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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1999 Commission File No. 000-26893
INTERACTIVE PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1275544
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
Registrant's telephone number, including area code: (423) 482-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
16,562,713 shares of $0.001 par value common stock outstanding as of October
31, 1999
Page 1 of 20
Exhibit Index on Page 20
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INTERACTIVE PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements...........................................................3-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................10-16
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................16-17
Item 2. Changes in Securities and Use of Proceeds...................................................17
Item 3. Defaults Upon Senior Securities.............................................................17
Item 4. Submission of Matters to a Vote of Security Holders.........................................17-18
Item 5. Other Information...........................................................................18
Item 6. Exhibits and Reports on Form 8-K............................................................18
Signatures................................................................................................19
Exhibit Index.............................................................................................20
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1999
-------- ---------
In thousands (1) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,064 $ 2,817
Securities available-for-sale -- 65,396
Accounts receivable, less allowance for doubtful accounts of
$170,000 at December 31, 1998 and $110,000 at September 30,
1999 (unaudited) 842 2,075
Inventory, less reserve for obsolescence of $100,000 at December
31, 1998 and $140,000 at September 30, 1999 (unaudited) 328 1,144
Prepaid expenses and other current assets 305 2,992
-------- ---------
Total current assets 2,539 74,424
-------- ---------
Property and equipment, net 1,353 2,119
Other assets 97 151
-------- ---------
Total assets $ 3,989 $ 76,694
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Convertible debenture $ 1,000 $ --
Accounts payable 401 506
Accrued expenses 1,656 2,067
Deferred revenue 118 223
-------- ---------
Total current liabilities 3,175 2,796
-------- ---------
Long-term portion of promissory note 21 15
Commitments and contingencies (Note 5)
Shareholders' equity:
Convertible preferred stocks:
Series A $0.001 par value; 1,644,817 shares authorized, issued and
outstanding at December 31, 1998
($6,577,526 aggregate liquidation value) 2 --
Series B $0.001 par value; 674,279 shares authorized at
December 31, 1998; 526,340 shares issued and
outstanding at December 31, 1998 ($43,126,249 aggregate
liquidation value at December 31, 1998) 1 --
Series C $0.001 par value; 4,482,705 shares authorized at
December 31, 1998; 2,357,058 shares issued and
outstanding at December 31, 1998 ($13,999,990 aggregate
liquidation value at December 31, 1998) 2 --
Common stock, $0.001 par value; 17,004,500 and 100,000,000
shares authorized at December 31, 1998 and September 30, 1999
(unaudited), respectively; 4,101,805 and 16,562,713 shares issued and
outstanding at December 31, 1998 and
September 30, 1999 (unaudited), respectively 4 17
Additional paid-in capital 24,808 114,463
Deferred stock compensation -- (847)
Accumulated deficit (24,024) (39,750)
-------- ---------
Total shareholders' equity 793 73,883
-------- ---------
Total liabilities and shareholders' equity $ 3,989 $ 76,694
======== =========
(1) The December 31, 1998 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements
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INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30 September 30
----------------- -------------------
In thousands, except per share data 1998 1999 1998 1999
------- ------- ------- --------
(unaudited) (unaudited)
Revenues:
Products $ 753 $ 2,401 $ 1,832 $ 5,406
Services 30 -- 156 --
------- ------- ------- --------
783 2,401 1,988 5,406
------- ------- ------- --------
Cost of revenues:
Products 356 1,204 548 2,690
Services 28 -- 85 --
------- ------- ------- --------
384 1,204 633 2,690
------- ------- ------- --------
Gross profit 399 1,197 1,355 2,716
------- ------- ------- --------
Operating expenses:
Sales and marketing 2,238 5,809 5,625 12,429
Research and development 780 1,005 1,928 2,653
General and administrative 558 1,676 2,290 4,069
Non-cash compensation expense -- 85 -- 169
------- ------- ------- --------
Total operating expenses 3,576 8,575 9,843 19,320
Interest income 90 591 248 889
Interest expense (57) -- (177) (12)
Other income (expense), net 23 -- 23 --
------- ------- ------- --------
Net loss $(3,121) $(6,787) $(8,394) $(15,727)
======= ======= ======= ========
Basic and diluted loss per common share (Note 4) $ (0.78) $ (0.55) $ (1.71) $ (2.28)
See accompanying notes to the unaudited condensed consolidated financial
statements
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INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
1998 1999
-------- --------
In thousands (unaudited)
Cash flows from operating activities:
Net loss $ (8,394) $(15,727)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 156 256
Compensation expense related to issuance of stock options -- 169
Expense related to issuance of warrants -- 26
Provision for doubtful accounts receivable (20) 73
Gain on disposal of fixed assets -- (6)
Accretion of available-for-sale securities discounts and premiums (153) (424)
Provision for inventory obsolescence -- 40
Changes in operating assets and liabilities:
Accounts receivable (144) (1,305)
Inventory (278) (855)
Prepaid expenses and other current assets (209) (1,529)
Other assets 85 (213)
Accounts payable 72 105
Accrued expenses 281 (534)
Deferred revenue (37) 105
-------- --------
Net cash used in operating activities (8,641) (19,819)
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (626) (1,058)
Purchases of available-for-sale securities (7,831) (78,964)
Maturities of available-for-sale securities 5,000 13,992
Proceeds from disposal of equipment -- 42
-------- --------
Net cash used in investing activities (3,457) (65,988)
-------- --------
Cash flow from financing activities:
Net proceeds from issuance of common stock -- 63,696
Net proceeds from issuance of preferred stock 13,899 26,876
Repurchase of preferred and common stock (1,326) (3,730)
Proceeds from exercise of warrants -- 724
Repayments of promissory note (6) (6)
-------- --------
Net cash provided by financing activities 12,567 87,560
-------- --------
Net increase in cash and cash equivalents 469 1,753
Cash and cash equivalents, beginning of period 1,826 1,064
-------- --------
Cash and cash equivalents, end of period $ 2,295 $ 2,817
======== ========
No income taxes or interest payments were made in either period presented.
Noncash investing and financing activities:
During March 1999, a $1,000,000 convertible debenture and accrued
interest was converted into 174,535 shares of Series C preferred stock.
Also during March 1999, the Company issued 105,142 shares of redeemable
common stock for a portion of the placement fee in connection with the
issuance of Series D preferred stock.
During August 1999, the Company issued $1.0 million of common stock
(55,556 shares) to Creative Artists Agency as an advertising alliance
fee.
See accompanying notes to the unaudited condensed consolidated financial
statements
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements include
the accounts of Interactive Pictures Corporation and its wholly-owned
subsidiary, Interactive Picture UK Limited. The consolidation of these entities
will collectively be referred to as the Company. All significant intercompany
balances and transactions have been eliminated. These financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
audited financial statements of the Company as of and for the period ended
December 31, 1998. The information furnished reflects all adjustments which are
necessary for a fair presentation of the Company's financial position as of
September 30, 1999, and the results of its operations and its cash flows for the
three month periods and nine month periods ended September 30, 1998 and 1999.
All such adjustments are of a normal recurring nature.
2. RESULTS OF OPERATIONS
The results of operations for the three month periods and nine month periods
ended September 30, 1998 and 1999, are not necessarily indicative of the results
to be expected for the respective full years.
3. EQUITY AND RELATED TRANSACTIONS
In April and May of 1999, the Company issued options to employees and directors
to purchase 795,130 shares of common stock at $7.70 per share. The Company
recorded deferred stock compensation totaling approximately $1,034,000 during
these time periods, which represents the difference between the deemed fair
market value of the Company's common stock for accounting purposes and the
exercise price of the options at the date of grant. The deferred stock
compensation has been presented as a reduction of shareholders' equity and will
be amortized over the three-year vesting period of the options.
In August 1999, the Company raised net proceeds of $63.5 million from our
initial public offering of our common stock.
In order to comply with certain underwriting compensation rules of the National
Association of Securities Dealers, Inc., the Company repurchased an aggregate of
484,367 shares of our common stock upon the consummation of the initial public
offering for an aggregate repurchase price of $3,730,000. This repurchase
transaction was completed in September 1999.
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4. LOSS PER SHARE
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
In thousands, except per share data 1998 1999 1998 1999
------- -------- ------- --------
(UNAUDITED) (UNAUDITED)
NUMERATOR:
Net loss $(3,121) $ (6,787) $(8,394) $(15,727)
DENOMINATOR:
Weighted average shares 4,013 12,297 4,899 6,913
NET LOSS PER SHARE:
Basic and diluted $ (0.78) $ (0.55) $ (1.71) $ (2.28)
5. COMMITMENTS AND CONTINGENCIES
In October 1998, a lawsuit was filed against the Company. This lawsuit alleged
that the Company breached a duty of confidence, made misrepresentations and
misappropriated trade secrets. The Company removed this action to arbitration
and cross-claimed alleging various affirmative claims. The court dismissed the
lawsuit in May 1999, upon motion of the plaintiffs. However, arbitration is
expected to take place in the spring of 2000. In May 1999, one of the original
plaintiffs filed a second lawsuit against the Company alleging patent
infringement. Management believes that the claims are without merit and intends
to vigorously defend against such claims. Since the plaintiffs have not
specified in their lawsuit the amount of damages they seek, an estimate of the
ultimate liability of the Company cannot be made. If the Company does not
effectively defend against the claims, the Company's financial condition,
results of operations and cash flows could be materially adversely affected.
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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.
6. SEGMENTS
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.
RESEARCH AND
DEVELOPMENT
IPIX SERVICES
In thousands PRODUCTS FOR OTHERS TOTAL
THREE MONTHS ENDED SEPTEMBER 30,
1998
Revenues $ 753 $ 30 $ 783
Gross profit 397 2 399
1999
Revenues 2,401 -- 2,401
Gross profit 1,197 -- 1,197
NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues 1,832 156 1,988
Gross profit 1,284 71 1,355
1999
Revenues 5,406 -- 5,406
Gross profit 2,716 -- 2,716
7. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities. 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 issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. 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.
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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 defers for one year the
application of certain provisions of Statement of Position 97-2, Software
Revenue Recognition. 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, 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.
8. INCOME TAXES
Internal Revenue Code Section 382 stipulates an annual limitation on the amount
of Federal and State net operating losses incurred prior to a change in
ownership which can be utilized to offset the Company's future taxable income.
An ownership change occurred as a result of the consummation of the initial
public offering.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.
---------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
------ ------ ------ ------
Revenues
Products 96.2% 100.0% 92.2% 100.0%
Services 3.8 -- 7.8 --
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of revenues
Products 45.4 50.2 27.5 49.7
Services 3.6 -- 4.3 --
------ ------ ------ ------
49.0 50.2 31.8 49.7
------ ------ ------ ------
Operating expenses
Sales and marketing 285.8 241.9 282.9 229.9
Research and development 99.6 41.9 97.0 49.1
General and administrative 71.3 69.8 115.2 75.3
Non-cash compensation expense -- 3.5 -- 3.1
------ ------ ------ ------
Total operating expenses 456.7 357.1 495.1 357.4
------ ------ ------ ------
Interest and other income (expense), net 7.2 24.6 4.7 16.2
------ ------ ------ ------
Net loss (398.5)% (282.7)% (422.2)% (290.9)%
====== ====== ====== ======
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QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1998
Revenues. Total revenues increased to $2,401,000 in the third quarter of 1999,
compared to $783,000 in the third quarter of 1998, an increase of $1,618,000 or
206.6%. Product revenues increased to $2,401,000 from $753,000, an increase of
$1,648,000. This increase was due primarily to an increase in sales of IPIX keys
and 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 60,298 IPIX
keys in the third quarter of 1999, compared to 13,518 keys in the third quarter
of 1998, an increase of 46,780 keys. We did not have service revenues in the
third quarter of 1999, compared to $30,000 in the third 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 $1,204,000 in the third quarter of
1999, compared to $356,000 in the third quarter of 1998, an increase of
$848,000. Cost of product revenues as a percentage of product revenues increased
from 47.3% in the third quarter of 1998 to 50.1% in the third quarter of 1999.
Cost of service revenues consists primarily of labor costs. In the third quarter
of 1998, cost of service revenues was $28,000, or 93.3% of service revenues. We
did not incur any cost of service revenues in the third 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 $5,809,000 in the third quarter of 1999, compared to $2,238,000 in
the third quarter of 1998, an increase of $3,571,000, or 159.6%. This increase
was due primarily to a significant increase in our sales force and advertising
expenses.
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 $1,005,000 in the
third quarter of 1999, compared to $780,000 in the third quarter of 1998, an
increase of $225,000, or 28.8%. This increase was due primarily to additional
staffing and associated costs in our research and development effort.
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 increased to $1,676,000 in the third quarter of 1999,
compared to $558,000 in the third quarter of 1998, an increase of $1,118,000,
or 200.4%. This increase was due primarily to personnel and related costs.
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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
$591,000 in the third quarter of 1999, compared to $56,000 in the third quarter
of 1998, a change of $535,000. This change was due primarily to increased
earnings on our investments as a substantial portion of funds raised from our
1999 stock issuances have been invested in securities available-for-sale.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Total revenues increased to $5,406,000 in the first nine months of
1999, compared to $1,988,000 in the first nine months of 1998, an increase of
$3,418,000 or 171.9%. Product revenues increased to $5,406,000 from $1,832,000,
an increase of $3,574,000. This increase was due primarily to an increase in
sales of IPIX keys and 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 120,571 IPIX keys in the first nine months of 1999, compared to
30,346 keys in the first nine months of 1998, an increase of 90,225 keys. We did
not have service revenues in the first nine months of 1999, compared to $156,000
in the first nine months of 1998.
Cost of Revenues. Cost of product revenues increased to $2,690,000 in the nine
months ended September 30, 1999, compared to $548,000 in the nine months ended
September 30, 1998, an increase of $2,142,000. Cost of product revenues as a
percentage of product revenues increased from 29.9% in the first nine months of
1998 to 49.8% in the first nine months 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. In the first nine months of
1998, cost of service revenues was $85,000 or 54.5% of service revenues. We did
not incur any cost of service revenues in the nine months ended September 30,
1999.
Sales and Marketing. Sales and marketing expenses increased to $12,429,000 in
the first nine months of 1999, compared to $5,625,000 in the first nine months
of 1998, an increase of $6,804,000, or 121.0%. This increase was due primarily
to a significant increase in our sales force and advertising expenses.
Research and Development. Research and development expenses increased to
$2,653,000 in the first nine months of 1999, compared to $1,928,000 in the first
nine months of 1998, an increase of $725,000, or 37.6%. This increase was due
primarily to increased staffing and associated costs in our research and
development effort.
General and Administrative Expenses. General and administrative expenses
increased to $4,069,000 in the first nine months of 1999, compared to $2,290,000
in the first nine months of 1998, an increase of $1,779,000, or 77.7%. This
increase was due primarily to personnel and related costs.
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Interest and Other Income (Expense). Net interest and other income increased to
$877,000 in the first nine months of 1999, compared to $94,000 in the first nine
months of 1998, a change of $783,000. This change was due primarily to increased
earnings on our cash investments and a reduction in the amount of our
indebtedness.
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. In
August 1999, we raised net proceeds of $63.5 million from our initial public
offering of our common stock. At September 30, 1999, we had $2,817,000 of cash
and cash equivalents and $65,396,000 in securities available-for-sale.
Net cash used in operating activities was $8,641,000 for the nine months ended
September 30, 1998 and $19,819,000 for the nine months ended September 30, 1999.
Net cash used for operating activities in each of these periods is primarily a
result of net losses.
Net cash used in investment activities was $3,457,000 for the nine months ended
September 30, 1998 and $65,988,000 for the nine months ended September 30, 1999.
Net cash used in investing activities was related to the net purchases and
maturities of short-term investments and the acquisition of computer software
and hardware and other equipment.
Net cash provided by financing activities was $12,567,000 for the nine months
ended September 30, 1998 and $87,560,000 for the nine months ended September 30,
1999. The net cash provided by financing activities for these periods was due
primarily to the sale of shares of our common and preferred stock.
In order to comply with certain underwriting compensation rules of the National
Association of Securities Dealers, Inc., we repurchased an aggregate of 484,367
shares of our common stock upon the consummation of the initial public offering
for an aggregate repurchase price of $3,730,000. This repurchase transaction was
completed in September 1999.
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 our
recently completed common stock 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 as we make investments in our sales and
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marketing and distribution capabilities and that our operating expenses will be
a material use of our cash resources for the foreseeable future.
We believe that the net proceeds from our recently completed initial public
offering of our common stock, 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. After these twelve
months, we may require additional funds to support our working capital
requirements or for other purposes and may seek to raise additional funds
through public or private equity financing, bank debt financing or from other
sources. There can be no assurance that this 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 year 2000 information could
generate erroneous data or fail.
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 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.
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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. A failure 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 SFAS No. 133, Accounting for Derivatives and
Hedging Activities. 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 issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. 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 defers for one year the
application of certain provisions of Statement of Position 97-2, Software
Revenue Recognition. 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.
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In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities, 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.
INFLATION
Inflation has not had a significant impact on our operations to date.
FORWARD-LOOKING STATEMENTS
This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our management's beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may cause
our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Factors that
could contribute to these differences include those discussed in "Risk Factors"
of our prospectus dated August 5, 1999.
The words "believe", "may", "will", "should", "anticipate", "estimate",
"expect", "intends", "objective" or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 alleged in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
alleged that our technology wrongfully incorporated trade secrets and other
know-how gained from them in breach of various affirmative claims, including
trade secret theft. Minds-Eye and Mr. Oxaal voluntarily dismissed their suit on
May 19, 1999. Although the lawsuit was dismissed, an arbitration is proceeding
in Knoxville, Tennessee to decide this dispute with Mr. Oxaal.
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On May 20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant
in the same court alleging that our technology infringes upon a patent claim for
360E spherical visual technology held by him. Mr. Oxaal claims that this alleged
infringement is deliberate and willful and is seeking treble damages against us
in an unspecified amount plus interest, an accounting by us, costs and
attorney's fees, in addition to a permanent injunction prohibiting the alleged
infringement of his patent by us. We will assert defenses to Mr. Oxaal's claims
as we believe we did not infringe any valid claims of his patent. We believe
that Mr. Oxaal's claims are without merit and we intend to vigorously defend
against his claims. If Mr. Oxaal were to prevail in this lawsuit, our business
and financial condition could be materially adversely affected.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of our first registration statement, filed on Form S-1 under
the Securities Act of 1933, as amended, (No. 333-78983) relating to our initial
public offering of common stock, was August 4, 1999. A total of 4,200,000 shares
of our common stock, of which we sold 3,850,000 shares, were sold to an
underwriting syndicate which was managed by J.P. Morgan & Co., Hambrecht &
Quist, Morgan Keegan & Company, Inc. and Stephens, Inc. The offering commenced
and was completed on August 5, 1999 at a price of $18.00 per share. As a result
of the initial public offering we received gross proceeds of $69.3 million, $4.9
million of which was applied toward the underwriting discount. Other expenses
related to the offering totaled approximately $900,000. Our net proceeds from
this offering were $63.5 million, all of which were deposited into our accounts
in August 1999 following the close of the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 30, 1999, Interactive Pictures Corporation held a Special Meeting of
Shareholders to consider and vote on three matters:
X to approve and adopt the Articles of Amendment to the Charter of IPIX
that would effect a .34009-for-1 reverse stock split of the $0.001 par
value common stock and the $0.001 par value preferred stock of IPIX;
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X to amend and restate the Bylaws of IPIX, adding provisions that will
enable IPIX to protect itself from unsolicited, hostile takeover
attempts; and
X to approve and adopt the Fourth Amended and Restated Charter of IPIX
that would, among other things, authorize 100,000,000 shares of $0.001
par value common stock and 10,000,000 shares of $0.001 par value of
preferred stock of IPIX.
Shareholders holding 22,579,711 (before adjustment of the voted upon stock
split), or 85%, of the shares outstanding at that time, approved each of the
foregoing proposals.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27.1 Financial Data Schedule
b. Reports on Form 8-K
None
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INTERACTIVE PICTURES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 15, 1999 INTERACTIVE PICTURES CORPORATION
(Registrant)
/s/ John J. Kalec
--------------------------------------------
John J. Kalec
Chief Financial Officer and
Chief Accounting Officer
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INTERACTIVE PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1999
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
27.1 Financial Data Schedule (for SEC use only)
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