<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1999
REGISTRATION NO. 333-78983
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTERACTIVE PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<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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<S> <C>
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. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value per share.................... $67,620,000 $18,800
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes $16,000 previously paid in connection with the initial filing and
$2,800 which is being paid in connection with Amendment No. 1.
---------------------
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 14, 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 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.
<TABLE>
<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 CALDWELL 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
We have not authorized anyone to give you any information that differs from the
information in this prospectus. If you receive any different information, you
should not rely on it. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers and sales are
permitted.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
Forward-looking Statements.......... 10
Use of Proceeds..................... 11
Dividend Policy..................... 11
Capitalization...................... 12
Dilution............................ 13
Selected Financial Information...... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business............................ 23
Management.......................... 36
Principal and Selling
Shareholders...................... 43
Certain Transactions................ 45
Description of Capital Stock........ 46
Shares Eligible For Future Sale..... 50
Underwriting........................ 52
Legal Matters....................... 54
Experts............................. 54
Where You Can Find More
Information....................... 54
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
-------------------------------------
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.
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.
-i-
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights the information contained in this prospectus. This
summary is not complete and does not contain all of the information that you
should consider before investing in the common stock. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements and related notes.
Except as otherwise indicated, the share information in this prospectus assumes
that the underwriters do not exercise the option granted by us to purchase
additional shares in this offering and assumes, upon consummation of this
offering, the conversion of all of our preferred stock into common stock,
including preferred stock issuable upon the net exercise of all outstanding
preferred stock warrants and the net exercise of all outstanding common stock
warrants into common stock. 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. We have developed patented technology which combines two 1858
photographs taken with a standard digital camera. The resulting spherical image
allows viewers to see the picture from a complete 3608 by 3608 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 as well as from the license of archived IPIX
images. We estimate that over 3,000 commercial web sites are utilizing IPIX
images.
Our customers use IPIX images to enhance their marketing and e-commerce
initiatives. IPIX images introduce interactivity and realism to existing digital
imaging technology. We believe that leading companies use IPIX images 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.
Our technology is easy to use, portable and cost-effective. With an IPIX key, a
user can post the IPIX image to a web site, view it on a personal computer or
email it. 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.
We have established strategic relationships with leading customers, camera
manufacturers and technology companies in order to accelerate the promotion,
adoption and enhancement of IPIX images. For example, we have established
relationships with customers in our commercial markets such as Homes.com and
Microsoft CarPoint. We have also established strategic relationships with
Creative Artists Agency, as well as leading camera manufacturers such as Kodak,
Nikon and Olympus and technology companies such as IBM, Intel and RealNetworks
and have gained access to REALTOR.com, the largest real estate listing site on
the Internet.
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:
- building brand awareness;
- targeting commercial markets;
- penetrating consumer markets;
- creating new product offerings;
- expanding strategic relationships; and
- expanding internationally.
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 2,514,614 shares of common stock issuable upon the
exercise of outstanding stock options, including options outstanding under our
1997 equity compensation plan, of which options to purchase 1,260,505 shares are
currently exercisable and options to purchase 186,341 shares will become
exercisable upon the consummation of this offering. The table also excludes
676,289 shares of common stock reserved for future grant or award under our 1997
equity compensation plan 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 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.
2
<PAGE> 7
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.
<TABLE>
<CAPTION>
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THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
In thousands, except per share data ------- ------- -------- ------- -------
(UNAUDITED)
<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) $ (0.39)
======== =======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
AS OF MARCH 31, 1999
---------------------
AS OF PRO FORMA
DECEMBER 31, 1998 ACTUAL AS ADJUSTED
----------------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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
</TABLE>
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 PARTICULAR TO INTERACTIVE PICTURES CORPORATION
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES, AND WE MAY CONTINUE
TO REALIZE LOSSES IN THE FUTURE
As a result of our limited operating history, we have limited meaningful
historical financial data upon which to base planned operating expenses. Thus,
our expense levels are based in part on our expectations of future revenues. We
cannot assure you that we will be able to accurately predict our revenues,
particularly in light of our limited operating history. In addition, our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies like ours that operate in new and rapidly evolving
industries. To address these risks and achieve profitability and increased sales
levels, we must:
- establish widespread market acceptance of our products;
- expand sales and marketing operations;
- introduce new and enhanced products on a timely basis; and
- successfully market and support our products.
As of March 31, 1999, we had an accumulated deficit of $27.7 million. We expect
to continue to incur substantial losses as we significantly expand our sales and
marketing efforts, increase the number of our employees and invest in product
development. We cannot assure you that we will achieve significant revenues or
profitability or, if we do, that they can be sustained or increased on a
quarterly or annual basis.
OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE SIGNIFICANTLY
We believe that our quarterly operating results could vary significantly in the
future, and that quarter-to-quarter comparisons should not be relied upon as
indications of future performance. It is likely that in some future periods our
operating results may fall below the expectations of securities analysts and
investors, which could have a material adverse effect on the trading price of
our common stock. Among the factors that may influence our operating results
are:
- the introduction of new or enhanced products and services 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.
OUR FUTURE SUCCESS DEPENDS UPON THE WIDESPREAD USE OF DIGITAL CAMERAS AND
FISHEYE LENSES AND ADOPTION OF IMMERSIVE IMAGING
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.
4
<PAGE> 9
In addition, immersive imaging is a new concept that may not be accepted by
businesses or consumers. In particular, there can be no assurance that our
concept of immersive imaging will be adopted over other types of immersive
imaging offered by our competition. Further, our future growth will be based
upon both the business and consumer markets adopting our technology, and we can
give no assurance that such adoption will occur. The failure of either the
business or consumer markets to adopt our technology would limit our future
growth.
WE DEPEND ON PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS THE
FAILURE OR LIMITATION OF WHICH WOULD MATERIALLY HARM OUR BUSINESS
We rely on a combination of patent, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to protect our
intellectual property rights. Our success is heavily dependent upon recognition
and enforcement of these rights. We cannot assure you that any of our patents or
trademarks will not be challenged and invalidated or circumvented, or that any
patents will issue as a result of our pending or future patent applications. We
have been involved in litigation relating to the protection of our intellectual
property rights and could be involved in future litigation as third parties
develop products that we believe infringe on our patent and other intellectual
property rights. 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 or otherwise use aspects of our processes and devices that we
regard as proprietary. A party who is able to copy or gain unauthorized use of
our processes and devices could misappropriate proprietary information or
circumvent the use of IPIX keys. We have experienced attempts to misappropriate
our technology, and we expect that those attempts may continue. We may be
required to expend significant capital and resources to prevent any further
attempts. Policing unauthorized use of our proprietary information is difficult,
and we cannot assure you that the steps we take will prevent misappropriation of
our technologies. 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 have a material adverse effect on our business, results
of operations and financial condition. The volume of products that we sell to
customers within these and other commercial markets is likely to vary from year
to year.
WE MAY ENCOUNTER RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT, AND CONSUMERS
MAY NOT ADOPT OUR PRODUCTS
The markets for our products have only recently begun to develop and are rapidly
changing. In addition, our products are new and based on evolving technologies.
We are also dependent upon the continued use of our products by the business
market and the acceptance of our products by the individual consumer. We have
not yet made any sales to individual consumers and cannot assure you that they
will be willing to purchase and use our products. Thus, both the timing and
growth of market acceptance for our products are subject to a high level of
uncertainty. Acceptance of our products will be highly dependent on a number of
factors, including:
- competing products;
- the development of technologies that will facilitate the use of our
products by businesses and consumers;
5
<PAGE> 10
- the ease-of-use and performance of our products; and
- the success of our marketing efforts.
We cannot assure you that we will be successful in obtaining market acceptance
of our products. Failure to gain market acceptance of our products would 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 implementation of our
business plans, which could materially harm our business.
OUR FAILURE TO INCREASE THE DISTRIBUTION OF OUR IPIX VIEWER COULD DELAY OR
HINDER OUR FUTURE GROWTH
IPIX images can be viewed and navigated with an IPIX viewer or with a viewer
using JAVA. The IPIX viewer is available as a plug-in for free, but must be
downloaded from our web site or other participating web sites. The IPIX viewer
provides greater picture resolution and navigational controls than viewing the
image using JAVA. Although we are working with some of our strategic partners to
develop alternative methods to view an IPIX image without a viewer, we are still
substantially dependent upon the viewer for a competitive advantage.
Often, a web site visitor is unwilling to, or incapable of, downloading the
viewer and thus does not experience the best available IPIX image. We must
increase the download rates for our viewer, particularly with individual
consumers, or include the viewer with other software or as part of a personal
computer's operating system. If we do not significantly increase distribution of
our viewer, our business, results of operations and financial condition could be
materially adversely affected and our growth could be hindered or delayed.
OUR MARKET IS HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE GREATER
FINANCIAL OR TECHNICAL RESOURCES THAN US
Our primary competitors are Apple Computer, Inc., Bamboo.com, Inc., Be Here
Corporation, Black Diamond, Inc., Cyclovision, Inc., Infinite Pictures
Corporation and Live Picture Corporation. Each of these companies develops and
markets imaging products and services that provide a panoramic image experience.
We compete with these companies on the basis of price, ease of use and picture
resolution. Some of our competitors offer their products at lower prices and
with greater picture resolution than us.
We cannot assure you that others will not develop technologies that are similar
or superior to our technologies, duplicate our technologies or design around our
patents. To compete effectively, we must:
- 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.
6
<PAGE> 11
IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH, THE PRICE OF OUR COMMON STOCK MAY
DECLINE SIGNIFICANTLY
Due to our recent growth, the number of our employees has grown from 17 as of
December 31, 1995, to 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 would have a material adverse effect on our business,
future results of operations and financial condition.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED SERVICE OF OUR KEY EMPLOYEES AND OUR
ABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL
Our future success depends on our ability to attract and retain key management,
scientific, technical and other personnel. In addition, we must recruit
additional qualified management, scientific, technical, marketing and sales and
support personnel for our operations. Competition for 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 may have
a material adverse effect on our business, results of operations and financial
condition.
OUR GROWTH STRATEGY OF DEVELOPING AND INCREASING PUBLIC RECOGNITION OF OUR BRAND
AND ATTEMPTING TO INCREASE SALES OF OUR PRODUCTS THROUGH INCREASED SALES AND
MARKETING EFFORTS MAY BE UNSUCCESSFUL
We believe that establishing and maintaining the IPIX brand is important to our
efforts to increase our customer base. We intend to make significant
expenditures in creating and maintaining distinct brand loyalty through
traditional media advertising campaigns such as print, billboards and
television. In addition, we are considering establishing a new web site through
which we would sell IPIX-compatible digital cameras in an attempt to enhance
IPIX key sales. Establishment of this new web site could involve significant
expenditures on our part. If customers do not perceive our existing products to
be of high quality, or if we introduce new products or enter into new business
ventures that are not favorably received or ultimately successful, the value of
our brand could be diluted, 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 FACE DIFFERENT RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS AND MAY NOT
BE SUCCESSFUL IN IMPLEMENTING OUR STRATEGY TO EXPAND INTO INTERNATIONAL MARKETS
A part of our strategy is to distribute our products in international markets.
We cannot assure you that our products will become widely accepted in any
international markets. We may experience difficulty in managing 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.
Risks inherent in our doing business on an international level include:
- failure of foreign countries to rapidly adopt the Internet and digital
imaging;
- unexpected changes in regulatory requirements, especially regarding the
Internet;
- trade barriers regarding electronic commerce;
7
<PAGE> 12
- slower payment and collection of accounts receivable than in our domestic
market;
- difficulty in enforcing contracts; and
- political and economic instability.
We cannot assure you that we will be successful in our international expansion
or that one or more of the above factors will not have a material adverse effect
on our future international operations and, consequently, on our business,
results of operations and financial condition.
INDUSTRY RISKS
ADOPTION OF THE INTERNET AS A COMMERCIAL MEDIUM IS UNCERTAIN, ESPECIALLY DUE TO
SECURITY CONCERNS, AND ANY LACK OF ADOPTION COULD LIMIT OUR GROWTH
Our future success substantially depends on the continued growth in the use of
the Internet for commercial purposes. Continued growth of the Internet could be
slowed by:
- inadequate infrastructure;
- lack of availability of cost-effective, high-speed systems and service;
- failure to develop a reliable network system;
- delays in developing or adopting new standards and protocols to handle
increased levels of Internet activity; or
- government regulation.
If any one of these factors limits the growth of the Internet as a viable
information medium or commercial marketplace, or if the use of and interest in
the Internet does not continue to grow, our business, results of operations and
financial condition could be materially adversely affected.
Concerns over the security of Internet transactions and user privacy may also
inhibit the growth of the Internet, particularly as a means of conducting
commercial transactions. Since we conduct business over the Internet through our
web site, security breaches could expose us to a risk of loss or litigation and
possible liability. We cannot assure you that contractual provisions attempting
to limit our liability in these areas will be successful or enforceable, or that
other parties will accept these contractual provisions as part of our
agreements, which could have a material adverse effect on our business, results
of operations and financial condition.
GOVERNMENT REGULATION OF THE INTERNET, AS WELL AS OTHER LEGAL UNCERTAINTIES, MAY
DIMINISH OUR GROWTH
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, a number of legislative and regulatory proposals are under
consideration by various governmental organizations. It is possible that a
number of laws or regulations may be adopted to govern the Internet relating to
user privacy, taxation, pricing and the quality of products and services. The
adoption of any of these laws or regulations may slow the growth in Internet
use, which could in turn decrease the demand for our product, increase our cost
of doing business or, in other ways, have a material adverse effect on our
business, results of operations and financial condition.
Moreover, existing laws governing property ownership, copyright, trademark,
trade secret, obscenity, libel and personal privacy may be applied to the
Internet in the future. Any new legislation or regulation, or application or
interpretation of existing laws, could have a material adverse effect on our
business, results of operations and financial condition.
8
<PAGE> 13
PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT 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 have a material adverse effect on our
business, results of operations and financial condition.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES AND,
IF WE FAIL TO ADAPT TO THOSE CHANGES, OUR PRODUCTS MAY BECOME OBSOLETE
We compete in a market characterized by rapidly changing technology, evolving
industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. These market
characteristics are intensified by the emerging nature of the Internet and the
multitude of companies offering Internet-based products and services. 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.
The failure by our management to apply these funds effectively could have a
material adverse effect on our business, results of operations and financial
condition.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE SUBSTANTIAL NUMBER
OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of common stock into the public market
after this offering, or the perception that such sales could occur, could
materially and adversely affect our stock price or could impair our ability to
obtain capital through an offering of equity securities. After this offering, we
will have outstanding 16,757,186 shares of common stock, or 17,387,186 shares if
the underwriters fully exercise their over-allotment option. In addition,
2,514,614 shares of common stock are issuable upon the exercise of outstanding
stock options. This number includes options to purchase 1,260,505 shares that
are currently exercisable under our 1997 equity compensation plan and options to
purchase 186,341 shares that will become exercisable under that plan at the
consummation of this offering. We also have reserved 676,289 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
9
<PAGE> 14
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, 11,675,839 shares of our common stock held by those
shareholders will be available for immediate resale, subject to certain
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 COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, AND OUR STOCK PRICE COULD BE
VOLATILE
Our common stock price is likely to be highly volatile. The stock market in
general has experienced extreme volatility that often has been unrelated to the
operating performance of many technology, emerging growth and developing
companies. These broad market and industry fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. Since we may be viewed as one of these types of companies, market
fluctuations may adversely affect the market price of our common stock.
OUR CHARTER AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE
DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE FUTURE, 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 such
differences include, but are not limited to, 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 such forward-looking
statements entirely by these cautionary factors.
10
<PAGE> 15
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 such opportunities. Pending such
uses, the net proceeds will be invested in government securities and other
short-term, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends on our common stock. 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.
11
<PAGE> 16
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, 34,009,000 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.
12
<PAGE> 17
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.
13
<PAGE> 18
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) $ (0.39)
======== =======
</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>
14
<PAGE> 19
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
3608 by 3608 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 more expensive.
15
<PAGE> 20
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
Based on results through June 30, 1999, we expect total revenues in the second
quarter of 1999 to be $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. 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. 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 at the initial public offering price. At an assumed initial public
offering price of $13 per share, we will issue them 76,923 shares of our common
stock.
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.
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>
16
<PAGE> 21
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%. 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
17
<PAGE> 22
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.
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.
Our operating results have varied on a quarterly basis during our operating
history and may fluctuate in the future as a result of different factors, many
of which are outside our control. Additionally, as a result of our limited
operating history and the emerging nature of the immersive imaging market in
which we compete, it is
19
<PAGE> 24
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.
In order to comply with the Conduct Rules of the National Association of
Securities Dealers, Inc., we will 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.
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
20
<PAGE> 25
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 such
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 such 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.
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
21
<PAGE> 26
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.
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 certain elements of SOP 97-2, and provides additional
authoritative guidance on software revenue recognition. SOP 97-2 is effective
for fiscal years beginning after March 15, 1999. We do not expect its adoption
to have a material impact on our reported results of operations, financial
position or cash flows.
INFLATION
Inflation has not had a significant impact on our operations to date.
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<PAGE> 27
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 3,000 commercial web sites are utilizing
IPIX images.
Our patented technology creates IPIX images by combining two film or digital
photographs taken with a fisheye lens into one 360(degree) by 360(degree)
spherical image. Our Wizard software corrects the distortion inherent in 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.
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
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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
DSL networks are enabling the use of more feature-rich multimedia content.
Forrester Research predicts that approximately 16 million U.S. households will
have broadband connection by the end of 2002, representing approximately 25% of
the homes connected to the Internet.
Growth in the use of digital imaging
Fundamental changes are occurring in the photography industry with the
introduction of the digital camera. The digital camera allows the user to take
pictures and display them digitally, either on a personal computer or over the
Internet, without the need for traditional film development. Because digital
cameras were initially expensive, early adopters of this technology were
professionals and hobbyists. Recently, sales of digital cameras have grown
substantially due to improved performance and lower unit prices. IDC forecasts
that worldwide digital camera shipments will grow from 2.1 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.
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.
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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.
Our technology is easy to use, portable and cost-effective. Our Wizard 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.
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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. In order to
increase our presence on the Internet, we target high-profile, high-traffic web
sites to use our technology. For example, we provided IPIX images of the space
shuttle to CNN that were used in its special broadcast of John Glenn's return to
space. We intend to use portions of the net proceeds of this offering to expand
our sales and marketing programs and increase our brand awareness.
Target commercial markets that can best capitalize on our technology
We believe that applications within targeted commercial markets provide the most
immediate revenue opportunities for IPIX images. These markets are characterized
by the need for high visual content in advertising, product information and
entertainment. We initially have targeted the following commercial markets: real
estate, travel and hospitality, electronic publishing, corporate and e-commerce
and education and entertainment. We actively seek customers that are leaders in
each of these markets. For example, we have entered into an agreement with
Cendant Corporation and are the preferred provider of immersive imaging to its
real estate subsidiaries, Coldwell Banker, Century 21 and ERA. We organize our
sales force and customize our product offering to each commercial market to
satisfy the needs of the particular market and customer. In addition, we believe
that opportunities exist for our technology in other commercial markets such as
security, child care, government agencies and architecture.
Develop approaches to penetrate consumer markets
With the availability of IPIX images on retail products such as CD-ROM
encyclopedias and increased usage of IPIX images on web sites, we believe that
consumers are becoming familiar with immersive imaging and will begin to require
the same immersive imaging technology for their personal use.
By taking advantage of the increasing use and decreasing cost of digital
cameras, we currently are pursuing a number of different product approaches for
the consumer market. The first of these, a personal edition digital camera kit,
is targeted towards the early adopter, as well as the photo enthusiast. We also
seek to partner with leading camera manufacturers to develop a single use point
and shoot film camera kit that will create an immersive panoramic image and be
targeted to a broader use market. We believe the consumer will utilize the
services of a third party to process and deliver the IPIX images on a CD-ROM or
via the Internet.
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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.
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 Wizard 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 via 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 OF 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 via e-mail.
IPIX Kits. Our IPIX kit contains all the necessary items to create an IPIX
image, including a digital camera, fisheye lens, rotator, tripod, Wizard
software and an initial amount of IPIX keys. Kit sales are intended primarily to
increase the number of capture devices in the market and to stimulate repeat
purchases of IPIX keys and are not intended to be a significant source of our
future profits. We have established strategic relationships with leading digital
camera manufacturers such as Kodak, Nikon and Olympus 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.
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
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multimedia features such as Macromedia Director to provide an attractive
interactive product. For example, in November 1998, PBS and Intel used our
multimedia software to incorporate and link IPIX images into its digital
television broadcast of the Ken Burns documentary on Frank Lloyd Wright.
IPIX-TV. Our multimedia software can create an IPIX image to include automated
viewing and background audio. By adding autoplay with either music or narration,
the user can provide a video-like viewing experience of a still image. For
example, Swissotel used an IPIX image of the exterior of a hotel, with automated
motion and accompanied by background street noise, to make the viewer feel as if
he were watching a video of the front of the hotel. Jupiter Communications, an
Internet marketing research firm, selected IPIX-TV as one of the top five
technologies to watch in 1999.
New Products
We continually make enhancements and improvements to our technology and take
advantage of innovations in image compression and cross platform software
development languages. We believe these efforts have enabled us to explore new
applications for our technology. Described below are several products currently
under development:
V360. Our patented technology has the potential to generate full-motion
steerable video. When fully developed, V360 will enable multiple viewers to
simultaneously and independently select their own field of view within a
spherical video image from a fixed camera source. For example, an IPIX-enabled
V360 video feed from a sporting event would allow viewers to choose their own
camera angle, just as if they were actually in the stadium. V360 was featured at
IDC's Demo '99 conference as one of the forty most innovative technologies of
1999. We are exploring additional potential commercial applications of V360 such
as the security, teleconference and surveillance industries.
We believe V360 will benefit from the deployment of high-speed digital networks.
Multiple V360 streams could be delivered to the home via a digital cable
network, satellite or broadband. We have developed working prototypes in
conjunction with industry leaders such as MediaOne and Motorola. Our goal is to
become the leader in the field of full-motion steerable video by aggressively
pursuing and developing commercial applications for V360.
IPIX Webcam. According to InfoTrends, the number of webcams in service will
grow from 1.2 million in 1998 to 12 million by 2002. Existing webcam technology
continuously captures and transmits two-dimensional digital images over the
Internet. We have developed a webcam which will permit the remote capture,
creation and transmission of 1808 navigable hemispherical IPIX images over the
Internet. The IPIX image is continuously updated and viewed on a personal
computer or other Internet-enabled device such as Web-TV. The IPIX Webcam will
enable an unlimited number of viewers to view the IPIX image and independently
control their viewpoint. We are currently engaged in a beta test with some of
our customers to further refine this technology. Potential commercial
applications include entertainment, child care and security industries.
IPIX On-Location. We are developing a blue screen application to our technology
in which an IPIX image can be used as a virtual set background. Blue screens are
used to create entire production studios from graphically rendered images. We
believe that our application of this technology, when fully developed, will
provide a cost-effective interactive solution for these virtual studios.
IPIX Touch Screen. We have incorporated the ability to view an IPIX image with
a touch screen monitor. Viewers may navigate within the IPIX image by touching
the screen in the direction in which they wish to view. This innovation provides
an easy to use method of viewing an IPIX image. Potential opportunities for our
touch screen technology include kiosk manufacturers and airport and tourist
information exhibitors who wish to incorporate IPIX images into their product
offerings.
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CUSTOMERS
We have directed our initial sales efforts to industry leaders within targeted
commercial markets. We believe that adoption of our technology by these leaders
will encourage other members of these markets to use IPIX images in order to
stay competitive. The following is a description of our targeted commercial
markets and our representative customers within these segments.
<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.
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.
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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 prior
to purchasing a ticket online. Our corporate and e-commerce customers either
purchase kits to create their own IPIX images or utilize our in-house studio to
create IPIX images for them.
Education and Entertainment
Leaders in the education and entertainment industries use IPIX images to enhance
the appeal and functionality of their products and web sites. In particular,
these customers provide significant exposure for our brand and products. For
example, IBM features IPIX images in their 1998 IBM Worldbook electronic
encyclopedia. Also, an IPIX virtual tour of the set of the movie, Episode I: The
Phantom Menace, posted on the starwars.com web site helped promote the film's
release. Our education and entertainment clients request studio work and
purchase kits and keys to create their own IPIX images. 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.
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. 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.
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.
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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.
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 prior to shipment and process customer service inquiries concerning order
status, shipping information, returns and exchanges.
RESEARCH AND PRODUCT DEVELOPMENT
We have made substantial investments in research and product development. We
continue to develop enhancements to our technology and pursue new product
offerings. In particular, we are pursuing products compatible with the pending
availability of broadband networks and higher resolution cameras. One product in
beta test phase is the IPIX Webcam, which we call the eyes of the Internet. This
technology will permit the remote capture, creation and transmission of 1808
navigable hemispherical IPIX images over the Internet. Another new product
development is our steerable video technology, V360. When fully developed, V360
will enable multiple viewers to independently select their own field of view by
navigating within a spherical video image transmitted by a stationary camera. As
of June 30, 1999, we employed 17 engineers dedicated to research and product
development.
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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 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 dismissed the lawsuit on May 19,
1999. Although the lawsuit was
34
<PAGE> 39
dismissed, the arbitration will proceed in Knoxville, Tennessee in the fall of
1999 as to 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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<PAGE> 40
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.
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
36
<PAGE> 41
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.
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.
37
<PAGE> 42
DOUG HOLMES has been a director of our company since April 1998. Since May 1998,
Mr. Holmes has served as executive vice president-strategy and business
development for MediaOne Group, Inc. From January 1997 to May 1998, he was
executive vice president-finance, strategy & business development for MediaOne.
From January 1995 to January 1997, Mr. Holmes was vice president and chief
financial officer of US WEST Media Group. From January 1994 to January 1995, Mr.
Holmes was executive director-investor relations of US WEST. Mr. Holmes is also
a director of Time Warner Telecom, Inc. Mr. Holmes holds a bachelor's degree and
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 prior to 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.
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.
38
<PAGE> 43
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 pursuant to 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 $2,000
per month for his service on the technology advisory board.
39
<PAGE> 44
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation received
for services rendered to us during 1998 by our chief executive officer and our
four other highest paid executive officers who are referred to as the named
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
----------------------------------------------
ANNUAL COMPENSATION
----------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) 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 $13.00, the mid-point of the range shown on the cover of this
prospectus, over the terms of the options in compliance with the rules and
regulations of the Securities and Exchange Commission, and does not represent
our estimate or projection of the future value of the common stock. The actual
value realized may be greater or less than the potential realizable values
presented in the table.
(2) Mr. Peters' stock options vest in equal amounts over a three year period and
expire in equal amounts on August 17, 2004, 2005 and 2006.
(3) Mr. Kalec's stock options vest in equal amounts over a three year period and
expire in equal amounts on August 24, 2004, 2005 and 2006.
40
<PAGE> 45
The following table presents information concerning stock option holdings held
by the named officers at December 31, 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
---------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
FY-END(#) FY-END($)
--------------------------- ---------------------------
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 prior to August 24, 2000, Mr.
Kalec is entitled to a severance payment of $175,000.
Mr. Murphy. Mr. Murphy's employment agreement continues indefinitely
unless terminated by us or Mr. Murphy. Mr. Murphy receives an annual salary
of $163,600 and is eligible for a performance based annual bonus. We may
terminate Mr. Murphy's employment agreement with or without cause; however,
if we terminate the agreement without cause before the end of the term, Mr.
Murphy is entitled to a severance payment equal to two months' salary.
Mr. Zimmermann. Mr. Zimmermann's employment agreement expires on June 23,
2000. Mr. Zimmermann receives an annual salary of $127,000. We may
terminate Mr. Zimmermann's employment agreement with or without cause;
however, if we terminate the agreement without cause before the end of the
term, Mr. Zimmermann is entitled to a severance payment of equal to one
year's salary.
1997 EQUITY COMPENSATION PLAN
Our 1997 equity compensation plan, or the plan, was adopted by the board of
directors in November 1997 and approved by the shareholders on December 8, 1997.
The plan provides for grants of stock options to selected employees, officers,
directors, consultants and advisors. By encouraging stock ownership, we seek to
attract, retain and motivate these persons and to encourage them to devote their
best efforts to our business and financial success.
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<PAGE> 46
The plan authorizes the granting of options to purchase up to 1,998,559 shares
of our common stock, subject to adjustment in certain circumstances. Options to
purchase 1,308,893 shares of common stock had been granted under the plan.
Considering all options to purchase shares, options to purchase 1,260,505 shares
are currently exercisable and 186,341 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 such other
method as the committee may approve. The committee may impose such vesting and
other conditions on options as the committee deems appropriate. Options may be
exercised while the grantee is an employee, officer, director, consultant or
advisor or within a specified period after termination of the grantee's
employment or services.
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee during the year ended December 31, 1998 consisted of
Messrs. Jackson, Hendricks, Newhouse and Phillips. Mr. Phillips is our chairman
and chief executive officer. None of our executive officers has served as a
director or member of the compensation committee of any other entity whose
executive officers served on our board of directors or compensation committee.
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<PAGE> 47
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 in
accordance with 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%
11615 S. Monticello Drive
Knoxville, TN 37922
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
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
43
<PAGE> 48
(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.
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%.
44
<PAGE> 49
CERTAIN 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 pursuant to a patent license agreement dated January 17, 1997. These
licenses have been granted for the lives of the underlying Motorola patents on a
worldwide, royalty-free, non-exclusive, non-transferrable basis with the right
to sublicense. We may not grant third parties exclusive licenses for our
technology for a term exceeding one year without the prior written consent of
Motorola.
In January 1997, we granted Discovery a world-wide, exclusive license to utilize
our technology in connection with the development of 15 destination-specific
CD-ROM titles. The term of the Discovery license will expire on the expiration
date of the last underlying patent.
In July 1998, we purchased 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>
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.
45
<PAGE> 50
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 CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The directors comprising the board of directors will be divided into three
classes. Two directors will constitute class I and will stand for election at
the annual meeting of shareholders to be held in 1999. Two directors will
constitute class II and will stand for election at the annual meeting of
shareholders to be held in 2000. Two directors will constitute class III and
will stand for election at the annual meeting of shareholders to be held in
2001. After their initial term following the offering, directors in each class
will serve for a term of three years. The charter will provide that directors
can be removed only for cause by a majority of the shareholders and only
46
<PAGE> 51
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. To be
timely notice for an annual meeting, a shareholders's notice must be delivered
to or mailed and received at our principal executive offices at least 120 days
before the first anniversary of the date our notice of annual meeting was
provided for the previous year's annual meeting of shareholders. If we did not
hold an annual meeting in the prior year, or if we have changed the date of the
annual meeting to be more than 30 calendar days earlier or 60 calendars after
that anniversary, different notice procedures are required. 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. To be timely notice for a special meeting, a shareholder's notice
must be delivered to us by the close of business 10 days after notice of the
meeting is given to shareholders. The bylaws also specify requirements as to the
form and content of a shareholders' notice. These provisions may prevent
shareholders from bringing matters before an annual meeting of shareholders or
from making nominations for directors at an annual meeting of shareholders.
We are subject to anti-takeover provisions provided under Tennessee law,
including the following:
Business Combination Statute. The Tennessee Business Combination Act, or TBCA,
provides that a party owning 10% or more of stock in a resident domestic
corporation, an interested shareholder, cannot engage in a business combination
with the resident domestic corporation unless the combination (1) takes place at
least five years after that shareholder first acquired 10% or more of the
resident domestic corporation, and (2) either (A) is approved by at least
two-thirds of the voting shares of the resident domestic corporation not
counting that shareholder or (B) satisfies fairness conditions specified in the
TBCA.
A business combination with an entity can proceed without delay when approved by
the target corporation's board of directors before that entity becomes 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, 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
47
<PAGE> 52
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 according to Section 12(g) of the Exchange
Act. TGA provides that it is unlawful for any corporation to purchase any of its
shares at a price above the market value, as defined in TGA, from any person who
holds more than 3% of its class of securities if the person has held these
shares for less than two years, unless either (1) the purchase is first approved
by the affirmative vote of a majority of the outstanding shares of each class of
voting stock issued or (2) the corporation makes an equivalent offer, on a value
per share basis, to all holders of shares of the class.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by Tennessee law, our amended charter will provide that our
directors shall not be personally liable to us or our shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our shareholders may be unable to obtain
monetary damages from a director for breach of 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
48
<PAGE> 53
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.
49
<PAGE> 54
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 restricted shares
for at least one year, including the holding period of any prior owner except an
affiliate of ours, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of: (1) 1% of the number of
shares of common stock then outstanding, which will equal approximately 167,572
shares immediately after this offering; or (2) the average weekly trading volume
of the common stock during the four calendar weeks preceding the filing of a
Form 144 in connection with the sale. Sales under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been our affiliate at any time during the three months preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years, including the holding period of any prior owner except an
affiliate, is entitled to sell those 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 the issuer becomes 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. 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.
We have agreed not to offer, sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of J.P.
Morgan Securities Inc., subject to certain limited exceptions.
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
50
<PAGE> 55
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.
51
<PAGE> 56
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>
52
<PAGE> 57
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, under other
conditions, affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that, under other conditions,
might exist in the open market. If the underwriters commence these activities,
they may discontinue them at any time. The underwriters may carry out these
transactions on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Interactive Pictures Corporation estimates that the total expenses of this
offering, excluding underwriting discounts and commissions, will be $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 retirees who have expressed an
interest in participating in this offering. Interactive Pictures Corporation
expects these persons to purchase no more than % of the common stock
offered in this offering. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Interactive Pictures Corporation 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 these and
other factors in relation to the price of similar securities of generally
comparable companies. Neither Interactive Pictures Corporation nor the
underwriters can assure investors that an active trading market will develop for
the common stock, or that the common stock will trade in the public market at or
above the initial offering price.
From time to time in the ordinary course of their 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
53
<PAGE> 58
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.
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 more than $50,000 of our common stock. Holland and Knight will pass upon
legal matters for the selling shareholders. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Cahill Gordon &
Reindel, a partnership including a professional corporation, New York, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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 are not complete. 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
54
<PAGE> 59
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.
55
<PAGE> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Interactive Pictures Corporation ("IPIX" or the "Company") is engaged in the
design and sale of electronic digital imaging products related to IPIX images.
The Company's patented technology allows viewers to Step Inside the Picture with
IPIX images and changes the way people create and view images, immersing them in
a 360 degrees X 360 degrees spherical environment. IPIX images provide a
complete field of view in a window, which can be navigated by moving a cursor
inside the image.
Using the Company's technology, clients can create virtual tours and multimedia
content to enhance marketing and accelerate electronic commerce over the
Internet. The Company's customers are primarily in the real estate, publishing
and corporate and e-commerce industries. Customers in the real estate and the
corporate and e-commerce markets represented an aggregate of 63%, 57% and 62% of
total revenues for 1996, 1997 and 1998.
The Company performs research and development to enhance its own products, as
well as for other entities with whom the Company has entered into contracts. The
Company also performs content development services for itself and others with
whom the Company has entered into contracts.
The Company is currently preparing a registration statement on Form S-1.
Management anticipates that the registration statement will be filed with the
Securities and Exchange Commission ("SEC") in May 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS. Information in the accompanying financial
statements and notes to the financial statements for the interim period as of
March 31, 1999, and for the three-month periods ended March 31, 1998 and 1999,
is unaudited. The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles and Regulation S-X.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of Interactive Pictures Corporation and its
wholly-owned subsidiary, Interactive Pictures UK Limited, a United Kingdom
company formed in 1998. All significant intercompany balances and transactions
have been eliminated. The subsidiary's functional currency is the British Pound.
The cumulative translation adjustment account as of December 31, 1998 and March
31, 1999, was insignificant.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments with a maturity of three months or less when purchased to be cash
equivalents.
SECURITIES AVAILABLE-FOR-SALE. Securities available-for-sale represent those
securities intended to be held for an indefinite period of time. Securities
available-for-sale are recorded at fair value based on prices obtained from
commercial pricing services.
Unrealized gains and losses are excluded from earnings and reported in other
comprehensive income in shareholders' equity. Interest income includes interest,
amortization of purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on the specific
identification method. The securities portfolio at December 31, 1997, consisted
entirely of U.S. government obligations with maturities of less than one year.
Amortized costs approximated fair values and unrealized gains and losses were
insignificant.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents, and accounts receivable. Cash and cash
F-8
<PAGE> 68
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents are deposited with high credit quality financial institutions. The
Company's accounts receivable are derived from revenue earned from clients
located in the U.S. and abroad. The Company performs ongoing credit evaluations
of its clients' financial condition and generally requires no collateral from
its clients. To date, the Company has not experienced any material losses.
The following table summarizes the revenue from product customers in excess of
10% of total revenues:
<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 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
F-9
<PAGE> 69
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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
F-10
<PAGE> 70
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
\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>
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>
F-11
<PAGE> 71
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 5,335,091
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.
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.
F-12
<PAGE> 72
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-13
<PAGE> 73
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 74
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-15
<PAGE> 75
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-16
<PAGE> 76
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-17
<PAGE> 77
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
</TABLE>
F-18
<PAGE> 78
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
--------------------------------------
RESEARCH AND
DEVELOPMENT
IPIX SERVICES
PRODUCTS FOR OTHERS TOTAL
---------- ------------ ----------
<S> <C> <C> <C>
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> 79
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 plaintiffs dismissed
the lawsuit in May 1999. 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 alleging patent infringement. Management believes that the
claims are without merit and intends to vigorously defend against such claims.
If the Company does not
F-20
<PAGE> 80
INTERACTIVE PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 81
(LOGO IPIX INTERACTIVE PICTURES CORPORATION)
<PAGE> 82
[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]
V630 Steerable Video
[V360 logo image]
IPIX On Location
<PAGE> 83
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> 84
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 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
II-2
<PAGE> 85
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)
24.1** -- Power of Attorney (included on page II-5)
27.1** -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
II-3
<PAGE> 86
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> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Interactive Pictures Corporation, has duly caused this amendment no. 1 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 13th 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. 1
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 13, 1999
* and Chief Executive Officer
- ---------------------------------------------------
James M. Phillips
/s/ President and Chief Operating July 13, 1999
* Officer
- ---------------------------------------------------
Jeffrey D. Peters
/s/ Vice President and Chief Financial July 13, 1999
JOHN J. KALEC Officer (Principal Accounting
- --------------------------------------------------- Officer)
John J. Kalec
/s/ Director July 13, 1999
*
- ---------------------------------------------------
John S. Hendricks
/s/ Director July 13, 1999
*
- ---------------------------------------------------
Doug Holmes
/s/ Director July 13, 1999
*
- ---------------------------------------------------
Laban P. Jackson, Jr.
/s/ Director July 13, 1999
*
- ---------------------------------------------------
Randall Battat
*By: /s/ JOHN J. KALEC
---------------------------------------------
James M. Phillips
Power of Attorney
</TABLE>
II-5
<PAGE> 88
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>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 3.1
FOURTH AMENDED AND RESTATED CHARTER
OF
INTERACTIVE PICTURES CORPORATION
Pursuant to the provisions of Section 48-20-107 of the Tennessee
Business Corporation Act, the undersigned corporation hereby restates its
Charter to supersede the Second Amended and Restated Charter and any and all
prior amendments thereto as follows:
I. The name of the corporation is: Interactive Pictures Corporation.
II. The text of the Restated Charter is as follows:
1. The name of the corporation is Interactive Pictures Corporation.
2. The corporation is for profit.
3. The duration of the corporation is perpetual.
4. The street address and zip code of the corporation's principal
office in Tennessee shall be:
1009 Commerce Park Drive
Oak Ridge, Tennessee 37830
County of Anderson
5. (a) The name of the corporation's registered agent is Matthew S.
Heiter.
(b) The street address, zip code, and county of the corporation's
registered office and registered agent in Tennessee shall be:
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103
County of Shelby
6. The corporation is organized to do any and all things and to
exercise any and all powers, rights, and privileges that a corporation may now
or hereafter be organized to do, or to exercise, under the Tennessee Business
Corporation Act, as amended.
7. The corporation is authorized to issue two classes of stock in the
following number of shares: (i) 100,000,000 shares of common stock, par value
$.001 per share (the "Common Stock"), and (ii) 10,000,000 shares of preferred
stock, $.001 par value (the "Preferred Stock").
<PAGE> 2
The preferences, limitations, and relative rights of the above
classes of stock shall be as follows:
(a) Preferred Stock. Shares of Preferred Stock may be issued
in one or more classes or series at such time or times for such
consideration as the Board of Directors may determine. Each such class
or series shall be given a distinguishing designation. All shares of
any one class or series shall have preferences, limitations, and
relative rights identical with those of other shares of the same class
or series and, except to the extent otherwise provided in the
description of such class or series, with those of other shares of
Preferred Stock. Authority is hereby expressly granted to the Board of
Directors to fix from time to time, by resolution or resolutions
providing for the establishment and issuance of any class or series of
Preferred Stock, the designation of such class or series, and the
relative rights, preferences, qualifications, and limitations of the
shares of such class or series. Before issuing any shares of Preferred
Stock, the corporation shall deliver to the Secretary of State for
filing Articles of Amendment, which shall be effective without
shareholder action, that set forth (a) the name of the corporation, (b)
the text of the amendment determining the terms of the class or series,
(c) the date the amendment was adopted, and (d) a statement that the
amendment was duly adopted by the Board of Directors.
(b) Common Stock. Each share shall be entitled to one vote.
Upon dissolution of the corporation, each share of Common Stock shall
be entitled to receive a pro-rata share of the net assets of the
corporation.
8. The shareholders of the corporation shall not have preemptive
rights.
9. All corporate powers shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be managed under the
direction of, a Board of Directors consisting of not less than three nor more
than nine directors, the exact number of directors to be determined in the
manner provided in the Bylaws of the corporation. The directors shall be divided
into three classes, designated Class I, Class II, and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. Each class of directors
shall be elected for a three year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting of
shareholders for the year in which his or her term expires and until his or her
resignation, retirement, disqualification, or removal from office. Any vacancy
on the Board of Directors, including a vacancy that results from an increase in
the number of directors or a vacancy that results from the removal of a director
with cause, may be filled only by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors.
Any director may be removed from office but only for cause by (a) the
affirmative vote of the holders of a majority of the voting power of the shares
entitled to vote in the election of directors,
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considered for this purpose as one class, unless a vote of a special voting
group is otherwise required by law, or (b) by the affirmative vote of a majority
of the entire Board of Directors then in office.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office, filling of
vacancies, and other features of such directorships shall be governed by the
terms of this Charter applicable thereto.
Notwithstanding any other provision of this Charter, the affirmative
vote of holders of two-thirds of the voting power of the shares entitled to vote
at an election of directors shall be required to amend, alter, change or repeal,
or to adopt any provisions as part of this Charter or as part of the
corporation's Bylaws inconsistent with the purpose and intent of this Article 9.
10. To the fullest extent permitted by the Tennessee Business
Corporation Act as in effect on the date hereof and as hereafter amended from
time to time, a director of the corporation shall not be liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. If the Tennessee Business Corporation Act or any successor
statute is amended after adoption of this provision to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Tennessee Business Corporation Act, as so
amended from time to time, or such successor statute. Any repeal or modification
of this Article 10 by the shareholders of the corporation shall not affect
adversely any right or protection of a director of the corporation existing at
the time of such repeal or modification or with respect to events occurring
prior to such time.
11. The corporation shall indemnify every person who is or was a party
or is or was threatened to be made a party to any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, by reason of the fact
that he or she is or was a director or officer or is or was serving at the
request of the corporation as a director, officer, employee, agent, or trustee
of another corporation or of a partnership, joint venture, trust, employee
benefit plan, or other enterprise, including service on a committee formed for
any purpose (and, in each case, his or her heirs, executors, and
administrators), against all expense, liability, and loss (including counsel
fees, judgments, fines, ERISA excise taxes, penalties, and amounts paid in
settlement) actually and reasonably incurred or suffered in connection with such
action, suit, or proceeding, to the fullest extent permitted by applicable law,
as in effect on the date hereof and as hereafter amended. Such indemnification
may include advancement of expenses in advance of final disposition of such
action, suit, or proceeding, subject to the provision of any applicable statute.
The indemnification and advancement of expenses provisions of this
Article 11 shall not be exclusive of any other right that any person (and his or
her heirs, executors, and administrators) may have or hereafter acquire under
any statute, this Charter, the corporation's Bylaws, resolution adopted by the
shareholders, resolution adopted by the Board of Directors, agreement, or
insurance,
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purchased by the corporation or otherwise, both as to action in his or her
official capacity and as to action in another capacity. The corporation is
hereby authorized to provide for indemnification and advancement of expenses
through its Bylaws, resolution of shareholders, resolution of the Board of
Directors, or agreement, in addition to that provided by this Charter.
12. Bylaws of this corporation may be amended, altered, modified, or
repealed by resolution adopted by the Board of Directors, subject to any
provisions of law then applicable.
13. The corporation shall hold a special meeting of shareholders only
in the event of a call of any of the officers authorized to do so by the Bylaws
of the corporation or of a majority of the members of the Board of Directors of
the corporation.
Notwithstanding any other provision of this Charter, the affirmative
vote of holders of two-thirds of the voting power of the shares entitled to vote
at an election of directors shall be required to amend, alter, change or repeal,
or to adopt any provisions as part of this Charter or as part of the
corporation's Bylaws inconsistent with the purpose and intent of this Article
13.
III. The Fourth Amended and Restated Charter as set forth above was duly
adopted on July ____, 1999 by the Board of Directors of the corporation.
INTERACTIVE PICTURES CORPORATION
By:
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Name:
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Title:
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
INTERACTIVE PICTURES CORPORATION
(THE "CORPORATION")
JULY ___, 1999
ARTICLE I.
OFFICES
The Corporation may have such offices, either within or without the
State of Tennessee, as the Board of Directors may designate or as the business
of the Corporation may require from time to time.
ARTICLE II.
SHAREHOLDERS
2.1 ANNUAL MEETING. An annual meeting of the shareholders of the
Corporation shall be held on such date as may be determined by the Board of
Directors. The business to be transacted at such meeting shall be the election
of directors and such other business as shall be properly brought before the
meeting.
2.2 SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the Chairman of the Board, the Chief Executive Officer, the President,
or a majority of the Board of Directors.
2.3 PLACE OF MEETINGS. The Board of Directors may designate any place,
either within or without the State of Tennessee, as the place of meeting for any
annual meeting or for any special meeting. If no place is fixed by the Board of
Directors, the meeting shall be held at the principal office of the Corporation.
2.4 NOTICE OF MEETINGS; WAIVER. (a) Notice. Notice of the date, time
and place of each annual and special shareholders' meeting and, in the case of a
special meeting, a description of the purpose or purposes for which the meeting
is called, shall be given no fewer than ten (10) days nor more than two (2)
months before the date of the meeting. Such notice shall comply with the
requirements of Article XI of these Bylaws.
(b) Waiver. A shareholder may waive any notice required by law, the
Corporation's Amended and Restated Charter (the "Charter") or these Bylaws
before or after the date and time stated in such notice. Except as provided in
the next sentence, the waiver must be in writing, be signed by the shareholder
entitled to the notice and be delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. A shareholder's attendance at a
meeting: (1) waives
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objection to lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting (or promptly upon his arrival)
objects to holding the meeting or transacting business at the meeting; and (2)
waives objection to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented.
2.5 RECORD DATE. The Board of Directors shall fix as the record date
for the determination of shareholders entitled to notice of a shareholders'
meeting, to demand a special meeting, to vote, or to take any other action, a
date not more than seventy (70) days before the meeting or action requiring a
determination of shareholders. A record date fixed for a shareholders' meeting
is effective for any adjournment of such meeting unless the Board of Directors
fixes a new record date, which it must do if the meeting is adjourned to a date
more than four (4) months after the date fixed for the original meeting.
2.6 SHAREHOLDERS' LIST. After the record date for a meeting has been
fixed, the Corporation shall prepare an alphabetical list of the names of all
shareholders who are entitled to notice of a shareholders' meeting. Such list
will show the address of and number of shares held by each shareholder. The
shareholders' list will be available for inspection by any shareholder,
beginning two (2) business days after notice of the meeting is given for which
the list was prepared and continuing through the meeting, at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held. A shareholder or his agent or attorney is
entitled on written demand to inspect and, subject to the requirements of the
Tennessee Business Corporation Act (the "Act"), to copy the list, during regular
business hours and at his expense, during the period it is available for
inspection.
2.7 VOTING OF SHARES. Unless otherwise provided by the Act or the
Charter, each outstanding share is entitled to one (1) vote on each matter voted
on at a shareholders meeting. Only shares are entitled to vote. Unless otherwise
provided in the Charter, directors are elected by a plurality of the votes cast
by the shares entitled to vote in the election at a meeting at which a quorum is
present.
2.8 PROXIES. A shareholder may vote his or her shares in person or by
proxy. A shareholder may appoint a proxy to vote or otherwise act for him or her
by signing an appointment either personally or through an attorney-in-fact. An
appointment of a proxy is effective when received by the Secretary or other
officer or agent authorized to tabulate votes. An appointment is valid for
eleven (11) months unless another period is expressly provided in the
appointment form. An appointment of a proxy is revocable by the shareholder
unless the appointment form conspicuously states that it is irrevocable and the
appointment is coupled with an interest.
2.9 ACCEPTANCE OF SHAREHOLDER DOCUMENTS. If the name signed on a
shareholder document (a vote, consent, waiver, or proxy appointment) corresponds
to the name of a shareholder, the Corporation, if acting in good faith, is
entitled to accept such shareholder document and give it effect
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as the act of the shareholder. If the name signed on such shareholder document
does not correspond to the name of a shareholder, the Corporation, if acting in
good faith, is nevertheless entitled to accept such shareholder document and to
give it effect as the act of the shareholder if:
(i) the shareholder is an entity and the name signed
purports to be that of an officer or agent of the entity;
(ii) the name signed purports to be that of a fiduciary
representing the shareholder and, if the Corporation requests, evidence
of fiduciary status acceptable to the Corporation has been presented
with respect to such shareholder document;
(iii) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the Corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the shareholder document;
(iv) the name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the
signatory's authority to sign for the shareholder has been presented
with respect to such shareholder document; or
(v) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one
(1) of the co-owners and the person signing appears to be acting on
behalf of all the co-owners.
The Corporation is entitled to reject a shareholder document if the
Secretary or other officer or agent authorized to tabulate votes, acting in good
faith, has a reasonable basis for doubt about the validity of the signature on
such shareholder document or about the signatory's authority to sign for the
shareholder.
2.10 ACTION WITHOUT MEETING. Action required or permitted by the Act to
be taken at a shareholders' meeting may be taken without a meeting. If all
shareholders entitled to vote on the action consent to taking such action
without a meeting, the affirmative vote of the number of shares that would be
necessary to authorize or take such action at a meeting is the act of the
shareholders.
The action must be evidenced by one (1) or more written consents
describing the action taken, at least one of which is signed by each shareholder
entitled to vote on the action in one (1) or more counterparts, indicating such
signing shareholder's vote or abstention on the action and delivered to the
Corporation for inclusion in the minutes or for filing with the corporate
records.
If the Act or the Charter requires that notice of a proposed action be
given to nonvoting shareholders and the action is to be taken by consent of the
voting shareholders, then the Corporation shall give its nonvoting shareholders
written notice of the proposed action at least ten (10) days
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before such action is taken. Such notice shall contain or be accompanied by the
same material that would have been required to be sent to nonvoting shareholders
in a notice of a meeting at which the proposed action would have been submitted
to the shareholders for action.
2.11 PRESIDING OFFICER AND SECRETARY. Meetings of the shareholders
shall be presided over by the Chairman, or if the Chairman is not present or if
the Corporation shall not have a Chairman, by the President or Chief Executive
Officer, or if neither the Chairman nor the President or Chief Executive Officer
is present, by a chairman chosen by a majority of the shareholders entitled to
vote at such meeting. The Secretary or, in the Secretary's absence, an Assistant
Secretary shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present, a majority of the shareholders entitled
to vote at such meeting shall choose any person present to act as secretary of
the meeting.
2.12 NOTICE OF NOMINATIONS. Nominations for the election of directors
may be made by the Board of Directors or a committee appointed by the Board of
Directors authorized to make such nominations or by any shareholder entitled to
vote in the election of directors generally. However, any such shareholder
nomination may be made only if written notice of such nomination has been given,
either by personal delivery or the United States mail, postage prepaid, to the
Secretary of the Corporation at the principal executive offices of the
Corporation not later than (a) with respect to an election to be held at an
annual meeting of shareholders, one hundred twenty (120) calendar days in
advance of the anniversary date of the proxy statement for the previous year's
annual meeting, and (b) with respect to an election to be held at a special
meeting of shareholders for the election of directors, the close of business on
the tenth day following the date on which notice of such meeting is first given
to shareholders. In the case of any nomination by the Board of Directors or a
committee appointed by the Board of Directors authorized to make such
nominations, compliance with the proxy rules of the Securities and Exchange
Commission shall constitute compliance with the notice provisions of the
preceding sentence.
In the case of any nomination by a shareholder, each such notice shall set
forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address, and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the Corporation's books,
of such shareholder, (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder, and (iii) a representation
that the shareholder is a record or beneficial holder of at least one percent
(1%) or $2,000.00 in market value of stock of the Corporation entitled to vote
at such meeting, has held such stock for at least one year and shall continue to
own such stock through the date of such meeting,
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and intends to appear in person or by proxy at the meeting to present the
nomination; and (c) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder. The President, Chief Executive Officer, or chairman of
the meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
2.13 NOTICE OF NEW BUSINESS. At an annual meeting of the shareholders
only such new business shall be conducted, and only such proposals shall be
acted upon, as have been properly brought before the meeting. To be properly
brought before the annual meeting, such new business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a shareholder. For a proposal to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation and the
proposal and the shareholder must comply with Rule 14a-8 under the Securities
Exchange Act of 1934. To be timely a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than one hundred twenty (120) calendar days in advance of the anniversary
date of the proxy statement for the previous year's annual meeting. If the
Company did not hold an annual meeting the previous year, or if the date of the
annual meeting has been changed to be more than thirty (30) calendar days
earlier than or sixty (60) calendar days after that anniversary, then, in order
to be timely a shareholder's notice must be received at the principal executive
offices of the Corporation not more that ninety (90) calendar days before nor
later than the later of sixty (60) days prior to the date of such annual meeting
or the tenth day following the date on which public announcement of such annual
meeting is first made. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
shareholder's notice as described above.
A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business; (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder; (d) a representation that the shareholder
is a record or beneficial holder of at least one percent (1%) or $2,000.00 in
market value of stock of the Corporation entitled to vote at such meeting, has
held such stock for at least one year and shall continue to own such stock
through the date of such meeting, and intends to appear in person or by proxy at
the meeting to present the nomination; and (e) any financial interest of the
shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.13. The
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President, Chief Executive Officer, or chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section 2.13, and if he or she should so determine,
he or she shall so declare to the meeting and any such business or proposal not
properly brought before the meeting shall not be acted upon at the meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
2.14 CONDUCT OF MEETINGS. Meetings of the shareholders generally shall
follow accepted rules of parliamentary procedure subject to the following:
(a) The President, Chief Executive Officer, or chairman of the meeting
shall have absolute authority over the matters of procedure, and there shall be
no appeal from the ruling of the President, Chief Executive Officer, or
chairman. If, in his or her absolute discretion, the President, Chief Executive
Officer, or chairman deems it advisable to dispense with the rules of
parliamentary procedure as to any meeting of shareholders or part thereof, he or
she shall so state and shall state the rules under which the meeting or
appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents the continuation of the
legitimate business of the meeting, the President, Chief Executive Officer, or
chairman may quit the chair and announce the adjournment of the meeting, and
upon so doing, the meeting will immediately be adjourned.
(c) The President, Chief Executive Officer, or Chairman may ask or
require that anyone not a bona fide shareholder or proxy leave the meeting.
(d) The resolution or motion shall be considered for vote only if
proposed by a shareholder or a duly authorized proxy and seconded by a
shareholder or duly authorized proxy other than the individual who proposed the
resolution or motion.
(e) Except as the President, Chief Executive Officer, or Chairman may
permit, no matter shall be presented to the meeting which has not been submitted
for inclusion in the agenda at least thirty (30) days prior to the meeting.
ARTICLE III.
DIRECTORS
3.1 POWERS AND DUTIES. All corporate powers shall be exercised by or
under the authority of and the business and affairs of the Corporation managed
under the direction of the Board of Directors.
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3.2 NUMBER AND TERM. (a) Number. The Board of Directors shall consist
of no fewer than three (3) or more than nine (9) members. The exact number of
directors, within the minimum and maximum, or the range for the size of the
Board, or whether the size of the Board shall be fixed or variable-range may be
fixed, changed or determined from time to time by the Board of Directors.
(b) Term. Each Director shall be elected at the annual shareholder's
meeting and shall hold office until the next annual meeting and until his or her
successor is duly elected and qualified, subject, however, to prior death,
resignation, retirement, disqualification, or removal from office.
3.3 MEETINGS; NOTICE. The Board of Directors may hold regular and
special meetings either within or without the State of Tennessee. The Board of
Directors may permit any or all directors to participate in a regular or special
meeting by, or conduct the meeting through the use of, any means of
communication by which all directors participating may simultaneously hear each
other during the meeting. A director participating in a meeting by this means is
deemed to be present in person at the meeting.
(a) Regular Meetings. Unless the Charter otherwise provides, regular
meetings of the Board of Directors may be held without notice of the date, time,
place, or purpose of the meeting.
(b) Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman, the President, Chief Executive Officer, or any two (2)
directors. Unless the Charter otherwise provides, special meetings must be
preceded by at least twenty-four (24) hours' notice of the date, time, and place
of the meeting but need not describe the purpose of such meeting. Such notice
shall comply with the requirements of Article XI of these Bylaws.
(c) Adjourned Meetings. Notice of an adjourned meeting need not be
given if the time and place to which the meeting is adjourned are fixed at the
meeting at which the adjournment is taken, and if the period of adjournment does
not exceed one (1) month in any one (1) adjournment.
(d) Waiver of Notice. A director may waive any required notice before
or after the date and time stated in the notice. Except as provided in the next
sentence, the waiver must be in writing, signed by the director, and filed with
the minutes or corporate records. A director's attendance at or participation in
a meeting waives any required notice to him or her of such meeting unless the
director at the beginning of the meeting (or promptly upon his arrival) objects
to holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
3.4 QUORUM. Unless the Charter requires a greater number, a quorum of
the Board of Directors consists of a majority of the fixed number of directors
if the Corporation has a fixed board size or a majority of the number of
directors prescribed, or if no number is prescribed, the number in office
immediately before the meeting begins, if the Corporation has a variable range
board.
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3.5 VOTING. If a quorum is present when a vote is taken, the
affirmative vote of a majority of directors present is the act of the Board of
Directors, unless the Charter or these Bylaws require the vote of a greater
number of directors. A director who is present at a meeting of the Board of
Directors when corporate action is taken is deemed to have assented to such
action unless:
(i) he or she objects at the beginning of the meeting (or
promptly upon his or her arrival) to holding the meeting or transacting
business at the meeting:
(ii) his or her dissent or abstention from the action taken
is entered in the minutes of the meeting; or
(iii) he or she delivers written notice of his or her dissent
or abstention to the presiding officer of the meeting before its
adjournment or to the Corporation immediately after adjournment of the
meeting. The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
3.6 ACTION WITHOUT A MEETING. Unless the Charter otherwise provides,
any action required or permitted by the Act to be taken at a Board of Directors
meeting may be taken without a meeting. If all directors consent to taking such
action without a meeting, the affirmative vote of the number of directors that
would be necessary to authorize or take such action at a meeting is the act of
the Board of Directors. Such action must be evidenced by one or more written
consents describing the action taken, at least one of which is signed by each
director, indicating the director's vote or abstention on the action, which
consents shall be included in the minutes or filed with the corporate records
reflecting the action taken. Action taken by consent is effective when the last
director signs the consent, unless the consent specifies a different effective
date.
3.7 COMPENSATION. Directors and members of any committee created by the
Board of Directors shall be entitled to such reasonable compensation for their
services as directors and members of such committee as shall be fixed from time
to time by the Board, and shall also be entitled to reimbursement for any
reasonable expenses incurred in attending meetings of the Board or of any such
committee meetings. Any director receiving such compensation shall not be barred
from serving the Corporation in any other capacity and receiving reasonable
compensation for such other services.
3.8 RESIGNATION. A director may resign at any time by delivering
written notice to the Board of Directors, the Chairman, President, or Chief
Executive Officer, or to the Corporation. A resignation is effective when the
notice is delivered unless the notice specifies a later effective date.
3.9 VACANCIES. Unless the Charter otherwise provides, if a vacancy
occurs on the Board of Directors, including a vacancy resulting from an increase
in the number of directors or a vacancy resulting from the removal of a director
for cause, the Board of Directors shall fill such vacancy by
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the affirmative vote of a majority of all the directors remaining in office,
even though the directors remaining in office may constitute fewer than a quorum
of the Board of Directors.
3.10 REMOVAL OF DIRECTORS. (a) By Shareholders. The shareholders may
remove one (1) or more directors from office, but only for cause by the
affirmative vote of the holders of a majority of the voting power of the shares
entitled to vote in the election of directors, considered for this purpose as
one class, unless a vote of a special voting group is otherwise required by law.
(b) By Directors. Any of the directors may be removed for cause by the
affirmative vote of a majority of the entire Board of Directors then in office.
(c) General. A director may be removed by the shareholders or directors
only at a meeting called for the purpose of removing him or her, and the meeting
notice must state that the purpose, or one (1) of the purposes, of the meeting
is removal of directors.
ARTICLE IV.
COMMITTEES
Unless the Charter otherwise provides, the Board of Directors may
create one (1) or more committees, each consisting of one (1) or more members.
All members of committees of the Board of Directors which exercise powers of the
Board of Directors must be members of the Board of Directors and serve at the
pleasure of the Board of Directors.
The creation of a committee and appointment of a member or members to
it must be approved by the greater of (i) a majority of all directors in office
when the action is taken or (ii) the number of directors required by the Charter
or these Bylaws to take action.
Unless otherwise provided in the Act, to the extent specified by the
Board of Directors or in the Charter, each committee may exercise the authority
of the Board of Directors. All such committees and their members shall be
governed by the same statutory requirements regarding meetings, action without
meetings, notice and waiver of notice, quorum, and voting requirements as are
applicable to the Board of Directors and its members.
ARTICLE V.
OFFICERS
5.1 NUMBER. The officers of the Corporation shall be a Chairman, a
President, a Chief Executive Officer, a Treasurer, a Secretary and such other
officers as may be from time to time appointed by the Board of Directors or by
the Chairman with the Board of Directors' approval. One person may
simultaneously hold more than one office, except the President may not
simultaneously hold the office of Secretary.
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5.2 APPOINTMENT. The principal officers shall be appointed annually by
the Board of Directors at the first meeting of the Board following the annual
meeting of the shareholders, or as soon thereafter as is conveniently possible.
Each officer shall serve at the pleasure of the Board of Directors and until his
or her successor shall have been appointed, or until his or her death,
resignation, or removal.
5.3 RESIGNATION AND REMOVAL. An officer may resign at any time by
delivering notice to the Corporation. Such resignation is effective when such
notice is delivered unless such notice specifies a later effective date. An
officer's resignation does not affect the Corporation's contract rights, if any,
with the officer.
The Board of Directors may remove any officer at any time with or
without cause, but such removal shall not prejudice the contract rights, if any,
of the person so removed.
5.4 VACANCIES. Any vacancy in an office for any reason may be filled
for the unexpired portion of the term by the Board of Directors.
5.5 DUTIES. (a) Chairman. The Chairman shall preside at all meetings of
the shareholders and the Board of Directors and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
(b) Chief Executive Officer. The Chief Executive Officer of the
Corporation shall have general and active management of the business of the
Corporation.
(c) President. The President shall perform such duties as shall be
prescribed to him from time to time by the Chief Executive Officer or the Board
of Directors.
(d) Vice President. The Vice President or Vice Presidents (if any)
shall be active executive officers of the Corporation, shall assist the
Chairman, President, and Chief Executive Officer in the active management of the
business, and shall perform such other duties as the President or the Board of
Directors may from time to time prescribe.
(e) Secretary and Assistant Secretary. The Secretary or Assistant
Secretary shall attend all meetings of the Board of Directors and all meetings
of the shareholders and shall prepare and record all votes and all minutes of
all such meetings in a book to be kept for that purpose. He or she shall also
perform like duties for any committee when required. The Secretary or Assistant
Secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the Board of Directors when required, and unless directed
otherwise by the Board of Directors, shall keep a stock record containing the
names of all persons who are shareholders of the Corporation, showing their
place of residence and the number of shares held by each of them. The Secretary
or Assistant Secretary shall have the responsibility of authenticating records
of the Corporation. The Secretary or Assistant
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Secretary shall perform such other duties as may be prescribed from time to time
by the Board of Directors.
(f) Treasurer. The Treasurer shall have the custody of the
Corporation's funds and securities, shall keep or cause to be kept full and
accurate account of receipts and disbursements in books belonging to the
Corporation, and shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse or cause to be disbursed the funds of the Corporation as required in
the ordinary course of business or as may be ordered by the Board, taking proper
vouchers for such disbursements, and shall render to the Chairman, the
President, the Chief Executive Officer, and directors at the regular meetings of
the Board, or whenever they may require it, an account of all of his or her
transactions as Treasurer and the financial condition of the Corporation. He or
she shall perform such other duties as may be incident to the office or as
prescribed from time to time by the President or the Board of Directors. The
Treasurer shall give the Corporation a bond, if required by the Board of
Directors, in a sum and with one or more sureties satisfactory to the Board for
the faithful performance of the duties of the office and for the restoration to
the Corporation in case of his or her death, resignation, retirement, or removal
from office, of all books, papers, vouchers, money, and other property of
whatever kind in his or her possession or under his control belonging to the
Corporation.
(g) Other Officers. Other officers appointed by the Board of Directors
shall exercise such powers and perform such duties as may be delegated to them.
(h) Delegation of Duties. In case of the absence or disability of any
officer of the Corporation or of any person authorized to act in his or her
place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any officer, or any director, or any other person whom
it may select, during such period of absence or disability.
5.6 INDEMNIFICATION, ADVANCEMENT OF EXPENSES, AND INSURANCE. (a)
Indemnification and Advancement of Expenses. The Corporation shall indemnify and
advance expenses to every person who is or was a party or is or was threatened
to be made a party to any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that he or she is or was
a director or officer or is or was serving at the request of the Corporation as
a director, officer, employee, agent, or trustee of another corporation or of a
partnership, joint venture, trust, employee benefit plan, or other enterprise,
including service on a committee formed for any purpose (and, in each case, his
or her heirs, executors, and administrators), against all expense, liability,
and loss (including counsel fees, judgments, fines, ERISA excise taxes,
penalties, and amounts paid in settlement) actually and reasonably incurred or
suffered in connection with such action, suit, or proceeding, to the fullest
extent permitted by the laws of the State of Tennessee, as in effect on the date
hereof and as hereafter amended. The Corporation may indemnify and advance
expenses to any employee or agent of the Corporation who is not a director or
officer (and such person's heirs, executors, and administrators) to the same
extent as to a director or officer, if the Board of Directors
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determines that doing so is in the best interests of the Corporation. Such
indemnification may include advancement of expenses in advance of final
disposition of such action, suit, or proceeding, subject to the provision of any
applicable statute.
(b) Non-Exclusivity of Rights. The indemnification and expense
advancement provisions of subsection (a) of this Section 5.6 shall not be
exclusive of any other right which any person (and such person's heirs,
executors and administrators) may have or hereafter acquire under any statute,
provision of the Charter, provision of these Bylaws, resolution adopted by the
shareholders, resolution adopted by the Board of Directors, agreement, or
insurance (purchased by the Corporation or otherwise), both as to action in such
person's official capacity and as to action in another capacity.
(c) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any individual who is or was a director, officer,
employee, or agent of the Corporation, or who, while a director, officer,
employee, or agent of the Corporation, is or was serving at the request of the
Corporation's Board of Directors or its Chief Executive Officer as a director,
officer, partner, trustee, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under this Article or the Act.
ARTICLE VI.
SHARES OF STOCK
6.1 SHARES WITH OR WITHOUT CERTIFICATES. The Board of Directors may
authorize that some or all of the shares of any or all of the Corporation's
classes or series of stock be evidenced by a certificate or certificates of
stock. The Board of Directors may also authorize the issue of some or all of the
shares of any or all of the Corporation's classes or series of stock without
certificates. The rights and obligations of shareholders with the same class
and/or series of stock shall be identical whether or not their shares are
represented by certificates.
(a) Shares with Certificates. If the Board of Directors chooses to
issue shares of stock evidenced by a certificate or certificates, each
individual certificate shall include the following on its face: (i) the
Corporation's name, (ii) the fact that the Corporation is organized under the
laws of the State of Tennessee, (iii) the name of the person to whom the
certificate is issued, (iv) the number of shares represented thereby, (v) the
class of shares and the designation of the series, if any, which the certificate
represents, and (vi) such other information as applicable law may require or as
may be lawful.
If the Corporation is authorized to issue different classes of shares
or different series within a class, the designations, relative rights,
preferences, and limitations determined for each series (and the authority of
the Board of Directors to determine variations for future series) shall be
summarized on the front or back of each certificate. Alternatively, each
certificate shall state on its front or back
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that the Corporation will furnish the shareholder this information in writing,
without charge, upon request.
Each certificate of stock issued by the Corporation shall be signed
(either manually or in facsimile) by any two officers of the Corporation. If the
person who signed a certificate no longer holds office when the certificate is
issued, the certificate is nonetheless valid.
(b) Shares without Certificates. If the Board of Directors chooses to
issue shares of stock without certificates, the Corporation, if required by the
Act, shall, within a reasonable time after the issue or transfer of shares
without certificates, send the shareholder a written statement of the
information required on certificates by Section 6.1(a) of these Bylaws and any
other information required by the Act.
6.2 SUBSCRIPTIONS FOR SHARES. Subscriptions for shares of the
Corporation shall be valid only if they are in writing. Unless the subscription
agreement provides otherwise, subscriptions for shares, regardless of the time
when they are made, shall be paid in full at such time, or in such installments
and at such periods, as shall be determined by the Board of Directors. All calls
for payment on subscriptions shall be uniform as to all shares of the same class
or of the same series, unless the subscription agreement specifies otherwise.
6.3 TRANSFERS. Transfers of shares of the capital stock of the
Corporation shall be made only on the books of the Corporation by (i) the holder
of record thereof, (ii) his or her legal representative, who, upon request of
the Corporation, shall furnish proper evidence of authority to transfer, or
(iii) his or her attorney, authorized by a power of attorney duly executed and
filed with the Secretary of the Corporation or a duly appointed transfer agent.
Such transfers shall be made only upon surrender, it applicable, of the
certificate or certificates for such shares properly endorsed and with all taxes
thereon paid.
6.4 LOST, DESTROYED, OR STOLEN CERTIFICATES. No certificate for shares
of stock of the Corporation shall be issued in place of any certificate alleged
to have been lost, destroyed, or stolen except on production of evidence,
satisfactory to the Board of Directors, of such loss, destruction, or theft,
and, if the Board of Directors so requires, upon the furnishing of an indemnity
bond in such amount and with such terms and such surety as the Board of
Directors may in its discretion require.
ARTICLE VII.
CORPORATE ACTIONS
7.1 CONTRACTS. Unless otherwise required by the Board of Directors, the
Chairman, the President, the Chief Executive Officer, or any Vice President
shall execute contracts or other instruments on behalf of and in the name of the
Corporation. The Board of Directors may from time to time authorize any other
officer, assistant officer, or agent to enter into any contract or execute
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any instrument in the name of and on behalf of the Corporation as it may deem
appropriate, and such authority may be general or confined to specific
instances.
7.2 LOANS. No loans shall be contracted on behalf of the Corporation
and no evidence of indebtedness shall be issued in its name unless authorized by
the Chairman, the President, the Chief Executive Officer, or the Board of
Directors. Such authority may be general or confined to specific instances.
7.3 CHECKS, DRAFTS, ETC. Unless otherwise required by the Board of
Directors, all checks, drafts, bills of exchange, and other negotiable
instruments of the Corporation shall be signed by either the Chairman, the
President, the Chief Executive Officer, a Vice President or such other officer,
assistant officer, or agent of the Corporation as may be authorized so to do by
the Board of Directors. Such authority may be general or confined to specific
business, and, if so directed by the Board, the signatures of two or more such
officers may be required.
7.4 DEPOSITS. All funds of the Company not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks or
other depositories as the Board of Directors may authorize.
7.5 VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise
required by the Board of Directors, the Chairman, President, or Chief Executive
officer shall have full power and authority on behalf of the Corporation to
attend any meeting of security holders, or to take action on written consent as
a security holder, of other corporations in which the Corporation may hold
securities. In connection therewith the Chairman, the President, or the Chief
Executive Officer shall possess and may exercise any and all rights and powers
incident to the ownership of such securities which the Corporation possesses.
The Board of Directors may, from time to time, confer like powers upon any other
person or persons.
7.6 DIVIDENDS. The Board of Directors may, from time to time, declare,
and the Corporation may pay, dividends on its outstanding shares of capital
stock in the manner and upon the terms and conditions provided by applicable
law. The record date for the determination of shareholders entitled to receive
the payment of any dividend shall be determined by the Board of Directors, but
which in any event shall not be less than ten (10) days prior to the date of
such payment.
ARTICLE VIII.
FISCAL YEAR
The fiscal year of the Corporation shall be determined by the Board of
Directors, and in the absence of such determination, shall be the calendar year.
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ARTICLE IX.
CORPORATE SEAL
The Corporation shall not have a corporate seal.
ARTICLE X.
AMENDMENT OF BYLAWS
Except as otherwise provided in the Charter of the Corporation as
amended or restated from time to time, these Bylaws may be altered, amended,
repealed, or restated, and new Bylaws may be adopted, at any meeting of the
shareholders by the affirmative vote of a majority of the stock represented at
such meeting, or by the affirmative vote of a majority of the members of the
Board of Directors who are present at any regular or special meeting.
ARTICLE XI.
NOTICE
Unless otherwise provided for in these Bylaws, any notice required
shall be in writing, except that oral notice is effective if it is reasonable
under the circumstances and not prohibited by the Charter or these Bylaws.
Notice may be communicated in person, by telephone, telegraph, teletype,
facsimile transmission or other form of wire or wireless communication, or by
mail or private carrier. If these forms of personal notice are impracticable,
notice may be communicated by a newspaper of general circulation in the area
where published, or by radio, television, or other form of public broadcast
communication. Written notice to a domestic or foreign corporation authorized to
transact business in Tennessee may be addressed to its registered agent at its
registered office or to the corporation or its secretary at its principal office
as shown in its most recent annual report or, in the case of a foreign
corporation that has not yet delivered an annual report, in its application for
a certificate of authority.
Written notice to shareholders, if in a comprehensible form, is
effective when mailed, if mailed postpaid and correctly addressed to the
shareholder's address shown in the Corporation's current record of shareholders.
Except as provided above, written notice, if in a comprehensible form, is
effective at the earliest of the following: (a) when received; (b) five (5) days
after its deposit in the United States mail, if mailed correctly addressed and
with first class postage affixed thereon; (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested, and
the receipt is signed by or on behalf of the addressee; or (d) twenty (20) days
after its deposit in the United States mail, as evidenced by the postmark if
mailed correctly addressed, and with other than first class, registered, or
certified postage affixed. Oral notice is effective when communicated if
communicated in a comprehensible manner.
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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 13, 1999
