ (0.31)
Pro forma basic and diluted loss
per share (Note 2)............. $ $
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
61
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
ON
PREFERRED PREFERRED PREFERRED PREFERRED ADDITIONAL AVAILABLE-FOR-
COMMON STOCK STOCK STOCK STOCK PAID-IN SALE
STOCK SERIES A SERIES B SERIES C SERIES D CAPITAL SECURITIES
------- --------- --------- --------- --------- ----------- ---------------
Balances, January 1, 1996............ $16,423 $ -- $ -- $ -- $ -- $ 5,995,992 $ 27,334
Proceeds from issuance of 1,982,648
common shares, net of related
costs............................ 1,982 -- -- -- -- 3,972,562 --
Issuance of 80,000 common shares
upon exercise of options......... 80 -- -- -- -- 920 --
Change in net unrealized gain on
securities available-for-sale.... -- -- -- -- -- -- (27,334)
Net loss........................... -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----------- --------
Balances, December 31, 1996.......... 18,485 -- -- -- -- 9,969,474 --
Net loss........................... -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----------- --------
Balances, December 31, 1997.......... 18,485 -- -- -- -- 9,969,474 --
Issuance of 220,000 common shares
upon exercise of options......... 220 -- -- -- -- 2,780 --
Conversion of 6,819,064 shares of
common stock into Series A and B
preferred stock.................. (6,819) 4,836 1,983 -- -- 15,041 --
Proceeds from issuance of 6,435,643
shares of Series C preferred
stock and warrants, net of
related costs.................... -- -- -- 6,435 -- 12,523,001 --
Conversion of $1,000,000 debenture
into 495,049 shares of Series C
preferred stock.................. -- -- -- 495 -- 999,505 --
Proceeds from issuance of 675,000
shares of common stock and
warrants, net of related costs... 675 -- -- -- -- 1,281,015 --
Exchange of common for preferred
shares and related repurchase and
retirement of 500,000 shares of
Series C preferred stock......... (500) -- -- -- -- -- --
Repurchase and retirement of
435,000 shares of Series B
preferred stock.................. -- -- (435) -- -- -- --
Net loss............................. -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----------- --------
Balances, December 31, 1998.......... 12,061 4,836 1,548 6,930 -- 24,790,816 --
Proceeds from issuance of
10,305,344 shares of Series D
preferred stock and warrants, net
of related costs (unaudited)..... -- -- -- -- 10,305 25,140,897 --
Issuance of 267,440 common shares
upon exercise of options
(unaudited)...................... 268 -- -- -- -- 126,406 --
Issuance of 309,160 shares to
placement agent upon closing of
private placement (unaudited).... 309 -- -- -- -- 809,691 --
Conversion of $1,000,000 debenture
and interest into 513,201 shares
of Series C preferred stock
(unaudited)...................... -- -- -- 513 -- 1,036,153 --
Net loss (unaudited)............... -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----------- --------
Balances, March 31, 1999
(unaudited)........................ $12,638 $4,836 $1,548 $7,443 $10,305 $51,903,963 $ --
======= ====== ====== ====== ======= =========== ========
------------
ACCUMULATED
DEFICIT
------------
Balances, January 1, 1996............ $ (2,633,217)
Proceeds from issuance of 1,982,648
common shares, net of related
costs............................ --
Issuance of 80,000 common shares
upon exercise of options......... --
Change in net unrealized gain on
securities available-for-sale.... --
Net loss........................... (1,194,500)
------------
Balances, December 31, 1996.......... (3,827,717)
Net loss........................... (5,578,029)
------------
Balances, December 31, 1997.......... (9,405,746)
Issuance of 220,000 common shares
upon exercise of options......... --
Conversion of 6,819,064 shares of
common stock into Series A and B
preferred stock.................. (15,041)
Proceeds from issuance of 6,435,643
shares of Series C preferred
stock and warrants, net of
related costs.................... --
Conversion of $1,000,000 debenture
into 495,049 shares of Series C
preferred stock.................. --
Proceeds from issuance of 675,000
shares of common stock and
warrants, net of related costs... --
Exchange of common for preferred
shares and related repurchase and
retirement of 500,000 shares of
Series C preferred stock......... (499,500)
Repurchase and retirement of
435,000 shares of Series B
preferred stock.................. (878,265)
Net loss............................. (13,224,836)
------------
Balances, December 31, 1998.......... (24,023,388)
Proceeds from issuance of
10,305,344 shares of Series D
preferred stock and warrants, net
of related costs (unaudited)..... --
Issuance of 267,440 common shares
upon exercise of options
(unaudited)...................... --
Issuance of 309,160 shares to
placement agent upon closing of
private placement (unaudited).... --
Conversion of $1,000,000 debenture
and interest into 513,201 shares
of Series C preferred stock
(unaudited)...................... --
Net loss (unaudited)............... (3,712,454)
------------
Balances, March 31, 1999
(unaudited)........................ $(27,735,842)
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
62
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation........................ 107,605 132,069 223,562 38,911 77,000
Provision for doubtful accounts
receivable........................ -- 190,000 (20,000) -- --
Loss (gain) on disposal of fixed
assets............................ -- 87,871 -- -- (6,098)
Amortization of product development
and patent costs.................. 71,040 857,899 -- -- --
Accretion of securities
available-for-sale discounts...... (49,816) (51,479) (166,515) -- (11,276)
Provision for inventory
obsolescence...................... 43,533 (43,533) 100,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable............... (147,846) (444,717) (284,281) 180,588 (331,987)
Inventory......................... (59,686) (120,021) (196,387) (74,007) (109,364)
Prepaid expenses.................. (55,416) 6,873 (171,864) (40,669) (142,286)
Other assets...................... (16,356) (161,932) 20,647 (2,367) 76,953
Accounts payable.................. 169,356 (84,750) 75,460 (168,297) (135,750)
Accrued expenses.................. (43,010) 519,605 1,081,178 517,423 131,748
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 3,912 (34,922) 64,458 -- --
Deferred revenue.................. (17,502) (99,798) 54,981 10,275 28,737
----------- ----------- ------------ ----------- -----------
Net cash used in operating
activities................... (1,188,686) (4,824,864) (12,443,597) (2,191,344) (4,134,777)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and
equipment........................... (129,462) (504,331) (913,137) (86,231) (250,764)
Purchases of securities
available-for-sale.................. (3,174,300) (3,932,596) (7,831,124) -- (16,637,585)
Maturities of securities
available-for-sale.................. 5,141,125 3,484,845 8,997,639 1,000,000 --
Proceeds from disposal of equipment... -- -- -- -- 41,941
Patent and product development
costs............................... (677,883) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
investing activities......... 1,159,480 (952,082) 253,378 913,769 (16,846,408)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock............................... 3,975,544 -- 1,284,690 -- 126,674
Net proceeds from issuance of
preferred stock..................... -- -- 12,529,436 -- 26,943,064
Repurchase of preferred and common
stock............................... -- -- (1,378,700) -- --
Issuance (repayment) of convertible
debenture........................... -- 3,000,000 (1,000,000) -- --
Repayments of promissory note......... -- (3,333) (7,333) (2,000) (2,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities......... 3,975,544 2,996,667 11,428,093 (2,000) 27,067,738
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 3,946,338 (2,780,279) (762,126) (1,279,575) 6,086,553
Cash and cash equivalents, beginning
of year............................. 659,685 4,606,023 1,825,744 1,825,744 1,063,618
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of
year................................ $ 4,606,023 $ 1,825,744 $ 1,063,618 $ 546,169 $ 7,150,171
=========== =========== ============ =========== ===========
F-6
63
- ---------------
No income taxes were paid in any period presented. Interest payments totaled $0,
$0 and $202, $333 in the years ended December 31, 1996, 1997 and 1998,
respectively, and $0 in both of the three month periods ended March 31, 1998 and
1999 (unaudited), respectively.
Noncash investing and financing activities:
The Company acquired furniture and equipment of $40,000 in 1997 through the
issuance of a promissory note.
During 1998, a $1,000,000 convertible debenture was converted into 495,049
shares of Series C preferred stock. In addition, 6,819,064 shares of common
stock were exchanged for 4,836,416 shares of Series A preferred stock and
1,982,648 shares of Series B preferred stock.
During March 1999, a $1,000,000 convertible debenture and accrued interest was
converted into 513,201 shares of Series C preferred stock.
At March 31, 1999, offering costs of $981,862 related to the first quarter
private placement had not yet been paid by the Company (unaudited).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
64
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Interactive Pictures Corporation ("IPIX" or the "Company") is engaged in the
design and sale of electronic digital imaging products related to IPIX images.
The Company's patented technology allows viewers to Step Inside the Picture with
IPIX images and changes the way people create and view images, immersing them in
a 360 degrees X 360 degrees spherical environment. IPIX images provide a
complete field of view in a window, which can be navigated by moving a cursor
inside the image.
Using the Company's technology, clients can create virtual tours and multimedia
content to enhance marketing and accelerate electronic commerce over the
Internet. The Company's customers are primarily in the real estate, publishing
and corporate and e-commerce industries. Customers in the real estate and the
corporate and e-commerce markets represented an aggregate of 63%, 57% and 62% of
total revenues for 1996, 1997 and 1998.
The Company performs research and development to enhance its own products, as
well as for other entities with whom the Company has entered into contracts. The
Company also performs content development services for itself and others with
whom the Company has entered into contracts.
The Company is currently preparing a registration statement on Form S-1.
Management anticipates that the registration statement will be filed with the
Securities and Exchange Commission ("SEC") in May 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. Information in the accompanying financial
statements and notes to the financial statements for the interim period as of
March 31, 1999, and for the three-month periods ended March 31, 1998 and 1999,
is unaudited. The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles and Regulation S-X.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of Interactive Pictures Corporation and its
wholly-owned subsidiary, Interactive Pictures UK Limited, a United Kingdom
company formed in 1998. All significant intercompany balances and transactions
have been eliminated. The subsidiary's functional currency is the British Pound.
The cumulative translation adjustment account as of December 31, 1998 and March
31, 1999, was insignificant.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments with a maturity of three months or less when purchased to be cash
equivalents.
SECURITIES AVAILABLE-FOR-SALE. Securities available-for-sale represent those
securities intended to be held for an indefinite period of time. Securities
available-for-sale are recorded at fair value based on prices obtained from
commercial pricing services.
Unrealized gains and losses are excluded from earnings and reported in other
comprehensive income in shareholders' equity. 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. The securities portfolio at December 31, 1997, consisted
entirely of U.S. government obligations with maturities of less than one year.
Amortized costs approximated fair values and unrealized gains and losses were
insignificant.
CONCENTRATIONS OF CREDIT RISK. 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
F-8
65
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following table summarizes the revenue from product customers in excess of
10% of total revenues:
------------
1996 1998
---- ----
Customer A.................................................. 0% 13%
Customer B.................................................. 12 0
Customer C.................................................. 16 0
At December 31, 1998, Customer A accounted for 16% of accounts receivable. One
additional customer also represented 16% of accounts' receivable at December 31,
1998. Four customers represented 10%, 10%, 11%, and 28%, respectively, of
accounts' receivable at December 31, 1997. However, no customer represented in
excess of 10% of the Company's revenues in 1997, or in the three-month periods
ended March 31, 1998 and 1999 (unaudited).
INVENTORY. Inventory, which consists primarily of digital cameras and related
hardware, is stated at the lower of cost or market, with cost determined using
standard costs (which approximate first-in, first-out costs). The Company
records a provision for obsolete inventory whenever such an impairment has been
identified.
PROPERTY AND EQUIPMENT. Property and equipment consist primarily of computer
equipment and office furnishings, which are stated at cost. 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 upon disposal. To date, disposals of property and
equipment have been insignificant. Fixed assets are depreciated primarily using
the straight-line method over estimated useful lives, which range from three to
ten years. Leasehold improvements are amortized over the term of the lease, or
estimated useful life whichever is shorter.
PATENTS AND PRODUCT DEVELOPMENT COSTS. External legal costs incurred to
maintain the Company's intellectual property position are capitalized and
amortized over the estimated useful life of the related patents.
The Company also capitalizes eligible software costs incurred after
technological feasibility of the product has been established by a working
model. Capitalized software costs are amortized over the estimated useful life
of the product on a straight-line basis.
During 1997, the Company revised the estimated economic lives of both
capitalized product development costs and patent costs from five years and
seventeen years, respectively, to one year and three years, respectively. The
effect of the change was to increase amortization expense by approximately
$755,000. Qualifying costs in 1997 and 1998, were insignificant and, therefore,
the Company did not capitalize such costs.
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 or circumstances, both internally and externally, that may
suggest impairment. To date no such impairment has been indicated.
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.
F-9
66
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company does not recognize deferred income taxes for temporary differences
associated with its investment in the foreign subsidiary because the differences
are essentially permanent in duration.
Interactive Pictures UK Limited is not included in the tax filing of its parent,
Interactive Pictures Corporation. As a result, Interactive Pictures UK Limited
files a separate return with the United Kingdom jurisdiction governing the
subsidiary.
REVENUE RECOGNITION. Product revenue is recognized upon shipment or delivery
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. Payments received in advance are initially
recorded as deferred revenue and recognized ratably as obligations are
fulfilled.
The Company derives service revenues from research and development activities
performed under fixed-price contracts with certain U.S. government agencies and
other third parties. Such revenues are 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 are made on a contract-by-contract basis and are
recognized in the period in which such losses become probable and can be
reasonably estimated. To date, such losses have been insignificant. Unbilled
fees and services on contracts are 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 are classified
as deferred revenue.
RESEARCH AND DEVELOPMENT COSTS. Research and development expenditures are
expensed as incurred. 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 (Note 12).
ADVERTISING EXPENSES. All advertising expenditures are expensed as incurred.
Advertising expenses for 1996, 1997 and 1998, were $0, $391,800 and $1,087,000,
respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected to continue
following Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees, and related Interpretations in accounting for stock
options granted to employees rather than the alternative fair value accounting
provided for under SFAS No. 123, Accounting for Stock-Based Compensation
("Statement 123").
FOREIGN CURRENCY TRANSACTIONS. Substantially all historical sales have been
denominated in U.S. dollars. All transaction gains and losses are included in
operations. Such amounts have been insignificant to date.
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 patents and product development costs, certain
accruals, receivables and inventory.
SEGMENT REPORTING. In 1998, the Company adopted Statement of Financial
Accounting Standards 131 ("SFAS 131"), Disclosure About Segments of an
Enterprise and Related Information. SFAS 131 requires use of the "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. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED). The accompanying pro forma
shareholders' equity at March 31, 1999 reflects (i) the conversion of all
outstanding shares of preferred stock into an aggregate of
F-10
67
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24,133,297 shares of common stock and (ii) the "cashless exercise" of all
outstanding common and preferred stock warrants calculated using an assumed
initial public offering price of $ and the conversion of the preferred
shares issued upon the exercise of the preferred stock warrants into common
shares, resulting in the issuance of shares of common stock.
NET LOSS PER SHARE. The Company computes net loss per share in accordance with
SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, 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 the computation of basic and dilutive net loss
per share for the periods indicated:
--------------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
NUMERATOR:
Net loss....................... $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
DENOMINATOR:
Weighted average shares........ 16,574,029 18,485,004 13,704,574 18,485,004 12,162,816
NET LOSS PER SHARE:
Basic and diluted.............. $ (0.07) $ (0.30) $ (0.96) $ (0.14) $ (0.31)
The following table sets forth common stock equivalents that are not included in
the diluted net income per share calculation above because to do so would be
antidilutive for the periods indicated:
--------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- ---------- ----------- ---------- -----------
Weighted average effect of common
stock equivalents
Preferred Stocks:
Series A.......................... -- -- 3,519,836 -- 4,836,416
Series B.......................... -- -- 1,278,594 -- 1,547,648
Series C.......................... -- -- 4,443,013 -- 6,982,008
Series D.......................... -- -- -- -- 1,882,952
Employee stock options.............. 596,955 2,050,167 1,944,222 2,099,610 2,567,872
Convertible debenture............... -- 255,776 1,298,130 1,485,149 445,544
-------- ---------- ----------- ---------- -----------
596,955 2,305,943 12,483,795 3,584,759 18,262,440
======== ========== =========== ========== ===========
PRO FORMA NET LOSS PER SHARE (UNAUDITED). Pro forma net loss per share for the
year ended December 31, 1998 and for three months ended March 31, 1999, is
computed using the weighted-average number of common shares outstanding,
including (i) the conversion of all outstanding shares of the Company's
preferred stock into an aggregate of 24,133,297 shares of the Company's common
stock, and (ii) the "cashless exercise" of all outstanding common and preferred
stock warrants calculated using an assumed initial public offering price of
$ and the conversion of the preferred shares issued upon exercise of
the preferred stock warrants into common shares, resulting in the issuance of
shares of common stock, as if such
F-11
68
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions occurred at the beginning of the respective period, or at the date
of original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute basic and diluted net
loss per share of for the year ended December 31, 1998 and
for the three months ended March 31, 1999. The calculation of diluted net loss
per share excludes other potential common shares described above as the effect
would be antidilutive.
RECLASSIFICATIONS. Certain reclassifications have been made to certain
previously reported 1996 and 1997 amounts to conform with the 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities ("SFAS 133"). SFAS 133
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133 is effective for fiscal years beginning after June
15, 2000. The adoption of SFAS 133 is not expected to have a material impact on
the Company's reported results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 is effective for
financial statements for the years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company will adopt the provisions of SOP 98-1 in
its fiscal year ending December 31, 1999, and does not expect such adoption to
have a material effect on the Company's reported results of operations,
financial position, or cash flows.
In March 1998, AICPA issued Statement of Position 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2 ("SOP 98-4"). SOP 98-4 defers for one
year the application of certain provisions of Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"). Different informal and
nonauthoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA issued SOP 98-9 in December 1998, which is effective
for periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The adoption of SOP
97-2, SOP 98-4 and SOP 98-9 have not had and are not expected to have a material
impact on the Company's reported results of operations, financial position or
cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of this standard is
not expected to have a material impact on the Company's reported results of
operations, financial position or cash flows.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
---------------------
1997 1998
-------- ----------
Accrued legal fees.......................................... $210,000 $ 451,000
Accrued vacation............................................ 55,176 137,498
Accrued relocation expenses................................. -- 461,235
Other liabilities........................................... 301,860 598,481
-------- ----------
$567,036 $1,648,214
======== ==========
F-12
69
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
The components of the Company's net deferred tax asset (liability) as of
December 31, 1997 and 1998, is as follows:
-------------------------
1997 1998
----------- -----------
DEFERRED TAX ASSETS (LIABILITIES):
Financial reserves.......................................... $ 72,000 $ 103,000
Accrued expenses and deferred revenue....................... 91,000 255,000
----------- -----------
163,000 358,000
Valuation allowance......................................... (163,000) (358,000)
----------- -----------
Net current deferred tax asset (liability)........ $ -- $ --
=========== ===========
LONG-TERM:
Net operating loss carryforwards............................ $ 3,121,000 $ 7,911,000
Research and development credits............................ 45,000 45,000
Intangible assets........................................... 259,000 239,000
----------- -----------
3,425,000 8,195,000
Valuation allowance......................................... (3,425,000) (8,195,000)
----------- -----------
Net long-term deferred tax asset (liability)...... $ -- $ --
=========== ===========
At December 31, 1998, the Company has available net operating loss carryforwards
of approximately $21,000,000, which it may use to offset future federal taxable
income. The net operating loss carryforwards, if not utilized, will begin to
expire in 2009. The Company has available research and development credits of
approximately $45,000 that will expire in 2010.
Income tax benefits have not been recorded since the Company has fully reserved
the tax benefit of temporary differences, operating losses and tax credit
carryforwards based on management's evaluation of the positive and negative
evidence impacting the realizability of the assets, consisting principally of
net operating loss carryforwards. Management has considered the Company's
history of losses and concluded that as of December 31, 1997 and 1998, the
deferred tax assets should be fully reserved.
The Company's 1996, 1997 and 1998 income tax provision differs from that
obtained by using the statutory rate of 34% due to the following:
-------------------------------------
1996 1997 1998
--------- ----------- -----------
Computed "expected" tax benefit............................ $(406,000) $(1,897,000) $(4,496,000)
State income taxes, net of federal income tax benefit...... (48,000) (223,000) (524,000)
Change in valuation allowance.............................. 451,000 2,105,000 4,965,000
Permanent differences...................................... 3,000 15,000 55,000
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
5. DEBT
On October 29, 1997, the Company issued a $3,000,000, 8% convertible debenture
due September 30, 1998 (the Debenture). The debenture was convertible into
1,485,149 shares of Series C preferred stock. Effective October 23, 1998,
$1,000,000 of the Debenture was assigned by the investor to a group of private
investors who converted such portion of the Debenture into 495,049 shares of
Series C preferred stock. The Company paid off
F-13
70
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,000,000 of the Debenture in October 1998, and converted the remaining
$1,000,000 into 513,201 shares of Series C preferred stock in March 1999.
The Company entered into a $40,000 noninterest bearing promissory note payable
during August 1997; due in monthly installments of $667, including principal and
imputed interest, through August 2002. The note is collateralized by certain
furniture and equipment of the Company.
6. SHAREHOLDERS' EQUITY
As of December 31, 1997, the Company's outstanding capital stock consisted
solely of common stock. The investment agreements among the Company and certain
corporate investors provide certain rights and obligations to the parties,
including but not limited to board representation, the issuance of equity
securities, and public registration and antidilution rights.
During April 1998, the Company authorized and issued to new corporate investors
6,435,643 shares of Series C preferred stock, as well as warrants to purchase an
additional 1,792,055 shares of Series C preferred stock, at a for net proceeds
of $12,529,436. The warrants expire five years from the issuance or upon
consummation of a "qualified public offering," as defined in the warrant
agreements. The warrant exercise price for 1,608,911 shares is $2.42 and $2.02
for the remaining shares under these warrants.
In connection with the Series C transaction, the Company exchanged, on a
one-for-one basis, an aggregate of 6,819,064 shares of common stock for
4,836,416 shares of Series A preferred stock and 1,982,648 shares of Series B
preferred stock.
During August 1998, the Company issued warrants to purchase 67,500 shares of
common stock. These warrants have an exercise price of $2.42 per share and
expire three years from the issuance or upon consummation of a "qualified public
offering," as defined in the warrant agreement.
On March 19 and April 12, 1999, the Company amended its Charter to (i) increase
the number of common shares authorized to 100,000,000 shares; (ii) change the
authorized number of shares of Series B and C preferred stock to 1,547,648 and
9,267,297, respectively; and (iii) change the par value of its common stock to
$0.001. All amounts included in the accompanying financial statements have been
restated to retroactively reflect the change in par value.
Subsequent to the year ended December 31, 1998, the Company issued an aggregate
of 10,305,344 shares of Series D preferred stock for gross proceeds of
$27,000,000, of which approximately $16,600,000 was invested in commercial paper
with maturities of less than one year. These obligations are reported at
amortized cost, which approximates fair value.
In connection with the Series D issuance, warrants to purchase 650,000 shares of
Series D preferred stock were issued. The warrants have an exercise price of
$3.14 and expire three years from issuance or upon consummation of a "qualified
public offering," as defined in the warrant agreement.
The Company's amended Charter provides the following rights and preferences to
the holders of Series A, B, C and D preferred stock:
VOTING
Each share of all series of preferred stock has voting rights equal to an
equivalent number of shares of common stock into which it is convertible
and votes together as one class with the common stock.
The consent of the holders of greater than 70% of the outstanding shares of
Series A, B and C preferred stock will be necessary to effect certain
changes to the Company's Charter that would adversely affect the powers,
preferences and other rights of the preferred stock.
F-14
71
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consent of the holders of greater than a majority of the outstanding
shares of Series D preferred stock will be necessary to effect certain
changes to the Company's Charter.
The holders of Series A and B preferred stock shall each be entitled to
elect one director at each annual meeting of the stockholders. The holders
of Series C and D preferred stock shall be entitled to elect two directors
at each meeting.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series A, B and C preferred stock are
entitled to receive an amount of $1.36, $2.02 and $2.02 per share,
respectively, prior to and in preference to any distribution to the holders
of common stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series D preferred stock are entitled
to receive an amount of $2.62 per share prior to and in preference to any
distribution to the holders of common stock and all other classes of
preferred stock.
CONVERSION
Each share of all series of outstanding preferred stock is convertible, at
the option of the holder, according to a conversion ratio which is subject
to adjustment for dilution. In the event that the per share offering price
of proceeds from a "qualified public offering," as defined in the Company's
charter, exceed certain thresholds, each share of all series of outstanding
preferred stock automatically converts on a one-for-one basis to common
stock.
DIVIDENDS
Holders of preferred stock are entitled to receive noncumulative dividends
when and if declared by the Board of Directors. No dividends have been
declared through December 31, 1998.
7. 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.
8. EMPLOYEE STOCK AND BENEFIT PLANS
STOCK OPTION PLAN
The Company has authorized the 1997 Equity Compensation Plan (the Plan), under
which 5,876,560 shares of common stock are authorized and reserved for issuance
to selected employees, officers, directors, consultants
F-15
72
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and advisors. The Company has reserved a sufficient number of shares of common
stock for issuance pursuant to the authorized options. As of December 31, 1998,
1,611,250 options had been granted under this Plan. In addition, the Company has
granted certain options to purchase shares of the Company's common stock to
employees not under the 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 three-year periods
and expire five years after the respective vesting dates.
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, 1996..... 1,527,440
Options granted in 1996............. 412,000 $1.25 $0.33
Options exercised in 1996........... (80,000) 0.01
Options cancelled in 1996........... (120,000) 1.25
---------
Under option at December 31, 1996... 1,739,440 1,311,440 $0.19
Options granted in 1997............. 2,622,049 1.38 0.33
Options cancelled in 1997........... (316,000) 1.25
---------
Under option at December 31, 1997... 4,045,489 1,990,952 0.55
Options granted in 1998............. 1,576,250 2.04 0.41
Options exercised in 1998........... (220,000) 0.01
Options cancelled in 1998........... (33,334) 2.20
---------
Under option at December 31, 1998... 5,368,405 2,455,797 0.84
=========
The following table summarizes information about stock options at December 31,
1998:
----------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AT REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICE 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
$0.01 907,440 0.7 years $0.01 907,440 $0.01
$1.25 2,566,049 2.7 years $1.25 1,431,024 $1.25
$2.02 - $2.20 1,894,916 8.9 years $2.06 117,333 $2.18
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under APB 25, because the exercise price of the Company's stock options equals
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 has determined that the
difference between historical results and such pro forma information would have
been to increase the net loss by $133,037, $311,129 and $300,876 in 1996, 1997
and 1998, respectively, and to increase the net loss per share to $(0.08),
$(0.32), and $(0.99) in 1996, 1997 and 1998, respectively.
F-16
73
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, risk free interest
rate of 6.21% in 1996, 5.71% in 1997, 4.59% in 1998, and expected dividends and
volatility of zero in 1996, 1997 and 1998. Because the determination of fair
value of all options granted after such time as the Company becomes a public
entity would include an expected volatility factor in addition to the factors
described in this paragraph, these results may not be representative of future
periods.
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 $33,432, $43,803 and $116,071
in 1996, 1997 and 1998, respectively.
9. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes new requirements for reporting and displaying
comprehensive income (loss) and its components. The adoption of SFAS No. 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 to be reported as accumulated other comprehensive
income (loss).
The following reclassification adjustments are required to avoid double-counting
net realized gains on sales of securities that were previously included in
comprehensive income prior to the sales of the securities:
--------
1996
--------
Net gains on sales of securities included in interest
income.................................................... $ 27,334
Other comprehensive income reclassification adjustment...... (27,334)
--------
Net unrealized gain (loss) reported in other comprehensive
income................................................. $ --
========
10. SEGMENT INFORMATION
The Company has two reportable segments: 1) IPIX products, and 2) research and
development services for others. 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 IPIX products segment.
F-17
74
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about reported segments for the years ended December 31, 1996, 1997
and 1998, and the three-month periods ended March 31, 1998 and 1999, is as
follows:
--------------------------------------
RESEARCH AND
DEVELOPMENT
IPIX SERVICES
PRODUCTS FOR OTHERS TOTAL
---------- ------------ ----------
YEAR ENDED DECEMBER 31:
1996
Revenues................................................. $1,336,686 $208,167 $1,544,853
Gross profit............................................. $ 794,082 $ 99,493 $ 893,575
1997
Revenues................................................. $2,127,872 $317,898 $2,445,770
Gross profit............................................. $1,681,936 $ 1,864 $1,683,800
1998
Revenues................................................. $2,711,947 $329,008 $3,040,955
Gross profit............................................. $1,504,726 $ 88,324 $1,593,050
THREE-MONTH PERIODS ENDED MARCH 31:
1998 (UNAUDITED)
Revenues................................................. $ 319,494 $ 97,700 $ 417,194
Gross profit............................................. $ 247,244 $ 66,050 $ 313,294
1999 (UNAUDITED)
Revenues................................................. $1,228,621 $ -- $1,228,621
Gross profit............................................. $ 641,810 $ -- $ 641,810
Revenue and long-lived asset information by geographic area as of and for the
years ended December 31, 1996, 1997 and 1998 and the three-month periods ended
March 31, 1998 and 1999, is as follows:
------------------------------------------------------------
THREE-MONTH PERIODS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- -------- ----------
(UNAUDITED)
REVENUES:
United States......................... $1,147,845 $1,833,851 $2,403,793 $268,227 $ 978,899
Japan................................. 138,000 273,093 352,330 82,650 4,825
Singapore............................. 259,008 143,364 13,000 -- 1,695
United Kingdom........................ -- 21,537 40,979 48,395 194,619
Other foreign countries............... -- 173,925 230,853 17,922 48,583
---------- ---------- ---------- -------- ----------
$1,544,853 $2,445,770 $3,040,955 $417,194 $1,228,621
========== ========== ========== ======== ==========
LONG-LIVED ASSETS:
Foreign............................... $ -- $ 14,962 $ 23,006
United States......................... 662,967 1,337,580 1,467,457
---------- ---------- ----------
$ 662,967 $1,352,542 $1,490,463
========== ========== ==========
F-18
75
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign revenues include all sales made to customers outside the United States,
including those generated by the UK subsidiary.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain office space under noncancelable operating leases.
Future minimum lease payments with remaining terms in excess of one year are as
follows:
----------
1999........................................................ $ 536,567
2000........................................................ 419,488
2001........................................................ 376,143
2002........................................................ 328,968
2003........................................................ 55,530
----------
$1,716,696
==========
Rental expense for operating leases was $46,378, $152,120 and $430,010 for 1996,
1997 and 1998, 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.
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company performs certain research and development activities under various
third party contracts under which the Company receives payments upon achieving
certain targets in the development process.
Total revenue earned and costs incurred under third party research and
development contracts, excluding contracts with government agencies, at December
31, is as follows:
----------------------------
1996 1997 1998
------- -------- -------
Revenue earned.............................................. $79,750 $104,500 $62,700
Cost incurred............................................... 44,693 208,168 --
13. SUBSEQUENT EVENT (UNAUDITED)
In April 1999, the Compensation Committee of the Company's Board of Directors
approved the issuance of 2,252,000 options to purchase common stock at an
exercise price of $2.62 per share.
F-19
76
(LOGO IPIX INTERACTIVE PICTURES CORPORATION)
77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered, other than the underwriting discount, are
estimated as follows:
SEC Registration Fee........................................ $16,000
NASD Fees................................................... 6,250
NASDAQ Listing Fees......................................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accountants' Fees and Expenses.............................. *
Expenses of Qualification Under State Securities Laws....... *
Transfer Agent and Registrar's Fees......................... *
Miscellaneous Costs......................................... *
-------
Total............................................. $ *
=======
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Tennessee Business Corporation Act ("TBCA") provides that a corporation may
indemnify any director or officer against liability incurred in connection with
a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interests, and, in all other cases, that his or her conduct
was not opposed to the best interests of the corporation, and (iii) the director
or officer in connection with any criminal proceeding had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer is adjudged liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
Our amended and restated charter and bylaws will provide that we will indemnify
from liability, and advance expenses to, any present or former director or
officer to the fullest extent allowed by the TBCA, as amended from time to time,
or any subsequent law, rule, or regulation adopted in lieu thereof.
Additionally, our charter will provide that no director will be personally
liable to us or any of our shareholders for monetary damages for breach of any
fiduciary duty except for liability arising from (i) any breach of a director's
duty of loyalty to us or our shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, or
(iii) any unlawful distributions.
The proposed form of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement contains certain provisions relating to our
indemnification and our controlling persons by the Underwriters and relating to
the indemnification of the Underwriters by us, our controlling persons and the
selling shareholders.
II-1
78
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the past
three years involving sales of the Registrant's securities that were not
registered under the Securities Act.
Within the past three years, the Registrant has issued options to purchase
6,485,299 shares of its common stock to various employees, officers, directors,
consultants and advisors with exercise prices ranging from $.01 to $2.62 per
share. Within the past three years, we have issued 707,440 shares of common
stock pursuant to stock option exercises for an aggregate consideration of
$132,674, at an average exercise price of $.19 per share.
In December 1996, the Registrant issued to each of Motorola, Inc. and Discovery
Communications, Inc. an aggregate of 1,982,648 shares of common stock for an
aggregate purchase price of $4,000,000.
In October 1997, the Registrant issued to a private investor a $3,000,000
aggregate principal amount, 8% convertible debenture.
On April 9, 1998, the Registrant issued to Motorola 4,396,416 shares of Series A
preferred stock and 991,324 shares of Series B preferred stock in exchange for
5,387,740 shares of common stock of the Registrant. No cash consideration was
paid in connection with this exchange.
On April 9, 1998, the Registrant issued to Discovery 991,324 shares of Series B
preferred stock in exchange for a like number of shares of common stock of the
Registrant. No cash consideration was paid in connection with this exchange.
From April to July 1998, the Registrant issued to eight private investors an
aggregate of 6,435,643 shares of Series C preferred stock for an aggregate
purchase price of $13,000,000. In connection with such sale, the Registrant
issued to these investors warrants to purchase an aggregate of 1,608,911 shares
of Series C preferred stock at an exercise price of $2.02 per share. Morgan
Keegan & Company, Inc. acted as the Registrant's placement agent in this
transaction and received cash commissions of $265,450 and warrants to purchase
183,144 shares of Series C preferred stock for an exercise price of $2.42 per
share.
In May 1998, the Registrant issued to two shareholders an aggregate of 440,000
shares of Series A preferred stock in exchange for a like number of shares of
common stock of the Registrant. No cash consideration was paid in connection
with this exchange.
In August 1998, the Registrant issued to 17 private investors an aggregate of
675,000 shares of common stock of the Registrant for an aggregate consideration
of $1,363,500. Morgan Keegan acted as the Registrant's placement agent for this
transaction and received cash commissions of $81,810 and a warrant to purchase
67,500 shares of common stock at an exercise price of $2.42 per share.
From January to March 1999, the Registrant issued to 16 private investors an
aggregate of 10,305,344 shares of Series D preferred stock for an aggregate
purchase price of $27,000,000. In connection with this transaction, the
Registrant issued to one of the investors a warrant to purchase an aggregate of
650,000 shares of Series D preferred stock at an exercise price of $3.14 per
share. J.P. Morgan & Co. acted as placement agent for the Registrant to this
transaction and received a commission of $1,620,000, half of which was paid in
cash and the remainder with 309,160 shares of common stock.
The issuance of securities described in Item 15 were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. The
issuance of securities described under the first paragraph of Item 15 was deemed
to be exempt from registration under the Securities Act in reliance on Section
4(2) or Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
II-2
79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* -- Form of the Underwriting Agreement among Interactive
Pictures Corporation, the selling shareholders and the
underwriters
3.1* -- Form of Amended and Restated Charter of Interactive Pictures
Corporation
3.2* -- Form of Amended and Restated Bylaws of Interactive Pictures
Corporation
4.1* -- Form of certificate representing the common stock, $.001 par
value per share of Interactive Pictures Corporation
4.2 -- Amended and Restated Registration Rights Agreement dated
December 23, 1996, between Interactive Pictures Corporation,
Motorola, Inc. and Discovery Communications, Inc.
4.3 -- Rights Agreement dated April 9, 1998, between Interactive
Pictures Corporation and purchasers of Series C Preferred
Stock
4.4 -- Amended and Restated Rights Agreement dated March 22, 1999,
between Interactive Pictures Corporation and purchasers of
Series D Preferred Stock
5.1* -- Opinion of Baker, Donelson, Bearman and Caldwell as to the
legality of the common stock being offered
10.1 -- Executive Employment Agreement dated January 24, 1997,
between Interactive Pictures Corporation and James M.
Phillips, as amended
10.2 -- Employment and Noncompetition Agreement dated June 20, 1997,
between Interactive Pictures Corporation and John M. Murphy
10.3 -- Employment and Noncompetition Agreement dated August 17,
1998, between Interactive Pictures Corporation and Jeffrey
D. Peters
10.4 -- Employment and Noncompetition Agreement dated August 24,
1998, between Interactive Pictures Corporation and John J.
Kalec
10.5 -- Employment Agreement dated June 23, 1997, between
Interactive Pictures Corporation and Steven D. Zimmermann
10.6 -- License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Discovery
Communications, Inc.
10.7 -- Patent License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Motorola, Inc.
10.8 -- 1997 Equity Compensation Plan
10.9 -- Marketing Agreement dated March 22, 1999, between
Interactive Pictures Corporation and GE Capital Equity
Investments, Inc.
10.10 -- Warrant Agreement dated March 22, 1999, between Interactive
Pictures Corporation and GE Capital Equity Investments, Inc.
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Baker, Donelson, Bearman & Caldwell (included in
opinion filed as Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for SEC use only)
- ---------------
* To be filed by amendment
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80
Schedules
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
All schedules have been omitted because either they are not required, or not
applicable or the information is otherwise set forth in the consolidated
financial statements and notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) To provide the underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names
as required by the underwriter to permit prompt delivery to each purchaser.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Interactive Pictures Corporation, has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Oak Ridge, State of Tennessee, on this 20th day of May, 1999.
INTERACTIVE PICTURES CORPORATION
By: /s/ JAMES M. PHILLIPS
----------------------------------------
James M. Phillips
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints James M. Phillips,
Jeffrey D. Peters and John J. Kalec, each of them severally, 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, including post-effective
amendments to this Registration Statement, and to sign any and all additional
registration statements relating to the same offering of securities of the
Registration Statement that are filed pursuant to Rule 462(b) of the Securities
Act of 1933, and to file the same, 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.
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PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED:
SIGNATURES TITLE DATE
---------- ----- ----
Chairman of the Board of Directors May 20, 1999
/s/ JAMES M. PHILLIPS and Chief Executive Officer
- ---------------------------------------------------
James M. Phillips
President and Chief Operating May 20, 1999
/s/ JEFFREY D. PETERS Officer
- ---------------------------------------------------
Jeffrey D. Peters
Vice President and Chief Financial May 20, 1999
/s/ JOHN J. KALEC Officer
- ---------------------------------------------------
John J. Kalec
Director May 20, 1999
/s/ JOHN S. HENDRICKS
- ---------------------------------------------------
John S. Hendricks
Director May 20, 1999
/s/ DOUG HOLMES
- ---------------------------------------------------
Doug Holmes
Director May 20, 1999
/s/ LABAN P. JACKSON, JR.
- ---------------------------------------------------
Laban P. Jackson, Jr.
Director May 20, 1999
/s/ RANDALL BATTAT
- ---------------------------------------------------
Randall Battat
Director May 20, 1999
/s/ TONY PANTUSO
- ---------------------------------------------------
Tony Pantuso
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* -- Form of the Underwriting Agreement among Interactive
Pictures Corporation, the selling shareholders and the
underwriters
3.1* -- Form of Amended and Restated Charter of Interactive Pictures
Corporation
3.2* -- Form of Amended and Restated Bylaws of Interactive Pictures
Corporation
4.1* -- Form of certificate representing the common stock, $.001 par
value per share of Interactive Pictures Corporation
4.2 -- Amended and Restated Registration Rights Agreement dated
December 23, 1996, between Interactive Pictures Corporation,
Motorola, Inc. and Discovery Communications, Inc.
4.3 -- Rights Agreement dated April 9, 1998, between Interactive
Pictures Corporation and purchasers of Series C Preferred
Stock
4.4 -- Amended and Restated Rights Agreement dated March 22, 1999,
between Interactive Pictures Corporation and purchasers of
Series D Preferred Stock
5.1* -- Opinion of Baker, Donelson, Bearman and Caldwell as to the
legality of the common stock being offered
10.1 -- Executive Employment Agreement dated January 24, 1997,
between Interactive Pictures Corporation and James M.
Phillips, as amended
10.2 -- Employment and Noncompetition Agreement dated June 20, 1997,
between Interactive Pictures Corporation and John M. Murphy
10.3 -- Employment and Noncompetition Agreement dated August 17,
1998, between Interactive Pictures Corporation and Jeffrey
D. Peters
10.4 -- Employment and Noncompetition Agreement dated August 24,
1998, between Interactive Pictures Corporation and John J.
Kalec
10.5 -- Employment Agreement dated June 23, 1997, between
Interactive Pictures Corporation and Steven D. Zimmermann
10.6 -- License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Discovery
Communications, Inc.
10.7 -- Patent License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Motorola, Inc.
10.8 -- 1997 Equity Compensation Plan
10.9 -- Marketing Agreement dated March 22, 1999, between
Interactive Pictures Corporation and GE Capital Equity
Investments, Inc.
10.10 -- Warrant Agreement dated March 22, 1999, between Interactive
Pictures Corporation and GE Capital Equity Investments, Inc.
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Baker, Donelson, Bearman & Caldwell (included in
opinion filed as Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for SEC use only)
- ---------------
* To be filed by amendment