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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 00-26363
INTERNET PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2213841
State or other jurisdiction (IRS Employer
incorporation or organization Identification No.)
3160 CROW CANYON ROAD, SAN RAMON, CALIFORNIA 94853
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 242-4002
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Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2002 was $13,533,520 (based on the average bid and
ask price of $2.05).
The number of shares outstanding of the registrant's common stock, $.001 par
value, as of March 1, 2002 was 6,780,317. On August 22, 2001 our shareholders
approved a ten-for-one reverse stock split. All share and per share data is
presented to give effect to the retroactive application of the reverse stock
split.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Stockholders'
Meeting to be held on or about May 30, 2002, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, are incorporated by reference into Part III
of this report on Form 10-K. Such Proxy Statement, except for the portions
thereof which are specifically incorporated herein by reference, shall not be
deemed "filed" for purposes of this report on Form 10-K.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Internet Pictures Corporation, or iPIX, is a technology provider and the leader
in the delivery of mission-critical imaging. The Company's open imaging
platform and immersive imaging technologies allow businesses to harness the
power of imaging to increase revenues, improve operations and enhance the
overall Internet user experience.
Our robust and reliable imaging infrastructure manages in excess of 200 million
image views and 1.5 million image submissions every 24 hours, facilitating
millions of dollars in commerce each and every day.
iPIX combines its people, technology, processes and partnerships to deliver an
extensive range of full and self-service imaging solutions worldwide. Our
end-to-end solutions include the capture, processing, hosting and distribution
of immersive, still and video images. We deliver the necessary imaging
solutions to facilitate commerce, communication and security so customers can
outsource their imaging needs and focus on their core competencies.
iPIX is organized in two primary business units: Transaction Services and
Immersive Solutions. The Transaction Services unit focuses on the sale of iPIX
solutions to customers who rely on images to complete business transactions
such as real estate, auctions and classifieds. The Immersive Solutions business
unit focuses on the sale of immersive technology licenses into the observation
and security, travel and hospitality and visual documentation markets.
THE IPIX SOLUTION
iPIX Rimfire(R) Imaging Platform
iPIX's open imaging platform, Rimfire, allows business and consumer sites to
quickly and easily capture, manage and distribute media from site viewers to
live Web pages. Rimfire is an end-to-end, fully automated imaging management
solution that addresses the preparation, submission and management of digital
media. With Rimfire, users can easily publish still photos and other digital
media to the Web with simple drag-and-drop image submission. Through processes
that are nearly instantaneous and invisible to the user, Rimfire automatically
sizes the images to the target Web site's specifications. At the same time, on
behalf of the target Web site, Rimfire can handle all of the data and image
management, storage and serving requirements associated with that image. The
iPIX open imaging platform solves the most common problems associated with
user-supplied digital media by automating the tasks and simplifying the process
for the user and the Web site.
Digital Media Preparation
Rimfire allows Web sites to attract and retain users regardless of
their technical skill. Rimfire's drag-and-drop technology allows users
to quickly and easily submit their own media content to the Web
without the need to prepare it with desktop software ahead of time.
Challenging tasks such as formatting, sizing and cropping, are easily
and automatically accomplished through Rimfire's integrated and
intuitive tools. Instant previews of the media supplied prevent
incorrect submissions.
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Digital Media Submission
Rimfire accepts a wide and growing variety of file formats and
converts the files to customer specifications automatically, without
user intervention. Rimfire's smart-sizing feature allows the user to
supply files of any size without worry about upload times for
submission, or viewing times. Like file formats, Rimfire automatically
prepares the media for transmission by optimizing its size to the
requirements of the site. In addition, Rimfire supports the submission
of multiple files and associated data.
Media Deployment
Once media is received by Rimfire, it is processed to customer
specifications. This includes database management, further processing
such as creating multiple files of varying sizes or quality and
distribution to the appropriate storage facility. Rimfire's "layered"
architecture enables services such as the transformation of still
images into interactive advertisements, slide shows, images
watermarked with text or graphics or new capabilities created by iPIX
or our third party developers. Rimfire technology was designed to be
scalable and fault tolerant to handle high volumes of user submissions
and our clients' rapid pace of growth. Built on industry standard
hardware and software platforms, Rimfire allows for rapid expansion of
rich media acquisition, processing, transformation and delivery.
Rimfire generates direct and indirect revenue opportunities for our customer's
Web sites by incorporating imaging into their e-commerce and community
offerings. Rimfire's media processing capabilities include the mechanism to
take different media items supplied from users such as text, audio and images
and transform them into one new rich media item. iPIX can then serve the media
directly from iPIX servers or send the media to a remote database to be served
directly from the customer's Web site.
By offering an outsourced infrastructure solution, we offer our customers an
alternative to building costly infrastructure, enabling them to utilize scarce
technical resources in other mission critical capacities. Our solution
eliminates expensive media processing tasks and decreases customers' support
expenses. Further, our solution optimizes storage and bandwidth resources for
our customers.
iPIX Immersive Imaging
iPIX patented technology creates iPIX immersive images from film or digital
photographs taken with a fisheye lens. Our technology automatically compensates
for any minor error in camera placement and corrects the distortion inherent in
these photographs. The resulting immersive image can be viewed in any
direction, up-down, left-right and horizon to horizon. The viewer can easily
navigate the image by moving a cursor inside the image or using the iPIX
navigation bar. iPIX immersive imaging provides maximum field of view with a
single image.
Previously priced only on a per image basis, iPIX now offers a new image key
pricing model that allows users to purchase an annual, unlimited subscription
to create iPIX immersive images. These iPIX licenses make iPIX technology
easier to use, cost effective and more accessible to a larger audience.
Current iPIX immersive imaging solutions and applications include:
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iPIX Immersive Images and Virtual Tours
iPIX provides the leading immersive, 360-degree virtual tours for real
estate, e-commerce, travel and hospitality and entertainment Web
sites. In addition, iPIX immersive imaging is designed for
documentation, project management and facilities planning
applications. iPIX immersive images offer viewers the opportunity to
navigate a scene on their own terms, looking in any direction, and
zooming in and out as they choose. This interactive imaging experience
helps to increase buyer confidence and immerses the viewer in the
photographed scene so everything is viewed in context of its complete
surroundings.
iPIX Camera Solutions
Partnering with leading camera manufacturers, iPIX offers complete
camera solutions for the self-service capture of iPIX immersive
images. Photographers, Web developers and other businesses may
purchase complete camera solutions including a digital camera, fisheye
lens, iPIX software, camera rotator and tripod. Users may also
purchase partial kits to use with their existing digital camera
equipment.
iPIX Immersive Imaging Software & Keys
iPIX offers complete immersive imaging software to allow users the
ability to create their own 360-degree by 360-degree immersive images.
The software offers automatic de-warping of fisheye images and
seamless generation of 360-degree by 360-degree immersive images from
two 185-degree images. iPIX software creates an iPIX immersive image
that has a small file size, typically between 25 and 160 kilobytes,
and can be quickly delivered, even across low bandwidth systems.
An iPIX Image Key is an encryption tool that enables the user to save
a single iPIX immersive image captured using iPIX software. One iPIX
Image Key enables the user to save one iPIX image, just as one film
negative enables the creation of one film photograph. Customers can
purchase additional keys through our online store or through our
toll-free order system. iPIX Image Keys are sold on a pay-per-use or
unlimited use subscription basis.
iPIX Immersive Video
iPIX immersive video is a revolutionary development in security and
surveillance imaging that provides the most expansive view of live and
archival video from a single camera without requiring pan/tilt/zoom
hardware. iPIX-enabled cameras capture immersive wide-angle views up
to 200-degrees that can be navigated in any direction with zoom in and
out capabilities.
The iPIX Viewer Software Development Kit (SDK) offers security system
designers and integrators an immersive enhancement for expansive
wide-field viewing without the need for pan/tilt/zoom hardware.
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THE IPIX STRATEGY
Establish iPIX as the Standard for Mission-Critical Imaging
We believe iPIX imaging solutions deliver the most interactive, reliable,
high-quality and expansive imaging available on and offline. Because iPIX
offers end-to-end imaging solutions, we are able to deliver multi-dimensional
and exponential value to businesses. As a result, we believe we are poised to
be the standard for mission-critical imaging technology. We will focus our
business, sales and marketing strategies to support this position. We will
continue research and development efforts so that our technology remains at the
forefront of innovation, yet open for easy integration with other technologies.
We will concentrate on developing partnerships to make iPIX imaging a standard
component of every security solution and the preferred technology for online
image management.
With these combined efforts, we believe the value proposition of iPIX imaging
solutions will become well known and we will earn the reputation as the
standard and extensible platform for mission-critical imaging.
Build Indirect Sales & Marketing Channels
iPIX has adopted a strategy that will leverage relationships with business
partners and major market leaders in order to increase market penetration and
revenue while reducing operating expenses. This strategy will develop multiple
sales and marketing channels for iPIX products and services including:
Vertical Market Leaders
iPIX has partnered with major customers such as eBay, Clairol, LA
Times and Homestore.com to leverage their leading sales channels to
our target markets with iPIX products and services. Through these
relationships, our customers market and sell imaging products and
services, powered by iPIX, along with their existing services directly
to their customers. iPIX benefits from the brand equity and buying
recommendation provided by the customer's sales channel to increase
sales and market penetration while maintaining the ability to focus on
iPIX technology support and enhancements. We will continue to partner
with additional vertical market leaders to serve as direct and
indirect channels for the promotion and sale of iPIX products and
services.
Integrators and Resellers
iPIX has partnered with established security system resellers and
integrators to help penetrate the security and observation markets.
Resellers and integrators such as ADT Security Services, Public Safety
Systems, LLC and Visual Security offer iPIX the opportunity to be
integrated into full security systems sold and marketed by vendors
well-known and respected in the industry. Through relationships, we
believe iPIX technology will be incorporated in NetCams, digital and
analog CCTV cameras, security applications and other embedded security
solutions.
Partner with Web Developers
We will leverage the community of Web developers currently building
and designing Web sites to drive the use and adoption of iPIX dynamic
imaging. We will also generate revenue through the purchase of camera
kits and Keys by Web developers and their customers. We will continue
to support iPIX Web Developers through the iPIX Developer Network
program. This dedicated program was specifically designed to
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increase iPIX-to-developer and developer-to-developer interactivity
and will provide Web developers a competitive advantage through
availability of increased resources, technical support and special
pricing for iPIX offerings.
Partner Internationally
We intend to capitalize on what we believe to be significant revenue
opportunities in international markets. International licensing and
distribution agreements with partners in a wide range of countries
spanning Europe, the Middle East and Asia. Relationships with
companies such as Emirates Venture Group in the United Arab Emirates
and LAC in Japan allow us to deploy iPIX technology into regions of
the world that would normally require significant time and effort for
marketing and development.
Business Development and Strategic Direct Sales
In addition to our existing sales channels, iPIX employs a team of
senior sales professionals focused on new business development
opportunities and strategic direct sales across our target markets.
New Initiatives
In the year 2002, iPIX intends to execute several new initiatives to support
our overall business strategies. These new initiatives will include:
Indirect Channel Support
iPIX will institute sales and marketing programs to support our
indirect channel partners. These programs will be designed to educate
our partners on how to sell our solutions and provide them with the
tools to do so. We will also work together with our partners to
jointly develop tools and materials in support of the channel.
iPIX is also committed to support indirect channels through technology
development and enhancement that meet channel-specific business
requirements, including partnering with complementary technologies.
Third Party Solution Integration
Leveraging our open imaging platform, we intend to enhance the iPIX
solutions offering through the integration of third party solutions.
These initiatives will be pursued based upon value to our customers
and potential long-term revenue opportunity.
Government Imaging Projects and Technology Grants
iPIX is proactively researching and pursuing government projects and
technology grants that will allow iPIX technology to be incorporated
into major US government imaging initiatives. We believe these
projects offer iPIX the opportunity to drive revenue and advance iPIX
technology through government-funded projects and grants.
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MARKETS
We have directed our sales efforts and channel strategies toward the industry
leaders within the following markets.
Auctions and Classifieds: As the primary mechanism for ecommerce, auction and
classified sites and portals such as eBay rely heavily upon imaging to drive
sales of new and used consumer items. Sellers require an easy to use method for
uploading images to accompany their item listing and buyers desire confidence
in items they can view and inspect online. In our experience, listings with
images result in more bids and higher final sale amounts. With Rimfire, auction
and classified sites can offer photo services that make adding images to Web
sites easy, affordable and efficient.
Consumer Product Manufacturers: Traditional businesses and consumer product
manufacturers rely on imaging to help sell, market and enhance their current
products. They often capture and distribute images using systems that have been
developed internally and typically require manual and time-consuming processes.
With Rimfire, these companies can outsource their imaging infrastructure and
automate imaging processes saving time and operational expenses. Rimfire
technology makes it cost-effective, fast and easy for businesses to leverage
imaging for online and offline catalogs, operational directories, new
interactive marketing tools and personalized, image-enhanced consumer products.
For example, Clairol uses Rimfire services to allow consumers to upload
personal photos into Clairol's "Try It On Studio" tool and test different hair
colors and styles.
Real estate: Residential and commercial real estate companies and professionals
use our solutions to provide online iPIX immersive images of properties
including existing homes, new homes, rental apartments, time-share units and
office buildings and their surrounding areas. Our imaging solutions allow real
estate companies and professionals offering real estate for sale or lease to
use the Internet to provide more visual information about the property to
prospective buyers. Our solutions enable real estate professionals to
cost-effectively market properties to a wide audience, thereby providing a
value-added service to both buyers and sellers.
Observation and Security: Businesses, facilities, airlines and airports can use
iPIX immersive technology to monitor and secure buildings, people and property.
Whether observing department store activity through a security camera, or
offering airline pilots a full-cabin view from the cockpit, iPIX immersive
imaging offers the best way to capture the most data in a single image. Unlike
traditional cameras that capture only what is directly in front of the camera,
iPIX-enabled cameras capture 180(degree) by 360(degree) scenes that can be
navigated in any direction with zoom in and out capabilities without additional
hardware. The unique features of iPIX immersive imaging offer the most
cost-effective solutions to capture the maximum field of view.
Travel and Hospitality: Hotel chains, vacation resorts, cruise lines, golf
courses, restaurants, theme parks, major tourist attractions and tourism
bureaus use our digital media content solutions to enhance their online
marketing. iPIX immersive images provide a prospective visitor the opportunity
to take online tours of rooms, meeting and conference facilities and
attractions. Our visual content and digital media solutions enable consumers to
more effectively research, plan and reserve travel arrangements over the
Internet. Further, online tours allow destination operators to feature premier
packages as well as showcase specific destinations. We distribute our
customer's digital media content to their own Web sites and to selected travel
destination affiliate Web sites.
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Visual Documentation: Because iPIX immersive technology allows customers to
capture a full 360-degree by 360-degree environment, iPIX is simply the best
way to photographically document facilities, public buildings, schools and
other spaces for emergency and tactical preparedness, project management,
historical archival image database, facilities planning and design, training
vulnerability and disaster assessments. iPIX visual documentation is also
proven to be effective in presenting locations that would otherwise be
inaccessible or entail a risk of exposure to hazardous materials or situations.
SALES AND MARKETING
Our marketing efforts focus on supporting our sales force with marketing
materials and sales tools that help generate and close new business for iPIX.
Using this strategy, we intend to acquire new customers for our end-to-end
solutions, increase purchases of iPIX kits and iPIX keys and develop new sales
opportunities. We also intend to continue utilizing distributors and resellers
to penetrate indirect markets. Our marketing efforts include traditional and
Internet advertising as well as direct mailings, participation in trade shows,
co-marketing with strategic partners and public relations campaigns.
Our sales and marketing groups focus on direct and indirect sales. Located in
Oak Ridge, TN, San Ramon, CA and London, England, our sales teams focus on
developing strategic relationships and opening sales channels with potential
partners and customers in our targeted vertical markets. We also employ a
telesales team that targets additional business customers, provides support for
the direct sales teams and fields inquiries from our Web site and toll-free
customer service number.
We also maintain a customer relations department to answer inquiries regarding
our offerings and respond to technical questions. Our service personnel also
perform quality assurance checks on each component included in an iPIX kit
prior to shipping and process customer service inquiries concerning order
status, shipping information, returns and exchanges.
COMPETITION
We currently compete with several providers of immersive imaging technology.
However, we do not believe any of our competitors are dominant in this
industry. We compete with these companies on the basis of ease of use,
reliability, end user experience and price.
In the security markets, our immersive video solutions compete with traditional
pan/tilt/zoom cameras. iPIX technology, however, can deliver the pan/tilt/zoom
functionality at a lower cost and without the need for additional hardware that
requires maintenance and repair over the life of the camera. Our navigable
solution also captures a larger field of view with fewer cameras.
When selling our imaging platform and image management services, we often find
that potential customers are considering internal development of an imaging
system. The time, cost and imaging expertise required to build their own
imaging system typically leads them to the conclusion that they should
outsource. There are other companies marketing image servers and interactive
imaging services to our target markets. However, they offer only components or
layers of the iPIX comprehensive imaging solution and do not currently address
how their technology successfully integrates with others to deliver an
end-to-end solution (capture, process, host and distribute) to compete with
iPIX.
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While these companies may offer only components of the end-to-end solution iPIX
imaging solution, they may have greater financial, marketing, distribution and
technical resources with which to target our markets. Our success will be
dependent on our ability to compete on the cost-effectiveness and quality of
our solutions, the success of our indirect channel partners, and the tangible
value our solutions offer.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trade secret and trademark laws
and contractual restrictions to establish and protect proprietary rights in our
products. Our patents are intended to protect and support current and future
development of our technology. We currently have 16 U.S. patents. In addition,
we hold international counterparts to many of our U.S. patents in selected
countries covering various aspects of our products. We have numerous patent
applications pending in the United States as well as international counterparts
to many of these applications. 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.
Our success and ability to compete are dependent on our ability to develop and
maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We seek to limit disclosure of
our intellectual property by requiring employees, suppliers and customers with
access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our services or software or to obtain and use information that we
regard as proprietary. 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. The laws of many countries do not protect our
proprietary rights to as great an extent as to the laws of the United States.
Litigation may be necessary in the future to enforce our intellectual property
rights to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. There can be no assurance that the statutory and contractual
arrangements we currently depend upon will provide sufficient protection to
prevent misappropriation of our technology or deter independent third-party
development of competing technologies.
Claims by third parties that our current or future products infringe upon their
intellectual property rights may have a material adverse effect on us.
Intellectual property litigation is complex and expensive, and the outcome of
this litigation is difficult to predict. We have been involved in litigation
relating to the protection of our intellectual property rights. We are
currently subject to a third party infringement claim that is in litigation.
This litigation, and any future litigation, regardless of outcome, may result
in substantial expense to us and significant diversion of our management and
technical personnel. An adverse determination in any litigation may subject us
to significant liabilities to third parties, require us to license disputed
rights from other parties, if licenses to these rights could be obtained, or
require us to cease using the technology.
EMPLOYEES
As of March 1, 2002, we employed 87 full-time employees. Our employees are not
represented by any collective bargaining unit. We believe our relations with
our employees are good.
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ITEM 2. PROPERTIES.
We lease approximately 13,000 square feet of space in Oak Ridge, Tennessee for
our corporate office and operations and approximately 19,000 square feet in San
Ramon, California for our co-headquarters. We also maintain an office in
London, England from which we direct our European operations. We also lease
34,489 square feet of office space in Toronto, Canada. We have sublet
approximately 18,000 square feet of our Toronto, Canada space to a wholly-owned
subsidiary of Homestore.com, Inc. In February 2002, we exited the remaining
space in Toronto, Canada, and we are actively marketing this space to potential
sub-tenants. We have also exited approximately 31,000 square feet of office
space in Oak Ridge for which we are actively marketing to potential
sub-tenants. We have also exited approximately 6,500 square feet of office
space in San Ramon for which we are actively marketing to potential
sub-tenants. If we are unable to successfully sublease our vacated and
unoccupied office space, or if any of our current sub-tenants fail to make
required lease payments, our business, financial condition, results of
operations and cash flows may be adversely affected. (See Note 13 to our
consolidated financial statements included elsewhere in this Annual Report on
From 10-K).
ITEM 3. LEGAL PROCEEDINGS.
On October 28, 1998, Minds-Eye-View, Inc. and Mr. Ford Oxaal filed a lawsuit
against us in the United States District Court for the Northern District of New
York. Minds-Eye alleged in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
alleged that our technology wrongfully incorporated trade secrets and other
know-how gained from them in breach of various duties. The court removed this
action to arbitration upon our motion, and we cross-claimed alleging various
affirmative claims, including trade secret theft. Minds-Eye and Mr. Oxaal filed
a motion to dismiss the suit, and the court dismissed the lawsuit on May 19,
1999. Although the lawsuit was dismissed, we intend to proceed with the
arbitration in Knoxville, Tennessee. The arbitration has been stayed pending
resolution of the following lawsuit.
On May 20, 1999, Mr. Oxaal filed a lawsuit against us and certain of our
customers in the same court alleging that our technology infringes upon a
patent claim for 360 degree spherical visual technology held by him. 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. Mr. Oxaal filed an
additional complaint on December 5, 2000 in the United States District Court
for the Northern District of New York, naming us as the sole defendant. The
complaint states a single claim for relief, alleging infringement of U.S.
Patent No. 6,157,385, which issued on December 5, 2000. This patent encompasses
a method of seamlessly combining at least two images into a spherical image.
We have asserted defenses to Mr. Oxaal's claims as we believe we did not
infringe any valid claims of his patents. We believe that Mr. Oxaal's claims
are without merit, and we intend to vigorously defend against his claims.
However, if Mr. Oxaal were to prevail in either of these lawsuits, our
financial condition, results of operations and cash flows could be materially
adversely affected.
On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg,
Patrick Oliver and related entities, all of whom are former stockholders of
PictureWorks Technology, Inc. (which we acquired in April 2000) filed a lawsuit
in the Delaware Chancery Court alleging causes of action for failure to timely
issue stock certificates and breach of contract. An unspecified amount of
damages is sought. Discovery proceedings in the case are on-going. We believe
that the plaintiffs' claims are without merit, and we intend to vigorously
defend against
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these claims. If the plaintiffs were to prevail in their action, however, our
financial condition, result of operations in cash flows could be materially
adversely affected.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters where submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal year 2001.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth information with respect to our executive officers as
of March 1, 2002:
NAME AGE TITLE
Donald W. Strickland............................ 52 President and Chief Executive Officer
Paul A. Farmer.................................. 43 Chief Financial Officer, Executive
Vice President and Treasurer
Matthew S. Heiter............................... 41 Executive Vice President, General
Counsel and Secretary
DONALD W. STRICKLAND has been the chief executive officer of iPIX since May
2001 and has been president and chief operating officer since October 2000. Mr.
Strickland joined iPIX in April 2000 and served as executive vice president
until his appointment as president and chief operating officer in October 2000.
Prior to joining us, Mr. Strickland was president and chief executive officer
of PictureWorks Technology, Inc. from March 1996 until March 2000. From June
1993 until March 1996, Mr. Strickland held the position of vice president,
Imaging and Publishing at Apple Computer. Prior to joining Apple in June 1993,
Mr. Strickland spent twenty years at Eastman Kodak Company where he held a
succession of positions in engineering, sales, marketing and executive
management. Mr. Strickland holds several degrees including a bachelor's degree
in physics from Virginia Tech, a master's degree in physics from the University
of Notre Dame, a master's degree in optics from the University of Rochester, a
master's degree in management from the Stanford Sloan School of Management and
a law degree from George Washington University.
PAUL A. FARMER has been the chief financial officer, executive vice president
and treasurer of iPIX since June 2001. Prior to joining us, Mr. Farmer was the
chief financial officer of Buzzsaw.com from June 2000 to June 2001. Prior to
Buzzsaw, Mr. Farmer was chief financial officer, chief administrative officer
and executive vice president of CCAi Consulting from June 1998 to June 2000.
Prior to CCAi, Mr. Farmer was chief financial officer of TCSI, Inc. from June
1994 to June 1998 and vice president and corporate controller of Technology
Solutions Company from November 1990 to June 1994. Mr. Farmer is a CPA and was
with PricewaterhouseCoopers LLP from January 1982 through November 1990. Mr.
Farmer holds a bachelor's degree in accounting from the University of Illinois
and a masters in business administration from the University of Chicago.
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MATTHEW S. HEITER has been the executive vice president, general counsel and
secretary of iPIX since January 2000. Mr. Heiter served as vice president,
secretary and general counsel of Interactive Pictures from October 1999 until
January 2000. Prior to joining us, Mr. Heiter was a shareholder in the law firm
of Baker, Donelson, Bearman & Caldwell, P.C. Mr. Heiter holds a bachelor's
degree in political science from the University of Mississippi and a juris
doctor from Vanderbilt University Law School.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market (symbol: IPIX). Prior
to August 26, 1999, there was no public market for our common stock. As of
March 1, 2002, there were 955 stockholders of record.
The following table reflects the range of the high and low bid information for
our common stock for the periods indicated and takes into account the
ten-for-one reverse stock split in August 2001.
HIGH LOW
------ ------
FISCAL 2001
Fourth Quarter..................................................... $3.33 $1.63
Third Quarter...................................................... 3.60 1.10
Second Quarter..................................................... 11.50 1.25
First Quarter...................................................... 14.69 1.25
FISCAL 2000
Fourth Quarter..................................................... 56.25 9.69
Third Quarter...................................................... 171.25 51.25
Second Quarter..................................................... 288.75 93.75
First Quarter...................................................... 450.00 165.00
We currently intend to retain all future earnings to finance the continuing
development of our business and do not anticipate paying cash dividends on our
common stock in the foreseeable future. Any payment of cash dividends in the
future will depend upon our financial condition, future loan covenants, capital
spending requirements and earnings, as well as other factors the board of
directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL INFORMATION
The statement of operations data presented below for the years ended December
31, 1999, 2000 and 2001 and the balance sheet data as of December 31, 2000 and
2001 have been derived from our consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, that are included
elsewhere in this report. The statement of operations data for the years ended
December 31, 1997 and 1998 and the balance sheet data as of December 31, 1997,
1998 and 1999 are derived from audited consolidated financial statements that
are not included in this report. These results are not necessarily indicative
of results to be expected for any future period. You should read the data
presented below together with our consolidated financial statements and related
notes to those statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this report.
12
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues:
Products............................ $2,174 $2,789 $12,523 $48,943 $14,758
Services............................ 318 329 -- 4,730 14,148
------ ------ ------- ------- -------
2,492 3,118 12,523 53,673 28,906
Cost of revenues:
Products............................ 461 1,274 7,262 25,442 7,205
Services............................ 316 241 -- 2,464 4,961
------ ------ ------- ------- -------
777 1,515 7,262 27,906 12,166
------ ------ ------- ------- -------
Gross profit........................... 1,715 1,603 5,261 25,767 16,740
------ ------ ------- ------- -------
Operating expenses:
Sales and marketing................. $2,839 $8,783 $37,785 $80,026 $19,647
Research and development............ 1,213 2,885 5,359 13,202 7,021
General and administrative.......... 2,720 3,939 13,906 22,306 13,667
Amortization of product development
and patent costs................. 858 -- -- -- --
Stock based compensation expense -- 1,162 20,675 5,127 4,499
Impairment and amortization of
intangibles...................... -- -- -- 234,024 2,433
Merger expenses..................... -- -- -- 15,175 --
Loss on disposal of assets.......... -- -- -- -- 1,655
Restructuring charges............... -- -- -- 4,161 11,655
------ ------ ------- ------- -------
Total operating expenses.... 7,630 16,769 77,725 374,021 60,577
------ ------ ------- ------- -------
Loss from operations................... (5,915) (15,166) (72,464) (348,254) (43,837)
Interest expense....................... (42) (202) (6,684) (436) (10,667)
Other income (expense), net............ 236 303 2,545 2,095 (75)
------ ------ ------- ------- -------
Net loss before extraordinary gain....` (5,721) (15,065) (76,603) (346,595) (54,579)
Extraordinary gain -- -- -- -- 901
------ ------ ------- ------- -------
Net loss (5,721) (15,065) (76,603) (346,595) (53,678)
Dividend relative to beneficial
conversion feature of Series B
convertible preferred stock......... -- -- 1,000 -- --
------ ------ ------- ------- -------
Net loss attributable to common
stockholders........................ $(5,721) $(15,065) $(77,603) $(346,595) $(53,678)
======= ======== ======== ========= ========
Net loss per common share -
basic and diluted $ (5.01) $ (12.22) $ (30.13) $ (61.55) $ (8.22)
======= ======== ======== ========= ========
Weighted average common shares -
basic and diluted 1,143 1,233 2,576 5,631 6,534
======= ======== ======== ========= ========
AS OF DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash, cash equivalents and
securities available for sale....... $2,830 $1,494 $73,366 $11,035 $11,103
Working capital (deficit).............. (157) (371) 58,617 1,174 3,506
Total assets........................... 4,599 4,769 95,803 60,614 23,078
Long-term liabilities.................. 29 21 387 957 2,392
Total stockholders' equity............. 510 1,310 81,041 28,213 8,770
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.
OVERVIEW
In 2001, we restructured our Company around our higher gross margin businesses.
The result is that we are focused on two businesses: (1) providing outsourced
imaging services to facilitate online transactions in the auction, classifieds
and real estate markets and (2) providing imaging solutions for the real
estate, security and observation and visual documentation markets. Our products
and services include the capture, processing, management and distribution of
images and related data. Revenues from online auctions and classifieds are
primarily transactions based. Our transaction services involve designing,
building and managing an image management infrastructure as well as leasing
spaces from state-of-the-art co-location facilities with access to bandwidth.
Since these services are capital intensive, a high percentage of the costs
associated with transaction services are fixed and accordingly the margins from
transaction services are highly dependent upon asset utilization.
Our immersive technology primarily generates revenues in two ways: licenses of
software and re-sale of camera equipment. We utilize iPIX keys to license our
still immersive technology to capture and save a single immersive image. We
also offer time-based seat or user licenses which permit an unlimited number of
immersive images to be captured and saved within a specific time period,
usually a year. Our video immersive technology, which may be off-line or
online, may be purchased on a per-unit basis or a per-year license. We sell our
immersive products and services primarily into the real estate, security and
observation and visual documentation markets. The cost of sales for our
licenses is very low. The cost of sales for the re-sale of camera equipment can
be 50 to 75% of revenues.
We also provide professional services to customers that request specific
customizations or integrations of our products and services. Providing
professional services is labor intensive, and our cost of sales for
professional service tends to be 50 to 60% of revenues.
Our real estate business has changed over the past few years. In 2000, our real
estate focused revenues were generated from four primary sources: full service
virtual tours; image management services; camera kits and immersive keys; and
professional services. We offered full service virtual tours through January
2001. A full service tour includes the capture, processing, management and
distribution of real estate images and related data for one price. As part of
the sale of assets to a subsidiary of Homestore.com in January 2001, we no
longer directly sell full service virtual tours to customers in the US
residential real estate market.
Throughout 2001, our real estate focused revenues were generated from three
primary sources: image management services; camera kits and immersive keys; and
other services. Our image management products and services were used in the
real estate industry primarily to associate online still images with for-sale
listings. This service is offered to customers under license
14
agreements, transaction based agreements and revenue share agreements for real
estate properties around the world. Through January 12, 2002, we provided
Homestore.com with processing, hosting and distribution services and received
transaction fees.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently issued by the Securities
and Exchange Commission ("SEC"), requires all registrants to discuss critical
accounting policies or methods used in the preparation of the financial
statements. The notes to the consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of our Company's consolidated financial statements. Further, we
have made a number of estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and actual results may differ from
those estimates. Those areas that require the greatest degree of management
judgment include adequacy of the allowance for doubtful accounts, reserves for
obsolete inventory, valuations of intangible assets and the estimated costs for
excess facilities related to lease terminations and non-cancelable lease costs
utilized in satisfaction of outstanding lease obligations.
We believe that full consideration has been given to all relevant circumstances
that we may be subject to, and our financial statements accurately reflect
management's best estimate of the results of operations, financial position and
cash flows for the years presented.
We believe the following represent our critical accounting policies:
Revenue Recognition.
We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition
and SAB No. 101, Revenue Recognition in Financial Statements.
Transaction hosting revenues are recognized ratably as transactions are
performed provided there was persuasive evidence of an arrangement, the fee was
fixed and determinable and collection of the resulting receivable was probable.
Initial license fees are recognized when a contract exists, the fee is fixed
and determinable, software delivery has occurred and collection of the
receivable is deemed probable. If there are continuing obligations, then we
recognize revenue ratably over the life of the contract.
Product revenue is recognized upon shipment or delivery provided there are no
uncertainties surrounding product acceptance or significant vendor obligations,
the fees are fixed and determinable and collection is considered probable.
Royalties derived from desktop imaging products are recognized as revenues upon
receipt of the royalty sell-through reports from customers, which are generally
in the quarter following the quarter in which the sale by the customer took
place.
Revenue from the sale of the Company's virtual tour product are recognized upon
distribution to the Website designated by the customer.
We provide an allowance for returns upon recognizing revenue as deemed
necessary based on historical experience. Returns were insignificant for all
years presented. Payments received in
15
advance were initially recorded as deferred revenue and recognized ratably as
obligations are fulfilled.
Revenues generated from professional services are recognized as the related
services are performed. When such professional services are combined with
on-going transaction services or are deemed to be essential to the
functionality of the delivered software product, revenue from the entire
arrangement is recognized while the transaction services are performed, on a
percentage of completion method or not until the contract is completed in
accordance with SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, and ARB No. 45, Long-Term Construction-Type
Contracts.
Our operating expenses are primarily based on anticipated revenue levels. Since
a high percentage of those expenses are relatively fixed, a delay in revenue
from licenses or transactions could cause significant variations in operating
results from quarter to quarter, and we may sustain losses as a result.
Allowances for Doubtful Accounts.
Significant management judgments and estimates must be made and used in
connection with establishing the doubtful account allowances in any accounting
period. Management specifically analyzes accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy
of the allowance for doubtful accounts. Material differences could result in
the amount and timing of expense recorded if management made different judgment
or utilized different estimates.
RECENT DEVELOPMENTS
During 2001 and into 2002, we introduced new products, formed new international
partnerships and entered into new markets.
New product introductions include the NetCam technology for Internet based
immersive video. New international partnerships include an exclusive agreement
for distribution of NetCam technology in Japan and an exclusive distribution
agreement for all product lines (including immersive stills, immersive video
and Rimfire content management solutions) in the United Arab Emirates and some
neighboring Middle Eastern countries. Our entry into new markets included
online classifieds and security. During the last six months, several new
classified customers have entered into agreements to utilize our image
management services for their online sites. In addition, in early 2002, the
Utah Olympic Public Safety Command, made up of more than 60 law enforcement
agencies including the FBI and Secret Service, used our immersive imagery for
surveillance and emergency response planning at the Salt Lake City Winter
Olympic Games.
In January 2001, we sold assets to a subsidiary of Homestore.com. The
Homestore.com subsidiary purchased computers, furniture, fixtures and equipment
with a recorded book value of $0.3 million. The Homestore.com subsidiary also
assumed certain obligations for undelivered virtual tours under assigned sales
contracts with residential real estate brokers and agents. The accounts
receivable and deferred revenue associated with these tours was $7.5 million.
As part of the acquisition, Homestore.com's subsidiary hired a number of our
sales force and customer service personnel. The purchase price for these assets
was $12 million. We also granted Homestore.com's subsidiary an exclusive
license of iPIX's virtual tour technology for the US residential real estate
market. The assets that were sold were related to the pooling of Interactive
16
Pictures Corporation and bamboo.com; accordingly, the gain on the sale of these
assets was recorded as an extraordinary gain in 2001.
In August 2001, our shareholders approved a ten-for-one reverse stock split of
all of our outstanding $0.001 par value common stock and our $0.0001 Class B
common stock. All share and per share data is presented to give effect to the
retroactive application of the reverse stock split.
During September 2001, we completed the final stage of our 2001 financing. We
issued 1,115,080 shares of the Company's Series B Preferred Stock for total
consideration of $22 million. Each share of Series B Preferred Stock is
convertible into approximately 9.2 shares of the Company's common stock.
RESTRUCTURING ACTIONS AND IMPAIRMENT CHARGES
We executed several restructuring actions throughout 2001. These actions and
the charges relating to them are described below.
On March 1, 2001, we had 552 employees, but by the end of the second quarter we
had reduced our workforce by approximately 440 positions. The reductions were
primarily in the full-service virtual real estate business. The first quarter
reductions resulted in a restructuring charge of $3.0 million. In the second
quarter of 2001, we reorganized our management personnel, closed our sales
offices throughout the USA and made further reductions in our workforce. As a
result of these actions, we recorded a $7.2 million restructuring charge in the
second quarter of 2001.
Included in the third quarter of 2001 is a $1.5 million impairment charge
related to the write off of the unamortized portion of our directors' and
officers' insurance policy. We were required to obtain a new policy due to the
change in control related to our 2001 financing which culminated in the third
quarter.
In summary, we recorded a total of $11.7 million in restructuring charges for
the year ended December 31, 2001, of which $1.4 million was primarily for lease
obligations, $3.0 million was for write-offs of equipment and leasehold
improvements and $6.7 million was for separation agreements. We expect to
realize significant savings annually beginning in 2002 as a result of these
restructuring actions. The savings are expected to be realized primarily in
cost of sales but also in selling, general and administrative expenses and
research and development expenses.
OUTLOOK
The Company is subject to generally prevailing economic conditions and, as
such, believes that 2002 will be a challenging year. With the elimination of
$7.5 million of 2001 full service real estate revenue and other lower margin
businesses, the Company believes revenue in 2002 will be less than 2001 but
that due to the restructuring actions described above, our gross margins will
be improved. Additionally, the Company expects to make significant capital
investments in its image management infrastructure, which is expected to
consume some of the Company's cash reserves.
Management believes we have sufficient cash resources to meet our funding needs
for 2002. We finished the year with $11.1 million in cash and short-term
investments. Management's focus in 2002 will be to reduce our cash requirements
to manageable levels and focus our operations on profitability. Our long-term
strategy remains unchanged. We will continue to make significant investments in
research and development for all segments and will invest in the expansion of
the
17
online auction and classified businesses and in the development of new security
and observation products and services during this economic downturn.
FISCAL YEARS ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Products............................................ $ 12,523 $ 48,943 $ 14,758
Services............................................ -- 4,730 14,148
-------- --------- --------
12,523 53,673 28,906
Cost of revenues
Products............................................ 7,262 25,442 7,205
Services............................................ -- 2,464 4,961
-------- --------- --------
7,262 27,906 12,166
-------- --------- --------
Gross profit........................................... 5,261 25,767 16,740
-------- --------- --------
Operating expenses:
Sales and marketing................................. 37,785 80,026 19,647
Research and development............................ 5,359 13,202 7,021
General and administrative.......................... 13,906 22,306 13,667
Stock-based compensation expense.................... 20,675 5,127 4,499
Impairment and amortization of intangibles.......... -- 234,024 2,433
Merger expenses..................................... -- 15,175 --
Loss on disposal of assets.......................... -- -- 1,655
Restructuring and impairment........................ -- 4,161 11,655
-------- --------- --------
Total operating expenses..................... 77,725 374,021 60,577
-------- --------- --------
Loss from operations................................... (72,464) (348,254) (43,837)
Interest expense....................................... (6,684) (436) (10,667)
Interest income and other, net......................... 2,545 2,095 (75)
-------- --------- --------
Net loss before extraordinary gain..................... (76,603) (346,595) (54,579)
Extraordinary gain..................................... -- -- 901
-------- --------- --------
Net loss............................................... (76,603) (346,595) (53,678)
Dividend relative to beneficial conversion feature
of Series B convertible preferred stock............. 1,000 -- --
-------- --------- --------
Net loss attributable to common stockholders........... $(77,603) $(346,595) $(53,678)
======== ========= ========
Net loss per common share - basic and diluted.......... $ (30.13) $ (61.55) $ (8.22)
======== ========= ========
Weighted average common shares - basic and diluted..... 2,576 5,631 6,534
======== ========= ========
18
The following table presents for the periods indicated, the percent
relationship to total revenues of select items of our statement of operations:
FISCAL YEARS ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
------ ------ ------
Revenues
Products............................................ 100.0% 91.2% 51.1%
Services............................................ -- 8.8 48.9
------ ------ ------
100.0 100.0 100.0
Cost of revenues
Products............................................ 58.0 47.4 24.9
Services............................................ -- 4.6 17.2
------ ------ ------
58.0 52.0 42.1
------ ------ ------
Gross profit........................................... 42.0 48.0 57.9
------ ------ ------
Operating expenses:
Sales and marketing................................. 301.7 149.1 68.0
Research and development............................ 42.8 24.6 24.3
General and administrative.......................... 111.0 41.6 47.3
Stock-based compensation expense.................... 165.1 9.6 15.6
Impairment and amortization of intangibles.......... -- 436.0 8.4
Merger expenses..................................... -- 28.3 --
Loss on disposal of assets.......................... -- -- 5.7
Restructuring and impairment........................ -- 7.7 40.3
------ ------ ------
Total operating expenses..................... 620.6 696.9 209.6
------ ------ ------
Loss from operations................................... (578.6) (648.9) (151.7)
Interest expense....................................... (53.4) (0.8) (36.9)
Interest income and other, net......................... 20.3 3.9 (0.3)
------ ------ ------
Net loss before extraordinary gain..................... (611.7) (645.8) (188.8)
Extraordinary gain..................................... -- -- 3.1
------ ------ ------
Net loss............................................... (611.7) (645.8) (185.7)
Beneficial conversion of Series B convertible
preferred stock..................................... (8.0) -- --
------ ------ ------
Net loss attributable to common stockholders........... (619.7)% (645.8)% (185.7)%
====== ====== ======
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenues. Total revenues decreased to $28.9 million in 2001, compared to $53.7
million in 2000, a decrease of $24.8 million or 46%. This decrease was due
primarily to a decrease of $27.9 million in sales of full service virtual tours
to the residential real estate market, which was off-set by an increase of $3.1
million in technology products and services revenues.
As part of the sale of assets to Homestore.com during the first quarter of
2001, we no longer directly sell full service virtual tours or iPIX keys to
customers in the U.S. residential real estate market. Instead, through January
12, 2002, we provided Homstore.com certain processing, hosting and distribution
services and received transaction fees and royalties. Throughout 2001, other
than full service virtual tours, our real estate focused revenues were
generated from three primary sources: image management services; camera kits
and immersive keys; and other services.
The 2001 revenues of $28.9 million included $21.4 million from the sale of our
technology products and services and $7.5 million related to full service
virtual real estate tours. The 2000 revenues of $53.7 million included $18.3
million from the sale of our technology products and services and $35.4 million
related to full service virtual real estate tours. We expect to generate
19
minimal future revenues from the sale of full service virtual real estate tours
in the U.S. residential markets. The increase in 2001 technology products and
services revenues was primarily related to image management solutions for the
auction industry.
Product revenues decreased to $14.8 million in 2001, compared to $48.9 million
in 2000, a decrease of $34.1 million. This decrease was due primarily to the
reduction in sales of virtual tours. Services revenues from our professional
services and Rimfire technology were $14.1 million in 2001, compared to $4.7
million in 2000. The increase in professional service revenues related
primarily to integrations of our technology with new customers.
Cost of Revenues. Cost of revenues consists of our direct expenses associated
with the processing, hosting and distribution of digital content and the costs
of the digital camera and related components included in an iPIX kit. Cost of
revenues decreased to $12.1 million in 2001, compared to $27.9 million in 2000,
a decrease of $15.7 million or 56%. Cost of revenues as a percentage of total
revenues decreased to 42% in 2001 from 52% in 2000. This decrease was primarily
the result of a lower volume of virtual tour deliveries and an increase in
higher margin Rimfire based revenue.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales and business development personnel. Sales and marketing
expenses also include commissions and related benefits for sales personnel and
consultants, traditional advertising and promotional expenses. Sales and
marketing expenses decreased to $19.6 million in 2001, compared to $80.0
million in 2000, a decrease of $60.4 million or 75%. This decrease was due
primarily to our decision to sell more of our products and services through
third parties and become less reliant upon a worldwide direct sales force. As a
result, we significantly reduced our sales force and eliminated our field
operations personnel. In addition, we eliminated costs relating to technology
access and sponsorship fees and decreased advertising and branding expenses.
Research and Development. Research and development expenses consist primarily
of personnel costs related to building and enhancing our digital media
infrastructure and immersive imaging technology. Research and development
expenses decreased to $7.0 million in 2001, compared to $13.2 million in 2000,
a decrease of $6.2 million or 47%. This decrease was due primarily to decreased
personnel and related costs as a result of our reduction in work force and our
exit from the full service virtual tour real estate business.
General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services, bad debt expenses and other
costs associated with being a public company. General and administrative
expenses decreased to $13.7 million in 2001, compared to $22.3 million in the
third quarter of 2000, a decrease of $8.6 million or 39%. This decrease was due
primarily to a decrease in personnel and related costs and fees related to
professional services. Bad debt expense was $4.4 million 2001, compared to $4.0
million in 2000, an increase of $0.4 million.
Stock-based Compensation. Stock-based compensation expense consists of the
amortization of deferred compensation related to stock options granted to
employees and others prior to our initial public offering with an exercise
price below the deemed fair market value of our common stock on the date of
grant. In addition, it also includes the amortization of the fair value of
warrants and options issued to non-employees and restricted stock granted to
employees. The related compensation is amortized over the vesting period of the
options or stock grants. Expenses related to the warrants are amortized over
the term of the agreements to which they relate. Stock-
20
based compensation expense decreased to $4.5 million in 2001, compared to $5.1
million in 2000, a decrease of $0.6 million or 12%. This decrease was due to a
decrease in expense related to stock options and warrants which were issued
prior to 2001. In 2001, we did not issue any additional warrants or stock
options priced below the deemed fair market value of our common stock on the
date of grant.
Impairment and amortization of intangibles. The amortization consists of
goodwill associated with corporate acquisitions during the second quarter of
2000. Amortization of goodwill was $2.4 million in 2001, compared to $234.0
million in 2000, a decrease of $231.6 million or 99%. The decrease is related
to the impairment charge taken in the fourth quarter of 2000 of $176.8 million.
Merger Expenses. Merger expenses consist of costs incurred as a result of the
merger of Interactive Pictures and bamboo.com that occurred on January 19,
2000. Merger expense was $0.0 million in 2001, compared to $15.2 million in
2000, a decrease of 100%.
Restructuring and Impairment. Restructuring and Impairment charges were $11.7
million in 2001, compared to $4.2 million in 2000, an increase of $7.5 million
or 180%. Restructuring charges are primarily associated with reductions of our
workforce, outstanding obligations under non-productive leases resulting from
the consolidation of certain offices and write-offs of abandoned computers and
office furniture and equipment. Included in the 2001 impairment expense is $1.5
million related to the write off of the unamortized portion of our directors'
and officers' insurance policy. We were required to obtain a new policy due to
the change in control related to our 2001 financing which culminated in the
third quarter.
Interest Expense. Interest expense was $10.7 million 2001, compared to $0.4
million in 2000, an increase of $10.3 million. In 2001, we recorded non-cash
interest expense of $10.0 million related to the accretion of the second
quarter 2001 promissory note issued in the second quarter to its face value
when converted to preferred stock during the third quarter of 2001.
Interest Income and Other. Interest income and other consists primarily of
interest earned on cash and investments. Interest income and other decreased to
$(0.1) million in 2001, compared to $2.1 million in 2000. This decrease was due
primarily to decreased earnings on our cash investments related to lower
average cash balances throughout the years.
Extraordinary Gain. Extraordinary gain was $0.9 million 2001, compared to $0.0
million in 2000. We recorded an extraordinary gain from the cash received from
the sale of assets to Homestore.com in January, 2001. The assets were used to
provide tours of residential real estate properties that were related to the
pooling of Interactive Pictures Corporation and bamboo.com.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenues. Total revenues increased to $53.6 million in 2000, compared to $12.5
million in 1999, an increase of $41.2 million. Product revenues increased to
$48.9 million in 2000, compared to $12.5 million in 1999, an increase of $36.4
million. This increase was due primarily to an increase of $20.1 million in
sales of virtual tours and an increase of $3.9 million in sales of iPIX kits
and iPIX keys, primarily to e-commerce and real estate customers. Services
revenues from our professional services and Rimfire technology were $4.7
million in 2000.
We did not have services revenues in 1999.
21
Cost of Revenues. Cost of product revenues increased to $25.4 million in 2000,
compared to $7.2 million in 1999, an increase of $18.1 million. This increase
was due primarily to the sale of a higher volume of virtual tours. Cost of
product revenues as a percentage of product revenues decreased from 58% in 1999
to 47% in 2000. This decrease was primarily related to productivity
improvements in the virtual tours and a favorable product mix toward higher
margin products.
Cost of service revenues was $2.5 million in 2000, or 53% of service revenues.
We did not incur any cost of services revenues in 1999.
Sales and Marketing. Sales and marketing expenses increased to $80.0 million in
2000, compared to $37.8 million in 1999, an increase of $42.2 million, or 112%.
This increase was due primarily to a significant increase in our sales force,
increased costs relating to technology access and sponsorship fees and
increased advertising and branding expenses. Sales and marketing expenses also
increased due to the acquisitions in the second quarter of 2000.
Research and Development. Research and development expenses increased to $13.2
million in 2000, compared to $5.4 million in 1999, an increase of $7.8 million,
or 146%. This increase was due primarily to increased staffing associated with
expanding our research and development efforts to build and enhance our digital
media infrastructure.
General and Administrative Expenses. General and administrative expenses
increased to $22.3 million in 2000, compared to $13.9 million in 1999, an
increase of $8.4 million, or 60%. This increase was due primarily to an
increase in personnel and related expenses required to support our growth,
professional services, expansion of our leased facilities, bad debt expense and
other costs associated with being a public company. Bad debt expense was $4.0
million 2000, compared to $0.4 million in 1999, an increase of $3.6 million.
Stock-based Compensation Expense. Stock-based compensation expense decreased to
$5.1 million in 2000, compared to $20.7 million in 1999. This change is due to
a decrease in expense related to stock options issued in previous years offset
by an increase in expense related to warrants issued during 2000.
Impairment and amortization of intangibles. Amortization of intangible assets
was $57.2 million in 2000 and $0.0 million in 1999. The amortization was a
result of acquisitions during the second quarter of 2000. During the fourth
quarter of 2000, we recorded an impairment of goodwill of $176.8 million.
Certain events occurred during the fourth quarter including the decline of our
stock price and market capitalization that led us to reevaluate expected future
cash flows from acquired businesses which indicated a need to record the
impairment charge.
Merger Expenses. Merger expenses consist of costs incurred as a result of the
merger of Interactive Pictures and bamboo.com that occurred on January 19,
2000. Merger expense was $15.2 million in 2000, compared to $0.0 million in
1999. These merger costs consisted primarily of investment banking fees and
costs of attorneys, accountants and other directly related external costs.
Restructuring and Impairment. Restructuring expense was $4.2 million in 2000,
compared to $0.0 million in 1999. During the fourth quarter of 2000, we
recorded a restructuring charge of $4.2 million primarily associated with a
reduction of our workforce, the consolidation of certain offices and a
write-off of abandoned computer equipment.
22
Interest Expense. Interest expense was $0.4 million 2000, compared to $6.7
million in 1999, a decrease of $6.3 million. In June 1999, we entered into an
agreement to sell 1,100 shares of our Series C mandatorily redeemable preferred
stock and 12,518 shares of our common stock for total gross proceeds of $11
million. The $11 million of proceeds was allocated $4.4 million to the Series C
mandatorily redeemable preferred stock and $6.6 million to the common stock,
based on their relative fair values. The shares of the Series C mandatorily
redeemable preferred stock were redeemed in accordance with their original
terms after completion of our initial public offering by payment of their face
value of $11 million. Consequently, we recorded interest expense of $6.6
million in 1999, which represented primarily the original discount on the
Series C mandatorily redeemable preferred stock.
Interest Income and Other. Interest income and other decreased to $2.1 million
in 2000 from $2.5 million in 1999. This decrease was due primarily to
relatively higher average cash and investment balances in 1999. The decrease
was also due to the write-off of investments during 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture, a
convertible promissory note and warrant and option exercises. At December 31,
2001, we had $11.1 million of cash and cash equivalents.
On May 14, 2001, we executed definitive agreements with Paradigm Capital
Partners and Memphis Angels, LLC for an investment by the parties into the
Company. The agreement called for the investment to occur in two tranches.
Tranche A consisted of the sale of $10.0 million in convertible notes and
warrants to purchase Series B preferred stock. On September 26, 2001, we
completed Tranche B of the investment. At the close of Tranche B, we issued
1,115,080 shares of our Series B Preferred Stock represented by the conversion
of the $10.0 million note, the conversion of $0.3 million of interest on the
note and $12.0 million in cash through the exercise of warrants from Tranche A.
Net cash used in operating activities was $26.5 million for year ended December
31, 2001 and $99.9 million for the year ended December 31, 2000. Net cash used
for operating activities in each of these periods is primarily a result of net
losses offset by changes in net operating assets. Our net loss for the years
ended December 31, 2001 and 2000 included non-cash charges for $5.9 million and
$239.9 million, respectively, of depreciation and amortization, $6.7 million
and $5.1 million, respectively, of non-cash stock based compensation and $10.0
million and $0.0 million, respectively, of non-cash interest related to debt
and warrants.
Net cash provided by investment activities was $16.1 million for the year ended
December 31, 2001 and $24.6 million for the year ended December 31, 2000. Net
cash provided by investing activities was related to the net purchases and
maturities of short-term investments, the acquisition of computer software and
hardware and other equipment and the proceeds from the sale of assets.
Net cash provided by financing activities was $17.1 million for the year ended
December 31, 2001 and $61.7 million for the year ended December 31, 2000. The
net cash provided by financing activities for these periods was due primarily
to the sale of shares of our common and preferred stock, the exercise of stock
options and the issuance of a convertible promissory note, off-set by the
repayment of capital lease obligations and other notes payable.
23
Management believes we have sufficient cash resources to meet our funding needs
for 2002. We finished the year with $11.1 million in cash and short-term
investments. Management's focus in 2002 will be to reduce our cash requirements
to manageable levels and focus our operations on profitability. Our long-term
strategy remains unchanged. We will continue to make significant capital
investments as well as investments in research and development for all segments
and will invest in the expansion of the online auction and classified
businesses and in the development of new security and observation products and
services during this economic downturn.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 141 (FAS 141), "Business
Combinations" and Statement No. 142 (FAS 142), "Goodwill and Other Intangible
Assets". FAS 141 supercedes APB 16, Business Combinations and primarily
addresses the accounting for the cost of an acquired business (i.e., the
purchase price allocation), including any subsequent adjustments to its cost.
The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby
eliminating use of the pooling-of-interests method along with the establishment
of new criteria for determining whether intangible assets acquired in a
business combination should be recognized separately from goodwill. FAS 141 is
effective for all business combinations (as defined in the statement) initiated
after September 30, 2001 and for all business combinations accounted for by the
purchase method that are completed after September 30, 2001 (that is, the date
of the acquisition is July 1, 2001 or later). We do not expect adoption of FAS
141 to have a material impact on our reported results of operations, financial
position or cash flows.
The Company also adopted FAS No 142, for fiscal years beginning after December
31, 2001. Under FAS No. 142, goodwill is no longer amortized but reviewed for
impairment annually, or more frequently if certain indicators arise. The
Company completed its transitional impairment test in the quarter ended
December 31, 2001 and no impairment loss resulted.
In August 2001, the FASB issued Statement No. 144 (FAS 144), "Accounting for
the Impairment or Disposal of Long-Lived Assets." FAS 144 replaces FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The FASB issued FAS 144 to establish a single accounting
model, based on the framework established in FAS 121, as FAS 121 did not
address the accounting for a segment of a business accounted for as a
discontinued operation under APB 30, "Reporting The Results of Operations --
Reporting The Effects of Disposal of a Segment of a Business and Extraordinary
Unusual and Infrequently Occurring Events and Transactions." FAS 144 also
resolves significant implementation issues related to FAS 121. Companies are
required to adopt FAS 144 for fiscal years beginning after December 15, 2001,
but early adoption is permitted. We do not expect adoption of FAS 144 to have a
material impact on our reported results of operations, financial position or
cash flows.
In November 2001, the FASB's Emerging Issues Task Force reached a consensus on
EITF Issue 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products," which is a codification of EITF 00-14,
00-22 and 00-25. This issue presumes that consideration from a vendor to a
customer or reseller of the vendor's products to be a reduction in the selling
prices of the vendor's product and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor's income statement and could
lead to negative revenue under certain circumstances. Revenue reduction is
required unless consideration related to a separate identifiable benefit and
the benefit's fair value can be
24
established. This issue is to be applied retroactively in the first fiscal
quarter beginning after December 15, 2001. We have not yet evaluated the
effects of this consensus on our consolidated financial statements.
INFLATION
Inflation has not had a significant impact on our operations to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company, together with the report
thereon of PricewaterhouseCoopers, LLP, independent accountants, are set forth
on the pages indicated in item 14(a) below of this Annual Report on Form 10-K.
This Form 10-K contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution investors that future financial and
operating results may differ materially from those projected in forward-looking
statements made by, or on behalf of, us. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance, or achievements to be materially different
form any future results, performance, or achievements expressed or implied by
such forward-looking statements.
RISK FACTORS
Our limited operating history and recent restructuring efforts makes it
difficult to evaluate our business
During the quarter ended March 31, 2001, we sold our full-service, residential
real estate business and completed a significant restructuring of our Company.
We focused our business on generating higher margin revenue from our Rimfire
and iPIX immersive solutions and significantly reduced our operating expenses
and number of employees. As a result, we have a limited operating history on
which you can base an evaluation of our business and prospects. Our prospects
must be considered in the light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies that have undertaken a
substantial business restructuring. To address these risks and uncertainties,
we must, among other things:
- increase our customer base for Rimfire services;
- maintain and enhance our brand and expand our immersive
product and service offerings;
- attract, integrate, retain and motivate qualified personnel;
and
- adapt to meet changes in our markets and competitive
developments.
25
We may not be successful in accomplishing these objectives.
Failure to increase our revenues or increases in expenses would prevent us from
achieving and maintaining profitability
We have never been profitable. We have incurred significant losses and expect
to continue to incur losses in the future. A substantial portion of our
revenues for 2001 and our future revenues will be derived from transaction fees
and license fees from our Rimfire customers, particularly eBay Inc. In the
future, we may introduce new products and services and enhancements and
improvements to our current product and service offerings. We may have to
increase our operating expenses in order to increase our customer base, enhance
our brand image and support our growing infrastructure. In order for us to
become profitable, we must increase our revenues and gross profit margins
sufficiently to cover current and future operating expenses. If we fail to do
so, we may never achieve profitability.
Our quarterly results may fluctuate, which could make financial forecasting
difficult and increase volatility in our common stock
Our revenues and operating results may vary significantly from
quarter-to-quarter. As a result, quarter-to-quarter comparisons of our revenues
and operating results may not be meaningful. In addition, due to our limited
operating history and restructuring, it may be difficult to predict our future
revenues and results of operations accurately. It is likely that, in one or
more future quarters, our operating results will fall below the expectations of
investors. If this happens, the trading price of our common stock is likely to
be materially and adversely affected.
We rely on third party systems to provide our Rimfire service
We rely on certain third-party computer systems and third-party service
providers, including a third party Internet service provider, to host and
maintain our production services for all of our Rimfire customers. The
performance and availability of our Internet systems is critical to our
business and reputation. Any system failure, including network, software or
hardware failure that interrupts the delivery of Rimfire services or decreases
our responsiveness to our customers could be disruptive to our business. Our
Internet service provider does not guarantee that its Internet access will be
uninterrupted, error free or secure. Because our revenue from our Rimfire
service is transaction based, any interruption in Internet access will result
in a loss of revenue for the period that Internet access is unavailable.
Our operating results are highly dependent on generating recurring revenue from
our existing Rimfire service customers, and we must be successful in adding new
Rimfire service customers and generating revenue from new markets
Substantially all of our recurring revenue is derived from transaction fees
generated by our Rimfire service. In particular, eBay and Homestore.com, Inc.
are our largest Rimfire customers. eBay represented approximately 21% of total
revenue and 43% of total Rimfire service revenue for 2001. Homestore.com
represented approximately 23% of total revenue and 44% of total Rimfire service
revenue for 2001. The loss of either of these customers would have a material
adverse effect on our business. We believe that transaction fees from eBay will
continue to increase as a percentage of revenue as more eBay customers utilize
our service on the eBay auction Website. Because we are dependent on these two
customers, we must continue to add new Rimfire customers in order to increase
revenues and diversify our sources of revenue. We must also be successful in
developing our product and service offerings for new markets, such as
26
security and observation and classified advertising. In order to achieve and
maintain profitability, we must be successful in generating revenue from sales
of our product and service offerings into existing and new markets. In
addition, any significant decrease in demand for our picture services on the
eBay auction site could have a material adverse effect on our revenue and our
ability to achieve profitability. We must also continue to improve and enhance
our Rimfire service. If we fail to do so in a timely manner, or if we suffer a
decrease in demand for our products and services, our revenue will decrease.
Our success depends on our ability to protect our intellectual property
We rely on trademark, copyright and patent law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. If we are not successful
in protecting our intellectual property, there could be a material adverse
effect on our business.
While we believe that our issued patents and pending patent applications help
to protect our business, there can be no assurance that:
- any patent can be successfully defended against challenges by
third parties;
- pending patent applications will result in the issuance of
patents;
- our competitors or potential competitors will not devise new
methods of competing with us that are not covered by our
patents or patent applications;
- new prior art will not be discovered which may diminish the
value of or invalidate an issued patent; or
- a third party will not have or obtain one or more patents
that prevent us from practicing features of our business or
will require us to pay for a license to use those features.
Also, our patents, service marks or trademarks may be challenged and
invalidated or circumvented. In addition, we are exposed to infringement of our
intellectual property in foreign markets because our intellectual property is
protected under United States laws that may not extend to foreign uses.
We have been involved in litigation relating to the protection of intellectual
property rights and could be involved in future litigation as third parties
develop products that we believe infringe on our patents and other intellectual
property rights. We have experienced attempts to misappropriate our technology,
and we expect those attempts may continue. We are currently involved in
litigation in which our rights to technology have been challenged. The cost of
such litigation, or the determination against us in this type of lawsuit, could
have a material adverse effect on our business.
If we lose key members of our personnel, our future success could be limited
Our future success depends on our ability to attract and retain key management,
engineering, technical and other personnel. In addition, we must recruit
additional qualified management, engineering, technical and marketing and sales
and support personnel for our operations. Competition for this type of
personnel is intense, and we may not be successful in attracting or retaining
personnel. The loss of the services of one or more members of our management
group or other key employees or the inability to hire additional qualified
personnel will limit our ability to grow our business.
27
Our success is dependent upon our ability to adapt to technological changes,
and if we fail to do so, our offerings may become obsolete
We compete in a market characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. These market
characteristics are intensified by the emerging nature of the Internet and the
multitude of companies offering Internet-based products and services. Thus, our
success depends on our ability to adapt to rapidly changing technologies, to
adapt our offerings to evolving industry standards and to continually improve
the performance, features and reliability of our offerings in response to
competitive products and shifting demands of the marketplace. In addition,
widespread changes in Internet, networking or telecommunications technologies
or other technological alterations could require substantial expenditures to
modify our products, services or infrastructure. Failure to adapt to new
technology in any of these areas could have a material adverse effect on our
business, results of operations and financial condition.
We may not be successful in expanding our business into international markets
A part of our long-term strategy has been to expand into international markets.
The success of any additional foreign operations will be substantially
dependent upon our entering and succeeding in those markets. We may experience
difficulty in managing international operations as a result of competition,
technical problems, distance, language or cultural differences.
As we manage our international efforts, we will be subject to a number of
risks, including the following:
- failure of foreign countries to rapidly adopt the Internet,
digital imaging or other required technologies;
- unexpected changes in regulatory requirements, especially
regarding the Internet;
- slower payment and collection of accounts receivable than in
our domestic market; and
- political and economic instability.
We cannot assure you that we will be able to successfully market our products
in foreign markets.
We are susceptible to breaches of online commerce security
A party able to circumvent our security measures could misappropriate
proprietary database information or cause interruptions in operations. As a
result, we may need to expend significant capital and other resources to
protect against security breaches or to alleviate problems caused by security
breaches. This additional expense could harm our business, financial condition
and results of operation.
Our certificate of incorporation and bylaws contain anti-takeover provisions
that may make it more difficult or expensive to acquire us in the future, which
could negatively affect our stock price
Our amended and restated certificate of incorporation and amended and restated
bylaws and applicable provisions of Delaware law contain several provisions
that may make it more difficult for a third party to acquire control of us
without the approval of our board of directors. In addition, in October of
2000, our board of directors approved a shareholder rights plan that has the
effect of making an acquisition of us prohibitively expensive unless our board
of directors
28
approves of the acquisition. The provisions of our certificate and bylaws and
the Delaware General Corporation Law may make it more difficult or expensive
for a third party to acquire a majority of our outstanding voting common stock
or delay, prevent or deter a merger, acquisition, tender offer or proxy
contest, which may negatively affect our stock price.
Because our product and service offerings are intended to enhance internet
commercial transactions, the success of our business will be dependent upon
continued growth of internet commerce
Our products and services are intended to enhance and facilitate commercial
transactions over the Internet. Our future revenues are substantially dependent
upon the widespread acceptance and use of the Internet and other online
services as a medium for commerce by consumers and sellers. If continued
acceptance and growth of Internet use does not occur, it could have a material
adverse effect on our business.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and in the amount of traffic.
Continued development and maintenance of the Internet's infrastructure to
handle this increased traffic must continue. In addition, timely development of
complimentary products, such as high-speed modems, providing reliable Internet
access and services will also be required.
The Internet has experienced a variety of outages and other delays as a result
of computer viruses and other damages to portions of its infrastructure.
Outages and delays and infections by computer viruses are likely to continue
and affect the level of Internet usage generally. Such outages and delays will
affect processing of transactions on Rimfire integrated Websites. We will
experience a reduction in revenues and increased expenses as a result of such
outages and delays. We will be required to continually make capital investments
to enhance our infrastructure and protect our services from computer viruses
and other outages and delays on the Internet. The cost of such improvements
could have a material adverse effect on our business.
Our market is highly competitive, and our business may suffer if we are unable
to compete successfully
The market for our immersive products and our Rimfire products and services are
new and rapidly evolving. We currently compete with other providers of image
management services, such as Kodak and MGI Software. The market for immersive
products and services is intensely competitive. We compete with other providers
of immersive imaging technology, such as Apple and BeHere Corporation. Each of
these companies develops and markets products and services similar to ours. We
expect additional competition from other emerging and established companies.
There can be no assurance that the Company's current and potential competitors
will not develop products that are more effective than our current or future
products, or that our products and technology will not be rendered obsolete by
such developments. Some of our competitors have longer operating histories,
greater name recognition and significantly greater financial, technical and
marketing resources. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or devote greater
resources to promotion and sale of their products than us. Our business will
suffer if we are unable to compete effectively.
29
Concentrated control over our voting stock could adversely affect stockholders
As of December 31, 2001, the holders of our Series B Preferred Stock
beneficially owned approximately 62% of our outstanding voting stock. As a
result, these stockholders are able to exercise control over certain matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such control could discourage
others from initiating potential merger, takeover or other change of control
transactions. As a result, the market price of our common stock could be
adversely affected.
Recent terrorist activities and resulting military and other actions could
adversely affect our business
Terrorist attacks in New York, Pennsylvania and Washington, D.C. on September
11, 2001 disrupted commerce throughout the United States and other parts of the
world. The continued threat of terrorism within the United States and abroad,
and the continued military action and heightened security measures, may cost
significant disruptions to global commerce. Such disruptions could result in
the delay or cancellation of customer orders, a general decrease in corporate
spending on information technology or our ability to effectively market and
sell our products and services. Such events could have material adverse affect
on our business.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholders to be held on or
about May 30, 2002, to be filed with the SEC pursuant to Regulations 14A under
the Securities Exchange Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholders to be held on or
about May 30, 2002, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholders to be held on or
about May 30, 2002, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is incorporated herein by reference to
iPIX's Proxy Statement for its Annual Meeting of Stockholder to be held on or
about May 30, 2002, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
Page
----
Internet Pictures Corporation Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2000 and 2001 ..........................................F-2
Consolidated Statements of Operations for the years ended December 31, 1999,2000
and 2001..........................................................................................F-3
Consolidated Statements of Stockholders' Equity for the period from
January 1, 1999 to December 31, 2001..............................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 2000 and 2001...............................................................................F-7
Notes to Consolidated Financial Statements..........................................................F-8
All schedules have been omitted because they are not required or
because the required information is contained in the financial statements or
notes thereto.
32
(b) Reports on Form 8-K.
1. October 3, 2001; Item 5
(c) Exhibits.
The following exhibits are filed herewith or incorporated by
reference:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Form S-1 as declared effective on August 25, 1999
(File No. 333-80639)).
3.1(a) Form of Amendment to the Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Form S-1 as filed with the Commission on
March 17, 2000).
3.2 Form of Amended and Restated Bylaws of the Registrant (incorporated herein by reference
to Form 10-Q as filed with the Commission on November 14, 2000).
3.3 Certificate of Designations of Series A Junior Participating Preferred Stock
(incorporated herein by reference to Form 8-A as filed with the Commission on November
2, 2000).
3.3 Amended Certificate of Designations of Series B Preferred
Stock (incorporated herein by reference to Form 8-K as filed
with the Commission on October 3, 2001).
4.1 Form of certificate representing the common stock, $.001 par value per share of Internet
Pictures Corporation (incorporated herein by reference to Form 10-K as filed with the
Commission on March 30, 2000).
4.2 Rights Agreement dated October 31, 2000 between Internet Pictures Corporation and
EquiServe (incorporated herein by reference to Form 8-A as filed with the Commission on
November 2, 2000).
4.3 Registration Rights Agreement dated May 14, 2001 between Internet Pictures Corporation
and Image Investors Portfolio, a separate series of Memphis Angels, LLC (incorporated
herein by reference to Form 8-K as filed with the Commission on May 29, 2001).
10.1* Executive Employment Agreement dated January 24, 1997,
between Interactive Pictures Corporation and James M.
Phillips, as amended (incorporated herein by reference to
Form S-1 as declared effective on August 4, 1999 (File No.
333-78983)) as further amended by amendment number 3 on
February 22, 2001 (incorporated herein by reference to Form
10-K as filed with the Commission on March 30, 2000).
33
10.2* Separation of Employment and Consulting Agreement between Internet Pictures Corporation
and James M. Phillips dated as of May 14, 2001 (incorporated herein by reference to Form
8-K as filed with the Commission on May 29, 2001)
10.3* Employment Agreement dated July 1, 2001, between Internet Pictures Corporation and
Donald W. Strickland (incorporated herein by reference to Form 10-Q as filed with the
Commission on August 14, 2001).
10.4#* Employment Agreement dated May 31, 2001, between Internet Pictures Corporation and
Matthew S. Heiter, as amended.
10.5* Employment Agreement dated July 1, 2001, between Internet
Pictures Corporation and Paul A. Farmer (incorporated herein
by reference to Form 10-Q as filed with the Commission on
August 14, 2001).
10.6 Amended and Restated Internet Pictures Corporation 2001 Equity Incentive Plan
(incorporated herein by reference to Form S-8 as filed with the Commission on January
16, 2002).
10.7 Amended and Restated 1997 Equity Compensation Plan (incorporated herein by reference to
Form S-4 as declared effective on December 16, 1999 (File No. 91139))
10.8 Amended and Restated 1998 Employee, Director and Consultant Stock Plan (incorporated
herein by reference to Form S-4 as declared effective on December 16, 1999 (File No.
91139)).
10.9 1999 Employee Stock Purchase Plan (incorporated herein by reference to Form S-4 as
declared effective on December 16, 1999 (File No. 91139)
10.10 2000 Equity Incentive Plan (incorporated herein by reference to Form S-8 as declared
effective on June 27, 2000 (File No. 333-40160).
10.11 PictureWorks Technology, Inc. 1994 Stock Option Plan (incorporated herein by reference
to Form S-8 as declared effective on May 2, 2000 (File No. 333-36068))
10.12 PictureWorks Technology, Inc. 1996 Stock Option Plan (incorporated herein by reference
to Form S-8 as declared effective on May 2, 2000 (File No. 333-36068))
10.13 PictureWorks Technology, Inc. 1997 Stock Option Plan (incorporated herein by reference
to Form S-8 as declared effective on May 2, 2000 (File No. 333-36068))
10.14 Form of Indemnification Agreement between the Registrant and each of its directors and
officers (incorporated herein by reference to Form S-1 as declared effective on August
25, 1999 (File No. 333-80639)).
10.15 Acquisition Agreement dated January 12, 2001 between Internet Pictures Corporation and
Homestore Virtual Tours, Inc. (incorporated herein by reference to Form 8-K as filed
with the Commission on January 29, 2001).