AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999
Registration No.: 0-266932
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NUMBER 1 TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER
UNDER SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
____________________
PHOTOLOFT.COM
(Name of Small Business Issuer in its Charter)
NEVADA 87-0431036
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
300 ORCHARD CITY DRIVE, SUITE 142 CAMPBELL, CALIFORNIA 95008
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (408) 364-8777
Securities to be registered pursuant to Section 12(b) of the Act:
Securities to be registered pursuant to Section 12(g) of the Act:
Common stock, par value $.001 per share
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PHOTOLOFT.COM
FORM 10-SB
Table of Contents
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Item 1 Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . . . 22
Item 3 Description of Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 4 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 36
Item 5 Directors, Executive Officers, Promoters and Control Persons . . . . . . . . . . . . 38
Item 6 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 7 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 44
Item 8 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Item 9 Market For Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 48
Item 10 Recent Sales of Unregistered Securities. . . . . . . . . . . . . . . . . . . . . . . 50
Item 11 Description of Registrant's Securities to be Registered. . . . . . . . . . . . . . . 54
Item 12 Indemnification of Directors and Officers. . . . . . . . . . . . . . . . . . . . . . 58
Item 13 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 59
Item 15 Financial Statements and Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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ITEM 1. DESCRIPTION OF BUSINESS
PhotoLoft.com is a photo-sharing and digital imaging e-commerce
"community", meaning that individuals with access to the Internet can store,
view and share their personal photographic images on our Web site. As a result,
our Web site is a "community" of Web pages with images collected from around the
world. Our viewing and printing technology allows users to access and print
their personal images quickly, easily and inexpensively. Users can choose from
over 90 categories in which to catalogue their images and view others. This
growing list provides users with a quick reference point to access images of
interest to them, while at the same time giving potential advertisers and
sponsors on the site the opportunity to ultra-target their audience. We are also
developing a multi-faceted e-commerce program, including a complete line of
photo-personalized gifts and customized electronic greeting cards, consumables
such as ink, paper and other digital imaging items, and photos offered by
professional photographers.
BACKGROUND
Although our company was originally formed in November 1993, we adopted our
current business model, which is described in the previous paragraph, in June
1998. In that regard, we are very much like a start-up company and we have
received minimal revenues since the adoption of our new business model.
Under our previous business model, we operated under the corporate name,
AltaVista Technology, Inc. Alta Vista's business model was formed to take
advantage of the burgeoning need for fun and creative applications for the
Internet. The market place was rapidly leaving behind cumbersome computers that
required highly trained operators and was turning to PC-based computing that
allowed people with average computer skills to enter a new world. AltaVista
began developing imaging software that made computing even more fun, and the
various products that were designed and marketed brought images to life on the
computer. In 1995 AtlaVista introduced Howdy!, the world's first ever
multi-media e-mail tool. Still being shipped today, the software was an instant
success because it was engaging, fun and easy to use. As a component of this
product, AltaVista also established web pages via e-mail. Over the years,
AltaVista developed and marketed the following products:
Howdy! - an electronic postcard maker for Windows PCs
Howdios - additional postcards for Howdy! owners available on line
Webcannon! - a template-driven Web page authoring "system"
Media Wrangler - a multimedia authoring tool
SmartNet Singles - thematic Internet access kits
Internet Suite - a suite of products designed to get users up and
running quickly and easily on the Internet.
As a software developer, AltaVista followed the traditional revenue model
of bundling its software with original equipment manufacturers. As that market
evolved into a non-revenue source, we began exploring new ways to bring products
to market at a profit. This coincided with the phenomenal growth of the
Internet and the evolution of Internet users who were rapidly beginning to
utilize the medium as a source of entertainment as well as information. The
expertise of AltaVista was clearly in Internet imaging technology and the
decision was made to aggregate images into a photo-sharing community.
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We initiated our current business model in June 1998 and in that respect,
we are much like a start-up company. In August 1998 we sold our URL,
AltaVista.com, to Digital Equipment, now Compaq Computer, and changed our name
to PhotoLoft.com, Inc., a California corporation. The official launch of our new
Web site was in February 1999, the same month that PhotoLoft.com, Inc. entered
into a reorganization with Data Growth, Inc., a non-operating public company
incorporated in Nevada. Under the terms of the reorganization, PhotoLoft.com,
Inc. shareholders received shares of Data Growth in exchange for their shares of
PhotoLoft.com, Inc. common stock, PhotoLoft.com, Inc. became a wholly-owned
subsidiary of Data Growth, all of the executive officers and directors of Data
Growth resigned, the executive officers and directors of PhotoLoft.com, Inc.
became the executive officers and directors of Data Growth, and Data Growth
changed its name to PhotoLoft.com. See "Item 7. Certain Relationships and
Related Transactions." All of our business is currently conducted through
PhotoLoft.com, Inc., and our principal executive offices are located at 300
Orchard City Drive, Suite 142, Campbell, California. Our telephone number at
this address is (408) 364-8777.
Photo Processing Technology
The continuing evolution of the Internet as an entertainment medium coupled
with rapid advances in technology are working together to create a very
different photo processing model that the traditional chemical film based model.
Typically, photographers drop their used film at a photo processor, return at a
later date to retrieve it, make decisions for additional copies of certain
photos and then return several days later to get those as well. Digital
photography, the Internet and advances in printing technology are making that
model obsolete.
The digital camera market continues to explode as well. According to
NewMedia, digital camera prices dropped 40 percent to 50 percent during 1998,
making them more accessible to more people and the digital camera market is
currently enjoying a boom that is expected to reach $5.4 billion in sales by
2002. In Japan today, sales of digital cameras exceed those of film-based
cameras.
Printer technology continues to focus on crisp, clear prints delivered via
the home printer at affordable prices. Companies like Hewlett-Packard derive
more revenue from ink sales than printer sales, and printers that provide
consumers with excellent images, using a lot of ink in the process, help to
drive the technology.
In this new world, digital images are directly uploaded to the Internet
where the owner can view and share them with others. Traditional photos can
easily be scanned onto the Internet. The owner can then choose to print the
photos of his choice from the comfort of his or her own computer. This avoids
getting unwanted photos, provides an excellent storage place for the images, and
ensures that photos can be found and reprinted at any time. Using our software,
the prints made will be to the highest resolution of the printer, which
typically provides photo-finish quality prints. All printers shipped by Epson
and Hewlett-Packard in the U.S. in 1999 have this capability. The printer
prices start at $250. In addition, users can designate what standard
photographic size they prefer, anything from wallet to 8"x10".
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The Internet
The move from a chemical-based photo solution to a digital one coincides
with the explosive growth of the Internet into a significant global medium for
entertainment, communications, news, information and commerce.
Commercialization of the Internet began in the mid-1980s, with e-mail providing
the primary means of communication. However, it was the Internet's World Wide
Web, which provided a means to link text and pictures, that has led to the
blossoming of e-commerce and sparked the explosive growth of the Internet in the
1990s. Today, according to NewMedia, at least 100 million people in 135
countries send and receive information, and purchase products and services,
through the Internet.
While a number of factors have contributed to the continued growth of the
Internet, several specific trends have been particularly important. The first
has been the emergence of community Web sites. Community sites provide a
platform for publishing and aggregating the rapidly increasing volume of
personalized content created by Internet users. Online communities also provide
a single online destination where like-minded users can interact and quickly
find pertinent information, products and services related to their particular
needs. Community sites generally offer free services including access to e-mail
accounts, chat rooms, message boards, news and entertaining. Through these
features, community sites can provide Internet users with the same opportunities
for expression, interaction, sharing, support and recognition that they seek in
the everyday world. A successful community will accomplish these goals and
create a base of loyal members who will collaborate in the evolution of the site
as their needs and interests change and expand.
To date, advertisers on the Internet have typically used traditional
navigational sites and professionally created content sites to promote their
products and services online. However, online communities allow them to reach
highly targeted audiences within a more personalized context, thus providing the
opportunity to increase advertising efficiency and improve the likelihood of a
successful sale. Moreover, advertisers can track more accurately the
effectiveness of their advertising messages by receiving reports of the number
of advertising "impressions" delivered to consumers and the resulting
"click-through" rate to their Web sites.
OUR SOLUTION
For Internet consumers, PhotoLoft.com provides a photo-sharing community
that continues to meet the evolving needs of the marketplace. It is attractive
to photographers of all types, from professional to neophyte, who want to share
their images, solicit comments on their photos, browse others' pictures and
participate in photo-personalized e-commerce or simply take advantage of a
convenient solution for purchasing digital imaging supplies. In addition, our
advanced viewing technology allows users to study photos from a number of
different angles and our printing technology allows them to print photo-finish
quality prints from their home or office printers. For business partners,
PhotoLoft.com brings a unique solution to the questions of how to make their
sites more interesting and ultimately more appealing to their users. No other
photo-sharing web site on the Internet currently offers this broad combination
of products and services to meet all of these needs.
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Consumers
Our solution is well timed to take advantage of the growing popularity of
online communities. Jupiter Communications has reported that facilitating the
sharing of photos among communities will be the primary application for on-line
consumer digital imaging. Our response has been to offer an entry point to the
Internet for digital imaging, replete with photo-sharing opportunities, photo
chats, contests, targeted advertising and a unique e-commerce solution. In
addition, our efforts to develop an entertaining community site are positioning
us well to capture a share of the next generation of Internet users who will be
looking to the Internet for reasons other than information. Internal statistics
show that as an entertainment medium and Web site, we are not only successful at
attracting users, but we also keep them on the site for long periods of time and
keep members once they upload their images. These statistics have been
supported by the findings of PCData Online, which indicate that users spend an
average of three minutes viewing the pages of our Website. Sharing photos with
family and friends; being able to browse other photos and comment on them; and
enjoying a community of photography buffs, all combine to make us a popular
community with a promising future with new members.
In addition, PhotoLoft.com offers a highly focused Web site, which is
particularly attractive to advertisers. Through our 98 different categories,
advertisers can choose to target their audience as much or little as possible.
Combined with PhotoLoft.com's community, which sponsors contests and provides
information and news about digital imaging, the Web site is a very attractive
option for advertisers, that can choose traditional banner advertising on
ultra-targeted pages or sponsorships of the various activities available at the
site. Sponsorships tend to be long-term relationships between companies with
increased opportunities for revenue than simple banner advertisements.
We have also developed a multi-faceted e-commerce solution that will appeal
to users looking for photo-personalized gifts and greeting cards, as well as
those choosing to take advantage of the "ease of doing business" that
PhotoLoft.com affords them. The first component of the e-commerce program is in
place today and offers customers a choice of over 150 photo-personalized gift
items. Because these gifts are always unique, they can never be commoditized
and are proving to be an excellent opportunity for repeat sales to users. The
second component of the e-commerce program is photo-personalized cards, which
have the additional feature of customized greetings. The unique design of this
program allows PhotoLoft.com to generate both advertising and e-commerce
revenues. The third component of the e-commerce solution includes on-line sales
of digital imaging products such as cameras, scanners and printers. In
addition, we will offer printing paper and ink cartridges for sale at costs
competitive with more traditional retail outlets.
Business Partners
As a photo-sharing community, PhotoLoft.com attracts members that are
actively looking for the "community" experience with a "photographic" slant. As
members join PhotoLoft.com they upload images and remain with us, as opposed to
some communities where it is easy to switch to a competitive site. As discussed
by PCData Online, statistics show that PhotoLoft.com is a "sticky" site, in that
it attracts users for an average of three minutes per visit, a very important
point for advertisers on the web site. Examining photos takes more time than
simply scanning most web sites. Also, PhotoLoft.com users then zoom in on or
pan the image they have chosen an average of three times. This feature is very
important because each time it is accessed it increases the total amount of time
a user is on the site. These two factors combined have made PhotoLoft.com very
attractive to other Web sites that are constantly looking for ways to increase
the potential of their communities. Utilizing PhotoLoft.com's unique
co-branding and private label opportunities, sites like PowWow, owned by Tribal
Voice, are able to further cement their relationship with users.
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The final component of the e-commerce solution involves
PhotoLoft.com-enabled e-commerce. This product was developed on demand from
professional photographers, who will utilize PhotoLoft.com to display photos
taken for events. Potential customers can browse the photos in a PhotoLoft.com
album created by the photographer and then print directly from the web site.
The photographer will be reimbursed based upon the number of photos printed.
Technology
What makes our site truly popular with all users is the technology. Our
software greatly simplifies the task of displaying images on the Internet,
offering automatic creation of thumb-nails; auto-generation of a perfectly sized
viewable image; transparent image compression; the photo album metaphor, and
many other uses. We have also taken Internet digital imaging a step further
with our advanced viewing capabilities. Users can zoom in on or pan an image,
allowing them to observe even the tiniest details or enjoy the full panorama of
a photo. This technology, which is compatible with all on-line auction sites,
makes us particularly popular with bidders closely scrutinizing their potential
purchases. In addition, to take full advantage of the digital revolution, we
allow users to print their pictures at home. This home photo processing is
comparable to the current photo finish quality, and is cost competitive with the
traditional model of film processing with the added advantages of allowing users
the convenience of printing only the photos they want, at the sizes they
designate from the comfort of their homes.
To complement our technology, we have located our Website in a secure
individual "cage" space with AboveNet Communications, Inc., a San Jose,
California based company offering Internet connectivity and co-location
solutions for high-bandwidth, mission critical applications. Our co-location
agreement with AboveNet has a term of one year, expiring in March, 2000.
STRATEGY
In order to achieve our goal of becoming the most complete photo-sharing
e-commerce community on the Internet, we have implemented a multi-faceted
strategy to enhance the content and features available on our Web site, increase
the amount of traffic on our site, expand advertising sales and sponsorships,
and develop a variety of e-commerce solutions.
Enhance Our Online Community
We continue to evolve our site to offer the latest in technology as well as
the latest trends in Internet communities. To be successful in the rapidly
developing market, we need to be pacesetters at all times.
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Recently, we began to aggressively upgrade the look and feel of our site,
creating new and popular contests, encouraging users to comment on photos via
the "guest books" feature, and bringing new users to the site through an
e-invitation e-mail program. By virtue of the photos, our site is inherently
"sticky," meaning that users visiting the site tend to be there a while. Users
study photos for a period of time before moving on and, due to our viewing
technology, for every image served on our site, users zoom or pan the image an
average of three times. In addition, once users upload their photos to the
photo sharing community, they are reluctant to move them. These are extremely
important features for potential partners as well as advertisers.
New developments trend into two distinct arenas: technology and
entertainment. Technically, we are working to add new features that enhance our
current product, such as advanced image editing - cropping, red eye, image
manipulation, etc., -- simplified image uploading, and the addition of audio.
We realize that to be successful, we must have an extremely easy, user-friendly
site. We recently instituted a "feedback" page on the site that allows users to
communicate their ideas easily and quickly with us. Many of our new
enhancements will be derived from this user interface. We are also working to
cut the costs of technology. As our Web site continues to grow we can achieve
many cost efficiencies. In addition, our engineers are working to lower the
cost even more through developing new technologies for image hosting. Finally,
we are devoted to Internet image hosting, and as that develops, we plan to
remain on the forefront of the technology. For example, we are constantly
monitoring the state of web-based video.
Perhaps even more important is the entertainment component of the site. We
are constantly on the lookout for new ideas that will enhance the community
experience for our users. In the very near term we anticipate adding additional
contests, an automated address book for emailing purposes and private
communication between members versus the public forum available today through
Guest Books.
Traffic Generation
We have made a strategic decision to make traffic generation our top
priority. In order to accomplish this, we intend to enter into co-branding
relationships with original equipment manufacturers of digital imaging
equipment. We currently enjoy successful partnerships with original equipment
manufacturers of digital cameras, scanners, printers and other digital
photography equipment, including UMAX, Epson, and Hewlett-Packard. Our partners
ship copies of our software with new equipment; advertise PhotoLoft.com on their
boxes; feature our site in box inserts and/or user guides; and create links from
their Web sites.
Typically original equipment manufacturer relationships are manifested as
co-branded Web sites, whereby users on the original equipment manufacturer
partner's home page can click through to a page featuring the original equipment
manufacturer's branding along with PhotoLoft.com. As users browse through the
site and take advantage of all our unique features, they constantly see both
brands-the original equipment manufacturer and PhotoLoft.com. This solution,
unique to PhotoLoft.com, is very popular with original equipment manufacturer's
that are understandably are reluctant to send potential customers to another Web
site. PhotoLoft.com, the original equipment manufacturer and the user are all
winners: we grow our user base and image bank; the original equipment
manufacturer is perceived as offering a value-added service; both companies
share in the revenue generated by advertising sales and e-commerce; and the user
has an opportunity to join our community. See "Marketing and
Promotion--Co-Branding Agreements."
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Another promising strategy for traffic generation is the development of
private label sites. This concept was pioneered when we developed a private
label site for the Walt Disney Company in conjunction with Disney's launch of "A
Bug's Life." Under this concept, a partner company, such as Disney, can
commission us to create a Web site that is branded exclusively for them, giving
users the impression they have never left the original site. As an added
feature, the private label partner can specify parameters for the site,
including content and advertising. The advantages of a private label site are
numerous for both the partner and us. The partner has total control over the
site, including tight security, the chance to communicate with visitors and
reinforce its brand. We add to our image bank, enjoy additional traffic and
participate in revenues generated via e-commerce and advertising sales.
Our private label program allows partners to choose how to feature
PhotoLoft.com or offer its services. That way, we are not a competitor, but a
value-added supplier and partner. As we add private label agreements,
PhotoLoft.com will quickly become the digital imaging host for the Internet.
See "Marketing and Promotion--Private Labeling Agreements."
We are also maximizing relationships with other Web sites to drive traffic
from an entirely different population - Internet surfers. We already have
agreements in place with Compaq Computer; Lycos; Hylas; Tribal Voice and
Netopia, and are actively pursuing additional agreements with high traffic Web
sites. See "Marketing and Promotion--Web Site Partnering."
Advertising Sales
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the look out for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
ultra-targeted advertising and we are an ideal Web site, acting as an
electronic alternative to printed photo magazines. Our unique design allows
users to generate numerous impressions based on just one image. Users
publishing complete albums create an exponential number of impressions. Each
impression allows advertisers to reach an increasingly targeted audience, an
advantage not lost upon cost-conscious advertisers looking for value. Also, the
unique nature of our greeting card program creates multiple impressions as users
create their own cards. In addition, the community nature of our Web site
creates opportunities to further segment the audience, giving advertisers an
even more targeted buy.
To further our advertising strategy, we have partnered with Adsmart as our
advertising representation company. Adsmart is the industry's largest
site-focused on-line advertising representation firm, and the relationship
provides us with a tremendous opportunity to grow advertising sales. In
addition, we are aggressively pursuing partnering arrangements with advertisers
interested in sponsorship opportunities on our Web site. See "Advertising."
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E-Commerce
E-commerce is a growing phenomenon of the Internet and we intend to take
advantage of this opportunity by offering convenience and quality to buyers. We
currently offer a wide selection of photo-personalized gifts, and plans are in
place for phased introduction of additional products and services, including
photo-personalized greeting cards, consumables, and photos offered by
professional photographers. See "Products and Services--E-Commerce."
PRODUCTS AND SERVICES
Our Web Site
Our Web site at Photoloft.com was created to give our members a place to
store their pictures; a way to categorize their memories; and a mechanism for
sharing their photos. Members can store photos; utilize the site's album
metaphor to organize the photos; and either view them on-line, through high
quality output devises such as television, or print them using our print
technology.
Once users arrive at our site, navigating the different areas is quite
simple. Immediately, users can opt to sign up, upload their photos or search
for a specific album. Following this lead navigation bar, users can scroll
through the 98 photographic categories ranging from animals to news to travel.
Views of photos are only a click away. Users choosing to upload a photo must
first join PhotoLoft.com by completing a very brief registration form and
agreeing to the site's terms and conditions. Once that is handled, users can
load their images three ways, via the digital camera, scanning or emailing the
image. They are automatically stored in an "album" which can be edited and
manipulated very easily at any time. Also available on the home page are
buttons to display the current Photoloft.com stock quote, through a link with
Yahoo Finance; contest winners; contest entries; and gift ordering.
One of the unique and attractive features of our Web site is the community
experience. The importance of community cannot be underestimated: Internet users
are looking for interaction and the "community" experience fulfills that need.
The longer users stay on the site, the more opportunity Web sites have to be
successful. Our site currently features 98 categories of images that users can
browse through. These categories represent the top subjects that photographers
typically photograph. In addition to giving users a convenient way to view
photos, the segmentation is attractive to potential advertisers that can use the
categories to ultra-target audiences. For example, pet food ads can be featured
on the "Pet" section of our site. The categories also help draw viewers deeper
into the site, increasing the number of impressions received and the number of
images served. This, in turn, makes our site particularly attractive for
advertisers, thereby increasing opportunities for advertising revenues. See
"Advertising."
Other features on our site that contribute to the community experience
include photo comments, photo sharing, and user participation via contests.
Using our Guest Books feature, users can comment on various images throughout
the site. Those comments can then be viewed by anyone accessing the photo.
This is a particularly popular feature for professional models, who use the site
to post their portfolios, and professional photographers. A unique component to
the Guest Books feature that is scheduled to launch during the third quarter of
1999, is an e-mail service that will alert users when comments about their
images have been received.
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According to a Jupiter Communications study, sharing is one of the top
reasons that people choose digital images. Our site provides the perfect
vehicle to do that easily through its e-invitation feature. Members simply
e-mail their friends and family when they post a photo or album they want to
share. Rather than tie up the recipient's computer with large e-mail files
carrying photos, our system invites the recipient to "click here" to view the
photo or album. This system is extremely easy and popular; is very fast since
it does not download actual photos to the recipient's PC; and brings more users
to our site.
Another important aspect of our community experience is the contents and
other forms of entertainment on our site. Currently, our users can participate
in two contests on our site: "image of the week" and "album of the week." Users
are invited to submit their work for these contests and all interested users are
allowed to vote. These contests offer substantial promotional opportunities for
advertisers willing to "sponsor" a contest on our site. See "Advertising."
Technology
One of our competitive advantages is our unique advanced viewing and
printing technologies. They are both based on Hewlett-Packard's FlashPix
technology, but take the concept a step further, allowing for the simplicity of
viewing and ease of printing.
Our advanced viewing capability is unique to our site and allows users to
zoom in on or out of a photo and examine the tiniest details of an image.
Conversely, users can also pan an image to enjoy the full panorama of the photo.
These features are available directly from the user's browser, requiring no
special down loads or add-ons and are particularly popular with users of on-line
auction sites.
Our proprietary printing technology allows users to print to the highest
quality of their printer, giving them crisp, clear photos. Most technology only
allows users to print 72 dots per inch using the "screen print" feature on their
PCs. With our technology and the appropriate printer, users can easily print
photos that rival those printed at the top photo finishers. Prices for these
printers start at approximately $250 and every Hewlett-Packard printer shipped
after 1998 has this ability. In addition, the technology allows users to grab
and print the identified image, rather than printing the entire page, and gives
users a variety of size options ranging from 8"x10" to wallet sizes. This
technology directly rivals the traditional photo processing model. It is
changing photo printing, allowing photographers to bypass the local photo
finishers.
E-commerce
We have taken a multi-faceted approach to e-commerce and expect that it
will become an important revenue stream in the future. The first phase of our
e-commerce solution, photo-personalized gifts, is already in place. Users
currently have a choice of over 120 gift items, ranging from T-shirts to coffee
mugs, all emblazoned with the image of their choice. This service is currently
provided to us through an arrangement with Pix.com, a leader in Web-based
e-commerce. Under terms of the agreement, we share the generated revenues with
Pix.com; however, we retain the right to utilize other services or implement
this program itself at any time.
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The next phase of our e-commerce solution is photo-personalized greeting
cards. Other sites offering online greeting cards have generated a significant
amount of traffic, and printed photo-personalized greeting cards have also
become quite popular. Our greeting card solution will combine both of these
successful approaches into an easy Internet solution. Initially our members
will be able to choose from over 140 exclusive card designs, ranging from
birthdays to bar mitzvahs, that can not only be photo-personalized, but also
customized with the greeting of the members' choice. The cards can be e-mailed
or printed and mailed. Because of our proprietary printing technology, the home
printed greeting cards will be of the same quality as those purchased in stores
with the added bonus of being photo-personalized. In addition, the user can
provide us with the appropriate address and we will print and mail the card for
them. Users can order up to 500 copies of a greeting card to be printed and
either mailed to them or distributed to a mailing list provided to us. Adding
to the convenience is a value-added service that will trigger an e-mail reminder
when an important "card giving" occasion, such as a birthday or anniversary, is
approaching. Our greeting card products and services were rolled out and fully
operational by October, 1999
The next phase of our e-commerce solution will be a wide array of
consumables. By simply clicking a mouse button, users will be able to order
paper, ink, cameras, scanners and other digital imaging and photo sharing
equipment on our site. A helpful reminder service will prompt users to
periodically check their ink and paper volumes to ensure they have a continuous
supply. Once ordered, the item will be delivered to the address indicated
within a specified time frame. We expect to launch this service during the
fourth quarter of 1999 and anticipate entering into resale agreements with
wholesalers of digital imaging products.
Prior to the end of 1999, we will expand our e-commerce opportunities to
professional photographers choosing to partner with us. Under this scenario,
professional photographers will upload photos from a specific event to their
album and utilize our e-invitation email system to notify customers that the
photos are available for viewing. Customers can then view the photos, choose
those they'd like to purchase, indicate the size and number they want and place
the order, all on-line. This option is particularly attractive to wedding and
special event photographers. This component of our service will have a "lock
out" provision on the printing technology to deter users from simply printing
their own images.
Product Development
Product development on our site continues at a rapid pace. We hired a site
producer in May 1999 and have identified 58 additional features that will be
added to the community by the end of the third quarter 1999. These include
advanced image editing like cropping, "red eye," spinning and introduction of
additional contests, such as a Treasure Hunt; an audio feature for slide shows;
introduction of a newsletter focusing on digital imaging and photography;
customized album designs; and much more.
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Membership Plans
We currently offer two membership plans. Our free membership allows
members to access up to 20 megabytes of storage, enough for approximately 200
photos. We also offer members a premium account at a price of $29.95 annually.
This service gives users an additional 30 megabytes of storage, password
protection if the user opts for privacy; and merchandise discounts. The true
benefit of the Premium Account to us is that it allows co-brand partners to
bundle the Premium Account with the other products creating a perception of
value for the consumer. See "Marketing and Promotion--Co-Branding Agreements."
ADVERTISING
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the lookout for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
ultra-targeted advertising and our Web site an ideal program, acting as an
electronic alternative to printed photo magazines. Our unique design allows
users to generate numerous impressions based on just one picture. Users
publishing complete albums create an exponential number of impressions. Each
impression allows advertisers to reach an increasingly targeted audience, an
advantage not lost upon cost-conscious advertisers looking for value. Also, the
unique nature of our site brings a virtually unlimited number of viewers to the
site each day to view the photos.
In addition, the community nature of Web site creates opportunities to
further segment the audience, giving advertisers an even more targeted buy.
Similar to the already successful community sites, our community encompasses 98
categories of popular targets ranging from astrology to zoos. Enthusiasts
simply post their photo albums to these communities, where they can share images
while seeing the latest from advertisers in that field.
We have recently entered into an agreement with Adsmart, an advertising
representation firm, to ensure that we maximize the opportunities available via
advertising sales. Adsmart is the industry's largest site-focused online
advertising representation firm. It has more than 175 premier Web brands
totaling 1.2 billion impressions per month. The contract guarantees that 100%
of our inventory will be sold each month. The cost per thousand impressions is
based on a sliding scale. This number will increase as we continue to increase
the volume of traffic to our site. In addition, we can receive more revenue per
cost per thousand by providing numerous ultra-targeted channels, such as the
categories. Working with Adsmart, we have begun to target key affinity networks
that will utilize our site as an advertising venue.
Recognizing that the traditional banner advertising will, by definition,
eventually reach a cap, we are beginning to explore more creative advertising
sales opportunities. Forrester Research speculates that over the next five
years, between 50%-70% of Internet marketing budgets will be spent on
promotional activities versus traditional banner advertising. Our promotions
are primarily taking the form of sponsorship opportunities. Under this
scenario, advertisers can "sponsor" a contest or other form of entertainment on
our Web site. The advantages to the sponsor are that it gets a more focused
audience, since visitors want to participate in the event and will not "click
through" the message; the message can be more advertorial, usually carrying more
credibility with the target audience; and it is not "competing" with the myriad
of other messages typically found on Web sites. The advantage to us is that it
allows us to work in conjunction with advertisers as business partners to create
venues that will enhance the community facet of our Web site and, ultimately,
increase our membership. Sponsorships also have the potential to generate more
revenue than most banner ads.
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Typical advertisers and sponsors on our site include Visa, Intel,
About.com, TravelNow, and Hewlett-Packard. Our contract with Adsmart will
increase the number of advertisers and allow us to target certain advertisers
that will benefit by the site's unique community set up.
MARKETING AND PROMOTION
We market our site through the following three primary channels:
1. links to other sites;
2. co-branding agreements; and
3. private labeling agreements.
Links to Other Websites
Web site partnering arrangements allow us to recruit members from the
broadest of populations - Internet surfers. We already have agreements in place
with Compaq Computer, through the AltaVista search service, Hylas, Tribal Voice,
and Netopia, guaranteeing exposure to approximately 30 million potential users
per day, and we are actively pursuing additional agreements with high traffic
Web sites. To that end, we are actively utilizing banner swaps in our
advertising program. Under this scenario, we gain advertising space on targeted
Web sites in exchange for running that Web site's banner ads for free. This
barter arrangement allows us to advertise without incurring the expense that is
usually associated with Internet advertising.
Co-Branding Agreements
Co-branding agreements are particularly popular with original equipment
manufacturers. Typically these agreements call for a co-branded home page,
featuring the look and feel of our site along with the brand of the partner
company. Usually this brand is found in the upper right corner of the home
page. The partner companies also advertise PhotoLoft.com through their
packaging by including our logo on the box, inserts in the packaging, and
mentions in the users' manuals or newsletters. Users are directed to our site
via a link at the partner company's Web site. As an added inducement to utilize
our site, all purchasers are offered premium accounts at no extra charge. We
share with our partners any revenues generated via advertising sales and
e-commerce from the co-branded site.
The original equipment manufacturer views adding our software to its
package of products as a value added benefit for the consumer. In addition,
depending upon the original equipment manufacturer partner, we can help to
increase sales. For example, Hewlett-Packard, can increase sales of ink as
consumers print high resolution photos--enabled by our proprietary printing
technology on their printers. Currently we have co-brand agreements in place
with UMAX, Epson, Casio, Hewlett-Packard and others. We are actively engaged in
discussions to develop additional co-branding agreements with other Web sites
and Internet companies.
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As our business development team grows, co-branding agreements are being
marketed to other sectors as well. A recently signed agreement is with PowWow,
a fully integrated instant messaging and online community with over four million
users, that was developed by Tribal Voice. Under terms of the arrangement,
PowWow users will be notified that they have received a free one-year Premium
Account with PhotoLoft.com. Announcements in the online newsletter will further
explain the program and a direct link from the PowWow Web site will bring users
to our site. Tribal Voice was searching for a photo sharing solution for its
site, photos being a critical component in the success of a community site.
PhotoLoft.com was an excellent solution as our model of co-branded sites allowed
PowWow to keep its branding program intact while offering an additional value
added service to its users.
Private Label Agreements
Our unique web site architecture allows us to offer private label
agreements to partner companies. To date, no other photo sharing community has
integrated this component into its marketing strategy. In these agreements, the
partner company pays an initial development fee and we create a private photo
sharing community for that company. While the entire space is branded by the
partner company, a tag line reads "powered by PhotoLoft.com" and the uploaded
images become part of the our image bank. Typically we share with the partner
company any revenues generated by advertising sales and e-commerce on the
private label site.
The most prominent example of a private label site is the one created by
PhotoLoft.com for the Walt Disney Company in conjunction with its launch of "A
Bug's Life." As our marketing efforts mature, we are finding more and more
opportunities to create private label sites. They are particularly appealing to
online portals that are reluctant to lose their branding but want a photo
sharing community as a component of their portfolio.
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OPERATIONS AND SYSTEMS
Administrative Operations
To provide our members with the most efficient, flexible, and innovative
services possible, our administrative operations combine in-house and outsourced
services and functions. Our strategy is to keep our in-house staff small, with
a focus on core competencies in technical and research and development areas,
and to outsource other functions and projects on an as-needed basis. Internal
functions currently include account management, traffic management, and
managerial projects focusing on the development and management of business
partnerships with appropriate parties. At this point, outsourced functions
include e-commerce business services and maintenance of network hardware and
Internet connections.
Systems
Our Web site is located in a secured individual "cage" space at the San
Jose, California site hosting site operated by AboveNet Communications, Inc.
AboveNet is the architect of the global, one-hop Internet Service ExchangeTM , a
network delivering Internet connectivity and co-location solutions for
high-bandwidth, mission-critical applications. AboveNet's major networking
equipment includes Cisco 12000 and 7500 series routers and Cisco Catalyst
switches. Brooks Fiber, Pacific Bell, TCG and MFS currently have fiber cabinets
and connections at the AboveNet San Jose Network Center. We have a co-location
agreement in place with AboveNet. The agreement has a term of one year.
AboveNet also provides our Web site with its connection to the Internet and also
houses some of our equipment.
Our site is served on a series of Intel Pentium II - Dual Processor
Servers with high availability disk arrays for maximum uptime guarantee. Our
site currently utilizes several Single Processor Pentium 400's with 1Gb RAM for
the web servers. The Image servers are hosted by several Dual Processor Pentium
400's with 1Gb RAM. Currently, there is one dual Processor Pentium 400 with 512M
RAM for the database engine. The combination of a database server, several
image servers, and several web servers is called a POD, and we add pods as our
community grows.
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PhotoLoft.com's secure data management is through SQL Server version 7.0.
SQL Server Logs are generated every 24 hours to facilitate database
reconstruction in the case of hardware or software failure. These files are
written to the hard disk and the CD-ROM that is generated nightly. All data is
backed up on a daily basis utilizing CD-ROM Burner and software developed in
house. Currently, the average Photoloft.com web site serves .8 page views/sec
and the average peak load is 1.13 page views/sec. With the above referenced
software and hardware configurations, it has been determined that the current
peak load served is 15 page views per second per image server. With 6 image
servers, the site is capable of 90 page views per second. To scale the system,
additional web servers and image servers are added as needed. To scale the
database, a mirror copy is made of the database server and dedicated to a
particular account.
Since January 1998, our site has maintained an uptime service record of
99.6+%. This service time excludes outages that were due to "act of god" or
catastrophic failure of the hosting service unrelated to any specific
PhotoLoft.com software or hardware issues.
COMPETITION
Competition in the Internet photo sharing and digital imaging arena is
intensifying. When we began development of our site in 1998 there were
virtually no competitors. By the time that our site was officially launched in
February 1999, several potential competitors had emerged and we are aware of new
companies planning to enter the market in the near future. As one of the first
photo sharing communities in the marketplace, we have laid the groundwork for
many competitors to follow. In doing internal competitive analysis, it is clear
that competitors have mimicked our technology and marketing strategies in a
number of ways. However, to date, none of the competitors have successfully
duplicated the unique combinations of features and advanced technology that we
offer.
PhotoNet, PhotoHighway, PhotoPoint.com, Zing.com, and ClubPhoto are among
the first wave of companies engaged in activities similar to ours. These
companies allow users to upload their images and share them via e-mail, and some
offer online greeting cards and photo-personalized gifts. Some of these sites
have followed the online community business model. These companies are also
forging valuable marketing relationships and some enjoy significant financial
backing. However, they have not introduced advanced viewing and high resolution
printing capabilities comparable to ours. Also, at present, PhotoNet, which is
50% owned by Kodak, is primarily designed to help Kodak protect the traditional
chemical film based photography industry. But, we anticipate that this will
change in the future as the popularity of digital imaging increases.
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There are many other smaller photo-sharing Web sites in various stages of
development. In a recent competitive analysis, we identified at least 15
additional companies beginning to get into the photo sharing/digital imaging
Internet business. The barriers to entry for a photo storing Web site are few.
However, to develop an interactive site with a large database of images that
also offers advanced technology is more costly and time consuming. A more real
threat could be traditional media companies, a number of which, including
Disney, CBS and NBC, have recently made significant acquisitions or investments
in Internet companies.
We believe that the principal competitive factors in our market are
community development, technology, number of images in the database, rate of
adding members, and the ability to partner with companies that can bring large
groups of users who are already interested in digital imaging to our Web site.
Certain of our current and many of our potential competitors have longer
operating histories, larger customer bases, greater brand recognition in other
business and Internet markets and significantly greater financial, marketing,
technical and other resources than us. In addition, other online services may
be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Therefore, certain of our
competitors with other revenue sources may be able to devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to Web site and systems development than
us or may try to attract traffic by offering services for free. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand. See "Item 2. Management's Discussion and Analysis
or Plan of Operations--Risk Factors--Operating Results and Financial
Condition--We May Not Be Able To Compete Successfully."
INTELLECTUAL PROPERTY
"Photoloft" and "HOWDY" are trademarks and service marks of PhotoLoft.com.
We have registered our trademark "Howdy" with, and our application for
registration of the mark "Photoloft" is currently pending before, the United
States Patent and Trademark Office.
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We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with its suppliers and strategic partners in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by us to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-party development of similar
technologies. While we intend to pursue registration of our trademarks and
service marks in the U.S. and internationally, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online.
We also rely on certain technologies that we license from third parties,
such as the suppliers of key database technology, the operating system and
specific hardware components for our products and services. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
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GOVERNMENTAL REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets certain standards and regulations regarding communications and
related equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
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EMPLOYEES
As of October 31, 1999, we had 27 full time employees, including 4 in
marketing and advertising sales and customer support; 3 in business development;
4 in administration; and 17 in product development. We recently embarked on an
active search to hire up to six additional product development employees;
three additional advertising sales and customer support professionals; three
additional business development experts; and one administration employee.
Although talented and qualified employees are difficult to find in the current
tight job market, we have experienced relative success in attracting and
retaining highly motivated and talented employees. Digital imaging is a growing
field and many employees working in the Internet arena are attracted to a
start-up company with a record of success in such a dynamic field.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and graphical location is intense, and there can be no assurance
that we will be successful in attracting, integrating, retaining and motivating
a sufficient number of qualified personnel to conduct its business in the
future. From time to time, we also employ independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
SELECTED FINANCIAL DATA
The following table contains certain selected financial data of
Photoloft.com and is qualified by the more detailed financial statements and the
notes thereto provided in this registration statement. The financial data as of
and for the years ended December 31, 1998 and 1997, have been derived from
Photoloft.com's financial statements, which statements were audited by BDO
Seidman, LLP. The financial data as of June 30, 1999 and for the six-month
periods ended June 30, 1999 and 1998, have been derived from Photoloft.com's
unaudited financial statements.
The comparisons made between the noted periods should be evaluated in light
of the following significant factors: First, during 1997 and 1998,
Photoloft.com's primary source of revenue was derived from selling software. As
the gross margin from selling software began to decline, Photoloft.com explored
other means of generating revenue. Beginning in early 1998, Photoloft.com
shifted focus and began selling advertising on the AltaVista web page. Second,
the sale of the AltaVista URL in July 1998 resulted in a significant increase to
net income but eliminated the advertising revenue generated by the web site,
which is calculated based on the number of impressions the web site receives.
With the sale of AltaVista, Photoloft.com began developing PhotoLoft.com as a
new source of generating advertising revenue. Third, during 1999, Photoloft.com
has begun to focus on building the PhotoLoft.com brand name and increasing the
number of daily impressions to the site. As a means of achieving this,
Photoloft.com has made a strategic decision to focus on increasing traffic to
the PhotoLoft.com web site instead of generating revenue. To accomplish this,
Photoloft.com has increased its marketing efforts by trading advertising space
with other Internet companies and attending trade shows. As a result, the
number of impressions to the PhotoLoft.com web site has increased, which should
ultimately increase revenues.
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Statement of Operations Data
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
June 30, December 31,
-------- ------------
1999 1998 1998 1997
----------- ----------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . $ 85,500 $ 497,400 $ 674,300 $ 574,200
Net Income (loss) . . . . . . . (615,800) 62,400 1,663,300 (165,500)
Net Income (loss) per share to
Common Shareholders:
Basic . . . . . . . . . . . . $ (0.14) $ 0.01 $ .26 $ (0.03)
Diluted . . . . . . . . . . . $ (0.14) $ 0.01 $ .18 $ (0.03)
</TABLE>
Balance Sheet Data
<TABLE>
<CAPTION>
June 30, December 31,
--------- -------------
1999 1998 1998 1997
------------ -------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current Assets. . . . . . . . $ 1,658,100 $235,000 $1,211,100 $ 93,900
Total Assets. . . . . . . . . $ 3,070,400 $263,500 $2,939,000 $123,900
Current Liabilities . . . . . $ 216,900 $172,300 $ 502,900 $151,000
Total Liabilities . . . . . . $ 797,400 $172,300 $1,169,600 $151,000
Shareholders Equity (Deficit) $ 2,273,000 $ 91,300 $1,769,400 $(27,100)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this registration statement.
The matters discussed in this registration statement contain forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below in "Risk Factors--Operating Results, and Financial Condition" as well as
those discussed in this section and elsewhere in this registration statement.
Overview
PhotoLoft.com is an Internet web site community that is changing data
imaging and photo processing. PhotoLoft.com is a growing photographic imaging
community on the Internet, and its unique software allows consumers to share and
print personal images quickly, easily and inexpensively. Users can create a
"virtual photo album," which is impossible to lose; instantly accessible and
easily reproducible; easily transported; easily displayed on high quality output
devices, such as television; and completely personalized. Members can
automatically invite others to view their albums via e-mail and give users the
opportunity to comment on other images. PhotoLoft.com is also taking advantage
of the rise in e-commerce, offering a wide array of gift items that have been
imprinted with a PhotoLoft.com image selected by the user. The site has been
carefully designed to be user friendly and the community aspect of PhotoLoft.com
makes for a highly entertaining experience for visitors and members.
PhotoLoft.com was founded in 1993 as AltaVista Technology, Inc. In July
1998, the URL, AltaVista.com was sold to Digital Equipment, now Compaq Computer,
and we changed our name to Photoloft.com. Since then, we have continued to
upgrade the site, offering better and faster user components to PhotoLoft.com.
Through February 1999, revenues have been derived primarily through the sale of
advertising. With the latest release of PhotoLoft.com in February 1999, we
began focusing on increasing e-commerce sales and advertising sales.
Anticipated success in these areas will come from the increased membership base,
estimated to increase from 24,000 to 123,000 in 1999, and increased impressions
per day, estimated to increase from 20,000 per day in 1998 to 500,000 per day in
1999.
In 1998, PhotoLoft.com began developing a new product, ID4Life. Designed
as a preventative service to aid in finding missing persons, ID4Life has
developed as a different product than the rest of PhotoLoft.com. We are seeking
to sell ID4Life.
Operating Results
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $85,500, a decrease of
$411,900, or approximately 83%, compared to $497,400 for the six months ended
June 30, 1998. Revenues decreased primarily due to a change in Photoloft.com's
operations from selling software to selling advertising. This change did not
occur until the latter half of 1998, contemporaneously with the sale of the URL
to Compaq Computer. The new business plan is focused on advertising sales and
e-commerce revenues. The second quarter results reflect less than one year of
operations under the new model.
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The gross margin for the six months ended June 30, 1999 was $33,500, a
decrease of $401,200 or approximately 93%, compared to the gross profit of
$434,700 for the six months ended June 30, 1998. This decrease in gross margin
is due primarily to the transition of Photoloft.com's business from software
sales to advertising sales and the accompanying significant decrease in
revenues, resulting in an inability to cover the fixed cost component of the
cost of revenues during the six months ended June 30, 1999.
Selling, general, and administrative expenses for the six months ended June
30, 1999 were $1,096,700, an increase of $767,700 or 323% compared to $329,000
for the six months ended June 30, 1998. This increase reflects the planned
aggressive growth phase of Photoloft.com's new business model. Included in the
costs are additional equipment to handle increased image volume; necessary
staffing increases, particularly in the engineering and sales areas; and
additional facilities. The growth plan calls for a ramp up of all operations
throughout 1999, leveling off in 2000.
Loss from operations for the six months ended June 30, 1999 was $1,063,200,
a decrease of $1,168,900 compared to income from operations of $105,700 for the
six months ended June 30, 1998. This decrease is primarily due to the transition
in Photoloft.com's business strategy and the costs incurred to develop the
PhotoLoft.com web site.
Interest income for the six months ended June 30, 1999 was $40,500, an
increase of 100% compared to $0 for the six months ended June 30, 1998.
Interest income increased due to the note receivable related to the sale of the
AltaVista URL in July 1998.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Revenues for fiscal 1998 were $674,300, an increase of $100,100 or
approximately 17%, compared to $574,200 for fiscal 1997. Revenues increased due
to Photoloft.com generating advertising revenue in addition to software sales.
Gross profit for fiscal 1998 was $561,300, an increase of $47,900 or 9%,
compared to $513,400 for fiscal 1997. However, there was a decrease in the
gross profit as a percentage of sales to 8.3% for fiscal 1998 from 8.9% in
fiscal 1997, which was due primarily to a reduction in the sales price of
software bundled with original equipment manufacturer product.
Selling, general, and administrative expenses for fiscal 1998 were
$1,324,000, an increase of $649,600 or 96% compared to $674,400 for fiscal 1997.
As a percentage of revenue, selling, general and administrative expenses
increased to 196% in fiscal 1998 from 117% in fiscal 1997, primarily as a result
of investment in the technology required to generate web page advertising and
the increase in employee headcount.
Loss from operations for fiscal 1998 was $762,700, an increase of $601,700
compared to a loss from operations of $161,000 for fiscal 1997. The increase is
due primarily to the higher selling, general and administrative expenses
resulting from the increased number of employees and Photoloft.com's investment
in technology.
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Net income for fiscal 1998 was $1,663,300, an increase of $1,828,800
compared to the net loss of $165,500 for fiscal 1997. The increase is primarily
due to the sale of the AltaVista URL in July 1998.
Liquidity and Capital Resources
Net cash used in operating activities during the six months ended June 30,
1999 was $1,017,900, which reflected the net effect of the net loss for the
period, decreases in deferred income taxes and deferred revenues and an increase
in prepaid expenses and other current assets, which was partially offset by an
increase in accounts payable. Net cash used in operating activities during
fiscal 1998 was $361,000, a decrease of $374,800 compared to net cash provided
by operating activities of $13,800 in fiscal 1997. The net cash used in
operating activities in fiscal 1998 reflects the gain on the sale of the
AltalVista URL that was partially offset by the net income for the year and an
increase in deferred income taxes. In October, we were paid $1,804,700 in full
settlement of the note, at which time we recorded a loss of $75,200.
Accordingly, the balance sheet as of June 30, 1999 classifies this note as a
current asset.
Net cash used in investing activities was $57,800 for the six months ended
June 30, 1999, primarily reflecting cash used for the acquisition of property
and equipment. Net cash used in investing activities in fiscal 1998 was $54,300
compared with net cash used in fiscal 1997 of $14,200, with both years
reflecting cash used for the acquisition of property and equipment.
Net cash provided by financing activities was $1,076,900 for the six months
ended June 30, 1999, primarily reflecting cash received from the sale of stock
and exercise of stock options, and the proceeds from the note receivable
relating to the AltaVista URL sale. Net cash provided by financing activities
for fiscal 1998 was $785,300 due to the proceeds from the AltaVista URL sale.
Our capital requirements are dependent on several factors, including market
acceptance of our services, the amount of resources devoted to investments in
Photoloft.com's Web site, the resources devoted to marketing and selling
Photoloft.com's services and brand promotions and other factors. Fueling
Photoloft.com's need for cash currently is the development of rival technology
and new Internet sites and portals offering similar products. See "Item 1.
Business-Competition." As we enjoy continued growth we must work to stay at the
forefront of technology and continue to grow in sales. This will necessitate a
substantial increase in capital expenditures. In addition, PhotoLoft.com will
continue to evaluate possible investments in businesses, products and
technologies and plans to expand its sales and marketing programs and conduct
more aggressive brand promotions. We anticipate that we will require
approximately $10.5 million in 2000 to grow as contemplated. At June 30, 1999,
Photoloft.com had cash and cash equivalents totaling $486,800, resulting
principally from the sale of common stock in a private placement during March
1999, and working capital of $1,441,200.
We believe that our cash requirements will be provided in 2000 primarily by
cash from operations and, in particular, from advertising revenues. In addition,
we anticipate that PhotoLoft.com may require additional debt or equity
financing. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. The incurrence of
indebtedness would result in an increase in our fixed obligations and could
result in operating covenants that would restrict its operations. There can be
no assurance that financing will be available in amounts or on terms acceptable
to us, if at all. If financing is not available when required or is not
available on acceptable terms, we may be unable to develop or enhance our
products or services. In addition, we may be unable to take advantage of
business opportunities or respond to competitive pressures. Any of these events
could have a material and adverse effect on our business, results of operations
and financial condition.
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Impact of the Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. The third-party vendor upon which we materially rely
is AboveNet Communications, Inc. which co-locates our Web equipment and provides
our connection to the Internet. We have sought confirmation from AboveNet
Communications, Inc. that its system is Year 2000 compliant and AboveNet
Communications, Inc. has informed us that its system is Year 2000 compliant.
In addition, we have sough verification from other key vendors,
distributors and suppliers that they are Year 2000 compliant or, if they are not
presently compliant, to provide a description of their plans to become so. To
the extent that vendors failed to provide certification that they were Year 2000
compliant, we have terminated and replace these relationships.
We are conducting an internal assessment of all material information
technology and non-information technology systems at our headquarters. Until we
complete the assessment, we will not know whether these systems are or will be
Year 2000 compliant.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. There can be no assurance that we will not discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the operational facilities that support our
business, or our Web-hosting facilities, are not Year 2000 compliant, we may be
unable to deliver goods or services to our customers and portions of our Web
site may become unavailable. In addition, there can be no assurance that
third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
27
<PAGE>
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be
Year2000-compliant. The failure by these entities to be Year 2000-compliant
could result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that might occur if technologies on which we depend are not
Year 2000-compliant and fail to operate effectively after the Year 2000. The
results of our Year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
This is a Year 2000 readiness disclosure statement within the meaning of
the Year 2000 Information and Readiness Disclosure Act. P.L. 105-271.
Seasonality
We believe that we may experience seasonality in our business, with use of
the Internet in general and our Photoloft.com website traffic being somewhat
lower during periods of the year. In particular, we believe that advertising
sales in traditional media, such as television and radio, generally are lower
in the first and third calendar quarters of each year due to the summer vacation
period and post-Winter holiday season slowdown. If similar seasonal patterns
emerge in Internet advertising, our advertising revenues and operating results
also may vary significantly based upon these same patterns. In addition, as
traditional retail sales are generally higher in the fourth calendar quarter of
each year during the winter holiday season, and subsequently lower in the first
calendar quarter of each year, we anticipate that e-commerce revenues may follow
a similar seasonal pattern and that our e-commerce revenues and operating
results also may vary significantly based upon these patterns.
Effects of Inflation
Due to relatively low levels of inflation in 1997 and 1998, inflation has
not had a significant effect on our results of operations since inception.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Historically, we have not used derivatives and
therefore this new pronouncement is not expected to have a significant impact
on results of operations and financial position.
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended, and the Securities
Act of 1933, as amended, and is subject to the safe harbors created by those
sections. These forward-looking statements are subject to significant risks and
uncertainties, including information included under Items 1 and 2 of this
registration statement, which may cause actual results to differ materially from
those discussed in such forward-looking statements. The forward-looking
statements within this registration statement are identified by words such as
"believes," "anticipates," "expects," "intends,""may," "will" and other similar
expressions regarding our intent, belief and current expectations. However,
these words are not the exclusive means of identifying such statements. In
addition, any statements which refer to expectations, projections or other
characterizations of future events or circumstances and statements made in the
future tense are forward-looking statements. Readers are cautioned that actual
results may differ materially from those projected in the forward looking
statements as a result of various factors, many of which are beyond our control.
We undertake no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this registration statement
with the Securities and Exchange Commission. Readers are urged to carefully
review and consider the various disclosures made by us in this registration
statement.
RISK FACTORS
We have identified the following risk factors which could affect our actual
results and cause actual results to differ materially from those in the forward
looking statements.
We Are Much Like A Start Up Company And Have A Limited Operating History On
Which To Evaluate Our Potential For Future Success.
We launched our current business model in October, 1998 and therefore are
much like a start-up company. We have only a limited operating history upon
which you can evaluate our business and prospects. You must consider the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. If we are unsuccessful in
addressing these risks and uncertainties, our business, results of operations
and financial condition will be materially and adversely affected.
We Expect Losses For The Foreseeable Future, and Our Operating Results May
Fluctuate From Quarter to Quarter.
Since 1997, we have incurred losses from operations, resulting primarily
from costs related to developing our Web site, attracting users to our Web site,
and establishing our brand. Because of our plans to invest heavily in marketing
and promotion, to hire additional employees, and to enhance our Web site and
operating infrastructure, we expect to incur net losses for the foreseeable
future. We believe these expenditures are necessary to build and maintain the
technical infrastructure necessary to host multiple images and to strengthen our
brand recognition, attract more users to our Web site and ultimately, generate
greater online revenues. If our revenue growth is slower than we anticipate or
our operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability.
Our Future Revenues Are Unpredictable And Our Quarterly Operating Results May
Fluctuate Significantly.
Our revenues for the foreseeable future will remain primarily dependent on
the number of users that we are able to attract to our Web site, and on
sponsorship and advertising revenues. We cannot forecast with any degree of
certainty the number of visitors to our Web site or the amount of sponsorship
and advertising revenues.
We expect our operating results to fluctuate from quarter to quarter. We
believe that sponsorship and advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If similar seasonal and cyclical patterns emerge in
Internet sponsorship and advertising spending, these revenues may vary based on
these patterns. See "Management's Discussion and Analysis of Financial Condition
and Operations-Seasonality."
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Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat visitors to our Web site and convert
them into users;
- our ability to keep current with the evolving tastes of our target market;
- our ability to manage the number of items listed on our services;
- the ability of our competitors to offer new or enhanced Web site features,
products or services;
- the demand for sponsorship and advertising on our Web site;
- the level of use of the Internet and online services;
- consumer confidence in the security of transactions over the Internet;
- unanticipated delays or cost increases with respect to product and service
introductions; and
- the costs, timing and impact of our marketing and promotion initiatives.
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
Your Holdings May be Diluted in the Future.
We are authorized to issue up to 50,000,000 shares of common stock. See
"Item 11. Description of Registrant's Securities to be Registered." To the
extent of such authorization, our Board of Directors will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
in the future for such consideration as our Board of Directors may consider
sufficient. The issuance of additional common stock in the future will reduce
the proportionate ownership and voting power of our common stock held by
existing stockholders. We are also authorized to issue up to 500,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by our Board of Directors. To the extent of such authorization, such
designations may be made without stockholder approval. The designation and
issuance of series of preferred stock in the future would create additional
securities that would have dividend and liquidation preferences over our common
stock.
We May Fail To Establish An Effective Internal Advertising Sales Organization To
Attract Sponsorship And Advertising Revenues.
To date, we have relied principally on outside parties to develop
sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal advertising sales organization. Our internal
sales team currently has only two members. We will need to increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected. See "Item 1. Business--Employees."
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We Are Growing Rapidly, And Effectively Managing Our Growth May Be Difficult.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management systems and resources. To manage
our growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. We cannot be certain that we will be
able to integrate new executives and other employees into our organization
effectively. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
See "Item 1. Business-Employees" and "Item 5. Directors and Executive
Officers."
We Depend On Our Key Personnel To Operate Our Business, And We May Not Be Able
To Hire Enough Additional Management And Other Personnel As Our Business Grows.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Jack Marshall, our Chief Executive Officer, President and Treasurer. The loss of
the services of any of our executive officers could materially and adversely
affect our business. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future. See "Item 1. Business-Employees" and "Item 5. Directors
and Executive Officers."
We May Not Be Able To Compete Successfully.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost. We currently or potentially compete with a
number of other companies, including a number of large online communities and
services that have expertise in developing online commerce, and a number of
other small services, including those that serve specialty markets. Competitive
pressures created by any one of these companies, or by our competitors
collectively, could have a material adverse effect on our business, results of
operations and financial condition. See "Item 1. Business--Competition."
We May Need Further Capital.
We currently anticipate that our available funds will be sufficient to meet
our anticipated needs for working capital, capital expenditures and business
expansion through December, 1999. Thereafter, we will need to raise additional
funds. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and such securities
may have rights, preferences and privileges senior to those of our common stock.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to fund expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services or products or respond to competitive pressures. Such inability could
have a material adverse effect on our business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Operations-Liquidity and Capital Resources."
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We May Fail To Establish And Maintain Strategic Relationships With Other Web
Sites To Increase Numbers Of Web Site Users And Increase Our Revenues.
We intend to establish numerous strategic alliances with popular Web sites
to increase the number of visitors to our Web site. There is intense competition
for placement on these sites, and we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances with other Web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships or strategic alliances and expand our existing ones could have a
material and adverse effect on our business.
We Would Lose Revenues And Incur Significant Costs If Our Systems Or Material
Third-Party Systems Are Not Year 2000-Compliant.
We have not devised a Year 2000 contingency plan. The failure of our
internal systems, or any material third-party systems, to be Year 2000-compliant
could have a material and adverse effect on our business, results of operations
and financial condition.
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. However, we may fail to discover Year
2000 compliance problems in our systems that will require substantial revisions
or replacements. In the event that the operational facilities that support our
business, or our Web-hosting facilities, are not Year 2000-compliant, portions
of our Web site may become unavailable and we would be unable to deliver
services to our users. In addition, there can be no assurance that third-party
software, hardware or services incorporated into our material systems will not
need to be revised or replaced, which could be time-consuming and expensive. Our
inability to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs and other
business interruptions, any of which could have a material and adverse effect on
our business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in our software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services,
any of which would have a material and adverse effect on our business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Statements and Results of Operations- Impact of the Year 2000."
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Acquisitions May Disrupt Or Otherwise Have A Negative Impact On Our Business.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding, nor are we having any discussions relating to any such
acquisition or investment. If we buy a company, then we could have difficulty in
assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. An acquisition
could distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
shareholders.
Unforeseen Developments May Occur With Respect To Digital Imaging Technology.
Digital imaging is a relatively new phenomenon and the slower than expected
acceptance of the new technology could affect our ability to grow as rapidly as
we need to in order to meet our financial targets. Digital camera manufacturers
have made great strides in the past two years improving the functionality of
their cameras and pricing them in a range that is attractive to many consumers.
The continued refinement of the technology and commoditization of the price will
help to move acceptance of the technology along. Full acceptance of digital
imaging technology will require a move on the part of the photographic
population away from traditional chemical-based photo processing to the new
paradigm of home printed photos. The costs remain competitive for digital
imaging, however, there is no guarantee the general population will make this
shift rapidly, if at all.
We Are Dependent On The Continued Development Of The Internet Infrastructure.
Our industry is new and rapidly evolving. Our business would be adversely
affected if Web usage and e-commerce does not continue to grow. Web usage may be
inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, Web sites have experienced a variety of interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, Web usage, including usage of our Web site, could grow slowly or
decline.
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Our Long-Term Success Depends On The Development Of The E-Commerce Market, Which
Is Uncertain.
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce by consumers.
Rapid growth in the use of the Web and commercial online services is a recent
phenomenon. Demand for recently introduced services and products over the Web
and online services is subject to a high level of uncertainty. The development
of the Web and online services as a viable commercial marketplace is subject to
a number of factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and growth.
Statistical Data Regarding The Internet May Be Unreliable Or Inaccurate
This Registration Statement includes statistical data regarding
Photoloft.com and the markets in which it operates. Such data is based on our
records or are taken or derived from information published by various sources,
including Dataquest, Reuters Technology Survey, New Media, Jupiter
Communications, and International Data Corporation. Although these companies
specialize in providing market and strategic information for the information
technology industry, this type of data is inherently imprecise. You are
cautioned not to place undue reliance on this data.
Adoption Of The Internet As An Advertising Medium Is Uncertain.
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our Web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Our
business, financial condition and operating results would be adversely affected
if the market for Internet advertising fails to develop or develops slower than
expected. See "Item 1. Business--Advertising."
We Face Risks Associated With Government Regulation Of And Legal Uncertainties
Surrounding The Internet.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad. See
"Item 1. Business - Government Regulation."
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Shares Eligible For Future Sale By Our Current Stockholders May Adversely Affect
Our Stock Price.
To date, we have had a very limited trading volume in our common stock.
See "Item 9. Market Price and Dividends on the Registrant's Common Equity and
Related Stockholder Matters." Sales of substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
under Securities and Exchange Commission Rule 144 or otherwise could adversely
affect the prevailing market price of our common stock and could impair our
ability to raise capital at that time through the sale of our securities.
Anti-Takeover Provisions And Our Right To Issue Preferred Stock Could Make A
Third-Party Acquisition Of Us Difficult.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our Board of Directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock. See "Item 11.
Description of Registrant's Securities to be Registered -- Nevada Anti-Takeover
Laws and Certain Charter Provisions."
Our Common Stock Price Is Likely To Be Highly Volatile.
The market price of our common stock is likely to be, highly volatile as
the stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. See "Item 9. Market Price
and Dividends on the Registrant's Common Equity and Related Stockholder
Matters." Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have recorded
lows well below historical highs. We cannot assure you that our stock will trade
at the same levels of other Internet stocks or that Internet stocks in general
will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
ITEM 3. DESCRIPTION OF PROPERTIES
Our executive offices, comprising approximately 2,628 square feet, are
located at 300 Orchard City Drive, Suite 142, Campbell, California 95008. These
facilities are leased pursuant to a lease expiring August 31, 2001. The monthly
rent is $5,519. We also sublease approximately 1,430 square feet of space in
another building located in Campbell, California under a sublease that expires
in September 2000.
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. See "Item 1. Business--Operations and Systems." Our
operations are dependent in part on our ability to protect our operating systems
against physical damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins or other similar events. Furthermore,
despite our implementation of network security measures, our servers are also
vulnerable to computer viruses, break-ins and similar disruptive problems. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to our users which could have a material adverse effect on
our business, results of operations and financial condition.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 31, 1999, the ownership of
our common stock by each of our directors and executive officers, all of our
executive officers and directors as a group, and all persons known by us to
beneficially own more than 5% of our common stock
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and the address of each beneficial owner listed
below is c/o 300 Orchard City Drive, Suite 142, Campbell, California 95008.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT
BENEFICIAL OWNER OF BENEFICIAL OF
OWNERSHIP (1) CLASS (1)
- ------------------------------------------ ------------------ ---------
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C>
Jack Marshall (2)(3) . . . . . . . . . . . 2,519,269 19.6%
- ------------------------------------------ ------------------ ---------
Christopher McConn (4) . . . . . . . . . . 860,722 6.8%
- ------------------------------------------ ------------------ ---------
Lisa Marshall (2)(5) . . . . . . . . . . . 159,627 1.3%
- ------------------------------------------ ------------------ ---------
Patrick Dane (6) . . . . . . . . . . . . . 102,411 *
- ------------------------------------------ ------------------ ---------
John Marshall(2)(7). . . . . . . . . . . . 772,080 6.2%
- ------------------------------------------ ------------------ ---------
All directors and executive officers as a
group (5 Persons) (3)(4)(5)(6)(7). . . . 4,414,109 33.4%
- ------------------------------------------ ------------------ ---------
OTHER 5% STOCKHOLDERS:
- ------------------------------------------
George Perlegos. . . . . . . . . . . . . . 2,270,063 18.2%
- ------------------------------------------ ------------------ ---------
Keith Queeney. . . . . . . . . . . . . . . 700,759 5.6%
- ------------------------------------------ ------------------ ---------
<FN>
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<PAGE>
* Less than one percent.
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Under Rule 13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned by
such person, but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) John Marshall is the father of Jack and Lisa Marshall, who are brother
and sister.
(3) Includes 401,991 shares of common stock subject to options that
are exercisable within 60 days of the date hereof.
(4) Includes 160,796 shares of common stock subject to options that
are exercisable within 60 days of the date hereof.
(5) Includes 9,784 shares of common stock subject to options that are
exercisable within 60 days of the date hereof.
(6) Includes 88,911 shares of common stock subject to options that
are currently exercisable.
(7) Includes 88,911 shares of common stock subject to options that
are currently exercisable.
</TABLE>
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<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and positions of our directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------
<S> <C> <C>
President, Treasurer, Chief Executive
Jack Marshall (1) (3) (4) 38 Officer and Director
- ------------------------- --- -------------------------------------
Christopher McConn. . . . 40 Chief Technology Officer and Director
- ------------------------- --- -------------------------------------
Lisa Marshall (1) . . . . 41 Secretary
- ------------------------- --- -------------------------------------
Patrick Dane (2) (3) (4). 50 Director
- ------------------------- --- -------------------------------------
John Marshall (1) (2) . . 69 Director
- ------------------------- --- -------------------------------------
<FN>
(1) John Marshall is the father of Jack and Lisa Marshall, who are brother
and sister.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Finance Committee
</TABLE>
The following sets forth biographical information concerning our directors
and executive officers for at least the past five years:
JACK MARSHALL has been developing Internet applications since 1993. After
assignments at Texas Instruments and Honeywell, Mr. Marshall worked as a sales
manager for Teradyne, formerly MegaTest, a leading developer of high-end,
state-of-the-art semiconductor test equipment. Mr. Marshall founded Photoloft
in 1993 under the name AltaVista Technology. Inc. Mr. Marshall received his
bachelor's degree in electrical engineering and computer engineering from
Michigan State University and has taught electric circuit analysis at Highland
Community College in Illinois. He has also completed several masters level
courses in computer engineering at Santa Clara University.
CHRISTOPHER MCCONN has been the Chief Technology Officer of Photoloft.com
since February 1994. Prior to our adoption of the Photoloft.com business
strategy, he served as our webmaster and developed web-based multimedia and
imaging programs. He has extensive expertise in programming C++ and served as a
consultant to Borland International, a leading producer of C++ and software
development tools from July 1995 to July 1996. In this role, Mr. McConn helped
develop the Object Windows Library, a foundation for PhotoLoft.com. Mr. McConn
received his bachelor's degree in electrical engineering from UC Davis in 1982.
Mr. McConn has over 13 years of industry experience including stints at Ford
Aerospace and Teradyne, where he oversaw the company's software QA development.
LISA MARSHALL has over 20 years of strategic and tactical communications
experience, focused primarily on investor relations, media communications and
marketing and brand development. Working in a number of diverse industries, she
helped spearheaded nationwide efforts to deregulate the airline, natural gas
transportation, and most recently, electric generation industries, working to
establish strong, deregulated competitors in the various marketplaces. In
addition, she handled the communications efforts of the Vastar Resources Initial
Public Offering, which was the largest to date on the New York Stock Exchange
when implemented in 1994. From 1985 to 1988 she served in various managerial
positions at Continental Airlines. From 1988 to 1993 she served in various
managerial positions at Tenneco Inc. From February 1993 to June 1997 she served
as director of Communications for ARCO/Vastar Resources. From July 1997 to
October 1998 she served as director of Communications for Southern Company. Ms.
Marshall earned her bachelor's degree from the University of Wyoming in American
Studies in 1980 and her bachelors degree from the University of Houston in
journalism in 1984.
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<PAGE>
PATRICK DANE has spent more than twenty years in the high technology
industry. He spent fifteen years in sales and marketing at Xerox where he was
responsible for bringing the "Alto" Computer Ethernet and File, Print &
Communication Servers out to the public from the Palo Alto Research Center in
1980. Additionally, he was the creator of the award winning slogan "Team Xerox"
and other pioneering efforts. As Vice President, Sales & Marketing at Dove
Computer Corp. he introduced the MacWorld World Class Award Winning Dove Fax
Modem. As a General Manager with Calera Recognition Systems from 1991 to 1992
Dane was responsible for bringing Fax Grabber to there tail and original
equipment manufacturer marketplace. While President and CEO of SoftNet in from
July 1992 to August 1993 he launched the category-leading Fax Works for Windows.
Dane co-founded and ran Pipeline Communications which introduced online warranty
registration to the computer industry. This service is used by over seventy five
of the top PC manufacturers and ISV's in the marketplace today. In the spring
of1996, Dane founded Tuneup.com an online PC service center, Quarterdeck
Corporation acquired his "Pioneer" among the Internet subscription-based
businesses in May of 1997. In September1996, Dane and Mike Walter began
broadcasting a weekly radio show devoted to the Internet called, "Pat & Mike's
World Wide Web Radio Show". The show, sponsored by CompuServe, Yahoo! IZift
Davis, Hewlett-packard, Office Depot.com, McAfee and USA Today, has a growing
worldwide audience on the Internet and in twenty seven real radio markets. The
show was picked up for national syndication by Premiere Radio Networks in mid
1997. Mr. Dane graduated from Broom Comm College in 1969.
JOHN C. MARSHALL began his career in 1952 with Shell Oil Company, where he
held various management positions until 1975, when he was named General Manager
of Land Operations, North America. He left the company in 1979 to join Patrick
Petroleum as senior vice president. A year later he was named executive vice
president responsible for all operations, and all merger and acquisition
activity. After negotiating the sale of all PPC assets to General Electric, he
founded Kleenburn Energy in 1984 a privately held independent oil and gas
concern. Mr. Marshall earned his bachelor's degree in business from the
University of Wyoming in 1952.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders
following their election or until their successors have been elected and
qualified. Executive officers are appointed by and serve at the pleasure of the
Board of Directors. We may adopt provisions in our By-laws and/or Articles of
Incorporation to divide the board of directors into more than one class and to
elect each class for a certain term. These provisions may have the effect of
discouraging takeover attempts or delaying or preventing a change of control of
Photoloft.
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<PAGE>
BOARD COMMITTEES
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our stock option plan. The current
members of the Compensation Committee are Messrs. Dane, and John Marshall. Prior
to April 8, 1999, we did not have a Compensation Committee or any other
committee of the Board of Directors that performed any similar functions. See
"Compensation Committee Interlocks and Insider Participation."
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The current members of the
audit committee are Messrs. Dane and Jack Marshall.
The Finance Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various financing matters. The
current members of the audit committee are Messrs. Dane and Jack Marshall.
The Board of Directors does not have a nominating committee.
DIRECTORS' COMPENSATION
Directors who are also employees of Photoloft.com receive no compensation
for serving on the Board of Directors. With respect to directors who are not
employees, we intend to reimburse such directors for all travel and other
expenses incurred in connection with attending meetings of the Board of
Directors and any committees of the Board. Non-employee directors are also
eligible to receive and have received grants of non-qualified stock options
under our stock option plan, and we intend to establish a non-employee director
stock option plan which will provide for initial option grants of a fixed number
of shares of our common stock to non-employee directors and successive annual
option grants to such non-employee directors covering an additional fixed number
of shares to provide us with an effective way to recruit and retain qualified
individuals to serve as members of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the Board of
Directors performing similar functions during the fiscal years ending December
31, 1997 and 1998. Messrs. Jack Marshall and Chris McConn are each officers of
Photoloft.com and, as members of the Board of Directors, participated in
deliberations of the Board of Directors relating to the compensation of our
executive officers. The Board of Directors established a Compensation Committee
as of April 8, 1999. See "Board Committees."
40
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the year ended December 31,
1998:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)(2)
LONG-TERM COMPENSATION
NAME AND PRINCIPAL ANNUAL COMPENSATION NUMBER OF SECURITIES UNDERLYING
POSITION SALARY ($) OPTIONS (#)
<S> <C> <C>
Jack Marshall, CEO,
President and Treasurer. 156,864 1,135,032
Christopher E. McConn,
Chief Technology Officer 127,229 454,013
<FN>
(1) Information set forth herein includes services rendered by the Named
Executives while employed by Photoloft.com, Inc. prior to the reorganization with
Data Growth, Inc. and by Photoloft.com following the reorganization with Data
Growth, Inc
(2) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock
Awards", "LTP Payouts" and "All other Compensation" have been omitted because
there is no compensation required to be reported.
</TABLE>
The following table sets forth certain information concerning options
granted to the Named Executives during 1998.
<TABLE>
<CAPTION>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998(1)
Number of % of Total Potential Realizable Value
Securities Options Exercise at Assumed Annual Appreciation
Underlying Granted to Price Per Rates of Stock Price
Options Employees Share Expiration for Option Term 5)
NAME Granted (#) (1) in 1998 (2) ($/Sh)(3) Date(4) 0% 5% 10%
- --------------------- --------------- ----------- ---------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack Marshall . . . . 1,135,032 42.2% 0.48 July, 2007 ($181,605) $11,350 $306,459
- --------------------- --------------- ----------- ---------- ----------- ---------- -------- ---------
Christopher E. McConn 454,013 16.9% 0.48 July, 2007 ($72,642) $ 4,540 $122,584
- --------------------- --------------- ----------- ---------- ----------- ---------- -------- ---------
<FN>
41
<PAGE>
(1) Each option represents the right to purchase one share of our common stock.
(2) In 1998, we granted officers, employees and consultants options to purchase an aggregate of 2,690,706
shares of our common stock.
(3) The fair market value of our common stock on the date of grant for each of the listed options, as
determined by our board of directors, was $0.32 per share.
(4) Options may terminate before their expiration dates if the optionee's status as an employee or
consultant is terminated or upon the optionee's death or disability.
(5) Amounts represent hypothetical gains that could be achieved for the respective options if exercised
at their end of their respective terms. The 0%, 5%, and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our
estimate or projection of the future prices of the common stock. Actual gains, if any, on any exercises of
options are dependent upon the future performance of the common stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
</TABLE>
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executives concerning exercisable and unexercisable stock options held by
them as of December 31, 1998. None of these executive officers exercised options
to purchase common stock in 1998.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES
NAME Number of Unexercised Value of Unexercised In-the-
Options at Year End(#) Money Options at Year End (1)
-------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Jack Marshall . . . . 118,233 1,016,799 $ 59,116 $ 508,399
- --------------------- ----------- ------------- ------------ --------------
Christopher E. McConn 47,293 406,720 $ 23,646 $ 203,360
- --------------------- ----------- ------------- ------------ --------------
<FN>
(1) Based on a per share fair market value of our common stock equal to
$0.50 per share, the fair market value as determined by our Board of Directors
at December 31, 1998.
</TABLE>
42
<PAGE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On February 26, 1999 we entered into an employment agreement with Jack
Marshall. Under the executive employment agreement, Jack Marshall is to serve
as our Chief Executive Officer, President and Treasurer and perform such duties
as may be reasonably assigned to him by the Board of Directors. The executive
employment agreement provides for an annual base salary of $120,000 which shall
be reviewed at least annually. Under the executive employment agreement, the
executive is also eligible for annual bonus compensation in the minimum amount
of $60,000 if Photoloft reaches certain specific milestones. The executive
employment agreement also provides that Mr. Marshall is to receive options to
purchase between 250,000 and 750,000 shares of our common stock if traffic to
our Web Site reaches between 500,000 and 1,000,000 hits in any particular month.
These options will have an exercise price of $0.75 per share. He is eligible to
receive vacation in accordance with Photoloft.com's policies. He is also
eligible to participate in the health, life insurance, medical, retirement and
other benefit programs which we may offer from time to time. He also is to
receive a car allowance of $500 per month.
The term of the executive employment agreement lasts until December 31,
2001 and continues thereafter on a year to year basis unless terminated pursuant
to the terms thereof. We may terminate him at any time with or without cause.
The term "cause" is defined in the executive employment agreement as: (i) the
willful neglect of duties reasonably assigned by the Board of Directors; (ii)
material breach of the agreement; or (iii) willful gross misconduct. If Mr.
Marshall is terminated without cause, he is to receive severance pay through
December 31, 2001 equal to: (i) the base salary; (ii) bonus compensation; (iii)
vested options to purchase common stock; (iv) health insurance; (v) car
allowance; and (vi) any unused vacation time. pre payment of all automobile
allowance for the remaining period of the term. If he resigns from his position
for good cause, including a substantial reduction in his position, duties or a
material breach of the agreement by us, he is to be deemed terminated without
cause and is eligible to receive severance.
EMPLOYEE BENEFIT PLANS
Stock Option Plan
Our stock option plan was adopted by the Board of Directors, and ratified
and approved by our stockholders, as of the closing of the reorganization with
Data Growth, Inc. The Board of Directors amended the Plan in June 1999. The
following description of our stock option plan is a summary and qualified in its
entirety by the text of the plan, which is filed as an exhibit to this
registration statement.
The purpose of the Plan is to enhance our profitability and stockholder
value by enabling us to offer stock based incentives to employees, directors and
consultants. The Plan authorizes the grant of options to purchase shares of
common stock to employees, directors and consultants of Photoloft and its
affiliates. Under the Plan, we may grant incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 and non-qualified
stock options. Incentive stock options may only be granted our employees.
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<PAGE>
The number of shares available for options under the Plan is 3,800,000. The
Plan is administered by the Compensation Committee of the board. Subject to the
provisions of the Plan, the Compensation Committee has authority to determine
the employees, directors and consultants of Photoloft who are to be awarded
options and the terms of such awards, including the number of shares subject to
such option, the fair market value of the common stock subject to options, the
exercise price per share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award unless the grant is
to a stockholder holding more than 10% of our voting stock in which case it must
be 110% of the fair market value on the date of grant. Generally, they may not
have a duration of more than 10 years or five years if the grant is to a
stockholder holding more than 5% of our voting stock. Terms and conditions of
awards are set forth in written agreements between Photoloft.com and the
respective option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
If the employment with Photoloft of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the Plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability.
As of October 31, 1999 225,000 shares had been issued as the result of the
exercise of options previously granted under the Plan, 3,390,641 shares were
subject to outstanding options and 409,359 shares were available for future
grants. The exercise prices of the outstanding options ranged from $0.48 to
approximately $5.25. The options under the Plan vest over varying lengths of
time pursuant to various option agreements that we have entered into with the
grantees of such options.
We have not registered the Plan, or the shares subject to issuance
thereunder, pursuant to the Securities Act of 1933. Absent registration, such
shares, when issued upon exercise of options, would be "restricted securities"
as that term is defined in Rule 144 under the Securities Act of 1933.
43
<PAGE>
Optionees have no rights as stockholders with respect to shares subject to
options prior to the issuance of shares pursuant to the exercise thereof.
Options issued to employees under the Plan shall expire no later than ten years
after the date of grant. An option becomes exercisable at such time and for
such amounts as determined at the discretion of the Board of Directors or the
Compensation Committee at the time of the grant of the option. An optionee may
exercise a part of the option from the date that part first becomes exercisable
until the option expires. The purchase price for shares to be issued to an
employee upon his exercise of an option is determined by the Board of Directors
or the Compensation Committee on the date the option is granted. The purchase
price is payable in full in cash, by promissory note, by net exercise or by
delivery of shares of our common stock when the option is exercised.
The Plan provides for adjustment as to the number and kinds of shares
covered by the outstanding options and the option price therefor to give effect
to any stock dividend, stock split, stock combination or other reorganization of
or by Photoloft.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Unless otherwise indicated, information in this Item 7 regarding shares of
our common stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of Photoloft-California common stock at the time of the reorganization.
ISSUANCES TO FOUNDER. Upon his founding of Photoloft-California in
November, 1993, we issued 756,688 shares of common stock to Jack Marshall in
exchange for $500.00. At that time, we also issued him options to purchase up to
1,152,493 shares of common stock which vested over a four year period and had an
exercise price of $0.001 per share. He exercised his options and elected to
purchase 1,152,493 shares of common stock in February, 1999. During our
offering of preferred stock described below, he purchased 125,000 shares in
exchange for $25,000. He transferred 50,000 shares of common stock by gift in
February 1999. In March, 1999 his shares of Photoloft-California common stock
and his options to purchase shares of Photoloft-California common stock were
converted into shares of Photoloft.com common stock, and options to purchase
Photoloft.com common stock as a result of the reorganization with Data Growth,
Inc
44
<PAGE>
SERIES A PREFERRED OFFERING. From 1994 to 1998 we conducted a private
Offering of Photoloft.com, Inc., a California corporation, series A preferred
stock. As a result, we sold the aggregate amount of 2,275,625 shares of series
A preferred stock in exchange for $455,125. Under this offering, Messrs. John
Marshall, and Chris McConn, purchased 295,000 and 25,000 shares of stock,
respectively. As described above, Mr. Jack Marshall also participated in the
offering. Each outstanding share of series A preferred stock was converted into
1.5 shares of common stock of Photoloft-California in February, 1999. Ms. Lisa
Marshall purchased 12,500 shares for $2,500.
SERIES B PREFERRED OFFERING. In August 1996, conducted a private offering
of Photoloft.com, Inc., a California corporation, series B preferred stock. As
a result, we sold 150,000 shares of our series B preferred stock to Mr. Kris
Chellum for $45,000. Each outstanding share of series B preferred stock was
converted into 1.5 shares of common stock of Photoloft.com, Inc., a California
corporation, in February, 1999.
1996 CONSULTING SERVICES. In 1996 we issued 53,472 shares of common stock
to Mr. Keith Queeney and Mr. Christopher McConn in exchange for services
provided to us.
SERIES C PREFERRED OFFERING. In October, 1997 we entered into an agreement
with Kremen, Father & Partners to provide us with financial consulting services
and assist us with obtaining financing. One of our former directors, Gary
Kremen, was a principal of Kremen, Father & Partners. In exchange for $59,500
worth of services, we issued, from 1997 to 1998, 63,384 shares of series C
preferred stock to Mr. Kremen. Each outstanding share of series C preferred
stock was converted into 1.5 shares of common stock of Photoloft.com, Inc., a
California corporation, in February, 1999. Currently, we no longer contract with
Kremen, Father & Partners for any services.
1998 CONSULTING SERVICES. In 1998 we issued 176,006 shares of common stock
to consultants and employees who provided services to us. Under this offering,
Ms. Lisa Marshall received 15,739 shares of common stock.
45
<PAGE>
EXERCISED STOCK OPTIONS. In February, 1999 we issued the aggregate amount
of 2,844,112 shares of common stock upon the exercise of options to purchase
common stock which were granted to employees, directors and consultants of
Photoloft.com between 1993 and 1998. Under this issuance, Messrs. Jack Marshall
and Chris McConn exercised options to purchase 1,152,493 and 610,181 shares of
common stock, respectively.
STOCK OPTION PLAN. In 1998, we issued options to purchase the aggregate
amount of 2,690,706 shares of common stock to employees, directors and
consultants of Photoloft.com pursuant to Photoloft.com's stock option plan.
These options have an exercise price of $0.48 per share. Under this offering,
Mr. Jack Marshall and Mr. Chris McConn received options to purchase up to
1,135,032 and 454,013 shares of common stock, respectively, with exercise prices
of $0.48 per share. These options vest in 48 monthly installments.
Additionally, from January to October 1999, we have issued options to purchase
the aggregate amount of 699,936 shares of common stock to employees, directors
and consultants of Photoloft.com pursuant to Photoloft.com's stock option plan.
These options were issued at their fair market value on the date of grant and
have exercise prices ranging from $0.48 to $5.25.
In addition to the above, in March 1999, we issued the aggregate amount of
225,000 shares of common stock upon the exercise of options to purchase common
stock which were granted to certain employees, directors, and consultants of
Photoloft.com in March 1999 under Photoloft.com's stock option plan. These
options had an exercise price of $0.50 per share. Under this offering, Mr. John
Marshall exercised options to purchase 13,500 shares of common stock.
REORGANIZATION. On March 1, 1999, Photoloft.com, Inc., a California
corporation entered into the reorganization with a non-operating public company,
Data Growth, Inc., a Nevada corporation incorporated in January, 1996. Under the
Reorganization Agreement, the Photoloft.com, Inc. stockholders received
1.5133753 shares of Data Growth common stock in exchange for each of their
shares of Photoloft.com, Inc. common stock. Additionally, the holders of options
to purchase shares of common stock of Photoloft.com, Inc. terminated their
options and received options to purchase shares of common stock of Data Growth.
As a result of the reorganization with Data Growth, Photoloft.com, Inc. became a
wholly-owned subsidiary of Data Growth. Data Growth adopted the Photoloft.com,
Inc. stock option plan. An aggregate of 9,579,266 shares of common stock and
options to purchase an aggregate of 2,795,734 shares of common stock were issued
to the former Photoloft.com, Inc. stockholders and option holders, respectively,
in the reorganization and the Photoloft.com, Inc. stockholders owned
approximately 77% of Data Growth immediately after the reorganization. As part
of the reorganization, all of the executive officers and directors of Data
Growth resigned and the executive officers and directors of Photoloft.com, Inc.
became the executive officers and directors of Data Growth which changed its
name to Photoloft.com
BAYTREE CAPITAL ASSOCIATES, LLC. In February, 1999 Photoloft.com, Inc.
entered into an agreement with Baytree Capital Associates, LLC which we assumed
after the reorganization with Data Growth, Inc. Under the agreement, Baytree
provided financial consulting and assistance to Photoloft.com, Inc. which
including the structuring and negotiation of a loan, the identification of a
merger candidate and the assistance with the reorganization. For their
services, Baytree received 25,000 shares of our common stock and was paid
$10,000 in non-accountable expense reimbursements. In addition, Baytree has
46
<PAGE>
been granted a 24 month right of first refusal with respect to any subsequent
financings. Baytree also has unlimited "piggyback" registration rights as to its
25,000 shares. Lynn Dixon, a shareholder of Data Growth was instrumental in
locating Data Growth as an entity to be used in the reorganization. Mr. Dixon
was also involved in the negotiation of the terms of the transaction.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
47
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
There are presently two pending legal proceedings to which we are a party.
On April 2, 1999 James Vierra filed an action against us in the United States
District Court for the Northern District of California alleging, among other
things, breaches of fiduciary duties, violation of securities laws, and
employment related claims arising out of the disputed ownership of the ID4Life
division and the termination of Mr. Vierra's employment with us. The case number
is C-99 202280. Mr. Vierra is seeking preliminary and permanent injunctive
relief, restitution, actual and punitive damages. On May 12, 1999 we answered
the complaint and asserted a counterclaim comprising of claims for declaratory
relief, breach of fiduciary duty and breach of contract against Mr. Vierra. Our
counterclaim seeks declaratory relief with regard to the ownership of ID4Life
and damages for breach of contract and breach of fiduciary duty. We believe
that Mr. Vierra's claims are without merit and intend to defend our position
vigorously.
On June 23, 1999 Hewlett-Packard, Co. filed an action against us in the
Santa Clara County Superior Court of California alleging trade secret
misappropriation, unfair competition, and breach of contract arising out of the
activities of one of our employees. Hewlett-Packard is seeking injunctive
relief and damages. The case number is CV 782769. Hewlett-Packard seeks a
preliminary and permanent injunction enjoining us from directly or indirectly
using trade secrets of Hewlett-Packard and for damages. We are presently in
settlement negotiations with Hewlett-Packard with regard to this matter. We
have a preexisting relationship with Hewlett-Packard with respect to the
development and use of certain aspects of our advanced viewing and printing
technologies. See "Item 1. Business -- Products and Services."
To the best of our knowledge, there are presently no other pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of its knowledge, no such actions
against us are contemplated or threatened.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
No shares of our common stock have previously been registered with the
Securities and Exchange Commission or any state securities agency or authority.
Our common stock has been trading on the National Association of Security
Dealers Over-The-Counter Market Bulletin Board since March 1, 1999 under the
symbol "LOFT". The following table sets forth the range of high and low bid
prices of the common stock for each calendar quarterly period since trading
commenced as reported by the National Quotation Bureau, Inc. Prices reported by
the National Quotation Bureau represent prices between dealers, do not include
retail markups, markdowns or commissions and do not represent actual
transactions.
<TABLE>
<CAPTION>
1999 High Low
- ---------------------------------------- ------ ------
<S> <C> <C>
First Quarter (March 1 to March 31). . . $7.375 $4.500
Second Quarter (April 1 to June 30). . . $5.500 $3.625
Third Quarter (July 1 to September 30) . $5.375 $1.562
Fourth Quarter (October 1 to October 31) $2.343 $1.687
</TABLE>
48
<PAGE>
As of October 31, 1999 there were approximately 323 holders of record of
our common stock, which figure does not take into account those stockholders
whose certificates are held in the name of broker-dealers or other nominees.
Dividend Policy
We have not declared or paid cash dividends or made distributions in
the past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intend to retain and
invest future earnings to finance our operations.
Transfer Agent
Our transfer agent for our common stock is Interwest Transfer Co., Inc.,
1981 East 4800 South, Salt Lake City, Utah 84117.
49
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act of 1933, or rule of the Securities and Exchange
Commission under which exemption from registration was claimed.
Transactions described in Items (1) through (10) below refer to the
securities of PhotoLoft.Com, Inc., a California corporation which was the
predecessor entity of the filer of this registration statement, and transactions
described in Items (11) through (15) below refer to the securities of
Photoloft.com, a Nevada corporation which is the filer of this registration
statement.
Unless otherwise indicated, information in this Item 10 regarding shares of
our common stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of Photoloft.com, Inc. common stock at the time of the reorganization.
(1) From 1994 to 1998 we sold the aggregate amount of 2,275,625 shares
of series A preferred stock to 7 investors and 7 consultants in exchange for
$430,125 valued in cash and services provided to Photoloft.com pursuant to a
private offering of our series A preferred stock. The issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(2) In August 1996, we sold the aggregate amount of 150,000 shares of
our series B preferred stock to 1 investor for $45,000 pursuant to a private
offering of our preferred stock. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment, and who represented to
Photoloft.com that the shares were being acquired for investment.
(3) In 1996 and 1997 we issued 67,244 shares of common stock to 3
consultants ,1 director and 1 employee of Photoloft.com in exchange for
services rendered to us valued at $8,667. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
Solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(4) From 1997 to 1998, Photoloft.com issued 63,384 shares of series C
preferred stock to 1 investor in exchange for services valued at $59,500
pursuant to a private offering of our preferred stock. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment,
and who represented to Photoloft.com that the shares were being acquired for
investment.
50
<PAGE>
(5) In 1998 we issued 176,006 shares of common stock to 3 consultants
and 1 employee of Photoloft.com in exchange for services rendered to
Photoloft.com. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Photoloft.com that the shares were being acquired for investment.
(6) In 1998, we issued options to purchase up to 2,690,706 shares of
common stock to 7 employees, 4 directors and 2 consultants of Photoloft.com with
an exercise price of $0.48 per share pursuant to Photoloft.com's stock option
plan. These issuances were made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Rule 701 promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to Photoloft.com that the shares
were being acquired for investment.
(7) From January 1999 to October 1999 Photoloft.com issued options to
purchase the aggregate amount of 924,936 shares of common stock to 13 employees
pursuant to Photoloft.com's stock option plan with exercise prices from $0.48
per share to $5.25 per share. These issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and/or Rule 701 promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Photoloft.com that the shares were being acquired for investment.
(8) In February, 1999 we issued the aggregate amount of 2,844,112
shares of common stock upon the exercise of options to purchase common stock
which were granted to 3 employees, 3 directors and 2 consultants of
Photoloft.com between 1993 and 1998. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(9) In February 1999, we issued 5,650,207 shares of common stock in
exchange and upon the conversion of shares of issued and outstanding series A, B
and C preferred stock of Photoloft.com. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(10) In February 1999, Photoloft.com issued 85,011 shares of common
stock to 4 consultants of Photoloft.com in exchange for services valued at
$42,506. The issuances were made in reliance on Section 4(2) of the Securities
Act of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to Photoloft.com
that the shares were being acquired for investment.
51
<PAGE>
(11) In March 1999, under the terms of the reorganization with Data
Growth, Inc., Photoloft.com issued the aggregate amount of 9,579,266 shares of
common stock to the shareholders of Photoloft.com in exchange for their shares
of common stock of Photoloft.com, Inc., a California corporation. The issuances
were made in reliance on Section 4(2) of the Securities Act of 1933 and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to Photoloft.com that the shares
were being acquired for investment.
(12) In March 1999, under the terms of the reorganization with Data
Growth, Inc., the holders of options to purchase common stock of Photoloft.com,
Inc. exchanged their options for options to purchase the aggregate amount of
2,795,734 shares of common stock of Photoloft.com. These issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(13) In March 1999, pursuant to the terms of the reorganization with
Data Growth, Inc. Photoloft.com conducted a private offering of its common
stock. Pursuant to that offering, a total of 2,000,000 shares of common stock
were sold for total cash consideration of $1,000,000. The issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to Photoloft.com
that the shares were being acquired for investment.
(14) In March 1999, Photoloft.com issued 225,000 shares of common stock
upon the exercise of options to purchase common stock held by employees,
directors and consultants of Photoloft.com. These options were issued in 1999
and had exercise prices of $0.50 per share. These issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(15) In March 1999, Photoloft.com issued 25,000 shares of common stock
to Baytree Capital Associates pursuant to the terms of a Letter Agreement with
Baytree Capital Associates for financial business consulting services. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Photoloft.com that the shares were being
acquired for investment.
52
<PAGE>
(16) In September 1999, Photoloft.com issued warrants to purchase up to
300,000 shares of common stock to Xoom.com in consideration for services
performed for Photoloft.com by Xoom.com pursuant to a services agreement. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Photoloft.com that the shares were being
acquired for investment.
53
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The descriptions in this Item and in other sections of this registration
statement of our securities and various provisions of our Articles of
Incorporation and our Bylaws are summaries. Statements contained in this
registration statement relating to such provisions are not necessarily complete,
and reference is made to the Articles of Incorporation and Bylaws, copies of
which have been filed with the Securities and Exchange Commission as exhibits to
this registration statement, and provisions of applicable law.
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $.001 per share, and 500,000 shares of preferred stock, par value
$.001. As of October 31, 1999, 12,457,641 shares of our common stock were
issued and outstanding and 3,800,000 shares of common stock were reserved for
issuance upon exercise of outstanding options. Only our common stock is being
registered under the Securities Exchange Act of 1934 pursuant to this
registration statement. As of October 31, 1999, no shares of our preferred
stock were issued and outstanding. See "Item 2. Financial Information--Risk
Factors, Operating Results and Financial Condition--Anti-Takeover Provisions And
Our Right To Issue preferred stock Could Make A Third-Party Acquisition Of Us
Difficult."
Description of common stock
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when, as and if
declared by the Board of Directors from funds legally available therefor. No
holder of any shares of our common stock has a pre-emptive right to subscribe
for any of our securities, nor are any common shares subject to redemption or
convertible into other of our securities. Upon liquidation, dissolution or
winding up of Photoloft, and after payment of creditors and preferred
stockholders, if any, the assets will be divided pro-rata on a share-for-share
basis among the holders of the shares of common stock. All shares of common
stock now outstanding are fully paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the
election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of the common stock do not have
cumulative voting rights, so the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the Board of Directors.
Anti-Takeover Effects of Various Provisions of Nevada Law and Our Articles of
Incorporation and Bylaws
We are incorporated under the laws of the State of Nevada and are therefore
subject to various provisions of the Nevada corporation laws which may have the
effect of delaying or deterring a change in the control or management of
Photoloft.
54
<PAGE>
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations like us having at
least 200 stockholders, prohibits an "interested stockholder" from entering into
a "combination" with the corporation, unless certain conditions are met. A
"combination" includes
-- any merger with an "interested stockholder," or any other corporation
which is or after the merger would be, an affiliate or associate of the
interested stockholder;
-- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions, to
an "interested stockholder," having:
-- an aggregate market value equal to 5% or more of the aggregate
market value of the corporation's assets,
-- an aggregate market value equal to 5% or more of the aggregate
market value of all outstanding shares of the corporation, or
-- representing 10% or more of the earning power or net income of the
corporation,
-- any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate market
value equal to 5% or more of the aggregate market value of all the
outstanding shares of the corporation;
-- the adoption of any plan or proposal for the liquidation or dissolution
of the corporation proposed by the "interested stockholder,"
-- certain transactions which would have the effect of increasing the
proportionate share of outstanding shares of the corporation owned by the
"interested stockholder,"
-- the receipt of benefits, except proportionately as a stockholder, of any
loans, advances or other financial benefits by an "interested
stockholder."
An "interested stockholder" is a person who:
-- directly or indirectly owns 10% or more of the voting power of the
outstanding voting shares of the corporation or
-- an affiliate or associate of the corporation which at any time within
three years before the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the Board of Directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the Articles of Incorporation are met and either:
55
<PAGE>
-- the Board of Directors of the corporation approves, prior to such person
becoming an "interested stockholder," the combination or the purchase of
shares by the "interested stockholder" or the combination is approved by
the affirmative vote of holders of a majority of voting power not
beneficially owned by the "interested stockholder" at a meeting called no
earlier than three years after the date the "interested stockholder"
became such or
-- the aggregate amount of cash and the market value of consideration other
than cash to be received by holders of common shares and holders of any
other class or series of shares meets the minimum requirements set forth
in Sections 78.411 through 78.443, inclusive, and prior to the
consummation of the combination, except in limited circumstances, the
"interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Section 78.378-78.379, prohibits an acquiror, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While we do not currently exceed these thresholds, we may
well do so in the near future. In addition, although we do not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
we may do so in the future. Therefore, it is likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquiror crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquiror to consider the voting
rights of the acquiror's shares no more than 50 days, unless the acquiror agrees
to a later date, after the delivery by the acquiror to the corporation of an
information statement which sets forth the range of voting power that the
acquiror has acquired or proposes to acquire and certain other information
concerning the acquiror and the proposed control share acquisition. If no such
request for a stockholders' meeting is made, consideration of the voting rights
of the acquiror's shares must be taken at the next special or annual
stockholders' meeting. If the stockholders fail to restore voting rights to the
acquiror or if the acquiror fails to timely deliver an information statement to
the corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call certain of the acquiror's shares for redemption.
Our Articles of Incorporation and Bylaws do not currently permit us to call an
acquiror's shares for redemption under these circumstances. The Control Share
Acquisition Statute also provides that the stockholders who do not vote in favor
of restoring voting rights to the Control Shares may demand payment for the
"fair value" of their shares, which is generally equal to the highest price paid
in the transaction subjecting the stockholder to the statute.
56
<PAGE>
Certain provisions of our Bylaws which are summarized below may affect
potential changes in control of Photoloft. The Board of Directors believes that
these provisions are in the best interests of stockholders because they will
encourage a potential acquiror to negotiate with the Board of Directors, which
will be able to consider the interests of all stockholders in a change in
control situation. However, the cumulative effect of these terms maybe to make
it more difficult to acquire and exercise control of Photoloft and to make
changes in management more difficult.
The Bylaws provide the number of directors of Photoloft shall be
established by the Board of Directors, but shall be no less than one. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors.
The Bylaws further provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed all of the holders of common stock.
We are not aware of any proposed takeover attempt or any proposed attempt
to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of Photoloft.
Application of California General Corporation Law
Although we are incorporated in Nevada, our headquarters is in the State of
California. Section 2115 of the California General Corporation Law provides
that certain provisions of the California General Corporation Law shall be
applicable to a corporation organized under the laws of another state to the
exclusion of the law of the state in which it is incorporated, if the
corporation meets certain tests regarding the business done in California and
the number of its California stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations
with outstanding securities listed on the New York or American stock Exchange,
or with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 60% of our outstanding voting securities
are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California General Corporation Law regarding the following matters are made
applicable to the exclusion of the law of the State of Nevada:
-- general provisions and definitions;
-- annual election of directors;
57
<PAGE>
-- removal of directors without cause;
-- removal of directors by court proceedings;
-- filling of director vacancies where less than a majority in office
were elected by the stockholders;
-- directors' standard of care;
-- liability of directors for unlawful distributions;
-- indemnification of directors, officers and others;
-- limitations on corporate distributions of cash or property;
-- liability of a stockholder who receives an unlawful distribution;
-- requirements for annual stockholders meetings;
-- stockholders' right to cumulate votes at any election of directors;
-- supermajority vote requirements;
-- limitations on sales of assets;
-- limitations on mergers;
-- reorganizations;
-- dissenters' rights in connection with reorganizations;
-- required records and papers;
-- actions by the California Attorney General; and
-- rights of inspection.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada limits the liability of officers and
directors for breach of fiduciary duty except in certain specified
circumstances, and also empowers corporations organized under Nevada Law to
indemnify officers, directors, employees and others from liability in certain
circumstances such as where the person successfully defended himself on the
merits or acted in good faith in a manner reasonably believed to be in the best
interests of the corporation.
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of a directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his or her
fiduciary duties as a director or officer except in certain specified instances.
We may also adopt by-laws which provide for indemnification to the full extent
permitted under law which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with us to the maximum extent and under all circumstances permitted
by law.
There is presently one material pending legal proceeding to which a
director, officer and employee of ours is a party. See "Item 8 Legal
Proceedings". There is no other pending litigation or proceeding involving one
of our directors, officers, employees or other agents as to which
indemnification is being sought, and we are not aware of any pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
We have purchased directors and officers liability insurance to defend and
indemnify directors and officers who are subject to claims made against them for
their actions and omissions as directors and officers of Photoloft. The
insurance policy provides standard directors and officers liability insurance in
the amount of $5,000,000.
58
<PAGE>
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses,
including attorneys' fees and disbursements, incurred in connection with, or in
any way arising out of, any claim, action or proceeding, whether civil or
criminal, against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons
pursuant to the foregoing provisions or otherwise, we have 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.
ITEM 13. FINANCIAL STATEMENTS
Reference is made to the Financial Statements together with the notes
thereto and the report thereon from BDO Seidman, LLP appearing on pages F-1
through F-21 of this Form 10-SB.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
59
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Balance sheets F-3
Statements of operations F-4
Statements of shareholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7 - F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
PhotoLoft.com, Inc.
We have audited the accompanying balance sheet of PhotoLoft.com, Inc. (the
Company) as of December 31, 1998, and the related statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1998 and
1997. 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 in accordance with generally accepted auditing
principles. Those standards require that we plan and perform our audits 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PhotoLoft.com, Inc. as of
December 31, 1998, and the results of its operations and cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/S/ BDO Seidman, LLP
San Jose, California
April 2, 1999
F-2
<PAGE>
PHOTOLOFT.COM
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
(Unaudited)
========================================================================= ============ =============
<S> <C> <C>
ASSETS (Note 6)
CURRENT ASSETS:
Cash and cash equivalents (Note 10) . . . . . . . . . . . . . . . . . . $ 486,800 $ 370,000
Note receivable, current portion (Note 2) . . . . . . . . . . . . . . . 2,099,200 658,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 28,000 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . - 183,100
- ------------------------------------------------------------------------- ------------ -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,614,000 1,211,100
PROPERTY AND EQUIPMENT, net (Note 3). . . . . . . . . . . . . . . . . . . 203,200 65,700
NOTE RECEIVABLE, less current portion (Note 2). . . . . . . . . . . . . . - 1,656,700
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 5,500
- ------------------------------------------------------------------------- ------------ -------------
$ 2,827,700 $ 2,939,000
========================================================================= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,100 $ 129,500
Accrued expenses (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 79,800 73,500
Deferred revenue (Note 5) . . . . . . . . . . . . . . . . . . . . . . . 7,000 36,300
Deferred income taxes (Note 9). . . . . . . . . . . . . . . . . . . . . 327,200 263,600
- ------------------------------------------------------------------------- ------------ -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 544,100 502,900
DEFERRED INCOME TAXES (Note 9). . . . . . . . . . . . . . . . . . . . . . 10,600 666,700
- ------------------------------------------------------------------------- ------------ -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554,700 1,169,600
- ------------------------------------------------------------------------- ------------ -------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 1, 6, 10 and 12)
SHAREHOLDERS' EQUITY: (Notes 1, 8 and 12)
Preferred stock, $0.001 par value; 500,000 shares authorized; no
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . - -
Common stock, $0.001 par value; 50,000,000 shares authorized;
12,454,268 and 6,650,145 shares issued and outstanding, respectively. 12,400 6,700
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 2,695,900 648,200
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . (435,300) 1,114,500
- ------------------------------------------------------------------------- ------------ -------------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . . 2,273,000 1,769,400
- ------------------------------------------------------------------------- ------------ -------------
$ 2,827,700 $ 2,939,000
========================================================================= ============ =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PHOTOLOFT.COM
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
-------------------------- ------------------------
1999 1998 1998 1997
=========================================== ============ ============ =========== ===========
(UNAUDITED) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 10). . . . . . . . . . . . . $ 85,500 $ 497,400 $ 674,300 $ 574,200
COST OF REVENUES. . . . . . . . . . . . . . 52,000 62,700 113,000 60,800
- ------------------------------------------- ------------ ------------ ----------- -----------
GROSS PROFIT (LOSS) . . . . . . . . . . . . 33,500 434,700 561,300 513,400
- ------------------------------------------- ------------ ------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing . . . . . . . . . . . 31,100 13,600 325,000 32,200
General and administrative (Note 7) . . . 1,065,600 315,400 999,000 642,200
TOTAL OPERATING EXPENSES. . . . . . . . . . 1,096,700 329,000 1,324,000 674,400
- ------------------------------------------- ------------ ------------ ----------- -----------
(LOSS) INCOME FROM OPERATIONS . . . . . . . (1,063,200) 105,700 (762,700) (161,000)
- ------------------------------------------- ------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Sale of trade name (Note 2) . . . . . . . - - 3,100,000 -
Interest income . . . . . . . . . . . . . 40,500 - 76,900 -
Interest expense. . . . . . . . . . . . . - (1,700) (500) -
Other . . . . . . . . . . . . . . . . . . (700) - (2,400) (3,700)
- ------------------------------------------- ------------ ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE). . . . . . . . 39,800 (1,700) 3,174,000 (3,700)
- ------------------------------------------- ------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . (1,023,400) 104,000 2,411,300 (164,700)
INCOME TAX (BENEFIT) EXPENSE (Note 9) . . . (407,600) 41,600 748,000 800
- ------------------------------------------- ------------ ------------ ----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . $ (615,800) $ 62,400 $1,663,300 $ (165,500)
=========================================== ============ =========== ===========
Deemed dividend on conversion of preferred
stock into common stock . . . . . . . . . 934,000 - - -
- ------------------------------------------- ------------ ------------ ----------- -----------
Net loss available to common shareholders . $(1,549,800) - - -
=========================================== ============ ============ =========== ===========
Basic earnings (loss) per share . . . . . . $ (0.14) $ 0.01 $ 0.26 $ (0.03)
=========================================== ============ ============ =========== ===========
Diluted earnings (loss) per share . . . . . $ (0.14) $ 0.01 $ 0.18 $ (0.03)
=========================================== ============ ============ =========== ===========
Basic weighted-average common shares
outstanding . . . . . . . . . . . . . . . 10,763,700 6,388,700 6,488,300 6,297,000
- ------------------------------------------- ------------ ------------ ----------- -----------
Stock options . . . . . . . . . . . . . . . - 2,799,400 2,799,400 -
- ------------------------------------------- ------------ ------------ ----------- -----------
Diluted weighted-average common shares
outstanding . . . . . . . . . . . . . . . 10,763,700 9,188,100 9,287,700 6,297,000
=========================================== ============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PHOTOLOFT.COM
STATEMENTS OF SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
(Accumulated
Additional Deficit)
Common Stock Paid-in Retained
-----------------------
Shares Amount Capital Earnings Total
====================================== ========== =========== =========== ============ ===========
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997. . . . . . . 6,267,448 $ 6,300 $ 497,200 $ (383,300) $ 120,200
Issuance of stock for services . . . . 59,025 100 18,200 - 18,300
Net loss . . . . . . . . . . . . . . . - - - (165,500) (165,500)
- -------------------------------------- ---------- ----------- ----------- ------------ -----------
BALANCES, December 31, 1997. . . . . . 6,326,473 6,400 515,400 (548,800) (27,000)
Issuance of stock for services . . . . 323,672 300 132,800 - 133,100
Net income . . . . . . . . . . . . . . - - - 1,663,300 1,663,300
- -------------------------------------- ---------- ----------- ----------- ------------ -----------
BALANCES, December 31, 1998. . . . . . 6,650,145 6,700 648,200 1,114,500 1,769,400
Exercise of stock options (unaudited). 3,069,112 3,000 112,300 - 115,300
Issuance of common stock for services
(unaudited). . . . . . . . . . . . . 85,011 100 42,400 - 42,500
Deemed dividend on beneficial
conversion of preferred stock into
common stock (unaudited) . . . . . . - - 934,000 (934,000) -
Issuance of common stock in
connection with reverse merger
(unaudited). . . . . . . . . . . . . 625,000 600 4,900 - 5,500
Sale of common stock, net of stock
issuance costs of approximately
$56,500 (unaudited). . . . . . . . . 2,025,000 2,000 954,100 - 956,100
Net loss (unaudited) . . . . . . . . . - - - (615,800) (615,800)
- -------------------------------------- ---------- ----------- ----------- ------------ -----------
BALANCES, June 30, 1999 (unaudited). . 12,454,268 $ 12,400 $ 2,695,900 $ (435,300) $2,273,000
====================================== ========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PHOTOLOFT.COM
STATEMENTS OF CASH FLOWS
(Note 11)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1999 1998 1998 1997
===================================================== ============ ============ ============ ==========
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . $ (615,800) $ 62,400 $ 1,663,300 $(165,500)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . 15,200 4,700 13,200 8,600
Allowance for doubtful accounts . . . . . . . . - - (75,100) 82,800
Gain on sale of trade name. . . . . . . . . . . - - (3,100,000) -
Issuance of stock for services. . . . . . . . . 42,500 55,900 133,100 18,300
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . - - 170,700 (130,600)
Prepaid expenses and other current assets . . (28,000) (59,400) 6,600 47,300
Deferred income taxes . . . . . . . . . . . . (409,400) 41,600 747,200 -
Accounts payable. . . . . . . . . . . . . . . 600 (19,400) 65,000 58,100
Accrued expenses. . . . . . . . . . . . . . . 6,300 (900) (21,300) 94,800
Deferred revenue. . . . . . . . . . . . . . . (29,300) - 36,300 -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES . (1,017,900) 84,900 (361,000) 13,800
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal received under note receivable. . . . . . 215,500 - 785,300 -
Purchase of property and equipment. . . . . . . . . (152,700) (3,800) (51,100) (12,200)
Other assets. . . . . . . . . . . . . . . . . . . . (5,000) 600 (3,200) (2,000)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . 57,800 (3,200) 731,000 (14,200)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of stock. . . . . . . . . . 1,120,900 - - -
Payment of stock issuance costs . . . . . . . . . . (44,000) - - -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . 1,076,900 - - -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. 116,800 81,700 370,000 (400)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, beginning of period. . . . 370,000 - - 400
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . $ 486,800 $ 81,700 $ 370,000 $ -
===================================================== ============ ============ ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
1. SUMMARY OF ACCOUNTING POLICIES
The Company
PhotoLoft.com, Inc. (formerly AltaVista Technology, Inc.) (the Company) a
California corporation, was incorporated on November 17, 1993. The Company
provides users with advanced, easy-to-use technology to instantly create,
share and print Internet photo albums.
On March 1, 1999, 100% of the Company's outstanding common stock was
acquired by PhotoLoft.com (formerly Data Growth, Inc., a publicly traded
shell corporation) (PhotoLoft), a Nevada Corporation, in exchange for
9,579,268 shares of PhotoLoft's $.001 par value common stock. For
accounting purposes, the acquisition has been treated as the acquisition of
PhotoLoft, with the Company as the acquiror (reverse acquisition).
The shares held by the shareholders of PhotoLoft prior to the acquisition
(625,000 shares after reflecting a 2.46 to 1 reverse stock split effected
by PhotoLoft immediately prior to the acquisition) have been recognized as
if they were issued in connection with the acquisition of PhotoLoft by the
Company. Since PhotoLoft prior to the reverse acquisition was a public
shell corporation with no significant operations, pro forma information
giving effect to the acquisition is not presented. All shares and per share
data prior to the acquisition have been restated to reflect the stock
issuance as a recapitalization of the Company. The historical information
prior to March 1, 1999 is that of the Company.
Use of 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.
F-7
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Cash and Cash Equivalents
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated economic useful lives of the
assets, generally ranging from five to seven years.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles for impairment. When events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company writes the asset down to its estimated fair value.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value.
Note receivable:
The fair value for the note receivable is estimated based on current
interest rates available to the Company for investments with similar
terms and remaining maturities.
F-8
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Short-term debt:
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
As of December 31, 1998, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
Revenue Recognition
The Company recognizes revenues when earned or upon product shipment,
provided no significant obligations remain, and collectibility is probable.
Advertising
The cost of advertising is expensed as incurred. Advertising costs for the
six month periods ended June 30, 1999 and 1998 aggregated $20,300 and
$1,000 respectively (unaudited). Advertising costs for the years ended
December 31, 1998 and 1997 aggregated $26,000 and $4,100, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires an asset and liability approach. This approach results in
the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets
and liabilities. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation allowance when
management believes it is more likely than not that the deferred tax assets
will not be realized.
F-9
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged assets or liabilities, that
are attributable to the hedged risk, or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its
financial statements.
Earnings Per Common Share
During 1998, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. For the six months ended
June 30, 1999 and the year ended December 31, 1997, options to purchase
3,263,065 and 2,844,112 shares of common stock, respectively, were excluded
from computation of diluted earnings per share since their effect would be
antidilutive. For the six months ended June 30, 1998 and the year ended
December 31, 1998, options to purchase 206,878 and 2,728,539 shares of
common stock, respectively, were excluded from the computation of diluted
earnings per share because the options' exercise price was greater than the
estimated average fair market value of the common shares.
F-10
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Basis of Presentation
The accompanying balance sheet as of June 30, 1999 and the statements of
operations and cash flows for each of the six month periods ended June 30,
1999 and 1998 have not been audited. However, in the opinion of management,
they include all normal recurring adjustments necessary for a fair
presentation of the financial position and the results of operations for
the periods presented. The results of operations for the six months ended
June 30, 1999 are not necessarily indicative of results to be expected for
any future period.
2. SALE OF TRADE NAME
On July 31, 1998, the Company sold all its rights in and to the AltaVista
mark and the internet domain name "altavista.com" to Digital Equipment
Corporation for a total of $3,100,000, payable $350,000 in cash and
$2,750,000 in a promissory note. The note, payable in 12 quarterly
installments commencing October 1, 1998, bears interest at 7% annually.
In October 1999, Digital Equipment Corporation paid the company $1,804,700
in full settlement of the note, at which time the Company recorded a loss
of $75,200. Accordingly, the balance sheet as of June 30, 1999 classifies
this note as a current asset (unaudited).
F-11
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
(UNAUDITED)
============================= ============ ============
<S> <C> <C>
Office equipment. . . . . . . $ 239,500 $ 90,500
Furniture and fixtures. . . . 13,000 9,300
- ----------------------------- ------------ ------------
252,500 99,800
Less accumulated depreciation 49,300 34,100
- ----------------------------- ------------ ------------
$ 203,200 $ 65,700
============================= ============ ============
</TABLE>
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
(UNAUDITED)
================== =========== ============
<S> <C> <C>
Vacation . . . . . $ 39,800 $ 24,900
Consulting fees. . 20,000 20,000
Salaries and wages 19,900 19,900
Other. . . . . . . 100 8,700
- ------------------ ----------- ------------
$ 79,800 $ 73,500
================== =========== ============
</TABLE>
5. DEFERRED REVENUE
Deferred revenue consists of quarterly and annual subscriptions for web
hosting services. Revenue from the subscriptions is recognized ratably over
the term of the subscriptions.
F-12
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain equipment under operating
leases. The facility leases require the Company to pay certain maintenance
and operating expenses, such as utilities, property taxes and insurance
costs. Rent expense for the six month periods ended June 30, 1999 and 1998
was $54,300 and $10,600, respectively (unaudited). Rent expense related to
these operating leases for the years ended December 31, 1998 and 1997 was
$39,900 and $18,700, respectively.
A summary of the future minimum lease payments required under
non-cancelable operating leases with terms in excess of one year, follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
============================= ========
<S> <C>
1999. . . . . . . . . . . . . $ 95,700
2000. . . . . . . . . . . . . 91,300
2001. . . . . . . . . . . . . 51,600
2002. . . . . . . . . . . . . 3,600
- ----------------------------- --------
Future minimum lease payments $242,200
============================= ========
</TABLE>
In September 1998, the Company entered into an agreement whereby the
Company acts as guarantor of a third party in a sub-lease agreement. The
sub-lease agreement expires in September 2000.
Debt Agreement
The Company maintains a $200,000 revolving line of credit with a bank that
is secured by all corporate assets, including accounts receivable,
inventory and intangible assets. The loan is limited to $100,000 until the
Company fulfills certain milestone covenants and pays an additional loan
fee. The line of credit accrues interest at 2% over the Lender's Prime
Rate. Advances against the line of credit are limited to 70% of eligible
accounts receivable. As of June 30, 1999 and December 31, 1998, the line of
credit had no outstanding balance.
F-13
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
7. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company paid approximately
$20,000 for consulting services from a shareholder.
8. SHAREHOLDERS' EQUITY
Preferred Stock
The Company had authorized 5,000,000 shares of Preferred Stock that may be
issued in one or more series. As of December 31, 1998, the Company had
2,489,009 Preferred shares issued and outstanding, which are Series A, B
and C. Each series of Preferred Stock was identical in respect to rights
and preferences, as follows:
Each share of Preferred Stock was entitled to receive cash dividends equal
to $.20 per share per annum, payable prior and in preference to any
distribution to the holders of Common Stock. The rights to such dividends
were not cumulative.
Each share of Preferred Stock was convertible into such number of Common
Stock as determined by dividing $.20 by the then applicable conversion
price in effect at the time of the conversion. Due to the conversion of the
Company's preferred stock into common stock and a 1.513 stock split in
February 1999, as well as the recapitalization of the Company in connection
with the reverse acquisition in March 1999, the statements of shareholders'
equity (deficiency) and per share data have been restated (Note 12).
Stock Options
Options are exercisable as determined by the Board of Directors on the date
of grant and expire not more than ten years after the date of grant. The
Company applies Accounting Principles Board (APB) No. 25, Accounting for
Stock Issued to Employees, and Related Interpretations in Accounting for
Stock Options Issued to Employees. Under APB Opinion No. 25, employee
compensation cost is recognized when the estimated fair value of the
underlying stock on date of grant exceeds the exercise price of the stock
option. For stock options issued to non-employees, the Company applies SFAS
No. 123, Accounting for Stock-Based Compensation, which requires the
recognition of compensation cost based upon the fair value of stock options
at the grant date using the Black-Scholes option pricing model.
F-14
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
A summary of the status of the Company's stock option plan as of December
31, 1998 and 1997 and changes during the years then ended (restated to
reflect the 1.513 stock split in February 1999), is presented in the
following table:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
December 31, 1998 December 31, 1997
---------------------- ----------------------
Wtd.-Avg. Wtd.-Avg.
Shares Exer. Price Shares Exer. Price
========= =========== ========= ===========
<S> <C> <C> <C> <C>
Beginning 2,844,112 $ 0.007 2,806,278 $ 0.001
Granted 2,690,705 $ 0.480 37,834 $ 0.480
Exercised/forfeited - - - -
--------- ---------
Ending 5,534,817 $ 0.237 2,844,112 $ 0.007
========= =========== ========= ===========
Exercisable at year-end 3,194,588 2,795,400
========= =========
Wtd.-avg. fair value of options
granted during the year $ 0.480 $ 0.480
=========== ===========
</TABLE>
F-15
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Wtd.-Avg.
Range of Number Remaining Wtd.-Avg. Number Wtd.-Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/98 Price
======== =========== =========== ========== =========== =========
<S> <C> <C> <C> <C> <C>
$ 0.001 2,806,278 5.26 years $ 0.001 2,806,278 $ 0.001
$ 0.480 2,728,539 9.54 years $ 0.480 388,310 $ 0.480
----------- -----------
5,534,817 $ 0.237 3,194,588 $ 0.059
=========== ========== =========== =========
</TABLE>
While the Company continues to apply APB Opinion No. 25, SFAS No. 123,
Accounting for Stock-Based Compensation, requires the Company to provide
pro forma information regarding net income (loss) as if compensation cost
for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed by SFAS No. 123. The Company
estimates the fair value of stock options at the grant date by using the
minimum value method with the following assumptions used for the grants in
1998 and 1997, respectively: dividend yield of 0; risk-free interest rate
of 6.0% and 6.6%; and an expected life of five years for all plan options.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) would have been reduced (increased) to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
- ----------- ---------- ----------
<S> <C> <C>
As reported $1,663,300 $(165,500)
=========== ========== ==========
Pro forma . $1,317,800 $(171,300)
=========== ========== ==========
</TABLE>
F-16
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
9. INCOME TAXES
For the years ended December 31, 1998 and 1997, income tax expense
comprises:
<TABLE>
<CAPTION>
1998 CURRENT DEFERRED TOTAL
======= ======= ======== ========
<S> <C> <C> <C>
FEDERAL $ - $628,600 $628,600
STATE . 800 118,600 119,400
- ------- ------- -------- --------
$ 800 $747,200 $748,000
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 Current Deferred Total
======= ======= ======== =====
<S> <C> <C> <C>
Federal $ - $ - $ -
State . 800 - 800
- ------- ------- -------- -----
$ 800 $ - $ 800
======= ======= ======== =====
</TABLE>
The following summarizes the differences between the income tax expense
(benefit) and the amount computed by applying the Federal income tax rate
of 34% in 1998 and 1997 to income (loss) before income taxes:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
========================================== ========== =========
<S> <C> <C>
Federal income tax at statutory rate . . . $ 819,800 $(56,000)
State income taxes, net of federal benefit 138,200 (9,400)
(Decrease) increase in valuation allowance (211,200) 65,700
Other, net . . . . . . . . . . . . . . . . 1,200 500
- ------------------------------------------ ---------- ---------
$ 748,000 $ 800
========================================== ========== =========
</TABLE>
F-17
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
(UNAUDITED)
================================= =========== ============
<S> <C> <C>
Loss carryforwards. . . . . . . . $ 489,800 $ 166,600
Reserves not currently deductible 16,500 16,500
- --------------------------------- ----------- ------------
Total deferred tax assets . . . . $ 506,300 $ 183,100
================================= =========== ============
Installment sale of trade name. . $ (833,500) $ (919,700)
Depreciation. . . . . . . . . . . (10,600) (10,600)
- --------------------------------- ----------- ------------
Total deferred tax liabilities. . $ (844,100) $ (930,300)
================================= =========== ============
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards
available to reduce future taxable income, if any, of approximately
$453,700 and $194,100 for Federal and California state tax purposes,
respectively. The benefits from these carryforwards expire in various years
through 2018.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryover may be
limited, if a cumulative change of ownership of more than 50% occurs within
any three-year period. The Company has not determined if such a change in
ownership has occurred.
10. CONCENTRATIONS
Major Customers
During the six month periods ended June 30, 1999 and 1998 and the years
ended December 31, 1998 and 1997, the Company had no customers that
comprised more than 10% of net revenues.
F-18
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents. The
Company places its cash and cash equivalents with high quality financial
institutions. As of December 31, 1998, the Company had deposits at one
financial institution that aggregated $350,000, of which $100,000 is
insured by the Federal Deposit Insurance Corporation.
11. STATEMENT OF CASH FLOWS
During the six month periods ended June 30, 1999 and 1998, non-cash
financing activities included the issuance of 85,011 and 133,731 shares of
common stock for services aggregating approximately $42,500 and $55,900,
respectively (unaudited). During the six month period ended June 30, 1999,
additional non-cash financing activities included the issuance of 25,000
shares of common stock for the payment of stock issuance costs totaling
$12,500 and a deemed dividend of $934,000 relating to the beneficial
conversion of its preferred stock into common stock (unaudited). During the
years ended December 31, 1998 and 1997, non-cash financing activities
included the issuance of 323,672 and 59,025 shares of common stock for
services aggregating approximately $133,100 and $18,300, respectively.
During the six month periods ended June 30, 1999 and 1998, the Company paid
$0 and $1,700 for interest, respectively, and $1,800 and $0 for income
taxes, respectively (unaudited). During 1998 and 1997, the Company paid
$2,800 and $3,700 for interest, respectively, and $800 for income taxes in
both years.
12. SUBSEQUENT EVENTS
In February 1999, the Company entered into an employment agreement with one
of its officers which provides for a severance payment of base salary and
bonus compensation through December 31, 2001, as well as immediate vesting
of all outstanding stock options if the officer is terminated without
cause.
In February 1999, 2,844,112 stock options were exercised for common and
85,011 shares of common stock were issued for services. Also in stock,
February 1999, the Company converted its preferred stock into common stock
on a 1 to 1.5 basis.
F-19
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Immediately following these issuances of common stock and the conversion
of preferred stock into common stock, the Company did a 1 to 1.513 stock
split in anticipation of the Company entering into an acquisition agreement
with a publicly traded shell corporation. On a retroactive basis, the
conversion and stock split resulted in the Company having 6,650,145 shares
of common stock issued and outstanding as of December 31, 1998.
Due to the conversion of the preferred stock into common stock and the
1.513 stock split, the effective exercise price of the stock options
originally granted at $0.75 was now $0.33; therefore, on March 1, 1999, the
Company adjusted the exercise price to $0.48.
As more fully described in Note 1, the Company completed a reverse
acquisition with PhotoLoft.com on March 1, 1999.
Immediately following the closing of the acquisition, the Company completed
a Private Placement of 2,000,000 shares of common stock aggregating
$1,000,000. Additionally, the Company issued 25,000 shares of restricted
common stock as payment for a portion of the underwriter's commission and
adopted the 1999 Stock Option Plan (the Plan). The Company then granted
225,000 options under the Plan, which vested immediately and were exercised
in March 1999.
Also in March 1999, the Company entered into an agreement to obtain public
relations services valued at a minimum of $6,000 per month through March
2000. The Company expects to amend the agreement to include an additional
$4,000 per month in services. The services provided will aggregate
approximately $100,000 over the life of the agreement.
In April 1999, a former employee and co-founder of ID 4 Life, a product of
the Company, filed an action against the Company arising out of the
disputed ownership of the ID4Life division of the Company and the
termination of that person's employment. It is the opinion of management
that the outcome of this matter will not materially affect the consolidated
operations or the consolidated financial position of the Company.
F-20
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
During the six months ended June 30, 1999, the Company granted an
additional 572,359 options under the 1999 stock option plan (unaudited).
In June 1999, a third party corporation filed an action against the Company
alleging trade secret misappropriations, unfair competition, and breach of
contract arising out of the activities of one of the Company's employees.
The Company is presently in settlement negotiations with the plaintiff, and
it is the opinion of management that the outcome of this matter will not
materially affect the consolidated operations or the consolidated financial
position of the Company (unaudited).
In June 1999, the Company amended its stock option plan (the Plan). Under
the Plan, 3,800,000 shares of common stock are available for options which
may be granted to employees, directors, and consultants (unaudited).
F-21
<PAGE>
(A) EXHIBITS
The following exhibits are filed with this registration statement:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Reorganization dated as of February 16, 1999
by and among Data Growth, Inc. Gary B. Peterson
and the Registrant.
*3.1 Articles of Incorporation of the Registrant.
*3.2 Certificate of Amendment to the Articles of Incorporation of
the Registrant.
*3.3 By-Laws of Registrant.
*4.1 Sample Stock Certificate of the Registrant.
*4.2 See Exhibit Nos. 3.1, 3.2 and 3.3.
*10.1 Form of Series A preferred stock Purchase Agreement
*10.2 Series B preferred stock Purchase Agreement dated August 1, 1996
by and among Kris Chellam and the Registrant.
*10.3 OEM/ Re-Marketing Agreement, dated November 15, 1996,
by and between ArcSoft, Inc. and the Registrant.
*10.4 Software License Agreement, dated January 22, 1997 by and
between Seattle Filmworks, Inc, and the Registrant.
*10.5 Online Distribution Agreement, dated April 24, 1997 by and
between KC Audio and the Registrant.
*10.6 OEM License Agreement, dated May 22, 1998, by and
between AITech International and the Registrant.
*10.7 Series C Preferred Stock Purchase Agreement dated June 5, 1997
by and among Gary Kremen and the Registrant.
*10.8 Distribution and Re-Publishing Agreement dated October 17, 1997
by and between Softpool, a division of infoMedia
GmbH and the Registrant.
*10.9 Engagement letter dated October 24, 1997 between Gary
Kremen and the Registrant.
<PAGE>
*10.10 Letter Agreement dated February 12, 1998 by and between
Venture Banking Group and the Registrant.
*10.11 Distribution Agreement dated March, 1998 by and between
Kuni Research International Corporation and the Registrant.
*10.12 Lease Agreement dated July 8, 1998 by and between The
Manufacturer's Life Insurance Company, (U.S.A.) Company,
Ltd., and the Registrant.
10.13 [Intentionally Blank / Updated form of Agreement filed as
Exhibit 10.32]
*10.14 Sublease Agreement dated September 1, 1998 by and
between Surefire Verification, Inc. and the Registrant.
+10.15 Consulting Services Agreement, dated October 22, 1998 by
and between Hewlett-Packard Company and the Registrant.
*10.16 Amendment to an Agreement with Infomedia, dated January 15, 1999.
*10.17 Sublease Agreement dated February 1, 1999 by and between
Summit Microelectronics and the Registrant.
*10.18 Amendment No. 1 to Consulting Services Agreement
(Exhibit 10.15 above), dated February 9, 1999 by and
between Hewlett-Packard Company and the Registrant
*10.19 Letter Agreement, dated February 10, 1999 by and between
Bay Tree Capital Associates, LLC and the Registrant.
*10.20 Employment Agreement dated February 26, 1999 by and
between Mr. Jack Marshall and the Registrant.
*10.21 Stock Option Plan of the Registrant.
*10.22 Form of Stock Option Agreement issued under the Stock
Option Plan of the Registrant.
*10.23 Stock Option Agreement dated July 1, 1999 by and between
Chris McConn and the Registrant
*10.24 Stock Option Agreement dated July 1, 1999 by and between
Jack Marshall and the Registrant
*10.25 Co-Branded Marketing Agreement, dated March 8, 1999, by
and between Picture Works and the Registrant.
<PAGE>
*10.26 Co-Branded Marketing Agreement, dated March 11, 1999
between Umax Technologies, Inc. and the Registrant.
*10.27 Internet Services and Co-Location Agreement, dated March 15, 1999
by and between AboveNet Communications, Inc.
and the Registrant.
*10.28 Cowabunga Reciprocal Website Linking Agreement, dated
April,1999 by and between Cowabunga Enterprises, Inc., a
wholly owned subsidiary of Gateway 2000, Inc. and the
Registrant.
*10.29 Representation Agreement, dated April 26, 1999, by and
between ADSmart Network and the Registrant.
*10.30 Co-Branded Marketing Agreement, dated May 3, 1999, by
and between Tribal Voice and the Registrant.
*10.31 Co-Branded Marketing Agreement, dated May 12, 1999, by
and between, Netopia, Inc. and the Registrant.
10.32 Agreement, dated July 31, 1998, by and between Digital
Equipment Corporation and the Registrant.
*21.1 Subsidiaries of the Company
*27.1 Financial Data Schedule
<FN>
*Previously filed with the SEC.
+ Confidential treatment requested.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOTOLOFT.COM
(Registrant)
Date: November 4, 1999 By: /s/ Jack Marshall
-------------------
Jack Marshall, Chief Executive
Officer, President and Treasurer
<PAGE>
AGREEMENT
---------
This Agreement (the "Agreement') is made and entered into by and between
Digital Equipment Corporation ("Digital"), a Massachusetts corporation, and
AltaVista Technology, Inc. ("ATI"), a California corporation (collectively, the
"Parties").
WHEREAS, ATI registered the domain name "altavista.com" with InterNIC on or
about February 1, 1995;
WHEREAS, on or about March 14, 1996, the Parties entered into an Agreement
pursuant to which ATI agreed to assign to Digital all of its right, title and
interest in and to the ALTAVISTA trademark and Digital agreed to grant ATI a
nonexclusive license to use the ALTAVISTA mark as part of the corporate name
"AltaVista Technology, Inc." and as part of the Internet domain name
"altavista.com";
WHEREAS, on or about March 14, 1996, the Parties entered into a trademark
Assignment Agreement pursuant to which ATI assigned to Digital all of its right,
title and interest in and to the ALTAVISTA trademark;
WHEREAS, on or about March 19, 1996, the parties entered into a Trademark
License Agreement ("License Agreement") pursuant to which Digital granted ATI a
nonexclusive license to use the ALTAVISTA mark as part of the corporate name
"AltaVista Technology, Inc." and as part of the Internet domain name
"altavista.com";
WHEREAS, certain disputes have arisen relating to the Parties' performance
of their respective obligations under the License Agreement and relating to the
Parties' use of the ALTAVISTA mark;
WHEREAS, Digital has asserted breach of contract trademark infringement and
related claims against ATI in an action filed in the United States District
Court for the District of Massachusetts captioned Digital Equipment Corporation
-----------------------------
v. Alta Vista Technology, Inc., Civil Action No. 96-12192 NG (D. Mass.)(the
- ----------------------------------
"Action");
WHEREAS, ATI has asserted breach of contract, trademark infringement and
related counterclaims against Digital in the Action;
WHEREAS, the Parties in order to resolve this dispute have agreed, without
admitting liability of any kind, to enter into a settlement of the Action on the
terms set forth herein and for good and valuable consideration, to avoid further
expense, inconvenience and the risk and distraction of burdensome and protracted
litigation; and
WHEREAS, the Parties have agreed to terminate the License Agreement and
enter into a License Termination and Installment Sale Agreement whereby ATI has
agreed to sell, transfer and assign to Digital all of ATI's rights in and to the
ALTAVISTA mark granted to ATI under the License Agreement, including but not
limited to ATI's right to use the ALTAVISTA mark as part of the corporate name
"AltaVista Technology, Inc." and as part of the Internet domain name
"altavista.com" for three million one hundred thousand dollars ($3,100,000.00);
1
<PAGE>
NOW, THEREFORE, for and in consideration of the mutual promises, releases
and agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. Installment Sale Agreement.
-----------------------------
Immediately upon execution of this Agreement, the Parties shall execute a
License Termination and Installment Sale Agreement, in the form attached hereto
as Exhibit A.
2. Linking and Content Agreement.
--------------------------------
Immediately upon execution of this Agreement, the Parties shall execute a
Linking and Content Agreement in the form attached hereto as Exhibit B.
3. Payment of Attorneys Fees by Digital.
------------------------------------------
Immediately upon the execution of this Agreement, ATI shall deliver or
cause to be delivered to Digital a detailed accounting of its legal expenses
incurred in connection with the Action, including attorneys' fees and costs.
Within five (5) business days of Digital's receipt of this accounting, Digital
shall reimburse ATI for its documented legal expenses incurred in connection
with the Action, to the extent those expenses are not paid in accordance with
any applicable insurance policy, up to but not to exceed two hundred fifty
thousand dollars ($250,000.00).
4. Press Release by Digital.
----------------------------
Within ten (IO) days after the execution of this Agreement, Digital will
issue a press release regarding the Parties' agreements, substantially in the
form attached hereto as Exhibit C. Except as permitted in paragraph 7.1 hereof,
ATI shall not make any statements regarding the terms of this Agreement or any
other agreement of the Parties entered into contemporaneously herewith except
those terms disclosed in the press release, nor shall ATI respond to inquiries
from the press or from any other person regarding said terms, except to refer
such inquiries to
Digital's press release.
5. Mutual Release.
----------------
5.1 Execution of Mutual Release. Immediately upon the execution
----------------------------
of this Agreement, transfer of the Internet domain name "altavista.com" to
Digital as set forth in the License Termination and Installment Sale Agreement,
and termination of the License Agreement as set forth in the License Termination
and Installment Sale Agreement, the Parties shall execute a Mutual Release
Agreement in the form attached hereto as Exhibit D.
2
<PAGE>
5.2 This Agreement represents the compromise of disputed claims between
the Parties hereto. Therefore, neither the execution and performance of this
Agreement nor any term or provision of this Agreement will be deemed an
admission of any kind by either Party hereto.
6. Return of Confidential Information.
--------------------------------------
Within ten (1O) days after the execution of this Agreement, each party
shall return all (including all copies) of the other Party's confidential
information produced in connection with the Action.
7. Confidentiality.
----------------
7.1 Confidentiality and Nondisparagement- Except to the extent that
disclosure of the terms of this Agreement (i) may be required by law or (ii) is
required for purposes of obtaining tax or accounting advice or communicating
with insurance carriers, the Parties agree that the terms of this Agreement, the
settlement negotiations prior thereto, and the facts and circumstances
underlying this Agreement shall be considered confidential. Any and all
statements made by the Parties in connection with this Agreement and the
settlement negotiations prior thereto, whether a statement of fact, opinion,
supposition or otherwise, may not and will not be used, quoted or alluded to in
any manner. The Parties agree to use commercially reasonable efforts to prevent
disclosure of the terms of this Agreement and the settlement negotiations prior
thereto any third party. The Parties agree not to publicly disparage each other
(including, but not limited to, through their counsel) concerning the litigation
or the subject matter thereof.
7.2 Material Breach of Confidentiality. The Parties agree that any
-------------------------------------
violation of the provisions of paragraph 7.1 shall be a material breach of this
Agreement.
8. Dismissal of Action and Appeal.
-----------------------------------
Within five (5) days after the execution of this Agreement, transfer of the
Internet domain name "altavista.com" to Digital as set forth in the License
Termination and Installment Sale Agreement, and termination of the License
Agreement as set forth in the License Termination and Installment Sale
Agreement, the Parties shall file with the Court a Stipulation of Dismissal With
Prejudice in the form attached hereto as Exhibit E. Within five (5) days after
the execution of this Agreement, transfer of the Internet domain name
"altavista.com" to Digital as set forth in the License Termination and
Installment Sale Agreement, and termination of the License Agreement as set
forth in the License Termination and Installment Sale Agreement, the Parties
shall file with the Court of Appeals for the First Circuit a Stipulation of
Dismissal with Prejudice in the form attached hereto as Exhibit F.
3
<PAGE>
9. Material Breach.
-----------------
The Parties agree that upon any material breach by ATI of the terms of this
Agreement or the terms of the License Termination and Installment Sale
Agreement, all of Digital's obligations under the Linking and Content Agreement
shall terminate.
10. Miscellaneous.
--------------
10.1 Notices. All notices, requests, waivers, consents, or other
-------
communications required or permitted by this Agreement ("Notices") shall be in
writing. Notices shall be deemed delivered for all purposes when delivered in
person or when dispatched by electronic facsimile transmission or upon
confirmation of receipt when dispatched by a nationally recognized overnight
courier service to the appropriate party with a copy to counsel (which shall not
constitute notice) as follows:
If to Digital:
- ----------------
Cliff Simpson, Esq.
Group Counsel, Consumer Products Group
Office of the General Counsel
Compaq Computer Corporation
20555 SH249
MS I 10701
Houston, Texas 77070
Telephone:(281) 518-2552
Facsimile:(281) 514-8332
with a copy to:
Shepard M. Remis, P.C.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
Telephone: (617) 570-1350
Facsimile: (617) 523-1231
4
<PAGE>
If to ATI:
- ------------
Jack Marshall
President
AltaVista Technology, Inc-
1671 Dell Avenue, Suite 209
Campbell, California 95008
Telephone: (408) 364-8777
Facsimile:(408) 364-8778
with a copy to:
Lee Carl Bromberg, Esq.
Bromberg & Sunstein LLP
125 Summer Street
Boston, Massachusetts 02110-1618
Telephone: (617) 443-9292
Facsimile: (617) 443-0004
10.2 Amendment and Waiver. This Agreement may be amended, modified,
---------------------
waived, discharged or terminated only by an instrument in writing of subsequent
or even date signed by both Parties.
10.3 Successors and Assigns. This Agreement will be binding upon
-------------------------
and inure to the benefit of the Parties and their respective successors and
assigns.
10.4 Rights of the Parties. Nothing expressed or implied in this
------------------------
Agreement is intended or will be construed to confer upon or give any person or
entity other than the Parties or their respective successors and assigns any
rights or remedies under or by reason of this Agreement or any transaction
contemplated hereby.
10.5 Titles and Headings. Titles and headings to Articles and
----------------------
Sections herein are inserted for convenience of reference only, and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
10.6 Entire Agreement. This Agreement, together with its Exhibits,
------------------
constitutes the entire agreement between the Parties with respect to the subject
matter hereof, and there are no agreements between the Parties with respect
hereto except as expressly set forth herein.
10.7 Delay or Omission. No delay or omission by either of the Parties in
------------------
exercising any right under this Agreement will operate as a waiver of any right.
A waiver of consent given by either of the Parties on any occasion is effective
only in that instance and will not be construed as a bar to or waiver of any
right on any other occasion.
5
<PAGE>
10.8 Severability. In case any provision contained in this
-------------
Agreement is determined by a court to be invalid or unenforceable, the validity
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
10.9 Additional Documents. Each of the Parties shall, upon the
----------------------
request of the other party, provide such other party with such additional
instruments, certificates and documents as the requesting party shall reasonably
require, whether or not such request is made after the date of this Agreement,
in order to provide the requesting party with the rights and benefits to which
such party is entitled under the Agreement.
10.10 Counterparts. This Agreement may be executed in any number of
-------------
counterparts, each of which when executed and delivered shall be deemed an
original; such counterparts shall together constitute but one agreement.
10.11 Corporation. Each party hereto is a corporation, and each
------------
person executing this Agreement on behalf of a corporation represents and
warrants that: (a) such corporation is duly organized, validly authorized and in
good standing, and possesses full power and authority to enter into and comply
with the terms of this Agreement; (b) the execution and delivery, and compliance
with the terms, of this Agreement have been duly and validly authorized by all
requisite corporate acts and consents and do not contravene the terms of any
other obligation to which the corporation is subject; (c) this Agreement, when
effective, shall constitute a legal, binding and valid obligation of such
entity, enforceable in accordance with its terms; and (d) each of the Parties
hereto shall furnish to the other party such evidence of such actions and
consent, and such legal opinions with respect thereto, as either of the Parties
may reasonably request.
10.12 Governing Law. This Agreement and the terms, covenants and
--------------
conditions hereof shall be construed in accordance with, and governed by, the
laws of the Commonwealth of Massachusetts (without giving effects to any
conflicts of law provisions contained therein).
IN WITNESS HEREOF, the Parties hereto have duly executed this Agreement on this
31st. day of July, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By: /s/ Robert E. Hult By:
--------------------- ---------------------
Robert E. Hult Jack Marshall
6
<PAGE>
10.12 Governing Law. This Agreement and the terms, covenants and
---------------
conditions hereof shall be construed in accordance with, and governed by, the
laws of the Commonwealth of Massachusetts (without giving effect to any
conflicts of law provisions contained therein).
IN WITNESS HEREOF, the Parties hereto have duly executed this Agreement on
this 31-st. day of July, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY,INC.
By: By: /s/ Jack Marshall
--------------------- ---------------------
Robert E. Hult Jack Marshall
7
<PAGE>
EXHIBIT A
LICENSE TERMINATION AND INSTALLMENT SALE AGREEMENT
This License Termination and Installment Sale Agreement ("Installment Sale
Agreement") is made and entered into by and between Digital Equipment
Corporation ("Digital"), a Massachusetts corporation, and AltaVista Technology,
Inc. ("ATI"), a California corporation (collectively, the "Parties").
WHEREAS, ATI registered the domain name "altavista.com" with InterNIC on or
about February 1,1995; and
WHEREAS, on or about March 19, 1986, the Parties entered into a trademark
license agreement (the "License Agreement") pursuant to which Digital granted to
ATI a nonexclusive license to use the ALTAVISTA mark as part of the corporate
name "AltaVista Technology, Inc." and as part of the Internet domain name
"altavista.com";
WHEREAS, the Parties have agreed to terminate the License Agreement; and
WHEREAS, ATI has agreed to sell, transfer and assign to Digital all of
ATI's rights in and to the ALTAVISTA mark granted to ATI under the License
Agreement, including but not limited to ATI's right to use the ALTAVISTA mark as
part of the corporate name "AltaVista Technology, Inc." and as part of the
Internet domain name "altavista.com";
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements contained herein and in the Agreement of the Parties entered into
contemporaneously with this Installment Sale Agreement, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. Termination of License Agreement. Thirty (30) days after the
execution of this Installment Sale Agreement, the License Agreement shall
terminate, and ATI shall have no further rights under the License Agreement,
provided however, that ATI may continue to use the ALTAVISTA mark in the limited
manner set forth in paragraph 6 below.
2. Sale, Transfer and Assignment of Rights. ATI hereby sells,
---------------------------------------------
transfers and assigns to Digital, effective thirty (30) days after the execution
of this Installment Sale Agreement, all of its rights in and to the ALTAVISTA
mark granted to ATI under the License Agreement, including but not limited to
ATI's right to use the ALTAVISTA mark as part of the corporate name "Alta Vista
Technology, Inc."and as part of the Internet domain name "altavista.com" and
ATI's rights to use any other names containing the term "altavista" or a
confusingly similar term. ATI further sells, transfers and assigns to Digital
all rights associated with the domain name "altavista.com" effective thirty (30)
days after the execution of this Installment Sale Agreement. Within thirty (30)
days after the execution of this Installment Sale Agreement, ATI shall provide
Digital with the documentation necessary to transfer the domain name
"altavista.com" to Digital in accordance with the published procedures for
transfer domain names in effect at that time.
A-1
<PAGE>
Digital shall file such documentation with InterNIC no earlier than the
thirty-first day after execution of this installment Sale Agreement. ATI agrees
to execute and deliver to Digital such other documents and take such other
reasonable actions as are required to transfer the domain name "altavista.com"
to Digital and to confirm, evidence, or establish Digital's rights to the domain
name "altavista.com."
3. No Use of Similar Domain Name, ATI agrees to not use or register
-----------------------------
any domain name containing the term "altavista" or any confusingly similar term.
4. No Objection to Registration of Domain Name. ATI agrees to not
----------------------------------------------
object to or otherwise challenge Digital's use and registration worldwide of any
domain name containing the term "altavista" or any confusingly similar term.
5. Representation and Warranties.
--------------------------------
5.1 Seller. ATI represents and warrants to the best of its
------
actual knowledge, as of the date of its execution of this Installment Sale
Agreement, that:
(a) There are no existing or threatened claims or proceedings by
any third party relating to ATI's use, registration, or ownership
of the domain name l,altavista.com";
(b) The domain name "altavista.com" is not subject to any
outstanding order, decree, judgment, stipulation, written
restriction, undertaking, or agreement that would prevent ATI
from complying with any of its obligations under this Installment
Sale Agreement;
(c) The domain name "altavista.com" is not subject to any lien,
security interest, mortgage, or other encumbrance;
(d) ATI has not granted any licenses to or authorized any third
parties to use the domain name "altavista.com" or any confusingly
similar domain name; and
(e) ATI does not own any domain name registrations or
applications containing the term "altavista" or any confusingly
similar term other than the domain name "altavista.com."
6. Transition Period.
-------------------
6.1 Domain Name. After the termination of the License
------------
Agreement, ATI shall not use the domain name altavista.com", provided however,
that ATI may refer to the domain name "altavista.com" in order to inform third
parties that it has changed its Web site address from the domain name
"altavista.com" to another domain name for a period of three (3) months
following the transfer of the domain name "altavista.com."
A-2
<PAGE>
6.2 E-Mail Routing. Upon transfer to Digital of the domain name
----------------
"altavista.com" and for a period of six (6) months following the transfer,
Digital shall route e-mail directed to "altavista.com" and intended to be
received by ATI to magicbit.com" or to any other Internet address designated by
ATI. ATI shall have the right to change the Internet address to which e-mail is
routed upon five (5) days written notice to Digital. Digital shall be
responsible for maintaining consistent operation of the e-mail routing software
so as to minimize any delay between Digital's receipt of e-mail and the
transmission of e-mail to ATI and so as to ensure the integrity of e-mail
messages and attachments. In no case shall e-mail be routed to the address
designated by ATI later than twelve (12) hours after receipt by Digital. For
the period of six (6) months following the transfer of the domain name
altavista.com", Digital shall not use any of the e-mail addresses currently used
by ATI, as listed in Exhibit I hereto. ATI may refer to the domain name
"altavista.com" during this six (6) month period in order to inform third
parties that it has changed its e-mail addresses.
6.3 Change of Corporate Name. Within ten (1O) business days after
---------------------------
the execution of this Installment Sale Agreement, ATI shall file papers with the
appropriate legal agency to legally change its corporate name. For a period of
thirty (30) days following the execution of this Installment Sale Agreement, ATI
may use the ALTAVISTA mark as part of its corporate name. ATI shall not use the
ALTAVISTA mark as part of its corporate name after the thirty (30) day period
following the execution of this Installment Sale Agreement has expired.
7. Termination of Agreements. Immediately upon the execution of
this Installment Sale Agreement, ATI shall give notice of the termination of all
agreements that could impair its right to sell, transfer and assign to Digital
all of its rights in and to the ALTAVISTA mark granted to ATI under the License
Agreement. Such notice shall be given to all parties to all such agreements.
8. Payment. Immediately upon the execution of this Installment Sale
-------
Agreement, Digital shall deliver or cause to be delivered to ATI the sum of
three hundred and fifty thousand dollars ($350,000.00) and shall execute a seven
percent (7%) promissory note in the principal amount of two million seven
hundred and fifty thousand dollars ($2,750,000.00) in the form of Exhibit 2.
9. Miscellaneous.
--------------
9.1 Amendment and Wavier. This Installment Sale Agreement may be
-----------------------
amended, modified, waived, discharged or terminated only by an instrument in
writing of subsequent or even date signed by both Parties.
9.2 Successors and Assigns. This Installment Sale Agreement will be
-----------------------
binding upon and inure to the benefit of the Parties and their respective
successors and assigns.
A-3
<PAGE>
9.3 Delay or Omission. No delay or omission by either of the
--------------------
Parties in exercising any right under this Installment Sale Agreement will
operate as a waiver of any right. A waiver of consent given by either of the
Parties on any occasion is effective only in that instance and will not be
construed as a bar to or waiver of any right on any other occasion.
9.4 Severability. In case any provision contained in this
Installment Sale Agreement is determined by a court to be invalid or
unenforceable, the validity and enforceability of the remaining provisions shall
not in any way be affected or impaired thereby.
9.5 Additional Documents. Each of the Parties shall, upon the
----------------------
request of the other party, provide such other party with such additional
instruments, certificates and documents as the requesting party shall reasonably
require, whether or not such request is made after the date of this Installment
Sale Agreement, in order to provide the requesting party with the rights and
benefits to which such party is entitled under this Installment Sale Agreement.
9.6 Counterparts. This Installment Sale Agreement may be executed in
-------------
any number of counterparts, each of which when executed and delivered shall be
deemed an original; such counterparts shall together constitute but one
agreement.
9.7 Corporations. Each party hereto is a corporation, and each
person executing this Installment Sale Agreement on behalf of a corporation
represents and warrants that: (a) such corporation is duly organized, validly
authorized and in good standing, and possesses full power and authority to enter
into and comply with the terms of this Installment Sale Agreement; (b) the
execution and delivery, and compliance with the terms, of this Installment Sale
Agreement have been duly and validly authorized by all requisite corporate acts
and consents and do not contravene the terms of any other obligation to which
the corporation is subject; (c) this Installment Sale Agreement, when effective,
shall constitute a legal, binding and valid obligation of such entity,
enforceable in accordance with its terms; and (d) each of the Parties hereto
shall furnish to the other party such evidence of such actions and consent, and
such legal opinions with respect thereto, as either of the Parties may
reasonably request.
9.8 Governing Law. This Installment Sale Agreement and the terms,
---------------
covenants and conditions hereof shall be construed in accordance with, and
governed by, the laws of the Commonwealth of Massachusetts (without giving
effect to any conflicts of law provisions contained therein).
IN WITNESS HEREOF, the Parties hereto have duly executed this Installment
Sale Agreement on this 31st day of July, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By: /s/ Robert E. Hult By: /s/ Jack Marshall
----------------------- ---------------------
Robert E. Hult Jack Marshall
A-4
<PAGE>
EXHIBIT I (INSTALLMENT SALE AGREEMENT)
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
jlockyer@altavista-com
[email protected]
[email protected]
[email protected]
kb@altavista-com
[email protected]
[email protected]
kwolf@altavista-com
Iharmon@altavista-com
[email protected]
marshall@altavista-com
[email protected]
[email protected]
[email protected]
hosting@altavista-com
hostingsupport@altavista-com
info@altavista-com
[email protected]
[email protected]
[email protected]
perldude@altavista-com
[email protected]
[email protected]
[email protected]
webdsign@altavista-com
A-5
<PAGE>
EXHIBIT 2 (INSTALLMENT SALE AGREEMENT)
7% PROMISSORY NOTE
DIGITAL EQUIPMENT CORPORATION
$2,750,000 BOSTON, MA
DATE: JULY 31,1998
FOR VALUE RECEIVED, Digital Equipment Corporation, a Massachusetts
corporation (the "Company"), hereby promises to pay to the order of AltaVista
Technology, Inc., a California corporation (the "Seller"), and its successors
and assigns, the principal amount of two million seven hundred fifty thousand
dollars ($2,750,000), with interest on the principal amount outstanding
hereunder from time to time from the date hereof through and including the date
on which such principal amounts are paid, at the rate of seven percent (7%)
annually. Interest shall be computed on the basis of the actual number of days
elapsed and a year of 360 days.
This Note, together with all accrued and unpaid interest, shall be payable
in twelve quarterly investments commencing October 1, 1998 and ending July 1,
200 1. The first through the eleventh payments shall each be in the amount of
two hundred fifty six thousand sixty two dollars and eighty eight cents
($256,062.88); except that the first payment shall have deducted from to it per
them interest of $534.72 for each day between the date of this Note and July 1,
1998. The final payment shall be in the amount of all unpaid principal of and
interest on this Note. All payments shall be in lawful money of the United
States of America. Neither principal of nor interest on this Note may be
prepaid by the Company without the prior consent of the Seller, which consent
the Seller may withhold in its sole discretion.
ARTICLE I
EVENTS OF DEFAULT
At the option of the holder of this Note and without prejudice to any other
rights the holder hereof may have at law or in equity, all sums of principal and
interest then remaining unpaid hereunder shall immediately become due and
payable, without demand, presentment or notice, all of which are hereby
expressly waived, if any of the following occur ("Events of Default"):
1. 1. The Company breaches any covenant or other term or provision of
this Note and such breach continues for five days after written notice thereof
to Company from the holder hereof.
1.2. The Company becomes insolvent or admits in writing its inability
to pay its debts as they mature; makes an assignment for the benefit of
creditors; applies for or consents to the appointment of a receiver or trustee
for it or for a substantial part of its property or business; or such a receiver
or trustee otherwise is appointed.
A-6
<PAGE>
1.3. Bankruptcy, insolvency, dissolution, winding up, reorganization or
liquidation proceedings or relief under any bankruptcy law or any law for the
relief of debtors is instituted by or against the Company and is not dismissed
within thirty days.
1.4. The Company fails to pay this Note when due in accordance with its
terms.
ARTICLE 11
MISCELLANEOUS
2.1. No amendment, modification or waiver of any provision of this Note
nor consent to any departure by the Company therefrom shall be effective unless
the same shall be in writing and signed by the holder hereof and such waiver or
consent shall be effective only in the specific instance and for the specific
Purpose for which given.
2.2. The Company hereby waives any requirements of notice of dishonor,
notice of protest and protest.
2.3. This Note shall be governed in all respects by the laws of the
Commonwealth of Massachusetts without giving effect to the conflict of law
provisions thereof.
2.4. This Note shall be binding upon the Company and its successors and
assigns and the terms hereof shall inure to the benefit of the Seller and its
successors and assigns, including
subsequent holders hereof.
2.5. The holding of any provision of this Note to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provisions, and the other provisions of this Note shall remain in full force and
effect.
2.6. If this Note becomes worn, defaced, or mutilated but is still
substantially intact and recognizable, the Company or its agent may issue a new
Note in lieu hereof upon the surrender of such worn, defaced, or mutilated Note.
If the holder of this Note claims that it has been lost, destroyed, or
wrongfully taken, the Company will issue a new Note in place of the original
Note if the holder so requests by written notice to the Company actually
received by the Company before it is notified that the Note has been acquired by
a bona fide purchaser.
2.7. If the holder or payee of this note changes its name or mergers
with or into another corporation or other entity, the Company shall upon request
issue a new Note of like tenor payable to the payee under its new corporate
name, or to the successor entity, in lieu hereof upon the surrender of this
Note.
A-7
<PAGE>
2.8. Unless otherwise specified by the holder hereof on the date when
payment is due, payment under this Note shall be made at and all notices to
holders shall be delivered to, the following address:
AltaVista Technology, Inc.
1671 Dell Ave. Suite 209
Campbell, CA 95009
Attention: Jack Marshall
DIGITAL EQUIPMENT CORPORATION
By: ____________________
Its:
By: ___________________
Its:
A-8
<PAGE>
EXHIBIT I (Linking and Content Agreement)
CONTENT STANDARDS
The content, functionality and appearance of the Internet Web site located
at "www.photoloft.com" shall be solely determined by AltaVista Technology, Inc.
("ATI"), provided, however, that ATI shall not include content available to the
public on the .www.photoloft.com" Web site that is illegal, obscene, or
pornographic, or references products or services related to tobacco or firearms,
or that would be considered offensive by the average user of the AltaVista
Internet Search Service.
A-9
<PAGE>
EXHIBIT B
LINKING AND CONTENT AGREEMENT
This Linking and Content Agreement ("Linking Agreement") is made and
entered into by and between Digital Equipment Corporation ("Digital"), a
Massachusetts corporation, and AltaVista Technology, Inc. ("ATI"), a California
corporation (collectively, the "Parties").
WHEREAS, Digital has developed and is operating the AltaVista Internet
Search Service which can currently be accessed at the domain name
'altavista.digital.com'; and
WHEREAS, ATI has developed and is operating an Internet Web-based service
located at the domain name "photoloft.com" which allows users to create and
share online photo albums and send electronic greeting cards;
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements herein contained and in the Agreement of the Parties entered into
contemporaneously with this Linking Agreement, the receipt and sufficiency of
which are hereby acknowledged, the Parties agree as follows:
1. Links.
-----
1.1 Commencing on the thirty-first day after the execution of this
Linking Agreement, Digital shall display one (1) textual link on the home page
of the AltaVista Internet Search Service to the Internet Web site located at the
domain name "photoloft.com" for a period of eighteen (18) months. The link
shall appear under the "Services" menu of the AltaVista Internet Search Service
home page. ATI and Digital shall mutually determine the textual content of the
link; provided, however, that the textual content of the link must be of similar
appearance to all other links under the same menu. Digital shall have the
exclusive right to modify the appearance of the user interface for the AltaVista
Internet Search Service at any time; provided, however, that any such
modification will affect ATI in a manner similar to that of all other links
under the "Services" menu. At the expiration of the eighteen (18) month period,
the Parties shall undertake reasonable efforts to enter into a one year linking
and content agreement pursuant to which the Parties would share in revenue
generated from the Web site located at the domain name "photoloft.com."
1.2 Commencing on the thirty-first day after the execution of this
Linking Agreement, Digital shall provide advertising impressions on the home
page of the AltaVista Internet Search Service to ATI consisting of a total of
eighteen (18) million impressions to be provided within an eighteen (18) month
period; provided, however, that no more than 1.5 million impressions will be
provided in any single month. Such advertising impressions shall be consistent
in placement and size as other advertising impressions on the home page.
<PAGE>
2. Content.
-------
ATI shall have the exclusive right to determine the content displayed on
the Internet Web site located at the domain name "photoloft.com"; provided,
however, that the content of that site must meet Digital's standards for the
acceptance of links on the AltaVista Internet Search Service Web site, as set
forth on Exhibit 1. Digital shall provide ATI with prompt notice of any
violation of its standards and ATI shall have one business day in which to
comply with such notice or restore the content of the site to the content
immediately prior to the notice. Thereafter, upon written request by ATI, the
Parties shall participate in binding arbitration within five (5) business days
over any unresolved content disputes before a mutually agreeable arbitrator in
Boston, Massachusetts. Time is of the essence and it is the Parties' intention
that any content disputes be resolved as soon as possible. If ATI fails or
refuses to restore the content of its site or if ATI fails or refuses to
arbitrate, Digital shall have the right to immediately take down the link.
3. Miscellaneous
-------------
3.1 Amendment and Wavier. This Linking Agreement may be amended,
-----------------------
modified, waived, discharged or terminated only by an instrument in writing of
subsequent or even date signed by both Parties.
3.2 Successors and Assigns. This Linking Agreement will be binding
------------------------
upon and inure to the benefit of the Parties and their respective successors and
assigns.
3.3 Delay or Omission. No delay or omission by either of the
--------------------
Parties in exercising any right under this Linking Agreement will operate as a
waiver of any right. A waiver of consent given by either of the Parties on any
occasion is effective only in that instance and will not be construed as a bar
to or waiver of any right on any other occasion.
3.4 Severability. In case any provision contained in this Linking
-------------
Agreement is determined by a court to be invalid or unenforceable, the validity
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
3.5 Additional Documents. Each of the Parties shall, upon the
---------------------
request of the other party, provide such other party with such additional
instruments, certificates and documents as the requesting party shall
reasonably require, whether or not such request is made after the date of this
Linking Agreement, in order to provide the requesting party with the rights and
benefits to which such party is entitled under this Linking Agreement.
3.6 Counterparts. This Linking Agreement may be executed in any
-------------
number of counterparts, each of which when executed and delivered shall be
deemed an original; such counterparts shall together constitute but one
agreement.
<PAGE>
3.7 Corporations. Each party hereto is a corporation, and each
------------
person executing this Linking Agreement on behalf of a corporation represents
and warrants that: (a) such corporation is duly organized, validly authorized
and in good standing, and possesses full power and authority to enter into a
comply with the terms of this Linking Agreement; (b) the execution and delivery,
and compliance with the terms, of this Linking Agreement have been duly and
validly authorized by all requisite corporate acts and consents and do not
contravene the terms of any other obligation to which the corporation is
subject; (c) this Linking Agreement, when effective, shall constitute a legal,
binding and valid obligation of such entity, enforceable in accordance with its
terms; and (d) each of the Parties hereto shall furnish to the other party such
evidence of such actions and consent, and such legal opinions with respect
thereto, as either of the Parties may reasonably request.
3.8 Governing Law. This Linking Agreement and the terms, covenants
--------------
and conditions hereof shall be construed in accordance with, and governed by,
the laws of Commonwealth of Massachusetts (without giving effect to any conflict
of law provisions contained therein).
IN WITNESS HEREOF, the Parties hereto have duly executed this Linking
Agreement on this 31st day of July, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By: /s/ Robert E. Hult By: /s/ Jack Marshall
--------------------- -------------------
<PAGE>
EXHIBIT C
PRESS RELEASE
COMPAQ ACQUIRES RIGHTS TO ALTAVISTA DOMAIN
HOUSTON, July 31, 1998 -- Compaq Computer Corporation (NYSE: CPQ) announced
today an agreement with AltaVista Technology, Inc. (AVT) of Campbell, California
to transfer to Compaq full rights to the AltaVista trademark and domain name,
www.altavista.com. The financial terms were not disclosed.
---------------
Under the deal, AVT sells, transfers and assigns all of its rights to the
trademark and domain name to Compaq. AVT will transfer to Compaq the
www.altavista.com URL within 30 days and notify all third parties of the change
to its Internet address. AVT's new Internet address will be www.PhotoLoft.com.
-----------------
This agreement supersedes all previous agreements between ATI and Digital
Equipment Corporation, which was purchased by Compaq in June.
ABOUT ALTAVISTA
Compaq's fast and powerful AltaVista Search Service is the premier resource
for locating information on the Internet. A forerunner in Web search
technology, AltaVista has set new standards, from indexing the entire Internet
to providing the Web's first instant language translation capabilities. With an
extensive line-up of innovative content and services, AltaVista is now regarded
as one of the top destination sites on the Web. For more information, visit
AltaVista's flagship site located at www.altavista.digital.com.
--------------------------
<PAGE>
COMPANY BACKGROUND
Compaq Computer Corporation, the world's largest computer manufacturer, is
a Fortune Global 200 company and the largest global supplier of personal
computers. Founded in 1982, Compaq develops and markets hardware, software,
solutions and services, including industry-leading enterprise computing
solutions, fault-tolerant business-critical solutions, networking and
communications products, commercial desktop and portable products and consumer
PCS. The company is a leader in environmentally friendly programs and business
practices.
Compaq products are sold and supported in more than 100 countries through a
network of authorized Compaq marketing partners. Customer support and
information about Compaq and its products are available at http://www.compaq.com
---------------------
or by calling 1-800-OK-COMPAQ. Product information and reseller locations are
available by calling 1-800-345-1518.
<PAGE>
EXHIBIT D
MUTUAL RELEASE AGREEMENT
This Mutual Release Agreement ("Mutual Release Agreement") is made and
entered into by and between Digital Equipment Corporation ("Digital"), a
Massachusetts corporation, and AltaVista Technology, Inc. ("ATI"), a California
corporation (collectively, the "Parties").
WHEREAS, on or about March 19, 1996, the parties entered into a Trademark
License Agreement ("License Agreement") pursuant to which Digital granted ATI a
nonexclusive license to use the ALTAVISTA mark as part of the corporate name
"AltaVista Technology, Inc." and as part of the Internet domain name
"altavista.com";
WHEREAS, certain disputes have arisen relating to the Parties' performance
of their respective obligations under the License Agreement and relating to the
Parties' use of the ALTAVISTA mark;
WEREAS, Digital has asserted breach of contract, trademark infringement and
related claims against ATI in an action filed in the United States District
Court for the District of Massachusetts captioned Digital Equipment Corporation
v. Alta Vista Technology, Inc., Civil Action No. 96-12192 NG (D.Mass.) (the
"Action");
WHEREAS, ATI has asserted breach of contract, trademark infringement and
related counterclaims against Digital in the Action; and
WHEREAS, on or about July 31, 1998, the Parties entered into an Agreement
(the "Agreement") pursuant to which the Parties agreed, inter alia, to execute
mutual releases of claims between them, including the claims asserted in the
Action;
NOW THEREFORE, for and in consideration of the mutual promises, releases
and agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. Release of ATI. In consideration of ATI's agreement to resolve the
----------------
Action pursuant to the terms and conditions of the Agreement, ATI's release of
claims against Digital as set forth in Article 2 below, and dismissal with
prejudice of the Action, the receipt and sufficiency of which are hereby
acknowledged, Digital, for itself and its divisions, subsidiaries, affiliates,
successors and assigns, hereby releases and forever discharges ATI and its
successors, assigns, divisions, affiliates, officers, directors, shareholders,
employees, agents and representatives, and each of them, from any and all manner
of claims, demands, damages, actions, causes of action, contracts, agreements,
charges, sums of money, claims for attorneys' fees and lawsuits of every kind
and description, whether known or unknown, now existing up to the date of this
release against ATI based upon, arising out of or having any connection in any
way whatsoever with the License Agreement, including, without limitation, any of
the claims asserted by Digital in the Action, any claims based on ATI's past use
of the ALTAVISTA mark or trade name, and any claims based on ATI's past use of
the Internet Web site located at the domain name "altavista.com."
However, Digital does not release any claims that may arise in connection with
the enforcement of the terms of the Agreement.
2. Release of Digital. In consideration of Digital's agreement to
--------------------
resolve the Action pursuant to the terms and conditions of the Agreement,
Digital's release of claims against ATI as set forth in Article I above, and
dismissal with prejudice of the Action, the receipt and sufficiency of which are
hereby acknowledged, ATI, for itself and its divisions, subsidiaries,
affiliates, successors and assigns, hereby releases and forever discharges
Digital and its successors, assigns, divisions, affiliates, officers, directors,
shareholders, employees, agents and representatives, and each of them, from any
and all manner of claims, demands, damages, actions, causes of action,
contracts, agreements, charges, sums of money, claims for attorneys' fees and
lawsuits of every kind and description, whether known or unknown, now existing
up to the date of this release against Digital based upon, arising out of or
having any connection in any way whatsoever with the License Agreement,
including, without limitation, any of the counterclaims asserted by ATI in the
Action, any claims based on Digital's past use of the ALTAVISTA mark or trade
name, and any claims based on Digital's past use of the Internet Web site
located at the domain name "altavista.digital.com." However, ATI does not
release any claims that may arise in connection with the enforcement of the
terms of the Agreement.
<PAGE>
3. California Civil Code Section 1542. The Parties acknowledge that they
-----------------------------------
are fully aware of the existence and meaning of California Civil Code
Section 1542, which provides as follows:
A general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor.
The Parties expressly waive the protection of Section 1542 and any right that
they may have to invoke its provisions, or any substantially similar provision
under any state or federal statute or law, with respect to the subject matter of
this Mutual Release Agreement.
IN WITNESS HEREOF, the Parties hereto have duly executed this Mutual Release
Agreement on this 31st. day of August,
1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By: /s/ Robert E. Hult By: /s/ Jack Marshall
--------------------- -------------------
<PAGE>
EXHIBIT E
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
DIGITAL EQUIPMENT CORPORATION,
Plaintiff, CIVIL ACTION
v. NO. 96-12192NG
ALTAVISTA TECHNOLOGY, INC.,
Defendant.
STIPULATION OF DISMISSAL WITH PREJUDICE
---------------------------------------
Plaintiff Digital Equipment Corporation ("Digital") and Defendant AltaVista
Technology, Inc. ("ATI"), by their undersigned attorneys, stipulate, as follows:
1. All claims of Digital against ATI that are included in Digital's
Complaint (filed October 30, 1996) shall be and hereby are dismissed with
prejudice pursuant to Rule 41 of the Federal Rules of Civil Procedure.
2. All claims of ATI against Digital that are included in the Answer and
Counterclaims of Defendant AltaVista Technology, Inc. (filed March 26, 1997)
shall be and hereby are dismissed with prejudice pursuant to Rule 41 of the
Federal Rules of Civil Procedure.
<PAGE>
3. Each party shall bear its own costs and both parties waive all rights of
appeal.
Dated: September 4, 1998. Dated: September 4, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By its attorneys, By its attorneys,
____________________________________ ______________________________
Shepard M. Remis, P.C. (BBO #416540) Kerry L. Timbers (BBO #552293)
Victoria C. DeMaret (BBO #631875) Bromberg & Sunstein LLP
Goodwin, Procter & Hoar LLP 125 Summer Street
Exchange Place Boston, MA 02110
Boston, MA 02109 (617) 443-9292
(617) 570-1000
<PAGE>
EXHIBIT F
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
DIGITAL EQUIPMENT CORPORATION,
Plaintiff,
v. NO. 98-1440
ALTAVISTA TECHNOLOGY, INC.,
Defendant.
STIPULATION OF DISMISSAL
------------------------
Defendant-Appellant AltaVista Technology, Inc. ("ATI") and Plaintiff-Appellee
Digital Equipment Corporation ("Digital"), by their undersigned attorneys,
stipulate as follows:
1. ATI and Digital have agreed that the appeal filed by ATI on March
13, 1998 shall be dismissed pursuant to Rule 42(b) of the Federal Rules of
Appellate Procedure.
2. ATI and Digital have agreed that each party shall bear its own
costs of appeal.
<PAGE>
WHEREFORE, the Parties respectfully request that ATI's appeal be dismissed
Dated: September 4, 1998. Dated: September 4, 1998.
DIGITAL EQUIPMENT CORPORATION ALTAVISTA TECHNOLOGY, INC.
By its attorneys, By its attorneys,
_______________________________ ________________
Shepard M. Remis, P.C. Lee Carl Bromberg
(BBO #416540) (BBO #058480)
Victoria C. DeMaret Kerry L. Timbers
(BBO#631875) (BBO #552293)
Goodwin, Procter & Hoar LLP Bromberg & Sunstein LLP
Exchange Place 125 Sununer Street
Boston, MA 02109 Boston, MA 021 10
(617) 570-1000 (617) 443-9292
<PAGE>
