<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1999
REGISTRATION NO. 333-78983
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERACTIVE PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
TENNESSEE 7372 62-1275544
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(423) 482-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JAMES M. PHILLIPS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
INTERACTIVE PICTURES CORPORATION
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(423) 482-3000
(Name and address, including zip code, and telephone number, including area
code, of registrant's agent for service)
COPIES TO:
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MATTHEW S. HEITER, ESQ. GERALD S. TANENBAUM, ESQ.
ROGER D. BAILEY, ESQ. CAHILL GORDON & REINDEL
SYLVIA M. REED, ESQ. EIGHTY PINE STREET
BAKER, DONELSON, BEARMAN & CALDWELL NEW YORK, NEW YORK 10005
165 MADISON AVENUE, SUITE 2000 (212) 701-3000 TELEPHONE
MEMPHIS, TENNESSEE 38103 (212) 269-5420 FACSIMILE
(901) 577-8117 TELEPHONE
(901) 577-2303 FACSIMILE
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS SUBJECT TO COMPLETION
DATED JULY 30, 1999
4,200,000 Shares
(IPIX LOGO Interactive Pictures Corporation)
Common Stock
Interactive Pictures Corporation is offering 3,850,000 shares of its common
stock. The selling shareholders named on page 48 are offering 350,000 shares of
our common stock. This is our initial public offering. We estimate that the
initial public offering price will be between $12.00 and $14.00 per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol IPIX.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
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PROCEEDS TO
INTERACTIVE PROCEEDS TO
PRICE TO UNDERWRITING PICTURES THE SELLING
PUBLIC DISCOUNT CORPORATION SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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Total $ $ $ $
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</TABLE>
We have granted the underwriters a 30-day option to purchase up to an additional
630,000 shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
STEPHENS INC.
, 1999
<PAGE> 3
[INSIDE FRONT COVER]
THE WORLD IS ROUND. WHY ARE YOUR PICTURES STILL FLAT?
[PICTURE OF LANDSCAPE ALONG WITH TWO FISH-EYE PICTURES MAKING UP LANDSCAPE]
STRATEGIC RELATIONSHIPS AND ALLIANCES
[NAMES AND LOGOS OF DISCOVERY COMMUNICATIONS, ADVANCE INTERNET, GE EQUITY,
MICROSOFT, CENDANT, OLYMPUS, AMERICAN EXPRESS, LIBERTY DIGITAL, MEDIAONE, KODAK,
NBC, MOTOROLA, REALNETWORKS AND IBM HOTMEDIA]
[PAGE]
REAL ESTATE
[PICTURES OF COLDWELL BANKER, RENT.NET AND WINKWORTH WEB SITES]
E-COMMERCE
[PICTURES OF TICKETMASTER, MSN CARPOINT AND KODAK WEB SITES]
[PAGE]
E-PUBLISHING
[PICTURES OF CNN, CITYSEARCH AND CHICAGO TRIBUNE WEB SITES]
EDUCATION/ENTERTAINMENT
[PICTURES OF DISCOVERY CHANNEL ONLINE, E! ONLINE AND THE 50TH ANNUAL EMMY AWARDS
WEB SITES]
[PAGE]
<PAGE> 4
TABLE OF CONTENTS
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PAGE
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
Forward-looking Statements.......... 9
Use of Proceeds..................... 10
Dividend Policy..................... 10
Capitalization...................... 11
Dilution............................ 12
Selected Financial Information...... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 14
Business............................ 24
</TABLE>
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PAGE
<S> <C>
Management.......................... 38
Principal and Selling
Shareholders...................... 46
Related Party Transactions.......... 49
Description of Capital Stock........ 51
Shares Eligible For Future Sale..... 55
Underwriting........................ 57
Legal Matters....................... 59
Experts............................. 60
Where You Can Find More
Information....................... 60
Other Information................... 60
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
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Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and regarding their unsold allotments
or subscriptions.
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-i-
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights the information contained in this prospectus. To
understand this offering fully, you should read the entire prospectus carefully.
Except as otherwise indicated, the share information in this prospectus assumes
that the underwriters do not exercise the option granted by us to purchase
additional shares in this offering and assumes, upon consummation of this
offering, the conversion of all of our preferred stock into common stock,
including preferred stock issuable upon the net exercise of all outstanding
preferred stock warrants and the net exercise of all outstanding common stock
warrants into common stock. In addition, the share information in this
prospectus does not give effect to our repurchase from two affiliates of the
underwriters, our repurchase from one of those underwriters and our repurchase
from an officer of another underwriter of a total of 444,496 shares of common
stock at a repurchase price of $7.70 per share, the price of those shares to
those parties, as described under the heading "Underwriting" in this prospectus.
INTERACTIVE PICTURES CORPORATION
We are a leading provider of interactive photography and immersive imaging for
the Internet. Our patented technology combines two 185(degrees) photographs
taken with a standard digital camera, resulting in a spherical image which
allows viewers to see the picture from a complete 360(degrees) by 360(degrees)
perspective. Viewers can easily navigate the IPIX image on a personal computer
screen by moving a cursor inside the image. We derive our revenues from the sale
of IPIX keys, IPIX kits and studio work and the license of archived IPIX images.
With an IPIX key, a user can post the IPIX image to a web site, view it on a
personal computer or e-mail it. We price our IPIX keys to meet the cost
requirements and anticipated use of the IPIX image by the end user, making them
a cost-effective alternative to other immersive imaging technologies.
Our customers use IPIX images to enhance their marketing and e-commerce
initiatives and to attract and retain visitors on their web sites by creating
realistic virtual tours and compelling multimedia content. We have targeted the
following domestic and international commercial markets: real estate, travel and
hospitality, electronic publishing, corporate and e-commerce and education and
entertainment. Our customers include Coldwell Banker, Rent.Net, Carnival Cruise
Lines, Swissotel, CNN, Microsoft, Intel, Ticketmaster and Disney.
To accelerate the promotion, adoption and enhancement of IPIX images, we have
established strategic relationships with camera manufacturers and technology
companies and customers in our commercial markets. We have established strategic
relationships with leading camera manufacturers such as Kodak, Nikon and Olympus
and technology companies such as IBM, Intel and RealNetworks. Our real estate
virtual tours may be posted to all of the major Internet real estate listing
sites, including REALTOR.com, the official web site of the National Association
of Realtors.
We continue to enhance and improve our technology and explore new product
applications. We have applied our technology to video, which, when fully
developed, will enable multiple viewers to simultaneously and independently
select their own field of view within a spherical video image. We have also
developed a webcam to permit the remote capture, creation and transmission of
continuously updated 180(degrees) IPIX images over the Internet.
We were incorporated in 1986 in Tennessee. Our primary business address is 1009
Commerce Park Drive, Oak Ridge, Tennessee 37830, and our telephone number is
(423) 482-3000. We can be found on the Internet at www.ipix.com. Information on
our web site is not a part of this prospectus.
1
<PAGE> 6
THE OFFERING
COMMON STOCK OFFERED BY
INTERACTIVE PICTURES
CORPORATION................... 3,850,000 shares
COMMON STOCK OFFERED BY THE
SELLING SHAREHOLDERS.......... 350,000 shares
COMMON STOCK OUTSTANDING AFTER
THE OFFERING.................. 16,757,186 shares
USE OF PROCEEDS................. We intend to use the net proceeds we receive
from this offering for general corporate
purposes, including expansion of sales and
marketing activities, enhancement of research
and development activities, possible
strategic acquisitions or investments and
working capital requirements. We will not
receive any proceeds from the sale of common
stock by the selling shareholders.
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL........................ IPIX
DIVIDEND POLICY................. We do not anticipate paying any cash
dividends.
The table above excludes 2,515,125 shares of common stock issuable upon the
exercise of outstanding stock options as of June 30, 1999, including options
outstanding under our 1997 equity compensation plan, of which options to
purchase 1,266,738 shares were currently exercisable and options to purchase
186,342 shares will become exercisable upon the consummation of this offering.
The table also excludes 675,777 shares of common stock reserved for future grant
or award under our 1997 equity compensation plan as of June 30, 1999 and $1.0
million of common stock to be issued to Creative Artists Agency at the initial
public offering price.
All references to shares of common stock presented in this prospectus reflect a
0.34009-for-1 reverse stock split which will become effective before the
consummation of this offering.
We have not authorized anyone to give you any information that differs from the
information in this prospectus. If you receive any different information, you
should not rely on it. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted.
2
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SUMMARY FINANCIAL INFORMATION
The following table contains our summary financial data which you should read
together with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information found in this prospectus. See note 2 of notes
to consolidated financial statements for an explanation of the determination of
the number of shares used in per share calculations. The pro forma as adjusted
consolidated balance sheet data presented below assumes the conversion of all of
our preferred stock into common stock, including preferred stock issuable upon
the net exercise of all outstanding preferred stock warrants, and the net
exercise of all outstanding common stock warrants into common stock and gives
effect to the issuance of 3,850,000 shares of common stock upon the consummation
of this offering.
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------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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1996 1997 1998 1998 1999
In thousands, except per share data ------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Product......................................... $ 1,337 $ 2,128 $ 2,712 $ 319 $ 1,229
Service......................................... 208 318 329 98 --
------- ------- -------- ------- -------
1,545 2,446 3,041 417 1,229
Cost of revenues
Product......................................... 543 446 1,207 72 587
Service......................................... 108 316 241 32 --
------- ------- -------- ------- -------
651 762 1,448 104 587
------- ------- -------- ------- -------
Gross profit...................................... 894 1,684 1,593 313 642
Operating expenses
Sales and marketing............................. 908 2,829 8,387 1,550 2,812
Research and development........................ 389 1,171 2,668 493 736
General and administrative...................... 921 2,598 3,864 887 828
Amortization of product development and patent
costs........................................ 71 858 -- -- --
------- ------- -------- ------- -------
Total operating expenses................ 2,289 7,456 14,919 2,930 4,376
------- ------- -------- ------- -------
Interest and other income (expense), net.......... 201 194 101 (37) 22
------- ------- -------- ------- -------
Net loss................................ $(1,194) $(5,578) $(13,225) $(2,654) $(3,712)
======= ======= ======== ======= =======
Basic and diluted loss per common share........... $ (0.21) $ (0.89) $ (2.84) $ (0.42) $ (0.90)
======= ======= ======== ======= =======
Pro forma basic and diluted loss per common
share........................................... $ (1.65) $ (0.38)
======== =======
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AS OF MARCH 31, 1999
---------------------
AS OF PRO FORMA
DECEMBER 31, 1998 ACTUAL AS ADJUSTED
----------------- ------- -----------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash, cash equivalents and securities
available-for-sale................................. $1,064 $23,799 $69,596
Working capital...................................... (635) 22,650 68,447
Total assets......................................... 3,989 27,369 73,166
Long-term debt....................................... 21 19 19
Redeemable common and preferred stock................ -- 3,810 --
Total shareholders' equity........................... 793 20,395 70,002
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3
<PAGE> 8
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
all of the other information contained in this prospectus before deciding to
purchase shares of our common stock.
RISKS RELATING TO OUR BUSINESS, FINANCES AND OPERATIONS
WE HAVE INCURRED SUBSTANTIAL LOSSES AND OUR EXPENSES CONTINUE TO INCREASE, AND
THUS WE MAY NEVER BECOME PROFITABLE
We expect our operating losses and negative cash flow to continue. Although our
revenues have increased over the past two years, we may not be able to sustain
future revenue growth. In addition, our expenses continue to increase as we
expand our sales and marketing efforts, increase the number of our employees and
invest in product development. We cannot assure you that our revenues will ever
exceed expenses or that we will become profitable. We have incurred net losses
and experienced negative cash flow every quarter since we began doing business.
As of March 31, 1999, we had an accumulated deficit of $27.7 million.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS, RESULTING IN A DECLINE IN OUR STOCK PRICE
Our quarterly and yearly results have varied widely in the past, and we believe
that our quarterly operating results could vary significantly in the future. For
this reason, quarter-to-quarter comparisons should not be relied upon as
indications of future performance. It is likely that in some future periods our
operating results may fall below the expectations of securities analysts and
investors, which could cause the trading price of our common stock to fall.
Among the factors that may influence our operating results are:
- the introduction of new or enhanced products and services or changes in
pricing policies by us or our competitors;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
- incurrence of costs relating to any potential future acquisitions; and
- economic conditions specific to the Internet or all or a portion of the
technology sector.
If we are unsuccessful in introducing new or enhanced products, responding to
competitors or controlling our expenses, our revenues may not exceed our
expenses. As a result, our operating results may fall below the expectations of
securities analysts and investors, resulting in a decrease in our stock price.
OUR FUTURE SUCCESS DEPENDS UPON THE WIDESPREAD USE OF DIGITAL CAMERAS AND
FISHEYE LENSES
Our future success is dependent upon the prevalent use of digital photography
and fisheye lenses. Generally, digital cameras are more expensive than film
cameras, and digital imaging does not offer the same clarity and pixel
resolution that film-based photographs offer. Although the cost of digital
cameras is declining and picture quality is improving, there can be no assurance
that digital photography will be as widely accepted as film-based photography.
If the use of digital cameras does not increase, we may not realize growth in
the sale of our products and services.
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<PAGE> 9
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND THESE RIGHTS
MAY BE CHALLENGED BY OTHERS, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR
DAMAGES AND INVALIDATION OF OUR INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of patent, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to protect our
intellectual property rights. Our success is heavily dependent upon our ability
to enforce and protect these rights, and we cannot assure you that we will be
successful in protecting these rights. Also, our patents or trademarks may be
challenged and invalidated or circumvented. We have been involved in litigation
relating to the protection of our intellectual property rights and could be
involved in future litigation as third parties develop products that we believe
infringe on our patent and other intellectual property rights. We are presently
involved in litigation in which our rights to our technology have been
challenged. A determination against us in this lawsuit would have a material
adverse effect on our business. Also, we cannot assure you that any claims and
issued patents or pending patent applications will be of sufficient scope or
strength. Further, we cannot assure you that any claims, patents or patent
applications will be issued in all countries where our products can be sold or
where our technologies can be licensed to provide meaningful protection against
any commercial damage to us. In particular, we are exposed to patent
infringement in foreign markets because our patents are protected under United
States patent laws that may not extend to foreign uses.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our processes and devices that we regard as
proprietary. A party who is able to copy or gain unauthorized use of our
processes and devices could misappropriate proprietary information or circumvent
the use of IPIX keys. We have experienced attempts to misappropriate our
technology, and we expect that those attempts may continue. We may be required
to expend significant capital and resources to prevent any further attempts.
Policing unauthorized use of our proprietary information is difficult, and we
cannot assure you that the steps we take will prevent misappropriation of our
technologies. If we are unable to protect our intellectual property rights, we
could face increased competition in the market for our products and
technologies. Any increased competition could negatively affect our sales and
ability to expand our business.
A SIGNIFICANT AMOUNT OF OUR SALES COMES FROM A FEW COMMERCIAL MARKETS
Currently, a significant portion of our revenues is derived from businesses in
the real estate and corporate and e-commerce commercial markets. Customers from
these markets represented 62% of our total revenues for 1998 and 75% of our
total revenues for the first quarter of 1999. In addition, 13% of our total
revenues for 1998 were derived from sales of products to Sumitomo Corporation,
our Japanese distributor. Our inability to continue to sell our products to
customers in these commercial markets could result in a significant reduction in
our total revenues and negatively affect our ability to become profitable. The
volume of products that we sell to customers within these and other commercial
markets is likely to vary from year to year.
IF OUR PRODUCTS AND OUR NEW PRODUCTS ARE NOT ACCEPTED BY THE BUSINESS AND
CONSUMER MARKETS, OUR FUTURE GROWTH WOULD BE LIMITED
We currently sell our products only to the business market. We are dependent
upon the continued and expanded use of our products by the business market and
the acceptance of our products by the individual consumer. We have not yet made
any sales to individual consumers and cannot assure you that they will be
willing to purchase and use our products. Thus, both the timing and growth of
market acceptance for our products are subject to a high level of uncertainty.
Acceptance of our products will be highly dependent on a number of factors,
including:
- competing products;
- the development of technologies that will facilitate the use of our
products by businesses and consumers;
- the ease-of-use and performance of our products; and
5
<PAGE> 10
- the success of our marketing efforts.
We cannot assure you that we will be successful in obtaining market acceptance
of our products or our new products. Failure to gain market acceptance of our
products would limit our future growth.
WE MAINTAIN MANY STRATEGIC RELATIONSHIPS THAT ARE NOT SUBJECT TO WRITTEN
AGREEMENTS AND MAY BE TERMINATED AT ANY TIME
Many of our strategic relationships are not governed by written or other formal
agreements and are subject to termination at any time. These relationships
include those with companies that have agreed to manufacture IPIX compatible
digital cameras, technology companies and industry leaders who use our
technology on their web sites. If any of our strategic relationships are
terminated for any reason, it could negatively impact the growth of our product
sales, which could materially harm our business.
OUR MARKET IS HIGHLY COMPETITIVE, AND OUR BUSINESS MAY FAIL IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY
The market for immersive imaging products and services is highly competitive,
and we expect this competitiveness to continue. Our primary competitors are
Apple Computer, Inc., Bamboo.com, Inc., Be Here Corporation, Black Diamond,
Inc., Cyclovision, Inc., Infinite Pictures Corporation and Live Picture
Corporation. Each of these companies develops and markets imaging products and
services that provide a panoramic image experience. We compete with these
companies on the basis of price, ease of use and picture resolution. Some of our
competitors offer their products at lower prices and with greater picture
resolution than us.
We cannot assure you that others will not develop technologies that are similar
or superior to our technologies, duplicate our technologies or design around our
patents. To compete effectively, we must:
- establish favorable brand name recognition for our products;
- introduce new versions of and enhancements to our products;
- price our products at appropriate and competitive levels; and
- provide strong marketing support to promote our products.
Some of our competitors have greater financial, marketing, distribution and
technical resources than us. In addition, we compete with other companies in the
traditional two-dimensional photography industry. Traditional photographs have
significant and established customer acceptance. Our success will be dependent
on our ability to compete with companies offering similar immersive imaging
products and with companies in the traditional photography industry. If we are
unable to compete effectively, our business may fail.
OUR GROWTH HAS PLACED SIGNIFICANT STRAIN ON OUR MANAGEMENT, AND IF WE ARE UNABLE
TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY FAIL
We have experienced significant growth in our business over the past two years,
and the number of our customers and technology relationships has increased. In
addition, the number of our employees has grown from 17 as of December 31, 1995,
to 138 as of June 30, 1999. This growth has placed a significant strain on our
management and resources. To manage our growth successfully, we must:
- manage multiple relationships among various customers, suppliers and
strategic partners;
- expand, train and manage our employees;
- maintain our research and development activities; and
- continue to improve our operational and financial systems.
We cannot assure you that we will be able to manage our growth successfully, and
our failure to do so could cause our business to fail.
6
<PAGE> 11
OUR SUCCESS IS DEPENDENT ON THE CONTINUED SERVICE OF OUR KEY EMPLOYEES AND OUR
ABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL
Our future success depends on our ability to attract and retain key management,
scientific, technical and other personnel. In addition, we must recruit
additional qualified management, scientific, technical, marketing and sales and
support personnel for our operations. Competition for this personnel is intense,
and we cannot assure you that we will be successful in attracting or retaining
personnel. The loss of the services of one or more members of our management
group or our inability to hire additional qualified personnel as needed would
limit our ability to grow our business.
OUR GROWTH STRATEGY OF DEVELOPING AND INCREASING PUBLIC RECOGNITION OF OUR BRAND
AND ATTEMPTING TO INCREASE SALES OF OUR PRODUCTS THROUGH INCREASED SALES AND
MARKETING EFFORTS MAY BE UNSUCCESSFUL
We believe that establishing and maintaining the IPIX brand is important to our
efforts to increase our customer base. We intend to make significant
expenditures in creating and maintaining distinct brand loyalty through
traditional media advertising campaigns such as print, billboards and television
and by increasing our sales and marketing activities. In addition, we are
considering establishing a new web site through which we would sell
IPIX-compatible digital cameras in an attempt to enhance IPIX key sales.
Establishment of this new web site could involve significant expenditures on our
part. If customers do not perceive our existing products to be of high quality,
or if we introduce new products or enter into new business ventures that are not
favorably received or ultimately successful, the value of our brand could be
diluted, in turn decreasing the attractiveness of our products. If we fail to
increase our revenue as a result of our branding efforts or fail to promote our
brand successfully, or if we incur excessive expenses in an attempt to promote
and maintain our brand without a corresponding increase in sales, our business
could be harmed.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR STRATEGY TO EXPAND INTO
INTERNATIONAL MARKETS
We presently sell our products domestically and internationally. We intend to
expand our efforts to market our products internationally. We cannot assure you
that our products will become widely accepted in any international markets. We
may experience difficulty in managing international operations as a result of
competition, technical problems, distance, language or cultural differences, and
we cannot assure you that we will be able to successfully market our products in
foreign markets.
As we expand our international efforts, we will be subject to the following
risks:
- failure of foreign countries to rapidly adopt the Internet and digital
imaging;
- unexpected changes in regulatory requirements, especially regarding the
Internet;
- slower payment and collection of accounts receivable than in our domestic
market; and
- political and economic instability.
We may not be successful in increasing our international sales or expanding into
international markets.
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PROBLEMS RELATING TO THE YEAR 2000 COMPUTER PROBLEM COULD DISRUPT OUR BUSINESS
We are reliant on e-commerce transaction systems for the sale of our products
over the Internet. If these systems fail due to year 2000 problems, our ability
to conduct these transactions may be severely impacted.
The most reasonably likely worst-case scenario is a failure related to one or
several of our external service providers including telecommunications
providers, utilities or Internet commerce systems which we rely upon on a daily
basis. A failure could cause any of the following:
- protracted interruption of electrical power to our operations and
Internet host servers which could materially adversely impact our ability
to enable online transactions and other services;
- significant or widespread failure of software products and services
provided to us by third-parties; or
- significant or widespread failure of third-party computer systems with
which our systems interface.
We cannot assure you that we will not suffer any losses relating to these or
other year 2000 problems. Any year 2000 compliance problems that either we, our
customers or our vendors experience could disrupt our operations and negatively
affect our ability to conduct business.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES AND,
IF WE FAIL TO ADAPT TO THOSE CHANGES, OUR PRODUCTS MAY BECOME OBSOLETE
We compete in a market characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. These market
characteristics are intensified by the emerging nature of the Internet and the
multitude of companies offering Internet-based products and services. Thus, our
success depends on our ability to adapt to rapidly changing technologies, to
adapt our products to evolving industry standards and to continually improve the
performance, features and reliability of our products in response to competitive
products and shifting demands of the marketplace. In addition, the widespread
adoption of Internet, networking or telecommunications technologies or other
technological changes could require substantial expenditures to modify our
products or infrastructure. Our failure to adapt to new technology in any of
these areas could have a material adverse effect on our business, results of
operations and financial condition.
RISKS RELATING TO THE OFFERING
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering. Our
management will have broad discretion in the application of the net proceeds. If
our management fails to apply these funds effectively, we may not be successful
in expanding our efforts to grow our business and revenues.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of common stock into the public market
after this offering, or the perception that these sales could occur, could cause
our stock price to decline. After this offering, we will have outstanding
16,757,186 shares of common stock, or 17,387,186 shares if the underwriters
fully exercise their over-allotment option. In addition, as of June 30, 1999,
2,515,125 shares of common stock are issuable upon the exercise of outstanding
stock options. As of June 30, 1999, this number includes options to purchase
1,266,738 shares that were currently exercisable under our 1997 equity
compensation
8
<PAGE> 13
plan and options to purchase 186,342 shares that will become exercisable under
that plan at the consummation of this offering. We also have reserved 675,777
shares of common stock for grant under that plan and have excluded $1.0 million
of common stock to be issued to Creative Artists Agency at the initial public
offering price. We intend to register for resale the shares of common stock
reserved for issuance under this plan as soon as practicable following the
consummation of this offering.
In addition, our officers, directors and some of our shareholders and option
holders will agree that, for a period of 180 days from the date of this
prospectus, they will not sell their shares. Thus, upon the expiration of the
180 day lock-up period, 11,695,152 shares of our common stock held by those
shareholders will be available for immediate resale, subject to restrictions
imposed by the securities laws.
We have entered into registration rights agreements with some of our
shareholders. Under circumstances described in the registration rights
agreements, these shareholders can demand that we register their shares for sale
to the public market. In addition, we may be required to include a portion of
their shares if we register additional shares for sale to the public market.
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE COMMON
STOCK IN THIS OFFERING
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
the offering. Any common stock you purchase in this offering will have a
post-offering net tangible book value per share of $8.82 less than the initial
public offering price, assuming an initial public offering price of $13.00 per
share, which is the mid-point of the range shown on the cover page of this
prospectus.
OUR CHARTER AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE
DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE FUTURE, WHICH COULD NEGATIVELY
AFFECT OUR STOCK PRICE
Our amended and restated charter and bylaws and applicable provisions of
Tennessee law contain several provisions that may make it more difficult for a
third party to acquire control of us without the approval of our board of
directors. In addition, the Tennessee Business Combination Act contains various
other anti-takeover provisions that apply to us even though those provisions
will not be in our charter. These provisions of our charter and bylaws and the
Tennessee Business Combination Act may make it more difficult or expensive for a
third party to acquire a majority of our outstanding voting common stock or
delay, prevent or deter a merger, acquisition, tender offer or proxy contest,
which may negatively effect our stock price.
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations which
are characterized as forward-looking statements. Forward-looking statements are
based on our management's beliefs, assumptions and expectations of our future
economic performance, taking into account the information currently available to
them. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Factors that could contribute to these
differences include those discussed in "Risk Factors" and in other sections of
this prospectus.
The words believe, may, will, should, anticipate, estimate, expect, intends,
objective or similar words or the negatives of these words are intended to
identify forward-looking statements. We qualify any forward-looking statements
entirely by these cautionary factors.
9
<PAGE> 14
USE OF PROCEEDS
Based on an assumed initial public offering price of $13.00 per share, the
mid-point of the range shown on the cover page of this prospectus, we estimate
our net proceeds will be approximately $45.8 million from the sale of shares of
common stock in this offering, or approximately $53.4 million if the
underwriters' over-allotment option is exercised in full, after deducting
underwriting discounts and estimated offering expenses payable by us. We will
not receive any proceeds from the sale of the common stock by the selling
shareholders.
We intend to use the net proceeds we receive from this offering for general
corporate purposes, including expansion of sales and marketing activities,
enhancement of research and development activities, possible strategic
acquisitions or investments and working capital requirements. Although we have
not identified any specific businesses, products or technologies that we may
acquire and have not entered into any current agreements regarding any of these
transactions, we from time to time evaluate these types of opportunities. The
net proceeds will be invested in government securities and other short-term,
investment-grade securities until we use them in our business.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends on our common stock. Future dividends, if
any, will be determined by the board of directors. We may incur indebtedness in
the future which may prohibit or restrict the payment of dividends.
10
<PAGE> 15
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999, on an actual
basis and on a pro forma as adjusted basis after giving effect to (1) the
issuance of 8,609,286 shares of common stock, comprised of (a) 8,207,493 shares
of common stock issuable upon the conversion of all of our outstanding preferred
stock, (b) 389,437 shares of common stock issuable upon the net exercise and
conversion into common stock of all outstanding preferred stock warrants, and
(c) 12,356 shares of common stock issuable upon the net exercise of all
outstanding common stock warrants into common stock, and (2) the sale of
3,850,000 shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share, the mid-point of the range presented on the
cover page of this prospectus, after the deduction of underwriting discounts and
estimated offering expenses. The table does not give effect to a new class of
preferred stock that will be authorized under our charter before the
consummation of this offering.
<TABLE>
<CAPTION>
-------------------------
AS OF MARCH 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Dollars in thousands
Long-term portion of promissory note........................ $ 19 $ 19
Series D redeemable convertible preferred stock; 389,416
shares designated, issued and outstanding, actual......... 3,000 --
Redeemable common stock; 105,142 shares designated, issued
and outstanding, actual................................... 810 --
Shareholders' equity:
Convertible preferred stock
Series A, 1,644,817 shares authorized, issued and
outstanding, actual................................... 1 --
Series B, 526,340 shares authorized, issued and
outstanding, actual................................... 1 --
Series C, 3,151,715 shares authorized; 2,531,592 shares
issued and outstanding, actual........................ 3 --
Series D, 3,725,803 shares authorized; 3,115,328 shares
issued and outstanding, actual........................ 3 --
Common Stock, 100,000,000 shares authorized; 4,192,759
shares issued and outstanding, actual; 16,757,186
shares issued and outstanding, pro forma as adjusted... 4 17
Additional paid-in capital................................ 48,119 97,721
Accumulated deficit....................................... (27,736) (27,736)
----------- --------
Total shareholders' equity............................. 20,395 70,002
----------- --------
Total capitalization................................... $ 24,224 $ 70,021
=========== ========
</TABLE>
The table above excludes 1,746,690 shares of common stock issuable upon the
exercise of outstanding stock options as of March 31, 1999, including options
outstanding under our 1997 equity compensation plan, of which options to
purchase 1,224,003 shares were currently exercisable and options to purchase
201,305 shares will become exercisable upon the consummation of this offering.
The table also excludes 1,444,213 shares of common stock reserved for future
grant or award under our 1997 equity compensation plan as of March 31, 1999.
11
<PAGE> 16
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $24,204,891, or
$1.88 per share of common stock, and assumes the conversion of all of our
preferred stock into common stock, including preferred stock issuable upon the
net exercise of all outstanding preferred stock warrants, and the net exercise
of all outstanding common stock warrants into common stock. Pro forma net
tangible book value per share is determined by dividing our net tangible book
value, total tangible assets less total liabilities, by the total number of
shares of common stock outstanding after giving effect to the transactions
described in the previous sentence. After giving effect to the sale of 3,850,000
shares of common stock offered by us at an assumed initial public offering price
of $13.00 per share, the mid-point of the range shown on the cover page of this
prospectus, and after deducting estimated underwriting discounts and offering
expenses, our adjusted pro forma net tangible book value as of March 31, 1999
would have been $70,001,391, or $4.18 per share. This represents an immediate
increase in the pro forma net tangible book value of $2.30 per share to existing
shareholders and an immediate dilution of $8.82 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
---------------
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $ 1.88
Increase to present shareholders attributable to new
investors.............................................. $ 2.30
------
Adjusted pro forma net tangible book value per share after
this offering............................................. $ 4.18
------
Dilution per share to new investors......................... $ 8.82
======
</TABLE>
The following table summarizes, as of March 31, 1999, the difference between the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid by the existing shareholders and by
the new investors, at an assumed initial public offering price of $13.00 per
share, the mid-point of the range presented on the cover page of this
prospectus, before deduction of estimated underwriting discounts and offering
expenses:
<TABLE>
<CAPTION>
----------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders..................... 12,907,186 77% $ 51,379,915 51% $ 3.98
New investors............................. 3,850,000 23 50,050,000 49 $13.00
----------- ---- ------------ ----
Total........................... 16,757,186 100% $101,429,915 100%
=========== ==== ============ ====
</TABLE>
The tables above assume no exercise of stock options outstanding as of March 31,
1999. If any of these options are exercised, there will be further dilution to
new investors.
12
<PAGE> 17
SELECTED FINANCIAL INFORMATION
The tables that follow present portions of our consolidated financial statements
and are not complete. You should read the following selected consolidated
financial data in conjunction with our consolidated financial statements and
related notes to those statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in this prospectus.
The statements of operations data presented below for the years ended December
31, 1996, 1997 and 1998 and the balance sheet data at December 31, 1997 and
1998, are derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, that are included in this
prospectus. The statements of operations data for the year ended December 31,
1994 and 1995 and the balance sheet data as of December 31, 1994, 1995 and 1996
are derived from audited consolidated financial statements that are not included
in this prospectus. The statements of operations data presented below for the
three months ended March 31, 1998 and 1999 and the balance sheet data as of
March 31, 1999 are derived from unaudited consolidated financial statements that
are included in this prospectus. The unaudited consolidated financial statements
include all adjustments, consisting of normal recurring accruals, which we
consider necessary for a fair presentation. The pro forma as adjusted
consolidated balance sheet data presented below assumes the conversion of all of
our preferred stock into common stock, including preferred stock issuable upon
the net exercise of all outstanding preferred stock warrants, and the net
exercise of all outstanding common stock warrants into common stock and gives
effect to the issuance of 3,850,000 shares of common stock upon the consummation
of this offering.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
In thousands, except per share data ------- ------- ------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Product................................................ $ 393 $ 699 $ 1,337 $ 2,128 $ 2,712 $ 319 $ 1,229
Service................................................ 492 578 208 318 329 98 --
------- ------- ------- ------- -------- ------- -------
885 1,277 1,545 2,446 3,041 417 1,229
Cost of revenues
Product................................................ 246 312 543 446 1,207 72 587
Service................................................ 475 347 108 316 241 32 --
------- ------- ------- ------- -------- ------- -------
721 659 651 762 1,448 104 587
------- ------- ------- ------- -------- ------- -------
Gross profit............................................. 164 618 894 1,684 1,593 313 642
Operating expenses
Sales and marketing.................................... 283 528 908 2,829 8,387 1,550 2,812
Research and development............................... 531 568 389 1,171 2,668 493 736
General and administrative............................. 549 1,476 921 2,598 3,864 887 828
Amortization of product development and patent costs... -- -- 71 858 -- -- --
------- ------- ------- ------- -------- ------- -------
Total operating expenses........................... 1,363 2,572 2,289 7,456 14,919 2,930 4,376
------- ------- ------- ------- -------- ------- -------
Interest and other income (expense), net................. 175 189 201 194 101 (37) 22
Income tax benefit....................................... 10 -- -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
Net loss........................................... $(1,014) $(1,765) $(1,194) $(5,578) $(13,225) $(2,654) $(3,712)
======= ======= ======= ======= ======== ======= =======
Basic and diluted loss per common share.................. $ (.19) $ (.32) $ (0.21) $ (0.89) $ (2.84) $ (0.42) $ (0.90)
======= ======= ======= ======= ======== ======= =======
Pro forma basic and diluted loss per common share........ $ (1.65) $ (0.38)
======== =======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
AS OF
MARCH 31, 1999
AS OF DECEMBER 31, ---------------------
------------------------------------------ PRO FORMA
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED
------ ------ ------ ------ ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and securities
available-for-sale.................................... $3,592 $3,105 $5,107 $2,826 $1,064 $23,799 $69,596
Working capital......................................... 3,396 2,819 4,944 (71) (635) 22,650 68,447
Total assets............................................ 5,628 3,918 6,780 4,574 3,989 27,369 73,166
Long-term debt.......................................... -- -- -- 29 21 19 19
Redeemable common and preferred stock................... -- -- -- -- -- 3,810 --
Total shareholders' equity.............................. 5,103 3,407 6,160 582 793 20,395 70,002
</TABLE>
13
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As a leader in interactive photography and immersive imaging for the Internet,
our IPIX images allow viewers to Step Inside the Picture. Our patented
technology changes the way people create and view images, immersing them in a
360(degrees) by 360(degrees) spherical environment. IPIX images capture the
world as we see it, providing a complete field of view -- from ground to sky,
floor to ceiling, horizon to horizon. Viewers can easily navigate the image on a
personal computer screen by moving a cursor inside the image.
We were founded in 1986 at the Oak Ridge National Laboratory in Tennessee to
develop remote robotic systems for the United States Department of Defense, the
Department of Energy, NASA and others. Our efforts in this field led us to the
invention of technology which removes the distortion inherent in fisheye
photographic images and corrects the viewing perspective. We obtained a patent
for this technology in 1991 and continued to improve upon it through special
projects for third parties. In 1994, Motorola, Inc. provided equity capital
which permitted us to further refine our technology. In 1996, Motorola and
Discovery Communications, Inc. provided additional equity capital to enable us
to explore potential commercial application of our technology. James M.
Phillips, our chairman and chief executive officer, joined us in the spring of
1997 to commence commercialization of our technology. Over the next two years,
we obtained additional equity capital, which we used to build an experienced
management team to implement our business model. Since the latter part of 1998,
we have continued to seek new commercial applications for our products by
positioning ourselves to take advantage of the acceleration in the availability
of digital cameras and significant growth in the popularity of the Internet. We
have targeted the following domestic and international commercial markets: real
estate, travel and hospitality, electronic publishing, corporate and e-commerce
and education and entertainment. We have also entered into strategic
relationships with digital camera manufacturers Kodak, Nikon and Olympus and
received favorable outcomes in legal proceedings relating to our patents.
Product revenues are generated by the sale of IPIX keys, IPIX kits and studio
work and the license of archived IPIX images. These revenues are recognized upon
the shipment or delivery of products to our customers. Service revenues
historically were generated by research and development projects, although we
have de-emphasized this business and are currently not engaged in any of these
projects. We intend to focus our initial efforts on establishing an installed
base of IPIX kits as well as building brand recognition through our studio work.
We intend to leverage this installed base to sell IPIX keys and generate
recurring revenue. For the three months ended March 31, 1999, we sold 26,668
keys compared to 40,902 keys in all of 1998. We continue to examine and refine
our business model and commercial applications to reflect a constantly changing
business environment which includes improving digital cameras, growing use of
the Internet and new product offerings by our competitors.
We sell our IPIX keys at different prices based on the potential number of
viewers, useful life and utility of the IPIX image. For example, an IPIX image
that is likely to be viewed by a large audience, has a lengthy useful life and
contributes significantly to the overall experience, commands a higher price. In
addition, we can further refine our IPIX key pricing through several
modifications. IPIX keys can be modified so that the IPIX image may be displayed
only in a particular file format or resolution, may be incorporated into
multimedia presentations, has a limited creation and viewing lifetime and may be
posted to a specific web site or distributed via e-mail. For example, an IPIX
key that creates a high resolution IPIX image to be utilized on a widely-viewed
CD-ROM encyclopedia with an unlimited life will command a higher price than an
IPIX key that creates an IPIX image to be posted on a used-auto web site, where
the IPIX image's lifetime is limited and will be viewed only by a select and
small audience. We will continue to examine our pricing strategy for IPIX keys
to meet current and changing market conditions.
International sales accounted for 26% of our total revenues for fiscal year
1996, 25% of our total revenues for fiscal year 1997 and 21% of our total
revenues for fiscal year 1998. International sales accounted for 36% for the
quarter ended March 31, 1998 and 20% for the quarter ended March 31, 1999. We
anticipate that international sales may continue to account for a significant
portion of our revenue in the future. A substantial portion of our international
sales are denominated in U.S. dollars. As a result, changes in the values of
foreign currencies relative to the value of the U.S. dollar can render our
products comparatively
14
<PAGE> 19
more expensive. Although we have not been negatively impacted in the past by
foreign currency changes, these conditions could negatively impact our
international sales in future periods.
In the second half of 1998, we introduced digital camera kits, which resulted in
an increase in our relative cost of revenues. In addition, we made a significant
investment to expand our marketing, distribution and brand awareness in 1998.
Our distribution system includes a direct sales force, a telemarketing group and
an online order fulfillment system. Research and development expenses have also
increased as we continue to enhance our existing products and develop future
applications of our technology, such as our IPIX Webcam and steerable video
product offering, V360. We expect these investments and costs to continue as we
develop additional product offerings and explore new commercial applications.
RECENT DEVELOPMENTS
Total revenues in the second quarter of 1999 were $1,777,000 compared to
$788,000 in the second quarter of 1998, an increase of $989,000, or 125.5%.
Total revenues for the first half of 1999 were $3,005,000, compared to
$1,205,000 in the first half of 1998, an increase of $1,800,000, or 149.4%.
Growth in revenues was due primarily to an increase in IPIX keys and IPIX kits
sold to customers in the e-commerce and real estate markets. Our net loss in the
second quarter of 1999 was $5,227,000 compared to $2,620,000 in the second
quarter of 1998. Our net loss for the first six months of 1999 was $8,939,000
compared to $5,273,000 in the first half of 1998. The increase in our net loss
for the first six months of 1999 was primarily due to increased operating
expenses relating to the continued expansion of our business. We sold 33,605
IPIX keys in the second quarter of 1999, compared to 13,507 keys in the second
quarter of 1998, an increase of 20,098 keys, or 148.8%. We sold a total of
60,273 IPIX keys in the first half of 1999, compared to 16,828 IPIX keys in the
first half of 1998, an increase of 43,445 keys, or 258.2%.
We have entered into an agreement with REALTOR.com, the official web site of the
National Association of Realtors, which allows residential real estate brokers
to post IPIX virtual tours to this web site. We have also engaged Creative
Artists Agency to serve as our representative to the entertainment industry for
a term of two years. In connection with our engagement with Creative Artists
Agency, we have agreed to pay them a fee of $1.0 million, which we will pay by
issuing them shares of our common stock. Our agreement with Creative Artist
Agency provides that our stock will be issued at the initial public offering
price. At an assumed initial public offering price of $13 per share, we will
issue to Creative Artist Agency 76,923 shares of our common stock. We are also
negotiating with Insignia Financial Group, a commercial real estate firm located
in New York City, for a three-year agreement to provide it with IPIX keys and
kits. Insignia has expressed an interest in acquiring in this offering $500,000
of our common stock at the initial public offering price.
In April and May of 1999, we issued options to employees and directors to
purchase 795,130 shares of common stock at an exercise price of $7.70 per share.
We recorded deferred stock compensation totalling approximately $1,034,000
during these time periods which represents the difference between the deemed
fair market value of our common stock for accounting purposes and the exercise
price of the options at the date of grant. The deferred stock compensation will
be presented as a reduction of shareholders' equity and will be amortized over
the three year vesting period of the options.
15
<PAGE> 20
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.
<TABLE>
<CAPTION>
---------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Product........................................ 86.5% 87.0% 89.2% 76.5% 100.0%
Service........................................ 13.5 13.0 10.8 23.5 --
----- ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0
Cost of revenues
Product........................................ 35.1 18.2 39.7 17.2 47.8
Service........................................ 7.0 12.9 7.9 7.7 --
----- ------ ------ ------ ------
42.1 31.1 47.6 24.9 47.8
----- ------ ------ ------ ------
Operating expenses
Sales and marketing............................ 58.8 115.7 275.8 371.7 228.8
Research and development....................... 25.2 47.9 87.7 118.2 59.9
General and administrative..................... 59.6 106.2 127.1 212.7 67.4
Amortization of product development and patent
costs....................................... 4.6 35.1 -- -- --
----- ------ ------ ------ ------
Total operating expenses.................... 148.2 304.9 490.6 702.6 356.1
----- ------ ------ ------ ------
Interest and other income (expense), net......... 13.0 7.9 3.3 (8.9) 1.8
----- ------ ------ ------ ------
Net loss.................................... (77.3)% (228.1)% (434.9)% (636.4)% (302.1)%
===== ====== ====== ====== ======
</TABLE>
Quarter Ended March 31, 1999 Compared to the Quarter Ended March 31, 1998
Revenues. Total revenues increased to $1,229,000 in the first quarter of 1999,
compared to $417,000 in the first quarter of 1998, an increase of $812,000, or
194.7%. Product revenues increased to $1,229,000 from $319,000, an increase of
$910,000. This increase was due primarily to an increase in sales of IPIX keys
and IPIX kits to customers in the corporate and e-commerce and real estate
markets and, to a lesser extent, an increase in international sales. We sold
26,668 IPIX keys in the first quarter of 1999, compared to 3,321 keys in the
first quarter of 1998, an increase of 23,347 keys. We did not have service
revenues in the first quarter of 1999, compared to $98,000 in the first quarter
of 1998. We have de-emphasized our services business and are not currently
performing any research and development projects for others.
Cost of Revenues. Cost of product revenues consists primarily of the costs of
the studio and the digital camera and related hardware included in our IPIX
kits. Cost of product revenues increased to $587,000 in the first quarter of
1999, compared to $72,000 in the first quarter of 1998, an increase of $515,000.
Cost of product revenues as a percentage of product revenues increased from
22.6% in the first quarter of 1998 to 47.8% in the first quarter of 1999. This
increase was due primarily to the costs of the digital camera and related
hardware included in our kits which were not available in the first half of
1998. Cost of service revenues consists primarily of labor costs associated with
research and development work. In the first quarter of 1998, cost of service
revenues was $32,000, or 32.7% of service revenues. We did not incur any cost of
service revenues in the first quarter of 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions paid to our direct sales, marketing and telemarketing groups,
expenses relating to advertising and public relations and studio expenses
incurred for production of demonstration products. Sales and marketing expenses
increased to $2,812,000 in the first quarter of 1999, compared to $1,550,000 in
the first quarter of 1998, an increase of $1,262,000, or 81.4%. This increase
was due primarily to a significant increase in our sales force.
Research and Development. Research and development expenses consist primarily
of compensation and other expenses related to the ongoing support of existing
product lines and development costs associated with future product
introductions. Research and development expenses increased to $736,000 in the
first quarter of 1999, compared to $493,000 in the first quarter of 1998, an
increase of $243,000, or 49.3%.
16
<PAGE> 21
This increase was due primarily to increased staffing and associated costs in
our research and development department.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs of the executive, finance and
human resource departments and outside professional services fees. General and
administrative expenses decreased to $828,000 in the first quarter of 1999,
compared to $887,000 in the first quarter of 1998, a decrease of $59,000, or
6.7%. This decrease was due primarily to a decrease in legal fees associated
with litigation relating to our patents, which was offset by an increase in
additional salary and related costs.
Interest and Other Income (Expense). Interest and other income (expense)
consists primarily of interest earned on our investments of cash, net of
interest paid on borrowed funds. Net interest and other income increased to
$22,000 in the first quarter of 1999, compared to $(37,000) in the first quarter
of 1998, a change of $59,000. This change was due primarily to increased
earnings on our cash investments and a reduction in the amount of our
indebtedness.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues. Total revenues increased to $3,041,000 in 1998, compared to
$2,446,000 in 1997, an increase of $595,000, or 24.3%. Product revenues
increased to $2,712,000 in 1998, compared to $2,128,000 in 1997, an increase of
$584,000, or 27.4%. The increase in total revenues and product revenues was due
primarily to an increase in the sale of IPIX keys, IPIX kits and studio work to
an expanded base of corporate and e-commerce customers. Service revenues
remained essentially unchanged, increasing to $329,000 in 1998, from $318,000 in
1997.
Cost of Revenues. Cost of product revenues increased to $1,207,000 in 1998,
compared to $446,000 in 1997, an increase of $761,000, or 170.6%. This increase
was due primarily to costs associated with the digital camera and related
hardware included in our kits, which were not introduced until the second half
of 1998, and an increase in sales. Cost of product revenues for 1998 also
included a write-down of obsolete product inventory in the amount of $220,000.
Cost of service revenues decreased to $241,000 in 1998 compared to $316,000 in
1997. This decrease was due primarily to a 1997 contract for which project costs
exceeded associated revenue.
Sales and Marketing. Sales and marketing expenses increased to $8,387,000 in
1998, compared to $2,829,000 in 1997, an increase of $5,558,000, or 196.5%. This
growth principally reflected an increase in salary and related expenses directly
attributable to the establishment of a direct sales force and an increase in
advertising and public relations expense.
Research and Development. Research and development expenses increased to
$2,668,000 in 1998, compared to $1,171,000 in 1997, an increase of $1,497,000,
or 127.8%. This increase was due primarily to increased staffing and associated
costs relating to the introduction of JAVA based applications in support of the
continued development of new product offerings, including V360 and IPIX Webcam
products.
General and Administrative Expenses. General and administrative expenses
increased to $3,864,000 in 1998, compared to $2,598,000 in 1997, an increase of
$1,266,000, or 48.7%. This increase was due primarily to legal fees associated
with litigation relating to protecting our patents and an increase in salaries
and other expenses as a result of an increase in employees.
Amortization of Product Development and Patent Costs. During 1997, we revised
the estimated economic lives of capitalized product development costs from five
years to one year and patent costs from seven years to three years. This change
resulted in additional amortization expense of $650,000 in 1997. In 1998,
product development and patent costs were insignificant, and therefore, we did
not capitalize those costs.
Interest and Other Income (Expense). Net interest and other income (expense) in
1998 was $101,000, compared to $194,000 in 1997, a decrease of $93,000 or 47.9%.
This decrease was primarily due to increased interest incurred on indebtedness
issued in the fourth quarter of 1997, which more than offset an increase in
interest income.
17
<PAGE> 22
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenues. Total revenues increased to $2,446,000 in 1997, compared to
$1,545,000 in 1996, an increase of $901,000, or 58.3%. Product revenues
increased to $2,128,000 in 1997, compared to $1,337,000 in 1996, an increase of
$791,000, or 59.2%. This increase resulted primarily from increased sales of
IPIX kits, IPIX keys and studio work in the real estate and international
markets. Service revenues increased to $318,000 in 1997, compared to $208,000 in
1996, an increase of $110,000, or 52.9%. This increase was primarily due to an
increase in research and development services provided to the Department of
Defense.
Cost of Revenues. Cost of product revenues decreased to $446,000 in 1997,
compared to $543,000 in 1996, a decrease of $97,000, or 17.9%. This decrease was
due primarily to a shift in product mix to higher margin IPIX keys and license
revenue. Cost of service revenues increased to $316,000 in 1997, compared to
$109,000 in 1996, an increase of $207,000, or 189.9%. This increase was due
primarily to a 1997 contract for which project costs exceeded associated revenue
and an increase in research and development services provided to the Department
of Defense.
Sales and Marketing. Sales and marketing expenses increased to $2,829,000 in
1997, compared to $908,000 in 1996, an increase of $1,921,000. The increase was
due primarily to increased advertising expenses and salaries and related
expenses resulting from an increase in personnel in the sales and studio
departments.
Research and Development. Research and development expenses increased to
$1,171,000 in 1997, compared to $389,000 in 1996, an increase of $782,000. This
increase was due primarily to salaries and related expenses resulting from an
increase in personnel conducting research and development projects.
General and Administrative Expenses. General and administrative expenses
increased to $2,598,000 in 1997, compared to $921,000 in 1996, an increase of
$1,677,000, or 182.1%. The increase was due primarily to legal fees related to
litigation concerning our patents, an increase in personnel and associated
relocation expense and an increase in our bad debt provisions.
Amortization of Product Development and Patent Costs. The amortization of
product development and patent costs increased to $858,000 in 1997, compared to
$71,000 in 1996, an increase of $787,000. This increase was due primarily to the
change in 1997 of the estimated economic lives of capitalized product
development costs from five years to one year and patent costs from seven years
to three years.
Interest and Other Income (Expense). Net interest and other income (expense)
decreased to $194,000 in 1997, compared to $201,000 in 1996, a decrease of
$7,000, or 3.5%.
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<PAGE> 23
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables represent unaudited quarterly consolidated statements of
operations data for each of the nine quarters in the period ended March 31,
1999, as well as this data expressed as a percentage of revenues. In the opinion
of management, this information has been prepared substantially on the same
basis as the consolidated financial statements appearing in other sections of
this prospectus, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited quarterly results. The quarterly information should be read
in conjunction with our consolidated financial statements and the related notes
appearing in the prospectus. The quarterly information has not been reviewed by
our auditors. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
1997 1998 1999
------------------------------------- ------------------------------------- -------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands
Revenues..................... $ 418 $ 772 $ 528 $ 728 $ 417 $ 788 $ 783 $1,053 $ 1,229
------ ------ ------- ------ ------ ------ ------ ------ -------
Gross profit................. 303 585 293 503 313 643 399 238 642
Operating expenses
Sales and marketing........ 344 540 859 1,086 1,550 1,837 2,238 2,762 2,812
Research and development... 92 98 530 450 493 655 780 740 736
General and
administrative........... 624 580 506 889 887 845 558 1,574 828
Amortization of product
development and patent
costs.................... 286 286 286 -- -- -- -- -- --
------ ------ ------- ------ ------- ------- ------- ------- -------
Total operating
expenses............... 1,346 1,504 2,181 2,425 2,930 3,337 3,576 5,076 4,376
------ ------ ------- ------ ------- ------- ------- ------- -------
Interest and other income
(expense), net............. 43 65 24 63 (37) 75 56 7 22
------- ------ ------- ------ ------- ------- ------- ------- -------
Net loss................. $(1,000) $ (854) $(1,864) $(1,859) $(2,654) $(2,619) $(3,121) $(4,831) $(3,712)
====== ====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
1997 1998 1999
------------------------------------- ------------------------------------- -------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of revenues
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 72.5 75.8 55.5 69.1 75.1 81.6 51.0 22.6 52.2
Operating expenses
Sales and marketing........ 82.3 70.0 162.7 149.2 371.7 233.1 285.8 262.3 228.8
Research and development... 22.0 12.7 100.4 61.8 118.2 83.1 99.6 70.3 59.9
General and
administrative........... 149.3 75.1 95.8 122.1 212.7 107.2 71.3 149.5 67.4
Amortization of product
development and patent
costs.................... 68.4 37.0 54.2 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 322.0 194.8 413.1 333.1 702.6 423.4 456.7 482.1 356.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest and other income
(expense), net............. 10.3 8.4 4.5 8.6 (8.9) 9.5 7.2 0.7 1.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss................. (239.2)% (110.6)% (353.1)% (255.4)% (636.4)% (332.3)% (398.5)% (458.8)% (302.1)%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
In the second half of 1998, we introduced digital camera kits, which resulted in
an increase in our relative cost of revenues. As a result of the cost of the
digital camera and related hardware included in our IPIX kits, our gross margins
decreased. In the fourth quarter of 1998, we wrote off $220,000 of obsolete
product inventory, which also impacted gross margins.
19
<PAGE> 24
Our operating results have varied on a quarterly basis during our operating
history and may fluctuate in the future. Many of the factors that influence our
operating results are outside of our control. Additionally, as a result of our
limited operating history and the emerging nature of the immersive imaging
market in which we compete, it is difficult for us to forecast our revenues or
earnings accurately. Our expense levels are largely based on investment plans
and future revenue expectations. Our operating expenses have increased over the
reported periods due to our investment in enhancing our sales and marketing and
distribution capabilities and research and development activities to position us
for future growth. Our general and administrative expenses have also increased
for the same periods as we built our current management team. We expect these
expenses to increase as we expand both our current and future business. These
expenses are fixed, particularly in the short term, and we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Any significant shortfall in relation to our expectations could cause
significant declines in our quarterly operating results. Thus, our quarterly
revenues and operating results are difficult to forecast. We believe that our
quarterly operating results could vary significantly in the future, and that
quarter-to-quarter comparisons should not be relied upon as indications of
future performance. It is therefore likely that in some future periods our
operating results may fall below the expectations of securities analysts and
investors. In that event, the trading price of our common stock would likely
decline.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the private
placements of capital stock and a convertible debenture. In the first quarter of
1999, we raised $27,000,000 through the sale of our Series D preferred stock. At
March 31, 1999, we had $7,150,000 of cash and cash equivalents and $16,649,000
in securities available-for-sale.
Net cash used in operating activities was $1,189,000 in the year ended December
31, 1996, $4,825,000 in the year ended December 31, 1997 and $12,444,000 in the
year ended December 31, 1998. Net cash used in operating activities was
$2,191,000 for the three months ended March 31, 1998 and $4,135,000 for the
three months ended March 31, 1999. Net cash used for operating activities in
each of these periods is primarily a result of net losses.
Net cash provided by, or used in, investment activities was $1,159,000 in the
year ended December 31, 1996, $(952,000) in the year ended December 31, 1997 and
$253,000 in the year ended December 31, 1998. Net cash provided by, or used, in
investment activities was $914,000 for the three months ended March 31, 1998 and
$(16,846,000) for the three months ended March 31, 1999. Net cash provided by,
or used in, investing activities was related to the acquisition of computer
software and hardware and other equipment, the purchase of short-term
investments and the maturity of acquired investment securities.
Net cash provided by, or used in, financing activities was $3,976,000 in the
year ended December 31, 1996, $2,997,000 in the year ended December 31, 1997 and
$11,428,000 in the year ended December 31, 1998. Net cash provided by, or used
in, financing activities was $(2,000) for the three months ended March 31, 1998
and $27,068,000 for the quarter ended March 31, 1999. The net cash provided by,
or used in, financing activities for these periods was due primarily to the sale
of shares of our common and preferred stock. Net cash also was provided by the
issuance of a $3,000,000 8% convertible debenture in 1997, $1,000,000 of which
was repaid and $2,000,000 of which was converted to preferred stock.
The Conduct Rules of the National Association of Securities Dealers, Inc. will
require us to repurchase an aggregate of 444,496 shares of our common stock as
soon as practicable following the consummation of this offering for an aggregate
repurchase price of $3,423,000. The number of shares to be repurchased is
calculated based on an assumed initial public offering price of $14.00, the high
end of the range shown on the cover page of this prospectus and assumes no
exercise of the over-allotment option by the underwriters. This repurchase
commitment will be funded by our existing cash and has been placed in a
segregated account designated for this purpose.
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<PAGE> 25
Although we have no material commitments for capital expenditures except the
stock purchase transaction described above, we anticipate an increase in the
rate of capital expenditures and other expenses consistent with our anticipated
growth in personnel, operations and marketing activities. We anticipate
utilizing a portion of the net proceeds of this offering to expand our sales and
marketing activities and enhance our research and development through the next
twelve months. We also may use cash to acquire or license technology, products
or business related to our current business. We anticipate that our operating
expenses will continue to grow as we make investments in our sales and marketing
and distribution capabilities. We believe that these enhanced capabilities will
enhance revenue growth. Our operating expenses will be a material use of our
cash resources. We do not expect to generate positive cash flows for at least
two years.
We believe that the net proceeds from this offering, together with existing cash
and cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
After these twelve months, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise
additional funds through public or private equity financing, bank debt financing
or from other sources. There can be no assurance that this capital will be
available in amounts or on terms acceptable to us, if at all.
YEAR 2000 READINESS, COSTS OF COMPLIANCE AND EFFECT ON OPERATIONS
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The year 2000 problem is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two digit year value of 00. The issue is whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize year 2000 information could
generate erroneous data or fail.
State of Readiness
We have completed our year 2000 compliance assessment plan. Our compliance
assessment plan included testing all of our information and non-information
technology as well as our internally developed studio and operation systems.
Based on our testing and assessment, we believe that our information and non-
information technology, as well as internally developed systems, are year 2000
compliant.
In addition, we are in the process of seeking verification from our key
suppliers and distributors that they are year 2000 compliant or, if they are not
presently compliant, to provide a description of their remedial plans. We have
obtained information from various other third-party providers regarding the year
2000 readiness of their systems and we are continuing to review this
information.
Costs
Our cost of upgrading our systems to become year 2000 compliant was
approximately $40,000.
Risks
If we fail to solve a year 2000 compliance problem with one of our systems, the
result could be a failure or interruption of normal business operations.
Although we believe that the potential for significant interruptions to normal
operations should be minimal due to the relative newness of our systems, our
business is exposed to risks associated with the year 2000 problem.
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<PAGE> 26
Our primary risks of year 2000 failures are those related to external service
providers including telecommunications, electrical power and Internet commerce
systems that we rely upon daily. The most reasonably likely worst-case scenario
is a failure related to one or several of our external service providers
referenced above. A failure could cause any of the following:
- protracted interruption of electrical power to our operations and
Internet host servers which could materially and adversely impact our
ability to enable online transactions and other services;
- significant or widespread failure of software products and services
provided to us by third parties; or
- significant or widespread failure of third party computer systems with
which our systems interface.
Contingency Plans
We have not established a contingency plan to mitigate the risks associated with
any inaccuracies to our year 2000 assessment. Although we have found no material
year 2000 problems with our internal systems, and despite our expectation that
year 2000 compliance efforts will result in year 2000 compliant services, there
can be no assurance that our compliance efforts will be successful. Further,
there is no assurance that the various telecommunications and power delivery
systems we rely upon will be year 2000 compliant or that any contingency plans
they have made will be successful. A failure of any of these systems would have
a material adverse effect on our business, results of operations and financial
condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction. We do not expect that the adoption of SFAS No. 133 will have
a material impact on our reported results of operations, financial position or
cash flows.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, AICPA, issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. SOP 98-1 is effective for our fiscal
year ending December 31, 1999. We do not expect its adoption to have a material
impact on our reported results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities", which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. We do not expect its adoption to
have a material impact on our reported results of operations, financial position
or cash flows.
22
<PAGE> 27
In December 1998, the AICPA issued Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions".
SOP 98-9 amends elements of SOP 97-2, and provides additional authoritative
guidance on software revenue recognition. SOP 97-2 is effective for fiscal years
beginning after March 15, 1999. We do not expect its adoption to have a material
impact on our reported results of operations, financial position or cash flows.
INFLATION
Inflation has not had a significant impact on our operations to date.
23
<PAGE> 28
BUSINESS
OVERVIEW
As a leader in interactive photography and immersive imaging for the Internet,
our IPIX images allow viewers to Step Inside the Picture. Our patented
technology changes the way people create and view images, immersing them in a
360(degree) by 360(degree) spherical environment. We believe IPIX images enhance
the key elements of a photograph: memory, information and entertainment. IPIX
images capture the world as we see it, providing a complete field of
view -- from ground to sky, floor to ceiling, horizon to horizon. Viewers can
easily navigate the image on a personal computer screen by moving a cursor
inside the image. To accelerate the adoption and enhancement of IPIX images, we
have established strategic relationships with leading camera manufacturers such
as Kodak, Nikon and Olympus as well as technology companies such as IBM, Intel
and RealNetworks. We estimate that over 4,000 commercial web sites are utilizing
IPIX images.
Our patented technology creates IPIX images by combining two film or digital
photographs taken with a fisheye lens into one 360(degree) by 360(degree)
spherical image. Our software corrects the distortion inherent in these
photographs. A person may view the resulting image in any direction, and, if
desired, save the image utilizing an IPIX key for posting to a web site,
transmitting by e-mail or saving to a disk. IPIX images can be downloaded
rapidly and can be viewed and navigated with the IPIX plug-in or a viewer using
JAVA. We are utilizing our patented technology to develop other immersive
imaging products, such as steerable video and an IPIX-compatible digital camera
for the consumer market.
Leading companies use our technology to create virtual tours and multimedia
content to attract and retain visitors on their web sites, which enhances their
marketing and e-commerce initiatives. We have targeted the following domestic
and international commercial markets: real estate, travel and hospitality,
electronic publishing, corporate and e-commerce and education and entertainment.
Our customers include Coldwell Banker, Rent.Net, Carnival Cruise Lines,
Swissotel, CNN, Microsoft, Intel, Ticketmaster and Disney. In addition, we have
entered into strategic relationships with leading customers in our commercial
markets such as Homes.com and Microsoft CarPoint to promote the use of IPIX
images to members of our targeted commercial markets. IPIX images can be posted
to all of the leading residential real estate web sites, including REALTOR.com,
the official web site of the National Association of Realtors.
INDUSTRY BACKGROUND
Growth of the Internet and e-commerce
The Internet has emerged as a global interactive medium enabling millions of
people worldwide to share information, communicate and conduct business
electronically. The Internet differs from traditional media by its lack of
geographic limitations and its ability to provide instantaneous data
communication. International Data Corporation, or IDC, estimates that the number
of web users will grow from approximately 69 million worldwide in 1997 to
approximately 320 million worldwide by the end of 2002. Growing usage of the
Internet has been driven primarily by the rapid proliferation of personal
computers, easier, faster and affordable access to the Internet, increasingly
robust network architectures and the emergence of compelling content and
applications.
24
<PAGE> 29
The emergence of the Internet and secure transaction networks has generated
significant opportunities for businesses to conduct electronic commerce. IDC
estimates e-commerce revenues will grow from approximately $12.4 billion
worldwide in 1997 to $237 billion worldwide by 2001. According to Forrester
Research, on-line leisure travel reservations will grow from 1.3 million trips
in 1997 to 65.5 million trips by 2003. Regarding real estate, Yankee Group
reports that the percentage of homebuyers using the Internet to shop for a home
will increase from 4% in 1997, to over 30% in the year 2000. Additionally,
Forrester Research estimates that on-line classified advertising will grow from
$185 million in 1998 to $2.9 billion in 2003. This widespread deployment and
acceptance of the Internet has introduced rapid changes in the way information
is produced, distributed and consumed.
Demand for effective on-line content
The popularity of the Internet has resulted in substantial growth in the number
and types of web sites. According to IDC, the number of web sites is estimated
to grow from 829.4 million in 1998 to 2.7 billion in 2000. New technologies are
allowing web site operators and advertisers to measure a site's traffic, average
time spent on a site and visit-to-purchase ratios. Advertisers are utilizing
this data to measure the effectiveness of Internet advertisements and to set
advertising rates.
This data is causing businesses to demand content and features that will allow
them to attract visitors, increase the amount of time spent on their web sites
and promote e-commerce. According to a Forrester Research survey of online
consumers, 75% of those surveyed stated that content was the most important
factor in attracting and retaining visitors to web sites.
Emergence of broadband capability
The transmission of data intensive content over the Internet has been limited
due to historical bandwidth constraints. Increasing availability of improved
delivery systems, such as digital cable modems, satellite delivery systems and
digital subscriber line networks are enabling the use of more feature-rich
multimedia content. Forrester Research predicts that approximately 16 million
U.S. households will have broadband connection by the end of 2002, representing
approximately 25% of the homes connected to the Internet.
Growth in the use of digital imaging
Fundamental changes are occurring in the photography industry with the
introduction of the digital camera. The digital camera allows the user to take
pictures and display them digitally, either on a personal computer or over the
Internet, without the need for traditional film development. Because digital
cameras were initially expensive, early adopters of this technology were
professionals and hobbyists. Recently, sales of digital cameras have grown
substantially due to improved performance and lower unit prices. IDC forecasts
that worldwide digital camera shipments will grow from 2.1 million units in 1997
to 15.5 million units in 2002.
Lack of interactivity and realism with existing digital imaging technology
Companies are increasingly using digital imaging to promote their products and
present information on their web sites. Digital imaging provides businesses with
a powerful, cost-effective medium to maximize the impact of their web sites.
25
<PAGE> 30
However, most of the images remain flat two-dimensional images offering a
limited field of view. Technological innovations that enhance realism and
interactivity and contribute to a viewer's retention to that web site will
facilitate the success of e-commerce by potentially leading to increased sales
and advertising rates. Webcams and streaming video are some of the technological
innovations businesses are using to attract and retain visitors to their web
sites.
Specifically, immersive imaging, or the ability to create the viewing
perspective of being inside the image, is becoming increasingly popular with
many web sites. However, image creation with many of the existing immersive
technologies is labor intensive and requires proprietary hardware. Conditions
such as inadequate lighting, subject motion or lack of portability reduce the
effectiveness of the image. As a result, market acceptance of these technologies
has been limited.
For widespread adoption of immersive imaging by businesses and consumers to
occur, new immersive technologies must offer the following benefits:
- ease of creating and viewing an image;
- ease of distributing and sharing the image;
- portability of the capture device;
- cost effectiveness;
- use of standardized technology; and
- platform independence.
THE IPIX SOLUTION
We believe that our 360(degree) by 360(degree) immersive imaging solution
enhances the key elements of a photograph: memory, information and
entertainment. An IPIX image provides more than just a picture. The key benefits
of our immersive imaging solution are as follows:
- IPIX images provide a more powerful viewing experience by creating a
360(degree) by 360(degree) immersive viewing environment;
- our technology is easy to use, portable and cost-effective; and
- our technology is compatible with commercially available digital cameras
and different computer platforms and has low bandwidth requirements.
IPIX images enhance the photo viewing experience by permitting a person to view
locations from ground to sky, floor to ceiling and horizon to horizon. A person
can navigate the image on a personal computer screen by moving the cursor within
the image. We believe IPIX images, alone or combined with other multimedia such
as audio, video and automation, can provide businesses with more compelling
content to attract and retain visitors to their web sites and promote
e-commerce.
26
<PAGE> 31
Our technology is easy to use, portable and cost-effective. Our software easily
and quickly combines two 185(degree) photographs taken with a standard digital
camera into one immersive image. After using an IPIX key, a user can post the
IPIX image to a web site, view it on a personal computer or e-mail it with the
click of a button. IPIX images can be viewed and navigated with the IPIX viewer
or with a viewer using JAVA. We price our IPIX keys to meet the cost
requirements and anticipated use of the IPIX image by the end user, making it a
cost effective alternative to other immersive imaging technologies.
Because our technology can be used with commercially available digital cameras,
IPIX images can be captured in almost any environment. Our technology is
compatible with most major operating systems and Internet browsers. The IPIX
image file size is small, 50 to 250 kilobytes, which results in quick delivery
and short download on low bandwidth systems. Our technology is also taking
advantage of the pending availability of broadband networks and higher
resolution digital cameras. We currently have in development our IPIX Webcam and
steerable video technology, V360.
OUR GROWTH STRATEGY
Our objective is to become a world leader in interactive photography and
immersive imaging for the Internet. We believe we can achieve this objective by
leveraging our leading position in immersive imaging technology. Our key
strategies to achieve this objective include:
Build awareness of the IPIX brand and experience
We have begun to create awareness of the IPIX brand name and experience through
a variety of activities. We are focusing our direct sales and advertising
initiatives on our targeted commercial markets. We have entered into
co-marketing relationships with camera manufacturers, such as Kodak, Nikon and
Olympus, and commercial market leaders such as American Express, CNN and General
Electric. We also participate in industry specific trade shows. We increase our
presence on the Internet, by targeting high-profile, high-traffic web sites to
use our technology. For example, we provided IPIX images of the space shuttle to
CNN that were used in its special broadcast of John Glenn's return to space. We
intend to use portions of the net proceeds of this offering to expand our sales
and marketing programs and increase our brand awareness.
Target commercial markets that can best capitalize on our technology
We believe that applications within targeted commercial markets provide the most
immediate revenue opportunities for IPIX images. These markets are characterized
by the need for high visual content in advertising, product information and
entertainment. We initially have targeted the following commercial markets: real
estate, travel and hospitality, electronic publishing, corporate and e-commerce
and education and entertainment. We actively seek customers that are leaders in
each of these markets. For example, we have entered into an agreement with
Cendant Corporation and are the preferred provider of immersive imaging to its
real estate subsidiaries, Coldwell Banker, Century 21 and ERA. We organize our
sales force and customize our product offering to each commercial market to
satisfy the needs of the particular market and customer. In addition, we believe
that opportunities exist for our technology in other commercial markets such as
security, child care, government agencies and architecture.
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Develop approaches to penetrate consumer markets
With the availability of IPIX images on retail products such as CD-ROM
encyclopedias and increased usage of IPIX images on web sites, we believe that
consumers are becoming familiar with immersive imaging and will begin to require
the same immersive imaging technology for their personal use.
By taking advantage of the increasing use and decreasing cost of digital
cameras, we currently are pursuing a number of different product approaches for
the consumer market. The first of these, a personal edition digital camera kit,
is targeted towards the early adopter, as well as the photo enthusiast. We also
seek to partner with leading camera manufacturers to develop a single use point
and shoot film camera kit that will create an immersive panoramic image and be
targeted to a broader use market. We believe the consumer will utilize the
services of a third party to process and deliver the IPIX images on a CD-ROM or
over the Internet.
Leverage our technology to enhance existing products and create new product
offerings
We continue research and development efforts to expand the features and
capabilities of our products and services and to develop new product offerings.
In particular, we are pursuing products compatible with the pending availability
of broadband networks and higher resolution digital cameras.
One product in beta test phase is the IPIX Webcam, which we call the eyes of the
Internet. This technology would permit the remote capture, creation and
transmission of hemispherical IPIX images over the Internet. The IPIX image is
continuously updated and can be viewed on a personal computer or other
Internet-enabled device. In addition to our current targeted commercial markets,
child care, security and entertainment industries are possible commercial market
applications.
Another new product development is our steerable video technology, V360. When
fully developed, V360 will enable multiple viewers to simultaneously and
independently select their own field of view by navigating within a spherical or
hemispherical video image transmitted from a stationary camera. Possible
applications for this technology include the sports broadcasting, tourism and
motion picture industries. V360 research is ongoing with working prototypes
developed in conjunction with Discovery, MediaOne and Motorola currently under
evaluation.
Expand strategic relationships
We have developed strategic relationships with camera manufacturers, technology
companies and content providers. We have established strategic relationships
with leading camera manufacturers such as Kodak, Nikon and Olympus as well as
technology companies such as IBM, Intel and RealNetworks. We believe these
relationships will enable us to achieve rapid adoption of our technology and
penetrate markets quickly. In addition, they will help us to facilitate the
development of compelling content and to expand the range of applications for
IPIX images. We also plan to continue to capitalize on relationships with
software and hardware vendors and distributors possessing complementary
technologies. We plan to expand these relationships and seek additional partners
with market and technology leaders.
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Expand internationally
We have increased our international presence through relationships with
strategic partners in select markets. Through these relationships, we sell to
our targeted commercial markets internationally. We have established an
operating subsidiary in the United Kingdom to target market opportunities in
Europe and have entered into distributorship arrangements with strategic
partners in Japan and Australia. Through our UK subsidiary, we have entered into
distribution arrangements with preferred partners in several European countries.
We intend to continue to seek new strategic relationships and organize
additional operating subsidiaries as we expand into new global markets.
PRODUCTS AND SERVICES
Our patented software technology creates IPIX images by combining two film or
digital photographs taken with a fisheye lens into one 360(degree) by
360(degree) spherical image. Our software corrects the distortion inherent in
these photographs. The resulting image can be viewed in any direction, up-down,
left-right, and horizon to horizon. The user may then view the IPIX image and,
if desired, save the image utilizing an IPIX key for posting to a web site,
transmitting by e-mail or saving to a disk. The following demonstrates the steps
to create an IPIX image.
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[SERIES OF FOUR PICTURES DESCRIBING STEPS TO CREATE AN IPIX IMAGE]
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We sell IPIX keys, kits and studio work, license archived IPIX images and
conduct special research and development projects.
Products
IPIX Keys. An IPIX key is an encryption tool that enables the user to save and
distribute an IPIX image and is our digital equivalent to standard film. One
IPIX key enables the saving and distribution of one IPIX image, just as one film
negative enables the creation of one film photograph. We provide an initial
bundle of IPIX keys in our IPIX kits. IPIX kit owners can purchase additional
keys from us through our web site or through our toll-free order system. We
price IPIX keys based on the potential number of viewers, useful life and
utility of the IPIX image. For example, IPIX images used in a CD-ROM
encyclopedia are viewed by a large audience, have a long life and contribute
significantly to the viewing experience and can command higher prices. In
addition, we offer enhancements to our IPIX keys. IPIX keys can be modified so
that the IPIX image may be displayed only in a particular file format or
resolution, may be incorporated into multimedia presentations, has limited
creation and viewing lifetime and may be posted to a specific web site or
distributed by e-mail.
IPIX Kits. Our IPIX kit contains all the necessary items to create an IPIX
image, including a digital camera, fisheye lens, rotator, tripod, software and
an initial amount of IPIX keys. Kit sales are intended primarily to increase the
number of capture devices in the market and to stimulate repeat purchases of
IPIX keys and are not intended to be a significant source of our future profits.
We have established strategic relationships with leading digital camera
manufacturers such as Kodak, Nikon and Olympus to increase the number of IPIX
enabled digital cameras in the market. We sell our IPIX kits through our direct
sales force, from an on-line store maintained on our web site and through our
toll-free telephone order system. We are considering establishing a new web
site, eCamera.com, where we would sell a full line of IPIX enabled digital
cameras to also enhance IPIX key sales.
In-house Studio. We maintain an in-house studio capable of creating
high-quality, multimedia-rich IPIX images for our customers. Our in-house studio
serves to introduce our technology to customers and stimulate additional sales.
We provide our studio customers with a complete turnkey solution where we take
the photographs, create the IPIX images and transmit the images to the customer
or directly to their web site. Prices charged for studio work vary depending on
the number of desired images, type of photograph requested, such as film or
digital, and nature of added enhancements.
IPIX Stockhouse. We maintain a growing archive of over 3,300 select IPIX images
from around the world, such as the Grand Canyon, the Great Wall of China and the
Eiffel Tower, which we license to others for a fee. These images are submitted
by company and freelance photographers. Customers who license IPIX images from
our IPIX stockhouse include online publishers, CD-ROM producers, travel
companies, multimedia designers and other content creators. Licensing fees for
using our stock IPIX images are determined based on quality, content, usage and
time frame. We intend to expand this business by partnering with other image
stockhouses to provide additional distribution channels for our archived IPIX
images.
Services
Research and Development Projects. We conduct special research and development
projects acting as a subcontractor for the customer who owns the final product.
However, we maintain ownership of our technology incorporated into the project,
including any improvements and enhancements. For example, we are developing an
in-flight entertainment system for a customer which will permit each individual
passenger on an airplane to view live scenes outside the aircraft on their
in-seat video monitor. Our participation in this project has contributed to the
development of our technology.
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Multimedia Enhancements
We can add the following multimedia capabilities to an IPIX image with minimal
incremental file size:
Multimedia Software. Our multimedia software can link a series of IPIX images
together and include other multimedia content, such as video, audio and text.
The user can combine the finished product with other digital multimedia features
such as Macromedia Director to provide an attractive interactive product. For
example, in November 1998, PBS and Intel used our multimedia software to
incorporate and link IPIX images into its digital television broadcast of the
Ken Burns documentary on Frank Lloyd Wright.
IPIX-TV. Our multimedia software can create an IPIX image to include automated
viewing and background audio. By adding autoplay with either music or narration,
the user can provide a video-like viewing experience of a still image. For
example, Swissotel used an IPIX image of the exterior of a hotel, with automated
motion and accompanied by background street noise, to make the viewer feel as if
he were watching a video of the front of the hotel. Jupiter Communications, an
Internet marketing research firm, selected IPIX-TV as one of the top five
technologies to watch in 1999.
New Products
We continually make enhancements and improvements to our technology and take
advantage of innovations in image compression and cross platform software
development languages. We believe these efforts have enabled us to explore new
applications for our technology. Described below are several products currently
under development:
V360. Our patented technology has the potential to generate full-motion
steerable video. When fully developed, V360 will enable multiple viewers to
simultaneously and independently select their own field of view within a
spherical video image from a fixed camera source. For example, an IPIX-enabled
V360 video feed from a sporting event would allow viewers to choose their own
camera angle, just as if they were actually in the stadium. V360 was featured at
IDC's Demo '99 conference as one of the forty most innovative technologies of
1999. We are exploring additional potential commercial applications of V360 such
as the security, teleconference and surveillance industries.
We believe V360 will benefit from the deployment of high-speed digital networks.
Multiple V360 streams could be delivered to the home using a digital cable
network, satellite or broadband. We have developed working prototypes in
conjunction with industry leaders such as MediaOne and Motorola. Our goal is to
become the leader in the field of full-motion steerable video by aggressively
pursuing and developing commercial applications for V360.
IPIX Webcam. According to InfoTrends, the number of webcams in service will
grow from 1.2 million in 1998 to 12 million by 2002. Existing webcam technology
continuously captures and transmits two-dimensional digital images over the
Internet. We have developed a webcam which will permit the remote capture,
creation and transmission of 1808 navigable hemispherical IPIX images over the
Internet. The IPIX image is continuously updated and viewed on a personal
computer or other Internet-enabled device such as Web-TV. The IPIX Webcam will
enable an unlimited number of viewers to view the IPIX image and independently
control their viewpoint. We are currently engaged in a beta test with some of
our customers to further refine this technology. Potential commercial
applications include entertainment, child care and security industries.
IPIX On-Location. We are developing a blue screen application to our technology
in which an IPIX image can be used as a virtual set background. Blue screens are
used to create entire production studios from graphically rendered images. We
believe that our application of this technology, when fully developed, will
provide a cost-effective interactive solution for these virtual studios.
IPIX Touch Screen. We have incorporated the ability to view an IPIX image with
a touch screen monitor. Viewers may navigate within the IPIX image by touching
the screen in the direction in which they wish to
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view. This innovation provides an easy to use method of viewing an IPIX image.
Potential opportunities for our touch screen technology include kiosk
manufacturers and airport and tourist information exhibitors who wish to
incorporate IPIX images into their product offerings.
CUSTOMERS
We have directed our initial sales efforts to industry leaders within targeted
commercial markets. We believe that adoption of our technology by these leaders
will encourage other members of these markets to use IPIX images to stay
competitive. The following is a description of our targeted commercial markets
and our representative customers within these segments.
<TABLE>
<CAPTION>
TARGETED COMMERCIAL MARKET REPRESENTATIVE CUSTOMERS
- -------------------------- ---------------------------------------------
<S> <C>
Real estate.................................. Century 21, Coldwell Banker, ERA, Prudential,
Rent.Net, Rubloff, Winkworth (London)
Travel and hospitality....................... Carnival Cruise Lines, Disney Vacation Club,
Hilton Hotels, Holiday Inn, Hyatt Hotels,
Marriott, Starwood, Swissotel, Travelocity
Electronic publishing........................ Associated Press, CNN, Chicago Tribune,
CitySearch, Knight-Ridder, New York Times,
Reuters, The Washington Post, The Weather
Channel
Corporate and e-commerce..................... AutoVantage, Bell South, Cablevision, General
Motors, HGTV, Intel, Kodak, MCI Worldcom,
Microsoft CarPoint, Road Runner, Saab,
Ticketmaster, Toyota
Education and entertainment.................. ABC, Discovery Channel, Dreamworks SKG, Duke
University, E! Online, Fox, IBM Worldbook,
MGM, MTV, NBA, NBC, NFL, National Geographic,
PBS, Paramount Parks, The Walt Disney
Company, Warner Brothers
</TABLE>
Real Estate
Residential and commercial real estate brokers and agents use IPIX images on
their web sites to provide online virtual tours of featured properties. This
capability allows brokers to differentiate themselves and gain new listings. In
addition, IPIX images allow brokers to cost-effectively showcase properties to
the widest possible audience as well as allow prospective buyers to quickly
target properties that match their criteria while expending minimal time and
money. To enhance our exposure to real estate brokers, we have entered into an
agreement with Top Producer, Inc., a leading provider of software customized for
residential real estate brokers, to include our virtual tour software with its
products. Our customers can post their IPIX virtual tours to all of the leading
residential web sites, including REALTOR.com, the official web site of the
National Association of Realtors. We are the preferred provider of virtual tours
and immersive imaging to Cendant Corporation's family of real estate brokers
which include Coldwell Banker, ERA and Century 21. We have entered into an
exclusive arrangement with Rent.Net, an on-line apartment locator service, to
provide immersive images of rental apartments. We have strategic relationships
with several real estate portals, including Homes.com and Microsoft HomeAdvisor,
to further penetrate this market.
We offer a virtual tour package which includes four IPIX images of a home taken
by an approved photographer for a suggested retail price of $99.95. Our real
estate customers who own their own IPIX kits may create their own four-room
virtual tour for a retail price of $49.95.
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Travel and Hospitality
Hotel chains, vacation resorts, cruise lines, theme parks, major tourist
attractions and tourism bureaus use IPIX images to influence travel plans to
targeted destinations, transportation modes and lodging. IPIX images provide a
prospective visitor the opportunity to take virtual tours of rooms, amenities
and attractions before making final travel plans.
The majority of our travel and hospitality clients utilize our studio for a
complete turnkey solution. On average, prices for our studio work range from
$2,000 to $4,000 per property.
Electronic Publishing
Broadcasters and publishers incorporate IPIX images on their web sites to
enhance their reporting and coverage of major news events. Also, local city
guides and online classified advertisers are beginning to use IPIX images to
enhance the information on their web sites and enhance online advertising. These
companies typically own their own digital cameras and purchase IPIX keys on a
per-key basis. We are exploring the adoption of a subscription service where a
customer in this industry can purchase a specific or unlimited number of IPIX
keys for one monthly charge.
Corporate and E-Commerce
Companies utilize IPIX images to advertise their product and service offerings
or provide virtual tours of their corporate facilities. For example, when
Ticketmaster launched the My Ticketmaster web site, they used IPIX images of
stadium and concert venues to allow customers to view their seat location before
purchasing a ticket online. Our corporate and e-commerce customers either
purchase kits to create their own IPIX images or utilize our in-house studio to
create IPIX images for them.
Education and Entertainment
Leaders in the education and entertainment industries use IPIX images to enhance
the appeal and functionality of their products and web sites. In particular,
these customers provide significant exposure for our brand and products. For
example, IBM features IPIX images in their 1998 IBM Worldbook electronic
encyclopedia. Also, an IPIX virtual tour of the set of the movie, Episode I: The
Phantom Menace, posted on the starwars.com web site helped promote the film's
release. Our education and entertainment clients request studio work and
purchase kits and keys to create their own IPIX images. To increase our
penetration into this market, we have engaged Creative Artist Agency to serve as
our representative to promote and market our technology to the entertainment
industry for a term of two years.
INTERNATIONAL
Through our operating subsidiary in the United Kingdom and our strategic
relationships with distributors in Japan and Australia, we market our technology
to international customers. For example, in Europe, our preferred partners
distribute IPIX products to customers in several European countries. In
addition, 13% of our total revenues for 1998 were derived from sales of products
to Sumitomo Corporation, our Japanese distributor. We believe that our strategy
of targeting commercial markets can be applied on a global scale as usage of the
Internet grows internationally. We intend to continue to seek new strategic
relationships and organize additional operating subsidiaries as we expand into
new global markets.
STRATEGIC RELATIONSHIPS
We are establishing strategic relationships with leading companies to integrate
our technology with other hardware, software and Internet applications, to
continue the development of IPIX enabled digital cameras and to promote and
distribute our products and services to existing and emerging customer bases.
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Technology Relationships
We are working with leading technology companies to increase the multimedia
features of IPIX images and to increase the applications available for viewing
IPIX images. We have entered into an agreement with RealNetworks and have
licensed our viewer software for incorporation into its RealPlayer. Through this
agreement, we intend to integrate our technology into their streaming audio and
video platform, RealPlayer, enabling users to view IPIX images, along with other
multimedia content. We also have entered into an agreement with IBM to
incorporate our technology in IBM's HotMedia software. HotMedia is a JAVA based
software which allows web developers to incorporate multimedia content into
e-commerce applications. One development that may arise out of this relationship
is the ability to include IPIX images within Internet banner ads. We are an
Intel MMX and Pentium technology development partner, and Intel has featured
IPIX images in demonstrations of the capabilities of its multimedia
microprocessor technology.
Digital Camera Manufacturers
We have relationships with leading manufacturers of digital cameras such as
Kodak, Nikon and Olympus. These manufacturers have developed several models of
IPIX-compatible digital cameras. Recently, sales of digital cameras have grown
substantially. IDC forecasts that shipments of digital cameras will grow from
2.7 million units in 1997 to 29.5 million in 2002, although only a small number
of digital cameras currently in circulation are IPIX compatible. We intend to
continue to work with these manufacturers to enhance the IPIX related features
and increase the availability of these cameras. We intend to enhance these
relationships to include joint product development, manufacture of fisheye
lenses that are easily adaptable to the digital camera, co-marketing
arrangements and distribution of our products through the manufacturer's
distribution channels.
Promotion and Distribution Relationships
We have established relationships with companies that provide technology to our
targeted commercial markets to accelerate awareness and adoption of our
technology. These companies market IPIX images with their own technology
offerings to members of commercial markets. For example, we have entered into an
agreement with Microsoft HomeAdvisor, a leading real estate portal site, to
promote IPIX virtual tours on its web site. We have also established
relationships with companies to distribute our products internationally. We
distribute our products in Europe through our preferred partner program.
SALES AND MARKETING
Our marketing efforts focus on increasing brand awareness and supporting our
product offerings. Using this strategy, we intend to acquire new customers,
increase repeat purchases of IPIX keys and develop new sales opportunities. Our
marketing efforts include print and Internet advertising, direct mailings,
participation in trade shows, co-marketing with strategic partners and public
relations campaigns. We intend to utilize a portion of the net proceeds of this
offering to expand our sales and marketing organization and efforts. Our sales
and marketing team focuses on commercial markets and targets industry leaders.
In addition, we continue to explore other commercial markets for our technology,
such as government agencies, and we have sold IPIX products to TVA, the General
Services Administration and the Tennessee Department of Education. As of June
30, 1999, our direct sales group consisted of 32 employees who operate out of
our Oak Ridge office and our multiple national and international sales offices.
We also have established a telesales group that targets web developers and other
potential users of our technology outside of our targeted commercial markets.
Our telesales team also provides support for the direct sales teams and fields
inquiries from our web site and our toll-free customer service number. As of
June 30, 1999 we had nine employees on our telesales team which is based in our
Oak Ridge office.
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We maintain a customer relations department with seven employees as of June 30,
1999. Our customer relations personnel answer telephone and e-mail inquiries
regarding our products and respond to technical questions. Our service personnel
also perform quality assurance checks on each item of equipment included in our
kits before it is shipped and process customer service inquiries concerning
order status, shipping information, returns and exchanges.
RESEARCH AND PRODUCT DEVELOPMENT
We have made substantial investments in research and product development. We
continue to develop enhancements to our technology and pursue new product
offerings. In particular, we are pursuing products compatible with the pending
availability of broadband networks and higher resolution cameras. One product in
beta test phase is the IPIX Webcam, which we call the eyes of the Internet. This
technology will permit the remote capture, creation and transmission of 1808
navigable hemispherical IPIX images over the Internet. Another new product
development is our steerable video technology, V360. When fully developed, V360
will enable multiple viewers to independently select their own field of view by
navigating within a spherical video image transmitted by a stationary camera. As
of June 30, 1999, we employed 17 engineers dedicated to research and product
development.
COMPETITION
We compete with companies that offer immersive imaging products and companies
that offer traditional two-dimensional photography. We compete with these
companies on the basis of price, ease of use, picture resolution and end user
experience. Our primary competitors are Apple Computer, Inc., Bamboo.com, Be
Here Corporation, Black Diamond, Inc., Cyclovision, Inc., Infinite Pictures
Corporation and Live Picture Corporation in the immersive imaging market. We do
not believe any of these companies are dominant in this industry. We also
compete against photography development companies in the traditional two-
dimensional film market. Some of our competitors may have greater financial,
marketing, distribution and technical resources than us. We believe our ease of
use and patented technology are positive factors that enhance our competitive
position. Our success will be dependent on our ability to compete with these
competitors on both a quality and cost-effective basis, and there is no
assurance that we will be successful in that competition.
INTELLECTUAL PROPERTY
We rely on a combination of patent, trade secret and trademark laws and
contractual restrictions to establish and protect proprietary rights in our
products. Our patents are intended to protect and support current and future
development of our technology. In the United States, we have seven issued
patents and 13 patent applications pending. We have 16 international patent
applications pending. In addition, we license related patents and their
associated international filings from Motorola under the terms of a non-royalty
bearing license agreement. Motorola has a limited right to license our patents,
and Motorola's consent must be obtained before any grant of an exclusive license
to our patents in excess of one year.
We believe that the ownership of patents is presently a significant factor in
our business. However, our success depends primarily on the innovative skills,
technical competence and marketing abilities of our personnel. In addition,
there can be no assurance that our current and future patent applications will
be granted, or, if granted, that the claims covered by the patents will not be
reduced from those included in our applications. We have entered into
confidentiality and invention assignment agreements with our employees and
entered into non-disclosure agreements with our suppliers, distributors and
appropriate customers to limit access to and disclosure of our proprietary
information. We must also guard against the unauthorized use or misappropriation
of our technology by third parties. We have experienced wrongful use in the
past, and although we have taken steps to stop that use, we expect to experience
more attempts in the future. There can be no assurance that the statutory and
contractual arrangements will provide
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sufficient protection to prevent misappropriation of our technology or deter
independent third-party development of competing technologies.
We pursue the protection of our trademarks in the United States and, based upon
anticipated use, internationally. The laws of some foreign countries might not
protect our products or intellectual property rights to the same extent as the
laws of the United States. Effective patent, trade secret and trademark
protection may not be available in every country in which we market or license
our products.
Claims by third parties that our current or future products infringe upon their
intellectual property rights may have a material adverse effect on us.
Intellectual property litigation is complex and expensive, and the outcome of
this litigation is difficult to predict. We have been involved in litigation
relating to the protection of our intellectual property rights. Any future
litigation, regardless of outcome, may result in substantial expense to us and
significant diversion of our management and technical personnel. An adverse
determination in any 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.
LITIGATION
On October 28, 1998, Minds-Eye-View, Inc. and Mr. Ford Oxaal filed a lawsuit
against us in the United States District Court for the Northern District of New
York. Minds-Eye alleged in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
alleged that our technology wrongfully incorporated trade secrets and other
know-how gained from them in breach of various duties. We removed this action to
arbitration and cross-claimed alleging various affirmative claims, including
trade secret theft. Minds-Eye and Mr. Oxaal filed a motion to dismiss the suit,
and the court dismissed the lawsuit on May 19, 1999. Although the lawsuit was
dismissed, the arbitration will proceed in Knoxville, Tennessee in the fall of
1999 to decide our affirmative claims against Mr. Oxaal.
On May 20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant
in the same court alleging that our technology infringes upon a patent claim for
3608 spherical visual technology held by him. Mr. Oxaal claims that this alleged
infringement is deliberate and willful and is seeking treble damages against us
in an unspecified amount plus interest, an accounting by us, costs and
attorney's fees, in addition to a permanent injunction prohibiting the alleged
infringement of his patent by us. We will assert defenses to Mr. Oxaal's claims
as we believe we did not infringe any valid claims of his patent. We believe
that Mr. Oxaal's claims are without merit and we intend to vigorously defend
against his claims. If Mr. Oxaal were to prevail in this lawsuit, our business
and financial condition could be materially adversely affected.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition or results of operations.
EMPLOYEES
As of June 30, 1999, we employed 138 full-time employees. Our employees are not
covered by any collective bargaining agreements. We believe that our employee
relations are good. There is significant competition for employees with the
managerial, technical, marketing, sales and other skills required to operate our
business. Our success will depend upon our ability to attract, retain and
motivate employees.
FACILITIES
We lease approximately 31,250 square feet of space in Oak Ridge, Tennessee for
our corporate office and operations. The current lease expires October 8, 2002.
We also lease space in Japan, the United Kingdom, New York, Chicago, San Jose
and Fort Lauderdale for sales offices.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following contains information concerning our directors and executive
officers as of June 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James M. Phillips............ 47 Chairman of the Board of Directors and Chief Executive
Officer
Jeffrey D. Peters............ 47 President and Chief Operating Officer
John J. Kalec................ 48 Vice President and Chief Financial Officer
William J. Gubbins........... 48 Vice President, Strategy
Marsha A. Lehman............. 47 Vice President, Operations
Edmond B. Lewis.............. 29 Vice President, Marketing and Secretary
John M. Murphy............... 44 Vice President and General Manager, Sales
Michael J. Tourville......... 39 Vice President, Product Engineering
Joseph M. Viglione........... 55 Vice President, Administration
Steven D. Zimmermann......... 40 Vice President and Corporate Fellow
Randall Battat............... 39 Director
John S. Hendricks............ 47 Director
Doug Holmes.................. 38 Director
Laban P. Jackson, Jr......... 55 Director
</TABLE>
- ---------------
JAMES M. PHILLIPS has served as our chairman and chief executive officer since
March 1997 and has been a member of our board of directors since 1995. From June
1995 to March 1997, Mr. Phillips was corporate vice president of Motorola,
Inc.'s multimedia markets division, a division that manufactures, markets and
sells cable modems and other advanced telecommunications products and systems.
From June 1994 to June 1995, Mr. Phillips was vice president and general manager
for Motorola's personal communication systems division, a division that designs,
manufactures, markets and distributes PCS subscriber and infrastructure systems
and equipment and other intelligent devices. Mr. Phillips also serves on the
Fogelman School of Business board of advisors at the University of Memphis and
on the Chancellor's advisory council for enhancement for the University of
Tennessee, and as a director of Tennessee Technology, Inc. and the East
Tennessee Economic Council. Mr. Phillips holds a bachelor's degree and a
master's degree in business administration from the University of Memphis.
JEFFREY D. PETERS joined us in August 1998 and serves as our president and chief
operating officer. From February 1996 to August 1998, Mr. Peters was vice
president/general manager of Eastman Kodak Company's digital imaging group. From
September 1991 to February 1996, Mr. Peters was vice president and general
manager of the semiconductor sector of Harris Corporation. Mr. Peters holds a
bachelor's degree from the University of Michigan and a master's degree in
business administration from the Florida Institute of Technology.
JOHN J. KALEC joined us in August 1998 and serves as vice president and chief
financial officer. From August 1996 to August 1998, Mr. Kalec was chief
financial officer of Clayton Homes, Inc., a company specializing in manufactured
housing headquartered in Knoxville, Tennessee. From January 1996 to August 1996,
Mr. Kalec served as senior vice president of Philips Lighting Americas. From
July 1992 to December 1995, he served as managing director, finance and
accounting for Philips Components International B.V., located in Eindhoven, the
Netherlands. Mr. Kalec holds a bachelor's degree in business administration from
Lewis University and a master's degree in accountancy from DePaul University.
Mr. Kalec is a director of Clayton Homes, Inc.
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<PAGE> 43
WILLIAM J. GUBBINS joined us in July 1999 and serves as our vice president of
strategy. From April 1996 to July 1999, Mr. Gubbins was a development and
strategy consultant with William Gubbins Incorporated. From October 1994 to
April 1996, Mr. Gubbins was executive vice president, development for Channel
One/K-III Communications. From June 1984 to October 1994, Mr. Gubbins was
employed by Whittle Communications, serving as its executive vice president,
Whittle Media Lab, from 1992 to 1994. Mr. Gubbins holds a bachelor's degree from
Bowling Green State University.
MARSHA A. LEHMAN joined us in May 1999 as vice president of operations. From
February 1997 to February 1998, Ms. Lehman was vice president of the digital and
applied imaging division of Eastman Kodak Company. From May 1994 to February
1997, Ms. Lehman served as general manager, worldwide dental business and vice
president, health imaging division of Eastman Kodak. Ms. Lehman serves on the
board of directors of Susquehanna University. Ms. Lehman holds a bachelor's
degree in mathematics from Susquehanna University and a master's degree in
operations research from the University of Rochester.
EDMOND B. LEWIS joined us in April 1997 as vice president, marketing. Mr. Lewis
became secretary in June 1997. From August 1994 to April 1997, Mr. Lewis served
as senior manager of business development and marketing for Motorola, Inc. From
September 1993 to August 1994, he served as manager of corporate development of
Telular Corporation. Mr. Lewis holds a bachelor's degree and a master's degree
in business administration from The University of Iowa.
JOHN M. MURPHY joined us as vice president and general manager, sales in July
1997. From June 1995 to June 1997, Mr. Murphy was president of Coryphaeus
Software, Inc., a real time 3-D simulation graphics company. From March 1993 to
June 1995, he was vice president of sales and marketing at Orchid Technology,
Inc., a multimedia graphics company. Mr. Murphy holds a bachelor's degree from
the University of Oregon.
MICHAEL J. TOURVILLE joined us in September 1993 as a senior engineer and was
promoted to vice president, product engineering in December of 1997. Mr.
Tourville holds a bachelor's degree in electrical engineering from Auburn
University.
JOSEPH M. VIGLIONE joined us in May 1998 and serves as our vice president,
administration. From January 1992 to May 1998, Mr. Viglione was senior vice
president, human resources and total quality at Anchor Advanced Products, a
manufacturer of injection molded products headquartered in Knoxville, Tennessee.
Mr. Viglione holds a bachelor's degree and a master's degree in business
administration from Drexel University.
STEVEN D. ZIMMERMANN rejoined us in July 1997 and serves as our corporate fellow
and a vice president. From December 1996 to July 1997, Mr. Zimmermann served as
senior engineer of Motorola, Inc. Mr. Zimmermann was an independent consultant
from August 1993 to November 1996 and assisted technology companies in consumer
product development. From June 1988 to August 1993, he was an engineer and an
officer with us and co-developed the technology on which our software is based.
Mr. Zimmermann holds bachelor of science and master of science degrees in
electrical engineering from The University of Tennessee.
RANDALL BATTAT was elected a director in January 1999. Since July 1998, Mr.
Battat has served as senior vice president and general manager of Motorola's
Internet and networking group. From January 1997 to July 1998, he was corporate
vice president and general manager of the information systems group of Motorola.
From January 1994 to January 1997, Mr. Battat served as corporate vice president
and general manager of the wireless data group, part of Motorola, Inc.'s
messaging, information and media sector. From January 1993 to January 1994, he
was vice president of the Macintosh desktop and powerbook division of Apple
Computer, Inc. Mr. Battat holds a bachelor's degree in electrical engineering
from Stanford University. Mr. Battat serves as a director at the designation of
Motorola, Inc.
39
<PAGE> 44
JOHN S. HENDRICKS has been a director since January 1997. Since 1982, Mr.
Hendricks has been chairman and chief executive officer of Discovery
Communications, Inc., a television broadcasting company. He is also a member of
the boards of directors of Excalibur Technologies Corporation, the National
Museum of Natural History, Smithsonian Institution, the James Madison Council,
the Library of Congress, the National Cable Television Association and the
Academy of Television Arts and Sciences. Mr. Hendricks is also a member of the
'advisory board of the Lowell Observatory, chairman of the board of trustees of
the Walter Kaitz Foundation and co-chair for the CEO Forum on Education and
Technology. Mr. Hendricks holds a bachelor's degree and an honorary doctorate
from the University of Alabama. Mr. Hendricks serves as a director at the
designation of Discovery Communications, Inc.
DOUG HOLMES has been a director since April 1998. Since May 1998, Mr. Holmes has
served as executive vice president-strategy and business development for
MediaOne Group, Inc. From January 1997 to May 1998, he was executive vice
president-finance, strategy & business development for MediaOne. From January
1995 to January 1997, Mr. Holmes was vice president and chief financial officer
of US WEST Media Group. From January 1994 to January 1995, Mr. Holmes was
executive director-investor relations of US WEST. Mr. Holmes is also a director
of Time Warner Telecom, Inc. Mr. Holmes holds a bachelor's degree and a master's
degree in business administration from Brigham Young University. Mr. Holmes
serves as a director at the designation of MediaOne Interactive Services, Inc.
LABAN P. JACKSON, JR. has been a director since 1989. Since January 1989, Mr.
Jackson has served as chairman of Clear Creek Properties, a real estate
development company. Mr. Jackson is a director of BankOne Corporation, TBN
Holdings, Inc. and Gulf Stream Home and Garden, Inc. Mr. Jackson is a graduate
of the United States Military Academy.
GE Capital Equity Investments, Inc. has the right to designate a member to our
board of directors. It is expected that GE Capital Equity Investments, Inc. will
designate its member before the consummation of this offering.
BOARD OF DIRECTORS
Observers
Representatives of Advance Publications, Inc. and Liberty IP, Inc. serve as
observers to our board of directors. Observers are given notice of all board of
directors meetings and copies of materials provided in connection with each
meeting. Observers do not have voting rights. Currently, Steven Newhouse,
president of Advance Internet, Inc. a subsidiary of Advance Publications,
represents Advance Publications as an observer. Mr. Newhouse previously served
as a member of our board of directors and is a director of Third Age Media. In
addition, Lee Masters, president and chief executive officer of Liberty Digital,
a wholly owned subsidiary of Liberty Media Corporation, represents Liberty IP as
an observer. Liberty IP is a subsidiary of Liberty Digital, which primarily
invests in new media and music businesses which emphasize the development of
interactive content for broadband networks. Our observers participate in
discussions and matters brought before the board of directors and provide
business and Internet media experience.
Classification of Directors
The board of directors will be divided into three classes under our amended and
restated charter. Class I will consist of two directors who will stand for
election at the annual meeting of shareholders to be held in 1999. Class II will
consist of two directors who will stand for election at the annual meeting of
shareholders to be held in 2000. Class III will consist of two directors who
will stand for election at the annual meeting of shareholders to be held in
2001. After their initial term following this offering, directors in each class
will serve for a term of three years. The charter will provide that directors
can be removed only for cause by a majority of the shareholders or by a majority
of the other directors. Officers are chosen by and serve at the discretion of
the board of directors.
40
<PAGE> 45
Board Committees
The audit committee has the responsibility to review our audited consolidated
financial statements and accounting practices, and to consider and recommend the
employment of, and approve the fee arrangements with, independent accountants
for both audit functions and for advisory and other consulting services. The
audit committee is currently comprised of Messrs. Jackson, Battat and Holmes.
The compensation committee reviews and approves the compensation and benefits
for our key executive officers, administers our employee benefit plans and makes
recommendations to our board of directors regarding these matters. The
compensation committee is currently comprised of Messrs. Jackson, Hendricks and
Phillips.
Director Compensation
Directors do not receive any cash compensation for their service as members of
the board of directors; however, they are reimbursed for reasonable out-of
pocket expenses incurred in connection with their attendance at meetings of the
board of directors and committee meetings. In March 1998, we adopted our
non-employee stock option policy, or the policy. Under the policy, non-employee
directors, during their first year of service, receive options to purchase
17,005 shares of common stock and are eligible for additional options annually,
as determined by the compensation committee. Options are granted under our 1997
equity compensation plan and become fully vested in the event of a change of
control, unless the compensation committee determines otherwise. The exercise
price for options granted under the policy is the fair market value of our
common stock on the date of grant, with fair market value to be determined by
the compensation committee. All options granted under the policy expire 10 years
from the date of the option grant.
Technology Advisory Board
We have established a technology advisory board whose membership includes
leaders in basic fields of science and technology which are relevant to our
future products, as well as other persons experienced in business and
photography. The members of the technology advisory board are: John Battin, who
previously served on our board of directors and was senior vice president of
Motorola's multimedia division; Dr. Alvin Trivelpiece, director of the Oak Ridge
National Laboratory and president of Lockhead-Martin Energy Research; Dr.
Deborah Rieman, executive director of CheckPoint Software Technologies, Inc., a
leading provider of secure enterprise networking solutions; Senator Howard H.
Baker, Jr., the former majority leader of the Senate and a publisher of a
collection of photographs of the Big South Fork region of Tennessee; and Dr. H.
Lee Martin, one of our co-founders and the executive director of the Tennessee
Technology Development Corporation. The technology advisory board is expected to
meet with our management and key research and development personnel at least
semi-annually and will provide advice regarding future trends in business,
photography, technology and basic sciences. In consideration of this service, we
granted to each of Messrs. Battin and Baker and Drs. Trivelpiece and Rieman
stock options to purchase 11,903 shares of our common stock. These grants were
made under the policy. The option to purchase 5,101 of these shares vested on
the date of the grant, with an additional 3,401 shares vesting on the first and
second anniversary of the date of the grant. Dr. Martin receives a stipend of
$2,000 per month for his service on the technology advisory board.
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<PAGE> 46
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation received
for services rendered to us during 1998 by our chief executive officer and our
four other highest paid executive officers who are referred to as the named
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
----------------------------------------------
ANNUAL COMPENSATION
----------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)
- --------------------------- ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
James M. Phillips................................... 1998 $383,438 $ -- $214,989(3)
Chairman and Chief Executive Officer
Jeffrey D. Peters................................... 1998 112,692(1) -- 25,000(4)
President and Chief Operating Officer
John J. Kalec....................................... 1998 62,372(2) -- --
Vice President and Chief Financial Officer
John M. Murphy...................................... 1998 162,700 10,000 --
Vice President and General Manager, Sales
Steven D. Zimmermann................................ 1998 101,500 16,682 --
Vice President and Corporate Fellow
</TABLE>
- ---------------
(1) Annualized salary for 1998 was $300,000.
(2) Annualized salary for 1998 was $175,000.
(3) This amount represents a relocation expense of $190,794 and life insurance
premiums of $24,195 we paid on behalf of Mr. Phillips.
(4) This amount represents a relocation expense for Mr. Peters.
The following table presents information concerning stock options granted to
each of the named officers during 1998. We did not grant stock options to Mr.
Phillips or Mr. Zimmermann in 1998. We have never granted stock appreciation
rights.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
INDIVIDUAL GRANTS
---------------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. Peters........... 102,027 19.0% $5.94 (2) $1,261,750 $1,986,475
John J. Kalec............... 42,511 7.9 5.94 (3) 525,726 827,693
John M. Murphy.............. 17,005 3.2 5.94 03/03/08 259,074 472,362
</TABLE>
- ---------------
(1) Assumes increases in the fair market value of the common stock of 5% and 10%
per year from $13.00, the mid-point of the range shown on the cover of this
prospectus, over the terms of the options in compliance with the rules and
regulations of the Securities and Exchange Commission, and does not represent
our estimate or projection of the future value of the common stock. The actual
value realized may be greater or less than the potential realizable values
presented in the table.
(2) Mr. Peters' stock options vest in equal amounts over a three year period and
expire in equal amounts on August 17, 2004, 2005 and 2006.
(3) Mr. Kalec's stock options vest in equal amounts over a three year period and
expire in equal amounts on August 24, 2004, 2005 and 2006.
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<PAGE> 47
The following table presents information concerning stock option holdings held
by the named officers at December 31, 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
FY-END(#) FY-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James M. Phillips............................. 579,016 193,005 $5,396,429 $1,798,807
Jeffrey D. Peters............................. -- 102,027 -- 720,311
John J. Kalec................................. -- 42,511 -- 300,128
John M. Murphy................................ 19,838 56,682 129,542 379,146
</TABLE>
Employment Agreements
We have entered into employment agreements with the following named officers:
Mr. Phillips. Mr. Phillips' employment agreement expires on December 31,
2001 and is renewable automatically for one year periods unless terminated
by us or Mr. Phillips. Mr. Phillips receives an annual salary of $386,250
and is eligible for a performance based bonus. We may terminate Mr.
Phillips' employment agreement with or without cause; however, if we
terminate the agreement without cause, Mr. Phillips is entitled to a
severance payment of $500,000, which increases to $1,000,000 upon the
consummation of this offering.
Mr. Peters. Mr. Peters' employment agreement continues indefinitely unless
terminated by us or Mr. Peters. Mr. Peters receives an annual salary of
$300,000 and is eligible for a performance based annual bonus. We may
terminate Mr. Peters' employment agreement with or without cause; however,
if we terminate the agreement without cause, Mr. Peters is entitled to a
severance payment equal to one year's salary.
Mr. Kalec. Mr. Kalec's employment agreement continues indefinitely unless
terminated by us or Mr. Kalec. Mr. Kalec receives an annual salary of
$175,000 and is eligible for a performance based annual bonus. We may
terminate Mr. Kalec's employment agreement with or without cause; however
if we terminate the agreement without cause before August 24, 2000, Mr.
Kalec is entitled to a severance payment of $175,000.
Mr. Murphy. Mr. Murphy's employment agreement continues indefinitely
unless terminated by us or Mr. Murphy. Mr. Murphy receives an annual salary
of $163,600 and is eligible for a performance based annual bonus. We may
terminate Mr. Murphy's employment agreement with or without cause; however,
if we terminate the agreement without cause before the end of the term, Mr.
Murphy is entitled to a severance payment equal to two months' salary.
Mr. Zimmermann. Mr. Zimmermann's employment agreement expires on June 23,
2000. Mr. Zimmermann receives an annual salary of $127,000. We may
terminate Mr. Zimmermann's employment agreement with or without cause;
however, if we terminate the agreement without cause before the end of the
term, Mr. Zimmermann is entitled to a severance payment of equal to one
year's salary.
1997 EQUITY COMPENSATION PLAN
Our 1997 equity compensation plan, or the plan, was adopted by the board of
directors in November 1997 and approved by the shareholders on December 8, 1997.
The plan provides for grants of stock options to selected employees, officers,
directors, consultants and advisors. By encouraging stock ownership, we seek
43
<PAGE> 48
to attract, retain and motivate these persons and to encourage them to devote
their best efforts to our business and financial success.
The plan authorizes the granting of options to purchase up to 1,998,559 shares
of our common stock. The number of shares may be adjusted. As of June 30, 1999,
options to purchase 1,322,782 shares of common stock had been granted under the
plan. Considering all options to purchase shares, options to purchase 1,266,738
shares are currently exercisable and 186,342 shares will be exercisable at the
consummation of this offering. If options expire or are terminated for any
reason without being exercised, the shares of common stock subject to these
options again will be available for grant.
The plan may be administered by the board of directors or by a committee of the
board of directors. Grants under the plan may consist of options intended to
qualify as incentive stock options, or ISOs, within the meaning of Section 422
of the Code, or non-qualified stock options, or NQSOs, that are not intended so
to qualify. During any calendar year, a grantee may not receive options to
purchase common stock for more than 25% of the total number of shares of common
stock reserved under the plan.
The option price of any ISO granted under the plan will not be less than the
fair market value of the underlying shares of common stock on the date of grant.
The option price of a NQSO will be determined by the committee, in its sole
discretion, and may be greater than, equal to or less than the fair market value
of the underlying shares of common stock on the date of grant. The committee
will determine the term of each option; provided that the exercise period may
not exceed ten years from the date of grant. The price of an ISO granted to a
person who owns more than 10% of our stock must be at least equal to 110% of the
fair market value of common stock on the date of grant, and the ISO's term may
not exceed five years. A grantee may pay the exercise price in cash, by
delivering shares of common stock already owned by the grantee and having a fair
market value on the date of exercise equal to the option price, or by any other
method as the committee may approve. The committee may impose vesting and other
conditions on options as the committee deems appropriate. Options may be
exercised while the grantee is an employee, officer, director, consultant or
advisor or within a specified period after termination of the grantee's
employment or services.
If a change of control occurs, all outstanding options shall become fully
exercisable, unless the committee determines otherwise. Except as provided
below, unless the committee determines otherwise, if a merger takes place where
we are not the surviving corporation, all outstanding options shall be assumed
by or replaced with comparable options by the surviving corporation. The
committee may require that grantees surrender their outstanding options in the
event of a change of control and receive a payment in cash or common stock equal
to the amount by which the fair market value of the shares of common stock
subject to the options exceeds the exercise price of the options.
401(K) PLAN
We have a 401(k) profit sharing plan which is intended to qualify under Sections
401(a) and 401(k) of the Code. Generally, all employees are eligible to
participate in the 401(k) plan after they have completed six months of service
and are fully vested three years from the date of their eligibility.
Eligible employees electing to participate in the 401(k) plan may defer a
portion of their compensation, on a pre-tax basis, by making a contribution to
the 401(k) plan. The maximum contribution is fixed in Section 401(k) of the
Code. The contribution limit for calendar year 1998 was $10,000. We may
contribute an annual discretionary matching contribution equal to 65% of each
participant's deferred compensation. Our matching contribution may not exceed
6.15% of the employee's annual compensation. We contributed to the 401(k) plan
an aggregate of $33,432 in fiscal year 1996, $43,803 in fiscal year 1997 and
$116,071 in fiscal year 1998.
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<PAGE> 49
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee during the year ended December 31, 1998 consisted of
Messrs. Jackson, Hendricks, Newhouse and Phillips. Mr. Phillips is our chairman
and chief executive officer. None of our executive officers has served as a
director or member of the compensation committee of any other entity whose
executive officers served on our board of directors or compensation committee.
45
<PAGE> 50
PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information regarding the beneficial ownership of
the common stock as of June 30, 1999, by (1) each person who beneficially owns
more than 5% of our common stock; (2) each of our directors and named officers;
and (3) all current executive officers and directors as a group. The table
includes all shares of common stock issuable within 60 days of June 30, 1999
upon the exercise of options and other rights beneficially owned by the
indicated shareholders on that date. Beneficial ownership is determined under
the rules of the Securities and Exchange Commission and includes voting and
investment power with regard to the shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with regard to all
shares beneficially owned. The applicable percent ownership for each shareholder
before the offering is based on 12,505,393 shares of common stock outstanding as
of June 30, 1999, which includes 8,207,493 shares of common stock issuable upon
the conversion of all of our outstanding shares of preferred stock, together
with applicable warrants and options for that shareholder. Shares of common
stock issuable upon exercise of warrants and options which are exercisable
within 60 days of June 30, 1999 are deemed outstanding for the purpose of
computing the percent ownership of the person holding those warrants and options
but are not deemed outstanding for computing the percent ownership of any other
person. The applicable percent ownership for each shareholder after the offering
is based on 16,757,186 shares of common stock and reflects the conversion of all
of our outstanding shares of preferred stock as well as the net exercise of all
preferred stock and common stock warrants into common stock. Unless otherwise
stated, the address for each person below is 1009 Commerce Park Drive, Oak
Ridge, Tennessee, 37830.
<TABLE>
<CAPTION>
----------------------------------------------
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE
PRINCIPAL SHAREHOLDERS OWNED OFFERING AFTER OFFERING
---------------------- ---------------- -------- --------------
<S> <C> <C> <C>
Dr. H. Lee Martin..................................... 2,557,178(1) 20.4% 13.5%
1020 Commerce Park Drive
Oak Ridge, TN 37830
Motorola, Inc......................................... 2,079,462(2) 16.6 12.4
1303 East Algonquin Rd.
Schamburg, IL 60196
MediaOne Interactive Services, Inc.................... 1,527,761(3) 11.9 8.3
188 Inverness Drive West
Englewood, CO 80112
GE Capital Equity Investments, Inc.................... 1,194,598(4) 9.4 6.2
120 Long Ridge Road
Stamford, CT 06927
Advance Publications, Inc............................. 1,052,259(5) 8.3 5.7
30 Journal Square
Jersey City, NJ 07306
Liberty IP, Inc....................................... 649,027(6) 5.2 3.9
8101 East Prentice Avenue
Englewood, CO 80111
</TABLE>
46
<PAGE> 51
<TABLE>
<CAPTION>
----------------------------------------------
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE
PRINCIPAL SHAREHOLDERS OWNED OFFERING AFTER OFFERING
---------------------- ---------------- -------- --------------
<S> <C> <C> <C>
James M. Phillips..................................... 772,021(7) 5.8 4.4
Jeffrey D. Peters..................................... 59,516(8) * *
John J. Kalec......................................... 59,516(9) * *
John M. Murphy........................................ 65,184(10) * *
Steven D. Zimmermann.................................. 394,736 3.2 2.4
John S. Hendricks..................................... 427,872(11) 3.4 2.5
Laban P. Jackson, Jr.................................. 153,666(12) 1.2 *
All directors and executive officers as a group....... 2,031,703(13) 15.0% 11.4%
</TABLE>
- ---------------
* Less than one percent
(1) As described below, Dr. Martin will beneficially own 2,257,178 shares of
common stock after the consummation of this offering. Includes 131,309 shares
owned by the H. Lee Martin Irrevocable Trust No. 2.
(2) Includes 2,073,793 shares issuable upon the conversion of outstanding shares
of preferred stock and 5,668 shares of common stock issuable upon the exercise
of stock options.
(3) Includes 1,217,674 shares issuable upon the conversion of outstanding shares
of preferred stock, 304,419 shares of common stock issuable upon the exercise of
warrants and 5,668 shares of common stock issuable upon the exercise of stock
options.
(4) Includes 973,540 shares issuable upon the conversion of outstanding shares
of preferred stock and 221,059 shares of common stock issuable upon the exercise
of warrants.
(5) Includes 841,807 shares issuable upon the conversion of outstanding shares
of preferred stock and 210,452 shares of common stock issuable upon the exercise
of warrants.
(6) Includes 649,027 shares issuable upon the conversion of outstanding shares
of preferred stock.
(7) Includes 772,021 shares of common stock issuable upon the exercise of stock
options.
(8) Includes 51,014 shares of common stock issuable upon the exercise of stock
options.
(9) Includes 42,511 shares of common stock issuable upon the exercise of stock
options.
(10) Includes 65,184 shares of common stock issuable upon the exercise of stock
options.
(11) Includes 5,668 shares of common stock issuable upon the exercise of stock
options. Also includes 74,542 shares of common stock issuable upon the
conversion of outstanding shares of preferred stock and 10,522 shares of common
stock issuable upon the exercise of warrants held by Hendricks Family
Investments, LLC. Also includes 337,139 shares of preferred stock of Discovery
Communications, Inc., of which Mr. Hendricks is chairman and chief executive
officer, to which he disclaims all beneficial ownership.
(12) Includes 143,747 shares issuable upon the conversion of outstanding shares
of preferred stock and 4,251 and 5,668 shares of common stock issuable upon the
exercise of warrants and stock options.
(13) Includes 218,288 shares issuable upon the conversion of outstanding shares
of preferred stock and 14,774 and 976,642 shares of common stock issuable upon
the exercise of warrants and stock options and 337,139 shares of preferred stock
of Discovery.
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<PAGE> 52
SELLING SHAREHOLDERS
Dr. H. Lee Martin is offering 300,000 shares of common stock in this offering.
Dr. Martin is one of our founders but is no longer employed by us or involved in
our day-to-day operations. Dr. Martin was our chief executive officer until
March 1997 and was our chief technology officer from March 1997 to July 1998.
Dr. Martin is also a member of our technology advisory board. As of June 30,
1999, Dr. Martin beneficially owned 2,557,178 of our common stock, or 20.4%.
After the consummation of this offering, Dr. Martin will beneficially own
2,257,178 shares of common stock, or 13.5%.
Daniel P. Kuban is offering 50,000 shares of common stock in this offering. Mr.
Kuban is our senior vice-president. As of June 30, 1999, Mr. Kuban beneficially
owned 465,284 shares of our common stock, or 3.7%. After the consummation of
this offering, Mr. Kuban will beneficially own 415,284 shares of common stock,
or 2.5%.
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<PAGE> 53
RELATED PARTY TRANSACTIONS
In December 1996, we issued to each of Motorola, Inc. and Discovery
Communications, Inc., 337,139 shares of common stock for an aggregate purchase
price of $2.0 million each. John S. Hendricks, one of our directors, is the
chairman and chief executive officer of Discovery. Each of Motorola and
Discovery are entitled to demand and piggyback registration rights with regard
to these shares. In April 1998, Motorola and Discovery exchanged their shares of
common stock for a like number of shares of Series B preferred stock.
We license from Motorola patent and patent applications related to our
technology under a patent license agreement dated January 17, 1997. These
licenses have been granted for the lives of the underlying Motorola patents on a
worldwide, royalty-free, non-exclusive, non-transferrable basis with the right
to sublicense. We may not grant third parties exclusive licenses for our
technology for a term exceeding one year without the prior written consent of
Motorola.
In January 1997, we granted Discovery a world-wide, exclusive license to utilize
our technology in connection with the development of 15 destination-specific
CD-ROM titles. The term of the Discovery license will expire on the expiration
date of the last underlying patent.
In July 1998, we purchased 170,045 shares of stock from Dr. H. Lee Martin, our
founder and beneficial owner of greater than 5% of our common stock, for an
aggregate purchase price of $500,000.
In August 1998, we purchased 147,939 shares of Series B preferred stock from
Motorola for an aggregate purchase price of $878,700.
From April to July 1998, we sold an aggregate of 2,188,698 shares of Series C
preferred stock to a group of private investors for an aggregate purchase price
of $13.0 million. We also issued warrants to these investors to purchase an
aggregate of 547,175 shares of Series C preferred stock at an exercise price of
$5.94 per share. Purchasers of our Series C preferred stock included the
following related parties:
<TABLE>
<CAPTION>
---------------------------------------------------
AGGREGATE NUMBER OF WARRANT
NAME NUMBER OF SHARES PURCHASE PRICE SHARES
- ---- ---------------- -------------- -----------------
<S> <C> <C> <C>
MediaOne Interactive Services, Inc.......... 1,217,674 $7,233,000 304,419
Advance Publications, Inc................... 841,807 5,000,000 210,452
John S. Hendricks........................... 42,090 250,000 10,522
Laban P. Jackson, Jr........................ 17,005 101,000 4,251
</TABLE>
From January to March 1999, we sold an aggregate of 3,504,744 shares of Series D
preferred stock to a group of private investors for an aggregate purchase price
of $27.0 million. Purchasers of our Series D preferred stock included the
following related parties:
<TABLE>
<CAPTION>
--------------------------------
AGGREGATE
NAME NUMBER OF SHARES PURCHASE PRICE
- ---- ---------------- --------------
<S> <C> <C>
GE Capital Equity Investments, Inc.......................... 973,540 $7,500,000
Liberty IP, Inc............................................. 649,027 5,000,000
Motorola, Inc............................................... 389,416 3,000,000
Laban P. Jackson, Jr........................................ 51,922 400,000
John S. Hendricks........................................... 32,451 250,000
</TABLE>
49
<PAGE> 54
All of our shares of preferred stock will automatically convert into common
stock upon completion of this offering. Each of the purchasers of the Series C
preferred stock and the Series D preferred stock are entitled to demand and
piggyback registration rights with regard to their shares of preferred stock.
In connection with the issuance of the Series D preferred stock to GE Capital,
we entered into a marketing agreement with GE Capital who will provide us
assistance in developing and implementing a marketing program and a cooperative
advertising allowance of $500,000. In addition, we issued a warrant to GE
Capital to purchase 221,059 shares of our Series D preferred stock at an
exercise price of $9.23 per share.
50
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Our amended and restated charter, which will become effective upon the closing
of this offering, authorizes the issuance of up to 100,000,000 shares of common
stock, and 10,000,000 shares of preferred stock, the rights and preferences of
which may be established from time to time by our board of directors. As of June
30, 1999, 4,297,901 shares of common stock were outstanding and 8,207,493 shares
of preferred stock convertible into 8,207,493 shares of common stock upon the
completion of this offering were issued and outstanding. As of June 30, 1999, we
had 80 shareholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Thus, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably any dividends
that may be declared by the board of directors out of funds legally available,
subject to any preferential dividend rights of outstanding preferred stock. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive ratably the net assets available after the payment of all
debts and other liabilities, subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription,
redemption or conversion rights. All of the issued and outstanding shares of
common stock will be fully paid and non-assessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future.
PREFERRED STOCK
Under the charter, the board of directors will be authorized, subject to
limitations prescribed by law, without further shareholder approval, from time
to time to issue up to an aggregate of 10,000,000 shares of preferred stock in
one or more series and to fix or alter the designations, preferences and rights,
and any qualifications, limitations or restrictions, of the shares of each of
these series, including the number of shares constituting any of these series
and the dividend rights, dividend rates, conversion rights, voting rights, terms
of reduction, including sinking fund provisions, if any, redemption price or
prices and liquidation preferences. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change of control. We have no
present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
We have granted registration rights to a number of our preferred shareholders
whose shares will convert into restricted shares of our common stock upon
consummation of this offering. If we propose to register for sale additional
shares of our common stock under the Securities Act after this offering, these
shareholders will be entitled to notice of the registration and inclusion of
their shares in the registration process. The registration rights are not
applicable to registration of securities in connection with employee benefit
plans. In addition, these shareholders may demand that we file a registration
statement for the sale of their shares. In either event, the underwriters for
the proposed offering will have the right to limit the number of shares included
in the registration. Also, these shareholders are entitled, subject to some
limitations, to require us to register their shares on Form S-3 when we are
eligible to use a short form. We have agreed to bear all of the expenses of any
registration.
TENNESSEE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The directors comprising the board of directors will be divided into three
classes. Two directors will constitute class I and will stand for election at
the annual meeting of shareholders to be held in 1999. Two directors will
constitute class II and will stand for election at the annual meeting of
shareholders to be
51
<PAGE> 56
held in 2000. Two directors will constitute class III and will stand for
election at the annual meeting of shareholders to be held in 2001. After their
initial term following the offering, directors in each class will serve for a
term of three years. The charter will provide that directors can be removed only
for cause by a majority of the shareholders and only by a majority of the other
directors. Officers are chosen by and serve at the discretion of the board of
directors. The charter will also provide that special meetings of shareholders
may be called only by the chairman of the board of directors, the chief
executive officer or the president or by a majority of the board of directors.
Our bylaws will provide that shareholders must provide timely notice in writing
to bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders.
Notice for an annual meeting is timely in the following circumstances:
- If we provided a notice of annual meeting of shareholders in the previous
year, then a shareholder's notice must be delivered to or mailed and
received at our principal executive offices at least 120 days before the
first anniversary of the date of the prior year's notice.
- If we did not hold an annual meeting the prior year, or if we have
changed the date of the meeting to be more than 30 calendar days earlier
or 60 calendar days after the anniversary of the prior meeting, different
notice provisions apply. In these instances, we must receive notice from
the shareholder at least 60 but no more than 90 days before the annual
meeting or within 10 days following the date on which notice of the date
of the meeting is given to shareholders or made public, whichever first
occurs.
A shareholder's timely notice for a special meeting must be delivered to us by
the close of business 10 days after notice of the meeting is given to
shareholders.
The bylaws also specify the form and content of a shareholders' notice. These
provisions may prevent shareholders from bringing matters before an annual
meeting of shareholders or from making nominations for directors at an annual
meeting of shareholders.
We are subject to anti-takeover provisions provided under Tennessee law,
including the following:
Business Combination Statute. The Tennessee Business Combination Act, or TBCA,
provides that a party owning 10% or more of the stock in a resident domestic
corporation is an interested shareholder. An interested shareholder can not
engage in a business combination with the resident domestic corporation unless
the combination:
- takes place at least five years after the interested shareholder first
acquired 10% or more of the resident domestic corporation; and
- either is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or satisfies the fairness
conditions of the TBCA.
A business combination with an entity can proceed without delay when approved by
the target corporation's board of directors before that entity becomes subject
to this restriction. TBCA does not apply when the resident corporation has
enacted a charter amendment or bylaw removing itself entirely from coverage
under TBCA. This charter amendment or bylaw must be approved by a majority of
the shareholders who have held shares for more than one year before the vote and
may not take effect for at least two years after the vote. We have not adopted a
charter or bylaw amendment removing us from coverage under TBCA.
Under TBCA, officers and directors of resident domestic corporations who do not
approve either (1) proposed business combinations or (2) charter amendments and
bylaws removing their corporations from TBCA's coverage cannot be held liable
for this action as long as they held a good faith belief that the proposed
business combination would adversely affect their corporation's employees,
customers,
52
<PAGE> 57
suppliers, or the communities in which their corporation operates or the
corporation's charter permits these factors to be considered by the board of
directors.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act, or
TCSAA, strips an acquiror's shares of voting rights any time an acquisition of
shares in a covered Tennessee corporation brings an acquiror's voting power to
prescribed maximum levels. Under TCSAA, the acquiror's voting rights can be
established only by a majority vote of the other shareholders. The acquiror may,
upon submitting a control share acquisition statement, demand a meeting of
shareholders to conduct this vote. The acquiror can demand a meeting before
acquiring a control share only if it holds at least 10% of outstanding shares
and announces a good faith intention to make the control share acquisition.
Under TCSAA, a target corporation has the option of redeeming an acquiror's
shares if the shares are denied voting rights. The TCSAA applies only to a
corporation that has adopted a provision in its charter or by-laws expressly
declaring that the TCSAA will apply. We have not adopted any provision in our
charter or bylaws electing protection under the TCSAA.
Investor Protection Act. Tennessee's Investor Protection Act, or TIPA applies
to tender offers directed at corporations that have substantial assets in
Tennessee and that are either incorporated in or have a principal office in
Tennessee. TIPA requires a company making a tender offer for another company to
file a registration statement with the Commissioner of Commerce and Insurance.
When the company intends to gain control of the target company, the registration
statement must indicate any plans the company has for the target company, among
other required information. The state commissioner may require additional
information material to the takeover offer and may call for hearings. This
statute does not apply to an offer that the target company's board of directors
has recommended to its shareholders.
In addition to requiring the company to file a registration statement with the
state commissioner, this statute requires the company and the target company to
deliver to the state commissioner all solicitation materials used in connection
with the tender offer. This statute prohibits fraudulent, deceptive, or
manipulative acts or practices by either side, and gives the state commissioner
standing to apply for equitable relief to the Chancery Court of Davidson County,
Tennessee, or to any other chancery court having jurisdiction whenever it
appears to the state commissioner that the company, the target company, or any
of their affiliates has engaged in or is about to engage in a violation of this
statute. Upon proper showing, the Chancery Court may grant injunctive relief.
This statute further provides civil and criminal penalties for violations.
Greenmail Act. The Tennessee Greenmail Act, or TGA, applies to any corporation
chartered under the laws of Tennessee which has a class of voting stock
registered or traded on a national securities exchange or registered with the
Securities and Exchange Commission. The TGA provides that it is unlawful for any
corporation to purchase any of its shares at a price above the market value from
any person who holds more than 3% of the shares if the person has held those
shares for less than two years. However, the TGA does allow the purchase if
either:
- the purchase is first approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued; or
- the corporation makes an equivalent offer, on a value per share basis, to
all holders of the class of securities being purchased.
53
<PAGE> 58
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by Tennessee law, our amended charter will provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our shareholders may be unable to obtain
monetary damages from a director for breach of duty of care.
Our charter and bylaws will provide for the indemnification of our directors and
officers to the fullest extent authorized by Tennessee law, except that we will
indemnify a director or officer in connection with an action initiated by that
person only if the action was authorized by our board of directors. The
indemnification provided under our charter and bylaws will include the right to
be paid expenses in advance of any proceeding for which indemnification may be
had, provided that the payment of these expenses incurred by a director or
officer in advance of the final disposition of a proceeding may be made only
upon delivery to us of an undertaking by or on behalf of the director or officer
to repay all amounts paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Under our bylaws, if we
do not pay a claim for indemnification within 60 days after we have received a
written claim, the director or officer may bring an action to recover the unpaid
amount of the claim and, if successful, the director or officer also will be
entitled to be paid the expense of prosecuting the action to recover these
unpaid amounts.
Under our charter and bylaws, we will have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents, or is or was serving at our request as a director, officer,
employee, partner or agent of another corporation or of a partnership, joint
venture, limited liability company, trust or other enterprise, against any
liability asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities.
The insurance will also cover any expenses related to the liability. The
insurance coverage is available to these persons whether or not we would have
the power to indemnify the person against the claim under the provisions of
Tennessee law. We have purchased director and officer liability insurance on
behalf of our directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
LISTING
We have applied to have the shares of common stock listed on the Nasdaq National
Market under the symbol IPIX.
54
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 16,757,186 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options under the plan. The number of shares of
common stock outstanding is also based on the conversion of all of our preferred
stock, including the net exercise of all preferred stock purchase warrants, to
common stock. Of these shares, the 4,200,000 shares sold in this offering will
be freely transferable without restriction or further registration under the
Securities Act, except for any shares held by an existing affiliate of ours, as
that term is defined in Rule 144 under the Securities Act. For purposes of Rule
144, our affiliate is a person that, directly or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
Interactive Pictures Corporation. Any shares held by one of our affiliates will
be subject to the resale limitations of restricted stock as defined in Rule 144
under the Securities Act. Other than the shares issued in this offering, and
without consideration of the contractual restrictions described below, 584,778
shares would be available for immediate sale in the public market without
restriction pursuant to Rule 144(k). Beginning 90 days after the date of this
prospectus, and without consideration of the contractual restrictions described
below, 9,061,808 shares will become eligible for sale in reliance upon Rule 144
and Rule 701 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 167,572 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days before a sale, and who has beneficially owned the restricted
shares for at least two years, is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon regarding the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisors prior to the date we become subject to the reporting requirements of
the Exchange Act, under written compensatory benefit plans or written contracts
relating to compensation of those persons. In addition, the Commission has
indicated that Rule 701 will apply to the typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of these options, including
exercises after the date of this prospectus. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold (1) by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144, and (2) by affiliates under Rule 144 without compliance
with its one-year holding period requirement.
All of our officers and directors and many of our shareholders will agree not to
sell any shares of common stock for 180 days after the date of this prospectus
without the prior written consent of J.P. Morgan Securities Inc., subject to
exceptions contained in the agreement. As a result of these contractual
restrictions and subject to the provisions of Rules 144 and 701, as applicable,
11,675,839 shares subject to restriction will be eligible for sale upon
expiration of these agreements.
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<PAGE> 60
We have agreed not to offer, sell or dispose of any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
or any rights to acquire common stock for a period of 180 days after the date of
this prospectus without the prior written consent of J.P. Morgan Securities Inc.
with a limited number of exceptions.
We intend to file one or more registration statements under the Securities Act
to register all shares of common stock issued, issuable or reserved for issuance
under our 1997 equity compensation plan. These registration statements are
expected to be filed as soon as practicable after the date of this prospectus
and will automatically become effective upon filing. Following this filing,
shares registered under these registration statements will, subject to the
180-day lock-up agreements described above and Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market.
56
<PAGE> 61
UNDERWRITING
Interactive Pictures Corporation, the selling shareholders and the underwriters
named below have entered into an underwriting agreement covering the common
stock to be offered in this offering. J.P. Morgan Securities Inc., Hambrecht &
Quist LLC, Morgan Keegan & Company, Inc. and Stephens Inc. are acting as
representatives of the underwriters. Each underwriter has agreed to purchase the
number of shares of common stock opposite its name below.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
UNDERWRITERS ----------------
<S> <C>
J.P. Morgan Securities Inc..................................
Hambrecht & Quist, LLC......................................
Morgan Keegan & Company, Inc................................
Stephens Inc................................................
---------
Total............................................. 4,200,000
=========
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if these shares are delivered to and accepted
by them. The underwriters will initially offer to sell shares to the public at
the initial public offering price shown on the cover page of this prospectus.
The underwriters may sell shares to securities dealers at a discount of up to
$ per share from the initial public offering price. Any of these securities
dealers may resell shares to other brokers or dealers at a discount of up to
$ per share from the initial public offering price. After the initial public
offering, the underwriters may vary the public offering price and other selling
terms.
If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional 630,000
shares of common stock from Interactive Pictures Corporation to cover these
sales. They may exercise this option during the 30-day period from the date of
this prospectus. If any shares are purchased with this option, the underwriters
will purchase shares in approximately the same proportion as shown in the table
above.
The following table shows the per share and total underwriting discounts that
Interactive Pictures Corporation and the selling shareholders will pay to the
underwriters. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
-----------------------------
PAID BY INTERACTIVE PICTURES
CORPORATION
-----------------------------
NO EXERCISE FULL EXERCISE
------------ --------------
<S> <C> <C>
Per share................................................... $ $
-------- --------
Total............................................. $ $
======== ========
</TABLE>
<TABLE>
<CAPTION>
----------------------------
PAID BY SELLING SHAREHOLDERS
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ --
--------
Total............................................. $ --
========
</TABLE>
57
<PAGE> 62
The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short shares,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while the offering is
in progress. The underwriters may also impose a penalty bid, which means that an
underwriter must repay to the other underwriters a portion of the underwriting
discount received by it. An underwriter may be subject to a penalty bid if the
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or affect the market price
of the common stock. As a result, the price of the common stock may be higher
than the price that might exist in the open market. If the underwriters commence
these activities, they may discontinue them at any time. The underwriters may
carry out these transactions on the Nasdaq National Market or in the
over-the-counter market.
Interactive Pictures Corporation estimates that the total expenses of this
offering, excluding underwriting discounts and commissions, will be $750,000.
Interactive Pictures Corporation and the selling shareholders have agreed to
indemnify the underwriters against various liabilities, including liabilities
under the Securities Act of 1933. Interactive Pictures Corporation and its
directors, officers and several of its shareholders, including the selling
shareholders, have agreed with the underwriters not to transfer, dispose of or
hedge any of their common stock, or securities convertible into or exchangeable
for shares of common stock, for a period of 180 days after the date of this
prospectus, except with the prior written consent of J.P. Morgan Securities Inc.
This agreement does not apply to any of our employee benefit plans existing on
the date of this prospectus.
At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees and to other persons with whom we have
business relationships and to friends of Interactive Pictures Corporation who
have expressed an interest in participating in this offering. Interactive
Pictures Corporation expects these persons to purchase no more than % of
the common stock offered in this offering. These persons may include Insignia
Financial Group which has expressed an interest in acquiring $500,000 of common
stock at the initial public offering price. The number of shares available for
sale to the general public will be reduced to the extent these persons purchase
reserved shares.
Interactive Pictures Corporation has applied to have the common stock listed on
the Nasdaq National Market under the symbol IPIX.
It is expected that delivery of the shares will be made to investors on or about
, 1999.
There has been no public market for the common stock before the consummation of
this offering. Interactive Pictures Corporation and the underwriters will
negotiate the initial offering price. In determining the price, Interactive
Pictures Corporation and the underwriters expect to consider a number of factors
in addition to prevailing market conditions, including:
- the history of and prospects for the industry and for Internet companies
generally;
- an assessment of Interactive Pictures Corporation's management;
- Interactive Pictures Corporation's present operations;
- Interactive Pictures Corporation's historical results of operations;
- the trend of Interactive Pictures Corporation's revenues and earnings;
and
- Interactive Pictures Corporation's earnings prospects.
Interactive Pictures Corporation and the underwriters will consider a number of
factors in relation to the price of similar securities of generally comparable
companies. Neither Interactive Pictures Corporation nor the underwriters can
assure investors that an active trading market will develop for the common
stock, or that the common stock will trade in the public market at or above the
initial offering price.
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<PAGE> 63
From time to time in the ordinary course of their businesses, some of the
underwriters and their affiliates have engaged in and may in the future engage
in commercial banking and/or investment banking transactions with Interactive
Pictures Corporation and its affiliates. J.P. Morgan Securities Inc. acted as
private placement agent in connection with Interactive Pictures Corporation's
Series D preferred stock offering which was completed in March 1999, for which
it received 105,142 shares of common stock as a portion of its compensation. In
connection with the Series D preferred stock offering, an affiliate of J.P.
Morgan Securities Inc. purchased 389,415 shares of Series D preferred stock and
an affiliate of Stephens Inc. purchased 129,805 shares of Series D preferred
stock. In addition, Morgan Keegan & Company, Inc. acted as private placement
agent in connection with Interactive Pictures Corporation's Series C preferred
stock offering which was completed in July 1998 for which it received warrants
to purchase 62,285 shares of Series C preferred stock and a private common stock
offering which was completed in August 1998, for which it received a warrant to
purchase 22,956 shares of common stock. Also, officers of Morgan Keegan &
Company, Inc. own 2,525 shares of Interactive Pictures Corporation's Series C
preferred stock purchased in April 1998, 31,458 shares of Interactive Pictures
Corporation's common stock purchased in August 1998 and 6,801 shares of
Interactive Pictures Corporation's Series D preferred stock purchased in March
1999.
The underwriters have agreed that:
- - they have not offered or sold and, prior to the date which is six months after
the date of this prospectus, will not offer or sell shares to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 or the
Financial Services Act 1986;
- - they have complied with and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by them in relation
to the shares in, from or involving the United Kingdom; and
- - they have only issued or passed on and will only issue or pass on in the
United Kingdom any document received by them in connection with the offer of
shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisement)(Exemptions) Order 1996
or is a person to whom this document may lawfully be issued or passed.
To comply with the provisions of Rule 2710 of the Conduct Rules of the National
Association of Securities Dealers, Inc. regarding underwriting compensation,
Interactive Pictures Corporation will repurchase 346,698 shares of its common
stock from J.P. Morgan Securities Inc. and its affiliate, 90,997 shares from the
affiliate of Stephens Inc. and 6,801 shares from an officer of Morgan Keegan &
Company, Inc. as soon as practicable following the consummation of this offering
at a purchase price of $7.70 per share, which is the price of these shares to
those parties. The number of shares to be repurchased by Interactive Pictures
Corporation is based on an assumed initial public offering price of $14.00, the
high end of the range shown on the cover page of this prospectus, and assumes no
exercise of the over-allotment option by the underwriters. The remaining 147,859
shares held by J.P. Morgan Securities Inc. and its affiliate and the remaining
38,808 shares held by the affiliate of Stephens Inc. will be restricted from
sale, transfer, pledge, assignment or hypothecation for a period of one year
from the date of this prospectus, subject to limited exceptions.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by Baker,
Donelson, Bearman & Caldwell, a professional corporation, Memphis, Tennessee.
Members of Baker, Donelson, Bearman & Caldwell, in the aggregate, beneficially
own 8,502 shares of our common stock. Holland and Knight LLP,
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<PAGE> 64
Tampa, Florida, will pass upon legal matters for the selling shareholders. Legal
matters in connection with this offering will be passed upon for the
underwriters by Cahill Gordon & Reindel, a partnership including a professional
corporation, New York, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1 regarding
the common stock being offered by this prospectus. This prospectus does not
contain all of the information presented in the registration statement. For
further information about us and the common stock, reference is made to the
registration statement and its exhibits. Descriptions in this prospectus of any
contract or other document include all material provisions of the contract or
other document. For a more complete description, you should refer to the
registration statement and the exhibits attached to the registration statement.
Copies of the registration statement, including exhibits, may be examined
without charge in the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W. Room 1024, Washington, DC 20549, and the
Securities and Exchange Commission's Regional Offices located at 500 West
Madison Street, Suite 1400, Chicago, IL 60601, and Seven World Trade Center,
13th Floor, New York, NY 10048, or on the Internet at http://www.sec.gov.
Information about the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0300. Copies of all or a portion of the
registration statement can be obtained from the Public Reference Section of the
Commission upon payment of prescribed fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and will file periodic reports, proxy
statements and other information with the Commission. Upon approval of the
common stock for quotation on the Nasdaq National Market, these reports, proxy
statements and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, DC 20006.
OTHER INFORMATION
We intend to furnish our shareholders annual reports containing audited
consolidated financial statements and quarterly reports containing unaudited
interim financial information for the first three quarters of each fiscal year.
We own or have rights to various trademarks and trade names used in our
business. These include the IPIX(TM) logo, IPIX(TM), GET THE WHOLE PICTURE(TM),
IPIX On Location(TM), IPIX Teleporter(TM), IPIX LOCATION ON DEMAND-WEBCAM(TM),
OMNIVIEW(TM), THE VIRTUAL EYE(R), V360(TM), IPIX: THE EYES OF THE INTERNET(TM),
IPIX WEBCAM: THE EYES OF THE INTERNET(TM), INTERACTV(TM) and STEP INSIDE THE
PICTURE(TM). This prospectus also includes trademarks, service marks and trade
names owned by other companies.
60
<PAGE> 65
INTERACTIVE PICTURES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Interactive Pictures Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Interactive Pictures Corporation and its subsidiary (the "Company") at December
31, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
January 29, 1999, except as to Notes 5 and 6
for which the date is April 12, 1999 and as to Note 13
for which the date is July 2, 1999
F-2
<PAGE> 67
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------
MARCH 31,
1999
PRO FORMA
DECEMBER 31, SHAREHOLDERS'
------------------------- MARCH 31, EQUITY
1997 1998 1999 (NOTE 2)
---------- ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $1,825,744 $ 1,063,618 $ 7,150,171
Securities available-for-sale............................... 1,000,000 -- 16,648,861
Accounts receivable, less allowance for doubtful accounts of
$190,000 at December 31, 1997 and $170,000 at both December
31, 1998 and March 31, 1999 (unaudited).................... 538,304 842,585 1,174,572
Inventory, less reserve for obsolescence of $100,000 at both
December 31, 1998 and March 31, 1999 (unaudited)........... 231,774 328,161 437,525
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... 64,458 -- --
Prepaid expenses and other current assets................... 231,398 305,030 383,317
---------- ------------ ------------
Total current assets................................. 3,891,678 2,539,394 25,794,446
---------- ------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and equipment..................................... 771,582 1,666,642 1,854,617
Leasehold improvements...................................... 35,393 53,470 80,416
---------- ------------ ------------
806,975 1,720,112 1,935,033
Less accumulated depreciation and amortization.............. (144,008) (367,570) (444,570)
---------- ------------ ------------
Property and equipment, net.............................. 662,967 1,352,542 1,490,463
---------- ------------ ------------
Other assets................................................ 19,273 96,858 83,903
---------- ------------ ------------
Total assets......................................... $4,573,918 $ 3,988,794 $ 27,368,812
========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible debenture....................................... $3,000,000 $ 1,000,000 $ --
Current portion of promissory note.......................... 8,000 8,000 8,000
Accounts payable............................................ 325,302 400,762 265,012
Accrued expenses............................................ 567,036 1,598,214 1,743,295
Accrued placement fees and related expenses................. -- 50,000 981,862
Deferred revenue............................................ 62,700 117,681 146,418
---------- ------------ ------------
Total current liabilities............................ 3,963,038 3,174,657 3,144,587
---------- ------------ ------------
Long-term portion of promissory note........................ 28,667 21,334 19,334
Commitments and contingencies (Note 11)
Series D redeemable convertible preferred stock; $.001 par
value; 389,416 shares designated, issued and outstanding at
March 31, 1999 (unaudited); ($3,000,000 aggregate
liquidation value at March 31, 1999 (unaudited)); no shares
issued and outstanding, pro forma.......................... $ -- $ -- $ 3,000,000 $ --
Redeemable common stock; $.001 par value; 105,142 shares
designated, issued and outstanding at March 31, 1999
(unaudited); no shares issued and outstanding, pro forma... -- -- 810,000 --
SHAREHOLDERS' EQUITY:
Convertible preferred stock:
Series A $0.001 par value; 1,644,817 shares authorized,
issued and outstanding at December 31, 1998 and March 31,
1999 (unaudited) ($6,577,526 aggregate liquidation value
at December 31, 1998 and March 31, 1999 (unaudited); no
shares issued and outstanding, pro forma................. -- 1,645 1,645 $ --
Series B $0.001 par value; 674,279 and 526,340 shares
authorized at December 31, 1998 and March 31, 1999,
respectively; 526,340 shares issued and outstanding at
December 31, 1998 and March 31, 1999 (unaudited),
respectively ($3,126,249 aggregate liquidation value at
December 31, 1998 and March 31, 1999 (unaudited); no
shares issued and outstanding, pro forma................. -- 526 526 --
Series C $0.001 par value; 4,482,705 and 3,151,715 shares
authorized at December 31, 1998 and March 31, 1999,
respectively; 2,357,058 and 2,531,592 shares issued and
outstanding at December 31, 1998 and March 31, 1999
(unaudited), respectively ($13,999,990 and $15,036,656
aggregate liquidation value at December 31, 1998 and
March 31, 1999 (unaudited), respectively); no shares
issued and outstanding, pro forma........................ -- 2,357 2,532 --
Series D $0.001 par value; 3,725,803 authorized; 3,115,328
shares issued and outstanding at March 31, 1999
($24,000,000 aggregate liquidation value (unaudited); no
shares issued and outstanding, pro forma................. -- -- 3,115 --
Common stock, $0.001 par value, 17,004,500 and 34,009,000
shares authorized at December 31, 1998 and March 31, 1999,
respectively; 6,286,565 and 4,101,805 shares issued and
outstanding at December 31, 1997 and 1998, respectively;
4,192,759 shares issued and outstanding at March 31, 1999
(unaudited); 12,905,214 shares issued and outstanding, pro
forma...................................................... 6,287 4,102 4,193 12,905
Additional paid-in capital.................................. 9,981,672 24,808,178 48,119,339 51,928,445
Accumulated deficit......................................... (9,405,746) (24,024,005) (27,736,459) (27,736,459)
---------- ------------ ------------ ------------
Total shareholders' equity........................... 582,213 792,803 20,394,891 $ 24,204,891
---------- ------------ ------------ ============
Total liabilities and shareholders' equity........... $4,573,918 $ 3,988,794 $ 27,368,812
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 68
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Products......................... $ 1,336,686 $ 2,127,872 $ 2,711,947 $ 319,494 $ 1,228,621
Services......................... 208,167 317,898 329,008 97,700 --
----------- ----------- ------------ ----------- -----------
1,544,853 2,445,770 3,040,955 417,194 1,228,621
----------- ----------- ------------ ----------- -----------
COST OF REVENUES:
Products......................... 542,604 445,936 1,207,221 72,250 586,811
Services......................... 108,674 316,034 240,684 31,650 --
----------- ----------- ------------ ----------- -----------
651,278 761,970 1,447,905 103,900 586,811
----------- ----------- ------------ ----------- -----------
Gross profit..................... 893,575 1,683,800 1,593,050 313,294 641,810
----------- ----------- ------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing.............. 908,383 2,828,876 8,387,401 1,549,846 2,811,595
Research and development......... 388,885 1,170,710 2,668,328 493,070 736,149
General and administrative....... 920,838 2,598,526 3,863,534 886,692 828,383
Amortization of product
development and patent costs... 71,040 857,899 -- -- --
----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 2,289,146 7,456,011 14,919,263 2,929,608 4,376,127
----------- ----------- ------------ ----------- -----------
Interest income.................. 110,760 181,396 276,681 23,114 30,607
Interest expense................. -- (42,667) (202,333) (60,001) (11,667)
Other income (expense), net...... 90,311 55,453 27,029 -- 2,923
----------- ----------- ------------ ----------- -----------
Net loss............... $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
=========== =========== ============ =========== ===========
Basic and diluted loss per common
share (Note 2)................. $ (0.21) $ (0.89) $ (2.84) $ (0.42) $ (0.90)
Pro forma basic and diluted loss
per share (Note 2)............. $ (1.65) $ (0.39)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 69
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
ON
PREFERRED PREFERRED PREFERRED PREFERRED ADDITIONAL AVAILABLE-FOR-
COMMON STOCK STOCK STOCK STOCK PAID-IN SALE
STOCK SERIES A SERIES B SERIES C SERIES D CAPITAL SECURITIES
------- --------- --------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996............ $5,586 $ -- $ -- $ -- $ -- $ 6,006,829 $ 27,334
Proceeds from issuance of 674,279
common shares, net of related
costs............................ 674 -- -- -- -- 3,973,870 --
Issuance of 27,207 common shares
upon exercise of options......... 27 -- -- -- -- 973 --
Change in net unrealized gain on
securities available-for-sale.... -- -- -- -- -- -- (27,334)
Net loss........................... -- -- -- -- -- -- --
------ ------ ----- ------ ------ ----------- --------
Balances, December 31, 1996.......... 6,287 -- -- -- -- 9,981,672 --
Net loss........................... -- -- -- -- -- -- --
------ ------ ----- ------ ------ ----------- --------
Balances, December 31, 1997.......... 6,287 -- -- -- -- 9,981,672 --
Issuance of 74,820 common shares
upon exercise of options......... 75 -- -- -- -- 2,925 --
Conversion of 2,319,095 shares of
common stock into Series A and B
preferred stock.................. (2,319) 1,645 674 -- -- 15,041 --
Proceeds from issuance of 2,188,698
shares of Series C preferred
stock and warrants, net of
related costs.................... -- -- -- 2,189 -- 12,527,247 --
Conversion of $1,000,000 debenture
into 168,361 shares of Series C
preferred stock.................. -- -- -- 168 -- 999,832 --
Proceeds from issuance of 229,561
shares of common stock and
warrants, net of related costs... 229 -- -- -- -- 1,281,461 --
Exchange of common for preferred
shares and related repurchase and
retirement of 170,045 shares of
Series C preferred stock......... (170) -- -- -- -- -- --
Repurchase and retirement of
147,939 shares of Series B
preferred stock.................. -- -- (148) -- -- -- --
Net loss............................. -- -- -- -- -- -- --
------ ------ ----- ------ ------ ----------- --------
Balances, December 31, 1998.......... 4,102 1,645 526 2,357 -- 24,808,178 --
Proceeds from issuance of 3,115,328
shares of Series D preferred
stock and warrants, net of
related costs (unaudited)........ -- -- -- -- 3,115 22,148,087 --
Issuance of 90,954 common shares
upon exercise of options
(unaudited)...................... 91 -- -- -- -- 126,583 --
Conversion of $1,000,000 debenture
and interest into 174,535 shares
of Series C preferred stock
(unaudited)...................... -- -- -- 175 -- 1,036,491 --
Net loss (unaudited)............... -- -- -- -- -- -- --
------ ------ ----- ------ ------ ----------- --------
Balances, March 31, 1999
(unaudited)........................ $4,193 $1,645 $ 526 $2,532 $3,115 $48,119,339 $ --
====== ====== ===== ====== ====== =========== ========
<CAPTION>
------------
ACCUMULATED
DEFICIT
------------
<S> <C>
Balances, January 1, 1996............ $ (2,633,217)
Proceeds from issuance of 674,279
common shares, net of related
costs............................ --
Issuance of 27,207 common shares
upon exercise of options......... --
Change in net unrealized gain on
securities available-for-sale.... --
Net loss........................... (1,194,500)
------------
Balances, December 31, 1996.......... (3,827,717)
Net loss........................... (5,578,029)
------------
Balances, December 31, 1997.......... (9,405,746)
Issuance of 74,820 common shares
upon exercise of options......... --
Conversion of 2,319,095 shares of
common stock into Series A and B
preferred stock.................. (15,041)
Proceeds from issuance of 2,188,698
shares of Series C preferred
stock and warrants, net of
related costs.................... --
Conversion of $1,000,000 debenture
into 168,361 shares of Series C
preferred stock.................. --
Proceeds from issuance of 229,561
shares of common stock and
warrants, net of related costs... --
Exchange of common for preferred
shares and related repurchase and
retirement of 170,045 shares of
Series C preferred stock......... (499,830)
Repurchase and retirement of
147,939 shares of Series B
preferred stock.................. (878,552)
Net loss............................. (13,224,836)
------------
Balances, December 31, 1998.......... (24,024,005)
Proceeds from issuance of 3,115,328
shares of Series D preferred
stock and warrants, net of
related costs (unaudited)........ --
Issuance of 90,954 common shares
upon exercise of options
(unaudited)...................... --
Conversion of $1,000,000 debenture
and interest into 174,535 shares
of Series C preferred stock
(unaudited)...................... --
Net loss (unaudited)............... (3,712,454)
------------
Balances, March 31, 1999
(unaudited)........................ $(27,736,459)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 70
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation........................ 107,605 132,069 223,562 38,911 77,000
Provision for doubtful accounts
receivable........................ -- 190,000 (20,000) -- --
Loss (gain) on disposal of fixed
assets............................ -- 87,871 -- -- (6,098)
Amortization of product development
and patent costs.................. 71,040 857,899 -- -- --
Accretion of securities
available-for-sale discounts...... (49,816) (51,479) (166,515) -- (11,276)
Provision for inventory
obsolescence...................... 43,533 (43,533) 100,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable............... (147,846) (444,717) (284,281) 180,588 (331,987)
Inventory......................... (59,686) (120,021) (196,387) (74,007) (109,364)
Prepaid expenses.................. (55,416) 6,873 (171,864) (40,669) (142,286)
Other assets...................... (16,356) (161,932) 20,647 (2,367) 76,953
Accounts payable.................. 169,356 (84,750) 75,460 (168,297) (135,750)
Accrued expenses.................. (43,010) 519,605 1,081,178 517,423 131,748
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 3,912 (34,922) 64,458 -- --
Deferred revenue.................. (17,502) (99,798) 54,981 10,275 28,737
----------- ----------- ------------ ----------- -----------
Net cash used in operating
activities................... (1,188,686) (4,824,864) (12,443,597) (2,191,344) (4,134,777)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and
equipment........................... (129,462) (504,331) (913,137) (86,231) (250,764)
Purchases of securities
available-for-sale.................. (3,174,300) (3,932,596) (7,831,124) -- (16,637,585)
Maturities of securities
available-for-sale.................. 5,141,125 3,484,845 8,997,639 1,000,000 --
Proceeds from disposal of equipment... -- -- -- -- 41,941
Patent and product development
costs............................... (677,883) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
investing activities......... 1,159,480 (952,082) 253,378 913,769 (16,846,408)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock............................... 3,975,544 -- 1,284,690 -- 126,674
Net proceeds from issuance of
preferred stock..................... -- -- 12,529,436 -- 26,943,064
Repurchase of preferred and common
stock............................... -- -- (1,378,700) -- --
Issuance (repayment) of convertible
debenture........................... -- 3,000,000 (1,000,000) -- --
Repayments of promissory note......... -- (3,333) (7,333) (2,000) (2,000)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities......... 3,975,544 2,996,667 11,428,093 (2,000) 27,067,738
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 3,946,338 (2,780,279) (762,126) (1,279,575) 6,086,553
Cash and cash equivalents, beginning
of year............................. 659,685 4,606,023 1,825,744 1,825,744 1,063,618
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of
year................................ $ 4,606,023 $ 1,825,744 $ 1,063,618 $ 546,169 $ 7,150,171
=========== =========== ============ =========== ===========
</TABLE>
F-6
<PAGE> 71
INTERACTIVE PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
- ---------------
No income taxes were paid in any period presented. Interest payments totaled $0,
$0 and $202, $333 in the years ended December 31, 1996, 1997 and 1998,
respectively, and $0 in both of the three month periods ended March 31, 1998 and
1999 (unaudited), respectively.
Noncash investing and financing activities:
The Company acquired furniture and equipment of $40,000 in 1997 through the
issuance of a promissory note.
During 1998, a $1,000,000 convertible debenture was converted into 168,361
shares of Series C preferred stock. In addition, 2,319,095 shares of common
stock were exchanged for 1,644,817 shares of Series A preferred stock and
674,279 shares of Series B preferred stock.
During March 1999, a $1,000,000 convertible debenture and accrued interest was
converted into 174,535 shares of Series C preferred stock.
Also during March 1999, the Company issued 105,142 shares of redeemable common
stock for a portion of the placement fee in connection with the issuance of
Series D preferred stock.
At March 31, 1999, offering costs of $981,862 related to the first quarter
private placement had not yet been paid by the Company (unaudited).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 72
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Interactive Pictures Corporation ("IPIX" or the "Company") is engaged in the
design and sale of electronic digital imaging products related to IPIX images.
The Company's patented technology allows viewers to Step Inside the Picture with
IPIX images and changes the way people create and view images, immersing them in
a 360 degrees X 360 degrees spherical environment. IPIX images provide a
complete field of view in a window, which can be navigated by moving a cursor
inside the image.
Using the Company's technology, clients can create virtual tours and multimedia
content to enhance marketing and accelerate electronic commerce over the
Internet. The Company's customers are primarily in the real estate, publishing
and corporate and e-commerce industries. Customers in the real estate and the
corporate and e-commerce markets represented an aggregate of 63%, 57% and 62% of
total revenues for 1996, 1997 and 1998.
The Company performs research and development to enhance its own products, as
well as for other entities with whom the Company has entered into contracts. The
Company also performs content development services for itself and others with
whom the Company has entered into contracts.
The Company is currently preparing a registration statement on Form S-1.
Management anticipates that the registration statement will be filed with the
Securities and Exchange Commission ("SEC") in May 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. Information in the accompanying financial
statements and notes to the financial statements for the interim period as of
March 31, 1999, and for the three-month periods ended March 31, 1998 and 1999,
is unaudited. The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles and Regulation S-X.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of Interactive Pictures Corporation and its
wholly-owned subsidiary, Interactive Pictures UK Limited, a United Kingdom
company formed in 1998. All significant intercompany balances and transactions
have been eliminated. The subsidiary's functional currency is the British Pound.
The cumulative translation adjustment account as of December 31, 1998 and March
31, 1999, was insignificant.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments with a maturity of three months or less when purchased to be cash
equivalents.
SECURITIES AVAILABLE-FOR-SALE. Securities available-for-sale represent those
securities intended to be held for an indefinite period of time. Securities
available-for-sale are recorded at fair value based on prices obtained from
commercial pricing services.
Unrealized gains and losses are excluded from earnings and reported in other
comprehensive income in shareholders' equity. Interest income includes interest,
amortization of purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on the specific
identification method. The securities portfolio at December 31, 1997, consisted
entirely of U.S. government obligations with maturities of less than one year.
Amortized costs approximated fair values and unrealized gains and losses were
insignificant.
F-8
<PAGE> 73
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents, and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from clients located in the U.S. and
abroad. The Company performs ongoing credit evaluations of its clients'
financial condition and generally requires no collateral from its clients. To
date, the Company has not experienced any material losses.
The following table summarizes the revenue from product customers in excess of
10% of total revenues:
<TABLE>
<CAPTION>
------------
1996 1998
---- ----
<S> <C> <C>
Customer A.................................................. 0% 13%
Customer B.................................................. 12 0
Customer C.................................................. 16 0
</TABLE>
At December 31, 1998, Customer A accounted for 16% of accounts receivable. One
additional customer also represented 16% of accounts' receivable at December 31,
1998. Four customers represented 10%, 10%, 11%, and 28%, respectively, of
accounts' receivable at December 31, 1997. However, no customer represented in
excess of 10% of the Company's revenues in 1997, or in the three-month periods
ended March 31, 1998 and 1999 (unaudited).
INVENTORY. Inventory, which consists primarily of digital cameras and related
hardware, is stated at the lower of cost or market, with cost determined using
standard costs (which approximate first-in, first-out costs). The Company
records a provision for obsolete inventory whenever such an impairment has been
identified.
PROPERTY AND EQUIPMENT. Property and equipment consist primarily of computer
equipment and office furnishings, which are stated at cost. Routine maintenance
and repair costs are expensed as incurred. The costs of major additions,
replacements, and improvements are capitalized. Gains and losses from disposals
are included in operations upon disposal. To date, disposals of property and
equipment have been insignificant. Fixed assets are depreciated primarily using
the straight-line method over estimated useful lives, which range from three to
ten years. Leasehold improvements are amortized over the term of the lease, or
estimated useful life whichever is shorter.
PATENTS AND PRODUCT DEVELOPMENT COSTS. External legal costs incurred to
maintain the Company's intellectual property position are capitalized and
amortized over the estimated useful life of the related patents.
The Company also capitalizes eligible software costs incurred after
technological feasibility of the product has been established by a working
model. Capitalized software costs are amortized over the estimated useful life
of the product on a straight-line basis.
During 1997, the Company became aware of certain competitors using alternative
technologies and determined that it was necessary to revise the estimated
economic lives of both capitalized product development costs and patent costs
from five years and seven years, respectively, to one year and three years,
respectively. The effect of the change was to increase amortization expense by
approximately $650,000. Qualifying costs in 1997 and 1998, were insignificant
and, therefore, the Company did not capitalize such costs.
LONG-LIVED ASSETS. The carrying value of intangible assets, property and
equipment, and other long-lived assets is reviewed on a regular basis for the
existence of facts, both internally and externally, that may suggest impairment.
The Company recognizes impairment losses whenever events or circumstances
F-9
<PAGE> 74
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result in the carrying amount of the assets exceeding the sum of the expected
future cash flows associated with such assets. The measurement of the impairment
losses to be recognized is based on the difference between the fair values and
the carrying amounts of the assets. To date no such impairment has been
indicated.
INCOME TAXES. The Company uses the asset and liability method of accounting for
income taxes, which requires the recognition of deferred tax liabilities and
assets for expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. A valuation
allowance against deferred tax assets is recorded if, based upon available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. Tax credits are accounted for as a reduction of tax
expense in the year in which the credits reduce taxes payable.
The Company does not recognize deferred income taxes for temporary differences
associated with its investment in the foreign subsidiary because the differences
are essentially permanent in duration.
Interactive Pictures UK Limited is not included in the tax filing of its parent,
Interactive Pictures Corporation. As a result, Interactive Pictures UK Limited
files a separate return with the United Kingdom jurisdiction governing the
subsidiary.
REVENUE RECOGNITION. Product revenue is recognized upon shipment or delivery to
distributors and end users provided there are no uncertainties surrounding
product acceptance, there are no significant vendor obligations, the fees are
fixed and determinable, and collection is considered probable. The Company
provides an allowance for returns upon recognizing revenue as deemed necessary
based on historical experience. Returns were insignificant for all years
presented. Payments received in advance are initially recorded as deferred
revenue and recognized ratably as obligations are fulfilled.
The Company derives service revenues from research and development activities
performed under fixed-price contracts with certain U.S. government agencies and
other third parties. Such revenues are recognized using the
percentage-of-completion method of accounting (based on the ratio of costs
incurred to total estimated costs, or as certain targets in the development
process are met, as appropriate under the contract). Provisions for estimated
losses on uncompleted contracts are made on a contract-by-contract basis and are
recognized in the period in which such losses become probable and can be
reasonably estimated. To date, such losses have been insignificant. Unbilled
fees and services on contracts are comprised of costs plus estimated earnings on
certain contracts in excess of contractual billings on such contracts. Advanced
billings and billings in excess of costs plus estimated earnings are classified
as deferred revenue.
RESEARCH AND DEVELOPMENT COSTS. Research and development expenditures are
expensed as incurred. Costs incurred under contracts to perform research and
development for others, excluding contracts with government agencies, are
accounted for under Statement of Financial Accounting Standards (SFAS) No. 68,
Research and Development Arrangements (Note 12).
ADVERTISING EXPENSES. All advertising expenditures are expensed as incurred.
Advertising expenses for 1996, 1997 and 1998, were $0, $391,800 and $1,087,000,
respectively. The Company recognizes expenditures under cooperative advertising
arrangements net of reimbursements received from participants.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected to continue
following Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees, and related Interpretations in accounting for stock
options granted to employees rather than the alternative fair value accounting
provided for under SFAS No. 123, Accounting for Stock-Based Compensation
("Statement 123").
F-10
<PAGE> 75
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS. Substantially all historical sales have been
denominated in U.S. dollars. All transaction gains and losses are included in
operations. Such amounts have been insignificant to date.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Examples of
items affected by certain significant estimates made by management are
long-lived assets, including patents and product development costs, certain
accruals, receivables and inventory.
SEGMENT REPORTING. In 1998, the Company adopted Statement of Financial
Accounting Standards 131 ("SFAS 131"), Disclosure About Segments of an
Enterprise and Related Information. SFAS 131 requires use of \the "management"
approach which designates the internal organization that is used by management
for making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position.
PRO FORMA SHAREHOLDERS' EQUITY (UNAUDITED). The accompanying pro forma
shareholders' equity at March 31, 1999 reflects (i) the conversion of all
outstanding shares of preferred stock into an aggregate of 8,207,493 shares of
common stock and (ii) the "cashless exercise" of all outstanding common and
preferred stock warrants calculated using an assumed initial public offering
price of $13.00 (the midpoint of the range) and the conversion of the preferred
shares issued upon the exercise of the preferred stock warrants into common
shares, resulting in the issuance of 399,820 shares of common stock.
NET LOSS PER SHARE. The Company computes net loss per share in accordance with
SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net
loss per share is computed by dividing the net loss available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
share excludes potential common shares if the effect is antidilutive. Potential
common shares are composed of incremental shares of common stock issuable upon
the exercise of potentially dilutive stock options and warrants and upon
conversion of the Company's preferred stock and convertible debenture.
The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
NUMERATOR:
Net loss....................... $(1,194,500) $(5,578,029) $(13,224,836) $(2,653,201) $(3,712,454)
DENOMINATOR:
Weighted average shares........ 5,636,662 6,286,565 4,660,789 6,286,565 4,136,452
NET LOSS PER SHARE:
Basic and diluted.............. $ (0.21) $ (0.89) $ (2.84) $ (0.42) $ (0.90)
</TABLE>
F-11
<PAGE> 76
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth common stock equivalents that are not included in
the diluted net income per share calculation above because to do so would be
antidilutive for the periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average effect of common
stock equivalents
Preferred Stocks:
Series A.......................... -- -- 1,197,061 -- 1,644,817
Series B.......................... -- -- 434,837 -- 526,340
Series C.......................... -- -- 1,511,024 -- 2,374,511
Series D.......................... -- -- -- -- 640,373
Employee stock options.............. 203,018 697,241 661,210 714,056 873,308
Convertible debenture............... -- 86,987 441,481 505,084 151,525
-------- ---------- ----------- ---------- -----------
203,018 784,228 4,245,613 1,219,140 6,210,874
======== ========== =========== ========== ===========
</TABLE>
PRO FORMA NET LOSS PER SHARE (UNAUDITED). Pro forma net loss per share for the
year ended December 31, 1998 and for three months ended March 31, 1999, is
computed using the weighted-average number of common shares outstanding,
including (i) the conversion of all outstanding shares of the Company's
preferred stock into an aggregate of 8,207,493 shares of the Company's common
stock, and (ii) the "cashless exercise" of all outstanding common and preferred
stock warrants calculated using an assumed initial public offering price of
$13.00 (the midpoint of the range) and the conversion of the preferred shares
issued upon exercise of the preferred stock warrants into common shares,
resulting in the issuance of 399,820 shares of common stock, as if such
transactions occurred at the beginning of the respective period, or at the date
of original issuance, if later. The resulting pro forma adjustment includes an
increase in the weighted average shares used to compute basic and diluted net
loss per share of 3,351,726 for the year ended December 31, 1998 and 5,528,164
for the three months ended March 31, 1999. The calculation of diluted net loss
per share excludes other potential common shares described above as the effect
would be antidilutive.
RECLASSIFICATIONS. Certain reclassifications have been made to certain
previously reported 1996 and 1997 amounts to conform with the 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
adoption of SFAS 133 is not expected to have a material impact on the Company's
reported results of operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 is effective for financial
statements for the years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company will adopt the provisions of SOP 98-1 in
its fiscal year ending December 31, 1999, and does not expect such adoption to
have a material effect on the Company's reported results of operations,
financial position, or cash flows.
F-12
<PAGE> 77
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, AICPA issued Statement of Position 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2. SOP 98-4 defers for one year the
application of certain provisions of Statement of Position 97-2, Software
Revenue Recognition. Different informal and nonauthoritative interpretations of
certain provisions of SOP 97-2 have arisen and, as a result, the AICPA issued
SOP 98-9 in December 1998, which is effective for periods beginning after March
15, 1999. SOP 98-9 extends the effective date of SOP 98-4 and provides
additional interpretive guidance. The adoption of SOP 97-2, SOP 98-4 and SOP
98-9 have not had and are not expected to have a material impact on the
Company's reported results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998, provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The adoption of this standard is not expected
to have a material impact on the Company's reported results of operations,
financial position or cash flows.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
---------------------
1997 1998
-------- ----------
<S> <C> <C>
Accrued legal fees.......................................... $210,000 $ 451,000
Accrued vacation............................................ 55,176 137,498
Accrued relocation expenses................................. -- 461,235
Other liabilities........................................... 301,860 598,481
-------- ----------
$567,036 $1,648,214
======== ==========
</TABLE>
4. INCOME TAXES
The components of the Company's net deferred tax asset (liability) as of
December 31, 1997 and 1998, is as follows:
<TABLE>
<CAPTION>
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Financial reserves.......................................... $ 72,000 $ 103,000
Accrued expenses and deferred revenue....................... 91,000 255,000
----------- -----------
163,000 358,000
Valuation allowance......................................... (163,000) (358,000)
----------- -----------
Net current deferred tax asset (liability)........ $ -- $ --
=========== ===========
LONG-TERM:
Net operating loss carryforwards............................ $ 3,121,000 $ 7,911,000
Research and development credits............................ 45,000 45,000
Intangible assets........................................... 259,000 239,000
----------- -----------
3,425,000 8,195,000
Valuation allowance......................................... (3,425,000) (8,195,000)
----------- -----------
Net long-term deferred tax asset (liability)...... $ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE> 78
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company has available net operating loss carryforwards
of approximately $21,000,000, which it may use to offset future federal taxable
income. The net operating loss carryforwards, if not utilized, will begin to
expire in 2009. The Company has available research and development credits of
approximately $45,000 that will expire in 2010.
Income tax benefits have not been recorded since the Company has fully reserved
the tax benefit of temporary differences, operating losses and tax credit
carryforwards based on management's evaluation of the positive and negative
evidence impacting the realizability of the assets, consisting principally of
net operating loss carryforwards. Management has considered the Company's
history of losses and concluded that as of December 31, 1997 and 1998, the
deferred tax assets should be fully reserved.
The Company's 1996, 1997 and 1998 income tax provision differs from that
obtained by using the statutory rate of 34% due to the following:
<TABLE>
<CAPTION>
-------------------------------------
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit............................ $(406,000) $(1,897,000) $(4,496,000)
State income taxes, net of federal income tax benefit...... (48,000) (223,000) (524,000)
Change in valuation allowance.............................. 451,000 2,105,000 4,965,000
Permanent differences...................................... 3,000 15,000 55,000
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
5. DEBT
On October 29, 1997, the Company issued a $3,000,000, 8% convertible debenture
due September 30, 1998 (the Debenture). The debenture was convertible into
505,084 shares of Series C preferred stock. Effective October 23, 1998,
$1,000,000 of the Debenture was assigned by the investor to a group of private
investors who converted such portion of the Debenture into 168,361 shares of
Series C preferred stock. The Company paid off $1,000,000 of the Debenture in
October 1998, and converted the remaining $1,000,000 into 174,535 shares of
Series C preferred stock in March 1999.
The Company entered into a $40,000 noninterest bearing promissory note payable
during August 1997; due in monthly installments of $667, including principal and
imputed interest, through August 2002. The note is collateralized by certain
furniture and equipment of the Company.
6. SHAREHOLDERS' EQUITY
As of December 31, 1997, the Company's outstanding capital stock consisted
solely of common stock. The investment agreements among the Company and certain
corporate investors provide certain rights and obligations to the parties,
including but not limited to board representation, the issuance of equity
securities, and public registration and antidilution rights.
During April 1998, the Company authorized and issued to new corporate investors
2,188,698 shares of Series C preferred stock, as well as warrants to purchase an
additional 609,460 shares of Series C preferred stock, for net proceeds of
$12,529,436. The warrants expire five years from the issuance or upon
consummation of a "qualified public offering," as defined in the warrant
agreements. The warrant exercise price for 547,175 shares is $5.94 and $7.12 for
the remaining shares under these warrants.
In connection with the Series C transaction, the Company exchanged, on a
one-for-one basis, an aggregate of 2,319,095 shares of common stock for
1,644,817 shares of Series A preferred stock and 674,279 shares of Series B
preferred stock.
F-14
<PAGE> 79
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During August 1998, the Company issued warrants to purchase 22,956 shares of
common stock. These warrants have an exercise price of $7.12 per share and
expire three years from the issuance or upon consummation of a "qualified public
offering," as defined in the warrant agreement.
On March 19 and April 12, 1999, the Company amended its Charter to (i) increase
the number of common shares authorized to 34,009,000 shares; (ii) change the
authorized number of shares of Series B and C preferred stock to 526,340 and
3,151,715, respectively; and (iii) change the par value of its common stock to
$0.001. All amounts included in the accompanying financial statements have been
restated to retroactively reflect the change in par value.
Subsequent to the year ended December 31, 1998, the Company issued an aggregate
of 3,504,744 shares of Series D preferred stock for gross proceeds of
$27,000,000, of which approximately $16,600,000 was invested in commercial paper
with maturities of less than one year. These obligations are reported at
amortized cost, which approximates fair value.
In connection with the Series D issuance, warrants to purchase 221,059 shares of
Series D preferred stock were issued. The warrants have an exercise price of
$9.23 and expire three years from issuance or upon consummation of a "qualified
public offering," as defined in the warrant agreement.
In April 1999, the Company issued 6,802 warrants to purchase common stock at
$9.23 per share. These warrants expire three years from issuance or upon
consummation of a "qualified public offering," as defined in the warrant
agreement.
The Company's amended Charter provides the following rights and preferences to
the holders of Series A, B, C and D preferred stock:
VOTING
Each share of all series of preferred stock has voting rights equal to an
equivalent number of shares of common stock into which it is convertible
and votes together as one class with the common stock.
The consent of the holders of greater than 70% of the outstanding shares of
Series A, B and C preferred stock will be necessary to effect certain
changes to the Company's Charter that would adversely affect the powers,
preferences and other rights of the preferred stock.
The consent of the holders of greater than a majority of the outstanding
shares of Series D preferred stock will be necessary to effect certain
changes to the Company's Charter.
The holders of Series A and B preferred stock shall each be entitled to
elect one director at each annual meeting of the stockholders. The holders
of Series C and D preferred stock shall be entitled to elect two directors
at each meeting.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series A, B and C preferred stock are
entitled to receive an amount of $3.9989, $5.9396 and $5.9396 per share,
respectively, prior to and in preference to any distribution to the holders
of common stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series D preferred stock are entitled
to receive an amount of $7.7038 per share prior to
F-15
<PAGE> 80
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and in preference to any distribution to the holders of common stock and
all other classes of preferred stock.
CONVERSION
Each share of all series of outstanding preferred stock is convertible, at
the option of the holder, according to a conversion ratio which is subject
to adjustment for dilution. In the event that the per share offering price
of proceeds from a "qualified public offering," as defined in the Company's
charter, exceed certain thresholds, each share of all series of outstanding
preferred stock automatically converts on a one-for-one basis to common
stock.
DIVIDENDS
Holders of preferred stock are entitled to receive noncumulative dividends
when and if declared by the Board of Directors. No dividends have been
declared through December 31, 1998.
The Company provided put options to certain of its underwriters upon their
purchase for cash of 389,416 shares of Series D convertible preferred stock and
105,142 shares of common stock. The option holders can exercise the options at
the close of an initial public offering only if the National Association of
Securities Dealers, Inc. (NASD) concludes upon the close of the initial public
offering that the underlying stock issuances result in compensation to the
underwriters in excess of its allowed limits. Upon exercise of the options by
the holders, the Company must pay cash to the holders of the original purchase
price of each share. There is no provision for unpaid dividends. The Company has
presented the shares of convertible preferred stock and common stock subject to
the put options as mandatorily redeemable stock in the balance sheet. The
Company has concluded that redemption value of these securities is the same as
the amount at which the securities were initially recorded.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments have been estimated using data which the
Company considered the best available. The following estimation methodologies
were used:
CASH AND CASH EQUIVALENTS. Cash and cash equivalents are reflected at
carrying value, which is considered fair value due to the short-term nature
of these instruments.
ACCOUNTS RECEIVABLE. Accounts receivable consists primarily of trade
receivables. The Company has estimated their fair value to be the carrying
value.
SECURITIES AVAILABLE-FOR-SALE. The estimated fair value of securities
available-for-sale is based on the quoted market prices for those or
similar investments. Amortized costs approximate fair value.
CONVERTIBLE DEBENTURE AND PROMISSORY NOTE. Fair values are based on quoted
market prices for the same or similar issues, or the carrying value is used
where a market price is unavailable. The carrying value is assumed to be
the fair value for these liabilities as no market price for a comparable
instrument was available.
REDEEMABLE COMMON AND PREFERRED STOCKS. Redeemable common and preferred
stocks are recorded at their redemption amounts which is considered to
approximate fair value.
F-16
<PAGE> 81
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE STOCK AND BENEFIT PLANS
STOCK OPTION PLAN
The Company has authorized the 1997 Equity Compensation Plan (the Plan), under
which 1,998,559 shares of common stock are authorized and reserved for issuance
to selected employees, officers, directors, consultants and advisors. The
Company has reserved a sufficient number of shares of common stock for issuance
pursuant to the authorized options. As of December 31, 1998, 547,970 options had
been granted under this Plan. In addition, the Company has granted certain
options to purchase shares of the Company's common stock to employees not under
the Plan; these options were primarily granted prior to the authorization of the
1997 plan. The exercise price of all options granted is the fair value of the
Company's common stock at the date of grant as estimated by common stock and
convertible preferred stock transactions with third parties at or near grant
dates. The options generally vest over one to three-year periods and expire five
years after the respective vesting dates.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE STOCK AVERAGE
OF EXERCISE GRANT DATE OPTIONS EXERCISE
SHARES PRICES FAIR VALUE EXERCISABLE PRICE
------ ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Under option at January 1, 1996..... 519,467
Options granted in 1996............. 140,117 $3.68 $0.97
Options exercised in 1996........... (27,207) 0.03
Options cancelled in 1996........... (40,811) 3.68
---------
Under option at December 31, 1996... 591,566 446,008 $0.56
Options granted in 1997............. 891,733 4.06 0.97
Options cancelled in 1997........... (107,468) 3.68
---------
Under option at December 31, 1997... 1,375,831 677,103 1.62
Options granted in 1998............. 536,067 6.00 1.21
Options exercised in 1998........... (74,820) 0.03
Options cancelled in 1998........... (11,337) 6.47
---------
Under option at December 31, 1998... 1,825,741 835,192 2.47
=========
</TABLE>
The following table summarizes information about stock options at December 31,
1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AT REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICE 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03 308,611 0.7 years $0.03 308,611 $0.03
$3.68 872,688 2.7 years $3.68 486,677 $3.68
$5.94 - $6.47 644,442 8.9 years $6.06 39,904 $6.41
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under APB 25, because the exercise price of the Company's stock options equals
the deemed fair value of the underlying stock on the date of the grant, no
compensation cost has been recognized in the
F-17
<PAGE> 82
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying financial statements. Pro forma information regarding net loss is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of Statement 123.
The Company has determined that the difference between historical results and
such pro forma information would have been to increase the net loss by $133,037,
$311,129 and $300,876 in 1996, 1997 and 1998, respectively, and to increase the
net loss per share to $(0.24), $(0.94), and $(2.91) in 1996, 1997 and 1998,
respectively.
The minimum fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected lives of five years, risk free interest
rate of 6.21% in 1996, 5.71% in 1997, 4.59% in 1998, and expected dividends and
volatility of zero in 1996, 1997 and 1998. Because the determination of fair
value of all options granted after such time as the Company becomes a public
entity would include an expected volatility factor in addition to the factors
described in this paragraph, these results may not be representative of future
periods.
401(K) PLAN
The Company has a 401(k) profit sharing plan which is available to all full-time
employees after six months of service and those part-time employees who have
completed one thousand hours of employment during twelve consecutive months. The
Company will match sixty-five cents per dollar up to 6.15% of the employee's
annual salary. The Company made contributions of $33,432, $43,803 and $116,071
in 1996, 1997 and 1998, respectively.
9. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which establishes new requirements for reporting and displaying
comprehensive income (loss) and its components. The adoption of SFAS No. 130 has
no impact on the Company's net loss or total stockholders' equity. This new
accounting standard requires net unrealized gains or losses on the Company's
available-for-sale securities to be reported as accumulated other comprehensive
income (loss).
The following reclassification adjustments are required to avoid double-counting
net realized gains on sales of securities that were previously included in
comprehensive income prior to the sales of the securities:
<TABLE>
<CAPTION>
--------
1996
--------
<S> <C>
Net gains on sales of securities included in interest
income.................................................... $ 27,334
Other comprehensive income reclassification adjustment...... (27,334)
--------
Net unrealized gain (loss) reported in other comprehensive
income................................................. $ --
========
</TABLE>
10. SEGMENT INFORMATION
The Company has two reportable segments: 1) IPIX products, and 2) research and
development services for others. The accounting policies of the segments are the
same as those of the Company. The Company evaluates the performance of its
segments and allocates resources to them based solely on evaluation of gross
profit. There are no inter-segment revenues. The Company does not make
allocations of corporate costs to the individual segments and does not identify
separate assets of the segments in making decisions regarding performance or
allocation of resources to them. Management believes the Company's future growth
will occur in the IPIX products segment.
F-18
<PAGE> 83
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about reported segments for the years ended December 31, 1996, 1997
and 1998, and the three-month periods ended March 31, 1998 and 1999, is as
follows:
<TABLE>
<CAPTION>
--------------------------------------
RESEARCH AND
DEVELOPMENT
IPIX SERVICES
PRODUCTS FOR OTHERS TOTAL
---------- ------------ ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31:
1996
Revenues................................................. $1,336,686 $208,167 $1,544,853
Gross profit............................................. $ 794,082 $ 99,493 $ 893,575
1997
Revenues................................................. $2,127,872 $317,898 $2,445,770
Gross profit............................................. $1,681,936 $ 1,864 $1,683,800
1998
Revenues................................................. $2,711,947 $329,008 $3,040,955
Gross profit............................................. $1,504,726 $ 88,324 $1,593,050
THREE MONTHS ENDED MARCH 31:
1998 (UNAUDITED)
Revenues................................................. $ 319,494 $ 97,700 $ 417,194
Gross profit............................................. $ 247,244 $ 66,050 $ 313,294
1999 (UNAUDITED)
Revenues................................................. $1,228,621 $ -- $1,228,621
Gross profit............................................. $ 641,810 $ -- $ 641,810
</TABLE>
Revenue and long-lived asset information by geographic area as of and for the
years ended December 31, 1996, 1997 and 1998 and the three-month periods ended
March 31, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
United States......................... $1,147,845 $1,833,851 $2,403,793 $268,227 $ 978,899
Japan................................. 138,000 273,093 352,330 82,650 4,825
Singapore............................. 259,008 143,364 13,000 -- 1,695
United Kingdom........................ -- 21,537 40,979 48,395 194,619
Other foreign countries............... -- 173,925 230,853 17,922 48,583
---------- ---------- ---------- -------- ----------
$1,544,853 $2,445,770 $3,040,955 $417,194 $1,228,621
========== ========== ========== ======== ==========
LONG-LIVED ASSETS:
Foreign............................... $ -- $ 14,962 $ 23,006
United States......................... 662,967 1,337,580 1,467,457
---------- ---------- ----------
$ 662,967 $1,352,542 $1,490,463
========== ========== ==========
</TABLE>
Foreign revenues include all sales made to customers outside the United States,
including those generated by the UK subsidiary.
F-19
<PAGE> 84
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain office space under noncancelable operating leases.
Future minimum lease payments with remaining terms in excess of one year are as
follows:
<TABLE>
<S> <C>
----------
1999........................................................ $ 536,567
2000........................................................ 419,488
2001........................................................ 376,143
2002........................................................ 328,968
2003........................................................ 55,530
----------
$1,716,696
==========
</TABLE>
Rental expense for operating leases was $46,378, $152,120 and $430,010 for 1996,
1997 and 1998, respectively.
The Company is subject to claims in the ordinary course of business. Management
believes the ultimate resolution of these matters will have no material impact
on the financial condition, results of operations or cash flows of the Company.
12. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company performs certain research and development activities under various
third party contracts under which the Company receives payments upon achieving
certain targets in the development process. One of these contracts provided for
receipt of royalties under a license agreement. The remaining contract for which
information is disclosed below included no such arrangements. Both of these
contracts expired prior to December 31, 1998.
Total revenue earned and costs incurred under third party research and
development contracts, excluding contracts with government agencies, at December
31, is as follows:
<TABLE>
<CAPTION>
----------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Revenue earned.............................................. $79,750 $104,500 $62,700
Cost incurred............................................... 44,693 208,168 --
</TABLE>
13. SUBSEQUENT EVENTS
On July 2, 1999, the Board of Directors approved a 0.34009-for-1 reverse stock
split. All references to number of shares, per share amounts, stock option data,
and warrant exercise prices have been restated for all periods presented.
Unaudited
In April and May of 1999, the Company issued options to employees and directors
to purchase 795,130 shares of common stock at $7.70 per share. The Company
recorded deferred stock compensation totalling approximately $1,034,000 during
these time periods which represents the difference between the deemed fair
market value of the Company's common stock for accounting purposes and the
exercise price of the options at the date of grant. The deferred stock
compensation will be presented as a reduction of shareholders' equity and will
be amortized over the three year vesting period of the options.
In October 1998, a lawsuit was filed against the Company. This lawsuit alleged
that the Company breached a duty of confidence, made misrepresentations and
misappropriated trade secrets. The Company removed this action to arbitration
and cross-claimed alleging various affirmative claims. The court dismissed the
lawsuit in May 1999 upon motion of the plaintiffs. However, arbitration is
expected to take place in the fall of 1999. In May 1999, one of the original
plaintiffs filed a second lawsuit against the Company
F-20
<PAGE> 85
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
alleging patent infringement. Management believes that the claims are without
merit and intends to vigorously defend against such claims. Since the plaintiffs
have not specified in their lawsuit the amount of damages they seek, an estimate
of the ultimate liability of the Company cannot be made. If the Company does not
effectively defend against the claims, the Company's financial condition,
results of operations and cash flows could be materially adversely affected.
By letter dated June 7, 1999, the NASD informed the Company that it would
consider a portion of the redeemable convertible preferred stock and redeemable
common stock to be underwriting compensation received in connection with the
proposed initial public offering in excess of the amounts allowable under the
NASD's Conduct Rules (Note 6). In order to comply with the NASD's Conduct Rules,
the Company will repurchase the requisite number of shares of common stock,
including shares representing the redeemable convertible preferred stock and the
redeemable common stock, immediately following the consummation of the initial
public offering. The number of shares that the Company will be required to
repurchase will not be known until the offering price has been determined and
the underwriters have exercised or waived their over-allotment option.
F-21
<PAGE> 86
(LOGO IPIX INTERACTIVE PICTURES CORPORATION)
<PAGE> 87
[INSIDE BACK COVER]
-------------------
CURRENT PRODUCTS
-------------------
Film for the Internet
IPIX Keys
Camera Kits
Kodak, Nikon & Olympus
In-house Studio Work
IPIX Photography and Web Development
IPIX Stockhouse
IPIX Stock Photography
------------------------------
NEW PRODUCT DEVELOPMENT
------------------------------
The Eyes of the Internet
IPIX Webcam
[IPIX Webcam logo image]
V360 Steerable Video
[V360 logo image]
IPIX On Location
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered, other than the underwriting discount, are
estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 18,800
NASD Fees................................................... 7,262
NASDAQ Listing Fees......................................... 95,000
Printing and Engraving Expenses............................. 120,000
Legal Fees and Expenses..................................... 250,000
Accountants' Fees and Expenses.............................. 150,000
Transfer Agent and Registrar's Fees......................... 10,000
Miscellaneous Costs......................................... 98,938
--------
Total............................................. $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Tennessee Business Corporation Act ("TBCA") provides that a corporation may
indemnify any director or officer against liability incurred in connection with
a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interests, and, in all other cases, that his or her conduct
was not opposed to the best interests of the corporation, and (iii) the director
or officer in connection with any criminal proceeding had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer is adjudged liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director or officer, if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expense if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
Our amended and restated charter and bylaws will provide that we will indemnify
from liability, and advance expenses to, any present or former director or
officer to the fullest extent allowed by the TBCA, as amended from time to time,
or any subsequent law, rule, or regulation adopted in lieu thereof.
Additionally, our charter will provide that no director will be personally
liable to us or any of our shareholders for monetary damages for breach of any
fiduciary duty except for liability arising from (i) any breach of a director's
duty of loyalty to us or our shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, or
(iii) any unlawful distributions.
The proposed form of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement contains certain provisions relating to our
indemnification and our controlling persons by the Underwriters and relating to
the indemnification of the Underwriters by us, our controlling persons and the
selling shareholders.
II-1
<PAGE> 89
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the past
three years involving sales of the Registrant's securities that were not
registered under the Securities Act.
Within the past three years, the Registrant has issued options to purchase
2,205,585 shares of its common stock to various employees, officers, directors,
consultants and advisors with exercise prices ranging from $.03 to $7.70 per
share. Within the past three years, we have issued 240,593 shares of common
stock pursuant to stock option exercises for an aggregate consideration of
$132,674, at an average exercise price of $.56 per share.
In December 1996, the Registrant issued to each of Motorola, Inc. and Discovery
Communications, Inc. an aggregate of 674,279 shares of common stock for an
aggregate purchase price of $4,000,000.
In October 1997, the Registrant issued to a private investor a $3,000,000
aggregate principal amount, 8% convertible debenture.
On April 9, 1998, the Registrant issued to Motorola 1,495,177 shares of Series A
preferred stock and 337,139 shares of Series B preferred stock in exchange for
1,832,316 shares of common stock of the Registrant. No cash consideration was
paid in connection with this exchange.
On April 9, 1998, the Registrant issued to Discovery 337,139 shares of Series B
preferred stock in exchange for a like number of shares of common stock of the
Registrant. No cash consideration was paid in connection with this exchange.
From April to July 1998, the Registrant issued to eight private investors an
aggregate of 2,188,698 shares of Series C preferred stock for an aggregate
purchase price of $13,000,000. In connection with such sale, the Registrant
issued to these investors warrants to purchase an aggregate of 547,175 shares of
Series C preferred stock at an exercise price of $5.94 per share. Morgan Keegan
& Company, Inc. acted as the Registrant's placement agent in this transaction
and received cash commissions of $265,450 and warrants to purchase 62,285 shares
of Series C preferred stock for an exercise price of $7.12 per share.
In May 1998, the Registrant issued to two shareholders an aggregate of 149,640
shares of Series A preferred stock in exchange for a like number of shares of
common stock of the Registrant. No cash consideration was paid in connection
with this exchange.
In August 1998, the Registrant issued to 17 private investors an aggregate of
229,561 shares of common stock of the Registrant for an aggregate consideration
of $1,363,500. Morgan Keegan acted as the Registrant's placement agent for this
transaction and received cash commissions of $81,810 and a warrant to purchase
22,956 shares of common stock at an exercise price of $7.12 per share.
From January to March 1999, the Registrant issued to 16 private investors an
aggregate of 3,504,744 shares of Series D preferred stock for an aggregate
purchase price of $27,000,000. In connection with this transaction, the
Registrant issued to one of the investors a warrant to purchase an aggregate of
221,059 shares of Series D preferred stock at an exercise price of $9.23 per
share. J.P. Morgan & Co. acted as placement agent for the Registrant to this
transaction and received a commission of $1,620,000, half of which was paid in
cash and the remainder with 105,142 shares of common stock.
In April 1999, the Registrant issued to a software provider a warrant to
purchase 6,802 shares of common stock at an exercise price of $9.23 per share.
In July 1999, the Registrant entered into an agreement with one private investor
to issue $1,000,000 of common stock at the initial public offering price at a
future date.
The issuance of securities described in Item 15 were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. The
issuance of securities described under the first paragraph of Item 15 was deemed
to
II-2
<PAGE> 90
be exempt from registration under the Securities Act in reliance on Section 4(2)
or Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1 -- Form of the Underwriting Agreement among Interactive
Pictures Corporation, the selling shareholders and the
underwriters
3.1** -- Form of Amended and Restated Charter of Interactive Pictures
Corporation
3.2** -- Form of Amended and Restated Bylaws of Interactive Pictures
Corporation
4.1 -- Form of certificate representing the common stock, $.001 par
value per share of Interactive Pictures Corporation
4.2** -- Amended and Restated Registration Rights Agreement dated
December 23, 1996, between Interactive Pictures Corporation,
Motorola, Inc. and Discovery Communications, Inc.
4.3** -- Rights Agreement dated April 9, 1998, between Interactive
Pictures Corporation and purchasers of Series C Preferred
Stock
4.4** -- Amended and Restated Rights Agreement dated March 22, 1999,
between Interactive Pictures Corporation and purchasers of
Series D Preferred Stock
5.1 -- Opinion of Baker, Donelson, Bearman and Caldwell as to the
legality of the common stock being offered
10.1** -- Executive Employment Agreement dated January 24, 1997,
between Interactive Pictures Corporation and James M.
Phillips, as amended
10.2** -- Employment and Noncompetition Agreement dated June 20, 1997,
between Interactive Pictures Corporation and John M. Murphy
10.3** -- Employment and Noncompetition Agreement dated August 17,
1998, between Interactive Pictures Corporation and Jeffrey
D. Peters
10.4** -- Employment and Noncompetition Agreement dated August 24,
1998, between Interactive Pictures Corporation and John J.
Kalec
10.5** -- Employment Agreement dated June 23, 1997, between
Interactive Pictures Corporation and Steven D. Zimmermann
10.6** -- License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Discovery
Communications, Inc.
10.7** -- Patent License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Motorola, Inc.
10.8** -- 1997 Equity Compensation Plan
10.9** -- Marketing Agreement dated March 22, 1999, between
Interactive Pictures Corporation and GE Capital Equity
Investments, Inc.
10.10** -- Warrant Agreement dated March 22, 1999, between Interactive
Pictures Corporation and GE Capital Equity Investments, Inc.
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Baker, Donelson, Bearman & Caldwell (included in
opinion filed as Exhibit 5.1)
</TABLE>
II-3
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
24.1** -- Power of Attorney (included on page II-5)
27.1** -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
** Previously filed
Schedules
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
All schedules have been omitted because either they are not required, or not
applicable or the information is otherwise set forth in the consolidated
financial statements and notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) To provide the underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names
as required by the underwriter to permit prompt delivery to each purchaser.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Interactive Pictures Corporation, has duly caused this amendment no. 2 to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Oak Ridge, State of Tennessee, on this 30th day
of July, 1999.
INTERACTIVE PICTURES CORPORATION
By: /s/ *
------------------------------------
James M. Phillips
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ * Chairman of the Board of Directors July 30, 1999
- --------------------------------------------------- and Chief Executive Officer
James M. Phillips
/s/ * President and Chief Operating July 30, 1999
- --------------------------------------------------- Officer
Jeffrey D. Peters
/s/ * Vice President and Chief Financial July 30, 1999
- --------------------------------------------------- Officer (Principal Accounting
John J. Kalec Officer)
/s/ * Director July 30, 1999
- ---------------------------------------------------
John S. Hendricks
/s/ * Director July 30, 1999
- ---------------------------------------------------
Doug Holmes
/s/ * Director July 30, 1999
- ---------------------------------------------------
Laban P. Jackson, Jr.
/s/ * Director July 30, 1999
- ---------------------------------------------------
Randall Battat
*By: /s/ JOHN J. KALEC
--------------------------------------------
John J. Kalec
Power of Attorney
</TABLE>
II-5
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1 -- Form of the Underwriting Agreement among Interactive
Pictures Corporation, the selling shareholders and the
underwriters
3.1** -- Form of Amended and Restated Charter of Interactive Pictures
Corporation
3.2** -- Form of Amended and Restated Bylaws of Interactive Pictures
Corporation
4.1 -- Form of certificate representing the common stock, $.001 par
value per share of Interactive Pictures Corporation
4.2** -- Amended and Restated Registration Rights Agreement dated
December 23, 1996, between Interactive Pictures Corporation,
Motorola, Inc. and Discovery Communications, Inc.
4.3** -- Rights Agreement dated April 9, 1998, between Interactive
Pictures Corporation and purchasers of Series C Preferred
Stock
4.4** -- Amended and Restated Rights Agreement dated March 22, 1999,
between Interactive Pictures Corporation and purchasers of
Series D Preferred Stock
5.1 -- Opinion of Baker, Donelson, Bearman and Caldwell as to the
legality of the common stock being offered
10.1** -- Executive Employment Agreement dated January 24, 1997,
between Interactive Pictures Corporation and James M.
Phillips, as amended
10.2** -- Employment and Noncompetition Agreement dated June 20, 1997,
between Interactive Pictures Corporation and John M. Murphy
10.3** -- Employment and Noncompetition Agreement dated August 17,
1998, between Interactive Pictures Corporation and Jeffrey
D. Peters
10.4** -- Employment and Noncompetition Agreement dated August 24,
1998, between Interactive Pictures Corporation and John J.
Kalec
10.5** -- Employment Agreement dated June 23, 1997, between
Interactive Pictures Corporation and Steven D. Zimmermann
10.6** -- License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Discovery
Communications, Inc.
10.7** -- Patent License Agreement dated January 17, 1997, between
Interactive Pictures Corporation and Motorola, Inc.
10.8** -- 1997 Equity Compensation Plan
10.9** -- Marketing Agreement dated March 22, 1999, between
Interactive Pictures Corporation and GE Capital Equity
Investments, Inc.
10.10** -- Warrant Agreement dated March 22, 1999, between Interactive
Pictures Corporation and GE Capital Equity Investments, Inc.
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Baker, Donelson, Bearman & Caldwell (included in
opinion filed as Exhibit 5.1)
24.1** -- Power of Attorney (included on page II-5)
27.1** -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
** Previously filed
<PAGE> 1
EXHIBIT 1.1
INTERACTIVE PICTURES CORPORATION
4,200,000 Shares of Common Stock
Underwriting Agreement
, 1999
J.P. Morgan Securities Inc.
Hambrecht & Quist LLC
Morgan Keegan & Company, Inc.
Stephens Inc.
As Representatives of the several underwriters
listed in Schedule I hereto
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Interactive Pictures Corporation, a Tennessee corporation (the
"Company"), proposes to issue and sell to the several Underwriters listed in
Schedule I hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 3,850,000 shares (the
"Company Underwritten Shares") of common stock, par value $.001 per share, of
the Company (the "Common Stock") and certain shareholders of the Company named
in Schedule II hereto (the "Selling Shareholders") propose to sell to the
several Underwriters an aggregate of 350,000 shares (the "Selling Shareholder
Underwritten Shares" and, together with the Company Underwritten Shares, the
"Underwritten Shares") of Common Stock. In addition, at the option of the
Underwriters and for the sole purpose of covering over-allotments in connection
with the sale of the Underwritten Shares, the Company proposes to issue and sell
to the Underwriters up to an additional 630,000 shares (the "Option Shares") of
Common Stock. The Underwritten Shares and the Option Shares are herein referred
to as the "Shares."
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement, including a prospectus, relating to the Shares. The registration
statement as amended at the time when it shall become effective including
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rule 430A under the Securities Act, is referred to
in this
<PAGE> 2
-2-
Agreement as the "Registration Statement", and the prospectus in the form first
used to confirm sales of Shares is referred to in this Agreement as the
"Prospectus." If the Company has filed an abbreviated registration statement
pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration
Statement"), then any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462 Registration Statement.
1. The Company agrees to issue and sell the Company Underwritten
Shares, and the Selling Shareholders agree, severally and not jointly, to sell
the Selling Shareholder Underwritten Shares set forth opposite the name of each
such Selling Shareholder on Schedule II hereto to the several Underwriters as
hereinafter provided, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees to purchase, severally and not jointly, from the
Company and the Selling Shareholders at a purchase price per share of $____ (the
"Purchase Price") the number of Underwritten Shares (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying the aggregate number
of Underwritten Shares to be sold by the Company and the Selling Shareholders by
a fraction, the numerator of which is the aggregate number of Underwritten
Shares to be purchased by such Underwriter as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Underwritten Shares to be purchased by all the Underwriters
from the Company and the Selling Shareholders hereunder.
In addition, the Company agrees to sell the Option Shares to the
several Underwriters, and the Underwriters shall have the option to purchase at
their election up to 630,000 Option Shares from the Company for the sole purpose
of covering over-allotments in the sale of the Underwritten Shares. The
Underwriters, on the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, shall have the
option to purchase, severally and not jointly, from the Company at the Purchase
Price that portion of the number of Option Shares as to which such election
shall have been exercised (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying such number of Option Shares by a fraction the
numerator of which is the maximum number of Option Shares which such Underwriter
is entitled to purchase and the denominator of which is the maximum number of
Option Shares that all of the Underwriters are entitled to purchase hereunder,
for the sole purpose of covering over-allotments (if any) in the sale of the
Underwritten Shares by the several Underwriters.
The Underwriters may exercise the option to purchase the Option Shares
at any time (but not more than once) on or before the thirtieth day following
the date of this Agreement, by written notice from the Representatives to the
Company. Such notice shall set forth the aggregate number of Option Shares as to
which the option is being exercised and the date and time when the Option Shares
are to be delivered and paid for which may be the same date and time as the
Closing Date (as hereinafter defined) but shall not be earlier
<PAGE> 3
-3-
than the Closing Date nor later than the tenth full Business Day (as hereinafter
defined) after the date of such notice (unless such time and date are postponed
in accordance with the provisions of Section 9 hereof). Any such notice shall be
given at least two full Business Days prior to the date and time of delivery
specified therein.
2. The Company and the Selling Shareholders understand that the
Underwriters intend (i) to make a public offering of the Shares as soon after
(A) the Registration Statement has become effective and (B) the parties hereto
have executed and delivered this Agreement, as in the judgment of the
Representatives is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
3. Payment for the Shares shall be made by wire transfer in
immediately available funds (X) to the account specified to the Representatives
by the Company with regard to payment to the Company in the case of the Company
Underwritten Shares and to the account specified by the Attorneys-in-Fact (as
defined below) with regard to payment to the Selling Shareholders with regard to
the Selling Shareholder Underwritten Shares, on , 1999, or at such other
time on the same or such other date, not later than the fifth Business Day
thereafter, as the Representatives and the Company and the Selling Shareholders
may agree upon in writing or (Y) to the account specified to the Representatives
by the Company with regard to payment to the Company with regard to the Option
Shares on the date and time specified by the Representatives in the written
notice of the Underwriters' election to purchase such Option Shares. The time
and date of such payment for the Underwritten Shares is referred to herein as
the "Closing Date" and the time and date for such payment for the Option Shares,
if other than the Closing Date, are herein referred to as the "Additional
Closing Date." As used herein, the term "Business Day" means any day other than
a day on which banks are permitted or required to be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than two
full Business Days prior to the Closing Date or the Additional Closing Date, as
the case may be, with any transfer taxes payable in connection with the transfer
to the Underwriters of the Shares duly paid by the Company or the Selling
Shareholders, as the case may be. The certificates for the Shares will be made
available for inspection and packaging by the Representatives at the office of
J.P. Morgan Securities Inc. set forth above not later than 1:00 P.M., New York
City time, on the Business Day prior to the Closing Date or the Additional
Closing Date, as the case may be.
4. (A) The Company represents and warrants to each Underwriter
and each Selling Shareholder that:
<PAGE> 4
-4-
(a) no order preventing or suspending the use of any
preliminary prospectus has been issued by the Commission, and each
preliminary prospectus filed as part of the Registration Statement as
originally filed or as part of any amendment thereto, or filed pursuant
to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Company in writing by such Underwriter through the Representatives
expressly for use therein;
(b) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose has been instituted or, to the knowledge of the Company,
threatened by the Commission; and the Registration Statement and
Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) comply, or will
comply, as the case may be, in all material respects with the
Securities Act and do not and will not, as of the applicable effective
date as to the Registration Statement and any amendment thereto and as
of the date of the Prospectus and any amendment or supplement thereto,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented, if applicable, at the Closing Date or Additional Closing
Date, as the case may be, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that the foregoing representations and
warranties shall not apply to statements or omissions in the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Company in writing by such Underwriter through the Representatives
expressly for use therein;
(c) the financial statements, and the related notes
thereto, included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and
its consolidated subsidiaries as of the dates indicated and the results
of their operations and changes in their consolidated cash flows for
the periods specified; said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis, and the supporting schedules included in the
Registration Statement present fairly the information required to be
stated therein;
<PAGE> 5
-5-
(d) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of the Company
or any of its subsidiaries, or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, business, prospects, management,
financial position, shareholders' equity or results of operations of
the Company and its subsidiaries, taken as a whole (a "Material Adverse
Change"), otherwise than as set forth or contemplated in the
Prospectus; and except as set forth or contemplated in the Prospectus
neither the Company nor any of its subsidiaries has entered into any
transaction or agreement (whether or not in the ordinary course of
business) material to the Company and its subsidiaries taken as a
whole;
(e) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in
the Prospectus, and has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification, other than
where the failure to be so qualified or in good standing would not have
a material adverse effect on the general affairs, business, prospects,
management, financial position, shareholders' equity or results of
operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect");
(f) each of the Company's subsidiaries has been duly
incorporated or organized and is validly existing as a corporation
under the laws of its jurisdiction of incorporation or organization,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus, and has been
duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of each jurisdiction in which it
owns or leases properties, or conducts any business, so as to require
such qualification, other than where the failure to be so qualified or
in good standing would not have a Material Adverse Effect; and all the
outstanding shares of capital stock of each subsidiary of the Company
have been duly authorized and validly issued, are fully-paid and
non-assessable, and (except, in the case of foreign subsidiaries, for
directors' qualifying shares and except as described in the Prospectus)
are owned by the Company, directly or indirectly, free and clear of all
liens, encumbrances, security interests and claims;
(g) this Agreement has been duly authorized, executed and
delivered by the Company;
<PAGE> 6
-6-
(h) the Company has an authorized capitalization as set
forth in the Prospectus and such authorized capital stock conforms as
to legal matters to the description thereof set forth in the
Prospectus, and all of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully-paid
and non-assessable and are not subject to any pre-emptive or similar
rights; and, except as described in or expressly contemplated by the
Prospectus, there are no outstanding rights (including, without
limitation, pre-emptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital
stock or other equity interest in the Company or any of its
subsidiaries, or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock
of the Company or any such subsidiary, any such convertible or
exchangeable securities or any such rights, warrants or options;
(i) the Company Underwritten Shares and the Option Shares
have been duly authorized, and, when issued and delivered to and paid
for by the Underwriters in accordance with the terms of this Agreement,
will be duly issued and will be fully paid and non-assessable and will
conform to the descriptions thereof in the Prospectus; and the issuance
of such Shares is not subject to any preemptive or similar rights;
(j) neither the Company nor any of its subsidiaries is,
or with the giving of notice or lapse of time or both would be, in
violation of or in default under, its certificate or articles of
incorporation or by-laws or any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which it or any of them or any
of their respective properties is bound, except for violations and
defaults which individually and in the aggregate are not material to
the Company and its subsidiaries taken as a whole; the issue and sale
of the Shares to be sold by the Company hereunder and the performance
by the Company of its obligations under this Agreement and the
consummation of the transactions contemplated herein will not conflict
with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will any such
action result in any violation of the provisions of the certificate or
articles of incorporation or the by-laws of the Company or any
applicable law or statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company,
its subsidiaries or any of their respective properties; and no consent,
approval, authorization, order, license, registration or qualification
of or with any such court
<PAGE> 7
-7-
or governmental agency or body is required for the issue and sale of
the Shares to be sold by the Company hereunder or the consummation by
the Company of the transactions contemplated by this Agreement, except
such consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue
Sky Laws in connection with the purchase and distribution of the Shares
by the Underwriters;
(k) other than as set forth or contemplated in the
Prospectus, there are no legal or governmental investigations, actions,
suits or proceedings pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its subsidiaries
or any of their respective properties or to which the Company or any of
its subsidiaries is or may be a party or to which any property of the
Company or any of its subsidiaries is or may be the subject which, if
determined adversely to the Company or any of its subsidiaries, could
individually or in the aggregate have, or reasonably be expected to
have, a Material Adverse Effect, and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others; and there are no
statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement that are not described
or filed as required;
(l) the Company and its subsidiaries have good and
marketable title in fee simple to all items of real property and good
and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except such
as are described or referred to in the Prospectus or such as do not
materially affect the value of such property and do not interfere with
the use made or proposed to be made of such property by the Company and
its subsidiaries; and any real property and buildings held under lease
by the Company and its subsidiaries are held by them under valid,
existing and enforceable leases with such exceptions as are not
material and do not interfere with the use made or proposed to be made
of such property and buildings by the Company or its subsidiaries;
(m) no relationship, direct or indirect, exists between
or among the Company or any or its subsidiaries on the one hand, and
the directors, officers, shareholders, customers or suppliers of the
Company or any of its subsidiaries on the other hand, which is required
by the Securities Act to be described in the Registration Statement and
the Prospectus which is not so described;
(n) except as disclosed in the Registration Statement, no
person has the right to require the Company to register any securities
for offering and sale under the Securities Act by reason of the filing
of the Registration Statement with the Commission or the issue and sale
of the Shares to be sold by the Company hereunder
<PAGE> 8
-8-
or, to the best knowledge of the Company, the sale of the Shares to be
sold by the Selling Shareholders hereunder; all holders of securities
of the Company having rights to the registration of shares of Common
Stock, or other securities, because of the filing of the Registration
Statement by the Company, have waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement;
(o) the Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(p) the Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida)
relating to doing business with the Government of Cuba or with any
person or affiliate located in Cuba;
(q) PricewaterhouseCoopers LLP ("PricewaterhouseCoopers")
who have certified certain financial statements of the Company and its
subsidiaries are independent public accountants as required by the
Securities Act;
(r) the Company and its subsidiaries have filed all
federal, state, local and foreign tax returns which have been required
to be filed and have paid all taxes shown thereon and all assessments
received by them or any of them to the extent that such taxes have
become due and are not being contested in good faith; and, except as
disclosed in the Registration Statement and the Prospectus, there is no
tax deficiency which has been or might reasonably be expected to be
asserted or threatened against the Company or any subsidiary;
(s) the Company has not taken nor will it take, directly
or indirectly, any action designed to, or that might be reasonably
expected to, cause or result in stabilization or manipulation of the
price of the Common Stock;
(t) each of the Company and its subsidiaries owns,
possesses or has obtained all licenses, permits, certificates,
consents, orders, approvals and other authorizations from, and has made
all declarations and filings with, all federal, state, local and other
governmental authorities (including foreign regulatory agencies), all
self-regulatory organizations and all courts and other tribunals,
domestic or foreign, necessary to own or lease, as the case may be, and
to operate its properties and to carry on its business as conducted as
of the date hereof, and neither the Company nor any such subsidiary has
received any actual notice of any proceeding relating to revocation or
modification of any such license, permit, certificate, consent, order,
approval or other authorization, except as described in the
Registration Statement
<PAGE> 9
-9-
and the Prospectus; and each of the Company and its subsidiaries is in
compliance with all laws and regulations relating to the conduct of its
business as conducted as of the date hereof, except for noncompliance
which would not, singly or in the aggregate, have a Material Adverse
Effect;
(u) there are no existing or, to the best knowledge of
the Company, threatened labor disputes with the employees of the
Company or any of its subsidiaries which are likely to have a Material
Adverse Effect;
(v) the Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a Material Adverse Effect;
(w) each employee benefit plan, within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended, ("ERISA") that is maintained, administered or contributed to
by the Company or any of its affiliates for employees or former
employees of the Company and its affiliates has been maintained in
compliance with its terms and the requirements of any applicable
statutes, orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code of 1986, as amended ("Code"). To
the knowledge of the Company, no prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code has
occurred with respect to any such plan excluding transactions effected
pursuant to a statutory or administrative exemption. For each such plan
which is subject to the funding rules of Section 412 of the Code or
Section 302 of ERISA no "accumulated funding deficiency" as defined in
Section 412 of the Code has been incurred, whether or not waived, and
the fair market value of the assets of each such plan (excluding for
these purposes accrued but unpaid contributions) exceeded the present
value of all benefits accrued under such plan determined using
reasonable actuarial assumptions;
(x) each of the Company and its subsidiaries owns, is
licensed to use or otherwise possesses adequate rights to use the
patents, patent rights, licenses, inventions, trademarks, service
marks, trade names, copyrights and know-how, including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
<PAGE> 10
-10-
information, systems or procedures (collectively, the "Intellectual
Property") necessary to carry on the business conducted by it, except
to the extent that the failure to own, be licensed to use or otherwise
possess adequate rights to use such Intellectual Property would not
have a Material Adverse Effect; except as set forth in the Prospectus,
the Company has not received any notice of infringement of or conflict
with (and the Company has no knowledge of any infringement of or
conflict with ) asserted rights of others with respect to its
Intellectual Property; the discoveries, inventions, products or
processes of the Company referred to in the Registration Statement and
the Prospectus do not, to the knowledge of the Company, infringe or
conflict with any right or patent of any third party, or any discovery,
patent product or process which is the subject of a patent application
filed by any third party, known to the Company which could have a
Material Adverse Effect;
(y) the statistical and market-related data included in
the Registration Statement and the Prospectus are based on or derived
from sources which are believed by the Company to be reliable;
(z) the Company carries, or is covered by, insurance in
such amounts and covering such risks as is adequate for the conduct of
its business and the value of its properties and as is customary for
companies engaged in similar businesses in similar industries;
(aa) except for compensation to be received by the
Underwriters under this Agreement, the Company does not know of any
outstanding claims for services, either in the nature of a finder's fee
or origination fee, with respect to any of the transactions
contemplated hereby;
(bb) The Company has reviewed its operations, the
operations of its subsidiaries and the operations of any third parties
with which the Company has a material relationship to evaluate the
extent to which the business or operations of the Company will be
affected by the Year 2000 Problem. As a result of such review and
except as disclosed in the Prospectus, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a
Material Adverse Effect or result in any material loss or interference
with the Company's or any subsidiary's business or operations. The
"Year 2000 Problem" as used herein means any significant risk that
computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1,
2000; and
<PAGE> 11
-11-
(cc) the Company has delivered to the Representatives
written agreements, substantially in the form set forth as Exhibit A
hereto (each, a "Lock-Up Agreement"), of each of its directors and
executive officers and certain stockholders previously identified by
the Representatives.
(B) Each of the Selling Shareholders severally represents
and warrants to, and agrees with, each of the Underwriters that:
(a) all consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Shareholder of
this Agreement and the Power of Attorney (the "Power of Attorney") and
the Custody Agreement (the "Custody Agreement") hereinafter referred
to, and for the sale and delivery of the Shares to be sold by such
Selling Shareholder hereunder, have been obtained; and such Selling
Shareholder has full right, power and authority to enter into this
Agreement, the Power of Attorney and the Custody Agreement and to sell,
assign, transfer and deliver the Shares to be sold by such Selling
Shareholder hereunder; this Agreement, the Power of Attorney and the
Custody Agreement have each been duly authorized, executed and
delivered by such Selling Shareholder;
(b) the sale of the Shares to be sold by such Selling
Shareholder hereunder and the compliance by such Selling Shareholder
with all of the provisions of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a
default under, any statute, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder is bound or
to which any of the property or assets of such Selling Shareholder is
subject, nor will such action result in any violation of any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Selling Shareholder or the property
of such Selling Shareholder;
(c) such Selling Shareholder has good and valid title to
the Selling Shareholder Underwritten Shares to be sold at the Closing
Date by such Selling Shareholder hereunder, free and clear of all
liens, encumbrances, equities or adverse claims; such Selling
Shareholder will have, immediately prior to the Closing Date, good and
valid title to the Selling Shareholder Underwritten Shares to be sold
at the Closing Date by such Selling Shareholder, free and clear of all
liens, encumbrances, equities or adverse claims; and, upon delivery of
the certificates representing such Selling Shareholder Underwritten
Shares and payment therefor pursuant hereto, good and valid title to
such Selling Shareholder Underwritten Shares, free and clear of all
liens, encumbrances, equities or adverse claims, will pass to the
several Underwriters;
<PAGE> 12
-12-
(d) such Selling Shareholder has not taken and will not
take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or
result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares; and
(e) the information pertaining to such Selling
Shareholder under the caption "Principal and Selling Shareholders" in
the Prospectus is complete and accurate in all material respects;
(f) when the Registration Statement becomes effective and
at all times subsequent thereto through the latest of the Closing Date,
the Additional Closing Date or the termination of the offering of the
Shares, such parts of the Registration Statement and Prospectus, and
any supplements or amendments thereto, as they relate to such Selling
Shareholder will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and
(g) such Selling Shareholder has no reason to believe
that the representations and warranties of the Company contained in
Section 4(A) of this Agreement are not true and correct in all material
respects.
Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Selling Shareholder
Underwritten Shares to be sold by such Selling Shareholders hereunder have been
placed in custody under a Custody Agreement relating to such Shares, in the form
heretofore furnished to you, duly executed and delivered by such Selling
Shareholder to the Company, as custodian (the "Custodian"), and that such
Selling Shareholder has duly executed and delivered Powers of Attorney, in the
form heretofore furnished to you, appointing the person or persons indicated in
Schedule II hereto, and each of them, as such Selling Shareholder's
Attorneys-in-fact (the "Attorneys-in-Fact" or any one of them the "Attorney-in
Fact") with authority to execute and deliver this Agreement on behalf of such
Selling Shareholder, to determine the purchase price to be paid by the
Underwriters to the Selling Shareholders as provided herein, to authorize the
delivery of the Shares to be sold by such Selling Shareholder hereunder and
otherwise to act on behalf of such Selling Shareholder in connection with the
transactions contemplated by this Agreement and the Custody Agreement.
Each of the Selling Shareholders specifically agrees that the
Selling Shareholder Underwritten Shares represented by the certificates held in
custody for such Selling Shareholder under the Custody Agreement, are subject to
the interests of the Underwriters
<PAGE> 13
-13-
hereunder, and that the arrangements made by such Selling Shareholder for such
custody, and the appointment by such Selling Shareholder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable. Each
of the Selling Shareholders specifically agrees that the obligations of such
Selling Shareholder hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling Shareholder, or, in
the case of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event. If any individual Selling
Shareholder or any such executor or trustee should die or become incapacitated,
or if any such estate or trust should be terminated, or if any such partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of Selling Shareholder Underwritten Shares by it hereunder,
certificates representing such Shares shall be delivered by or on behalf of such
Selling Shareholder in accordance with the terms and conditions of this
Agreement and the Custody Agreement, and actions taken by the Attorneys-in-Fact
pursuant to the Powers of Attorney shall be as valid as if such death,
incapacity, termination, dissolution or other event had not occurred, regardless
of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
5. (A) The Company covenants and agrees with each of the
several Underwriters as follows:
(a) to use its best efforts to cause the Registration
Statement to become effective at the earliest possible time and, if
required, to file the final Prospectus with the Commission within the
time periods specified by Rule 424(b) and Rule 430A under the
Securities Act and to file promptly all reports and any definitive
proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Exchange
Act") subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or
sale of the Shares; and to furnish copies of the Prospectus to the
Underwriters in New York City prior to 10:00 a.m., New York City time,
on the Business Day next succeeding the date of this Agreement in such
quantities as the Representatives may reasonably request;
(b) to deliver, at the expense of the Company, to the
Representatives five signed copies of the Registration Statement (as
originally filed) and each amendment thereto, in each case including
exhibits, and to each other Underwriter a conformed copy of the
Registration Statement (as originally filed) and each amendment
thereto, in each case without exhibits and, during the period mentioned
in paragraph (e) below,
<PAGE> 14
-14-
to each of the Underwriters as many copies of the Prospectus (including
all amendments and supplements thereto) as the Representatives may
reasonably request;
(c) before filing any amendment or supplement to the
Registration Statement or the Prospectus, whether before or after the
time the Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for
review and not to file any such proposed amendment or supplement to
which the Representatives reasonably object;
(d) to advise the Representatives promptly, and to
confirm such advice in writing (i) when the Registration Statement has
become effective, (ii) when any amendment to the Registration Statement
has been filed or becomes effective, (iii) when any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof, (iv) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus or the initiation or threatening of any proceeding for
that purpose, (vi) of the occurrence of any event, within the period
referenced in paragraph (e) below, as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, and (vii) of
the receipt by the Company of any notification with respect to any
suspension of the qualification of the Shares for offer and sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose; and to use its best efforts to prevent the issuance of
any such stop order, or of any order preventing or suspending the use
of any preliminary prospectus or the Prospectus, or of any order
suspending any such qualification of the shares, or notification of any
such order thereof and, if issued, to obtain as soon as possible the
withdrawal thereof;
(e) if, during such period of time after the first date
of the public offering of the Shares as in the opinion of counsel for
the Underwriters a prospectus relating to the Shares is required by law
to be delivered in connection with sales by the Underwriters or any
dealer, any event shall occur as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements
therein, in light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with law, forthwith to prepare and
furnish, at the expense of the Company, to the Underwriters
<PAGE> 15
-15-
and to the dealers (whose names and addresses the Representatives will
furnish to the Company) to which Shares may have been sold by the
Representatives on behalf of the Underwriters and to any other dealers
upon request, such amendments or supplements to the Prospectus as may
be necessary so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus will comply with law;
(f) to endeavor to qualify the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions as the
Representatives shall reasonably request and to continue such
qualification in effect so long as reasonably required for distribution
of the Shares; provided that the Company shall not be required to file
a general consent to service of process in any jurisdiction;
(g) to make generally available to its security holders
and to the Representatives as soon as practicable an earnings statement
covering a period of at least twelve months beginning with the first
fiscal quarter of the Company occurring after the effective date of the
Registration Statement, which shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 of the Commission promulgated
thereunder;
(h) so long as the Shares are outstanding, to furnish to
the Representatives copies of all reports or other communications
(financial or other) furnished to holders of the Shares, and copies of
any reports and financial statements furnished to or filed with the
Commission or any national securities exchange;
(i) for a period of 180 days after the date of the
Prospectus (the "Lock-Up Period") not to (i) offer, pledge, announce
the intention to sell, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the
Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise without the prior written consent of
the Representatives, other than the Shares to be sold by the Company
hereunder and any options granted or to be granted or shares of Common
Stock of the Company issued upon the exercise of options granted under
the Company's 1997 Equity Compensation Plan; notwithstanding the
foregoing, the Company may issue shares of its Common Stock during the
Lock-up Period in connection with acquisitions, strategic alliances or
joint ventures ("Excepted Transactions"); provided however, that (i)
the Company shall give J.P. Morgan Securities Inc. 5 days prior written
notice of any such issuance describing the Excepted Transaction in
reasonable detail and stating the number of shares of Common Stock
proposed to be issued in the Excepted Transaction, (ii) all Common
Stock issued in connection with the Excepted Transaction shall remain
subject to the lock-up restrictions of this Paragraph 5(A)(i) for the
remainder of the Lock-up Period, (iii) prior to any such issuance of
Common Stock, each person that is to acquire any such Common Stock
shall sign a lock-up agreement in form and substance reasonably
acceptable to J.P. Morgan Securities Inc. covering all such Common
Stock for the remainder of the Lock-up Period and (iv) no such issuance
shall be made unless and until the requirements and conditions in the
foregoing clauses (i) (ii) and (iii) have been complied with and
satisfied;
<PAGE> 16
-16-
(j) to use the net proceeds received by the Company from
the sale of the Shares by the Company pursuant to this Agreement in the
manner specified in the Prospectus under caption "Use of Proceeds";
(k) to use its best efforts to list for quotation the
Shares on the National Association of Securities Dealers Automated
Quotations National Market (the "Nasdaq National Market"); and
(l) whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all costs and expenses incident to the performance of
its obligations hereunder, including without limiting the generality of
the foregoing, all costs and expenses (i) incident to the preparation,
reregistration, transfer, execution and delivery of the Shares, (ii)
incident to the preparation, printing and filing under the Securities
Act of the Registration Statement, the Prospectus and any preliminary
prospectus (including in each case all exhibits, amendments and
supplements thereto), (iii) incurred in connection with the
registration or qualification of the Shares under the laws of such
jurisdictions as the Representatives may designate (including fees of
counsel for the Underwriters and its disbursements), (iv) in connection
with the listing of the Shares on the Nasdaq National Market, (v)
related to the filing with, and clearance of the offering by, the
National Association of Securities Dealers, Inc., (vi) in connection
with the printing (including word processing and duplication costs) and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and the furnishing to the Underwriters and dealers of copies
of the Registration Statement and the Prospectus, including mailing and
shipping, as herein provided, (vii) any expenses incurred by the
Company in connection with a "road show" presentation to potential
investors, (viii) the cost of preparing stock certificates and (ix) the
cost and charges of any transfer agent and any registrar.
(B) Each of the Selling Shareholders covenants and agrees
with each of the several Underwriters as follows:
(a) for a period of 180 days after the date of the
Prospectus not to (i) offer, pledge, announce to sell, sell, contract
to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
or (iii) make any demand for or exercise any right with respect to the
registration of
<PAGE> 17
-17-
any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock without the prior written
consent of the Representatives, in each case other than the Shares to
be sold by such Selling Shareholder hereunder; and
(b) to deliver to the Representatives prior to or at the
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
the Treasury Department regulations in lieu thereof) in order to
facilitate the Underwriters' documentation of their compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated.
(C) The Representatives represent and agree that (i) they
have not offered or sold and, prior to the expiry of the period of six months
from the Closing Date, will not offer or sell, any Shares to persons in the
United Kingdom except persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public within the meaning of
the Public Offers of Securities Regulation 1995, (ii) they have complied and
will comply with all applicable provisions of the Financial Services Act of 1986
with respect to anything done by them in relation to the Common Stock in, form
or otherwise involving the United Kingdom and (iii) they have only issued or
passed on, and will only issue and pass on, in the United Kingdom any document
received by them in connection with the offering of the Common Stock to a person
who is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisement) (Exemptions) Order 1995 or is a person to whom such
document may otherwise lawfully be issued or passed on.
6. The several obligations of the Underwriters hereunder
to purchase the Shares on the Closing Date or the Additional Closing Date, as
the case may be, are subject to the performance by the Company and each of the
Selling Shareholders of their respective obligations hereunder and to the
following additional conditions:
(a) the Registration Statement shall have become
effective (or if a post-effective amendment is required to be filed
under the Securities Act, such post-effective amendment shall have
become effective) not later than 5:00 P.M., New York City time, on the
date hereof; and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment shall be in
effect, and no proceedings for such purpose shall be pending before or
threatened by the Commission; the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations under
the Securities Act and in accordance with Section 5(a) hereof;
<PAGE> 18
-18-
and all requests for additional information shall have been complied
with to the satisfaction of the Representatives;
(b) the respective representations and warranties of the
Company and the Selling Shareholders contained herein are true and
correct on and as of the Closing Date or the Additional Closing Date,
as the case may be, as if made on and as of the Closing Date or the
Additional Closing Date, as the case may be, and each of the Company
and the Selling Shareholders shall have complied with all agreements
and all conditions on its part to be performed or satisfied hereunder
at or prior to the Closing Date or the Additional Closing Date, as the
case may be;
(c) subsequent to the execution and delivery of this
Agreement and prior to the Closing Date or the Additional Closing Date,
as the case may be, there shall not have occurred any downgrading, nor
shall any notice have been given of (i) any downgrading, (ii) any
intended or potential downgrading or (iii) any review or possible
change that does not indicate an improvement, in the rating accorded
any securities of or guaranteed by the Company by any "nationally
recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act;
(d) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any Material Adverse Change, or any development
involving a prospective Material Adverse Change, otherwise than as set
forth or contemplated in the Prospectus, the effect of which in the
judgment of the Representatives makes it impracticable or inadvisable
to proceed with the public offering or the delivery of the Shares on
the Closing Date or the Additional Closing Date, as the case may be, on
the terms and in the manner contemplated in the Prospectus; and neither
the Company nor any of its subsidiaries has sustained since the date of
the latest audited financial statements included in the Prospectus any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus;
(e) the Representatives shall have received (1) on and as
of the Closing Date or the Additional Closing Date, as the case may be,
a certificate of an executive officer of the Company, with specific
knowledge about the Company's financial matters, satisfactory to the
Representatives to the effect set forth in subsections (a) through (d)
(with respect to the respective representations, warranties, agreements
and conditions of the Company) of this Section and to the further
effect that there has not occurred any Material Adverse Change, or any
development involving a
<PAGE> 19
-19-
prospective Material Adverse Change from that set forth or contemplated
in the Registration Statement and (2) on and as of the Closing Date, a
certificate of the Selling Shareholders, satisfactory to the
Representatives to the effect set forth in subsection (b) of this
Section 6 (with respect to the respective representations, warranties,
agreements and conditions of the Selling Shareholders);
(f) Baker, Donelson, Bearman & Caldwell, counsel for the
Company, shall have furnished to the Representatives their written
opinion, dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to the Representatives,
to the effect that:
(i) the Company has been duly incorporated and
is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation, with power and
authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus;
(ii) the Company has been duly qualified as a
foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in
which it owns or leases properties, or conducts any business,
so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have
a Material Adverse Effect;
(iii) each of the Company's subsidiaries has been
duly incorporated or organized and is validly existing as a
corporation under the laws of its jurisdiction of
incorporation or organization with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus and has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification,
other than where the failure to be so qualified and in good
standing would not have a Material Adverse Effect; and all of
the outstanding shares of capital stock of each subsidiary
have been duly and validly authorized and issued, are fully
paid and non-assessable, and (except, in the case of foreign
subsidiaries, for directors' qualifying shares and except as
otherwise set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(iv) other than as set forth or contemplated in
the Prospectus, there are no legal or governmental
investigations, actions, suits or proceedings pending or, to
the best of such counsel's knowledge, threatened against or
<PAGE> 20
-20-
affecting the Company or any of its subsidiaries or any of
their respective properties or to which the Company or any of
its subsidiaries is or may be a party or to which any property
of the Company or its subsidiaries is or may be the subject
which, if determined adversely to the Company or any of its
subsidiaries, could individually or in the aggregate have, or
reasonably be expected to have, a Material Adverse Effect; to
the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others; and such counsel does not know of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(v) this Agreement has been duly authorized,
executed and delivered by the Company;
(vi) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(vii) the shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be sold by
the Company hereunder have been duly authorized and are
validly issued, fully paid and non-assessable;
(viii) the Shares to be issued and sold by the
Company hereunder have been duly authorized, and when
delivered to and paid for by the Underwriters in accordance
with the terms of this Agreement, will be validly issued,
fully paid and non-assessable and the issuance of such Shares
is not subject to any preemptive or similar rights;
(ix) the Common Stock conforms in all material
respects as to legal matters to the description thereof
contained in the Registration Statement and the Prospectus
under the heading "Description of Capital Stock." The
information in the Prospectus under the caption "Shares
Eligible for Future Sale," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such
counsel, is correct in all material respects and presents
fairly the information required to be disclosed therein under
the 1933 Act and the 1933 Act Regulations;
(x) such counsel is of the opinion that the
Registration Statement and the Prospectus and any amendments
and supplements thereto (other than the financial statements
and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with
<PAGE> 21
-21-
the requirements of the Securities Act and believes that
(other than the financial statements and related schedules
therein, as to which such counsel need express no belief) the
Registration Statement and the prospectus included therein at
the time the Registration Statement became effective did not
contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and
that the Prospectus, as amended or supplemented, if
applicable, does not contain any untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(xi) neither the Company nor any of its
subsidiaries is, or with the giving of notice or lapse of time
or both would be, in violation of or in default under, its
certificate or articles of incorporation or by-laws or, to
such counsel's knowledge, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known
to such counsel to which the Company or any of its
subsidiaries is a party or by which it or any of them or any
of their respective properties is bound, except for violations
and defaults which individually and in the aggregate are not
material to the Company and its subsidiaries taken as a whole;
the issue and sale of the Shares being delivered on the
Closing Date or the Additional Closing Date, as the case may
be, to be sold by the Company hereunder and the performance by
the Company of its obligations under this Agreement and the
consummation of the transactions contemplated herein will not
conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any
of its subsidiaries is a party or by which the Company or any
of its subsidiaries is bound or to which any of the property
or assets of the Company or any of its subsidiaries is
subject, nor will any such action result in any violation of
the provisions of the certificate or articles of incorporation
or the by-laws of the Company or, to such counsel's knowledge,
any applicable law or statute or any order, rule or regulation
of any court or governmental agency or body having
jurisdiction over the Company, its subsidiaries or any of
their respective properties;
(xii) no consent, approval, authorization, order,
license, registration or qualification of or with any court or
governmental agency or body is required for the issuance by
the Company of the Shares to be sold by it hereunder or the
consummation by the Company of the other transactions
contemplated by this Agreement, except such consents,
approvals, authorizations, orders, licenses, registrations or
qualifications as have been obtained
<PAGE> 22
-22-
under the Securities Act and as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(xiii) the Company is not and, after giving effect
to the offering and sale of the Shares, will not be an
"investment company" or entity "controlled" by an "investment
company", as such terms are defined in the Investment Company
Act;
(xiv) to such counsel's knowledge, each of the
Company and its subsidiaries owns, possesses or has obtained
all licenses, permits, certificates, consents, orders,
approvals and other authorizations from, and has made all
declarations and filings with, all federal, state, local and
other governmental authorities (including foreign regulatory
agencies), all self-regulatory organizations and all courts
and other tribunals, domestic or foreign, necessary to own or
lease, as the case may be, and to operate its properties and
to carry on its business as conducted as of the date hereof,
and neither the Company nor any such subsidiary has received
any actual notice of any proceeding relating to revocation or
modification of any such license, permit, certificate,
consent, order, approval or other authorization, except as
described in the Registration Statement and the Prospectus;
and, to such counsel's knowledge, each of the Company and its
subsidiaries is in compliance with all laws and regulations
relating to the conduct of its business as conducted as of the
date of the Prospectus;
(xv) to such counsel's knowledge, the Company and
its subsidiaries have good and marketable title in fee simple
to all real property and good and marketable title to all
personal property owned by them, in each case free and clear
of all liens, encumbrances and defects except such as are
described or referred to in the Prospectus or such as do not
materially affect the value of such property and do not
interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and, to such
counsel's knowledge, any real property and buildings held
under lease by the Company and its subsidiaries are held by
them under valid, existing and enforceable leases with such
exceptions as are not material and do not interfere with the
use made or proposed to be made of such property and buildings
by the Company or its subsidiaries; and
(xvi) to such counsel's knowledge, each of the
Company and its subsidiaries is in compliance with all
Environmental Laws, except, in each case, where noncompliance,
individually or in the aggregate, would not have a Material
Adverse Effect; there are no legal or governmental proceedings
<PAGE> 23
-23-
pending or, to the knowledge of such counsel, threatened
against or affecting the Company or any of its subsidiaries
under any Environmental Law which, individually or in the
aggregate, could reasonably be expected to have a Material
Adverse Effect; and
(xvii) the Registration Statement has been declared
effective under Securities Act and, to such counsel's
knowledge, no stop order proceedings with respect thereto are
pending before or threatened by the Commission under the
Securities Act.
In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the State of Tennessee, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance reasonably
satisfactory to Underwriters' counsel) of other counsel reasonably
acceptable to the Underwriters' counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent such counsel deems
proper, on certificates of responsible officers of the Company and
certificates or other written statements of officials of jurisdictions
having custody of documents respecting the corporate existence or good
standing of the Company. The opinion of such counsel for the Company
shall state that the opinion of any such other counsel upon which they
relied is in form satisfactory to such counsel and, in such counsel's
opinion, the Underwriters and they are justified in relying thereon.
With respect to the matters to be covered in subparagraphs (vi), (ix)
and (x) above counsel may state their opinion and belief is based upon
their participation in the preparation of the Registration Statement
and the Prospectus and any amendment or supplement thereto and review
and discussion of the contents thereof but is without independent check
or verification except as specified.
The opinion of Baker, Donelson, Bearman & Caldwell described
above shall be rendered to the Underwriters at the request of the
Company and shall so state therein;
(g) Holland & Knight LLP, counsel for the Selling
Shareholders, shall have furnished to the Representatives their written
opinion, dated the Closing Date, in form and substance satisfactory to
the Representatives, to the effect that:
(i) this Agreement has been duly authorized,
executed and delivered by or on behalf of each of the Selling
Shareholders;
(ii) a Power of Attorney and a Custody Agreement
have been duly authorized, executed and delivered by each
Selling Shareholder and constitute valid and binding
agreements of each Selling Shareholder in accordance with
their terms;
<PAGE> 24
-24-
(iii) each Selling Shareholder is the sole record
owner of all of the Selling Shareholder Underwritten Shares to
be sold by such Selling Shareholder, and upon the crediting of
the Selling Shareholder Underwritten Shares to the designated
Underwriters' accounts at the Depository Trust Company and
payment by J.P. Morgan Securities, Inc., on behalf of the
Underwriters, for the Selling Shareholder Underwritten Shares,
no action based on an adverse claim to the Selling Shareholder
Underwritten Shares, may be asserted against the Underwriters,
assuming that the Underwriters acquire such Selling
Shareholder Underwritten Shares without notice of any adverse
claims; and
(iv) the sale of the Selling Shareholder
Underwritten Shares and the execution and delivery by the
Selling Shareholder of, and the performance by each of the
Selling Shareholders of its obligations under, this Agreement,
and the consummation of the transactions contemplated herein,
(i) have been duly authorized on the part of the Selling
Shareholders, and (ii) will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which
any Selling Shareholder is a party or by which any Selling
Shareholder is bound or to which any of the property or assets
of any Selling Shareholder is subject, nor will any such
action result in any violation of any applicable law or
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over such
Selling Shareholder or any of his properties of which such
counsel is aware; and no consent, approval, authorization,
order, registration or qualification of or with any such court
or governmental agency or body is required for the sale of
such Shares or the consummation by the Selling Shareholders of
the transactions contemplated by this Agreement, except such
consents, approvals, authorizations, registrations or
qualifications as have been obtained under the Securities Act
and as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of such
Shares by the Underwriters.
In rendering such opinions, such counsel may (A) assume as to
matters involving the application of the laws of New York or Tennessee
that such applicable laws are identical to those of Florida and rely as
to matters involving the application of laws other than the laws of the
United States and the State of Florida, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all,
<PAGE> 25
-25-
upon an opinion or opinions (in form and substance reasonably
satisfactory to Underwriters' counsel) of other counsel reasonably
acceptable to the Underwriters' counsel, familiar with the applicable
laws; (B) rely as to matters of fact, to the extent such counsel deems
proper, on certificates of responsible officers of the Company and
certificates or other written statements of officials of jurisdictions
having custody of documents respecting the corporate existence or good
standing of the Company. Such counsel may rely, without further
investigation, upon the representations and warranties of the Selling
Stockholders contained in their respective Custody Agreements and in
this Agreement, stating that nothing has come to such counsel's
attention that causes them to believe that they are not justified in
relying upon such representations and warranties. The opinion of such
counsel for the Selling Shareholders shall state that the opinion of
any such other counsel upon which they relied is in form satisfactory
to such counsel and, in such counsel's opinion, the Underwriters and
they are justified in relying thereon.
The opinion of Holland & Knight described above shall be
rendered to the Underwriters at the request of the Company and shall so
state therein;
(h) Banner & Wittcoff, special intellectual property
counsel for the Company, shall have furnished to the Representatives
their written opinion, dated the Closing Date or additional Closing
Date, as the case may be, in form and substance satisfactory to the
Representatives, to the effect that the Company and each of its
subsidiaries owns, is licensed to use or otherwise possesses adequate
rights to use the Intellectual Property reasonably necessary to carry
on the business conducted by it, except to the extent that the failure
to own, be licensed to use or otherwise possess adequate rights to use
such Intellectual Property would not have a Material Adverse Effect;
except as set forth in the Prospectus, the Company has not received any
notice of infringement of or conflict with, and to the best of the such
counsel's knowledge, there is no infringement of or conflict with,
asserted rights of others with respect to the Intellectual Property,
the discoveries, inventions, products or processes of the Company
referred to in the Registration Statement and the Prospectus do not, to
the best of such counsel's knowledge, infringe or conflict with any
right or patent of any third party, or any discovery, patent product or
process which is the subject of a patent application filed by any third
party; to the knowledge of such counsel, the Company and each of its
subsidiaries owns, is licensed to use or otherwise possesses adequate
rights to use patents and patent rights reasonably necessary to carry
on the business conducted by it;
(i) on the effective date of the Registration Statement
and the effective date of the most recently filed post-effective
amendment to the Registration Statement and also on the Closing Date or
Additional Closing Date, as the case may be,
<PAGE> 26
-26-
PricewaterhouseCoopers shall have furnished to you letters, dated the
respective dates of delivery thereof, in form and substance
satisfactory to you, containing statements and information of the type
customarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
(j) the Representatives shall have received on and as of
the Closing Date or Additional Closing Date, as the case may be, an
opinion of Cahill Gordon & Reindel, counsel to the Underwriters, with
respect to the due authorization and valid issuance of the Shares, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(k) the Shares to be delivered on the Closing Date or
Additional Closing Date, as the case may be, shall have been approved
for listing on the Nasdaq National Market, subject to official notice
of issuance;
(l) on or prior to the Closing Date or Additional Closing
Date, as the case may be, the Company and the Selling Shareholders
shall have furnished to the Representatives such further certificates
and documents as the Representatives shall reasonably request; and
(m) the Lock-Up Agreements shall be in full force and
effect on the Closing Date or Additional Closing Date, as the case may
be.
7. The Company agrees to indemnify and hold harmless
each Underwriter, each affiliate of any Underwriter which assists such
Underwriter in the distribution of the Shares and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, the
legal fees and other expenses incurred in connection with any suit, action or
proceeding or any claim asserted) caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by such Underwriter through the
Representatives expressly for use therein.
<PAGE> 27
-27-
Each of the Selling Shareholders agrees, severally and not
jointly, to indemnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with
reference to information furnished to the Company in writing by or on behalf of
such Selling Shareholder expressly for use in the Registration Statement, the
Prospectus, any amendment and supplement thereto, or any preliminary prospectus;
provided, that the obligations of each Selling Shareholder under the foregoing
indemnity shall not exceed the net proceeds received by such Selling Shareholder
from the sale of the Shares sold by such Selling Shareholder hereunder.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person who controls the Company within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act
and each of the Selling Shareholders to the same extent as the foregoing
indemnity from the Company and the Selling Shareholders to each Underwriter, but
only with reference to information relating to such Underwriter furnished to the
Company in writing by such Underwriter through the Representatives expressly for
use in the Registration Statement, the Prospectus, any amendment or supplement
thereto, or any preliminary prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to the preceding
paragraphs of this Section 7, such person (the "Indemnified Person") shall
promptly notify the person or persons against whom such indemnity may be sought
(each an "Indemnifying Person") in writing, and such Indemnifying Persons, upon
request of the Indemnified Person, shall retain counsel reasonably satisfactory
to the Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Persons may designate in such proceeding and shall pay the fees and
expenses of such counsel related to such proceeding. In any such proceeding, any
Indemnified Person shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Person
and not the Indemnifying Persons unless (i) the Indemnifying Persons and the
Indemnified Person shall have mutually agreed to the contrary, (ii) the
Indemnifying Persons has failed within a reasonable time to retain counsel
reasonably satisfactory to the Indemnified Person or (iii) the named parties in
any such proceeding (including any impleaded parties) include both an
Indemnifying Person and the Indemnified Person and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that no Indemnifying Person
shall, in connection with any proceeding or related proceeding in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Indemnified Persons, and that all
such fees and
<PAGE> 28
-28-
expenses shall be reimbursed as they are incurred. Any such separate firm for
the Underwriters, each affiliate of any Underwriter which assists such
Underwriter in the distribution of the Shares and such control persons of
Underwriters shall be designated in writing by J.P. Morgan Securities Inc. and
any such separate firm for the Company, its directors, its officers who sign the
Registration Statement and such control persons of the Company shall be
designated in writing by the Company and any such separate firm for the Selling
Shareholders shall be designated in writing by the Attorney-in-Fact. No
Indemnifying Person shall be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, each Indemnifying Person agrees to
indemnify any Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an Indemnified Person shall have requested an Indemnifying Person
to reimburse the Indemnified Person for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, such
Indemnifying Person agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such Indemnifying Person of the
aforesaid request and (ii) such Indemnifying Person shall not have reimbursed
the Indemnified Person in accordance with such request prior to the date of such
settlement. No Indemnifying Person shall, without the prior written consent of
the Indemnified Person, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Person,
unless such settlement includes an unconditional release of such Indemnified
Person from all liability on claims that are the subject matter of such
proceeding.
If the indemnification provided for in the first four
paragraphs of this Section 7 is unavailable to an Indemnified Person or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each Indemnifying Person under such paragraph, in lieu of
indemnifying such Indemnified Person thereunder, shall contribute to the amount
paid or payable by such Indemnified Person as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Selling Shareholders on the one hand and the Underwriters on
the other hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other hand
shall be deemed to be in the same respective proportions as the net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholders and the total underwriting discounts and the commissions
<PAGE> 29
-29-
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate public offering price of the
Shares. The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Selling Shareholders or
by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the Selling
Shareholders or the Underwriters were treated as one entity for such purposes)
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any legal or
other expenses incurred by such Indemnified Person in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, (i) in no event shall an Underwriter be required
to contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission and (ii) in no event shall a Selling
Shareholder be required to contribute any amount in excess of the amount by
which the net proceeds received by it through the sale of its Shares to the
Underwriters exceeds the amount of any damages that such Selling Shareholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section ll(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number of
Shares set forth opposite their names in Schedule I hereto, and not joint.
The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Shareholders set forth in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter
<PAGE> 30
-30-
or any person controlling any Underwriter or by or on behalf of the Company, its
officers or directors or any other person controlling the Company or the Selling
Shareholders and (iii) acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement (or
the obligations of the several Underwriters with respect to the Option Shares)
may be terminated in the absolute discretion of the Representatives, by notice
given to the Company and the Selling Shareholders, if after the execution and
delivery of this Agreement and prior to the Closing Date (or, in the case of the
Option Shares, prior to the Additional Closing Date) (i) trading generally shall
have been suspended or materially limited on or by, as the case may be, any of
the New York Stock Exchange or the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Chicago Board Options Exchange, the
Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of or guaranteed by the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities, or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in the judgment of the Representatives, is material and
adverse and which, in the judgment of the Representatives, makes it
impracticable to market the Shares being delivered at the Closing Date or the
Additional Closing Date, as the case may be, on the terms and in the manner
contemplated in the Prospectus.
9. This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If on the Closing Date or the Additional Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Underwritten Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as the Representatives
may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If on the Closing Date or the Additional Closing
Date, as the case may be,
<PAGE> 31
-31-
any Underwriter or Underwriters shall fail or refuse to purchase Shares which it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Shares with respect to which such default occurs is more than one-tenth of
the aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to the Representatives, the Company and the Selling Shareholders
for the purchase of such Shares are not made within 36 hours after such default,
this Agreement (or the obligations of the several Underwriters to purchase the
Option Shares, as the case may be) shall terminate without liability on the part
of any non-defaulting Underwriter, the Company or the Selling Shareholder. In
any such case either you or the Company and the Selling Shareholders shall have
the right to postpone the Closing Date (or, in the case of the Option Shares,
the Additional Closing Date), but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company or the
Selling Shareholders to comply with the terms or to fulfill any of the
conditions of this Agreement, or if for any reason any of the Company or the
Selling Shareholders shall be unable to perform its obligations under this
Agreement or any condition of the Underwriters' obligations cannot be fulfilled,
the Company and the Selling Shareholders agree to reimburse the Underwriters or
such Underwriters as have so terminated this Agreement with respect to
themselves, severally, for all out-of-pocket expenses (including the fees and
expenses of its counsel) reasonably incurred by the Underwriter in connection
with this Agreement or the offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be binding
upon the Company, the Selling Shareholders and the Underwriters, each affiliate
of any Underwriter which assists such Underwriter in the distribution of the
Shares, any controlling persons referred to herein and their respective
successors and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person, firm or corporation any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. No purchaser of Shares from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
12. Any action by the Underwriters hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or
<PAGE> 32
-32-
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be given to the Representatives, c/o J.P. Morgan Securities
Inc., 60 Wall Street, New York, New York 10260 (telefax: (212) 648-5705);
Attention: Syndicate Department. Notices to the Company and/or the Selling
Shareholders (through the Attorneys-in-Fact) shall be given to them at 1009
Commerce Park Drive, Oak Ridge, Tennessee, (telefax: (404) 482-9755); Attention:
President, with a copy to Baker, Donelson, Bearman & Caldwell, 165 Madison
Avenue, Memphis, Tennessee 38103 (telefax: (901) 577-0737); Attention Matthew S.
Heiter and, if to the Selling Shareholders, with a copy to Holland & Knight LLP,
400 North Ashley Drive, Suite 2300, Tampa Florida 33602 (telefax (813)
229-0134); Attention Robert J. Grammig.
13. This Agreement may be signed in counterparts, each of which
shall be an original and all of which together shall constitute one and the same
instrument.
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PROVISIONS THEREOF.
<PAGE> 33
-33-
If the foregoing is in accordance with your understanding,
please sign and return four counterparts hereof.
Very truly yours,
Interactive Pictures Corporation
By:
------------------------------------
Name:
Title:
The Selling Shareholders
By:
------------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of each
of the Selling Shareholders named in
Schedule II to this Agreement.
<PAGE> 34
-34-
Accepted: , 1999
J.P. MORGAN SECURITIES INC.
HAMBRECHT & QUIST LLC
MORGAN KEEGAN & COMPANY, INC.
STEPHENS INC.
Acting severally on behalf
of themselves and the
several Underwriters listed
in Schedule I hereto.
By: J.P. MORGAN SECURITIES INC.
By: ------------------------------
Name:
Title:
<PAGE> 35
SCHEDULE I
<TABLE>
<CAPTION>
Number of Under-
written Shares
Underwriter To Be Purchased
- ----------- ---------------
<S> <C>
J.P. Morgan Securities Inc.......
Hambrecht & Quist LLC............
Morgan Keegan & Company, Inc.....
Stephens Inc.....................
------------
Total 4,200,000
============
</TABLE>
<PAGE> 36
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Selling Shareholders Underwritten Shares
- -------------------- -------------------
<S> <C>
H. Lee Martin.................................. 300,000
Daniel P. Kuban................................ 50,000
-------
Total.................... 350,000
=======
</TABLE>
<PAGE> 37
EXHIBIT A
LOCK-UP AGREEMENT
, 1999
J.P. MORGAN SECURITIES INC.
HAMBRECHT & QUIST LLC
MORGAN KEEGAN & COMPANY, INC.
STEPHENS INC.
As Representatives of the several
Underwriters named in Schedule I to
the Underwriting Agreement referred to below
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Re: Interactive Pictures Corporation - Initial Public Offering
Ladies and Gentlemen:
The undersigned understands that you, as Representatives of
the several Underwriters, propose to enter into an Underwriting Agreement (the
"Underwriting Agreement") with Interactive Pictures Corporation, a Tennessee
corporation (the "Company"), providing for the initial public offering (the
"Public Offering") by the several Underwriters named in Schedule I to the
Underwriting Agreement (the "Underwriters"), of common stock, par value $.001
per share (the "Common Stock"), of the Company. Capitalized terms used herein
and not otherwise defined shall have the meanings set forth in the Underwriting
Agreement.
In consideration of the Underwriters' agreement to purchase
and make the Public Offering of the Common Stock, and for other good and
valuable consideration receipt of which is hereby acknowledged, the undersigned
hereby agrees that, without the prior written consent of J.P. Morgan Securities
Inc. on behalf of the Underwriters, the undersigned will not, during the period
ending 180 days after the date of the prospectus relating to the Public Offering
(the "Prospectus"), (1) offer, pledge, announce the intention to sell, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock of the Company, or any securities of the Company which are substantially
similar to the Common Stock, or any securities convertible into or exercisable
or exchangeable for Common Stock (including, but not
<PAGE> 38
limited to, Common Stock which may be deemed to be beneficially owned by the
undersigned in accordance with the rules and regulations of the Securities and
Exchange Commission and securities which may be issued upon exercise of a stock
option or warrant) or (2) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the Common Stock or any securities of the Company which are
substantially similar to the Common Stock, including, but not limited to, any
security convertible into or exercisable or exchangeable for Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. In addition, the undersigned agrees that, without the prior written
consent of J.P. Morgan Securities Inc. on behalf of the Underwriters, it will
not, during the period ending 180 days after the date of the Prospectus, make
any demand for or exercise any right with respect to, the registration of any
shares of Common Stock or any substantially similar securities of the Company,
including but not limited to, any security convertible into or exercisable or
exchangeable for Common Stock.
In furtherance of the foregoing, the Company and any duly
appointed transfer agent for the registration or transfer of the securities
described herein are hereby authorized to decline to make any transfer of
securities if such transfer would constitute a violation or breach of this
Lock-Up Agreement.
The undersigned hereby represents and warrants that the
undersigned has full power and authority to enter into this Lock-up Agreement.
All authority herein conferred or agreed to be conferred and any obligations of
the undersigned shall be binding upon the successors, assigns, heirs or personal
representatives of the undersigned.
The undersigned understands that, if the Underwriting
Agreement does not become effective, or if the Underwriting Agreement (other
than the provisions thereof which survive termination) shall terminate or be
terminated prior to payment for and delivery of the Common Stock to be sold
thereunder, the undersigned shall be released from all obligations under this
Lock-Up Agreement.
The undersigned understands that the Underwriters are entering
into the Underwriting Agreement and proceeding with the Public Offering in
reliance upon this Lock-Up Agreement.
<PAGE> 39
THIS LOCK-UP AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
Very truly yours,
[ ]
By:
---------------------------
Name:
Title:
Accepted as of the date first set forth above:
J.P. MORGAN SECURITIES INC.
HAMBRECHT & QUIST LLC
MORGAN KEEGAN & COMPANY, INC.
STEPHENS INC.
Acting severally on behalf of themselves and the several Underwriters
named in Schedule I to the Underwriting Agreement
By: J.P. MORGAN SECURITIES INC.
By:
----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK
COMMON STOCK
NUMBER
SHARES
[INTERACTIVE PICTURES LOGO]
CUSIP 45839N 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS
AND RESTRICTIONS ON TRANSFER
INCORPORATED UNDER THE LAWS
OF THE STATE OF TENNESSEE
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE
OF $0.001 EACH OF
Interactive Pictures Corporation (hereinafter and on the back, hereof called
the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by a duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all provisions of Charter and the
Bylaws of the Corporation (copies of which are on file with the Transfer
Agent), as now or hereafter amended, to all of which the holder hereof by
acceptance hereof assents. This Certificate is not valid unless countersigned
and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ James Phillips /s/ Edmond Lewis
- ------------------------- -------------------------
CHAIRMAN SECRETARY
SEAL
<PAGE> 2
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, CO, 80201
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
INTERACTIVE PICTURES CORPORATION
In addition to the Common Stock, the Corporation is authorized to issue
Preferred Stock in such series or classes and with such rights, preferences,
privileges and restrictions as the Board of Directors of the Corporation may
determine from time to time. The Corporation will furnish without a charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. Such statement may be obtained by a request in
writing to the office of the Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as
tenants in common
UNIF GIFT MIN ACT - _____________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors.
Act _______________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ____________________________ hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND
ADDRESS OF ASSIGNEE
________________________________________________________________________________
<PAGE> 3
________________________________________________________________________________
________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
________________________________________________________________________________
________________Attorney to transfer the said stock on the books of the
within-named Corporation with full power of substitution in the premises.
Dated __________________________
X_______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE, IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17 Ad-15.
<PAGE> 1
EXHIBIT 5.1
July 30, 1999
Board of Directors
Interactive Pictures Corporation
1009 Commerce Park Drive
Oak Ridge, TN 37830
Gentlemen:
We have acted as counsel to Interactive Pictures Corporation, a Tennessee
corporation (the "Company"), in connection with the preparation and filing of
its Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission relating to the proposed public offering and
sale of 4,200,000 shares (4,830,000 shares if the underwriters' over-allotment
option is exercised in full) of the Company's common stock, $.001 par value per
share (collectively, the "Shares"). This opinion letter is furnished to you at
your request to enable you to fulfill the requirements of Item 601(b)(5) of
Regulation S-K in connection with the Registration Statement.
In delivering this opinion, we have examined such documents as we have
deemed necessary, including copies of the following documents:
1. an executed copy of the Registration Statement and all amendments
thereto;
2. the Restated Charter of the Company;
3. the Amended and Restated Bylaws of the Company;
4. the corporate proceedings taken to date with respect to the
authorization, issuance and sale of the Shares; and
<PAGE> 2
Board of Directors
July 30, 1999
Page 2
5. a form of underwriting agreement (the "Underwriting Agreement") to be
executed between the Company, the Selling Shareholders (as defined
therein) and the underwriters to be named therein.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
accuracy and completeness of all documents submitted to us, the authenticity of
all original documents and the conformity to authentic original documents of all
documents submitted to us as certified, telecopies, photostatic or reproduced
copies.
Based upon and limited by the foregoing, and subject to the following
qualifications and limitations, we are of the opinion that, as of the date
hereof:
1. The Company is a corporation duly incorporated and validly existing
under the laws of the State of Tennessee; and
2. The Shares, when issued and paid for in accordance with the terms of
the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
This opinion letter has been prepared solely for your use in connection
with the filing of the Registration Statement on the date of this opinion
letter and should not be quoted in whole or in part or otherwise be referred
to, nor filed with or furnished to any governmental agency or other person or
entity, without the prior written consent of this firm. Our opinions are
limited in all respects to the substantive law of the State of Tennessee, and
accordingly, we express no opinion as to the laws of any other state or
jurisdiction.
We hereby consent to the filing of this opinion letter as an exhibit to
the Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
BAKER, DONELSON, BEARMAN,
& CALDWELL
A Professional Corporation
By:____________________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated January 29, 1999, except as to Notes 5 and 6 for which the date is
April 12, 1999 and as to Note 13 for which the date is July 2, 1999, relating to
the financial statements of Interactive Pictures Corporation, which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Financial Information" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
July 29, 1999
