AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1999
Registration No.: 0-266932
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NUMBER 2 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 20
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 45
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 located on the
World Wide Web at www.photoloft.com. 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. Visitors to our Web site 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 target their audience. We are also
developing an e-commerce program through which we will market and sell 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 system allowing users to create web pages
Media Wrangler - a software tool allowing users to create emails which
Include graphics and animation.
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 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
photographs and then return several days later to get those as well. Digital
photography, the Internet and advances in printing technology are changing that
model.
Sales of digital cameras have increased dramatically. 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.
Developers of printers continue to focus on creating 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.
Our Web site allows visitors to place digital images captured by their
digital cameras onto the Internet so that others can view the images by
down-loading them from the Internet. Additionally, traditional film-based
photos can easily be scanned onto the Internet. A visitor can then choose to
print the photos of 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 gathering 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 entertainment. 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 end users exposed to their advertisements as well as the number of end users
who move directly to the Web site being advertised.
OUR SOLUTION
For Internet consumers, PhotoLoft.com provides an online 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 timed to take advantage of the growing popularity of online
communities. Our Web site offers an entry point to the Internet for users
interested in digital imaging. 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 Web site. Sharing photos with family and
friends; being able to browse other photos and comment on them; and being able
to correspond with other photography buffs, all combine to make our Web site a
popular community with a promising future with new members.
PhotoLoft.com offers a highly focused Web site, which is particularly
attractive to advertisers. Through our 98 different categories of photographs,
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 which
involve the placement of a banner on the web page being viewed by an end user.
We have also developed a multi-faceted e-commerce solution that will appeal
to users looking for photo-personalized gifts and greeting cards. The first
component of the e-commerce program is in place today and offers customers a
choice of over 150 photo-personalized gift items. For example, end users can
purchase shirts, coffee mugs or puzzles with their photographs printed on them.
The second component of the e-commerce program is photo-personalized cards,
which are greeting cards with particular photographs printed on them and include
personalized greetings drafted by the end user. The unique design of this
program allows PhotoLoft.com to generate advertising revenue by displaying
banner advertisements while customers create their product, as well as
e-commerce revenues once the end user purchases the product using their credit
card. The third component of the e-commerce solution includes on-line sales of
digital imaging products such as cameras, scanners and printers and will be
implemented in the first quarter of the year 2000. In addition, we will offer
printing paper and ink cartridges for sale at costs competitive with more
traditional retail outlets.
Business Partners
The PhotoLoft.com Web site attracts users who are interested in photography
and would like to share that interest with others. As members join
PhotoLoft.com they upload images and return to our Web site several times to
view the images as opposed to some online 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 traffic on their Web sites.
Utilizing PhotoLoft.com's unique co-branding and private label opportunities
which are discussed below.
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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 useful to users is the technology. Our software
greatly simplifies the task of displaying images on the Internet. End users can
view small images of several photographs before deciding to enlarge a particular
photograph. End users can also compress the image and forward it to a friend.
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.
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. Recently, we began to aggressively
upgrade the look and feel of our site, creating new and popular contests and
encouraging users to comment on photos using a "guest books" feature which
allows an end user to write comments about a given photo and post those comments
for others to read. We have also brought new users to the site through an
e-invitation e-mail program which allows end users to send emails to other users
inviting them to view photos at Photoloft.com.
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New developments trend into two distinct arenas: technology and
entertainment. Technically, we are working to add new features that enhance our
Web site, such as advanced image editing which will allow users to manipulate
photographs to crop the images or eliminate red-eye, for example, and simplified
image uploading. 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. For example, our engineers are working to
lower our operating by 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.
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.
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 and
private label web site linking relationships with other companies. A co-branded
web site is composed of web pages that include our Photoloft.com brand features
as well as the brand features of the company that contracts with us. Thus, end
users are exposed to the brand features of two or more companies in equal
amounts. On the other hand, a private label web site includes exclusively the
brand features of the company that contracts with us. As a result, end users
are not made aware of the fact that they are visiting a web page within our
control. The only indication that we have any involvement with a private label
web site is the single following statement, usually located towards the bottom
of the web page: "powered by PhotoLoft.com".
We intend to develop 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 branding. As users browse
through the site and take advantage of all our unique features, they constantly
see both the brands of the original equipment manufacturer and PhotoLoft.com.
This is very popular with original equipment manufacturer's that 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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We are currently striving to increase the amount of private label
relationships we have. 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 increase
traffic on our Web site by linking our Web site to other Web sites. We already
have agreements in place with Compaq Computer; Lycos; Hylas; Tribal Voice and
Netopia, and are actively pursuing additional agreements with other Web sites.
See "Marketing and Promotion--Web Site Partnering."
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 on the site; 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.
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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 raise
advertising and other revenue. 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 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 is an e-mail service that will alert users when comments
about their images have been received.
Our site provides an ideal vehicle for users to share images 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 view the photo or album by using a link between the text of the
email and the web page continuing the image. 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.
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 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.
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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
personal computers. 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.
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 in stages
and fully operational in 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
first quarter of 2000 and anticipate entering into resale agreements with
wholesalers of digital imaging products.
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During the first quarter of 2000 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 and implemented 58 additional features
to our web site. hese 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.
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
targeted advertising and our Web site is 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 our 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.
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Recognizing that the traditional banner advertising will, by definition,
eventually reach a cap, we are beginning to explore more creative advertising
sales opportunities. 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 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.
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 Web sites
Web site partnering arrangements allow us to recruit members from the
broadest of populations. 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.
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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.
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
The equipment that supports our Web site is located in a secured individual
cage space, meaning that the equipment is surrounded by a locked metal cage, at
the San Jose, California Web site hosting facility 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 companies such as ours. 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 web site is supported by on a series of Intel Pentium II Dual Processor
Servers. These servers share the obligation of supporting our web site in such
a manner that when one is overburdened, it shifts the excess obligation another
server. This provides substantial assurances that our web site will remain
accessible to users. Our site currently utilizes several Single Processor
Pentium 400's with one gigabyte of storage space to support the web site and
Dual Processor Pentium 400's with one gigabyte of storage space to support the
images posted on our web site. Currently, there is one dual Processor Pentium
400 with 512 megabytes of storage space to support our database engine that
catalogues photographs and maintains other data. The combination of a database
server, several image servers, and several web servers is called a "pod", and we
intend to add pods as our community grows.
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.
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Since January 1998, our site has been available for use by end users
approximately 99.6% of the time. 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.
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."
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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.
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.
EMPLOYEES
As of December 6, 1999, we had 40 full time employees, including 4 in
marketing and advertising sales and customer support; 4 in business development;
3 in administration; and 29 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.
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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 September 30, 1999 and for the
nine-month periods ended September 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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<TABLE>
<CAPTION>
Statement of Operations Data
Nine Months Ended Fiscal Year Ended
September 30, December 31,
----------------- ------------------
<S> <C>
1999 1998 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $124,800 $660,600 $674,300 $574,200
Net Income (loss) (1,465,600) 1,972,900 1,663,300 (165,500)
Net Income (loss) per share to
Common Shareholders:
Basic $(0.21) $0.31 $.26 $(0.03)
Diluted $(0.21) $0.21 $.18 $(0.03)
Balance Sheet Data
September 30, December 31,
----------------- ------------------
1999 1998 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Current Assets $2,124,000 $1,201,100 $1,211,100 $93,900
Total Assets $2,376,800 $3,141,200 $2,939,000 $123,900
Current Liabilities $928,700 $439,600 $502,900 $151,000
Total Liabilities $928,700 $1,103,900 $1,169,600 $151,000
Shareholders Equity (Deficit) $1,448,100 $2,037,300 $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 by the end of 1999, and increased
impressions per day, estimated to increase from 20,000 per day in 1998 to
500,000 per day by the end of 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
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues for the nine months ended September 30, 1999 were $124,800, a
decrease of $535,800, or approximately 81%, compared to $660,600 for the nine
months ended September 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 third quarter results reflect
less than one year of operations under the new model.
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The gross margin for the nine months ended September 30, 1999 was $36,300,
a decrease of $535,500 or approximately 94%, compared to the gross profit of
$571,800 for the nine months ended September 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 nine months ended September 30, 1999.
Selling, general, and administrative expenses for the nine months ended
September 30, 1999 were $2,249,100, an increase of $1,448,300 or 181% compared
to $800,800 for the nine months ended September 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 nine months ended September 30, 1999 was
$2,212,800, a increase of $1,983,800 compared to a loss from operations of
$229,000 for the nine months ended September 30, 1998. This increase 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 nine months ended September 30, 1999 was $110,000,
an increase of 236% compared to $32,700 for the nine months ended September 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 $100,200 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.
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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.
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 nine months ended
September 30, 1999 was $1,838,400, 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, accrued expenses and
depreciation and amortization. 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
AltaVista 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 $108,100.
Accordingly, the balance sheet as of September 30, 1999 classifies this note as
a current asset and a loss of $108,100 has been recorded as of September 30,
1999.
Net cash provided by investing activities was $225,300 for the nine months
ended September 30, 1999, and $731,000 for fiscal 1998, primarily reflecting
cash received from payments of principal on the AltaVista note. Net cash used in
investing activities in fiscal 1997 was $14,200, reflecting cash used for the
acquisition of property and equipment.
Net cash provided by financing activities was $1,486,600 for the nine
months ended September 30, 1999, primarily reflecting cash received from the
sale of stock and exercise of stock options and advances under our line of
credit. No cash was provided by financing activities in fiscal 1998.
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. We anticipate that
20% of our requirements will come from cash from operations. We will seek the
remainder from debt and equity financing sources. There can be no assurance
that we will be successful in this regard. At September 30, 1999, Photoloft.com
had cash and cash equivalents totaling $243,500, resulting principally from the
sale of common stock in a private placement during March 1999, and working
capital of $1,195,300.
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We believe that our cash requirements will be provided in 2000 by cash from
operations, in particular from advertising revenues, and by financing from
outside sources. We are actively seeking to raise additional capital through
debt or equity financing. We cannot assure you that we will be able to obtain
this additional financing. 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 or take advantage of business opportunities or respond to
competitive pressures. In addition, our ability to meet our obligations and
continue our obligations could be adversely affected. 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.
In September 1999 we obtained a $750,000 line of credit with a financial
institution. Borrowings under the line bear interest at the rate of 28% per
annum. The line of credit expires in September 2000, but automatically renews
for a one year period unless either we or the financial institution notifies the
other party. At September 30, 1999 $409,700 was outstanding under this line of
credit.
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.
25
<PAGE>
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.
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.
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<PAGE>
Seasonality
We believe that we may experience seasonality in our business, with use of
the Internet in general and our Photoloft.com Web site 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.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements. 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.
27
<PAGE>
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."
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
28
<PAGE>
- 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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<PAGE>
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 the end of the year. 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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<PAGE>
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.
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<PAGE>
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.
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.
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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<PAGE>
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.
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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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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 6, 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 OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) CLASS (1)
EXECUTIVE OFFICERS AND DIRECTORS:
- ------------------------------------------ --------------------------- -----------
<S> <C> <C>
Jack Marshall (2)(3) 2,655,473 20.4%
--------------------------- -----------
Christopher McConn (4) 879,639 6.9%
- ------------------------------------------ --------------------------- -----------
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 4,569,230 34.8%
group (5 Persons) (3)(4)(5)(6)(7)
- ------------------------------------------
OTHER 5% STOCKHOLDERS:
George Perlegos 2,270,063 18.2%
--------------------------- -----------
Keith Queeney 700,759 5.6%
- ------------------------------------------ --------------------------- -----------
<FN>
* Less than one percent.
</TABLE>
(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 538,195 shares of common stock subject to options that
are exercisable within 60 days of the date hereof.
(4) Includes 179,713 shares of common stock subject to options that
are exercisable within 60 days of the date hereof.
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<PAGE>
(5) Includes 14,675 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.
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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>
Jack Marshall (1) (3) (4) 38 President, Treasurer, Chief Executive
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."
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<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 $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the year ended December 31,
1998:
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
<S> <C> <C>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME AND PRINCIPAL SALARY ($) NUMBER OF SECURITIES UNDERLYING OPTIONS (#)
POSITION
Jack Marshall, CEO, 156,864 1,135,032
President and Treasurer
Christopher E. McConn, 127,229 454,013
Chief Technology Officer
</TABLE>
(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.
The following table sets forth certain information concerning options
granted to the Named Executives during 1998.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NAME Number of % of Total Exercise Expiration Potential Realizable Value at Assumed
Securities Options Price Per Date(4) Annual Rates of Stock Price Appreciation
Underlying Granted to Share for Option Term (5)
Options Employees ($/Sh)(3)
Granted (#) in 1998 (2)
(1)
- ------------- ----------- ----------- ---------- ----------- -------------------- -------- ----------
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 454,013 16.9% 0.48 July, 2007 ($72,642) $ 4,540 $122,584
E. McConn
</TABLE>
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<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.
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.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME Number of Unexercised Value of Unexercised In-the-
Options at Year End(#) Money Options at Year End (1)
---------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------- ----------------------------- ------------ --------------
Jack Marshall 118,233 1,016,799 $ 59,116 $ 508,399
Christopher E. McConn 47,293 406,720 $ 23,646 $ 203,360
</TABLE>
(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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 December 6, 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.
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.
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<PAGE>
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 Photloft.com, Inc., a California corporation common stock at the time of the
reorganization.
ISSUANCES TO FOUNDER. Upon his founding of Photoloft.com, Inc. 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.com, Inc. common stock and his options to
purchase shares of Photoloft.com, Inc. 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
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.com, Inc. 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 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 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.
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<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 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
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.
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<PAGE>
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.
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<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.
Management believes that the outcome of this matter will be a non-monetary
settlement. 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.
1999 High Low
---- ---- ---
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 December 6) $2.343 $1.343
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<PAGE>
As of December 6, 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.
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<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, IncThe 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 December 6, 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 December 6, 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.
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
54
<PAGE>
- -- 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.
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.
56
<PAGE>
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;
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<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.
San Jose, California
April 2, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
BALANCE SHEETS
=========================================================================================================
SEPTEMBER 30, December 31,
1999 1998
========================================================================= =============== =============
<S> <C> <C>
(Unaudited)
ASSETS (Note 7)
CURRENT ASSETS:
Cash and cash equivalents (Note 11) . . . . . . . . . . . . . . . . . . $ 243,500 $ 370,000
Note receivable, current portion (Note 2) . . . . . . . . . . . . . . . 1,804,700 658,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 75,800 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . - 183,100
- ------------------------------------------------------------------------- --------------- -------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,124,000 1,211,100
PROPERTY AND EQUIPMENT, net (Note 3). . . . . . . . . . . . . . . . . . . 242,300 65,700
NOTE RECEIVABLE, less current portion (Note 2). . . . . . . . . . . . . . - 1,656,700
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500 5,500
- ------------------------------------------------------------------------- --------------- -------------
$ 2,376,800 $ 2,939,000
========================================================================= =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank (Note 7). . . . . . . . . . . . . . . . . . . . . $ 409,700 $ -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 398,900 129,500
Accrued expenses (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 119,300 73,500
Deferred revenue (Note 5) . . . . . . . . . . . . . . . . . . . . . . . 800 36,300
Deferred income Taxes (Note 10) . . . . . . . . . . . . . . . . . . . . - 263,600
- ------------------------------------------------------------------------- --------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 928,700 502,900
- ------------------------------------------------------------------------- --------------- -------------
DEFERRED INCOME TAXES (Note 10) . . . . . . . . . . . . . . . . . . . . . - 666,700
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 928,700 1,169,600
- ------------------------------------------------------------------------- --------------- -------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 1, 6, 11 and 13)
SHAREHOLDERS' EQUITY: (Notes 1, 9 and 13)
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. 12,500 6,700
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 3,267,300 648,200
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . (546,600) -
(Accumulated deficit) Retained earnings . . . . . . . . . . . . . . . . (1,285,100) 1,114,500
- ------------------------------------------------------------------------- --------------- -------------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . . 1,448,100 1,769,400
- ------------------------------------------------------------------------- --------------- -------------
$ 2,376,800 $ 2,939,000
========================================================================= =============== =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF OPERATIONS
============================================================================================================
Nine Months Ended Years Ended
September 30, December 31,
1999 1998 1998 1997
===================================================== ============ ============ =========== ===========
(UNAUDITED) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 11) . . . . . . . . . . . . . . . . . . $ 124,800 $ 660,600 $ 674,300 $ 574,200
COST OF REVENUES . . . . . . . . . . . . . . . . . . . 88,500 88,800 113,000 60,800
- ----------------------------------------------------- ------------ ------------ ----------- -----------
GROSS PROFIT (LOSS). . . . . . . . . . . . . . . . . . 36,300 571,800 561,300 513,400
- ----------------------------------------------------- ------------ ------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing. . . . . . . . . . . . . . . . . 516,600 216,900 325,000 32,200
General and administrative (Note 8). . . . . . . . . 1,732,500 583,900 999,000 642,200
- ----------------------------------------------------- ------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 2,249,100 800,800 1,324,000 674,400
- ----------------------------------------------------- ------------ ------------ ----------- -----------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . (2,212,800) (229,000) (762,700) (161,000)
- ----------------------------------------------------- ------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Sale of trade name (Note 2). . . . . . . . . . . . . - 3,100,000 3,100,000 -
Loss on settlement of note receivable (Note 2) . . . (108,100) - - -
Interest income. . . . . . . . . . . . . . . . . . . 110,200 32,700 76,900 -
Interest expense . . . . . . . . . . . . . . . . . . - (2,600) (500) -
Other. . . . . . . . . . . . . . . . . . . . . . . . (200) - (2,400) (3,700)
- ----------------------------------------------------- ------------ ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) . . . . . . . . . . . . . 1,900 3,130,100 3,174,000 (3,700)
- ----------------------------------------------------- ------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . (2,210,900) 2,901,100 2,411,300 (164,700)
INCOME TAX (BENEFIT) EXPENSE (Note 10) . . . . . . . . (745,300) 928,200 748,000 800
- ----------------------------------------------------- ------------ ------------ ----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . (1,465,600) 1,972,900 1,663,300 (165,500)
Deemed dividend on conversion of preferred stock into
common stock. . . . . . . . . . . . . . . . . . . . 934,000 - - -
- ----------------------------------------------------- ------------ ------------ ----------- -----------
Net income (loss) available to common shareholders . . $(2,399,600) $ 1,972,900 $1,663,300 $ (165,500)
===================================================== ============ ============ =========== ===========
Basic earnings (loss) per share. . . . . . . . . . . . $ (0.21) $ 0.31 $ 0.26 $ (0.03)
===================================================== ============ ============ =========== ===========
Diluted earnings (loss) per share. . . . . . . . . . . $ (0.21) $ 0.21 $ 0.18 $ (0.03)
===================================================== ============ ============ =========== ===========
Basic weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . 11,327,200 6,427,300 6,488,300 6,297,000
Stock options. . . . . . . . . . . . . . . . . . . . . - 2,799,400 2,799,400 -
- ----------------------------------------------------- ------------ ------------ ----------- -----------
Diluted weighted-average common shares outstanding . . 11,327,200 9,226,700 9,287,700 6,297,000
===================================================== ============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF SHAREHOLDERS' EQUITY
(NOTES 9 AND 13)
==================================================================================================================================
(Accumulated
Additional Deferred Deficit)
Common Stock Paid-in Stock Retained
Shares Amount Capital Compensation Earnings Total
================================================== ========== ======= =========== ============== ============== ============
<S> <C> <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 3,100 112,200 - - 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
Deferred stock compensation (unaudited). . . . . . - - 571,500 (571,500) - -
Amortization of deferred stock compensation
(unaudited). . . . . . . . . . . . . . . . . . . - - - 24,900 - 24,900
Net loss (unaudited) . . . . . . . . . . . . . . . - - - - (1,465,600) (1,465,600)
- -------------------------------------------------- ---------- ------- ----------- -------------- -------------- ------------
BALANCES, September 30, 1999 (unaudited) . . . . . 12,454,268 $12,500 $ 3,267,300 $ (546,600) $ (1,285,100) $ 1,448,100
================================================== ========== ======= =========== ============== ============== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF CASH FLOWS
(Note 12)
===========================================================================================================
Nine Months Ended Years Ended
September 30, December 31,
-------------------------- ------------------------
1999 1998 1998 1997
===================================================== ============ ============ ============ ==========
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . $(1,465,600) $ 1,972,900 $ 1,663,300 $(165,500)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . 27,900 7,800 13,200 8,600
Allowance for doubtful accounts . . . . . . . . - - (75,100) 82,800
Compensation relating to stock options issued . 24,900 - - -
Gain on sale of trade name. . . . . . . . . . . - (3,100,000) (3,100,000) -
Loss of settlement of note receivable . . . . . 108,100 - - -
Accrued interest on note receivable . . . . . . (32,900) - - -
Issuance of stock for services. . . . . . . . . 42,500 91,500 133,100 18,300
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . - - 170,700 (130,600)
Prepaid expenses and other current assets . . (75,800) 78,900 6,600 47,300
Deferred income taxes . . . . . . . . . . . . (747,200) 928,200 747,200 -
Accounts payable. . . . . . . . . . . . . . . 269,400 24,300 65,000 58,100
Accrued expenses. . . . . . . . . . . . . . . 45,800 300 (21,300) 94,800
Deferred revenue. . . . . . . . . . . . . . . (35,500) - 36,300 -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES . (1,838,400) 3,900 (361,000) 13,800
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal received under note receivable. . . . . . 434,800 573,400 785,300 -
Purchase of property and equipment. . . . . . . . . (204,500) (35,700) (51,100) (12,200)
Other assets. . . . . . . . . . . . . . . . . . . . (5,000) (2,300) (3,200) (2,000)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . 225,300 535,400 731,000 (14,200)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit. . . . . . . . . . . . . 409,700 - - -
Proceeds from issuances of stock. . . . . . . . . . 1,120,900 - - -
Payment of stock issuance costs . . . . . . . . . . (44,000) - - -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . 1,486,600 - - -
- ----------------------------------------------------- ------------ ------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. (126,500) 539,300 370,000 (400)
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, beginning of period. . . . 370,000 - - 400
- ----------------------------------------------------- ------------ ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . $ 243,500 $ 539,300 $ 370,000 $ -
===================================================== ============ ============ ============ ==========
</TABLE>
[/R]
See accompanying notes to financial statements.
F-6
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 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 SEPTEMBER 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 SEPTEMBER 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's revenues are derived principally from the sale of banner
advertisements and subscriptions for web hosting services. Advertising revenues
are recognized in the period in which the advertisement is delivered, provided
that collection of the resulting receivable is probable. Advertisers are charged
on a per impression or delivery basis up to a maximum as specified in the
contract. To date, the duration of the Company's advertising commitments has not
exceeded one year. When the Company guarantees a minimum number of impressions
or deliveries, revenue is recognized ratably in proportion to the number of
impressions or deliveries recorded to the minimum number of impressions and
deliveries guaranteed. Product revenue is recognized upon shipment, provided no
significant obligations remain and collectibility is possible.
Advertising
The cost of advertising is expensed as incurred. Advertising costs for the
nine month periods ended September 30, 1999 and 1998 aggregated, $118,900 and
$6,500 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
F-9
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
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.
New Accounting Pronouncement
In September 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
F-10
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity. For the nine months ended September 30, 1999
and the year ended December 31, 1997, options to purchase 3,265,230 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
nine months ended September 30, 1998 and the year ended December 31, 1998,
options to purchase 2,355,062 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.
Basis of Presentation
The accompanying balance sheet and statement of shareholders' equity as of
September 30, 1999 and for the nine months then ended, respectively, and the
statements of operations and cash flows for each of the nine month periods ended
September 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 nine months ended September
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 September 1999, Digital Equipment Corporation agreed to pay the Company
$1,804,700 in full settlement of the note, at which time the Company recorded a
loss of $108,100. Accordingly, the balance sheet as of September 30, 1999
classifies this note as a current asset (unaudited).
F-11
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
September December 31,
30,1999 1998
============================= ============ =============
(UNAUDITED)
<S> <C> <C>
Office equipment. . . . . . . $ 291,300 $ 90,500
Furniture and fixtures. . . . 13,000 9,300
- ----------------------------- ------------ -------------
304,300 99,800
Less accumulated depreciation 62,000 34,100
- ----------------------------- ------------ -------------
$ 242,300 $ 65,700
============================= ============ =============
</TABLE>
4. ACCRUED EXPENSES A summary of accrued expenses follows:
<TABLE>
<CAPTION>
SEPTEMBER December
30, 1999 31, 1998
================== ============ =============
<S> <C> <C>
(UNAUDITED)
Vacation . . . . . $ 52,300 $ 24,900
Consulting fees. . 25,000 20,000
Salaries and wages 41,900 19,900
Other. . . . . . . 100 8,700
- ------------------ ------------ -------------
$ 119,300 $ 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 SEPTEMBER 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 nine month periods ended September 30, 1999 and 1998 was $79,200
and $20,000, 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.
7. DEBT AGREEMENTS
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 September
30, 1999 and December 31, 1998, this line of credit had no outstanding balance.
F-13
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
In September 1999, the Company entered into a line of credit agreement with
a financial institution, which provides for borrowing of $750,000, bearing
interest at 28%. The line of credit expires September 2000, and is automatically
renewable unless written notice is given by either party. In September 1999, the
Company borrowed $409,700 under this line of credit, and repaid the entire
balance in October 1999 (unaudited).
8. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company paid approximately
$20,000 for consulting services from a shareholder.
9. 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 and per share
data have been restated (Note 13).
F-14
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
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.
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 SEPTEMBER 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 SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
10. 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 SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
================================= ============= ============
<S> <C> <C>
(UNAUDITED)
Loss carryforwards. . . . . . . . $ 837,000 $ 166,600
Reserves not currently deductible 16,500 16,500
Installment sale of trade name. . $ (745,700) $ (919,700)
Depreciation. . . . . . . . . . . (10,600) (10,600)
Valuation allowance . . . . . . . (97,200) -
- --------------------------------- ------------- ------------
Total deferred tax liabilities. . $ - $ (747,200)
================================= ============= ============
</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.
11. CONCENTRATIONS
Major Customers
During the nine month periods ended September 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 SEPTEMBER 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. As of September 30, 1999, the Company had deposits at one
financial institution that aggregated $243,300, of which $100,000 is insured
(unaudited).
12. STATEMENT OF CASH FLOWS
During the nine month periods ended September 30, 1999 and 1998, non-cash
financing activities included the issuance of 85,011 and 222,549 shares of
common stock for services aggregating approximately $42,500 and $91,500,
respectively (unaudited). During the nine month period ended September 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 nine month periods ended September 30, 1999 and 1998, the
Company paid $0 and $2,600 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.
13. 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.
F-19
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
In February 1999, 2,844,112 stock options were exercised for common stock,
and 85,011 shares of common stock were issued for services. Also in February
1999, the Company converted its preferred stock into common stock on a 1 to 1.5
basis.
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.
F-20
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
================================================================================
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.
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 be a non-monetary
settlement and 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 to make an
additional 3,800,000 shares of common stock available for options which may be
granted to employees, directors, and consultants. As of September 30, 1999,
there were 534,770 shares of common stock available for grant of additional
options (unaudited).
During the nine months ended September 30, 1999, the Company granted
options for an additional 572,359 shares. Of these options, 71,700 were granted
to non-employees, resulting in compensation costs of $134,000, which is being
amortized over the life of the options (unaudited).
In September 1999, the Company issued warrants to purchase 350,000 shares
of common stock at an exercise price of $2.31 in connection with a services
agreement. The issuance of these warrants resulted in compensation costs of
$437,500, which is being amortized over the one year term of the agreement
(unaudited).
In November 1999, a former board member exercised options to purchase
88,991 shares of common stock for proceeds of $44,100 (unaudited).
F-21
<PAGE>
(A) EXHIBITS
The following exhibits are filed with this registration statement:
Exhibit No. Exhibit Name
- ------------ -------------
*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 [Intentionally Blank/Updated Form of Agreement Filed as Exhibit 10.33]
*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.
*10.26 Co-Branded Marketing Agreement, dated March 11, 1999 between Umax
Technologies, Inc. and the Registrant.
<PAGE>
*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 Web site 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.
10.33 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant.
10.34 Loan and Security Agreement, dated September 27, 1999 by an between
Aerofund Financial, Inc. and the Registrant.
*21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
*Previously filed with the SEC.
<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: December 20, 1999 By: /s/ Jack Marshall
--------------------------------------
Jack Marshall, Chief Executive
Officer, President and Treasurer
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
CONSULTING SERVICES AGREEMENT BETWEEN
HEWLETT-PACKARD COMPANY
AND
PHOTOLOFT.COM
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
TABLE OF CONTENTS
SECTIONS OF THE AGREEMENT
1. Definitions
2. HP Obligations
3. Customer obligations
4. Price and Payment
5. Change Orders
6. Acceptance
7. Warranties
8. Licenses
9. Intellectual Property Rights
10. Intellectual Property Indemnity
11. Confidential Information
12. Remedies and Liabilities
13. Term and Termination
14. General
EXHIBITS TO THE AGREEMENT
A. Statement of Work
B. Chan a Order Procedures
<PAGE>
HEWLETT
PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
This Consulting Services Agreement ("Agreement") is made between HEWLETT-PACKARD
COMPANY, a California Corporation ("HP") and Photoloft.Com, a California
corporation ("Customer"), as of October 22, 1998 ("Effective Date").
The purpose of this Agreement is to set forth the mutually agreeable terms and
conditions under which HP will perform Consulting Services and provide
Deliverables to Customer according to one or more Statements of Work.
1. DEFINITIONS
a) "CONSULTING SERVICES" (sometimes referred to as "Work") refers to such
activities as analysis, design, planning, development, consulting,
implementation, education, training and project management as described in a
Statement f Work. Consulting Services may also include other types of services
describe more specifically in a Statement of Work.
b) "DELIVERABLES" means the tangible results of the Consulting Services
provided by HP to Customer as described in a on Statement of Work. Unless
otherwise agreed, the term Deliverable. does not include custom hardware.
c) "SOFTWARE" means one or more programs (including any associated
documentation) capable of operating on a controller, processor or other hardware
device .
a) "STATEMENT OF WORK" means a document attached to this Agreement which
describes a specific project, engagement or assignment ("Project") for which HP
will provide Consulting Services to Customer. More than one Statement of Work
may be attached to this Agreement from time to time.
2. HP OBLIGATIONS
a) HP will use reasonable commercial efforts to perform the Consulting
Services and provide the Deliverables specifically described in ore or more
Statements of Work in accordance with the terms and conditions of this
Agreement. Customer and HP will sign a separate Statement of Work for each
Project that exceeds $10,000, which will be incorporated by reference into this
Agreement upon execution by the parties. Each Statement of Work will: (i) be
made in writing in the form attached an Exhibit A, (ii) reference this
Agreement, (iii) be numbered consecutively n a chronological basis, and (iv) be
executed by authorized representatives of Custom r no HP. Individual Statements
of Work should address at least the following areas:
1. Project description
2. Price, payment and delivery schedules
3. Scope of Consulting Services
4. Acceptance criteria
S. Nature of Deliverables
6. Project cost coordination
b) For all Projects under a value f $10,000, Customer's purchase order
referencing this Agreement will constitute the
applicable Statement of Work upon acceptance by HP.
c) Unless otherwise agreed, Consulting Service will be performed during HP's
normal business hour.
d) HP will use reasonable commercial efforts to provide the Deliverable and
perform the Consulting Service. in accordance with the delivery schedule
specified in each Statement of Work.
e) HE' may select qualified and reputable subcontractors to perform
Consulting Services and/or provide Deliverable.
f) HP will appoint a representative to supervise and coordinate HP's
performance of Consulting Services. HP may change its representative at any
time upon written notice.
a) Unless otherwise agreed in a Statement of Work, HP in not responsible for
providing support for any Deliverables.
3. CUSTOMEROBLIGATIONS
Customer will comply with the general obligations specified below together with
any specific Customer obligations described in a Statement of Work, in a timely
manner.
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
b) Customer acknowledges that HP's ability to deliver the Consulting
Services is dependent upon Customer's full and timely cooperation with HP, as
well as the accuracy and completeness of any information and data Customer
provides to HP. Therefore, Customer will:
1. Provide HP with access to, and use of, all information, data,
documentation, computer time, facilities, working space and office services
deemed necessary by HP.
2. Appoint a representative who will provide professional and prompt liaison
with HP, have the necessary expertise and authority to commit Customer, be
available at all times when HP's personnel are at the Customer's site (or
designate an alternate with the same level of authority in the event of
unavailability caused by illness or other valid reasons), and meet with the HP
representative at regular intervals to be agreed upon t review progress and
resolve any issues relating to the Consultinq Services or Deliverables.
c) Customer will be responsible for maintaining an external procedure for
reconstruction of lost or altered files, data or programs to the extent deemed
necessary by Customer, and for actually reconstructing any such materials.
d) Customer will be liable for any delays to the delivery schedule specified
in each Statement of Work caused by Customer or resulting from Customer's
failure to fulfill any of its obligations. HP may charge Customer for any
additional charges or losses incurred by HP as a result of such delays, and may
adjust the affected delivery schedule accordingly.
a) Customer will be responsible at all times for the supervision, management
and control of the Deliverables and any results obtained from the Deliverables,
including without limitation all responsibility for maintenance of proper
machine configuration, audit controls, operating methods, error detection and
recovery procedures, back-up plans, security, insurance, maintenance and all
that activities necessary to enable Customer to use the Deliverables.
f) Except as expressly provided in this Agreement, Customer has sale
responsibility to ensure that its information technology environment is Year
2000 compliant. HP is not providing Year 2000 services (for example, Year 2000
assessment, conversion or testing) under this Agreement. Customer acknowledges
that HP will not be responsible for failure to perform Consulting Services or
supply Deliverable. under this Agreement, if such failure is the result,
directly or indirectly, of the inability of any products to correctly process,
provide or receive date data (i.e., representations for month, day and year),
and to properly exchange data with the Deliverables by HP ,under this Agreement.
4. PRICE AND PAYMENT
a) Prices for Consulting Services and Deliverables a will be specified in
each Statement of work. Prices quoted in each Statement of Work are valid for
30 days. Prices include all materials and labor expenses, but do net include
sales, use, service, value added or like taxes, or customs duties. Such taxes
and duties, when applicable, will be added to HP's invoices.
b) HP will issue invoices in accordance with the payment schedule specified
in each Statement of Work. Charges for travel expenses may be invoiced
separately. Customer will pay all invoices within 30 days from the date of
invoice. HP may change credit terms upon reasonable notice at any time when, in
HP's opinion, Customer's financial condition, previous payment record, or the
nature of Customer's relationship with HP so warrants.
c) Should any sum due to HP remain unpaid after 60 days from the date of
invoice, HP may terminate this Agreement pursuant t Section 13.b.2 and
discontinue performance under any other agreement with Customer.
5. CHANGE ORDERS
a) "Change Order" means an agreed upon change or modification to the
Deliverables, Consulting Services or that material aspect of a Statement of Work
that complies with the requirements of Exhibit B. Requests by Customer and
recommendations by HP for Change Orders are subject to the procedures set forth
in Exhibit B, and will be made in writing in the form attached to Exhibit B as
Attachment B-1.
b) All Change Orders must be mutually agreed by the parties. Pending such
agreement, HP will continue to perform and be paid as if such Change Order had
not been requested or recommended, provided that if either party process a
Change Older which, in HP's judgment, represents a material change in the
Consulting Services or Deliverables ad such Change Order remains outstanding for
30 days or is rejected by Customer, HP will have the right to terminate the
affected Statement of Work pursuant to Section 13.b.2 below.
6. ACCEPTANCE
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
exhibit TM02
a ) HP will provide notice to Customer when the Deliverables are ready for
acceptance. Acceptance of Deliverables will occur upon
the earlier of: a) the date HP demonstrates to Customer, by the successful
completion of acceptance tests or otherwise, that the Deliverables substantially
conform to the acceptance criteria specified in the applicable Statement of
Work; or b) the date that Customer uses any substantial part of the Deliverables
for any purpose other than performing acceptance tests. Acceptance of
Consulting Services will occur upon HP's performance of such Consulting
Services,
b) In the event that any Deliverable fails to conform substantially to the
acceptance criteria specified in the applicable Statement of Work, HP will have
a reasonable time to remedy such substantial non-conformance, following HP's
receipt of written notice from Customer specifying in reasonable detail the
nature of Such non-conformance. In the event that HP is unable to remedy the
non-conformance: a) Customer may accept the Deliverable without warranty, on an
"AS IS" basis, subject to a reasonable price adjustment; or b) Customer may
return the Deliverable to HP and receive a refund of amounts paid to HP for the
Deliverable.
c) Acceptance will not be delayed for any minor non-conformance with the
requirements specified in any Statement of Work. Following acceptance, HP will
use reasonable commercial efforts to correct any minor non-conformance that
appears during acceptance testing.
d) If acceptance testing is delayed for reasons attributable to Customer,
acceptance will be deemed to occur on the 10th day after notice by HP that the
Deliverable in ready for acceptance testing.
7. WARRANTIES
a) HP will perform Consulting Services in accordance with generally
recognized commercial practices and standards. HP will re-perform any
Consulting Services not performed in accordance with the foregoing warranty,
provided that HP receives notice from Customer within 30 days after such
Consulting Services were performed.
b) HP warrants that Deliverables will substantially conform to the
acceptance criteria specified in the applicable Statement of Work for a period
of 90 days from the date of acceptance.
c) HP does not warrant that the operation of Deliverables will be
uninterrupted or error conform to any reliability or performance standards
beyond those specified in the applicable acceptance criteria. HP also does not
warrant that Deliverables will be compatible with future HP products those of
other vendors.
d) If HP receives notice during the warranty period of any substantial
non-conformance with the acceptance criteria that materially impairs the
functioning of a Deliverable, HP will, at its option, either correct such
non-conformance or provide a work-around which substantially remedies the
non-conformance.
e) If HP is unable within a reasonable time to comply with the foregoing
--
obligations, HP will refund a reasonable portion of the price stated in the
Statement of Work upon or prompt return of the affected Deliverable to HP,
and/or delivery to HP of proof of the destruction of the affected Deliverable.
f) The warranties provided in this Section 7 will not apply in the event of
deemed acceptance under Section 6.a(b) or 6.d above, or to defects or
non-conformance resulting from:
1. Unauthorized, improper or inadequate maintenance or calibration by Customer
or any third party.
2. Software, hardware, interfacing, or supplies not supplied by HP.
3. Unauthorized modification of Deliverables or any portion thereof.
4. Improper use or operation of Deliverable or any portion thereof or
Customer's failure to comply with the applicable environmental specification.
5. Improper site preparation or maintenance by Customer or a third
party.
g) THE ABOVE WARRANTIES ARE EXCLUSIVE AND NO OTHER WARRANTY, WHETHER WRITTEN
OR ORAL, IS EXPRESSED OR IMPLIED. HP SPECIFICALLY DISCLAIMS THE IMPLIED
WARRANTIES OF MERCHTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
8. LICENSES
a) Unless otherwise agreed in writing, when HP supplies Customer with a
Deliverable that in whole or in part consists of Software (sometimes referral to
in Sections 8 and 9 as a "Software Deliverable"), such Software Deliverable will
be supplied in object code form only.
b) Upon Customer acceptance of a Deliverable and receipt by HP of the
associated payment in full, HP grants Customer a non-exclusive, perpetual,
non-transferable license to use such Deliverable for its own internal purposes.
Customer's license confers no title or ownership in the Deliverable and no
rights in any associated Software Deliverable source code, and will not be
construed as a sale of any rights in the Deliverable or the media on which it is
recorded or printed.
c) Unless otherwise authorized by HP, Customer may only make copies of
Deliverables for archival purposes, or when copying is an essential step in the
authorized use of a Software Deliverable on a backup controller, processor or
other hardware device.
d) Customer will label each copy of Deliverables made under Section 8.c
above with the copyright notice that appears on the original.
e) Customer will not market, sublicense or otherwise provide the original,
any copy or partial copy, or any derivative of a Deliverable to any third party.
f) Customer's license does not include the right to updates, upgrades or
other enhancements to a Deliverable.
g) Customer will not disassemble or decompile any Software Deliverable
without HP's prior written consent. Where Customer has other rights under
statute, Customer will provide HP with reasonably detailed information regarding
any intended disassembly or decompilation. Customer will not decrypt any
Software Deliverable unless necessary for legitimate use of the Deliverable.
h) HP may terminate Customer's license in any Deliverables upon notice for
failure to comply with the terms of this Agreement. TR the event of termination
of Customer's license, Customer will immediately destroy or return to HP the
affected Deliverable and all partial or complete copies, or provide satisfactory
evidence of in their destruction to HP.
i) Customer grants HP a non-exclusive, worldwide, royalty-free license to
use, copy, make derivative works of, distribute, display, perform, and transmit
Customer's pre-existing copyrighted works or other intellectual property rights
to the extent necessary for HP to perform its obligations under this Agreement.
9. INTELLECTUAL PROPERTY RIGHTS
a) All copyrights aid other intellectual property rights existing prior to
the Effective Date will belong to the party that owned such rights immediately
prior to the Effective Date.
b) Neither party will gain by virtue of this Agreement any rights of
ownership of copyrights, patents, trade secrets, trademarks or any other
intellectual property rights owned by the other.
c) HP will own all copyrights, patents, trade secrets, trademarks and other
intellectual property rights, title and interest in or pertaining to all Works
(including computer programs, Deliverables and Software Deliverables) developed
by HP for purposes of this Agreement.
10. INTELLECTUALPROPERTYINDEMNITY
HP will defend or settle any claim against Customer regarding the Consulting
Services and Deliverables, to the effect that HP knowingly infringed a patent,
utility model, industrial design, copyright, trade secret, mask work or
trademark in the country where, such Deliverables are used or such Consulting
Services are provided.
b) The indemnities provided in Section 10.1 above will apply provided
Customer promptly notifies HP in writing of the claim, and Customer cooperates
with HP in and grants HP sole control of the defense or settlement
c) For infringement claims covered by this Section 10, HP will pay
infringement claim defense costs, settlement amounts and court-awarded damages.
If such a claim regarding a Deliverable appears likely, HP my modify the
Deliverable, procure any necessary license or replace it. If HP determines that
none of these alternatives is reasonably available, HP will refund Customer's
purchase price upon return of the Deliverable if within one year of delivery, or
Customer's net book value thereafter.
d) HP has no obligation for any claim of infringement arising from:
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
1. HP-s compliance with or use of Customer's information, technology,
designs, specifications or instructions, including those incorporated into dry
Statement of Work.
2. Modification of a Deliverable by Customer or a third party.
3. Use of a Deliverable in a way not indicated in a Statement of Work.
4. Use of a Deliverable with products not supplied by HP.
a) This Section 10 states HP's entire liability for claims of intellectual
property infringement.
11. CONFIDENTIAL INFORMATION
HP and Customer agree that all information exchanged between them is not
confidential unless they have entered into a separate confidential disclosure
agreement
12. REMEDIES AND LIABILITIES
a) The remedies in this Agreement are Customer's sole and exclusive
remedies.
b) To the extent HP IS held legally liable to Customer, HP's liability is
limited to:
1. Payments described in Sections 6, 7, and 10 above, this Section 12, and
Section 13.d below.
2. Damages for bodily injury.
3. Direct damages to tangible property up to a limit of U.S. $1,000,000.
c) Notwithstanding Section 12.b above, in no event will HP or its
affiliates, subcontractors and suppliers be liable for any of the following:
1. Actual loss or direct damage that is not listed in Section 12.b above.
2. Damages for loss of data, or Software restoration.
3. Damages relating to Customer's procurement of substitute products or
services (i.e., "cost of cover").
4. Incidental, special or consequential damages, including downtime costs or
lost profits but excluding damages for bodily injury and payments described in
Section 10.c above.
d) The Deliverables are not specifically designed, manufactured or intended
for sale as parts, components or assemblies for the planning, construction,
maintenance, or direct operation of a nuclear facility. Customer will be solely
liable if any Deliverables purchased or licensed by Customer are used for these
applications. Customer will indemnify and hold HP harmless from all loss,
damage, expense or liability in connection with such use.
13. TERM AND TERMINATION
a) This Agreement will commence on the Effective Date and will continue in
force until termination according to the terms of this Agreement. Individual
Statements of Work will be effective upon execution by both parties and will
continue in force until both parties have fulfilled all of their, Project
obligations, or until the earlier termination of such Statement of Work
according to the terms of this Agreement.
b) This Agreement or an individual Statement of Work may be terminated
immediately upon notice in
writing:
1. By either party if the other party is in material breach of any of its
obligations hereunder and fails to remedy such breach within 30 days of receipt
of a written notice by the other party which specifies the material breach.
2. By HP, in the absence of mutual agreement regarding a Change Order which
represents a material change under Section 5,b, or if Customer fails to pay any
sum due under this Agreement within the 60 day time period specified in Section
4.c.
3. By either party if the other party has a receiver appointed, or an
assignee for the benefit of creditors, or in the event of any insolvency or
inability to pay debts as they become due by the other party, except as may be
prohibited by applicable bankruptcy law
c) Either party may terminate this Agreement for convenience upon 30 days
prior written notice to the other party. Any termination of this Agreement will
not relieve either party of its obligations
HEWLETT PACKARD
<PAGE>
CONSULTING SERVICES AGREEMFNT (Deliverables)
E3NbitTM02
under any Statement of Work in effect on the date of termination of this
Agreement, unless otherwise mutually agreed to in writing.
d) Upon termination of any Statement of Work, Customer will pay HP for all
Work performed and charges and expenses incurred by HP up to the date of
termination, and Customer will receive all work in progress for which Customer
has paid. Should the sum of such amounts be less than any advance payment
received by HP, HP will refund the difference within 30 days of receipt of an
invoice from Customer.
a) Sections 4, 7, 8, 9, 10 and 12 above, and Section 14 below, will survive
termination of this Agreement.
14. GENERAL
a) STANDARD PRODUCTS. This Agreement does not cover standard HP hardware and
software products sold or licensed to Customer. Any such transactions will
be governed by the terms of Customer's HP purchase agreement or, in the absence
of a signed purchase agreement, HP's Terms add Conditions of
Sale and Service (Exhibit E16).
b) HEALTH AND SAFETY. HP and any of its subcontractors will, when at the
Customer's site, conduct
their activities so that their equipment, working conditions and methods are
safe and without risk to health for their own and Customer's employees as well
as for any that user. other Customer's site.
c) NON-RESTRICTIIVE RELATIONSHIP. HP may provide the same or similar
Consulting Services and Deliverables to other customer
d) NO PUBLICITY. Neither party will publicize or disclose to any third
party without the consent of the other party, either the price or other terms f
this Agreement or the fact of its existence. a aid execution, except as may be
necessary to comply with other obligations stated in this Agreement.
e) NO JOINT VENTURE. N thing contained in this Agreement will be construed
as creating a joint venture, partnership or employment relationship between the
parties hereto, nor will either party have the right, power or authority to
create any obligation or only, express or implied on behalf of the other.
f) NO ASSIGNMENT. Except will respect to HP's rights regarding the use of
subcontractors, neither party may assign any rights or obligations under this
Agreement to any Statement of Work without the prior written consent of the that
party.
g) EXPORT ADMINISTRATION REGULATIONS. If Customer exports any Deliverable
outside the country in which the Deliverable is delivered to Customer, Customer
assumes responsibility for complying with applicable laws and regulations and
for obtaining required export and import authorizations. Customer will not
export or re-export any technical data in violation of U.S. Export
Administration regulations or other applicable export regulations.
h) FORCE MAJEURE. Neither party will be liable for performance delays or
for non-performance due to causes beyond its reasonable control.
i) NOTICES. All notices required under or regarding this Agreement or any
individual Statement of Work will be in writing and will be considered given
upon personal delivery of a written notice to the HP representative or Customer
representative designated in the Statement of Work, or within five days of
mailing, postage prepaid and appropriately addressed.
j) WAIER. Neither party's failure to exercise any of its rights under this
Agreement will constitute or be deemed a waiver or forfeiture of those rights.
k) SERABILITY. If any term or provision of this Agreement is held to be
illegal or unenforceable, the validity or enforceability of the remainder of
this Agreement will not be affected.
1) EXHIBITS. The fo1lowing documents are attached hereto as exhibits, the
terms of which are incorporated by reference in their entirety:
A Statement of Work (and all subsequently executed Statements of Work)
B change Order Procedures
m) PRECEDENCE. In the event of conflict between the provision. of this
Agreement and any attached exhibit or Statement of Work, the provisions of this
Agreement will to the extent of such conflict take precedence.
n) ENTIRE AGREEMENT. This Agreement and its exhibits and Statements of Work
constitute the entire agreement between HP and Customer and supersede any prior
or contemporaneous communications,
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
representations or agreements between the parties, whether oral or written,
regarding the subject matter of this Agreement. Customer's additional or
different terms and conditions will not apply. The terms and conditions of this
Agreement may not be changed except by an amendment signed by an authorized
representative of each party.
o) APPLICABLE LAW. This Agreement is made under and will be construed in
accordance with the law of
California without giving effect to that state's choice of law rules.
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
AGREED TO: AGREED TO:
HP _____________________ Customer _____________________
s. Srinivas Sukumar s. Jack Marshall
--------------------- ------------------
Authorized Representative Authorized Representative
Signature Signature
Name: Srinivas Sukumar Name: Jack Marshall
Title: Hewlett Packard Title: CEO- PhotoLoft.com
ITIO Genera Manager
Address: 1100 Wolf Road Address: 300 Orchard City Dr.
Cupertino, CA 95014, USA Suite 142
Campbell, CA 95008
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
EXHIBIT A
STATEMENT OF WORK FORM
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
EXHIBIT B
CHANGE ORDER PROCEDURES
The following procedures will be observed for all Change Orders:
1. Either party may request a Change Order but all Change Orders must be in
writing and prepared by HP. HP may charge a reasonable fee for investigating,
preparing or initiating a Change Order at Customer's request.
2. Change Order requests will be processed as a on as is reasonably
possible.
3. All Change Orders will be in the form attached hereto as Attachment B-1
to Exhibit B, and will be signed by the appointed representative for each party
(or individuals specified in writing as substitute during periods of illness or
absence).
4. Change Orders will include the following:
a) A description of any additional work to be performed and/or any changes
to the performance required of either party.
b) A statement of the impact of the work or changes on the Consulting
Services, the Deliverables, the acceptance tests or criteria, or other
requirements of the Agreement.
c) The estimated timetable to complete the work specified in the Change Order
and the impact, if any, on the delivery schedule, pricing and payments.
d) Specific individuals with management or coordination responsibilities.
a) The documentation to be modified or supplied as part or the work.
f) Any additional acceptance test procedures for such work.
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
EXHIBIT B
TO CONSULTING SERVICES ADDENDUM
ATTACHMENT B-1
CHANGE ORDER FORM
1. Describe services or changes requested (attach additional pages if
necessary).
REQUESTED BY CUSTOMER: REQUESTED BY:
Customer: ________________ HP: ______________
___________________________ __________________________
Authorized Representative Signature Representative Signature
Name: _________________ Name: ____________________
Title: _______________ Title: __________________
Date: ________________ Date: ___________________
2. Modifications, clarifications or supplements to description of services or
changes requested in paragraph 1 above, if any (attach additional pages if
necessary):
3. Assignment of necessary HP personnel and resources (attach additional pages
if necessary):
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Exhibit TM02
4. Impact on price, delivery schedule, payment schedule, Deliverables,
Consulting Services and ancceptance test procedures and criteria (attach
additional pages if nece5sary):
a. Price
b. Delivery Schedule and Payment Schedule
c. Deliverables
d. Consulting Services
a. Acceptance Test Procedures and Criteria
<PAGE>
HEWLETT PACKARD
CONSULTING SERVICES AGREEMENT (Deliverables)
Fxhibit TM02
Change Order Approved and Accepted
Customer: ______________________ HP: ______________________________
_________________________________ ___________________________________
Authorized Representative Signature Authorized Representative Signature
Name: _________________________ Name: ____________________________
Title: _________________________ Title: ___________________________
Date: _________________________ Date: ____________________________
Change Order Rejected
Customer: ___________________________ HP:______________________________
__________________________________ _________________________________
Authorized Representative Signature Authorized Representative Signature
Name: ____________________ Name: _________________________
Title: ____________________ Title: ________________________
Date: ____________________ Date: _________________________
<PAGE>
LOAN AND SECURITY AGREEMENT
------------------------------
This LOAN AND SECURITY AGREEMENT, is entered into as of September 27, 1999
------------------
between Photoloft.com, Inc. ("Borrower"), having a place of business at 300
-------------------- ---
Orchard City Dr., Suite 142, Campbell CA 95008 and AEROFUND FINANCIAL INC having
------------------------------------ ----------------------
a place of business at 2787 Moorpark Avenue, San Jose, California, 95128
("Lender").
RECITALS
--------
A. The Borrower has requested that Lender provide financial
accommodation to Borrower as more fully set forth herein and in the Loan
Documents.
B. The Borrower has requested that the Guarantor guaranty the
Obligations.
C. This Agreement is entered into and will be performed in the State of
California.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Parties hereby agree as follows:
AGREEMENT
---------
D. Certain Definitions and Index to Definitions.
1. ACCOUNTING TERMS. Unless otherwise specified herein, all accounting
terms used herein shall be interpreted, all accounting determinations hereunder
shall be made, and all financial statements required to be delivered hereunder
shall be prepared in accordance with generally accepted accounting principles
and practices consistently applied.
2. DEFINITIONS. The following terms shall have the following
respective meanings:
a. "ACCOUNT DEBTOR" - the obligor on an Account.
b. "ACCOUNTS" - means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
c. "ADVANCES" - advances made by Lender to Borrower under Section 2.1
hereof.
d. "AGREEMENT" - means this Loan and Security Agreement and any
extensions, riders, supplements, notes, amendments, or modifications to or in
connection with this Loan and Security Agreement.
<PAGE>
e. "AUDIT FEE" - waived.
------
f. "AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" - means the Maximum
Amount less the average Obligations that were outstanding during the immediately
preceding month.
g. "BORROWER" - see Preamble.
h. "BORROWER'S ACCOUNT" - any general deposit account of Borrower.
i. "BORROWER'S BOOKS" - means all of Borrower's books and records
including ledgers, records indicating, summarizing, or evidencing Borrower's
properties or assets or liabilities, all information relating to Borrower's
business operations or financial condition, and all computer programs, disc or
tape files, printouts, runs, or other computer prepared information, and the
equipment containing such information.
j. "BORROWING BASE" - 80% (EIGHTY PERCENT) percent of the Net Face
---
Amount of Borrower's Eligible Accounts.
k. "BORROWING BASE CERTIFICATE" - a request for an Advance, in the form
annexed hereto. (Exhibit D.2.L)
l. "BUSINESS DAY" - means any day which is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close.
m. "CLEARANCE DAYS" - 5 (FIVE) Business Days.
-
n. "CLEARANCE DAY PAYMENTS" - payments received by Lender, in whatever
form and from whatever source, in reduction of the Obligations.
o. "CLOSING DATE" - means the date on which this Agreement is accepted
by Lender.
p. "COLLATERAL" - any collateral now or hereafter described in any form
UCC-1 filed against Borrower naming Lender as the secured party and any
negotiable collateral (as defined below), and all of Borrower's right, title and
interest in and to the following property, now owned and hereafter acquired:
<PAGE>
(1) All accounts, interests in goods represented by accounts, returned,
reclaimed or repossessed goods with respect thereto and rights as an unpaid
vendor, contract rights, chattel paper, general intangibles, including, but not
limited to, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as license or licensee, chooses in action and other
claims, and existing and future leasehold interests in equipment, and fixtures,
documents, notes, letters of credit, deposit accounts, certificates of deposit,
securities, bankers' acceptances or guaranties, credits, and all other interests
in Borrower's property now or hereafter held in any capacity by Lender or any
entity which at any time participates in Lender's financing of Borrower, and all
agreements or other property securing or relating to any of the items listed
above; and
(2) All goods, including, but not limited to the following:
(a) All Inventory;
(b) All Equipment;
(c) All consumer goods, farm products, crops growing or to be grown,
timber to be cut, minerals or the like (including, but not limited to, oil and
gas), wherever located and of whatever kind, nature or description; and
(3) All real and other personal property in or upon which Lender has or
may hereafter have a security interest, lien or right of setoff; and
(4) All Borrower's Books; and
(5) All products and proceeds of the foregoing, in whatever form and
wherever located, including, but not limited to, all insurance proceeds, all
claims against third parties for loss or destruction of or damage to any of the
foregoing, and all income from the lease or rental of any of the foregoing.
q. "COMMITMENT FEE" - waived.
r. "DEBTOR (ACCOUNT DEBTOR) SET-UP FEE" - waived.
s. "DEFAULT RATE" - 20% (TWENTY PERCENT) per annum in excess of the
---
Interest Rate.
t. "EQUIPMENT" - means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
vehicles (including motor vehicles and trailers), tools, parts, dies, jigs,
goods (other than consumer goods, farm products, or Inventory), wherever
located, and any interest of Borrower in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located.
u. "EVENT OF DEFAULT" - see Section 11.
v. "FEIN" - means Federal Employer Identification Number.
w. "GAAP" - means generally accepted accounting principles as in effect
from time to time in the United States, consistently applied.
<PAGE>
x. "GUARANTOR(S)" - Jack Marshall.
y. "INTEREST RATE" - 28% annual percentage rate.
z. "INVENTORY" - means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, and packing and shipping materials,
wherever located, and any documents of title representing any of the above.
aa. "LOAN DOCUMENTS" - means this Agreement, any other note or notes
executed by Borrower and payable to Lender, and any other agreement entered into
in connection with this Agreement.
bb. "MAINTENANCE FEE" - waived.
cc. "MAXIMUM AMOUNT" - $750,000.
--------
dd. "MONETARY COLLATERAL" - cash, checks or other proceeds of
Collateral in tangible form.
ee. "NEGOTIABLE COLLATERAL" - means all of Borrower's present and
future letters of credit, notes, drafts, instruments, certificated and
uncertificated securities (including the shares of stock of subsidiaries of
Borrower), documents, personal property leases (wherein Borrower is the lessor),
chattel paper, and Borrower's Books relating to any of the foregoing.
ff. "NET FACE AMOUNT" - with respect to an Account, the gross face
amount of such Account less all trade discounts or other deductions to which the
Account Debtor is entitled.
gg. "OBLIGATIONS" - all present and future obligations owing by
Borrower to Lender whether or not for the payment of money, whether or not
evidenced by any note or other instrument, whether direct or indirect, absolute
or contingent, due or to become due, joint or several, primary or secondary,
liquidated or unliquidated, secured or unsecured, original or renewed or
extended, whether arising before, during or after the commencement of any
bankruptcy case in which Borrower is a debtor, and all principal, interest,
fees, charges, expenses, attorney's fees and accountant's fees chargeable to
Borrower or incurred by Lender in connection with this Agreement and/or the
transaction(s) related thereto;
hh. "OVERAVAILABILITY FEE" - 18% (EIGHTEEN PERCENT) per annum
---
multiplied by the amount by which the average outstanding balance of the
Obligations exceeds the Borrowing Base.
ii. "PERMITTED LIENS" - means:
<PAGE>
(1) liens and security interests held by Lender;
(2) liens for unpaid taxes that are not yet due and payable;
(3) liens and security interests set forth on the schedule attached
hereto;
(4) mechanics', materialmen's, warehousemen's, or similar liens.
jj. "PRIME RATE" - the Prime Rate as reflected in The Wall Street
Journal (Western Edition). If such rate is shown as a range, then the Prime
Rate shall be the highest value in such range.
kk. "RENEWAL DATE" - the date which is TWELVE MONTHS from the Closing
Date.
ll. "TERMINATION DATE" - the earlier of the expiration of this
Agreement by its terms or the date on which the Lender elects to terminate this
Agreement pursuant to the terms herein.
mm. "UNUSED LINE FEE" - waived.
nn. "WIRE FEE" - waived.
E. CREDIT FACILITIES.
1. Subject to the terms and conditions of this Agreement, from the date
on which this Agreement becomes effective until the Termination Date Lender,
upon the request of Borrower, shall from time to time make Advances to Borrower.
2. Each request from Borrower for an Advance shall be accompanied by
Borrowing Base Certificate, completed and signed by Borrower.
3. GENERAL. All advances by Lender may be made by transferring funds
to Borrower's Account.
4. AUTHORIZATION FOR ADVANCES. Lender is authorized to make Advances:
(1) upon telephonic, facsimile or other instructions received from anyone
purporting to be an officer, employee, or representative of Borrower, or (2) at
the sole discretion of Lender, and notwithstanding any other provisions in this
Agreement, if necessary to meet any Obligations, including but not limited to
any interest not paid when due.
5. CONDITIONS OF LENDER'S OBLIGATIONS. All conditions of Lender's
obligations to make Advances are imposed solely and exclusively for the benefit
of Lender and may be freely waived or modified in whole or in part by Lender at
any time.
<PAGE>
6. LIMITATIONS ON CREDIT FACILITIES. Notwithstanding anything to the
contrary contained herein, Lender shall not be obligated to make an Advance if,
before or as a result thereof the Obligations shall exceed either the Borrowing
Base or the Maximum Amount.
F. PAYMENTS BY BORROWER.
1. IN GENERAL.
a. No checks, drafts or other instruments received by Lender
purportedly in satisfaction of any of the Obligations shall constitute payment
thereof unless and until such instruments have actually been collected.
b. Borrower shall have the right to make payments at any time in
reduction of the Obligations, in whole or in part, without premium or penalty;
provided, however, that Lender debtor may apply any payments received by
Borrower to any of the Obligations, or portion thereof, in any manner and in any
order as Lender may determine in its sole discretion, notwithstanding contrary
instructions received from the payor.
c. Borrower shall promptly make payments, without demand or notice, in
reduction of the Obligations in the amount by which the Obligations exceeds the
lesser of the Borrowing Base or the Maximum Amount.
2. INTEREST AND FEE PAYMENTS.
a. INTEREST.
(1) The interest on the Obligations shall be computed at the Interest
Rate, shall be due on the first day of each month following the accrual thereof,
and shall be computed on the basis of a 360-day year for actual days elapsed.
For any month in which the interest paid by Borrower to Lender hereunder is less
than the Minimum Monthly Charge, the difference shall be added to Obligations as
of the first day of the following month, until the date on which all Obligations
have been fully repaid (whether or not this Agreement has heretofore been
terminated).
(2) Lender is authorized to debit Borrower's Account on the first
business day of each month for interest accrued hereunder on the daily
Obligations during the preceding month at the Interest Rate;
(3) Any interest not paid when due (whether by acceleration or
otherwise, and before as well as after judgment) shall accrue at the Default
Rate.
b. UNUSED LINE FEE. Borrower shall pay Lender on the first day of each
month the Unused Line Fee for the Average Unused Portion, less than half of the
Maximum Amount.
<PAGE>
c. ADMINISTRATIVE FEE. Borrower shall pay the Administrative Fee to
Lender immediately upon the creation of an Account. The administrative fee each
month for the term of this agreement shall be no less than the Minimum Monthly
Charge.
d. COMMITMENT FEE. Borrower shall pay lender the Commitment Fee
immediately upon lender's acceptance of this agreement. Borrower shall also
lender the Commitment Fee for any increase in the maximum amount during the term
of this contract. waived - see page 2
e. MAINTENANCE FEE. Borrower shall pay the Maintenance Fee on the
first day of each month, computed on the average outstanding balance of Accounts
for the preceding month.
f. DEBTOR SET-UP FEE. Borrower shall pay lender the Debtor Set-Up Fee
immediately upon the set-up of each new.
g. OVERAVAILABILITY FEE. Borrower shall pay the Overavailability Fee
to lender each month for the computed average balance of the advanced amount
which is in excess of the eligible amount.
h. WIRE FEE. Borrower shall pay Lender the Wire Fee for each wire
transfer of funds. Borrower shall receive two wires per week at no charge.
3. REPAYMENT OF OBLIGATIONS UPON TERMINATION. Upon the Termination
Date, the unpaid balance of the Obligations shall be due and payable without
demand or notice.
4. MINIMUM MONTHLY CHARGE. For any month in which the Administrative
Fee paid by Borrower to Lender hereunder is less than the Minimum Monthly
Charge, the difference shall be added to Obligations as of the first day of the
following month, until the date on which all Obligations have been fully repaid
(whether or not this Agreement has heretofore been terminated).
5. APPLICATION OF COLLECTIONS. Lender shall, for the purpose of the
computation of interest due hereunder, add the Clearance Days to any Clearance
Day Payments, which is acknowledged by the parties to constitute an integral
aspect of the pricing of Lender's facility to Borrower, and shall apply
irrespective of the characterization of whether receipts are owned by Borrower
or Lender. Should any check or item of payment not be honored when presented
for payment, then Borrower shall be deemed not to have made such payment, and
interest shall be recalculated accordingly.
G. CONDITIONS PRECEDENT TO ALL ADVANCES.
1. The representations and warranties contained in the Loan Documents
shall be true and correct in all respects on and as of the date of such Advance;
<PAGE>
2. No Event of Default or event which the giving of notice or passage
of time would constitute an Event of Default shall have occurred and be
continuing on the date of such Advance;
3. No injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the making of such Advance shall have been
issued and remain in force by any governmental authority against Borrower or
Lender.
H. TERMINATION; AUTOMATIC RENEWAL; EARLY TERMINATION.
1. This Agreement shall become effective upon the execution and
delivery hereof by borrower and Lender and shall continue in full force and
effect for a term ending on the Renewal Date, and automatically shall be renewed
for successive years thereafter, unless sooner terminated pursuant to the terms
hereof.
2. Either party may terminate this Agreement effective on the Renewal
Date or on the anniversary hereof by giving the other party a written notice of
termination at least ninety days (90) prior to expiration by registered or
certified mail, return receipt requested. Contract will renew for one (1) year
from expiration date should notice not be given. The foregoing notwithstanding,
Lender shall have the right to terminate its obligations under this Agreement
immediately and without notice upon the occurrence and during the continuation
of an Event of Default.
3. If Borrower has sent a notice of termination under Section H.2
hereof but has failed to pay all Obligations on the date set forth in said
notice, then Lender may, but shall not be required to, renew this Agreement for
an additional twelve month period.
4. The provisions of this Agreement notwithstanding, Borrower shall
have the option, at any time upon ninety (90) days prior written notice to
Lender, to terminate this Agreement by paying to Lender, in cash the Obligations
and the Early Termination Premium.
5. If Lender terminates this Agreement upon the occurrence of an Event
of Default, in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result thereof, Borrower
shall pay to Lender upon the effective date of such termination, the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Lender as the result of the early termination and
Borrower agrees that it is reasonable under the circumstances currently
existing.
I. SECURITY INTEREST.
1. Borrower hereby grants to Lender a continuing security interest in
the Collateral to secure prompt repayment of any and all Obligations and in
order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents.
<PAGE>
2. Borrower shall immediately endorse and deliver Negotiable Collateral
to Lender.
J. COLLECTION AND ADMINISTRATION OF ACCOUNTS.
1. COLLECTION.
2. MONETARY COLLATERAL. Borrower shall, at Borrower's expense and in
the manner requested by Lender from time to time, direct that Monetary
Collateral be (or, if received by Borrower, shall cause same to be) (a) sent to
a post office box designated by and/or in the name of Lender, or in the name of
Borrower, but as to which access is limited solely to Lender and/or (b) paid
delivered to Lender. In connection therewith, Borrower shall execute such post
office box and/or blocked bank account agreements as Lender shall specify.
3. ELECTRONIC PROCEEDS OF COLLATERAL. In the event Borrower receives
proceeds of Collateral in the form of wire transfer or other intangible funds
transfer mechanism, Borrower shall immediately pay such proceeds to Lender.
4. POWER OF ATTORNEY. Borrower hereby appoints Lender and any designee
of Lender as Borrower's attorney-in-fact and authorizes Lender or such designee,
at Borrower's sole expense, to exercise at any times in Lender's or such
designee's discretion all or any of the following powers, which powers of
attorney, being coupled with an interest, are irrevocable until all of the
Obligations have been paid in full: (a) receive, take, endorse, assign, deliver,
accept and deposit, in the name of Lender or Borrower, any and all cash, checks,
commercial paper, drafts, remittances and other instruments and documents
relating to the Collateral or the proceeds thereof, (b) transmit to any Account
Debtor or any bailee notice of the interest of Lender in the Collateral or
request from any such entity, at any time, in the name of Borrower or Lender or
any designee of Lender, information concerning the Account and any amounts owing
with respect thereto, (c) notify any Account Debtor to make payment directly and
solely to Lender, or notify bailees as to the disposition of Collateral, (d)
take or bring, in the name of Lender or Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or
other realization upon any Collateral, (e) after an Event of Default, change the
address for delivery of mail to Borrower and to receive and open mail addressed
to Borrower, (f) after an Event of Default, upon any terms and conditions,
extend the time of payment of, compromise, or settle for cash, credit, return of
merchandise, any and all Accounts and discharge or release any Account Debtor
without affecting any of the Obligations, (g) execute in the name of Borrower
and file against Borrower in favor of Lender financing statements or amendments
with respect to any or all of the Collateral, and (h) execute in the name of
Borrower and file on behalf of Borrower with such governmental authorities as
are appropriate such documents (including, without limitation, applications,
certificates, and tax returns) as may be required for purposes of having
Borrower qualified to transact business in a particular state or geographic
location.
<PAGE>
5. RELEASE. Borrower hereby releases and exculpates Lender, its
officers, employees, agents, designees, attorneys, and accountants from any
liability arising from any acts under this Agreement or in furtherance thereof,
whether as attorney-in-fact or otherwise, whether of omission or commission, and
whether based upon any error of judgment or mistake of law or fact, except for
gross negligence or willful misconduct. In no event shall Lender have any
liability to Borrower for lost profits or other special or consequential
damages.
6. NO AMENDMENTS. After written notice by Lender to Borrower, and
automatically, without notice, after an Event of Default, Borrower shall not,
without the prior written consent of Lender in each instance, (a) grant any
extension of time for payment of any Account, (b) compromise or settle any
Account for less than the full amount thereof, (c) release in whole or in part
any Account Debtor, or (d) grant any credits, discounts, allowances, deductions,
return authorizations or the like with respect to my Account.
8. DELIVERY OF COLLATERAL. At such times as Lender may request and in
the manner specified by Lender, Borrower shall deliver to Lender or Lender's
representative original invoices, agreements, proof of rendition of services and
delivery of goods and other documents evidencing or relating to the transactions
which gave rise to any of the Collateral, together with customer statements,
schedules describing the Accounts and/or statements of accounts and confirmatory
assignments to Lender of the Accounts in form and substance satisfactory to
Lender and duly executed by Borrower. Without limiting the provisions of any
other section of this Agreement, Borrower will promptly notify Lender, in
writing, of Borrower's granting of credits, discounts, allowances, deductions,
return authorizations or the like with respect to any Accounts. In no event
shall any such schedule or confirmatory assignment (or the absence thereof or
omission of any Accounts therefrom) limit or in any way be construed as a
waiver, limitation, or modification of the Liens or rights of Lender or the
warranties, representations, and covenants of Borrower under this Agreement.
Any documents, schedules, invoices or other paper delivered to Lender by
Borrower may be destroyed or otherwise disposed of by Lender six (6) months
after receipt by Lender, unless Borrower requests their return in writing in
advance and makes prior arrangements for their return, at Borrower's expense.
K. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender as follows:
1. Borrower has good and indefeasible title to the Collateral, free and
clear of liens, claims, security interests, or encumbrances, except for
Permitted Liens.
2. The Eligible Accounts are and will remain bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account Debtors in the ordinary course of Borrower's business,
unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. At the time of the creation
of an Eligible Account Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
applicable Account Debtor regarding such Eligible Account.
3. The Inventory and Equipment are not stored with a bailee,
warehouseman, or similar party (without Lender's prior written consent) and are
located only at the locations identified on the attached exhibit.
<PAGE>
4. Borrower now keeps, and hereafter at all times shall keep, correct
and accurate records itemizing and describing the kind, type, quality, and
quantity of the Inventory, and Borrower's cost therefor.
5. The chief executive office of Borrower is located at the address
indicated in the preamble to this Agreement Accounts and Borrower's FEIN is
77-0363735.
------
6. There are no actions or proceedings pending by or against Borrower
before any court or administrative agency and Borrower does not have knowledge
or belief of any pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower or any guarantor of the Obligations, except for ongoing collection
matters in which Borrower is the plaintiff.
7. All financial statements relating to Borrower or any guarantor of
the Obligations that have been delivered by Borrower to Lender have been
prepared in accordance with GAAP and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been
a material adverse change in the financial condition of Borrower (or such
guarantor, as applicable) since the date of the latest financial statements
submitted to Lender on or before the Closing Date.
L. AFFIRMATIVE COVENANTS. Until full payment of the Obligations and
termination of this Agreement, Borrower shall:
1. FINANCIAL STATEMENTS, REPORTS AND CERTIFICATIONS. Furnish to
Lender, inform and substance satisfactory to Lender:
a. ANNUAL FINANCIAL STATEMENTS. As soon as possible after the end of
each fiscal year of Borrower, and in any event within sixty (60) days
----- ----
thereafter: (a) a complete copy of Borrower's financial statements, including
but not limited to (i) the management letter, if any, (ii) the balance sheet as
of the close of the fiscal year, and (iii) the income statement for such year,
together with a statement of cash flows, compiled by accountants selected by
--------
Borrower and satisfactory to Lender, and (b) a statement certified by the chief
financial officer of Borrower is in compliance with all the terms, conditions,
covenants and warranties of this Agreement; and
b. OTHER FINANCIAL STATEMENTS/TAX PAYMENTS AND STATEMENTS. No later
than 14 days after the close of each quarter (an "Accounting Period"),
-- -------
Borrower's balance sheet as of the close of such Accounting Period and its
income statement for that portion of the then current fiscal year through the
end of such Accounting Period and Borrower's Tax Payments and appropriate
statements through the end pay of such Accounting Period certified by Borrower's
chief financial officer as being complete, correct, and fairly representing its
financial condition and results of operations.
<PAGE>
2. INSPECTIONS. Permit Lender or any representatives thereof, during
usual business hours, without notice to Borrower, to periodically (a) inspect
Borrower's tangible assets and (b) inspect, audit, make copies of, and make
extracts from Borrower's Books, and pay Lender the Audit Fee. In addition to
the foregoing, Borrower hereby permits Lender at any time to access
electronically information concerning any accounts maintained by Borrower with
any bank or other financial institution so long as such access is in furtherance
of, or to monitor compliance with, the terms of this Agreement. Borrower is
obligated to pay lender the Audit Fee a maximum at twice per year, and in the
event of default.
3. EXPENSES.
a. GENERALLY. Pay all reasonable out-of-pocket expenses of Lender
(including, but not limited to, fees and disbursements of Lender's counsel)
incident to (whether by judicial proceedings or otherwise, and whether any
resulting dispute resolution procedure involving tort, contract or other
claims):
(1) the preparation, negotiation, execution, administration and
enforcement of the Loan Documents, any amendments, extensions and renewals
thereof, and any other documents prepared in connection with any transactions
between Borrower and Lender, whether or not executed;
(2) any expenses incurred by Lender (whether or not for the benefit of
Borrower) under this Agreement, including, without limitation, all expenses for
postage relating to the mailing of statements, invoices, and verifications, and
all expenses relating to any audits of all or any portion of the Collateral;
(3) the protection of Lender's rights under the Loan Documents;
(4) defending against any and all claims against Lender relating to any
of its acts of commission or omission directly or indirectly relating to the
Loan Documents;
(5) or in any way arising out of a bankruptcy proceeding commenced by
or against Borrower, including but not limited to expenses incurred in enforcing
or defending Lender's claims against Borrower or the Collateral, defending any
avoidance actions, and expenses related to the administration of said
proceeding;
4. TAXES AND EXPENSES REGARDING BORROWER'S ASSETS. Make timely payment
or deposit of all taxes, assessments or contributions required of Borrower. If
Borrower fails to make any such payment or deposit or furnish the required
proof, Lender may, in its sole discretion and without notice to Borrower, (a)
make payment of the same or any part thereof, or (b) set up such reserves
against the Obligations as Lender deems necessary to satisfy the liability
therefore, or both. Lender may conclusively rely on statements of the amount
owing or other official statements issued by the appropriate governmental
agency. Any payment made by Lender shall constitute neither (i) an agreement by
Lender to make similar payments in the future, nor (ii) a waiver by Lender of
any default under the Loan Documents. Lender need not inquire into, nor contest
the validity of, any expense, tax, security interest, encumbrance or lien, and
the receipt of the usual official notice requiring the payment thereof shall be
conclusive evidence that the same was validly due and owing.
<PAGE>
5. LOCATION OF COLLATERAL. Give Lender written notice immediately upon
forming an intention to change the location of its chief place of business or
any of the Collateral.
6. CHANGE IN NAME. Give Lender written notice immediately upon forming
an intention to change its name or form of business organization.
7. INSURANCE. At all times maintain, with financially sound and
reputable insurers, casualty insurance with respect to the Collateral and other
assets. All such insurance policies shall be in such form, substance, amounts
and coverage as may be satisfactory to Lender and shall provide for thirty (30)
days prior written notice to Lender of cancellation or reduction of coverage.
Borrower hereby irrevocably appoints Lender and any designee of Lender as
attorney-in-fact for Borrower to obtain at Borrower's expense, and, after an
Event of Default, to adjust or settle any claim or other matter under or arising
pursuant to such insurance or to amend or cancel such insurance. Borrower shall
deliver to Lender evidence of such insurance and a Lender's loss payable
endorsement naming Lender as loss payee as to all existing and future insurance
policies relating to the Collateral. Borrower shall deliver to Lender, in kind,
all instruments representing proceeds of insurance received by Borrower. Lender
may apply any and all insurance proceeds received at any time to the cost of
repairs to or replacement of any portion of the Collateral and/or, at Lender's
option, to the payment of or as security for any of the Obligations, whether or
not due, in any order or manner as Lender determines.
8. TAX RETURNS. Deliver to Lender copies of each of Borrower's federal
income tax returns, and any amendments thereto, within thirty (30) days of the
filing thereof with the Internal Revenue Service.
M. NEGATIVE COVENANTS. Until full payment of the Obligations and
termination of this Agreement, Borrower will not:
1. Create, incur, assume, or permit to exist, directly or indirectly,
any lien on or with respect to any of its property or assets of any kind,
whether now owned or hereafter acquired, or any income or profits therefrom,
except for Permitted Liens;
2. Enter into any transaction not in the ordinary and usual course of
Borrower's business, including the sale, lease, or other disposition of, moving,
relocation, or transfer, whether by sale or otherwise, of any of Borrower's
properties, assets (other than sales of Inventory to buyers in the ordinary
course of Borrower's business as currently conducted).
3. Change Borrower's name, FEIN, business structure, or identity, or
add any new fictitious name.
4. Suspend or go out of a substantial portion of its business.
<PAGE>
5. Without thirty (30) days prior written notification to Lender,
relocate its chief executive office to a new location and so long as, at the
time of such written notification, Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected Lender's security
interests and also provides to Lender a landlord's waiver in form and substance
similar party without Lender's prior written consent.
N. EVENTS OF DEFAULT. Each of the following events or conditions shall
constitute an "Event of Default":
1. Borrower defaults in the payment of any Obligations when due,
whether at maturity, upon acceleration, or otherwise;
2. Borrower is in default with respect to the Loan Documents;
3. Borrower or any Guarantor (i) fails to pay any Indebtedness for
borrowed funds when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), or (ii) fails to perform or observe any
term, covenant, or condition of any agreement relating to any such Indebtedness,
if the effect of such failure to perform or observe is the acceleration of the
maturity of such Indebtedness, whether or not such failure is waived by the
obligee of such Indebtedness; or any such Indebtedness is declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof;
4. An order for relief is entered against Borrower or any Guarantor by
any United States Bankruptcy Court; or Borrower or any Guarantor does not
generally pay is debts as they become due (within the meaning of 11 U.S.C.
303(h) as at any time amended, or any successor statute thereto); or Borrower or
any Guarantor makes an assignment for the benefit of creditors; or Borrower any
Guarantor applies for or consents to the appointment of a custodian, receiver,
trustee, or similar officer for it or for all or any substantial part of its
property, or such custodian, receiver, trustee, or similar office is appointed
without application or consent of Borrower or any Guarantor; or Borrower or any
Guarantor institutes (by petition, application, answer, consent, or otherwise)
any bankruptcy, insolvency, reorganization, moratorium, arrangement,
readjustment of debt, dissolution, liquidation, or otherwise) against Borrower
or any Guarantor; or any judgment, writ, warrant of attachment, execution, or
similar process shall be issued or levied against a substantial portion of the
property of Borrower or any Guarantor;
5. An adverse change occurs with respect to the financial condition or
operations of Borrower which results in a material impairment of the prospect of
repayment of Borrower's Indebtedness;
6. A sale, hypothecation or other disposition is made of twenty percent
or more of the beneficial interest in any class of voting stock of Borrower;
7. Borrower fails to generate or provide accounts to Lender for a 30
day period;
8. Any provision of this Agreement or any of the Loan Documents ceases,
for any reason, to be valid and binding on Borrower;
<PAGE>
9. Any Guarantor fails to perform or observe any of such Guarantor's
obligations under any Guaranty, or shall notify Lender of its intention to
rescind, modify, terminate or revoke the Guaranty with respect to future
transactions, or the Guaranty shall cease to be in full force and effect for any
reason whatever;
O. REMEDIES. Upon the occurrence of any Event of Default,
automatically, at Lender's option:
1. Lender's obligation to make any Advance available to Borrower shall
terminate;
2. All Obligations shall, without presentment, demand, protest, or
notice of any kind, all of which are hereby expressly waived, be forthwith due
and payable;
3. All Obligations shall accrue interest at the Default Rate; and
Lender may, immediately and without expiration of any period of grace, enforce
payment of all Obligations and exercise any and all other remedies granted to it
under the Loan Documents, at law, in equity, or otherwise, including but not
limited to the placement of Lender's agents or employees on Borrower's premises
to take all actions necessary to preserve the value of the Collateral.
P. NO LIEN TERMINATION WITHOUT RELEASE. In recognition of Lender's
right to have all its attorneys' fees and other expenses incurred in connection
with this Agreement secured by the Collateral, notwithstanding payment in full
of all Obligations by Borrower, Lender shall not be required to record any
terminations or satisfactions of any of its liens on the Collateral unless and
until Borrower and all Guarantors have executed and delivered to Lender general
releases which conform to California Civil Code '1541-2.
Q. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement,
provided that, this Agreement shall not become effective until all counterparts
hereof have been executed by all parties hereto.
R. SURVIVAL. All representations, warranties and agreements herein
contained shall be effective so long any portion of this Agreement remains
executory.
S. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement is held to be invalid, illegal or unenforceable in
any respect, then such provision shall be ineffective only to the extent of such
prohibition or invalidity, and the validity, legality, and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
T. AMENDMENT. This Agreement shall not be changed, modified, amended,
or terminated except by a writing duly executed by all parties hereto.
<PAGE>
U. WAIVER. No failure to exercise and no delay in exercising any
right, power, or remedy hereunder shall impair any right, power, or remedy which
Lender may have, nor shall any such delay be construed to be a waiver of any
breach or default of Borrower hereunder be deemed a waiver of any default or
breach subsequently occurring. All rights and remedies granted to Lender
hereunder shall remain in full force and effect notwithstanding any single or
partial exercise of, or any discontinuance of action begun to enforce, any such
right or remedy. The rights and remedies specified herein are cumulative and
not exclusive of each other or of any rights or remedies which Lender would
otherwise have. Any waiver, permit, consent or approval by Lender of any breach
or default hereunder must be in writing and shall be effective only to the
extent set forth in such writing and only as to that specific instance.
V. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
W. CHOICE OF LAW. This Agreement and all transactions contemplated
hereunder and/or evidenced hereby shall be governed by, construed under, and
enforced in accordance with the laws of the State of California.
X. STATUTE OF LIMITATIONS. Borrower waives the pleading of any statute
of limitations with respect to any and all actions in connection herewith.
Y. WAIVER OF TRIAL BY JURY. IN RECOGNITION OF THE HIGHER COSTS AND
DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING
HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
FOR: PHOTOLOFT.COM, INC.
By: /s/ Jack Marshall
-------------------
Printed Name: Jack Marshall
--------------
<PAGE>
Title: President
---------
AEROFUND FINANCIAL INC
By: _________________________
Title: ______________________
Addendum: $1,500.00 document processing fee due to AeroFund Financial Inc.
upon receipt of sign documents.
<PAGE>
EXHIBIT 1.2.12 - Borrowing Base Certificate
------------------------------------------------
BORROWING BASE CERTIFICATE
TO: AEROFUND FINANCIAL INC ("Lender")
This Collateral report is submitted pursuant to that certain Loan and
Security Agreement dated September 28, 1999 (the "Agreement") between the
undersigned ("Borrower") and Lender.
By making this request, Borrower certifies that it is not in default under
the Agreement.
Date:
Advance Request for: $
Requested by:
Title:
FOR AFI USE ONLY:
Gross Accounts Receivable as of Date of Request :
+ Additional Accounts Receivable created since DOR :
- - Reductions in Accounts Receivable since DOR :
- - Ineligible Accounts Receivable as of Advance Date :
= Total Eligible Accounts Receivable :
Availability:
The lesser of (i) 80% of Total Eligible
Accounts Receivable, or (ii) $750,000 :
ADVANCE AMOUNT APPROVED :
Borrower, and its officer signing on its behalf below, certify that there does
not now exist an Event of Default (as defined in the Agreement) or an event or
condition which, with the giving of passage of time, or both, would be or become
an Event of Default.
Photoloft.com Inc.
By: ___________________
Title: ________________
<PAGE>
EXHIBIT 8.3 - List of Inventory and Equipment Location
--------------------------------------------------------------
<PAGE>
Exhibit "A"
Acknowledgment of California Choice of Law and Santa Clara County Venue
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The parties expressly acknowledge their agreement that:
(1) California, as the state of the origin of the funding of this
lending on accounts and the state in which the lending on accounts is to be
consummated, is the place of performance of, and the state with the most
significant relationship with this agreement for lending on accounts and its
subject matter; and that
(2) California is the governing law applicable to this contract and its
interpretation as provided in this entire Loan and Security Agreement.
(3) Santa Clara County, as the county of the origin of the funding of
this lending on accounts and the county in which the lending on accounts is to
be consummated, is the place of performance of, the situs of, and the county
with the most significant relationship with this agreement for lending on
accounts and its subject matter will be venue of choice applicable to this
contract and its interpretation as provided in this entire Loan and Security
Agreement.
Agreed,
Borrower: Photoloft.com Inc. Lender: AeroFund Financial Inc
By: /s/ Jack Marshall _____________________
-------------------
Printed Name: Jack Marshall _____________________
--------------
Title: President _____________________
---------
Date: 9/28/99 _____________________
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H:ABCMASTER
- -----------
<PAGE>
PLEDGE AGREEMENT
-----------------
This Pledge Agreement is made and entered into on September 28, 1999, by
--
and between AeroFund Financial, Inc. ("AeroFund"), a California corporation, of
2787 Moorpark Avenue, San Jose, California, and PhotoLoft.com ("PhotoLoft"), a
Nevada corporation, of 300 Orchard City Drive, Suite 142, Campbell, California.
RECITALS
WHEREAS, AltaVista Technology, Inc. ("AltaVista") sold its domain name to
Digital Equipment Corporation ("Digital") in exchange for payments under that
certain 7% Promissory Note, dated July 31, 1998, made by Digital and payable to
AltaVista, a copy of which is attached to this Pledge Agreement as Exhibit A
---------
(the "Note");
WHEREAS, AltaVista changed its name to PhotoLoft.com, Inc. upon the sale of
its domain name to Digital;
WHEREAS, PhotoLoft.com, Inc. entered into a reorganization with Data
Growth, Inc. in February 1999 and became a wholly-owned subsidiary of Data
Growth, Inc.;
WHEREAS, Data Growth, Inc. changed its name to PhotoLoft.com;
WHEREAS, PhotoLoft and AeroFund wish to enter into a Loan and Security
Agreement under which PhotoLoft will borrow from AeroFund, and AeroFund will
lend to PhotoLoft, the sum of $419,200.00;
WHEREAS, PhotoLoft's obligations to AeroFund will be secured by the Note,
which is to be pledged as collateral for PhotoLoft's obligations under the Loan
and Security Agreement, in addition to other assets described in the Loan and
Security Agreement.
AGREEMENT
In consideration of the Recital above, and the mutual representations,
warranties and covenants set for below, the parties to this Pledge Agreement
hereby agree as follows:
1. PLEDGE. In consideration of any financial accommodations given or to be
given or construed to PhotoLoft by AeroFund, including, without limitation,
those under the Loan and Security Agreement, and as collateral security for the
payment of any indebtedness, obligation, or liability of PhotoLoft to AeroFund,
now or later existing, matured or to mature, absolute or contingent, and
wherever payable, PhotoLoft hereby assigns, transfers to, and deposits with,
AeroFund, the Note, and any additional property as may later be delivered by
PhotoLoft to AeroFund during the existence of this Pledge Agreement. PhotoLoft
shall also deliver with the Note a fully executed, but undated, endorsement of
the Note in the form attached as Exhibit B to this Pledge Agreement.
----------
<PAGE>
2. WARRANTIES. PhotoLoft warrants and represents the following with
respect to Note:
(1) PhotoLoft is the absolute owner of the Note and the obligations
described in the Note are due and payable as stated in those documents, and the
obligor under the Note is not now in default in any respect as to any
obligations under the Note.
(2) The Note is not subject to any prior assignment, claim, lien, or
security interest, and PhotoLoft will not make any further assignment of the
Note or create any further security interest in the Note, and will not permit
its rights in the Note to be reached by attachment, levy, garnishment, or other
judicial process.
(3) The obligations of the obligor under the Note are not subject to any
claim for credits, allowances, or adjustments.
(4) PhotoLoft is not aware of, and has not received any notice of the
bankruptcy, insolvency, or financial difficulty of the obligor under the Note.
If PhotoLoft becomes aware of or receives any notice of any such development,
PhotoLoft will immediately notify AeroFund in writing of such development.
(5) PhotoLoft has maintained and will continue to maintain accurate and
complete records and accounts of all obligations under and payments made as to
the Note and agrees to permit AeroFund to inspect these records and accounts.
PhotoLoft further agrees to submit statement of these accounts to AeroFund in
any reasonable form prescribed by AeroFund.
3. SUBSTITUTION OF COLLATERAL. If, with the consent of AeroFund, PhotoLoft
substitutes or exchanges other collateral, including, but not limited to
securities or instruments, in the place of the Note, then all of the rights and
privileges of AeroFund and all of the obligations of PhotoLoft under the Loan
and Security Agreement and this Pledge Agreement apply to the substituted or
exchanged collateral, and shall be the same in all respects as the rights,
privileges, and obligations concerning the Note originally pledged.
4. COLLECTION OF NOTE. If PhotoLoft defaults in any of its obligations
under the Loan and Security Agreement or the Pledge Agreement, then, immediately
and without prior notice to PhotoLoft, AeroFund shall have the right to notify
the obligor under the Note to make payments directly to it and to take control
of all the proceeds of the Note, or any part of it, and to enforce any and all
of the obligations of the obligor under the Note. Until such time as AeroFund
elects to exercise these rights after default, PhotoLoft is authorized to
collect payments on behalf of AeroFund and to enforce all rights under the Note
concerning current and past-due payments, but is not authorized to collect any
prepayments without the prior written consent of AeroFund. The costs of
collection and enforcement, including attorneys' fees and legal expenses, shall
be at the expense of PhotoLoft. PhotoLoft will reimburse any costs or expenses,
including attorneys' fees and legal expenses, that are incurred by AeroFund.
5. DEFAULT. PhotoLoft shall be in default under this Pledge Agreement on
the occurrence of any of the following events or conditions:
<PAGE>
(1) Default in the payment or performance of any of the obligations,
covenants, or liabilities secured by this Pledge Agreement, including, without
limitation, PhotoLoft's obligations under the Loan and Security Agreement.
(2) Any warranty, representation, or statement made or furnished to
AeroFund by or on behalf of PhotoLoft proves to have been false in any material
respect when made or furnished.
(3) Dissolution, termination of existence, insolvency, business failure,
appointment of a receiver, assignment for the benefit of creditors, or the
commencement of any proceeding under any bankruptcy or insolvency law by or
against PhotoLoft.
(4) Any default by the obligor under the terms of the Note.
6. REMEDIES. On the occurrence of any event of default, and at any later
time, AeroFund may declare all the obligations and liabilities of PhotoLoft
under this Pledge Agreement to become immediately due and payable,
notwithstanding any credit or extension of time allowed to PhotoLoft by any
instrument evidencing any of these liabilities. In addition, AeroFund may
proceed to enforce payment and may exercise any and all of the rights and
remedies provided by the California Commercial Code as well as other rights and
remedies either at law or in equity possessed by AeroFund, including but not
limited to the following rights:
(1) AeroFund may retain the Note and collect all payments under it as
provided under the paragraph 4 above, until all of PhotoLoft's obligations to
AeroFund under the Loan and Security Agreement and this Pledge Agreement are
fully paid and performed, including, without limitation, payment or
reimbursement of all fees and expenses AeroFund may have incurred in so
collecting such payments.
(2) On notice to PhotoLoft as required by the California Commercial Code,
AeroFund may sell or otherwise dispose of the Note. The sale may be as a unit
or in parts, at any time and place and on any terms, provided AeroFund acts in
good faith and in a commercially reasonable manner. Out of the proceeds of any
sale, AeroFund may retain an amount equal to the principal and interest then due
under the Loan and Security Agreement, plus the amount of the expenses of the
sale, and shall pay any balance of the proceeds of any sale to PhotoLoft.
PhotoLoft agrees to pay to AeroFund, on demand whatever balance may be due and
owing on the indebtedness secured by this Pledge Agreement after the sale of the
Note and the application of the proceeds as provided by this paragraph and as
required by law.
(3) On notice as required by the California Commercial Code, AeroFund may
propose to retain the Note in satisfaction of all obligations of PhotoLoft
secured by this Pledge Agreement. If PhotoLoft or any other person entitled to
receive notice objects in writing within 21 days after notice was sent, AeroFund
must dispose of the Note under the terms and conditions provided in paragraph
(1), above, or as otherwise authorized by law. In the absence of any written
objection, AeroFund may retain the Note, without any right of redemption, in
full satisfaction of PhotoLoft's obligations and indebtedness to AeroFund.
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7. TERMINATION; RENEWAL. This Pledge Agreement shall become effective upon
the execution and delivery hereof by PhotoLoft and shall continue in full force
and effect for a term ending on the Renewal Date. The parties hereto may agree
to renew this Pledge Agreement for successive terms hereafter by executing a
written amendment to this Pledge Agreement.
8. ATTORNEYS' FEES. In the event of any litigation between the parties to
this Pledge Agreement, regarding the rights and obligations of the parties under
this Pledge Agreement or any obligation secured by this Pledge Agreement, the
prevailing party will be entitled to recover its reasonable attorneys' fees and
legal expenses as determined by the court.
9. WAIVER OF RIGHTS BY PHOTOLOFT. PhotoLoft waives any right to require
AeroFund to (1) proceed against any person, (2) proceed or exhaust any
collateral, or (3) pursue any other remedy in AeroFund's power. PhotoLoft also
waives any defense arising from any disability or other defense of any other
person, or by reason of the cessation from any cause whatsoever of the liability
of any other person. PhotoLoft authorizes AeroFund to take and hold security,
other than the Note, for the payment of the indebtedness or any part of the
indebtedness, and exchange, enforce, waive, and release the Note or any other
security.
10. PRIOR AGREEMENTS SUPERSEDED. The Loan and Security Agreement and this
Pledge Agreement constitute the only agreement of the parties and supersedes any
prior understandings or written or oral agreements between the parties
respecting the subject matter of this Pledge Agreement. If there is a conflict
in the terms of the Loan and Security Agreement and the Pledge Agreement as to
the rights of the parties as to the Note, the terms of the Pledge Agreement
shall prevail. If there is a conflict in terms as to any other rights or
obligations of the parties or as to any other collateral, then the terms of the
Loan and Security Agreement shall prevail.
11. PARTIES BOUND. This Pledge Agreement is binding on and inures to the
benefit of the parties and their respective heirs, executors, administrators,
legal representatives, successors, and assigns as permitted by this Pledge
Agreement.
12. ASSIGNMENT. This assignment of a security interest in the Note shall
be for the benefit of AeroFund and its successors or assigns. If AeroFund
assigns, endorses, sells, transfers, or hypothecates to any other person or
entity the Note, or any other notes, evidences of indebtedness, bonds, stocks,
or other securities deposited under this Pledge Agreement or secured or intended
to be secured by this Pledge Agreement, or any part of it, the assignment or
transfer shall automatically constitute an assignment and transfer of this
Pledge Agreement and all of the rights granted by this Pledge Agreement. The
assignee, endorsee, transferee, or successor of AeroFund shall be granted and
shall have all of the rights and privileges given to AeroFund in accordance with
the terms of this Pledge Agreement.
13. TIME OF THE ESSENCE. Time is expressly declared to be of the essence
in this Pledge Agreement.
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14. PAYMENTS AND NOTICES. All payments and notices under this Pledge
Agreement or otherwise required by law shall be made to Stephen Troy, President
of AeroFund at the address set forth above, and to PhotoLoft at the address set
forth above, or to any other address as the party entitled to payment or notice
may designate to the other party in writing.
15. SATISFACTION OF OBLIGATION. On the satisfaction of all obligations of
PhotoLoft to AeroFund, AeroFund shall return the Note to PhotoLoft along with
all other documents and securities given as collateral under this Pledge
Agreement, and shall, if necessary, endorse all instruments to PhotoLoft or its
order.
16. CALIFORNIA LAW TO APPLY. This Pledge Agreement shall be construed
under and in accordance with the Uniform Commercial Code as enacted in
California and other applicable laws of the State of California.
17. LEGAL CONSTRUCTION. If one or more of the provisions contained in this
Agreement shall for any reason be held invalid, illegal, or unenforceable in any
respect, the invalidity, illegality, or unenforceability of that provision shall
not affect any other provision of this Pledge Agreement, and this Pledge
Agreement shall be construed as if the invalid, illegal, or unenforceable
provision had never been contained in it.
18. DEFINITIONS. All terms used in this Pledge Agreement that are defined
in the California Commercial Code shall have the same meaning in this Pledge
Agreement as in the Code.
Executed on September __, 1999, at San Jose, County of Santa Clara, State
of California.
PHOTOLOFT: AEROFUND:
PHOTOLOFT.COM AEROFUND FINANCIAL, INC.
By: /s/ Jack Marshall By: /s/
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Title: President Title: Pres.
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