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, 2002
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
-----------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 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.
[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 28, 2002 was $13,268,972 (based on
the last sale price of $2.00).
The number of shares outstanding of the registrant's common stock, $0.001 par
value, as of March 3, 2003 was 6,812,955. On August 22, 2001 our stockholders
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 Information Statement for the Annual Stockholders'
Meeting to be held on or about May 6, 2003, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14C under the Securities Exchange Act
of 1934, as amended, are incorporated by reference into Part III of this report
on Form 10-K. Such Information 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 imaging platforms and
technologies provide its customers with increased revenues, improved customer
satisfaction and enhanced security for the protection of life and property.
The robust and reliable imaging infrastructure, Rimfire, manages nearly a
billion image views and two million image submissions daily, 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's patented immersive imaging technology is used to provide an unparalleled
view of the world to promote, inspect and protect. iPIX is the leading provider
of virtual tour technology for real estate, travel and hospitality, and can even
be found on the White House Web site. Governments around the world are finding
new ways to use iPIX for video security, situational awareness, planning and
documentation.
In early 2003, iPIX organized into three primary business units: Transaction
Services, Immersive Still Solutions and Immersive Video Solutions. The
Transaction Services unit focuses on the sale of iPIX solutions to customers who
rely on images to complete business transactions such as auctions, real estate
and classifieds. The Immersive Still Solutions unit focuses on the sale of
immersive still technology licenses for real estate, travel and hospitality and
visual documentation markets. The Immersive Video Solutions unit provides
observation and security products and services for commercial and governmental
customers. We encourage you to also read our segment reporting disclosure in the
accompanying notes to the financial statements that are a part of this report.
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.
1
Digital Media Preparation
Rimfire leverages the ease-of-use of the Internet to allow end users to
drag-and-drop media content to the Web without the need to prepare it
with desktop software ahead of time. Challenging and complex tasks such
as formatting, sizing and cropping, are easily and automatically
accomplished through Rimfire's integrated and intuitive tools. Instant
previews of the media supplied prevent incorrect submissions.
Digital Media Submission
Rimfire accepts a wide and growing variety of file formats and converts
the files to customer specifications automatically, without user
intervention. Rimfire's smart-sizing feature allows the user to supply
files of any size without the worry of 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 customers'
businesses 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 a 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.
2
iPIX Immersive Imaging
iPIX patented technology creates spherical immersive images with a full
360-degree by 360-degree field of view. The technology is used with film or
video images captured with any camera equipped with a fisheye lens. iPIX
software and hardware technology compensates for errors in camera placement and
corrects the distortion inherent in fisheye photographs. The resulting immersive
image can be viewed in any direction, up-down, left-right and horizon to horizon
without curvature. The viewer can easily navigate the image by moving a cursor
inside the image or using iPIX navigation controls via an Internet browser or
integrated into third party software. For video applications, iPIX offers
360-degree and 180-degree hemispherical solutions.
iPIX Immersive Stills
iPIX offers an image key pricing model that allows users to purchase individual
still image keys or bulk key purchases to create iPIX immersive images. These
iPIX licenses make iPIX technology easy to use, cost effective and accessible to
a larger audience.
Current iPIX immersive still imaging solutions and applications include:
iPIX Immersive Images and Virtual Tours
iPIX provides 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 from a variety of manufacturers 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 and 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.
3
iPIX GPS Mapping System
The iPIX GPS Mapping System combines Geographic Information System
(GIS) Map editing software, Global Positioning System (GPS) precise
location information and iPIX Immersive Images to capture, create and
output interactive visual maps. The iPIX GPS Mapping System can import
hundreds of iPIX images into GIS maps in a matter of minutes. It is
designed to meet the specific needs of transportation, municipal
planners, military and defense, agricultural and land management,
chemical and facilities management.
iPIX Immersive Imaging Software Development Kit (SDK)
iPIX offers a software development kit to third parties for the
integration of iPIX images directly into their applications. The
availability of the SDK allows iPIX immersive imaging to enhance third
party applications with rich visual information and provides us with
the ability to reach new markets through partnership.
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 360-degree by 360-degree that can be
navigated in any direction with zoom in and out capabilities.
Current iPIX immersive video imaging solutions and applications include:
iPIX 360VS
The iPIX 360VS (Video Surveillance) provides complete 360-degree by
360-degree video coverage of an area in real time, using only one
camera, with no moving parts. The dual-lens, fixed spherical optical
system is manufactured by iPIX and uses iPIX patented software and
off-the-shelf hardware products to create a scalable core hardware
platform. Customized versions of the 360VS were first shipped to
government customers in the fourth quarter of 2002. Designed to be
custom configured to provide the highest level of reliable situational
awareness, the 360VS is rugged in construction and small in size making
it ideal for portable or fixed installations in a variety of housings,
or for operation on unmanned vehicles, robots or ground sensors in any
environment. This innovative technology, ideal for military, defense
and law enforcement security, facilitates live, real-time capture at up
to 18 frames per second and archived images for future playback.
iPIX NetCam Software
iPIX NetCam software provides the new rapidly growing network camera
market with incredible new vision capabilities. An iPIX NetCam enabled
network camera has the ability to pan/tilt/zoom an entire 360-degree by
4
180-degree scene without moving the camera. Plus, the entire scene can
be recorded or viewed by others regardless where another viewer is
looking. The iPIX NetCam software is ideal for businesses that want to
provide a real time view of their facilities. Hotels, construction
sites, ski areas, amusement parks, schools, pre-schools, offices,
warehouses and others are some of the first that have utilized iPIX
NetCam. The iPIX NetCam software includes Java based software that can
be installed directly into network cameras from Axis, IQinvision and
other popular network cameras, or placed on a server for higher volume
sites. Up to 50 simultaneous viewers can view and navigate the video
images using the on-camera software while the server software supports
thousands of simultaneous users.
iPIX NetCam i1000
The iPIX NetCam i1000 is a complete Web attraction camera ready for
easy installation. Everything needed is included, starting with the
mega pixel IQeye3 network camera from IQinvision. iPIX preconfigures
the system by pre-installing a vari-focal fisheye lens and embedding
the iPIX NetCam software directly into the camera's memory. After
plugging the cameras power into a wall jack and connecting to an
Ethernet network, the system is ready to start broadcasting high
quality video images with all the features of iPIX immersive
pan/tilt/zoom.
IPIXVS Software Development Kit (SDK)
The iPIXVS SDK offers security system designers and integrators an
immersive enhancement for expansive wide-field viewing without the need
for pan/tilt/zoom hardware. This software has been integrated into
several of the leading software solutions for digital security
including Milestone, Technivision and Sharks Eye. We are in discussions
with a number of DVR manufactures who intend to enable end users to
upgrade existing CCTV security installations with our system as well as
introduce new system sales to include the benefit of iPIX digital
pan/tilt/zoom.
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 security solutions 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
5
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
recommendations 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 commercial and governmental security
and observation markets. Resellers and integrators such as ADT Security
Services, Jullien Enterprises, Unisys, Loral, 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 such relationships, we believe iPIX
technology will be incorporated in solutions for homeland defense,
national security, critical infrastructure protection, commercial
security and other applications to protect life and property.
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 increase
iPIX-to-developer and developer-to-developer interactivity and will
provide member Web developers a competitive advantage through
availability of increased resources, technical support and special
pricing for iPIX offerings.
Partner Internationally
We intend to further capitalize on what we believe to be significant
revenue opportunities in international markets. We have international
licensing and distribution agreements with partners in a wide range of
countries spanning Europe, the Middle East and Asia. These
relationships 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.
6
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.
Observation and Security: Military, 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 providing the command and control center a full view of a
battlefield, 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 video cameras capture up to 360-degree by
360-degree scenes that can be navigated in any direction with zoom in and out
capabilities without additional hardware.
Real Estate: Residential and commercial real estate companies and professionals
use our solutions to provide online iPIX still and 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.
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.
Visual Documentation: Because iPIX immersive technology allows customers to
capture a full 360-degree by 360-degree environment, iPIX is one of the best
ways 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.
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
7
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 customers' digital media
content to their own Web sites and to selected travel destination affiliate Web
sites.
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 and San Ramon, CA, 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. 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. They generally 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.
While competitors may offer only components of the end-to-end solution iPIX
imaging solution, they may have greater financial, marketing, distribution and
8
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
of our solutions.
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 22 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. Such 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, 2003, we employed 81 full-time employees. Our employees are not
represented by any collective bargaining unit. We believe our relations with our
employees are good.
9
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 have exited approximately 6,500
square feet of office space in San Ramon for which approximately half has been
sub-let and we are actively marketing the remaining space 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 12 to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.)
Item 3. Legal Proceedings.
On October 28, 1998, Minds-Eye-View, Inc. ("Minds-Eye") and Mr. Ford Oxaal
("Oxaal") filed a lawsuit against us in the United States District Court for the
Northern District of New York. Minds-Eye alleged in its lawsuit that we breached
a duty of confidence to them, made misrepresentations and misappropriated trade
secrets. The court removed this action to arbitration upon our motion, and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court dismissed
the lawsuit on May 19, 1999. Although the lawsuit was dismissed, we proceeded
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.
On May 20, 1999, Oxaal filed a lawsuit against us and certain of our customers
in the same court alleging that our technology infringes upon a patent claim for
360 degree spherical visual technology held by him. Oxaal filed an additional
complaint on December 5, 2000 in the United States District Court for the
Northern District of New York, naming us as the sole defendant. The complaint
states a single claim for relief, alleging infringement of U.S. Patent No.
6,157,385, which issued on December 5, 2000. This patent encompasses a method of
seamlessly combining at least two images into a spherical image.
On June 11, 2002, we reached an out of court settlement with Oxaal and
Minds-Eye. As a result of the settlement, each of the lawsuits and the
arbitration proceeding described above were dismissed and mutual releases have
been executed. Pursuant to the settlement agreement, neither party admitted
liability or any wrong doing. We were granted a non-exclusive license under
patents and pending patents conceived by Oxaal or in which Oxaal has an
interest. The license rights inure to the benefit of our customers with respect
to their purchases from us and also inure to the benefit of our business
partners with respect to their business relations with us. We included the cost
of the license in computer hardware and software on the accompanying balance
sheet. We do not believe that the cost of the license in 2002 or the future,
will have a material effect on our financial condition, results of operations or
cash flows.
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 was sought. In December, 2002, we settled this case pursuant to a
settlement agreement in which neither party admitted liability or any wrong
doing. The settlement did not have a material effect on our financial condition,
results of operations or cash flows.
10
During the quarter ending September 30, 2002, we received approximately $1.4
million in cash from a previously disclosed favorable jury verdict against
Infinite Pictures that found the defendants liable for infringement of our
patents under the doctrine of equivalents and awarding us $1.0 million in
damages, plus approximately $0.4 million in interest and court costs. The
defendants filed for a writ of certiorari with the United States Supreme Court
in an effort to reverse the lower court's findings in our favor. The Supreme
Court refused to grant the writ, which exhausted the legal remedies for
disputing the award. Accordingly, we recorded the $1.0 million in damages as a
patent infringement award, along with the $0.4 million in interest and court
costs, in the quarter ended September 30, 2002.
On November 15, 2002, a First Amended Consolidated Complaint for violation of
federal securities laws was filed against Homestore.com, Inc. ("Homestore") by
the California Teachers' Retirement System ("CalSTRS"). The Complaint is a class
action lawsuit filed on behalf of stockholders of Homestore which flows from
alleged misstatements and omissions made by Homestore and the other named
defendants, which include us. The Complaint alleges that during 2001, Homestore
and iPIX entered into fraudulent reciprocal transactions intended to
artificially bolster and maintain Homestore's and our respective stock prices.
The Complaint alleges that Homestore's public statements with respect to these
transactions are attributable to us and violate Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. We joined with other co-defendants and filed a
joint motion to dismiss, alleging that the Complaint fails to state a claim upon
which relief may be granted, among other things. On March 7, 2003, the United
States District Court for the District of Central California granted our motion
to dismiss, with prejudice. However, CalSTRS may appeal this dismissal in
accordance with the federal rules of procedure.
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 2002.
Item 4A. Executive Officers of Registrant
The following sets forth information with respect to our executive officers as
of March 1, 2003:
NAME AGE TITLE
Donald W. Strickland.......... 53 President and Chief Executive Officer
Paul A. Farmer................ 44 Chief Financial Officer, Executive
Vice President and Treasurer
Sarah F. Pate................. 43 Executive Vice President and General
Manger Transaction Services Group
11
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 Price Waterhouse 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.
SARAH F. PATE has been the executive vice president, general manager of iPIX's
Transactional Services Group since December 2001, and has been with iPIX since
April 2000. Prior to joining us, Ms. Pate was vice president in charge of
operations for PictureWorks Technology, Inc., from August 1995 until March 2000.
Ms. Pate has extensive experience in financial services and in managing large
and small organizations. She spent 12 years with Household International serving
as president of Household Bank, director of sales at Household Finance
Corporation and several other high-level management roles. Ms. Pate holds a
bachelor's degree in business administration from the University of Washington.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq SmallCap Market (symbol: IPIX). Prior
to August 26, 1999, there was no public market for our common stock. As of March
1, 2003, there were 985 stockholders of record.
12
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 2002
Fourth Quarter.......................... $ 1.45 $0.72
Third Quarter........................... 1.86 1.00
Second Quarter.......................... 2.84 1.25
First Quarter........................... 3.48 2.00
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
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.
Equity Compensation Plan Information
The table below sets forth information relating to our compensation plans as of
December 31, 2002:
Number of securities
Number of remaining available
securities to be for future issuance
issued upon Weighted-average under equity
exercises of exercise price of compensation plans
outstanding outstanding (excluding securities
Plan Category options, warrants options, warrants reflected in column
and rights and rights (a))
- ---------------------------------------------------------------------------------------------------------------
(a) (b) (c)
2001 Equity Compensation Plan 2,854,287 $2.06 3,106,963
2000 Equity Compensation Plan 245,752 $28.06 --
1998 Employee, Director and Consultant 38,941 $286.69 --
Stock Option Plan
1997 Equity Compensation Plan 48,864 $137.17 --
Prior option plans 32,035 $32.77 --
Employee Stock Purchase Plan -- -- 473,075
Total 3,219,879 $9.86 3,580,038
13
Item 6. Selected Financial Data
Selected Historical Financial Information
The statement of operations data presented below for the years ended December
31, 2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and
2002 have been derived from our audited consolidated financial statements that
are included elsewhere in this report. The statement of operations data for the
years ended December 31, 1998 and 1999 and the balance sheet data as of December
31, 1998, 1999 and 2000 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.
Fiscal Years Ended December 31,
1998 1999 2000 2001 2002
(In thousands, except per share data)
Statement of Operations Data
Revenues:
Products.......................... $ $ 12,523 $ 48,943 $ 14,758 $ 6,512
2,789
Services.......................... 329 -- 4,730 14,148 15,901
-------- --------- --------- -------- -------
3,118 12,523 53,673 28,906 22,413
-------- --------- --------- -------- -------
Cost of revenues:
Products.......................... 1,274 7,660 25,555 7,270 2,145
Services.......................... 241 -- 2,516 4,991 6,583
-------- --------- --------- -------- -------
1,515 7,660 28,071 12,261 8,728
-------- --------- --------- -------- -------
Gross profit......................... 1,603 4,863 25,602 16,645 13,685
-------- --------- --------- -------- -------
Operating expenses:
Sales and marketing............... 9,366 51,138 83,064 21,252 7,607
Research and development.......... 3,018 6,690 14,582 7,671 4,862
General and administrative........ 4,385 19,499 22,850 15,816 2,933
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 11,655 687
-------- --------- --------- -------- -------
Total operating expenses.. 16,769 77,327 373,856 60,482 16,089
-------- --------- --------- -------- -------
Loss from operations................. (15,166) (72,464) (348,254) (43,837) (2,404)
Interest expense..................... (202) (6,684) (436) (10,667) (183)
Interest income...................... 276 2,546 3,345 305 456
Patent infringement award............ -- -- -- -- 1,000
Other income (expense), net.......... 27 (1) (1,250) (380) (12)
-------- --------- --------- -------- -------
Net loss before extraordinary gain..` (15,065) (76,603) (346,595) (54,579) (1,143)
Extraordinary gain................... -- -- -- 901 --
-------- --------- --------- -------- -------
Net loss...................... (15,065) (76,603) (346,595) (53,678) (1,143)
Dividend relative to beneficial
conversion feature of Series B
convertible preferred stock....... -- 1,000 -- -- --
-------- --------- --------- -------- -------
Net loss attributable to common
stockholders...................... $(15,065) $(77,603) $(346,595) $(53,678) $(1,143)
======== ========= ========= ======== =======
Net loss per common share -
basic and diluted................. $ (12.22) $ (30.13) $ (61.55) $ (8.22) $ (0.17)
======== ========= ========= ======== =======
Weighted average common shares -
basic and diluted................. 1,233 2,576 5,631 6,534 6,794
======== ========= ========= ======== =======
14
As of December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
-------- ------- -------- -------- -------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents,restricted
cash, short-term investments and
securities available for sale.... $1,494 $73,366 $11,035 $13,401 $5,992
Working capital (deficit)........... (371) 58,617 1,174 3,506 2,418
Total assets........................ 4,769 95,803 60,614 23,078 18,435
Long-term liabilities............... 21 387 957 2,392 1,769
Total stockholders' equity.......... 1,310 81,041 28,213 8,770 8,392
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 the Company around our higher gross margin businesses.
The result is that we are focused on two businesses: (1) providing outsourced
imaging services to facilitate online transactions in the auction, classifieds
and real estate markets and (2) providing immersive imaging solutions for the
real estate, security and observation and visual documentation markets.
Our products and services include the capture, processing, management and
distribution of images and related data. Revenues from online auctions and
classifieds are primarily transaction based. Our transaction services involve
designing, building and managing an image management infrastructure as well as
leasing spaces from state-of-the-art co-location facilities with access to
telecommunications bandwidth. Since these services are capital intensive, a high
percentage of the costs associated with transaction services are fixed and
accordingly the margins from transaction services are highly dependent upon
asset utilization. Substantially all of our recurring revenue is derived from
transaction fees generated by our Rimfire service. In particular, eBay and
Homestore are our largest Rimfire customers. eBay represented approximately 60%
of total revenue and 82% of total Rimfire service revenue for 2002 and
approximately 74% of total revenue and 94% of total Rimfire service revenue for
fourth quarter of 2002. Homestore.com represented approximately 16% of total
revenue and 13% of total Rimfire service revenue for 2002, but less than 10% of
total revenue and Rimfire revenue for the fourth quarter 2002.
Our principal agreements with Homestore and eBay, expire on June 30, 2003 and
September 30, 2003, respectively. These agreements are subject to extension,
amendment and re-negotiation from time to time. We are currently negotiating
extensions to our agreements with both customers. Significant changes in the
terms of our relationships with these customers or the loss of either customer
could have a material adverse effect on our business. We believe that
transaction fees from eBay will continue to increase as a percentage of Rimfire
and total revenue through September 30, 2003 as more eBay customers utilize our
service on the eBay auction Web site.
15
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 low in
proportion to the related revenue. The cost of sales for the sale of camera
equipment has generally been 50% to 75% of related revenues.
We also provide professional services to customers that request specific
customizations or integrations of our products and services. Providing
professional services is labor intensive, and our cost of sales for professional
service tends to be 40% 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 in January 2001, we no longer
directly sell full service virtual tours to customers in the U.S. residential
real estate market.
Throughout 2001 and 2002, our real estate focused revenues were generated from
three primary sources: image management services; camera kits and immersive
keys; and other services. Our image management products and services were used
in the real estate industry primarily to associate online still images with
for-sale listings. This service is offered to customers under license
agreements, transaction based agreements and revenue share agreements for real
estate properties around the world. Through January 12, 2002, we provided
Homestore with processing, hosting and distribution services and received
transaction fees.
iPIX INTERNATIONAL
In the third quarter of 2002, we entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based corporation
("Soroof"). Under the agreements, Soroof is the exclusive distributor for iPIX
immersive still products, including the iPIX GPS Mapping System, outside of
North America and Asia through Soroof's newly established entity, iPIX
International ("iPIX-I"). The agreement, effective July 1, 2002, expires
December 31, 2007, unless renewed. iPIX-I has an exclusive license to develop
integrated solutions for markets including real estate, travel and tourism and
other markets in which online marketing is critical. iPIX-I serves as an
effective extension of our international channel strategy and allows iPIX to
provide our patented immersive still products globally. For a more detailed
description of iPIX-I, please see Note 8 in the accompanying financial
statements.
16
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release 60 issued by the Securities and Exchange Commission
("SEC") requires all registrants to discuss critical accounting policies or
methods used in the preparation of the financial statements. The notes to the
consolidated financial statements included in our Annual Report filed on Form
10-K include a summary of the significant accounting policies and methods used
in the preparation of our consolidated financial statements. Further, we have
made a number of estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and actual results may differ from
those estimates. Those areas that require the greatest degree of management
judgment include revenue recognition, adequacy of the allowance for doubtful
accounts, goodwill and significant accruals.
We believe that full consideration has been given to all relevant circumstances
that we may be subject to, and our financial statements accurately reflect
management's best estimate of the results of operations, financial position and
cash flows for the periods presented.
We believe the following represent our critical accounting policies:
Revenue Recognition
We recognize revenue in accordance with SOP 97-2, "Software Revenue
Recognition," and SAB 101, "Revenue Recognition in Financial Statements."
Transaction hosting revenues are recognized as transactions are performed
provided there was persuasive evidence of an arrangement, the fee was fixed or
determinable and collection of the resulting receivable was reasonably assured.
Initial license fees are recognized when a contract exists, the fee is fixed or
determinable, software delivery has occurred and collection of the receivable is
reasonably assured. If there are continuing obligations, then we recognize
license 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,
persuasive evidence of an arrangement exists, the fees are fixed or determinable
and collection is reasonably assured.
Royalties derived from desktop imaging products are recognized as revenues upon
receipt of the royalty sell-through reports from customers, which are generally
in the quarter following the quarter in which the sale by the customer took
place.
Revenues from the sale of our virtual tour products are recognized upon
distribution to the Web site designated by the customer.
Revenues generated from professional services are recognized as the related
services are performed. When such professional services are combined with
on-going transaction services or are deemed to be essential to the functionality
of the delivered software product, revenue from the entire arrangement is
recognized while the transaction services are performed, on a percentage of
completion method or not until the contract is completed in accordance with SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and ARB 45, "Long-Term Construction-Type Contracts."
17
Allowances for Doubtful Accounts
Significant management judgments and estimates must be made and used in
connection with establishing the doubtful account allowances in any accounting
period. Management specifically analyzes accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the
amount and timing of expense recorded if management had different judgment or
utilized different estimates.
Goodwill
Under United States generally accepted accounting principles, we evaluate
goodwill for impairment on an annual basis and on an interim basis if events or
changes in circumstances between annual impairment tests indicate that the asset
might be impaired. In assessing the recoverability of our goodwill, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the goodwill. These estimates include forecasted revenues and
operating expenses, which are inherently difficult to predict. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets. We believe that the accounting
estimate related to goodwill is a "critical accounting estimate" because (1) it
requires Company management to make assumptions about fair values and (2) the
impact of recognizing an impairment could be material to our financial position,
as well as our results of operations. Management's assumptions about fair values
require significant judgment because broad economic factors, industry factors
and technology considerations can result in variable and volatile fair values.
If we are unable to extend our agreement with eBay, we may incur a significant
impairment of our goodwill.
Significant Accruals, including Restructuring Charges and Sales Tax
We recorded restructuring charges associated with vacated facilities. The key
assumptions associated with these charges include the timing and amount of
sub-lease income. In addition, in establishing and providing for sales tax
accruals, we make judgments based on the actual tax laws and guidance. While
management believes that its judgments and interpretations regarding tax
liabilities are appropriate, significant differences in actual experience may
materially affect our future financial results.
RECENT DEVELOPMENTS
During 2002, we introduced new products, formed new international distribution
arrangements and strengthened our intellectual property rights.
We introduced three iPIX Immersive Video products:
o iPIX Video SDK for Digital Security Applications - a software
developers kit licensed to OEMs to integrate iPIX's patented 360-degree
video pan/tilt/zoom into security applications. OEM partners are "iPIX
enabled" to turn any CCTV camera with a fish-eye lens into a digital
pan/tilt/zoom camera with no moving parts.
o iPIX NetCam i1000 - an intelligent network video camera that combines a
one mega-pixel high quality video stream with iPIX's patented
360-degree pan/tilt/zoom for observation and security applications.
18
o 360VS surveillance system for Homeland Security, DoD/Military, Federal,
State and local government use. iPIX 360VS provides real-time
360-degree spherical video surveillance with no blind spots and no
moving parts. The single-camera solution is the only way to monitor an
entire area without multiple cameras. There are no post processing
requirements for live, real-time viewing and multiple remote operators
can navigate simultaneously in any direction and allows for panning,
tilting and zooming of historical images.
We introduced several new and updated versions of still image photography
products including:
o The iPIX GPS Mapping System was introduced in June 2002. This system
creates a new way to utilize and index iPIX immersive photographs by
associating a GPS coordinate with images captured in the field. The
system, developed with inputs from customers in the U.S. military,
allows customers to quickly map large areas and to see those areas
using iPIX's patent immersive imaging.
o Several new digital camera models were introduced in 2002. Included
were the Nikon Coolpix 4500 and the Nikon Coolpix 4300. These cameras
are the latest in a long line of digital cameras offered by Nikon that
provide a high quality and cost effective solution for immersive
photography. Additionally, iPIX introduced support for the Canon G2,
the Sony DSC-F85 and the Olympus 4040. 2002 marked the introduction of
the broadest range of iPIX enabled cameras ever.
We also enhanced our Rimfire service in the following ways:
During 2002, we announced iPIXads which is built on the iPIX Rimfire(R)
technology. iPIXads is a turnkey solution providing newspapers with enhanced
selling power and revenue opportunities. Newspapers using iPIXads have the
ability to accept photos from their classified advertisers via a private labeled
online service. Similar to iPIX services provided to the Web's largest auction
sites and newspapers, iPIXads features intuitive "image wells" that allow users
to crop, rotate, edit and submit photos. Photo submissions can be used in the
online and print versions of the paper's classifieds. iPIX provides the service
turnkey, complete with localized branding, requiring virtually no technical
integration for the newspaper.
iPIXads completes the Company's three-pronged approach for making services
available to papers of all sizes. With the addition of iPIXads, Rimfire
technology is now available to virtually every newspaper reaching millions of
local classified advertisers around the world. Rimfire is also available to
newspapers through customized integration, such as LA Times' Recycler.com or San
Francisco Chronicle's SFGate.com, or application service providers including
AdStar and GDT-NOVA.
19
Key business benefits of iPIXads:
o iPIX handles all uploading and viewing of photos through a robust
imaging infrastructure--a complete outsourced solution that requires
virtually no technical integration by the newspaper.
o iPIXads is designed specifically for call centers, allowing newspapers
to begin generating revenue immediately.
o Enables classified advertisers to take advantage of the visual power of
the Internet to improve the effectiveness of their ads.
o The iPIXads interface and URL (Web address) is brandable and
customizable allowing newspapers to easily tie this into their print
and online marketing programs.
o Automatically prepares images for optional use in print.
Key features of iPIXads:
o iPIX Rimfire technology automatically performs all photo file format
conversions, compression, uploading, storage, and links to the ad.
o Submission of photos is fully automated over the Internet with no
special software required.
o Backed by iPIX, which handles nearly two million image uploads and
serves over a billion images daily via world-class 24x7x365 network
operations with planned 99.7 percent uptime - making it the largest,
most robust Internet imaging infrastructure in the world.
International
In 2002, we entered into license, distribution and trademark agreements with
Soroof. Under the agreements, Soroof will be the exclusive distributor for iPIX
immersive still products, including the iPIX GPS Mapping System, outside of
North America and Asia through its newly established entity, iPIX-I. We will
provide certain hosting services during the term of the agreements. Soroof has
committed to certain minimum quarterly royalties during the term of the
agreement. Should these minimum royalties not be met, we have the right to
terminate our agreements with Soroof. iPIX has a minority equity interest in
iPIX-I, however, iPIX does not have the ability to exercise significant
influence over iPIX-I operations. We account for our investment in iPIX-I on the
cost basis. We did not make any capital contributions to iPIX-I and we have no
commitments to fund iPIX-I. We do have the right, however, but not the
obligation, to purchase iPIX-I from Soroof after December 31, 2005 for
consideration as defined in the agreement. During 2002, we recognized $0.6
million of revenue under these agreements.
20
Intellectual Property Rights
On June 11, 2002, we reached an out of court settlement with Oxaal and
Minds-Eye. As a result of the settlement, each of the lawsuits and the
arbitration proceeding described above in Item 3 were dismissed and mutual
releases were executed. Pursuant to the settlement agreement, neither party
admitted liability or any wrong doing. We were granted a non-exclusive license
under patents and pending patents conceived by Oxaal or in which Oxaal has an
interest. The license rights inure to the benefit of our customers with respect
to their purchases from us and also inure to the benefit of our business
partners with respect to their business relations with us. We do not believe
that the cost of the license in 2002 or the future, will have a material effect
on our financial condition, results of operations or cash flows.
During the quarter ending September 30, 2002, we received approximately $1.4
million in cash from a previously disclosed favorable jury verdict against
Infinite Pictures that found the defendants liable for infringement of our
patents under the doctrine of equivalents and awarding us $1.0 million in
damages, plus $0.4 million in interest and court costs. The defendants filed for
a writ of certiorari with the United States Supreme Court in an effort to
reverse the lower court's findings in our favor. The Supreme Court refused to
grant the writ, which exhausted the legal remedies for disputing the award.
Accordingly, we recorded the $1.0 million in damages as a patent infringement
award, along with the $0.4 million in interest and court costs, in the quarter
ended September 30, 2002.
RESTRUCTURING ACTIONS
We executed several restructuring actions throughout 2001 and 2002. 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 U.S. 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 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.
In September 2002, $0.7 million of restructuring charges were recorded related
to expenses associated primarily with a negotiated buy-out of certain lease
obligations for previously vacated offices. We paid approximately $1.3 million
during the fourth quarter of 2002 to end our continuing obligations under those
leases.
21
The activity in the current and long-term restructuring accruals for the years
ended December 31, were as follows:
(In Thousands)
Payments/ Balance at Payments/ Balance at Payments/ Balance at
Initial Write-offs December Expense Write-offs December Expense in Write-offs December 31,
Expense in 2000 31, 2000 in 2001 in 2001 31, 2001 2002 in 2002 2002
----------------------------------------------------------------------------------------------------------
Restructuring
Provisions:
Severance $1,584 $(994) $590 $4,537 $(4,027) $1,100 $-- $(600) $500
Employee debt
forgiveness -- -- -- 2,163 (2,163) -- -- -- --
Write-offs and
impairments 692 (597) 95 1,959 (2,054) -- -- -- --
Lease obligations 1,681 (337) 1,344 3,006 (2,897) 1,453 687 (1,591) 549
Other 204 (173) 31 -- (31) -- -- -- --
------ -------- ------ ------- --------- ------ ---- -------- ------
Total $4,161 $(2,101) $2,060 $11,665 $(11,172) $2,553 $687 $(2,191) $1,049
====== ======== ====== ======= ========= ====== ==== ======== ======
We realized significant savings as a result of these restructuring actions. We
expect continued savings 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 much of our success in 2003 will be dependent upon the success of
our customers and the appropriations processes of various governmental
departments. With the elimination of $7.5 million of 2001 full service real
estate revenue and other lower margin businesses, revenue in 2002 was less than
2001, but due to the restructuring actions described above, our gross margins
were improved. Our principal agreements with Homestore and eBay, expire on June
30, 2003 and September 30, 2003, respectively. These agreements are subject to
extension, amendment and re-negotiation from time to time. We are currently
negotiating extensions to our agreements with both customers. Significant
changes in the terms of our relationships with these customers or the loss of
either customer could have a material adverse effect on our business. We believe
that transaction fees from eBay will continue to increase as a percentage of
revenue through September 30, 2003 as more eBay customers utilize our service on
the eBay auction Web site. In 2003, we are launching products aimed at serving
the growing needs of the security and observation markets.
We expect to continue to make significant capital investments in our image
management infrastructure and in the development of new products for the
security market, which may consume some of our cash reserves.
22
Fiscal Years Ended December 31,
2000 2001 2002
--------- --------- -------
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Products............................................ $ 48,943 $ 14,758 $ 6,512
Services............................................ 4,730 14,148 15,901
-------- -------- -------
53,673 28,906 22,413
-------- -------- -------
Cost of revenues:
Products............................................ 25,555 7,270 2,145
Services............................................ 2,516 4,991 6,583
-------- -------- -------
28,071 12,261 8,728
-------- -------- -------
Gross profit........................................... 25,602 16,645 13,685
-------- -------- -------
Operating expenses:
Sales and marketing................................. 83,064 21,252 7,607
Research and development............................ 14,582 7,671 4,862
General and administrative.......................... 22,850 15,816 2,933
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 11,655 687
-------- -------- -------
Total operating expenses..................... 373,856 60,482 16,089
-------- -------- -------
Loss from operations................................... (348,254) (43,837) (2,404)
Interest expense....................................... (436) (10,667) (183)
Interest income........................................ 3,345 305 456
Patent infringement award.............................. -- -- 1,000
Other expense.......................................... (1,250) (380) (12)
-------- -------- -------
Net loss before extraordinary gain..................... (346,595) (54,579) (1,143)
Extraordinary gain..................................... -- 901 --
-------- -------- -------
Net loss............................................... $(346,595) $(53,678) $(1,143)
========= ======== =======
Net loss per common share - basic and diluted.......... $ (61.55) $ (8.22) $ (0.17)
========= ======== =======
Weighted average common shares - basic and diluted..... 5,631 6,534 6,794
========= ======== =======
23
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,
-------------------------------------------
2000 2001 2002
--------- ---------- ----------
Revenues:
Products............................................ 91.2 % 51.1 % 29.1 %
Services............................................ 8.8 48.9 70.9
--------- --------- ---------
100.0 100.0 100.0
--------- --------- ---------
Cost of revenues:
Products............................................ 47.6 25.2 9.5
Services............................................ 4.7 17.3 29.4
--------- --------- ---------
52.3 42.5 38.9
--------- --------- ---------
Gross profit........................................... 47.7 57.5 61.1
--------- --------- ---------
Operating expenses:
Sales and marketing................................. 154.8 73.5 33.9
Research and development............................ 27.2 26.6 21.7
General and administrative.......................... 42.6 54.7 13.1
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 3.1
--------- --------- ---------
Total operating expenses..................... 696.6 209.2 71.8
--------- --------- ---------
Loss from operations................................... (648.9) (151.7) (10.7)
--------- --------- ---------
Interest expense....................................... (0.8) (36.9) (0.8)
Interest income........................................ 6.2 1.1 2.0
Patent infringement award.............................. -- -- 4.5
Other expense.......................................... (2.3) (1.3) (0.1)
--------- --------- ---------
Net loss before extraordinary gain..................... (645.8) (188.8) (5.1)
Extraordinary gain..................................... -- 3.1 --
--------- --------- ---------
Net loss............................................... (645.8)% (185.7)% (5.1)%
========= ========= =========
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Revenues. Total revenues decreased to $22.4 million in 2002, compared to $28.9
million in 2001, a decrease of $6.5 million or 22%. This decrease was due
primarily to a decrease of $7.5 million in sales of full service virtual tours
to the residential real estate market, which was off-set by an increase of $1.0
million in technology products and services revenues due to increased
transaction volumes.
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 2002, 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. We did not have any full
service virtual real estate tour revenues in 2002. We expect to generate minimal
future revenues from the sale of full service virtual real estate tours in the
U.S. residential markets.
24
Product revenues decreased to $6.5 million in 2002, compared to $14.8 million in
2001, a decrease of $8.3 million. This decrease was due primarily to the $7.5
million reduction in sales of virtual tours and reduced sales and marketing
efforts to sell low margin camera kits. Services revenues from our professional
services and Rimfire technology were $15.9 million in 2002, compared to $14.1
million in 2001. The increase in service revenues related primarily to expanded
use of Rimfire to process images for on-line auction transactions.
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 $8.7 million in 2002, compared to $12.3 million in 2001, a
decrease of $3.6 million or 29%. Cost of revenues as a percentage of total
revenues decreased to 39% in 2002 from 42% in 2001. This decrease was primarily
the result of a lower volume of virtual tour deliveries and an increase in
higher margin Rimfire based revenues.
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 $7.6 million in 2002, compared to $21.3 million
in 2001, a decrease of $13.7 million or 64%. 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 resulting in a decrease of $11.6 million. In addition, we eliminated
costs relating to technology access and sponsorship fees and decreased
advertising and branding expenses, which accounted for $2.1 million of the
decrease.
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 $4.9 million in 2002, compared to $7.7 million in 2001, a
decrease of $2.8 million or 37%. 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 $2.9 million in 2002, compared to $15.8 million in 2001, a decrease
of $12.9 million or 81%. This decrease was due primarily to a decrease in
personnel and related costs of $6.2 million. Bad debt expense decreased by $4.7
million in 2002 from $4.4 million in 2001. In 2002, no additional provisions for
uncollectible receivables were required; however, $0.3 million was collected
from previously reserved receivables. Professional fees, which included legal
fees, accounting fees and public company expenses, accounted for $2.0 million of
the decrease in 2002.
Stock-based Compensation. Stock-based compensation expense is included in
various expense line items in the statement of operations and 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
25
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. The following table summarizes amounts
expensed in 2001 and 2002 for stock-based compensation:
Years Ended December 31,
------------------------------------
(In thousands) 2001 2002
-------- --------
Cost of revenues $ 95 $ --
Sales and marketing 1,605 171
Research and development 650 --
General and administrative 2,149 --
-------- -------
$ 4,499 $ 171
======== ========
The decrease in total expense for 2001 and 2002 was because most of the related
stock options and warrants were fully vested prior to the end of 2001. In 2002,
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. Amortization expense consists of
goodwill associated with corporate acquisitions during the second quarter of
2000. We adopted Statement of Financial Accounting Standards 142, "Goodwill and
Other Intangible Assets" (FAS 142), effective January 1, 2002. Under FAS 142,
goodwill is no longer amortized, but reviewed for impairment annually, or more
frequently if certain indicators arise. Amortization of goodwill was $0.0
million in 2002, compared to $2.4 million in 2001.
Loss on Disposal of Assets. Loss on disposal of assets was $1.7 million in the
2001 compared to $0 in 2002. We recorded a loss on disposal of assets as a
result of the sale of assets used to provide residential real estate virtual
tours that consisted of the remaining residential real estate assets that were
unrelated to the 2000 pooling of Interactive Pictures Corporation and
bamboo.com.
Restructuring and Impairment. Restructuring and Impairment charges were $0.7
million in 2002, compared to $11.7 million in 2001, a decrease of $11.0 million
or 94%. 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. Please see Note 4 in the accompanying financial statements for a
more detailed explanation.
Interest Expense. Interest expense was $0.2 million 2002, compared to $10.7
million in 2001, a decrease of $10.5 million. In 2001, we recorded non-cash
interest expense of $10.0 million related to the accretion of a promissory note
issued in the second quarter 2001 to its face value when the promissory note was
converted to Series B Preferred Stock during the third quarter of 2001 and $0.3
million of interest expense on the promissory note. The remaining interest
expense charges in 2001 and 2002 relate to capital lease obligations.
Interest Income. Interest income consists primarily of interest earned on cash
and investments. Interest income increased to $0.5 million in 2002, compared to
26
$0.3 million in 2001. The increase was primarily due to interest earned of $0.3
million on the patent infringement award.
Patent Infringement Award. The patent infringement award in 2002 of $1.0 million
is due to the collection of a previously awarded court judgment for which all
legal remedies for appeal have been exhausted and the case is now closed.
Other Expense. Other expense was $0.0 million in 2002, compared to $0.4 million
in 2001. The change was primarily due to realized losses on investments sold
during 2001.
Extraordinary Gain. Extraordinary gain was $0.9 million 2001, compared to $0.0
million in 2002. 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 virtual tours of residential real estate properties that were related to
the pooling of Interactive Pictures Corporation and bamboo.com which occurred
less than 12 months prior to the sale.
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.
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 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 $12.3 million in 2001, compared to $28.1 million in 2000,
a decrease of $15.8 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
27
marketing expenses decreased to $21.3 million in 2001, compared to $83.1 million
in 2000, a decrease of $61.8 million or 74%. 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 $7.7 million in 2001, compared to $14.6 million in 2000, a
decrease of $6.9 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 $15.8 million in 2001, compared to $22.9 million in 2000, a
decrease of $7.1 million or 31%. 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 in 2001 compared to $4.0 million in 2000, an
increase of $0.4 million.
Stock-based Compensation. Stock-based compensation expense is included in
various expense line items in the statement of operations and 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.
The following table summarizes amounts expensed in 2000 and 2001 for stock-based
compensation:
Years Ended December 31,
-------------------------------------
(In thousands) 2000 2001
-------- --------
Cost of revenues $ 165 $ 95
Sales and marketing 3,038 1,605
Research and development 1,380 650
General and administrative 544 2,149
-------- --------
$ 5,127 $ 4,499
======== ========
Stock-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.
28
Impairment and Amortization of Intangibles. Amortization expense 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 primarily
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.
Loss on Disposal of Assets. Loss on disposal of assets was $1.7 million in the
2001 compared to $0 in 2000. We recorded a loss on disposal of assets as a
result of the sale of assets used to provide residential real estate virtual
tours that consisted of the remaining residential real estate assets that were
unrelated to the 2000 pooling of Interactive Pictures Corporation and
bamboo.com.
Restructuring and Impairment. 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 to its face value when converted to preferred stock during
the third quarter of 2001.
Interest Income. Interest income consists primarily of interest earned on cash
and investments. Interest income decreased to $0.3 million in 2001, compared to
$3.3 million in 2000. This decrease was due primarily to decreased earnings on
our cash investments related to lower average cash balances throughout the
years.
Other Expense. Other expense was $0.4 million in 2001, compared to other expense
of $1.2 million in 2000. In 2001, the expense was due to realized losses on
investments sold during 2001, while in 2000, the expense was primarily
associated with the write down of various investments.
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 which occurred less
than 12 months prior to the sale.
29
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,
2002, we had $6.0 million of cash, cash equivalents, restricted cash and
short-term investments.
Net cash used in operating activities was $4.7 million for year ended December
31, 2002 and $26.7 million for the year ended December 31, 2001. Net cash used
for operating activities in 2002 was primarily a result of payments throughout
the year for accounts payable of $1.1 million and accrued expenses of $1.7
million, many of which related to payments on restructuring and other
obligations from 2001 and earlier. In addition, during 2002, accounts
receivables increased $2.3 million, primarily as a result of fourth quarter
revenues, which were collected in January 2003.
Net cash provided by (used in) investment activities was $(4.9) million for the
year ended December 31, 2002 and $13.2 million for the year ended December 31,
2001. Net cash provided by (used in) 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 $1.5 million for the year ended
December 31, 2002 and $20.0 million for the year ended December 31, 2001. The
net cash provided by financing activities for 2002 was due primarily to the
proceeds from sale-leaseback transactions. The net cash provided by financing
activities for 2001 was due primarily to the sale of shares of our preferred
stock, off-set by the repayment of capital lease obligations.
The table below shows our contractual obligations as of December 31, 2002:
(In thousands) Payments Due by Period
Less than 1-3 4 - 5 After 5
Total 1 year years years years
Capital Leases $ 4,090 $ 2,582 $1,508 $ -- $ --
Operating Leases 7,786 3,189 3,762 771 64
Total 11,876 5,771 5,270 771 64
Management believes we have sufficient cash resources to meet our funding needs
for 2003. We finished 2002 with approximately $6.0 million in cash, cash
equivalents, restricted cash and short-term investments. Our principal
agreements with Homestore and eBay, expire on June 30, 2003 and September 30,
2003, respectively. These agreements are subject to extension, amendment and
re-negotiation from time to time. We are currently negotiating extensions to our
agreements with both customers. Significant changes in the terms of our
relationships with these customers, delays in payments from these customers or
the loss of either customer could have a material adverse effect on our
business. We believe that transaction fees from eBay will continue to increase
as a percentage of revenue through September 30, 2003 as more eBay customers
utilize our service on the eBay auction Web site.
Depending upon the outcome of the negotiations noted above, the timeliness of
collection of our accounts receivable, our rate of growth and our ability to
30
control costs, we may require additional equity or debt financing to meet future
working capital or capital expenditure needs. There can be no assurance that
such additional financing will be available or if available, that such financing
can be obtained on terms satisfactory to us.
Management's focus in 2003 will be to manage our cash requirements 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 February 2002, the Emerging Issues Task Force ("EITF") issued EITF 00-14,
"Income Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred," which is effective for financial statements beginning after
December 31, 2001. EITF 00-14 requires that reimbursements received for
out-of-pocket expenses incurred, generally, be characterized as revenue in the
statement of operations. We adopted EITF 00-14 in the quarter ended March 31,
2002. The adoption of EITF 00-14 did not have a material effect on our reported
results of operations, financial position or cash flows.
In June 2002, the Financial Accounting Standards Board ("FASB") issued FAS 146,
"Accounting for Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of FAS 146 also includes costs related to terminating a contract that is
not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. FAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002 and early application is
encouraged. We will adopt FAS 146 during the first quarter ending March 31,
2003. The effect on adoption of FAS 146 will change on a prospective basis the
timing of when restructuring charges are recorded from a commitment date
approach to when the liability is incurred.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the disclosure requirements are applicable in 2002. The
Company is complying with the disclosure requirements of FIN 45 for the year
ending December 31, 2002 (See Note 12) and is evaluating the effect the other
requirements may have on its financial statements.
In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
31
products, services and/or rights to use assets. The provisions of EITF Issue No.
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not believe that the adoption of
this standard will have a material effect on its financial position or results
of operations.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure"("FAS 148"). FAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. FAS 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, FAS 148 requires disclosure
of the pro forma effect in interim financial statements. The transition and
annual disclosure requirements of FAS 148 are effective for fiscal years ending
after December 15, 2002, and these disclosures are contained in Note 2. The
interim disclosure requirements are effective for interim periods commencing
after December 15, 2002. The Company will continue to apply the APB 25
provisions and will disclose the fair value information on a proforma basis.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51"("FIN 46"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The Company does not believe that the adoption of this standard
will have a material effect on its financial position or results of operations.
INFLATION
Inflation has not had a significant impact on our operations to date.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As of December 31, 2002, we had $6.0 million of cash, cash equivalents,
restricted cash and short-term investments. Our interest income is sensitive to
changes in the general level of United States interest rates, particularly since
the majority of our investments are in short-term instruments. Due to the nature
of our short-term investments, we concluded that we do not have material market
risk exposure.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and financial statement schedule of the
Company, together with the reports thereon of PricewaterhouseCoopers, LLP,
independent accountants, are set forth on the pages indicated in item 15 (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
32
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 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 deri