AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 2000
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____________________
PHOTOLOFT, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 7372 87-0431036
---- ----------
(State or Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
300 Orchard City Drive, Suite 142
Campbell, California 95008
(408) 364-8777
(Address and Telephone Number of Principal Executive Offices)
300 Orchard City Drive, Suite 142
Campbell, California 95008
(Address of Principal Place of Business or Intended Principal Place of Business)
Jack Marshall
CEO
PHOTOLOFT, INC.
300 Orchard City Drive, Suite 142
Campbell, California 95008
(408) 364-8777
(Name, Address and Telephone Number of Agent for Service)
Copy to:
James C. Chapman, Esq.
Cathryn S. Gawne, Esq.
Stephen W. Clinton, Esq.
Silicon Valley Law Group
152 N. Third Street, Suite 900
San Jose, California 95112
Telecopier: (408) 286-1400
Approximate Date of Proposed Sale to Public: As soon as practicable after this
Registration Statement becomes effective. If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933 check the following box
[X].
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
------------------- ------------------ ------------------- ---------- ----------------
Title of each class Amount to be Proposed Proposed Amount of
of securities to registered maximum maximum registration fee
be registered offering price per aggregate
unit offering
price
------------------- ------------------ ------------------- ----------- -----------------
<S> <C> <C> <C> <C>
Common stock, 10,712,100 shares $ 1.812(1) $19,519,045(1) $ 5,124.32
$.001 par value
Common stock, 6,844,300 shares $ 1.65(2) $11,293,095(2) $ 2,981.38
$.001 par value
Common stock, 80,140 shares $ 3.30(2) $ 264,000(2) $ 69.70
$.001 par value
Common stock, 350,000 shares $ 2.31(2) $ 808,500(2) $ 213.44
$.001 par value
Common stock, 299,961 shares $ 2.25(2) $ 674,912(2) $ 155.93
$.001 par value
Common stock, 299,961 shares $ 2.50(2) $ 749,902(2) $ 175.477
$.001 par value
Common stock, 349,961 shares $ 2.75(2) $ 962,392(2) $ 194.975
$.001 par value
Common stock, 299,961 shares $ 3.00(2) $ 899,883(2) $ 250.221
$.001 par value
Common stock, 600,000 shares $ 0.10(2) $ 60,000(2) $ 233.969
$.001 par value
Common stock, 50,000 shares $ 3.25(2) $ 162,500(2) $ 42.90
$.001 par value
Common stock, 50,000 shares $ 4.00(2) $ 200,000(2) $ 52.80
$.001 par value
Common stock, 50,000 shares $ 4.50(2) $ 225,000(2) $ 59.40
$.001 par value
Common stock, 100,000 shares $ 1.00(2) $ 100,000 $ 26.40
$.001 par value
Total 20,086,243 shares $35,331,729 $ 9,243.46
------------------- ------------------ ------------------- ------------- ---------------
<FN>
(1) Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457 (c) under the Securities Act of 1933, as amended.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457 (g) under the Securities Act of 1933, as amended.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
Subject to Completion, July 31, 2000
[GRAPHIC OMITTED]
20,086,243 Shares
Common Stock
We have prepared this prospectus to allow certain of our security holders,
or their respective pledges, donees, transferees or other successors in
interest, to sell up to 20,086,243 shares of our common stock that they own or
may acquire upon exercise of options or warrants to purchase our common
stock. We refer to these security holders, pledges, donees and transferees as
"selling stockholders". We will receive no proceeds from the sale of shares by
selling stockholders.
Our common stock is listed on the NASD O-T-C Market Bulletin Board under
the symbol "LOFT". The last sale price reported by the O-T-C Market Bulletin
Board for July 25, 2000 was $1.812 per share.
______________________
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF MATERIAL ISSUES TO
CONSIDER BEFORE PURCHASING OUR COMMON STOCK.
_______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 31, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Risk Factors 6
Price Range of Common Stock and Dividend Policy 14
Capitalization 15
Selected Consolidated Financial Data 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Business 21
Management 35
Related Party Transactions 43
Selling Stockholders 46
Principal Stockholders 48
Description of Capital Stock 49
Shares Eligible for Future Sale 55
Plan of Distribution 56
Legal Matters 57
Experts 58
Where You Can Find Additional Information 58
Index to Financial Statements F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "PhotoLoft, Inc.", "we", "us" and "our" refer to PhotoLoft, Inc.
"PhotoLoft" and "Howdy" are trademarks and service marks of PhotoLoft, Inc.
All other trademarks, service marks or trade names referred to in this
Prospectus are the property of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from elsewhere in this
prospectus. To understand this offering fully, you should read the entire
prospectus carefully, including the "Risk Factors" and financial statements.
PHOTOLOFT, INC.
As an early player in the online imaging market, PhotoLoft, Inc. established
itself as a business to business ("B2B") website. At the same time, we
established a consumer photosharing web site that served as a prototype for our
private label and co-branded partner sites. As the marketplace for our services
evolved over the ensuing years, we utilized this time to educate the
marketplace and build our consumer site. Now that the B2B marketplace has
become much more sophisticated and we have honed our products, we are looking to
become a leader in the nascent Internet digital imaging and photosharing B2B
market.
We provide turnkey B2B web-based infrastructure for rapidly producing
websites that can be integrated seamlessly with client companies' websites in
co-branded, private label and customized installations for consumer oriented
photosharing communities and digital imaging businesses. Designed for B2B
backbone purposes, and easy scaling, the PhotoLoft, Inc. solution is mated to a
powerful e-commerce engine that automates purchases of prints and other photo
related merchandise and integrates seamlessly with the client website and with
diverse product fulfillers and distributors. We intend to leverage our
technology to power the sites of others and garner fees and revenue splitting
from sharing print, e-commerce and advertising revenue, and from the sale of
these products on our own site.
We are incorporated in Nevada. Our principal executive offices are located
at 300 Orchard City Drive, Suite 142, Campbell, California 95008. Our phone
number is (408) 364-8777. Our internet address is www.PhotoLoft, Inc.. The
-----------------
information on our Web site is not part of this prospectus.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by selling stockholders 20,086,243 shares (1)
Common stock to be outstanding after this 59,374,283 shares (1)
Offering
Use of proceeds We will not receive any of the proceeds from
the sale of the common stock by the stock
holders under this prospectus. Any proceeds
we receive from the exercise of options and warrants
held by the selling stockholders will be used for
working capital and general corporate purposes.
O-T-C Bulletin Board symbol: "LOFT"
3
<PAGE>
Plan of Distribution The selling stockholders may offer shares
of our common stock through public or private
transactions on or off the NASD O-T-C
Bulletin Board in the United States, at
prevailing market prices or at privately
negotiated prices. For details of how the
selling stockholders may offer their shares
of our common stock, please see the section
of this prospectus called "Plan of
Distribution".
Risks The purchase of our common stock involves
substantial risks including, but not limited
to, lack of profits, changes in our business,
and a limited market for our common stock.
For a discussion of the risks you should
consider before investing in our common
stock, see "Risk Factors".
<FN>
__________
(1) Does not include an aggregate of 6,110,681 shares reserved for issuance upon exercise
of other stock options and warrants outstanding as of July 15, 2000.
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The following financial information has been derived from our financial
statements included elsewhere in the prospectus. This data should be read in
conjunction with those statements and the related notes. See "Financial
Statements".
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
----------------------- ------------------------
2000 1999 1999 1998
------------ ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA: (unaudited) (unaudited)
<S> <C> <C>
Revenues $ 61,800 $ 21,800 $ 254,500 $ 674,300
Cost of revenues 27,300 36,300 124,200 113,000
Loss from operations (2,687,500) (638,400) (5,492,800) (762,700)
Net (loss) income (2,688,400) (360,500) (4,752,100) 1,663,300
Net (loss) income available to common shareholders (2,688,400) (1,294,800) (5,766,100) 1,663,300
Basic (loss) earnings per share (0.21) (0.14) (0.49) 0.26
Diluted (loss) earnings per share (0.21) (0.14) (0.49) 0.18
Basic weighted average common shares outstanding 12,881,875 9,063,500 11,658,200 6,488,300
Diluted weighted average common shares outstanding 12,881,875 9,063,500 11,658,200 9,287,700
March 31, December 31,
2000 1999
Unaudited
BALANCE SHEET DATA: ---------- ------------
Cash and cash equivalents $ 300,700 $ 175,300
Working capital (deficiency) $(761,700) $ (650,600)
Total assets $ 771,800 $ 970,100
Short-term debt $ 115,000 $ --
Total shareholders' (deficiency) equity $(326,300) $ (215,400)
</TABLE>
5
<PAGE>
RISK FACTORS
An investment in the shares of our common stock offered by this prospectus
involves a high degree of risk. You should consider carefully the following
risk factors as well as the other information set forth in this prospectus
before you decide to buy our common stock.
RISKS RELATED TO PHOTOLOFT, INC.'S OPERATIONS
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 April 2000 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, and have yet to develop
sufficient experience regarding actual revenues to be received from our
products and services. 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. As of March 31, 2000, we had an accumulated deficit
of $7,340,000. Because of our recently launched new business model and our
current plans to invest in the expansion of our business 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, and ultimately, to generate greater 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.
We have no significant revenue history with respect to our recently
launched products and services. Our revenues for the foreseeable future will
remain primarily dependent on the number of private label, co-branded and
customized companies to whom PhotoLoft, Inc. provides solutions, and the revenue
sharing and fees generated from our B2B partners. We cannot forecast with any
degree of certainty the number of visitors to the sites of our partners, or the
revenue sharing and fees generated thereby.
We expect our operating results to fluctuate from quarter to quarter. We
believe that some of the revenue streams that we share with our customers and
partners, including e-commerce and advertising, will vary from quarter to
quarter. While fluctuations in the revenue and maintenance streams may be
offset by other revenue streams that we earn, such as set up fees, our operating
results may fluctuate significantly from quarter to quarter.
6
<PAGE>
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat customers;
- our customers' ability to attract new and repeat customers and sell
product through e-commerce channels;
- our ability to keep current with the evolving requirements of our target
market;
- our ability to protect our proprietary technology;
- the ability of our competitors to offer new or enhanced
features, products or services;
- the growth of the on-line photography market as projected;
- 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; CONTROLLING SHAREHOLDER.
The sale of a substantial number of shares of our common stock in the
public market, or the prospect of such sales, could materially and adversely
affect the market price of our common stock. We are authorized to issue up to
200,000,000 shares of common stock. 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.
We have designated 900 shares of our preferred stock as Series B preferred stock
and issued 900 of such shares in a private placement financing in June 2000.
Such shares were convertible automatically into common stock, on or Before July
7, 2000, in an amount equal to 50% of our then-outstanding common stock
following the conversion (on a fully-diluted basis). As a result, the holder of
the 900 shares of Series B preferred stock will also become a controlling
shareholder. At July 8, 2000 we had 33,825,266 shares of common stock
outstanding on a fully-diluted basis and therefore if all of the Series B
Preferred Stock had been converted on that date, the holder of the Series B
Preferred Stock would have owned and controlled 50% of our fully-diluted stock.
However, on July 8, 2000, we did not have enough shares of authorized common
stock to convert all of the Series B Preferred Stock. On that date, we issued
27,914,023 shares of common stock in partial conversion of the Series B
Preferred Stock. Pursuant to the terms of the May 22, 2000 letter agreement
between the holder of the Series B Preferred Stock and us, we incurred penalties
of $13,122,959 as a result of the inability to convert the remainder of the
Series B Preferred Stock. These penalties have been waived by the holder in
exchange for the issuance of warrants to purchase an aggregate of 11,900,000
shares of our common stock at an exercise price of $1.65 per share. The
conversion has diluted, and the exercise of these warrants will dilute, the
interests of our other shareholders. This does not include an aggregate of
6,110,681 shares reserved for issuance upon exercise of other stock options and
warrants outstanding as of July 15, 2000. Sales in the public market of
substantial amounts of our common stock, including sales of common stock
issuable upon exercise of these options and warrants, could depress prevailing
market prices for our common stock. Even the perception that such sales could
occur might impact market prices for the common stock. The existence of
outstanding options and warrants may prove to hinder our future equity
financings. In addition, the holders of such options and warrants might
exercise them at a time when we would otherwise be able to obtain additional
equity capital on terms more favorable to us. Such factors could materially and
adversely affect our ability to meet our capital needs.
7
<PAGE>
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION.
To date, we have relied to a significant extent on outside parties to
develop new customer opportunities. We believe that the growth of partner and
shared revenues will depend on our ability to establish an aggressive and
effective internal sales organization. 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.
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,
attract and retain senior management 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.
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. The loss of
the services of any of these executive officers or key employees 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.
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. We
currently or potentially compete with a number of other companies, including
some large photography equipment and service providers that have existing photo
lab customers and expertise in selling services to these customers, and a number
of other small services, including those that serve specialty markets. In
addition, companies that currently provide other digital imaging services or
online photo sharing communities may migrate into our markets, thus increasing
competition. 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. A potential competitor
could develop a technology that is competitive or superior to ours.
8
<PAGE>
WE MAY ENGAGE IN ADDITIONAL FINANCINGS WHICH MAY BE DILUTIVE TO EXISTING
STOCKHOLDERS.
We believe that our present cash resources and cash from operations will be
sufficient to finance our planned operations for the next 15 months. However,
we may need to raise additional equity or debt capital earlier than planned. 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 when required 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.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We have established in the past, and intend to establish in the future
strategic alliances with photo finishing equipment providers, photo lab
retailers and popular web sites to increase the number of customers using our
infrastructure. In the future, we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances, our partners may not attract significant numbers of users.
Therefore, our infrastructure may not generate the anticipated level of revenue
sharing. 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.
9
<PAGE>
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 companies. We do not have any
present understanding with 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 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.
In addition, traditional photo finishers have begun to migrate to offering film
based customers digital output alternatives. The continued refinement of the
technology and commoditization of the price will help to increase acceptance
of the technology; however, there can be no assurance that the digital
imaging will be accepted within a timeframe constant with our business
objectives.
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.
10
<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 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.
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.
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. As
long as this condition continues, the sale of a significant number of shares of
common stock at any particular time could be difficult to achieve at the market
prices prevailing immediately before such shares are offered. In addition,
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. In addition to the shares of our
common stock being registered for resale pursuant to this prospectus, we are
obligated to register an aggregate of 39,114,023 additional shares of our common
stock for resale under the Securities Act pursuant to an agreement with
Intellect Capital Group LLC. This registration must occur upon the demand of
Intellect Capital Group LLC, which demand may not occur prior to December 8,
2000. Upon completion of such registration, a substantial number of additional
securities will be placed into the public market with the potential adverse
consequences described above.
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.
11
<PAGE>
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. 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 as other Internet
stocks or that Internet stocks in general will sustain their recent 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.
In addition, our stock is currently traded on the NASD O-T-C Bulletin Board
and it is uncertain that we will be able to successfully apply for listing on
the NASDAQ National Market, the Nasdaq SmallCap Market or Amex in the
foreseeable future due to the trading price for our common stock, our working
capital and revenue history. We have filed an application for listing with
Amex; however, there can be no assurance that the application will be approved.
Failure to list our shares on the Nasdaq National Market, the Nasdaq SmallCap
Market, or Amex will impair the liquidity for our common stock.
12
<PAGE>
OPERATIONS DEPENDANT ON ABILITY TO PROTECT OUR OPERATING SYSTEMS.
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. Its operations are dependent in part on its ability to
protect its operating systems against physical damage from fire, floods,
earthquakes, power loss, telecommunications failures, break-ins or other similar
events. Furthermore, despite its implementation of network security measures,
its 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 its users, which accordingly
could have a material adverse effect on our business, results of operations
and financial condition.
SOME OF THE INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our
stockholders. There may be events in the future, however, that we are not able
to predict accurately or over which we have no control. The risk factors listed
in this section, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in these risk factors and elsewhere in
this prospectus could have a material and adverse effect on our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline and you
could lose all or part of your investment.
13
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the NASD O-T-C Bulletin Board under the
trading symbol "LOFT" since March 1, 1999. Prior to that date, our common stock
was not actively traded in the public market. The following table sets forth,
for the periods indicated, the high and low bid prices for our common stock as
reported by various Bulletin Board market makers. The quotations do not reflect
adjustments for retail mark-ups, mark-downs, or commissions and may not
necessarily reflect actual transactions.
2000 High Low
---- ------ ------
First Quarter (January 1 to March 31) $3.625 $1.718
Second Quarter (April 1 to June 30) $2.937 $1.312
Third Quarter (July 1 to July 15) $2.625 $1.875
1999
----
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 31) $2.937 $1.343
As of July 15, 2000, there were approximately 349 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.
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for Internet
companies in particular, has been highly volatile. 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
Internet companies' stocks have reached historical highs as well as historical
lows within the last 52 weeks and have reflected valuations which at times have
been substantially above historical levels. 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 recent 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;
- changes in the market valuations of other technology companies; and
- general market conditions.
DIVIDEND POLICY
To date, we have never declared or paid any cash dividends on our capital
stock. We currently intend to retain any future earnings for funding growth
and therefore, do not expect to pay any dividends in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 2000, Photoloft Inc.'s
capitalization on an actual basis, with a column for adjustments to reflect (i)
various short-term loans to the Company, (ii) the issuance of 900 shares of
Series B convertible preferred stock, (iii) the issuance of 10,674,600 shares of
common stock as part of a private placement, (iv) the redemption of 106
shares of Series A convertible preferred stock, and (v) the conversion of 900
shares of Series B convertible preferred stock into 27,914,023 shares of common
stock. The proforma column reflects Photoloft's capitalization after the effect
of the above transactions. This information should be read in conjunction with
our Financial Statements and the related Notes appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Actual Adjustments Proforma
------------ --------------- -----------
<S> <C> <C> <C> <C>
SHORT-TERM DEBT - 390,000 (a) 390,000
STOCKHOLDERS' EQUITY
Preferred stock, .001 par value; 1,060,000 9,000 (b)
500,000 shares authorized; (1,060,000)(d)
106 shares issued and (9,000)(e) -
outstanding actual; no shares
issued and outstanding proforma
Common stock, .001 par value; 12,900 10,700 (c)
50,000,000 shares authorized 27,900 (e) 51,500
actual; 200,000,000 shares
authorized proforma; 12,914,375
shares issued and outstanding
actual; 51,502,998 shares
issued and outstanding proforma
Additional paid-in capital 6,083,800 12,176,700 (b)
(12,176,700)(b)
12,166,000 (c)
(18,900)(e) 18,230,900
Deferred compensation (143,000) (143,000)
Accumulated deficit (7,340,000) (212,000)(d) (7,552,000)
------------ -----------
Total Stockholders' Equity (Deficit) (326,300) 10,587,400
TOTAL CAPITALIZATION (326,300) 10,977,400
</TABLE>
(a) Subsequent to March 31, 2000, we obtained loans of $115,000 from
shareholders and $275,000 from an investor.
(b) Subsequent to March 31, 2000, we issued 900 shares of Series B convertible
preferred stock to an investor for proceeds of $9,000. The Series B
convertible preferred stock was convertible into 50% of our common stock on
a fully-diluted basis. This transaction was accounted for as a stock
issuance cost of the subsequent private placement.
(c) Subsequent to March 31, 2000, we issued an aggregate of 10,674,600 shares
of common stock for net proceeds of $12,176,700 as part of a private
placement.
(d) Subsequent to March 31, 2000, we redeemed all of the outstanding Series A
convertible preferred stock for $1,272,000. The excess of the redemption
payment over the face value of the Series A convertible preferred stock has
been recorded as a dividend.
(e) Subsequent to March 31, 2000, the Series B convertible preferred
shareholder converted its shares into 27,914,023 shares of common stock and
11,900,000 warrants.
15
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are statements of operations data for the three months
Ended March 31, 2000 and 1999, respectively, and for the years ended December
31, 1999 and 1998, respectively, and summary balance sheet data as of March 31,
2000 and December 31, 1999. You should read this information in conjunction
with our Financial Statements and related Notes appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Three Months Ended Mar 31, Years Ended Dec. 31,
2000 1999 1999 1998
------------ ----------- ------------ -----------
STATEMENTS OF OPERATIONS DATA: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 61,800 $ 21,800 $ 254,500 $ 674,300
Cost of revenues 27,300 36,300 124,200 113,000
------------ ----------- ------------ -----------
Gross profit (loss) 34,500 (14,500) 130,300 561,300
OPERATING EXPENSES:
Sales and marketing 113,800 18,800 1,217,200 325,000
General and administrative 2,608,200 605,100 4,405,900 999,000
------------ ----------- ------------ -----------
TOTAL OPERATING EXPENSES 2,722,000 623,900 5,623,100 1,324,000
------------ ----------- ------------ -----------
Loss From operations (2,687,500) (638,400) (5,492,800) (762,700)
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Sale of trade name - - - 3,100,000
Loss on settlement of note receivable - - (108,100) -
Interest income (100) 40,100 110,600 76,900
Interest expense - - (6,000) (500)
Other - (2,500) (1,200) (2,400)
------------ ----------- ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (100) 37,600 (4,700) 3,174,000
------------ ----------- ------------ -----------
Income (loss) before income taxes (2,687,600) (600,800) (5,497,500) 2,411,300
Income tax (benefit) expense 800 (240,300) (745,400) 748,000
------------ ----------- ------------ -----------
NET INCOME (LOSS): (2,688,400) (360,500) (4,752,100) 1,663,300
Deemed dividend on issuance of warrants - - 80,000 -
Deemed dividend on conversion of preferred stock into common stock - 934,000 934,000 -
------------ ----------- ------------ -----------
Net income (loss) available to common shareholders (2,688,400) (1,294,500) (5,766,100) 1,663,300
============ =========== ============ ===========
Basic earnings (loss) per share $ (0.21) $ (0.14) $ (0.49) $ 0.26
============ =========== ============ ===========
Diluted earnings (loss) per share $ (0.21) $ (0.14) $ (0.49) $ 0.18
============ =========== ============ ===========
Basic weighted-average common shares outstanding 12,881,875 9,063,500 11,658,200 6,488,300
Stock options considered dilutive - - - 2,799,400
------------ ----------- ------------ -----------
Diluted weighted-average common shares outstanding 12,881,875 9,063,500 11,658,200 9,287,700
============ =========== ============ ===========
<PAGE>
March 31, December 31,
2000 1999
(unaudited)
BALANCE SHEET DATA: ------------ -----------
Cash and cash equivalents $ 300,700 175,300
Working capital (deficiency) $ (761,700) (650,600)
Total assets $ 771,800 970,100
Short-term debt $ 115,000 -
Total shareholders' deficiency $ (326,300) (215,400)
</TABLE>
16
<PAGE>
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 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, those discussed in this section and elsewhere in this
prospectus.
OVERVIEW
As an early player in the online imaging market, we established ourselves
As a business to business ("B2B") website. At the same time, we
established a consumer photosharing web site that served as a prototype for our
private label and co-branded partner sites. As the marketplace for our services
evolved over the ensuing years, we utilized this time to educate the
marketplace and build our consumer site. Now that the B2B marketplace has
become much more sophisticated and we have honed our products, we are looking to
become a leader in the nascent Internet digital imaging and photosharing B2B
market.
We provide turnkey B2B web-based infrastructure for rapidly producing
websites that can be integrated seamlessly with client companies websites in
co-branded, private label and customized installations for consumer oriented
photosharing communities and digital imaging businesses. Designed for B2B
backbone purposes, and easy scaling, the PhotoLoft, Inc. solution is mated to a
powerful e-commerce engine that automates purchases of prints and other photo
related merchandise and integrates seamlessly with the client website and with
diverse product fulfillers and distributors. We intend to leverage our
technology to power the sites of others and garner fees and revenue split from
sharing print, e-commerce and advertising revenue, and from the sale of these
products on our own site. We adopted our current business model in April 2000.
Accordingly, we are very much like a start-up company and have generated minimal
revenues since the adoption of this model.
We are incorporated in Nevada. Our principal executive offices are located
at 300 Orchard City Drive, Suite 142, Campbell, California 95008. Our phone
number is (408) 364-8777. Our internet address is www.PhotoLoft.com The
-----------------
information on our Web site is not part of this prospectus.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Revenues for the three months ended March 31, 2000 were $61,800, compared
to revenues of $21,800 for the three months ended March 31, 1999. The increase
in revenues was due to increased advertising sales. The cost of revenues
decreased to $27,300 for the three months ended March 31, 2000, compared to
$36,300 for the comparable period in 1999. Gross profit equaled $34,500 for the
three months ended March 31, 2000, compared to a gross loss of $14,500 for the
three months ended March 31, 1999. The negative gross margin for the three
months ended March 31, 1999 was due primarily to a low level of operations
during the transition of our business from software sales to revenue sharing and
e-commerce customers using our infrastructure, resulting in an inability to
cover the fixed component of the cost of revenues during those months.
Selling and marketing expenses were $113,800 for the three months ended
March 31, 2000, compared to $18,800 for the comparable period in 1999.
Substantially all of our selling and marketing expenses in the first quarter of
2000 were derived from a shift in our primary target customers from consumers to
organizations (both traditional and online) that service consumers.
General and administrative expenses increased to $2,608,200 for the three
months ended March 31, 2000, compared to $605,100 for the three months ended
March 31, 1999. The increase in general and administrative expenses was due
primarily to non-cash compensation relating to stock option and warrant grants
during the first quarter of 2000.
As a result of the foregoing factors, our net loss increased to $2,688,400
for the three months ended March 31, 2000, from a net loss of $360,500 for the
three months ended March 31, 1999. The net loss per share increased to $0.21 for
the three months ended March 31, 2000 from $0.14 for the comparable period in
1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues for fiscal 1999 were $254,500, a decrease of $419,800, or
approximately 62.3%, compared to $674,300 for fiscal 1998. Revenues decreased
primarily due to a change in PhotoLoft, Inc.'s operations from selling software
to selling advertising and e-commerce. This change did not occur until the
latter half of 1998, contemporaneously with the sale of the AltaVista URL
to Compaq Computer.
The gross profit for fiscal 1999 was $130,300, a decrease of $431,000, or
approximately 76.8%, compared to $561,300 for fiscal 1998. This decrease in
gross profit is due primarily to the transition of our business from
software sales to advertising and e-commerce sales and the accompanying
significant decrease in revenues, resulting in an inability to cover the
fixed cost component of the cost of revenues during fiscal 1999.
17
<PAGE>
Sales and marketing expenses for fiscal 1999 were $1,217,200, an increase
of $892,200, or approximately 274.5%, compared to $325,000 for fiscal 1998.
This increase reflects the planned aggressive growth phase of our new business
model. Included in these costs were mainly advertising expenses incurred as we
established our brand.
General and administrative expenses for fiscal 1999 were $4,405,900, an
increase of $3,406,900, or approximately 341.0%, compared to $999,000 for fiscal
1998. This increase also reflects the planned aggressive growth phase of our
new business model. Among these costs are accounting and legal, including the
costs associated with being a publicly traded company, rent, depreciation,
administrative personnel, and compensation relating to stock option and warrant
grants.
Loss from operations for fiscal 1999 was $5,492,800, an increase of
$4,730,100, or approximately 620.2%, compared to a loss from operations of
$762,700 for fiscal 1998. This increase is primarily due to the transition in
our business strategy and the costs incurred to develop our web
site.
Interest income for fiscal 1999 was $110,600, an increase of $33,700, or
approximately 43.8%, compared to $76,900 for fiscal 1998. Interest income
increased due to the note receivable related to the sale of the AltaVista URL in
July 1998.
Net loss for fiscal 1999 was $4,752,100, a difference of $6,415,400 from
net income of $1,663,300 for fiscal 1998. The net income for fiscal 1998 is
primarily due to the sale of the Alta Vista URL to Compaq Computer, for which
PhotoLoft, Inc. recorded other income of $3,100,000.The net loss for fiscal 1999
is primarily due to increases is selling, general and administrative expenses
resulting from the planned aggressive growth phase of our new business
model.
INCOME TAXES
As of December 31, 1999, we had a gross deferred tax asset of $974,100,
principally arising from net operating loss carry forwards available to offset
future taxable income. As we cannot determine that it is more likely than not
that we will realize the benefit of these assets, a 100% valuation allowance has
been established.
LIQUIDITY AND CAPITAL RESOURCES
18
<PAGE>
To date, we have financed our operations primarily through private
placements of equity securities and the revenue generated from the sale of our
Altavista.com URL in 1998. The private placements generated net proceeds of
$1,060,000 during the three months ended March 31, 2000 compared to proceeds of
$1,120,000 for the three months ended March 31, 1999.
The $1,060,000 of net proceeds generated during the three months ended
March 31, 2000 were raised in a March 2000 private placement of our Series A
Preferred Stock. The Series A Preferred Stock had an initial fixed conversion
price of $2.65 per share, which was adjustable to 80% of the average of the
closing price of our common stock for the five business days prior to
conversion. In conjunction with the private placement of the Series A Preferred
Stock, the placement agent received a 7.5% cash fee and warrants to purchase
185,500 shares of our common stock. In June 2000 we redeemed all outstanding
Series A Preferred Stock for an aggregate cash payment of $1,272,000 plus
warrants to purchase an aggregate of 80,140 shares of our common stock at an
exercise price of $3.30 per share.
On June 8, 2000, pursuant to a Stock Purchase Agreement dated as of April
18, 2000 (the "Agreement"), we issued and sold 900 shares of our Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to Intellect
Capital Group, LLC, a Delaware limited liability company ("ICG"). ICG is a Los
Angeles-based firm that provides investment and intellectual capital to
developmental and emerging growth stage technology companies and takes an active
role to assist them to realize their full potential. The consideration for the
Series B Preferred Stock consisted of $9,000 in cash. In conjunction with the
Agreement, ICG will become an active shareholder, and will assist us with the
creation and execution of our strategic plan, building a management team and
Board of Directors, identifying and consummating strategic relationships, and
advising on merger and acquisition activities, our capital formation process and
corporate finance and corporate communications. The Series B Preferred Stock
was convertible, on or before July 8, 2000, into 50% of our then-outstanding
common stock following the conversion (on a fully- diluted basis). At July 8,
2000; we had 33,825,266 shares of common stock outstanding on a fully-diluted
basis, and therefore, if ICG had converted all of the Series B Preferred Stock
on that date, it would have owned and controlled 50% of our fully-diluted common
stock.
However, on July 8, 2000, we did not have enough shares of authorized
common stock to convert all of the Series B Preferred Stock. On that date, we
issued 27,914,023 shares of common stock in partial conversion of the Series B
Preferred Stock. Pursuant to the terms of May 22, 2000 letter of agreement
between the holder of the Series B Preferred Stock and us, we incurred penalties
of $13,122,959 as a result of the inability to convert the remainder of the
Series B Preferred Stock. These penalties have been waived by the holder and
the holder has waived its right to receive the additional 5,911,243 shares it
was entitled to on July 8, 2000, in exchange for the issuance of warrants to
purchase an aggregate of 11,900,000 shares of our common stock at an exercise
price of $1.65 per share. The warrants are not exercisable before December 8,
2000: after that date, they may be exercised, or exchanged on a two-for one
basis for shares of our common stock. The conversion has diluted, and the
exercise of these warrants will dilute, the interests of our other shareholders.
Pursuant to the Agreement, we elected Terren S. Peizer, the ICG Chairman and
Chief Executive Officer, as our Chairman and a member of our Board of Directors.
Prior to entering into the Agreement, ICG loaned us $275,000 pursuant to a Loan
and Security Agreement dated May 18, 2000. The loan was evidenced by a
Promissory Note, and secured by all of our assets. We repaid the loan in
July 2000. Previously on March 24, 2000, we had sold and issued to an entity
related to ICG a warrant to purchase 400,000 shares of our common stock at an
exercise price of $0.10 per share.
In July 2000, we closed the private placement of an aggregate of 10,674,600
shares of our common stock and warrants to purchase an aggregate of 6,544,300
shares of our common stock, pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The warrants have an exercise price of
$1.65 per share, and expire in June or July 2003. We received gross proceeds of
$13,308,250 from this private placement, and our net proceeds, after commissions
and fees of $931,600 and estimated expenses, are anticipated to be approximately
$12,176,700. We note that our independent certified public accountants have in
the past included an explanatory paragraph relative to a going concern
uncertainty. However, as a result of recent private placements we have enough
cash for 15 months.
19
<PAGE>
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 December 31, 1999 and March 31, 2000 this line of credit
had no outstanding balance.
We believe that our present cash resources and cash from operations will be
sufficient to finance our planned operations for the next 15 months. However
we may need to raise additional equity or debt capital earlier than planned. 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.
IMPACT OF THE YEAR 2000
In our previous filings, we have discussed the nature and progress of our
plans to deal with potential Year 2000 problems. These problems arise from the
fact that many currently installed computer systems and software products were
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 needed to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. Prior to December 31, 1999, we completed our
assessment of all material information technology and non-information technology
systems at our headquarters, as well as our review of Year 2000 compliance by
our key vendors, distributors and suppliers. To date, we have experienced no
significant disruptions in mission critical information technology and
non-information technology systems and we believe those systems successfully
responded to the Year 2000 date changes. We are not aware of any material
problems resulting from Year 2000 issues, either with our own internal systems
or the products and services of third parties. We will continue to monitor
our mission critical computer applications and those of our suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
SEASONALITY
We believe that we may experience seasonality in our business, with use of
the Internet in general and our PhotoLoft, Inc. web site and partner websites
traffic being somewhat lower during periods of the year. 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. 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.
20
<PAGE>
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1998, 1999 and 2000, inflation
has not had a significant effect on our results of operations since inception.
BUSINESS
As an early player in the online imaging market, we established
ourselves as a B2B website. At the same time, we established a consumer
photosharing web site that served as a prototype for our private label and
co-branded partner sites. As the marketplace for our services evolved over the
ensuing years, we utilized this time to educate the marketplace and build our
consumer site. Now that the B2B marketplace has become much more sophisticated
and we have honed our products, we are looking to become a leader in the nascent
Internet digital imaging and photosharing B2B market.
The vast majority of the participants in the Internet digital imaging
market have focused only on the consumer market to draw traffic and photos to
their websites. In contrast, by focusing on supplying a digital imaging
infrastructure backbone, and taking a B2B approach, we are positioning ourselves
as a potential ally to major Internet and click-and-mortar players who wish to
participate in the Internet photography and digital imaging market.
These photosharing and photo retail websites, where users can post and
share photos with friends and family in online photo albums, and order prints
and photo-personalized merchandise, are spreading rapidly. Compared to
traditional photo prints, digital images, taken either by a conventional camera
and then digitized by a scanner, or taken directly by increasingly popular
digital cameras, are much easier to duplicate and share. Print fulfillment or
digital-imaging sites serve primarily for posting photos and ordering prints.
A photofinisher such as Canon, a neighborhood mini-lab with a PC and
digital scanner, a large retailer with a valuable in-store photo finishing
business, a wedding or portrait photographer, a reprint/reprint destination
website; all want to be able to offer their customers a state-of-the-art online
experience to capitalize on this fast-growing market. They want to offer their
customer the ability to go to a web page, look at or upload their photos, zoom
in and out, and then order prints and merchandise with automated e-commerce
processing. While they are at the site, this "sticky" activity boosts
advertising revenues.
We provide turnkey web-based infrastructure for all of these consumer
oriented reprint and digital imaging businesses. We intend to leverage our
technology to power the sites of others and garner fees and revenue splits from
sharing print, e-commerce and advertising revenue with our partners. We also
garner revenue from the sale of these products on our own site.
We adopted our current business model in April 2000. Accordingly, we are
very much like a start-up company and have generated minimal revenues since the
adoption of this model. We were originally formed in November 1993 and operated
under the corporate name of AltaVista Technology, Inc. AltaVista was formed to
develop imaging software that made computing more fun. In 1995 AltaVista
introduced Howdy!, the first multi-media e-mail tool. As a component of this
product, AltaVista also established web pages via e-mail.
21
<PAGE>
As the bundled software market evolved into a non-revenue generating
business, we began exploring new ways to generate profits. This search
coincided with the rapid growth of the Internet and the growth in Internet users
who were rapidly beginning to utilize the medium as a source of entertainment as
well as information. Because the expertise of AltaVista was in imaging
technology, a decision was made to enter into the online imaging market through
the launch of our general-purpose consumer destination site in the spring of
1999. Prior to that launch, we sold our URL, AltaVista.com, to Digital
Equipment in August 1998, and changed our name to PhotoLoft.com, Inc. In
March 1999, we entered into a reorganization with Data Growth, Inc., a
non-operating public company incorporated in Nevada. Under the terms of the
reorganization, 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. In July 2000, we changed our name to
Photoloft, Inc. to reflect our new business model.
MARKET OPPORTUNITY
The accelerating migration from conventional to digital cameras, and the
ability of photofinishers to scan and digitize conventional film negatives, is
driving this market. 92 billion photographic exposures were taken in 1999
(Source: Lyra Research, October 1999). The total online and offline amateur
photo image processing market is expected to reach $30 billion in 2000, of which
a little over 1%, or $414 million, is estimated to be online (Source: Lyra
Research, October 1999). The professional portrait market is estimated at $13
billion with an online share of $450 million (Source: Lyra Research, October
1999). Industry analysts expect explosive growth in this Internet space, and
with this growth, commensurate revenue potential. InfoTrends estimates the
number of photo-pushing members of online reprint sites will grow from about 2.8
million in 1999 to 11.5 million in 2003 (Source: InfoTrends, October 1999). The
number of unique visitors to online reprint sites will jump exponentially from
6.4 million in 1999 to 136 million in 2003 (Source: InfoTrends, October 1999)
with the major sponsorship, e-commerce and advertising revenue potential that
those hundreds of billions of page views imply, growing concomitantly.
With digital imaging projected to be the second largest Internet
application (trailing only e-mail), many entries can be expected over the next
few years to provide "sticky" applications, generate page views and provide
photo printing. The combined online markets that we currently addresses
directly or through our customer joint ventures totals $854 million in 2000 and
is projected to grow to $4.5 billion in 2002 (Source: Lyra Research, October
1999).
OUR SOLUTION AND STRATEGY
We are moving aggressively to become one of the leading providers of the
backbone technology for this rapidly growing industry by providing several
custom products, all based upon our proprietary technology, to meet the specific
needs of the various businesses in the reprint market. Our strategy
currently focuses on two market segments: print fulfillment and destination
sites and form on-line communities. Our technology powers the flexible and
customizable websites that allow companies to upload digital images onto their
websites, thus providing their customer the capability to order prints,
reprints, photo-personalized items such as tee-shirts, greeting cards and coffee
mugs as well as digital cameras and accessories.
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PRINT FULFILLMENT PRODUCTS
Most of the U.S. mini-lab film processors currently process film and
create prints, but lack a web presence and method to store digital photos.
These labs have neither the web-based or e-commerce capabilities, nor the
ability for their customers to look at, and choose, their prints on the
Internet. With our B2B solution, these mini-labs can scan their customers'
ordinary 35mm film and upload the digitized images onto their "own"
co-branded, private label or customized website. Reprints can be fulfilled back
at the original processing lab, and either mailed to the customer or picked up
by the customer at it's local outlet.
This is an ideal B2B solution for major retail outlets, distributed
mini-labs and traditional film companies that wish to keep pace with the
industry's transition to online digital solutions. By selling this solution
through its B2B channel to mini-labs, we enable, rather than compete with, this
industry. The online portion of this market segment is estimated at $3.3
billion in gross revenue in 2002 (Source: Lyra Research, October 1999).
Examples of our client relationships in this segment include Canon, Futureshop
and Pakon.
INTERNET DESTINATION SITE PRODUCTS
We have developed a B2B web-based infrastructure giving solution that
provides fully integrated templates for other websites giving these websites
with a complete online digital imaging/reprint solution. This solution
can be easily installed as a co-branded, private label or customized product for
online destination site companies. By providing a B2B solution to other
websites, we enable rather than compete in this space. The online portion of
this market segment is projected to be $651 million in 2002 (Source: InfoTrends,
October 1999). Reprint and digital-imaging sites are considered particularly
"sticky," as viewers spend time looking at photos and typically make two to
three viewing adjustments of each photo they view. This greatly increasing the
advertising and sponsorship revenue potential from each page view. Accordingly,
this boosts the relative value of reprint applications for portals and community
sites. Examples of client relationships in this segment include Maxpages and
Bravenet.
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<PAGE>
PRODUCTS AND SERVICES
We were one of the first companies dedicated to developing an online
photosharing business. We have recently changed our focus to build a suite of
sophisticated, fully-integrated, proprietary B2B digital imaging/ photosharing
technologies. Designed for B2B backbone purposes, our web-based application
technology installs easily, scales, supports multiple distributors and
fulfillers, and is integrated seamlessly with a website's existing e-commerce,
transaction and advertising functionality. Not only does it provide a highly
integrated digital imaging and reprint website, it automates a fast,
turnkey installation seamlessly into a company's existing website, picking up
the colors, structure, look and feel of that website. Our turnkey solution
provides an alternative to a complicated photosharing or photo enabled
e-commerce website that would take a customer months to build.
We continue, to develop and upgrade our technology to meet the needs of an
evolving market place. We are adding advanced image editing such as cropping,
red eye, image manipulation and others, as well as simplified image uploading
and the addition of audio features to maintain its leading-edge technological
advantage. Our products are all user friendly and convenient. Below is a
description of some of our current and planned products. Given that many of
these products were only recently launched, we have little or no revenue history
for relationships involving such products.
PRINT FULFILLMENT PRODUCTS
DealerLoft. Most of the U.S. mini-lab film processing labs currently process
----------
film and create prints, but they lack a Web presence and method to store digital
photos. These labs have limited or no Web-based or e-commerce capabilities, nor
the ability for their customers to look at, and choose their prints on
the Internet. Launched in February 2000, DealerLoft allows mini-labs to scan
their customers' ordinary 35mm film and upload the digitized images onto
their "own" PhotoLoft, Inc. co-branded or private label website. These
customers can then use our technology to review their photos, order prints and
pay for their orders on line. Canon and Futureshop are two DealerLoft
customers.
DESTINATION SITE PRODUCTS
UserLoft. Our first destination site product, UserLoft, is based upon the
--------
fundamental technology behind our B2B Web-based infrastructure applications.
Comprised of a suite of state-of-the-art technologies, it was initially deployed
on our own website.
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To create and capture the digital imaging/ photosharing B2B backbone
technology market, We have developed sophisticated, fully integrated UserLoft
templates that we easily install as a co-branded, private label or customized
version for B2B clients wanting a site completely under their own
control. UserLoft provides several photo upload mechanisms (Web, email
and FotoSend), free storage, content filtering (pornography filtering),
albums, categories, photo searching, cropping, pan & zoom photo display,
address-books, guest-books, e-Invitations, photo-personalized email and
postmail greeting cards, photo-personalized products and e-commerce.
Our co-branded product provides client companies with a photosharing web site
within our web-site, that is jointly branded by the client and us. End users
are not aware that they are visiting a collection of web pages within a web
site. Each page provides client logo impressions, and photos uploaded by the
client's users are client-branded when listed in our album listings. Epson.com
is a current co-branded customer.
Our private label, or custom template, version of UserLoft provides
clients that do not have photo-hosting capabilities with the ability to add full
UserLoft features such as hosting, account management and e-commerce transaction
processing to their existing web sites. This product offers complete client
branding of the site consistent with the look and feel of the rest of its
website. These sites still provide a branding opportunity for PhotoLoft, Inc.
as they are labeled with the "Powered by PhotoLoft" logo is a current private
label customer.
25
<PAGE>
PageLoft. Launched during the second quarter of 2000, PageLoft is
--------
Our most customized B2B product. It is a suite of interfaces that provide full
UserLoft functionality that can be embedded within clients' existing web sites.
Clients may use PageLoft to add photo upload and display components within their
web sites, as well as access to PhotoLoft, Inc.'s e-commerce facilities.
Express Page is one example of a current PageLoft customer.
As part of the ongoing evolution of our business model, we continually
Evaluate new market segments that could benefit from our technology.
CUSTOMER AND CLIENT RELATIONSHIPS
Below is a description of some of our customer and client relationships.
Many of these relationships have only recently been launched and, as such, there
is little or no revenue history associated with the arrangement.
NBCi/Xoom.com. Xoom, part of NBCI, is among the 25 busiest websites with an
-------------
e-commerce portal community and members. We provide a Xoom-labeled version
of our solution. As part of our arrangement with Xoom, we provide our current
member list to Xoom, and Xoom has the right to market via e-mail directly to
our members. We also have a revenue sharing arrangement with Xoom.
Canon. We. provide a private-label Canon version of the our solution
-----
incorporated into the Canon mini-lab. The solution was launched in April, 2000.
We receive a monthly service fee from Canon, and also have a revenue-sharing
arrangement.
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<PAGE>
Pakon. Pakon is among the largest suppliers of photographic digital scanners
-----
for mini-labs in the U.S., and its impact scanner is among the world's fastest
methods of digitizing film. Our platform is built into the Pakon scanner. We
also have a joint marketing agreement, but there is no revenue sharing
arrangement. Customers generated through the Pakon relationship become our
customers.
Bravenet. We provide Bravenet, a fast growing homepage making community
--------
with 1,395,000 unique users, with a private label B2B photosharing solution
under a January 2000 agreement. We have both a joint marketing and revenue
sharing arrangement with Bravenet.
Maxpage. Under a January 2000 agreement, we provide Maxpage, a fast growing
-------
homepage creation community, with a private label B2B photosharing solution.
We have both a joint marketing and revenue sharing arrangement with Maxpage.
Epson. Epson is a larger consumer electronics equipment supplier including
-----
digital cameras. We give all Epson users a "premium account" on our web
site (premium accounts include up to 50 megabytes of memory). Epson puts a
sticker on its photo printer boxes that directs users to PhotoLoft, Inc. where
they can register. There is no revenue share.
In the three months ended March 31, 2000, three customers, Canon, Arcsoft
and Adsmart each accounted for over 10% of our revenues. For the year ended
December 31. 1999, three customers Canon, Arcsoft and Adsmart each accounted for
over 10% of our revenues.
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<PAGE>
MARKETING
We market through two primary channels:
1. direct marketing force; and
2. co-branding agreements.
Direct Marketing. We maintain a force of internal and external marketing and
------------------
sales personnel that target potential customers that could benefit from our
products. We also attend tradeshows that our potential customers attend.
Co-Branding Relationships. Typically these agreements call for a co-branded web
-------------------------
page, featuring the look and feel of our site along with the brand features
of the partner company. Usually this brand is found in the upper right corner
of the home page. Where applicable, the partner companies also advertise us
through their packaging by including our logo on the box, inserts in the
packaging, and mentions in the users' manuals or newsletters. The co-branded
page is linked to both our website and the partner company's website.
We share with our partners revenues generated from advertising and
e-commerce from the co-branded page.
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TECHNOLOGY
Our web-based application technology installs easily, scales, supports
multiple distributors and fulfillers, and is integrated seamlessly with a,
website's existing e-commerce, transaction and advertising functionality. Not
only do we provide a highly integrated digital imaging and photosharing
website, but we also automate a fast, turnkey installation seamlessly into a
company's existing website, picking up the colors, structure, look and feel of
that website.
We believe that the open platform and tight integration of our technology
greatly enhance our power to provide valuable B2B solutions for our clients. In
addition, our proprietary configuration and licensed technology give us the
ability to provide a quick, private, label solution to our customers together
with unique features such as photo viewing from different angles, zooming in
and out and panning: a powerful competitive advantage in all B2B applications
from auction sites and e-tail catalogs to professional event and artist
photography sites.
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Our technology also provides secure transaction management, templates for
customizable, multimedia products, and fulfillment to multiple, distributed
fulfillers and can bind an image of the finished photo or photo-personalized
product, such as tee shirts, in the shopping cart compared with just a word
description found in other sites.
Our proprietary FotoSend technology allows digital cameras, film scanners,
software applications and other web sites to interact with any photohosting web
site. An essential component for B2B photosharing operations, it provides an
industry-standard means to upload, manage and share photos on the Web, which has
been lacking so far. Conventional photo hosting companies have each created
their own proprietary upload solutions, forcing hardware vendors to support a
different standard for each photo hosting site they support. We markets
FotoSend as the industry standard, to build sales and brand value.
We continue to develop and upgrade our technology. We are adding advanced
image editing such as cropping, red eye, image manipulation and others, as well
as simplified image uploading and the addition of audio features to maintain its
leading-edge technological advantage.
OPERATIONS AND SYSTEMS
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.
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 Dual Processor Pentium
III 400s with three gigabytes of storage space to support the web site and Dual
Processor Pentium III 400's with one and a half terabytes of storage space to
support the images posted on our web site. Currently, there are two dual
Processor Pentium III 400s with 25 gigabytes of storage space to support our
database engine that catalogues photographs and maintains other data. We
combine database servers, image servers, and web servers into a configuration
called a "pod", and we are able to add pods as our community grows.
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Our secure data management is through SQL Server version 7.0. SQL Server
Logs are generated every eight hours to facilitate database reconstruction in
the case of hardware or software failure. These files are written to the hard
disk and backed up to tape with a combination of third party software and
software developed in house.
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, Inc. software or hardware issues.
COMPETITION
The photo finisher side of the print fulfillment market includes Canon,
Pakon, Kodk, Fuji, Agfa, Digital Now, and retailers with photo finishing
businesses. We already provide private label solutions for Canon and Pakon.
Only Kodak is a competitor. Kodak is a large centralized lab operator that has
introduced a strong mini-lab product called Photonet. However, this product
requires fulfillment through a Kodak subsidiary and does not offer a private
label product. Digital Now sells scanning systems into the mini-lab market,
and has an estimated 40% of the European market.
Competition in the traditional Internet photosharing and digital imaging
arena is intensifying. When we began development of its site in 1998 there were
virtually no competitors. By the time the site was officially launched in
February 1999, several potential competitors had emerged. The online
destination market is highly fragmented. While we have our own valuable
photosharing and digital imaging destination website that site has emerged not
as a core business, but rather as a repository for building a customer base as
consumers "rollover" from client sites such as Canon. Our site also serves as a
consumer technology proving ground. Specific consumer online photo-sharing
sites include PhotoNet, PhotoPoint.com, Zing.com, and ClubPhoto. A number of
other companies offering related services have also been launched. For example,
several new on-line fulfillment companies, such as Ofoto and Shutterfly, have
received quite a bit of media attention. As these companies actually provide
printing for on-line photos, their current activities, for the most part,
complement rather than compete with ours. In the retail/photofinisher segment
of the market, these companies compete against our targeted customers for
digital camera print fulfillment. Recently other companies, such as Telepix,
PhotoIsland and Pixel Magic, have announced digital imaging infrastructure
offerings for retail photofinishers. However, we believe that many of these
companies do not have the ability to scale as rapidly As PhotoLoft and/or
provide private label web sites to these customers.
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In the online professional services market, only Zing has shown any
interest in this emerging and fragmented segment of a well-established brick and
mortar business. There are also two brick and mortar companies, Hicks and
Express Digital, that are gradually moving into the digital Web-based side of
the business. Currently, these potential competitors either lack an online
photosharing community or offer products that have limited functionality.
INTELLECTUAL PROPERTY
We have six potentially patentable technologies. These are the PSA
(photosharing Array), the e-mail upload mechanism, TPL, the customizable shop,
PageLoft and the albums. We are currently in the process of finalizing the
documents to be filed and intends to file them in the next 60-90 days. However,
there can be no assurance that patent protection will ultimately be granted for
these technologies.
"Photoloft" and "HOWDY" are trademarks and service marks of PhotoLoft,
Inc. We have registered the 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. We 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 our suppliers and strategic partners in order to limit access to
and disclosure of our 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 its 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.
GOVERNMENTAL REGULATION
Our 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.
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<PAGE>
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.
LEGAL MATTERS
On June 23, 1999 Hewlett-Packard, Co. filed an action against us in the
Santa Clara County Superior Court of California (Case Number CV 782769) alleging
trade secret misappropriation, unfair competition, and breach of contract
arising out of the activities of one of our employees. Hewlett-Packard sought a
preliminary and permanent injunction enjoining us from directly or indirectly
using trade secrets of Hewlett-Packard and for damages. In May 2000, the
parties agreed to a non-monetary settlement of this matter, and the action was
dismissed. 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.
On January 7, 2000 Gale Drive LLC filed an action against us in the Santa
Clara County Superior Court of California (Case Number CV 787055) alleging
breach of contract arising out of a lease agreement for office space located in
Campbell, California. We are currently conducting settlement discussions with
Gale Drive LLC.
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In January 2000 we agreed to the terms of a binding settlement agreement
with a former employee who had filed an action against us stating various claims
arising out of the termination of his employment with us. Under the terms of
the settlement agreement, in which we admitted no wrongdoing, we paid $20,000
and allowed the employee to exercise options to purchase 32,500 shares of our
common stock at no cost.
In April 2000 Expert Connection dba Kinetic Tec filed an action against us
in the Santa Clara County Superior Court alleging breach of contract arising out
of an alleged fee agreement. Kinetic Tec claims it submitted the resume of a
potential employee to us and we hired the employee and thus owe Kinetic Tec
according to a fee agreement. Kinetic Tec requests damages in the amount of
$21,000. We are currently seeking to stipulate to set aside a default which was
entered against us.
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.
EMPLOYEES
As of June 30, 2000, we had 41 full time employees, including 12 in sales,
marketing and business development, 5 in administration and 24 in research and
development. 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. We are in the process of augmenting its
management team with seasoned professionals.
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.
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 on a month-to-month basis, and 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 month-to-month sublease.
PROPERTIES
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. See "Description of 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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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information, as of July 15,
2000, concerning our executive officers and directors:
<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
------------------------- --- -------------------------------------
Lisa Marshall (1) 41 Secretary
------------------------- --- -------------------------------------
Robert Free 43 Vice President of Production
------------------------- --- -------------------------------------
Dan Devoe 44 Vice President of Marketing
------------------------- --- -------------------------------------
Kay Wolf Jones 36 Vice President of E-Commerce
------------------------- --- -------------------------------------
Terren Peizer 40 Director
------------------------- --- -------------------------------------
Patrick Dane (2) (3) (4) 50 Director
------------------------- --- -------------------------------------
John Marshall (1) (2) 69 Director
------------------------- --- -------------------------------------
Brian Dowd 34 Chief Financial Officer
------------------------- --- -------------------------------------
<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, Inc.
since February 1994. Prior to our adoption of the PhotoLoft, Inc. 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. 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.
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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.
ROBERT FREE has served as our Vice President of Production since May, 1999.
Previously, from 1998 to 1999, he served as Director of Engineering at
Integrated Software & Devices. Prior to that, from 1997 to 1998, he was an
architect, engineering manager and designer for award-winning three dimensional
web products at Live Picture. From 1996 to 1997, Mr. Free served as the founder
of Grafman providing corporate graphics, Internet site management and
award-winning three dimensional web content, where his works were published
internationally in several web design books. From 1995 to 1996, Mr. Free was
lead engineer for commercial web server software development at NetManage.
DANIEL DEVOE has served as our Vice President of Marketing since June,
2000. Prior to PhotoLoft, Inc., Mr. DeVoe was the Manager of Business
Development at Canon U.S.A., Inc. and was responsible for the overall design
and implementation of the strategic business and technology plans for
Multi-Media Imagin Lab and Internet Imaging opportunities. From 1991-1997 Mr.
DeVoe served as the Vice President of Sales and Marketing for Product
Development for Denim Systems, Inc., directing all aspects of the Marketing mix
from start-up through product development, market positioning, pricing and
distribution. At Denim Systems, Inc. Mr. DeVoe also developed a comprehensive
Production/POS/Accounting System for the Photo/Imaging Labs.
KAY WOLF JONES has served as our Vice President of Marketing since 1996.
From 1989 to 1996, she served in the marketing department of Konami, a leader in
the video game industry. In 1994, she was named vice president of marketing,
and in June, 2000 she was named the Vice-President of E-Commerce. Ms. Jones
earned her bachelor of arts degree in advertising from Michigan State in 1985.
BRIAN P. DOWD, Chief Financial Officer, adds more than a decade of
financial technology-based experience to our management team. Prior to
PhotoLoft, Inc. Mr. Dowd played a significant role in the formation of NetGUI
by not only providing strategic input to the company's business plan and
financial forecast but also by aiding in all aspects of implementing the
operational structure. Prior to NetGUI Mr. Dowd was with Spectratek
Technologies, a privately-held manufacturer of holographic film. Included in
his duties at Spectratek, Mr. Dowd oversaw operations administration, human
resources, information technology planning, accounting, financial reporting and
facilities. Prior to Spectratek, Mr. Dowd was Controller of Peerless Systems
Corporation, a publicly-held embedded imaging software developer. Mr. Dowd was
responsible for SEC filings, financial reporting and facilities. Rounding out
his financial management and technology background are stints as Controller with
Interactive Group Inc., and Smith Micro Software, both software development
companies. While at Smith Micro Software, Mr. Dowd directed the company's IPO
in conjunction with the Chief Financial Officer and oversaw the acquisition of
an existing software developer, and managed the financial reporting process.
Mr. Dowd holds a bachelor's of science degree in business administration with an
Emphasis in accounting and finance from California Polytechnic University at
San Luis Opispo. He is a Certified Public Accountant.
TERREN S. PEIZER joined our Board and was elected Chairman in June 2000.
He is Chairman and CEO of Intellect Capital Corp., a Los Angeles-based firm that
provides investment and intellectual capital to developmental and emerging
growth technology companies. Currently, Mr. Peizer also serves as Chairman of
the Board of Directors for Cray Inc. (NASDAQ: CRAY), the world's largest
independent supercomputer company. From February 1997 to February 1999, Mr
Peizer served as President and Vice Chairman of Hollis-Eden Pharmaceuticals.
From 1993 to 1997, he served as Chairman and Chief Executive Officer of
Beachwood Financial Company, Inc., an investment holding company that
specialized in venture capital and developmental phase and small capitalization
company investing. From 1990 to 1993, Mr. Peizer served as Chairman and Chief
Executive Officer of Financial Group Holdings, Inc., an investment holding
company. From 1985 to 1990, Mr. Peizer served as a senior member of the
investment banking firm of Drexel Burnham Lambert, Inc.'s High Yield Bond
Department. Mr. Peizer received his B.S.E. in Finance from The Wharton School
of Finance and Commerce.
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.
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<PAGE>
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, Inc.
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 finance 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, Inc. 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.
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<PAGE>
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. In 1999, Jack Marshall and Chris McConn served as members of
our compensation committee. The Board of Directors established a Compensation
Committee as of April 8, 1999. See "Board Committees."
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 $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the years ended December 31,
1998 and December 31, 1999:
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
NAME AND COMPENSATION NUMBER OF SECURITIES
POSITION YEAR SALARY ($) UNDERLYING OPTIONS (#)
<S> <C> <C> <C>
Jack Marshall, CEO, 1999 120,000 0
President and Treasurer
1998 156,864 1,135,032
Christopher E. McConn, 1999 115,000 0
Chief Technology Officer 1998 127,229 454,013
<FN>
(1) Information set forth herein includes services rendered by the Named
Executives while employed by PhotoLoft, Inc. prior to the reorganization
with Data Growth, Inc. and by PhotoLoft, Inc. following the reorganization with
Data Growth, Inc.
(2) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock
Awards", "LTP Payouts" and "All other Compensation" have been omitted because
there is no compensation required to be reported.
</TABLE>
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<PAGE>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999
No option grants were made to either of the Named Executives during the
fiscal year ended December 31, 1999.
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, 1999. None of these executive officers exercised options
to purchase common stock in 1999.
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
NAME Options at Year End(#) Money Options at Year End (1)
----------------------------------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------- ----------------------------- ------------ --------------
<S> <C> <C> <C> <C>
Jack Marshall . . . . 401,991 733,041 $ 510,529 $ 930,962
Christopher E. McConn 160,796 293,217 $ 204,211 $ 372,385
<FN>
(1) Based on a per share fair market value of our common stock equal to $1.75 per share, the fair
market value as determined by our Board of Directors at December 31, 1999.
</TABLE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
39
<PAGE>
JACK MARSHALL. On May 10, 2000 we entered into a new employment agreement
with Jack Marshall which replaced his preexisting March 15, 2000 employment
agreement. Under the new executive employment agreement, Jack Marshall is to
serve as our Chief Executive Officer and perform such duties as may be
reasonably assigned to him by the Board of Directors until such time a new
President is hired by us. The executive employment agreement provides for an
annual base salary of $240,000 which shall be reviewed at least annually. Under
the executive employment agreement, the executive is also eligible for incentive
bonus compensation to be no less than twenty-five (25%) percent of Jack
Marshall's annual salary if certain milestones are met. Mr. Marshall is eligible
for additional incentive bonus compensation to be no less than twenty five (25%)
percent of his annual salary if additional milestones are met. The new
executive employment agreement also provides that Mr. Marshall will continue to
accrue employment options granted under a 1998 Stock Option Agreement, whereby
Mr. Marshall will vest up to 200,000 options when certain additional performance
criteria and milestones are met. Mr. Marshall's current Stock Option
Agreement (relating to a total of 1,551,209 shares under option) shall remain in
effect. He is eligible to receive vacation in accordance with PhotoLoft, Inc.'s
policies. He is also eligible to participate in the health, life insurance,
medical, retirement and other benefit programs that we may offer from time to
time.
The term of the executive employment agreement lasts until April 30, 2002.
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 the lesser of (i) his base salary for twelve
(12) months or (ii) the base salary for the remaining life of the contract. In
addition, Mr. Marshall's options shall immediately vest and he shall continue,
to receive health, medical, life, and disability insurance for twelve (12)
months from the date of termination.
In the event we enter into an agreement with another person or entity, the
effect of which is to change the control of PhotoLoft, Inc., then Mr. Marshall
shall be exclusively entitled to terminate this Agreement and in such event, we
shall pay to him (i) the amount of two (2) years base salary, and (ii) 50% of
his base salary as an incentive bonus. In addition, upon such termination, the
vesting of all options to purchase common stock of PhotoLoft.com held by Mr.
Marshall shall be accelerated so that such options are immediately exercisable.
CHRIS MCCONN. On March 15, 2000 we entered into an employment agreement
with Chris McConn. Under the executive employment agreement, Chris McConn is to
serve as our Chief Technology Officer 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 $115,000 which shall be reviewed
at least annually. The executive employment agreement also provides that Mr.
McConn will continue to accrue employment options granted under a 1998 Stock
Option. He is eligible to receive vacation in accordance with PhotoLoft, Inc.'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.
The term of the executive employment agreement lasts until March 15, 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.
McConn is terminated without cause, he is to receive (i) pay in the amount of
one (1) year base salary (ii) vested stock options (iii) health insurance; and
(iv) any unused vacation for a period of one (1) year from the date of
termination.
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.
In the event we enter into an agreement with another person or entity, the
effect of which is to change the control of PhotoLoft, Inc., then Mr. McConn
shall be exclusively entitled to terminate this Agreement and in such event, we
shall pay to him (i) the amount of one (1) year base salary, and (ii) any
benefits payable through the end of the term. In addition, upon such
termination, the vesting of all options to purchase common stock of PhotoLoft,
Inc. held by Mr. McConn shall be accelerated so that such options are
immediately exercisable. Mr. McConn's change of control provision was waived
for the Intellect Capital Group Transaction.
BRIAN DOWD, On June 26, 2000 we entered into an employment agreement with
Brian Dowd. Under the executive employment agreement, Mr. Dowd is to serve as
our Chief Financial Officer 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 $150,000 which shall be reviewed at least
annually. Under the executive employment agreement, the executive is also
eligible for a discretionary bonus, as determined by the Board of Directors,
based upon performance criteria and milestones to be determined within four (4)
months of Mr. Dowd's employment date. The executive employment agreement also
provides that Mr. Dowd is to receive options to purchase 400,000 shares of our
common stock at a price of $2.44 per share. In the event of a merger,
consolidation, acquisition, separation or reorganization all of his granted
options shall vest immediately.
He is also eligible to participate in the health, life insurance, medical,
retirement, vacation and other benefit programs that we may offer from time to
time.
The term of the executive employment agreement lasts until June 26, 2003
and continues thereafter on an at will basis. We may terminate him at any time
with or without cause. The term "cause" is defined in the executive employment
agreement attached hereto as an exhibit.
If Mr. Dowd is terminated without cause, he is to receive the following:
(i) all accrued but unpaid base salary and vacation, in a lump sum; and (ii) an
amount equal to the lessor of (A) the remaining base compensation (base salary)
under the initial term (at the rate in effect at the time of termination) and
(B) six (6) months of base compensation (at the rate in effect at the time of
termination.)
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<PAGE>
KAY WOLF JONES. On March 15, 2000 we entered into an employment agreement
with Kay Wolf Jones. Under the executive employment agreement, Kay Wolf Jones
is to serve as our Vice President, Marketing. In June, 2000 Ms. Jones accepted
the position of Vice President of E-Commerce and will perform such duties as may
be reasonably assigned to her by the Board of Directors. The executive
employment agreement provides for an annual base salary of $95,000 which shall
be reviewed at least annually. The executive employment agreement also provides
that Ms. Jones will earn up to 150,000 options granted under the 1998 Stock
Option. She is eligible to receive vacation in accordance with PhotoLoft,
Inc.'s policies. She is also eligible to participate in the health, life
insurance, medical, retirement and other benefit programs which we may offer
from time to time.
The term of the executive employment agreement lasts until March 15, 2001
and continues thereafter on a year to year basis unless terminated pursuant to
the terms thereof. We may terminate her 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 Ms.
Jones is terminated without cause, she is to receive (i) pay in the amount of
one (1) year base salary (ii) vested stock options (iii) health insurance; and
(iv) any unused vacation for a period of one (1) year from the date of
termination.
If she resigns from her position for good cause, including a substantial
reduction in his position, duties or a material breach of the agreement by us,
she is to be deemed terminated without cause and is eligible to receive
severence.
In the event we enter into an agreement with another person or entity, the
effect of which is to change the control of PhotoLoft, Inc., then Ms. Jones
shall be exclusively entitled to terminate this Agreement and in such event, we
shall pay to her (i) the amount of one (1) year base salary, and (ii) any
benefits payable through the end of the term. In addition, upon such
termination, the vesting of all options to purchase common stock of PhotoLoft,
Inc. held by Ms. Jones shall be accelerated so that such options are
immediately exerciseable. Ms. Jones waived these provisions in the Intellect
Capital Transaction. Ms. Jones' change of control provision was waived for the
Intellect Capital Group Transaction.
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, Inc. 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 to 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, Inc. 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.
41
<PAGE>
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, Inc. and the
respective option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
If the employment with PhotoLoft, Inc. 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 July 15, 2000, 3,163,687 shares had been issued as the result of the
exercise of options previously granted under the plan and outside the plan,
and approximately 5,042,431 shares were subject to outstanding options granted
under the plan and outside the plan. 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.
42
<PAGE>
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, Inc..
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of 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 are presently no material pending legal proceeding to which a
director, officer and employee of ours is a party. There is no 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 entered 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 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.
To the extent provisions of our articles of incorporation provide for
indemnification of directors for liabilities arising under the Securities Act of
1933 or the Securities Exchange Act of 1934, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy and
therefore are unenforceable.
RELATED PARTY TRANSACTIONS
Unless otherwise indicated, information in this section regarding shares of
our common stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of PhotoLoft.com, Inc., a California corporation, common stock at the time of
the reorganization referred to below.
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<PAGE>
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.
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, Inc. 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.
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<PAGE>
STOCK OPTION PLAN. In 1998, we issued options to purchase the aggregate
amount of 2,675,572 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,
Messrs. Jack Marshall and 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 December 1999, we have issued options to purchase
the aggregate amount of 970,201 shares of common stock to employees, directors
and consultants of PhotoLoft, Inc. pursuant to PhotoLoft, Inc.'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
228,375 shares of common stock upon the exercise of options to purchase common
stock which were granted to certain employees, directors, and consultants of
PhotoLoft, Inc. in March 1999 under PhotoLoft, Inc.'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, Inc., 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.
45
<PAGE>
OTHER RELATED TRANSACTIONS. In December 1999, we issued options to
purchase up to 288,000 shares of common stock to Lisa Marshall, our Secretary as
compensation for services rendered. The right to exercise these options vests
in 16 equal quarterly installments over 4 years. The exercise price for the
options is $1.50 per share, which was not less than the fair market value of the
shares underlying the options on the date of grant.
In December 1999, in exchange for $250,000 we issued 163,217 shares of
common stock and warrants to purchase up to 33,000 shares of common stock with
exercise prices of $1.5317 per share to Lisa Marshall, our Secretary. In
December 1999, we also issued 97,930 shares of common stock to John Marshall, a
Member of our board of directors and warrants to purchase up to 20,000
shares of common stock with exercise prices of $1.5317 per share, in exchange
for $150,000.
In March 2000 we issued options to purchase up to 378,344 shares of common
stock to Jack Marshall, pursuant to his employment agreement.
In March 2000, we obtained loans from George Perlegos, a holder of more
than 5% of our common stock, and one other shareholder aggregating $115,000.
In May 2000, we received a loan of $50,000 from Kay Wolf Jones, one of our
officers. The loan bears interest at a rate of 10% per month. In June,
2000 we repaid the loan to Kay Wolf Jones.
On June 8, 2000, pursuant to a Stock Purchase Agreement dated as of April
18, 2000 (the "Agreement"), we issued and sold 900 shares of our Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to Intellect
Capital Group, LLC, a Delaware limited liability company ("ICG"). ICG is a Los
Angeles-based firm that provides investment and intellectual capital to
developmental and emerging growth stage technology companies and takes an active
role to assist them to realize their full potential. The consideration for the
Series B Preferred Stock consisted of $9,000 in cash. In conjunction with the
Agreement, ICG will become an active shareholder, and will assist us with the
creation and and execution of our strategic plan, building a management team and
Board of Directors, identifying and consummating strategic relationships, and
advising on merger and acquisition activities, our capital formation process and
corporate finance and corporate communications. The Series B Preferred Stock
was convertible, on or before July 8, 2000, into 50% of our then-outstanding
common stock following the conversion (on a fully- diluted basis). As of July
8, 2000, we had 33,825,266 shares of common stock outstanding on a fully-diluted
basis. However, on July 8, 2000, we did not have enough shares of authorized
common stock to convert all of the Series B Preferred Stock. On that date, we
issued 27,914,023 shares of common stock in partial conversion of the Series B
Preferred Stock. Pursuant to the terms of May 22, 2000 letter agreement between
the holder of the Series B Preferred Stock and us, we incurred penalties of
$13,122,959 as a result of the inability to convert the remainder of the Series
B Preferred Stock. These penalties have been waived by the holder and the
holder has waived its right to receive the additional 5,911,243 shares it was
entitled to on July 8, 2000 in exchange for the issuance of warrants to purchase
an aggregate of 11,900,000 shares of our common stock at an exercise price of
$1.65 per share. The warrants are not exercisable before December 8, 2000;
after that date, they may be exercised, or exchanged on a two-for one basis for
shares of our common stock. The conversion has diluted, and the exercise of
these warrants will dilute, the interests of our other shareholders.
Pursuant to the Agreement, we elected Terren S. Peizer, the ICG Chairman
and Chief Executive Officer, as our Chairman and a member of our Board of
Directors. In connection with the Agreement, we entered into a Registration
Rights Agreement, dated June 8, 2000, which requires us to register, at our
expense, the common stock into which the Series B Preferred Stock is convertible
upon the demand of ICG; provided, however, that no such demand can be made prior
to December 8, 2000. The Registration Rights Agreement also provides unlimited
piggyback registration rights. Certain of our shareholders also entered into an
Agreement among Shareholders and Company with ICG and us, pursuant to which
those shareholders agreed to vote to elect to the Board a candidate to be
designated by future investors and a Lock-Up Agreement restricting their
transfer of our common stock.
Prior to entering into the Agreement, ICG loaned us $275,000 pursuant to a
Loan and Security Agreement dated May 18, 2000. The loan is evidenced by a
Promissory Note, and secured by all of our assets. In July, 2000 we repaid this
loan. On May 22, 2000, we also entered into a side letter with ICG in which we
agreed to (i) file a consent solicitation statement with the Securities Exchange
Commission to solicit consents for the purpose of increasing our authorized
common stock to 200,000,000 shares and (ii) enter into Shareholder Agreements
with certain of our major shareholders in which those shareholders agreed to
consent to the increase in our authorized common stock. The side letter
provides for financial penalties in the event that we fail to file the consent
solicitation statement and obtain approval of the increase by specified dates.
In March 2000, we had sold and issued to an entity related to ICG a warrant
to purchase 400,000 shares of our common stock at an exercise price of $0.10 per
share. These warrants expire in March 2005.
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.
SELLING STOCKHOLDERS
This prospectus relates to the offering by the selling stockholders for
resale of shares of our common stock acquired by them in private placements
and other transactions. All of the shares of common stock offered by this
prospectus are being offered by the selling stockholders for their own accounts.
The following table sets forth information with respect to the common stock
beneficially owned by the selling stockholders as of the date of this
prospectus, including shares obtainable upon the exercise of certain options and
warrants. The selling stockholders provided us the information included in the
table below. To our knowledge, each of the selling stockholders has sole voting
and investment power over the shares of common stock listed in the table below.
Other than as set forth below, no selling stockholder, to our knowledge, has had
a material relationship with us during the last three years, other than as an
owner of our common stock or other securities.
46
<PAGE>
Additionally, the following table assumes the sale of all shares of common
stock offered by this prospectus; however, as the selling stockholders can offer
all, some or none of their shares of common stock, no definitive estimate can be
given as to the number of shares that the selling stockholders will hold after
the offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK OF COMMON STOCK
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- ------------------------------------------- ---------------------
SELLING NUMBER OF NUMBER OF NUMBER OF PERCENT OF
STOCKHOLDER SHARES SHARES TO BE SHARES CLASS
SOLD UNDER
THIS PROSPECTUS
----------------------- --------------------- -------------------- --------- ----------
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- --------- ----------
Intercoastal Financial 300,000 300,000 0 0
Services Corp
----------------------- --------------------- -------------------- --------- ----------
Xoom.com 350,000 350,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Continental Capital 237,500 237,500 0 0
----------------------- --------------------- -------------------- --------- ----------
Rick Holman (1) 800,000 300,000 500,000 *
----------------------- --------------------- -------------------- --------- ----------
OPUS X Capital 400,000 400,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Dr. Michael
Kesslbrenner 7,600 7,600 0 0
----------------------- --------------------- -------------------- --------- ----------
John Bolliger 760 760 0 0
----------------------- --------------------- -------------------- --------- ----------
Rance Merkel 7800 3800 0 0
----------------------- --------------------- -------------------- --------- ----------
Cranshire Capitol 15,200 15,200 0 0
By: Mitchel Kopin
----------------------- --------------------- -------------------- --------- ----------
Michael Woelfel 3,800 3,800 0 0
----------------------- --------------------- -------------------- --------- ----------
Shanji Xiong 760 760 0 0
----------------------- --------------------- -------------------- --------- ----------
Illinois Holding Co. 7,600 7,600 0 0
----------------------- --------------------- -------------------- --------- ----------
Peter Che Nan Chen 15,200 15,200 0 0
----------------------- --------------------- -------------------- --------- ----------
Sui Wa Chau 2,280 2,280 0 0
----------------------- --------------------- -------------------- --------- ----------
Wei Z. Yen 2,280 2,280 0 0
----------------------- --------------------- -------------------- --------- ----------
Jeremy Dallow 2,280 2,280 0 0
----------------------- --------------------- -------------------- --------- ----------
Steven and Cheryl Angel 1,520 1,520 0 0
----------------------- --------------------- -------------------- --------- ----------
Allen B. Cohen 3,800 3,800 0 0
----------------------- --------------------- -------------------- --------- ----------
David Z. Lu 1,520 1,520 0 0
----------------------- --------------------- -------------------- --------- ----------
Qilu Guan 3,800 3,800 0 0
----------------------- --------------------- -------------------- --------- ----------
Jinsheng Yi 1,520 1,520 0 0
----------------------- --------------------- -------------------- --------- ----------
Wiiliam R. Evans 2,280 2,280 0 0
----------------------- --------------------- -------------------- --------- ----------
Roy Roberts 1,900 1,900 0 0
----------------------- --------------------- -------------------- --------- ----------
David Meyrowitz 3,800 3,800 0 0
----------------------- --------------------- -------------------- --------- ----------
Friedlander
International Limited 1,202,400 1,202,400 0 0
----------------------- --------------------- -------------------- --------- ----------
Cefeo Investments LTD 1,199,843 1,199,843 0 0
----------------------- --------------------- -------------------- --------- ----------
Banca Del Gottardo 3,935,000 3,935,000 0 0
----------------------- --------------------- -------------------- --------- ----------
AMRO International 600,000 600,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Gary Kremen 292,500 292,500 0 0
----------------------- --------------------- -------------------- --------- ----------
Peconic Fund, Ltd. 300,000 300,000 0 0
----------------------- --------------------- -------------------- --------- ----------
PanAmerica Capital
Group, Inc. 1,250,000 1,250,000 0 0
----------------------- --------------------- -------------------- --------- ----------
James D. O'Brien 300,00 300,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Alan Levinson 450,000 450,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Ronald Pasternak 150,000 150,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Paul Mazzanobile 225,000 225,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Brian Delaney 750,000 750,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Isaac Klein 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Jeffery and Carol Starr 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Michael Palma 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Vincent Gioeni 90,000 90,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Apollo Capital Fund LLC 150,000 150,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Alborz Select Opportunities Fund, Ltd. 420,000 420,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Norman Tulchin 150,000 150,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Charles E. Rawley 300,000 300,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Gary Voigt 120,000 120,000 0 0
----------------------- --------------------- -------------------- --------- ----------
DM Management 480,000 480,000 0 0
----------------------- --------------------- -------------------- --------- ----------
RG Capital Fund, LLC 167,000 167,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Oleg Ostrovsky 30,000 30,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Robert Scibelli 30,000 30,000 0 0
----------------------- --------------------- -------------------- --------- ----------
James Scibelli 360,000 360,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Four Star Capital 30,000 30,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Anegada 240,000 240,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Aspen 240,000 240,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Danby 240,000 240,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Fairway Capital Partners LLC 90,000 90,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Summer Breeze, LLC 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Growth Ventures, Inc. 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Jim Harpel 240,000 240,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Benny Shabtai 625,000 625,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Montrose Investments, Ltd. 1,200,000 1,200,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Philip Marks 600,000 600,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Teccal Investments, Ltd. 200,000 200,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Bob Cohen 60,000 60,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Harpel Family Trust 240,000 240,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Jim Whitten 50,000 50,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Jack Erlanger 50,000 50,000 0 0
----------------------- --------------------- -------------------- --------- ----------
James O' Brien 100,000 100,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Alan Levinson 150,000 150,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Ronald Pasternak 50,000 50,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Paul Mazzanobile 75,000 75,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Brian Delaney 250,000 250,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Isaac Klien 20,000 20,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Jeffrey and Carol Starr 20,000 20,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Michael Palma 20,000 20,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Vincent Gioeni 30,000 30,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Ken Maghuyop 5,000 5,000 0 0
----------------------- --------------------- -------------------- --------- ----------
Total 20,086,243 20,086,243 0 0
===================== ==================== ========= ==========
</TABLE>
(1) Mr. Holman's shares include the 500,000 shares issuable upon exercise
of warrants held by Asher Investment Group. Mr. Holman is the principal
of Asher Investment Group.
* Less than a one percent holder.
We will pay the offering expenses of the selling stockholders in this
offering, other than brokers' commissions. We currently estimate these expenses
to be $140,000.
To date, we have had a very limited trading volume in our common stock.
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.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 8, 2000, certain information
with respect to 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.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting or investment power and also any shares
that the individual has the right to acquire within 60 days after July 15,
2000. The inclusion herein of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial owner of
such shares. Unless otherwise indicated, each person named in the table has sole
voting and investment power (or shares such power with his or her spouse) with
respect to all shares of common stock listed as owned by such person. The total
number of outstanding shares of common stock (which excludes ICG's 11.9 million
unexercised warrants and other unexercised warrants and options) at July 8, 2000
was 50,000,000.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
------------------------------------------ ------------------- -----------
<S> <C> <C>
Jack Marshall 2,898,136 (1) 5.7%
Christopher McConn 977,085 (2) 1.9%
Lisa Marshall 692,810 (3) 1.4%
Robert Free 84,376 (4) *
Kay Wolf Jones 350,422 (5) *
Patrick Dane 165,295 (6) *
John Marshall 974,588 (7) 1.9%
Terren Peizer 27,914,023 (8) 55.8%
All directors and executive officers as a 34,056,735 (9) 65.6%
group (eight persons)
OTHER 5% STOCKHOLDERS:
Intellect Capital Group, LLC 27,914,023 55.8%
11111 Santa Monica Boulevard
Suite 650
Los Angeles, CA 90025
George Perlegos 2,270,063 %
Banca Del Gottardo 3,900,000(10) 7.6%
Viale Stefano Franscini 8, 6901
Lugano, Switzerland
<FN>
* Less than one percent.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock options or warrants held by that person that are
currently exercisable or exercisable within 60 days of July 15, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
John Marshall is the father of Jack and Lisa Marshall, who are brother and
sister.
(1) Includes 780,859 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
(2) Includes 297,159 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
48
<PAGE>
(3) Includes 397,750 shares of common stock subject to options and
warrants that are exercisable within 60 days of July 8, 2000.
(4) Includes 84,376 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
(5) Includes 31,529 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
(6) Includes 151,795 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
(7) Includes 206,989 shares of common stock subject to options and
warrants that are exercisable within 60 days of July 8, 2000
(8) Includes shares beneficially owned by Intellect Capital Group, LLC.
Mr. Peizer is the Chairman and CEO of Intellect Capital Group, LLC.
(9) Includes 1,950,457 shares of common stock subject to options that are
exercisable within 60 days of July 8, 2000.
(10) Includes 1,300,000 shares of common stock subject to warrants that are
exercisable within 60 days of July 8, 2000.
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The descriptions in this section and in other sections of this prospectus
of our securities and various provisions of our articles of incorporation and
our bylaws are descriptions of the material terms of our securities. We note,
that our articles of incorporation and bylaws have been filed with the SEC as
exhibits to this registration statement of which this prospectus forms a part.
Our authorized capital stock consists of 200,000,000 shares of common
stock, par value $.001 per share, and 500,000 shares of preferred stock, par
value $.001. As of July 8, 2000, 50,000,000 shares of our common stock were
issued and outstanding. This does not include an aggregate of 6,110,681 shares
reserved for issuance upon exercise of stock options and warrants and the stock
options and warrants being registered in this registration statement. In
addition, as of that date, 900 shares of our preferred stock were designated as
Series B Preferred Stock, all of which were issued and outstanding.
COMMON STOCK
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when, 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, Inc., and after payment of creditors and preferred stockholders 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.
49
<PAGE>
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.
50
<PAGE>
SERIES B PREFERRED STOCK
Our Board of Directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 500,000 shares of preferred
stock. The preferred stock may be issued in one or more series and the Board of
Directors may fix its rights, preferences and designations.
On June 8, 2000, pursuant to a Stock Purchase Agreement dated as of April
18, 2000 (the "Agreement"), we issued and sold 900 shares of our Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to Intellect
Capital Group, LLC, a Delaware limited liability company. The Series B
Preferred Stock was convertible, on or before July 8, 2000, into 50% of our
then-outstanding common stock following the conversion (on a fully- diluted
basis). As of July 8, 2000, we had 33,825,266 shares of common stock
outstanding on a fully-diluted basis. However, on July 8, 2000, we did not have
enough shares of authorized common stock to convert all of the Series B
Preferred Stock. On that date, we issued 27,914,023 shares of common stock in
partial conversion of the Series B Preferred Stock. Pursuant to the terms of
May 22, 2000 letter agreement between the holder of the Series B Preferred Stock
and us, we incurred penalties of $13,122,959 as a result of the inability to
convert the remainder of the Series B Preferred Stock. These penalties have
been waived by the holder and the holder has waived its right to receive the
additional 5,911,243 share it was entitled to on July 8, 2000, in exchange for
the issuance of warrants to purchase an aggregate of 11,900,000 shares of our
common stock at an exercise price of $1.65 per share. The warrants are not
exercisable before December 8, 2000; after that date, they may be exercised, or
exchanged on a two-for one basis for shares of our common stock. The conversion
has diluted, and the exercise of these warrants will dilute, the interests of
our other shareholders.
The shares of Series B Preferred Stock have no voting rights, except as
required by law and as expressly provided for in the certificate of designation
for such shares.
The foregoing has been a brief description of some of the terms of our
Series B Preferred Stock. For a more detailed description of the rights of the
holders of the Series B Preferred Stock, prospective investors are directed to
the actual certificate of designation that has been filed as an exhibit to the
registration statement of which this prospectus is a part.
No shares of preferred stock are currently outstanding. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting stock. This
difficulty could adversely affect prevailing market prices for our common stock.
WARRANTS
In consideration for services in connection with the sale of our Series A
Preferred Stock in March 2000 (which we redeemed in June 2000), we also issued
185,500 warrants to purchase shares of our common stock. These warrants may be
exercised at any time during the five-year period following their issuance at an
exercise price of $3.30 per share. The number of shares issuable upon exercise
of the warrants is subject to adjustment upon the occurrence of stock splits,
dividends or reclassifications. The warrants do not carry registration rights.
In connection with the June 2000 redemption of our Series A Preferred Stock, we
issued warrants to purchase an additional 80,000 shares of common stock with the
same terms and conditions; provided that we are obligated to register the shares
of common stock underlying the June 2000 warrants.
In conjunction for with the sale of our common stock in the private
placement in July 2000, we also issued 5,829,300 warrants to purchase an
aggregate of 5,529,300 shares of our common stock. These warrants may be
exercised at any time during the three-year period following their issuance at
an exercise price of $1.65 per share. The number of shares issuable upon
exercise of the warrants is subject to adjustment upon the occurrence of stock
splits, dividends or reclassifications.
This has been a brief description of some of the terms of our outstanding
warrants. For a more detailed description of the rights of the holders of the
warrants, prospective investors are directed to the actual forms of warrants
that have been filed as exhibits to the registration statement of which this
prospectus is a part.
REGISTRATION RIGHTS
The holder of our Series B Preferred Stock has registration rights with
respect to the shares they hold. Pursuant to a registration rights agreement,
the common stock underlying the Series B Preferred Stock issued to investors are
to be registered within a specified period of time, and to have the registration
statement declared effective within a specific period of time. We must also
keep the registration statement effective until all of the common stock offered
has been sold. We are responsible for the payment of all fees and costs
associated with the registration of the common stock. We are required to
indemnify and hold harmless each investor and its officers, directors, agents
and brokers against any untrue statement of a material fact in a registration
statement, prospectus or amendment or supplement to a registration statement or
prospectus. Specific procedures for carrying out the indemnification are set
forth in the registration rights agreement.
The purchasers in our June 2000 private placement have registration rights
with respect to the shares and shares underlying the warrants they hold.
Pursuant to a registration rights agreement, the shares and common stock
underlying the warrants issued to these investors are to be registered as part
of the registration statement of which this prospectus forms a part. The
registration rights agreement requires us to file a registration statement with
respect to the common stock within a specified period of time, and to have the
registration statement declared effective within a specific period of time. We
must also keep the registration statement effective until all of the common
stock offered has been sold. We are responsible for the payment of all fees and
costs associated with the registration of the common stock, except that we are
not responsible for fees generated by the investors' counsel. We are required
to indemnify and hold harmless each investor and its officers, directors, agents
and brokers against any untrue statement of a material fact in a registration
statement, prospectus or amendment or supplement to a registration statement or
prospectus. Specific procedures for carrying out the indemnification are set
forth in the registration rights agreement. This prospectus is part of the
registration statement filed under our obligations to the above mentioned
holders.
51
<PAGE>
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, Inc.
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations like us having at
least 200 stockholders, prohibits an "interested stockholder" from entering into
a "combination" with the corporation, unless certain conditions are met. A
"combination" includes
-- any merger with an "interested stockholder," or any other corporation
which is or after the merger would be, an affiliate or associate of
the interested stockholder;
-- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions,
to an "interested stockholder," having:
-- an aggregate market value equal to 5% or more of the aggregate market
value of the corporation's assets,
-- an aggregate market value equal to 5% or more of the aggregate market
value of all outstanding shares of the corporation, or
-- representing 10% or more of the earning power or net income of the
corporation,
-- any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate
market value equal to 5% or more of the aggregate market value of all
the outstanding shares of the corporation;
-- the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested
stockholder,"
-- certain transactions which would have the effect of increasing the
proportionate share of outstanding shares of the corporation owned by
the "interested stockholder,"
-- the receipt of benefits, except proportionately as a stockholder, of
any loans, advances or other financial benefits by an "interested
stockholder."
52
<PAGE>
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:
-- 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.
53
<PAGE>
Certain provisions of our Bylaws which are summarized below may affect
potential changes in control of PhotoLoft, Inc. 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, Inc. and to make
changes in management more difficult.
The Bylaws provide the number of directors of PhotoLoft, Inc. 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, Inc.
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.
54
<PAGE>
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;
-- 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Interwest
Transfer, and its telephone number is (801) 272-9294.
SHARES ELIGIBLE FOR FUTURE SALE
On July 8, 2000, 50,000,000 shares of our common stock were outstanding.
This does not include the options and warrants being registered in this
Registration Statement and does not include an aggregate of 6,110,681 shares
reserved for issuance upon exercise of other stock options and warrants
outstanding as of July 15, 2000. Of the outstanding shares, 2,804,154 shares of
common stock are immediately eligible for sale in the public market without
restriction or further registration under the Securities Act of 1933. All other
outstanding shares of our common stock are "restricted securities" as such term
is defined under Rule 144, in that such shares were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rules 144, 144(k) or 701
promulgated under the Securities Act of 1933 or another exemption from
registration.
55
<PAGE>
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate. As of July 15, 2000, approximately
9,662,072 of our outstanding restricted shares were eligible for sale under
Rule 144.
There has been very limited trading volume in our common stock to date.
Sales of substantial amounts of our common stock under Rule 144, this prospectus
or otherwise could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through the future sale of
our securities.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
56
<PAGE>
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealer may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in puts and calls and other
transactions in securities of PhotoLoft, Inc. or derivatives of our securities
and may sell or deliver shares in connection with these trades. The selling
stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling sstockholders, or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser in
amounts to be negotiated. The selling stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Silicon Valley Law Group, San Jose, California.
57
<PAGE>
EXPERTS
The financial statements included in the registration statement on Form
SB-2 have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report, which
contains an explanatory paragraph regarding our ability to continue as a going
concern, appearing elsewhere herein and in the registration statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted, and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of PhotoLoft, Inc.,
such references are not necessarily complete and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. You may review a copy of the
registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or Seven World Trade Center, 13th Floor, New York, New
York 10048 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
The public may obtain information on the operation of the public reference
room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
------------------
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
You should rely only on the information provided in this prospectus or any
prospectus supplement. Neither we nor the selling stockholders have authorized
anyone else to provide you with different information. Neither we nor the
selling stockholders are making an offer to sell, nor soliciting an offer to
buy, these securities in any jurisdiction where that would not be permitted or
legal. Neither the delivery of this prospectus nor any sales made hereunder
after the date of this prospectus shall create an implication that the
information contained herein or our affairs have not changed since the date
hereof.
58
<PAGE>
<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' (deficiency) equity F - 5
Statements of cash flows F - 6
Notes to financial statements F - 7 - F - 25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
PhotoLoft, Inc.
We have audited the accompanying balance sheets of PhotoLoft, Inc. (the
Company) as of December 31, 1999, and the statements of operations,
shareholders' (deficiency) equity, and cash flows for the years ended December
31, 1999 and 1998. 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, Inc. as of December
31, 1999 and the results of its operations and cash flows for the years ended
December 31, 1999 and 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has an accumulated deficit of $4,651,600 as of
December 31, 1999 and incurred a net loss of $4,752,100 for the year ended
December 31, 1999. Additionally, the Company has negative working capital of
$650,600 as of December 31, 1999. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding those matters are also described in Note 1. The financial statements
do not include any adjustments relating to the recoverability and classification
of reported asset amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
San Jose, California
February 11, 2000, except for Note 12, for which the date is March 24, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT, INC.
BALANCE SHEETS
MARCH 31, December 31,
2000 1999
---------------------------------------------------------------- ------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS (Note 7)
CURRENT ASSETS:
Cash and cash equivalents (Notes 10 and 11) $ 300,700 $ 175,300
Accounts receivable, net of allowance for doubtful accounts
of $16,900 and $16,900, respectively 19,100 60,100
Notes receivable (Notes 2 and 8) -- 250,000
Prepaid expenses and other current assets 16,600 49,500
---------------------------------------------------------------- ------------ --------------
TOTAL CURRENT ASSETS 336,400 534,900
PROPERTY AND EQUIPMENT, net (Note 3) 409,400 418,000
OTHER ASSETS 26,000 17,200
---------------------------------------------------------------- ------------ --------------
$ 771,800 $ 970,100
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable to bank (Note 7) $ $
Notes payable to shareholders (Note 12) 115,000 --
Accounts payable 682,500 906,800
Accrued expenses (Notes 4 and 12) 287,300 263,500
Deferred revenue 13,300 15,200
---------------------------------------------------------------- ------------ --------------
TOTAL CURRENT LIABILITIES 1,098,100 1,185,500
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
(Notes 5, 6, 10, and 12)
SHAREHOLDERS' DEFICIENCY: (Notes 6, 8, 11, and 12)
Convertible preferred stock, $0.001 par value; 500,000 shares
authorized; 106 and 0 shares issued and outstanding 1,060,000 --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 12,914,375 and 12,881,875 shares issued
and outstanding, respectively 12,900 12,900
Additional paid-in capital 6,083,800 4,904,500
Deferred compensation (143,000) (481,200)
Accumulated deficit (7,340,000) (4,651,600)
---------------------------------------------------------------- ------------ --------------
TOTAL SHAREHOLDERS' DEFICIENCY (326,300) (215,400)
---------------------------------------------------------------- ------------ --------------
$ 771,800 $ 970,100
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT, INC.
STATEMENTS OF OPERATIONS
Three months ended March 31, Years ended December 31,
---------------------------- ------------------------
2000 1999 1999 1998
------------ ----------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 10) $ 61,800 $ 21,800 $ 254,500 $ 674,300
COST OF REVENUES 27,300 36,300 124,200 113,000
--------------------------------------------------- ------------ ----------- ------------ -----------
GROSS PROFIT (LOSS) 34,500 (14,500) 130,300 561,300
--------------------------------------------------- ------------ ----------- ------------ -----------
OPERATING EXPENSES:
Sales and marketing 113,800 18,800 1,217,200 325,000
General and administrative 2,608,200 605,100 4,405,900 999,000
--------------------------------------------------- ------------ ----------- ------------ -----------
TOTAL OPERATING EXPENSES 2,722,000 623,900 5,623,100 1,324,000
--------------------------------------------------- ------------ ----------- ------------ -----------
LOSS FROM OPERATIONS (2,687,500) (638,400) (5,492,800) (762,700)
OTHER INCOME (EXPENSE):
Sale of trade name (Note 2) -- -- -- 3,100,000
Loss on settlement of note receivable (Note 2) -- -- (108,100) --
Interest income (100) 40,100 110,600 76,900
Interest expense -- -- (6,000) (500)
Other -- (2,500) (1,200) (2,400)
--------------------------------------------------- ------------ ----------- ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (100) 37,600 (4,700) 3,174,000
--------------------------------------------------- ------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,687,600) (600,800) (5,497,500) 2,411,300
INCOME TAX (BENEFIT) EXPENSE (Note 9) 800 (240,300) (745,400) 748,000
--------------------------------------------------- ------------ ----------- ------------ -----------
NET INCOME (LOSS) (2,688,400) (360,500) (4,752,100) 1,663,300
Deemed dividend on issuance of warrants -- -- 80,000 --
Deemed dividend on conversion of preferred
stock into common stock -- 934,000 934,000 --
--------------------------------------------------- ------------ ----------- ------------ -----------
Net income (loss) available to common shareholders $(2,688,400) $(1,294,500) $(5,766,100) $1,663,300
=================================================== ============ =========== ============ ===========
Basic earnings (loss) per share $ (0.21) $ (0.14) $ (0.49) $ 0.26
=================================================== ============ =========== ============ ===========
Diluted earnings (loss) per share $ (0.21) $ (0.14) $ (0.49) $ 0.18
=================================================== ============ =========== ============ ===========
Basic weighted-average common shares outstanding 12,881,875 9,063,500 11,658,200 6,488,300
Stock options -- -- -- 2,799,400
--------------------------------------------------- ------------ ----------- ------------ -----------
Diluted weighted-average common shares outstanding 12,881,875 9,063,500 11,658,200 9,287,700
=================================================== ============ =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Preferred Stock Common Stock Additional
------------------- -------------------- paid-in Deferred Stock
Shares Amount Shares Amount Capital Compensation
-------------------------------------------------- ------ ----------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 -- $ -- 6,326,471 $ 6,400 $ 515,400 $ --
Issuance of stock for services -- -- 323,672 300 132,800 --
Net income -- -- -- -- -- --
-------------------------------------------------- ------ ----------- ----------- ------- ----------- ------------
BALANCES, December 31, 1998 -- -- 6,650,143 6,700 648,200 --
Exercise of stock options -- -- 3,131,187 3,100 142,100 --
Issuance of common stock for services -- -- 124,111 100 156,500 --
Deemed dividend on beneficial conversion of
preferred stock into common stock -- -- -- -- 934,000 --
Issuance of common stock in connection with
reverse merger -- -- 625,000 600 4,900 --
Sale of common stock, net of stock issuance costs
of approximately $56,500 -- -- 2,351,434 2,400 1,453,600 --
Deemed dividend on issuance of warrants in
connection with sale of common stock -- -- -- -- 80,000 --
Deferred stock compensation -- -- -- -- 803,800 (803,800)
Amortization of deferred stock compensation -- -- -- -- -- 322,600
Compensation associated with stock option grants -- -- -- -- 681,400 --
Net loss -- -- -- -- -- --
-------------------------------------------------- ------ ----------- ----------- ------- ----------- ------------
BALANCES, December 31, 1999 -- -- 12,881,875 12,900 4,904,500 (481,200)
Sale of preferred stock, net of
issuance costs of $79,500 (unaudited) 106 1,060,000 -- -- (79,500) --
Sale of common stock warrants (unaudited) -- -- -- -- 10,000 --
Exercise of stock options (unaudited) -- -- 32,500 -- 15,600 --
Compensation expense associated with granting
of stock options and warrants (unaudited) -- -- -- -- 1,093,700 --
Deferred stock compensation (unaudited) -- -- -- -- 139,500 (139,500)
Amortization of deferred stock
compensation (unaudited) -- -- -- -- -- 477,700
Net loss (unaudited) -- -- -- -- -- --
-------------------------------------------------- ------ ----------- ----------- ------- ----------- ------------
BALANCES, March 31, 2000 (unaudited) 106 $1,060,000 12,914,375 $12,900 $6,083,800 $ (143,000)
================================================== ====== =========== =========== ======= =========== ============
Retained
Earnings
(Accumulated
Deficit) Total
-------------------------------------------------- ------------- ------------
<S> <C> <C>
BALANCES, January 1, 1998 $ (548,800) $ (27,000)
Issuance of stock for services -- 133,100
Net income 1,663,300 1,663,300
-------------------------------------------------- ------------- ------------
BALANCES, December 31, 1998 1,114,500 1,769,400
Exercise of stock options -- 145,200
Issuance of common stock for services -- 156,600
Deemed dividend on beneficial conversion of
preferred stock into common stock (934,000) --
Issuance of common stock in connection with
reverse merger -- 5,500
Sale of common stock, net of stock issuance costs
of approximately $56,500 -- 1,456,000
Deemed dividend on issuance of warrants in
connection with sale of common stock (80,000) --
Deferred stock compensation -- --
Amortization of deferred stock compensation -- 322,600
Compensation associated with stock option grants -- 681,400
Net loss (4,752,100) (4,752,100)
-------------------------------------------------- ------------- ------------
BALANCES, December 31, 1999 (4,651,600) (215,400)
Sale of preferred stock, net of
issuance costs of $79,500 (unaudited) -- 980,500
Sale of common stock warrants (unaudited) -- 10,000
Exercise of stock options (unaudited) -- 15,600
Compensation expense associated with granting
of stock options and warrants (unaudited) -- 1,093,700
Deferred stock compensation (unaudited) -- --
Amortization of deferred stock
compensation (unaudited) -- 477,700
Net loss (unaudited) (2,688,400) (2,688,400)
-------------------------------------------------- ------------- ------------
BALANCES, March 31, 2000 (unaudited) $ (7,340,000) $ (326,300)
================================================== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT, INC.
STATEMENTS OF CASH FLOWS
Three months ended March 31, Years ended December 31,
---------------------------- ------------------------
2000 1999 1999 1998
------------ ----------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,688,400) $ (360,500) $(4,752,100) $1,663,300
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 42,000 7,400 82,100 13,200
Allowance for doubtful accounts -- -- 16,900 (75,100)
Compensation relating to stock options
and warrants issued 1,571,400 -- 1,004,000 --
Gain on sale of trade name -- -- -- (3,100,000)
Loss on settlement of note receivable -- -- 108,100 --
Accrued interest on note receivable -- -- (32,900) --
Issuance of stock for services -- 42,500 156,600 133,100
Changes in operating assets and liabilities:
Accounts receivable 41,000 -- (77,000) 170,700
Prepaid expenses and other current assets 32,900 (15,900) (49,500) 6,600
Deferred income taxes -- (240,300) (747,200) 747,200
Accounts payable (224,300) 62,600 777,300 65,000
Accrued expenses 39,400 (8,600) 190,000 (21,300)
Deferred revenue (1,900) (14,500) (21,100) 36,300
----------------------------------------------------- ------------ ----------- ------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (1,187,900) (527,300) (3,344,800) (361,000)
----------------------------------------------------- ------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal received under note receivable -- 215,500 2,239,500 785,300
Purchase of property and equipment (33,400) (48,200) (434,400) (51,100)
Other assets (8,800) (5,000) (11,700) (3,200)
----------------------------------------------------- ------------ ----------- ------------ -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (42,200) 162,300 1,793,400 731,000
----------------------------------------------------- ------------ ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
to shareholders 115,000 -- -- --
Advances on line of credit -- -- 409,700 --
Repayments on line of credit -- -- (409,700) --
Proceeds from shareholder note receivable 250,000 -- -- --
Proceeds from issuances of stock 1,060,000 1,120,900 1,400,700 --
Proceeds from issuance of warrants 10,000 -- -- --
Payment of stock issuance costs (79,500) (44,000) (44,000) --
----------------------------------------------------- ------------ ----------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,355,500 1,076,900 1,356,700 --
----------------------------------------------------- ------------ ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 125,400 711,900 (194,700) 370,000
CASH AND CASH EQUIVALENTS, beginning of period 175,300 370,000 370,000 --
----------------------------------------------------- ------------ ----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 300,700 $1,081,900 $ 175,300 $ 370,000
===================================================== ============ =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF ACCOUNTING POLICIES
The Company
PhotoLoft, 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, Inc. (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.
Basis of Presentation and Going Concern Uncertainty
The accompanying balance sheet as of March 31, 2000 and the statements of
operations and cash flows from each of the three month periods ended March
31, 2000 and 1999 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 three months
ended March 31, 2000 are not necessarily indicative of results to be
expected for any future period.
F-7
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company had an accumulated deficit of $4,651,600 as of
December 31, 1999 and incurred a net loss of $4,752,100 for the year ended
December 31, 1999. Additionally, the Company has negative working capital
of $650,600 as of December 31, 1999.
These conditions give rise to substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of reported
asset amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional financing or refinancing as may be required and
ultimately to attain profitability. The Company is actively marketing its
existing and new products, which it believes will ultimately lead to
profitable operations. Management is also pursuing additional financing and
has obtained additional financing of $910,000 through the issuance of 100
shares of convertible preferred stock (Note 12).
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.
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 three to five years.
F-8
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
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.
Accounts receivable
The carrying amount of accounts receivable approximates fair value
because of the short period of time to maturity.
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.
Accounts payable and short-term debt:
The fair value of accounts payable and short-term debt approximates
cost because of the short period of time to maturity.
As of December 31, 1999 and 1998, the fair values of the Company's
financial instruments approximate their historical carrying amounts.
F-9
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 at the lesser of the ratio of impressions delivered over
total guaranteed impressions or the straight-line basis over the term of
the contract. Product revenue is recognized upon shipment, provided no
significant obligations remain and collectibility is possible.
Periodically, the Company will engage in barter transactions, which are the
exchange by the Company of advertising space on the Company's web sites for
reciprocal advertising space on other web sites. Revenues from these barter
transactions are recorded as advertising revenues at the lower of the
estimated fair value of the advertisements received or delivered and are
recognized when the advertisements are run on the Company's web sites.
Barter expenses are recorded when the Company's advertisements are run on
the reciprocal web sites, which is typically in the same period as when
advertisements are run on the Company' web sites. There was no barter
revenue in the years ended December 31, 1999 and 1998.
Advertising
The cost of advertising is expensed as incurred. Advertising costs for the
three months ended March 31, 2000 and 1999 aggregated $60,800 and $14,500,
respectively (unaudited). Advertising costs for the years ended December
31, 1999 and 1998 aggregated $989,300 and $26,000, respectively.
F-10
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires an asset and liability approach. This approach results in
the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets
and liabilities. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation allowance when
management believes it is more likely than not that the deferred tax assets
will not be realized.
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.
F-11
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of
revenue in the financial statements. SAB 101 must be applied to the
financial statements no later than the quarter ending September 30, 2000.
The Company does not believe that the adoption of the SAB 101 will have a
material affect on the Company's financial results.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 (FIN 44) Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25. FIN
44 clarifies the application of Opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. Due to the
repricing of options, FIN 44 may have a material effect on the Company's
financial position and results of operations.
Earnings Per Common Share
During 1998, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. For the three months ended
March 31, 2000 and 1999, options to purchase 4,620,515 and 3,003,757 shares
of common stock, respectively, were excluded from computation of diluted
earnings per share since their effect would be antidilutive (unaudited).
For the year ended December 31, 1999, options to purchase 3,609,001 shares
of common stock were excluded from computation of diluted earnings per
share since their effect would be antidilutive. For the year ended December
31, 1998, options to purchase 2,728,539 shares of common stock were
excluded from the computation of diluted earnings per share because the
options' exercise price was greater than the estimated average fair market
value of the common shares.
F-12
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
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, bore interest at 7% annually.
In October 1999, Digital Equipment Corporation paid the Company $1,804,700
in full settlement of the note, at which time the Company recorded a loss
of $108,100.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
---------- -------------
(UNAUDITED)
<S> <C> <C>
Office equipment $ 553,600 $ 521,200
Furniture and fixtures 14,000 13,000
------------------------------ ---------- -------------
567,600 534,200
Less accumulated depreciation 158,200 116,200
------------------------------ ---------- -------------
$ 409,400 $ 418,000
============================== ========== =============
</TABLE>
4. ACCRUED EXPENSES
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
---------- -------------
(UNAUDITED)
<S> <C> <C>
Vacation $ 94,300 $ 54,000
Litigation Settlement (Notes 6 and 12) 111,900 111,900
Professional and consulting fees 16,600 61,900
Salaries and wages 50,500 16,400
Other 14,000 19,300
-------------------------------------- ---------- -------------
$ 287,300 $ 263,500
</TABLE>
F-13
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. 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 three months ended March 31, 2000 and 1999
aggregated $38,900 and $31,200, respectively (unaudited). Rent expense
related to these operating leases for the years ended December 31, 1999 and
1998 was $ 98,100 and $39,900, respectively.
A summary of the future minimum lease payments required under
non-cancelable operating leases with terms in excess of one year, follows:
Years ending December 31, Amount
----------------------------- -------
2000 $22,700
2001 17,400
2002 3,500
----------------------------- -------
Future minimum lease payments $43,600
============================= =======
In October 1999, the Company terminated its office lease and sub-lease
agreements (Note 12). The facility lease now operates on a month-to-month
basis. Therefore, the monthly obligation related to the facility lease is
not reflected in the above minimum lease payment schedule.
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. The employment agreement also provides that the officer receives
bonus compensation of at least $60,000 if the Company reaches certain
specific milestones, and options to purchase between 378,344 and 1,135,031
shares of common stock if traffic to the Company's web site reaches an
average of 500,000 to 1,000,000 hits per day in any particular month. The
exercise price will be the closing price on the first day following the
month in which the Company's web site reaches at least 500,000 hits (Note
12).
In November 1999, the Company entered into an agreement to obtain financial
management services valued at a minimum of $5,000 per month through May
2000 (Note 8).
F-14
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. LEGAL MATTERS
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. In January 2000, in exchange for
the release of all claims, the Company paid $20,000 and allowed the former
employee to exercise options to purchase 32,500 shares of common stock at
no cost.
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.
In May 2000, the parties agreed to a non-monetary settlement, and the
action was dismissed (unaudited).
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 December 31, 1999 and 1998, this line of credit
had no outstanding balance.
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.
8. SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock
Upon the reverse acquisition and reorganization, the Company authorized
500,000 shares of Preferred Stock, which may be issued in one or more
series. The Preferred Stock can be issued with such rights, preferences,
and designations as determined by the board of directors.
F-15
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Prior to the reverse acquisition and reorganization, the Company had
authorized 5,000,000 shares of Preferred Stock to be issued in one or more
series. As of December 31, 1998, the Company had 2,489,009 Preferred shares
issued and outstanding, which were 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 for all periods presented.
Common Stock
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 a reverse acquisition. 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.
F-16
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Immediately following the closing of the reverse 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.
In December 1999, the Company issued an aggregate of 326,434 shares of
common stock to three shareholders for proceeds of $500,000. Of this
amount, $250,000 was not paid until January 2000. This amount is classified
as notes receivable as of December 31, 1999. In connection with this
issuance of stock, the Company issued warrants to purchase an aggregate of
66,000 shares of common stock. The Company recorded a deemed dividend of
$80,000 for the value of these warrants.
Stock Purchase Warrants
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. 175,000 of these warrants vested immediately, resulting in
deferred compensation cost of $218,800, which is being amortized over the
one year term of the agreement.
In November 1999, the Company issued warrants to purchase 500,000 shares of
common stock at an exercise price of $1.01 in connection with a service
agreement (Note 5). These warrants vested immediately, resulting in
deferred compensation cost of $585,000, which is being amortized over the
six month term of the agreement.
F-17
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
As of December 31, 1999, the following common stock warrants were issued
and outstanding:
Shares
subject Exercise Expiration
to warrant price Date
-------------------------- ---------- --------- --------------
Issued with respect to:
Services agreement 350,000 $ 2.31 September 2004
Services agreement 500,000 1.01 November 2004
Issuance of common stock 66,000 1.53 December 2004
========================== ========== ========= ==============
Stock Options
In March 1999, the Company adopted a stock option plan (the Plan), for its
employees, directors, and consultants. The Plan was amended in June 1999.
The number of shares authorized for options under the Plan is 3,800,000. As
of December 31, 1999 there were 148,499 options available for grant.
Options are exercisable as determined by the Board of Directors on the date
of grant and expire not more than ten years after the date of grant. The
Company applies Accounting Principles Board (APB) No. 25, Accounting for
Stock Issued to Employees, and Related Interpretations in Accounting for
Stock Options Issued to Employees. Under APB Opinion No. 25, employee
compensation cost is recognized when the estimated fair value of the
underlying stock on date of grant exceeds the exercise price of the stock
option. For stock options issued to non-employees, the Company applies SFAS
No. 123, Accounting for Stock-Based Compensation, which requires the
recognition of compensation cost based upon the fair value of stock options
at the grant date using the Black-Scholes option pricing model.
F-18
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plan as of December
31, 1999 and 1998 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, 1999 December 31, 1998
-------------------------- ------------------------
Wtd.-Avg. Wtd.-Avg.
Shares Exer. Price Shares Exer. Price
------------------------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Beginning 5,557,518 $ 0.235 2,881,946 $ 0.001
Granted 1,486,576 $ 0.358 2,675,572 $ 0.480
Exercised (3,131,187) $ 0.046 -- $ --
Canceled (271,406) $ 0.048 -- $ --
------------------------------- ------------ ------------ ---------- ------------
Ending 3,641,501 $ 0.754 5,557,518 $ 0.235
=============================== ============ ============ ========== ============
Exercisable at
year-end 1,685,534 3,194,588
============ ==========
Wtd.-avg. fair value of options
granted during the year $ 1.875 $ 0.129
============ ============
</TABLE>
Due to the 1.513 stock split, the effective exercise price of the stock
options originally granted at $0.75 was now $0.50; on March 1, 1999, the
Company adjusted the exercise price to $0.48.
In December 1999, the Company repriced certain options granted in 1999 to
$1.50, the market value of the Company's common stock on the date of the
repricing.
During the year ended December 31, 1999, the Company granted 605,295
options to non-employees, resulting in compensation expense of $631,800.
F-19
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------- Options Exercisable
Wtd.-Avg. -----------------------
Range of Remaining Wtd.-Avg. Wtd.-Avg.
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Outstanding Price
---------- ----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.48 2,675,219 8.58 years $ 0.48 1,217,224 $ 0.48
1.50-2.00 965,350 9.59 years 1.51 467,377 1.51
5.50 932 9.50 years 5.50 932 5.50
---------- ----------- ----------- --------- ----------- ----------
3,641,501 1,685,533
=========== ===========
</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 weighted-average assumptions used
for the grants in 1999 and 1998, respectively: dividend yield of 0;
expected volatility of 79% and 0; risk-free interest rate of 5.0% and 6.0%;
and an expected life of five years for all plan options.
F-20
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Under the accounting provisions of SFAS No. 123, the Company's net (loss)
income available to common shareholders and net (loss) earnings per share
would have been reduced (increased) to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Years ended
-----------
DECEMBER 31, December 31,
1999 1998
---------------------------------- -------------- -------------
<S> <C> <C>
Net (loss) income available to
common shareholders:
As reported $ (5,766,100) $ 1,663,300
================================== ============== =============
Pro forma $ (6,012,500) $ 1,317,800
================================== ============== =============
Basic (loss) earnings per share:
As reported $ (0.49) $ 0.26
================================== ============== =============
Pro forma $ (0.52) $ 0.20
================================== ============== =============
Diluted (loss) earnings per share:
As reported $ (0.49) $ 0.18
================================== ============== =============
Pro forma $ (0.52) $ 0.14
================================== ============== =============
</TABLE>
9. INCOME TAXES
For the years ended December 31, 1999 and 1998, income tax (benefit)
expense comprises:
1999: CURRENT DEFERRED TOTAL
------- -------- ---------- ----------
FEDERAL $ -- $(628,600) $(628,600)
STATE 1,800 (118,600) (116,800)
------- -------- ---------- ----------
$ 1,800 $(747,200) $(745,400)
======= ======== ========== ==========
1998: CURRENT DEFERRED TOTAL
------- -------- ---------- ----------
FEDERAL $ -- $(628,600) $(628,600)
State 800 118,600 119,400
------- -------- ---------- ----------
$ 800 $ 747,200 $ 748,000
======= ======== ========== ==========
F-21
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 1999 and 1998 to income (loss) before income taxes:
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998
------------------------------------ ------------ ----------
<S> <C> <C>
Federal income tax at statutory rate $(1,869,200) $ 819,800)
State income taxes, net of federal
benefit (319,300) 138,200)
Compensation associated with
warrant/stock option grants 402,600 --
Increase (decrease) in valuation
allowance 974,100 (211,200)
Other, net 66,400 1,200
------------------------------------ ------------ ----------
$ (745,400) $ 748,000)
==================================== ============ ==========
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
---------------------------------- ------------ --------------
(UNAUDITED)
<S> <C> <C>
Loss carryforwards $ 2,027,700 $ 952,300
Reserves not currently deductible 6,700 6,700
Depreciation (6,400) (6,400)
Compensation and benefits 21,500 21,500
Valuation allowance (2,049,500) (974,100)
---------------------------------- ------------ --------------
Total deferred tax liabilities $ -- $ --
================================== ============ ==============
</TABLE>
The Company has placed a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
As of December 31, 1999, the Company has net operating loss carryforwards
available to reduce future taxable income, if any, of approximately
$2,540,000 and $1,447,000 for Federal and California state tax purposes,
respectively. The benefits from these carryforwards expire in various years
through 2019.
F-22
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryover may be
limited, if a cumulative change of ownership of more than 50% occurs within
any three-year period. The Company has not determined if such a change in
ownership has occurred.
10. CONCENTRATIONS
Major Customers
During the three months ended March 31, 2000, three customers accounted for
24%, 18% and 14% of net revenues, respectively. As of March 31, 2000,
these customers accounted for 86% of total accounts receivable. During the
three months ended March 31, 1999, the Company had no customers that
comprised more than 10% of net revenues (unaudited).
For the year ended December 31, 1999, three customers accounted for 24%,
14% and 14% of net revenues, respectively. As of December 31, 1999, these
customers accounted for 94.9% of total accounts receivable. During the year
ended December 31, 1998, the Company had no customers that comprised more
than 10% of net revenues.
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, 1999, the Company had deposits at one
financial institution that aggregated $152,000, of which $100,000 is
insured by the Federal Deposit Insurance Corporation. As of March 31, 2000,
the Company had deposits at one financial institution that aggregated
$425,800, of which $100,000 is insured by the Federal Deposit Insurance
Corporation (unaudited).
11. STATEMENT OF CASH FLOWS
During the three months ended March 31, 2000, noncash financing activities
included the issuance of 32,500 shares of common stock in exchange for
accrued expenses totaling $15,600 (unaudited). Noncash financing activities
for the three months ended March 31, 1999, consisted of the issuance 85,011
shares of common stock for services aggregating $42,500, and the issuance
of 25,000 shares of common stock for the payment of stock issuance costs
totaling $12,500 (unaudited).
F-23
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
During the year ended December 31, 1999, non-cash financing activities
included the issuance of 113,611 shares of common stock for services
aggregating approximately $156,600, the issuance of 25,000 shares of common
stock for the payment of stock issuance costs totaling $12,500, the
issuance of 163,217 shares of common stock for notes receivable of $250,000
and deemed dividends of $1,014,000. During the year ended December 31,
1998, non-cash financing activities included the issuance of 323,672 shares
of common stock for services aggregating approximately $133,100.
During the three months ended March 31, 2000 and 1999, the Company paid
$800 for income taxes and $0 for interest (unuadited). During the year
ended December 31, 1999, the Company paid $7,100 for interest, and $1,800
for income taxes. During 1998, the Company paid $2,800 for interest, and
$800 for income taxes.
12. SUBSEQUENT EVENTS
In January 2000, the lessor of the Company's facility filed an action
against the Company alleging a breach of a written lease agreement. The
Company believes that it has adequately accrued its estimated liability as
of December 31, 1999.
In March 2000, the Company granted an officer options to purchase 378,344
shares of common stock at an exercise price of $3.44 as a bonus, pursuant
to the officer's employment agreement described in Note 5.
In March 2000, the Company obtained additional financing of $980,500, net
of issuance costs of $79,500, through the issuance of 106 shares of Series
A convertible preferred stock to investors. The Company also issued
warrants to purchase an aggregate of 185,500 shares of common stock with an
exercise price of $3.30, expiring March 2005. The preferred stock is
convertible into shares of the Company's common stock, based on the number
of days from the issuance date through the conversion date, and the
conversion price, which is the lower of $2.65 or 80% of the average market
price for the Company's common stock for the last five trading days
immediately preceding the date of conversion. In June 2000, the Company
redeemed all 106 shares of Series A convertible preferred stock by paying
an aggregate of $1,272,000 and issuing warrants to purchase an aggregate of
80,140 shares of common stock at an exercise price of $3.30 per share
(unaudited).
In March 2000, the Company sold 400,000 warrants with an exercise price of
$0.10 to an investor for proceeds of $10,000. The warrants expire March
2005, and are exercisable as soon as the investor provides a term sheet to
assist the Company in locating financing of at least $15 million,
regardless of whether the financing is successfully completed (unaudited).
F-24
<PAGE>
PHOTOLOFT, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In March 2000, the Company obtained loans from two shareholders aggregating
$115,000 (unaudited).
In March 2000, the Company entered into employment agreements with three of
its officers, one of which replaced an existing agreement entered into in
February 1999. All three agreements are for one year, from March 15, 2000
through March 15, 2001. One officer's employment agreement provides for the
granting of 250,000 options after a term sheet is signed for a major
financing, and another 500,000 options on the effective date of a major
financing. In May 2000, the Company entered into a two year employment
contract with the officer that replaced the existing agreement. This new
agreement cancelled the 750,000 options (unaudited).
In April 2000 the Company repriced 500,000 warrants, originally granted
with an exercise price of $1.0093, to $0.10 (unaudited).
In April 2000, the Company granted warrants to purchase 200,000 shares of
common stock to a consultant at an exercise price of $0.10, and granted
warrants to purchase 100,000 shares of common stock to the same consultant
at an exercise price of $1.00. The warrants expire April 2005, and the
vesting of the warrants is contingent upon the consultant assisting the
Company in obtaining a term sheet for financing of at least $15,000,000,
regardless of whether the financing is successfully completed (unaudited).
In May 2000, the Company received a loan of $50,000 from an officer.
The loan was repaid in June 2000 (unaudited).
In May 2000, the Company received a loan of $275,000 from an investor. The
note, bearing interest at 10% per annum, was repaid in July 2000
(unaudited).
In May 2000, the Company entered into an agreement in which it issued
warrants to purchase 200,000 shares of common stock at exercise prices
ranging from $2.75 to $4.50 in exchange for investor relation services.
Fifty percent of the warrants vested upon execution of the agreement, and
the remaining fifty percent will vest if the agreement is renewed after 6
months (unaudited).
In June 2000, the Company entered into an employment agreement with an
officer, expiring June 26, 2003. The employment agreement provides for the
granting of options to purchase 400,000 shares of common stock at an
exercise price of $2.44 per share and for base salary compensation through
the expiration date of the agreement if the officer is terminated without
cause (unaudited).
In June 2000, the Company issued 900 shares of Series B convertible
preferred stock to an investor for proceeds of $9,000. The Series B
convertible preferred stock was convertible, on or before July 8, 2000,
into 50% of the Company's shares of common stock on a fully-diluted basis,
following such conversion. In July, 2000, the Series B convertible
preferred stock was exchanged for 27,914,023 shares of common stock and
warrants to purchase 11,900,000 shares of common stock at an exercise price
of $1.65 per share. The warrants can be exchanged for common stock on a
two-for-one basis after December 8, 2000. This transaction has been
recorded as a stock issuance cost for the subsequent private placement of
common stock (unaudited).
From May 2000 through July 2000, the Company issued 10,646,600 shares of
common stock and warrants to purchase 5,323,300 shares of common stock at
an exercise price of $1.65 for proceeds of $12,176,700, net of stock
issuance costs of $1,131,600. The Company also issued 28,000 shares of
common stock and 1,221,000 warrants at an exercise price of $1.65 per share
as a stock issuance fee (unaudited).
In July 2000, the Company's Board of Directors increased the number of
authorized shares of common stock to 200,000,000 (unaudited).
In July 2000, the Company issued warrants to purchase 300,000 shares of
common stock at an exercise price of $1.65 in settlement of a dispute
relating to a binding letter of intent for an equity financing (unaudited).
F-25
<PAGE>
Until __________, 2000, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PHOTOLOFT, INC.
20,086,243 Shares of
Common Stock
________________________
PROSPECTUS
________________________
, 2000
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 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 are presently no material pending legal proceedings to which a
director, officer and employee of ours is a party. There is no 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 entered 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 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
may be permitted to directors, officers, and controlling persons pursuant to the
foregoing provisions or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of various expenses, all of
which we will pay, in connection with the sale and distribution of the
securities being registered. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee $ 8,934
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 60,000
Miscellaneous $ 51,066
--------
Total $140,000
ITEM 26 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, or rule of the SEC under which exemption from
registration was claimed.
Transactions described in Items (1) through (4) below refer to the
securities of PhotoLoft.com, a California corporation which was the
predecessor entity of the filer of this form, and transactions described in
Items (5) through (15) below refer to the securities of PhotoLoft.com. a
Nevada corporation which is the filer of this form. Unless otherwise indicated,
information set forth below regarding shares of our common stock reflect the
1.5133753 for 1 conversion ratio applied to shares of PhotoLoft.com.
common stock at the time of the reorganization referred to in Item (5) below.
(1) From January 1999 to December 1999 PhotoLoft.com. issued options
to purchase the aggregate amount of 970,201 shares of common stock to 22
employees, 6 consultants and 5 directors 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.
(2) 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.
II-2
<PAGE>
(3) 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.
(4) From February 1999 to June 1999, PhotoLoft.com issued 124,111
shares of common stock to 7 consultants of PhotoLoft.com in exchange for
services valued at $156,600. 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.
(5) In March 1999, under the terms of the reorganization with Data
Growth, Inc., PhotoLoft.com issued the aggregate amount of 9,579,266 shares
of common stock to the shareholders of PhotoLoft.com in exchange for their
shares of common stock of PhotoLoft.com, Inc. 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 March 1999, under the terms of the reorganization with Data
Growth, Inc., the holders of options to purchase common stock of PhotoLoft,
Inc., Inc. exchanged their options for options to purchase the aggregate amount
of 2,795,734 shares of common stock of PhotoLoft, IncThese 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, Inc. that the shares were being acquired for
investment.
(7) 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.
(8) In March 1999, PhotoLoft.com issued 228,375 shares of common stock
upon the exercise of options to purchase common stock held by employees,
directors and consultants of PhotoLoft, IncThese 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, Inc. that the shares were being acquired for
investment.
II-3
<PAGE>
(9) 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.
(10) In September 1999, we issued warrants to purchase up to 350,000 shares
of common stock to Xoom.com in consideration for services performed for
PhotoLoft, Inc. by Xoom.com pursuant to a services agreement. The exercise
price for the warrants is $2.31 per share. 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, Inc. that the shares were being acquired for investment.
(11) In November 1999, we issued warrants to purchase up to 500,000
shares of common stock at an exercise price of $1.01 to a financial consultant
in partial consideration for services to be performed for us pursuant to a
financial management 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 us that the shares were being acquired for investment. In April
2000, the exercise price was reduced to $0.10.
(12) In November, 1999 we issued 58,700 shares of common stock to one of
our option holders upon the exercise of options to purchase common stock. The
issuance 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 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.
(13) In December 1999, we issued options to purchase up to 288,000 shares
of common stock to 1 officer with an exercise price of $1.50 per share. The
issuance was 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 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 that the shares were being acquired for
investment.
(14) In December 1999, we issued 326,434 shares of common stock in
exchange for $500,000 and warrants to purchase up to 66,000 shares of common
stock with exercise prices of $1.5317 per share to three investors. 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 was made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate the
investments, and who represented that the shares were being acquired for
investment.
II-4
<PAGE>
(15) In March 2000, we issued options to purchase up to 378,344 shares
of our common stock to one of our officers pursuant to the terms of our
employment agreement with the officer. The exercise price for the options was
$3.44 per share, which was not less than the fair market value of the shares on
the date of grant. The issuance was 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 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 us that the shares were being
acquired for investment.
(16) In March 2000, we issued 106 shares of preferred stock, designated
series A preferred stock, in exchange for $1,060,000 to investors in a private
placement. We subsequently redeemed the series A preferred stock in June, 2000.
In consideration for services in connection with the sale of our Series A
Preferred Stock in March 2000 we issued 185,500 warrants to purchase shares of
our common stock. These warrants may be exercised at any time during the
five-year period following their issuance at an exercise price of $3.30 per
share. The number of shares issuable upon exercise of the warrants is subject
to adjustment upon the occurrence of stock splits, dividends or
reclassifications. The warrants do not carry registration rights. In
connection with the June 2000 redemption of our Series A Preferred Stock, we
issued warrants to purchase an additional 80,140 shares of common stock with the
same terms and conditions; provided that we are obligated to register the shares
of common stock underlying the June 2000 warrants.
(17) In March 2000 we entered into a new employment agreement with Jack
Marshall in which he will receive 250,000 bonus options, granted under the
Employee Stock Option Plan, upon acceptance by the Board of a term sheet for a
sale of PhotoLoft, Inc. or a major financing. Employee will receive 500,000
bonus options, granted under the Employee Stock Option Plan, on the Effective
Date of a sale of PhotoLoft, Inc. or major financing. In June, 2000 Jack
Marshall entered into a new employment agreement which replaced the March 15,
2000 agreement. The new employment agreement did not include the 750,000 bonus
options provision for the boards acceptance of a term sheet or major financing.
(18) In March 2000, we sold 400,000 warrants with an exercise price of
$0.10 to an investor for proceeds of $10,000. The warrants expire March 2005,
and are exercisable as soon as the investor provides a term sheet to assist us
in locating financing of at least $15 million, regardless of whether the
financing is successfully completed. In May 2000, the investor provided a term
sheet for assisting us in locating financing. The warrants were issued and are
subsequently exercisable.
(19) In April 2000, we granted warrants to purchase 200,000 shares of
common stock to an investor at an exercise price of $0.10, and granted warrants
to purchase 100,000 shares of common stock to the investor at an exercise price
of $1.00. The warrants expire in April 2005, and the vesting of the warrants is
contingent upon the investor assisting us in obtaining a term sheet for
financing of at least $15,000,000, regardless of whether the financing is
successfully completed.
(24) In May 2000, we entered into an agreement in which we issued warrants
to purchase 200,000 shares of common stock at exercise prices ranging from $2.75
to $4.50 in exchange for investor relation services. Fifty percent of the
warrants vested upon execution of the agreement, and the remaining fifty percent
will vest if the agreement is renewed after 6 months.
(20) In June 2000, we issued 900 shares of Series B convertible preferred
stock to an investor for proceeds of $9,000. The Series B convertible preferred
stock was convertible, on or before July 8, 2000, into 50% of the Company's
shares of common stock on a fully-diluted basis, following such conversion. In
July, 2000, the Series B convertible preferred stock was exchanged for
27,914,023 shares of common stock and warrants to purchase 11,900,000 shares of
common stock at an exercise price of $1.65 per share. The warrants are not
exercisable before December 8, 2000; after that date, they may be exercised, or
exchanged on a two-for one basis for shares of our common stock. This
transaction recorded as a stock issuance cost for the subsequent private
placement of common stock.
(21) From May 2000 through July 2000, we issued 10,646,600 shares of common
stock and warrants to purchase 5,323,300 shares of common stock at an exercise
price of $1.65 for proceeds of $12,176,700, net of stock issuance costs of
$1,131,600. We also issued 28,000 shares of common stock and 1,221,000 warrants
at an exercise price of $1.65 per share as a stock issuance fee.
(22) In July 2000, our Board of Directors increased the number of
authorized shares of common stock to 200,000,000.
(23) In July 2000, we issued warrants to purchase 300,000 shares of common
stock at an exercise price of $1.65 in settlement of a dispute relating to a
binding letter of intent for an equity financing.
II-5
<PAGE>
ITEM 27. EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
----------- -------------
<S> <C>
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 (Incorporated
by Reference to Exhibit 2.1 of the Registrant's Registration Statement on
Form 10-SB (File No. 000-26957), as amended (the "Form 10-SB")).
3.1 Articles of Incorporation of the Registrant (Incorporated by Reference to
Exhibit 3.1 of the Form 10-SB).
3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant
(Incorporated by Reference to Exhibit 3.2 of the Form 10-SB).
3.3 By-Laws of Registrant (Incorporated by Reference to Exhibit 3.3 of the Form
10-SB).
3.4 Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock of the Registrant (Incorporated by Reference to Exhibit 3.4
of the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2000 (the "Form 10KSB").
3.5 Certificate of Designations, Preferences and Rights of Series B Convertible
Preferred Stock of the Registrant.
4.1 Sample Stock Certificate of the Registrant (Incorporated by Reference to
Exhibit 4.1 of the Form 10-SB).
4.2 See Exhibit Nos. 3.1, 3.2, 3.3, and 3.4.
4.3 Form of Voting Agreement, dated as of June 8, 2000, by and between the
Registrant and certain shareholders (Incorporated by Reference to Exhibit
4.3 of the Form 8-K).
5.1 Opinion of Silicon Valley Law Group with respect to the legality of
securities being registered.
10.1 Engagement letter dated October 24, 1997 between Gary Kremen and the
Registrant (Incorporated by Reference to Exhibit 10.9 of the Form 10-SB).
10.2 Distribution Agreement dated March, 1998 by and between Kuni Research
International Corporation and the Registrant (Incorporated by Reference to
Exhibit 10.11 of the Form 10-SB).
10.3 Lease Agreement dated July 8, 1998 by and between The Manufacturer's Life
Insurance Company, (U.S.A.) Company, Ltd., and the Registrant (Incorporated
by Reference to Exhibit 10.12 of the Form 10-SB).
10.4 Sublease Agreement dated September 1, 1998 by and between Surefire
Verification, Inc. and the Registrant (Incorporated by Reference to Exhibit
10.14 of the Form 10-SB).
10.5 Amendment to an Agreement with Infomedia, dated January 15, 1999
(Incorporated by Reference to Exhibit 10.16 of the Form 10-SB).
II-6
<PAGE>
10.6 Sublease Agreement dated February 1, 1999 by and between Summit
Microelectronics and the Registrant (Incorporated by Reference to Exhibit
10.17 of the Form 10-SB).
10.7 Amendment No. 1 to Consulting Services Agreement, dated February 9, 1999 by
and between Hewlett-Packard Company and the Registrant (Incorporated by
Reference to Exhibit 10.18 of the Form 10-SB).
10.8 Letter Agreement, dated February 10, 1999 by and between Bay Tree Capital
Associates, LLC and the Registrant (Incorporated by Reference to Exhibit
10.19 of the Form 10-SB).
10.9 Employment Agreement dated March 15, 2000 by and between Mr. Jack Marshall,
Chris McConn, Kay Wolf Jones and Brian Dowd the Registrant.
10.10 Stock Option Plan of the Registrant (Incorporated by Reference to Exhibit
10.21 of the Form 10-SB).
10.11 Form of Stock Option Agreement issued under the Stock Option Plan of the
Registrant (Incorporated by Reference to Exhibit 10.22 of the Form 10-SB).
10.12 Stock Option Agreement dated July 1, 1999 by and between Chris McConn and
the Registrant (Incorporated by Reference to Exhibit 10.23 of the Form
10-SB).
10.13 Stock Option Agreement dated July 1, 1999 by and between Jack Marshall and
the Registrant (Incorporated by Reference to Exhibit 10.24 of the Form
10-SB).
10.14 Internet Services and Co-Location Agreement, dated March 15, 1999 by and
between AboveNet Communications, Inc. and the Registrant (Incorporated by
Reference to Exhibit 10.27 of the Form 10-SB).
10.15 Representation Agreement, dated April 26, 1999, by and between ADSmart
Network and the Registrant (Incorporated by Reference to Exhibit 10.29 of
the Form 10-SB).
10.16 Agreement, dated July 31, 1998, by and between Digital Equipment
Corporation and the Registrant (Incorporated by Reference to Exhibit 10.32
of the Form 10-SB).
10.17 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant (Incorporated by Reference to
Exhibit 10.33 of the Form 10-SB).
II-7
<PAGE>
10.18 Loan and Security Agreement, dated September 27, 1999 by and between
Aerofund Financial, Inc. and the Registrant (Incorporated by Reference to
Exhibit 10.34 of the Form 10-SB).
10.19 Subscription Agreement, dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by Reference
to Exhibit 10.35 of the Form 10-SB).
10.20 Warrant Agreement dated December 1999, by and between John C. Marshall,
Martha Ann Marshall and the Registrant (Incorporated by Reference to
Exhibit 10.36 of the Form 10-SB).
10.21 Subscription Agreement, dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.37 of
the Form 10-SB).
10.22 Warrant Agreement dated December 1999, by and between Barbara Marshall and
the Registrant (Incorporated by Reference to Exhibit 10.38 of the Form
10-SB).
10.23 Subscription Agreement, dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit 10.39 of
the Form 10-SB).
10.24 Warrant Agreement dated December 1999, by and between Lisa Marshall, Don
Welsh and the Registrant (Incorporated by Reference to Exhibit 10.40 of the
Form 10-SB).
10.25 Stock Option Agreement dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit 10.41 of
the Form 10-SB).
10.26 Securities Purchase Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and the
Registrant (Incorporated by Reference to Exhibit 10.26 of the Form 10KSB).
10.27 Registration Rights Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and the
Registrant (Incorporated by Reference to Exhibit 10.27 of the Form 10KSB).
10.28 Placement Agency Agreement dated March 3, 2000 by and between May Davis
Group, Inc. and the Registrant (Incorporated by Reference to Exhibit 10.28
of the Form 10KSB).
10.29 Form of Warrant Agreement to Purchase Common Stock issued to May Davis
Group, Inc. as of March 3, 2000 (Incorporated by Reference to Exhibit 10.29
of the Form 10KSB).
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10.30 Financial Management Support Services Agreement dated November 29, 1999 by
and between Asher Investment Group, Inc. and the Registrant 2000
(Incorporated by Reference to Exhibit 10.30 of the Form 10KSB).
10.31 Stock Purchase Agreement, dated as of April 18, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.31 of the Form 8-K).
10.32 Registration Rights Agreement, dated June 8, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.32 of the Form 8-K).
10.33 Loan and Security Agreement, dated May 18, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.33 of the Form 8-K).
10.34 Promissory Note, dated May 18, 2000, by the Registrant in favor of
Intellect Capital Group, LLC shareholders (Incorporated by Reference to
Exhibit 10.34 of the Form 8-K).
10.35 Side Letter, dated May 22, 2000, by and between the Registrant and
Intellect Capital Group, LLC shareholders (Incorporated by Reference to
Exhibit 10.35 of the Form 8-K).
10.36 Form of Shareholder Agreement, dated June 8, 2000, by and among Registrant
and certain shareholders (Incorporated by Reference to Exhibit 10.36 of
the Form 8-K).
21.1 Subsidiaries of the Company (Incorporated by Reference to Exhibit 21.1 of
the Form 10-SB)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Silicon Valley Law Group (included in Exhibit 5.1)
24 Power of Attorney (included on signature page)
</TABLE>
* To be filed by Amendment
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the Registration Statement.
[Provided, however, that paragraphs (b)(1)(i) and (b)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities and Exchange of 1934 that are
incorporated by reference in the registration statement].
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(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the Offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of
Campbell, State of California, on July 31, 2000.
PHOTOLOFT, INC.
By: /s/ Jack Marshall
------------------------------------
Jack Marshall
CEO
POWER OF ATTORNEY
We the undersigned officers and directors of PhotoLoft, Inc., hereby
severally constitute and appoint Jack Marshall, our true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, and in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement (or any other Registration Statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933), and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as full to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jack Marshall Chief Executive Officer, Director July 31, 2000
-----------------
Jack Marshall
/s/ Christopher McConn Chief Technology Officer July 31, 2000
------------------------
Christopher McConn
/s/ Terren S Peizer Chairman and Director July 31, 2000
-------------------
Terren S Peizer
/s/ Patrick Dane Director July 31, 2000
------------------
Patrick Dane
/s/ John Marshall Director July 31, 2000
-------------------
John Marshall
/s/ Brian Dowd Chief Financial Officer July 31, 2000
-------------------
Brian Dowd
II-11
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C>
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 (Incorporated
by Reference to Exhibit 2.1 of the Registrant's Registration Statement on
Form 10-SB (File No. 000-26957), as amended (the "Form 10-SB")).
3.1 Articles of Incorporation of the Registrant (Incorporated by Reference to
Exhibit 3.1 of the Form 10-SB).
3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant
(Incorporated by Reference to Exhibit 3.2 of the Form 10-SB).
3.3 By-Laws of Registrant (Incorporated by Reference to Exhibit 3.3 of the Form
10-SB).
3.4 Certificate of Designations, Preferences and Rights of Series A Convertible
Preferred Stock of the Registrant (Incorporated by Reference to Exhibit 3.4
of the Registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2000 (the "Form 10KSB").
3.5 Certificate of Designations, Preferences and Rights of Series B Convertible
Preferred Stock of the Registrant.
4.1 Sample Stock Certificate of the Registrant (Incorporated by Reference to
Exhibit 4.1 of the Form 10-SB).
4.2 See Exhibit Nos. 3.1, 3.2, 3.3, and 3.4.
4.3 Form of Voting Agreement, dated as of June 8, 2000, by and between the
Registrant and certain shareholders (Incorporated by Reference to Exhibit
4.3 of the Form 8-K).
5.1 Opinion of Silicon Valley Law Group with respect to the legality of
securities being registered.
10.1 Engagement letter dated October 24, 1997 between Gary Kremen and the
Registrant (Incorporated by Reference to Exhibit 10.9 of the Form 10-SB).
10.2 Distribution Agreement dated March, 1998 by and between Kuni Research
International Corporation and the Registrant (Incorporated by Reference to
Exhibit 10.11 of the Form 10-SB).
10.3 Lease Agreement dated July 8, 1998 by and between The Manufacturer's Life
Insurance Company, (U.S.A.) Company, Ltd., and the Registrant (Incorporated
by Reference to Exhibit 10.12 of the Form 10-SB).
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<PAGE>
10.4 Sublease Agreement dated September 1, 1998 by and between Surefire
Verification, Inc. and the Registrant (Incorporated by Reference to Exhibit
10.14 of the Form 10-SB).
10.5 Amendment to an Agreement with Infomedia, dated January 15, 1999
(Incorporated by Reference to Exhibit 10.16 of the Form 10-SB).
10.6 Sublease Agreement dated February 1, 1999 by and between Summit
Microelectronics and the Registrant (Incorporated by Reference to Exhibit
10.17 of the Form 10-SB).
10.7 Amendment No. 1 to Consulting Services Agreement, dated February 9, 1999 by
and between Hewlett-Packard Company and the Registrant (Incorporated by
Reference to Exhibit 10.18 of the Form 10-SB).
10.8 Letter Agreement, dated February 10, 1999 by and between Bay Tree Capital
Associates, LLC and the Registrant (Incorporated by Reference to Exhibit
10.19 of the Form 10-SB).
10.9 Employment Agreement by and between Jack Marshall, Chris McConn, Kay
Wolf Jones, Brian Dowd and the Registrant.
10.10 Stock Option Plan of the Registrant (Incorporated by Reference to Exhibit
10.21 of the Form 10-SB).
10.11 Form of Stock Option Agreement issued under the Stock Option Plan of the
Registrant (Incorporated by Reference to Exhibit 10.22 of the Form 10-SB).
10.12 Stock Option Agreement dated July 1, 1999 by and between Chris McConn and
the Registrant (Incorporated by Reference to Exhibit 10.23 of the Form
10-SB).
10.13 Stock Option Agreement dated July 1, 1999 by and between Jack Marshall and
the Registrant (Incorporated by Reference to Exhibit 10.24 of the Form
10-SB).
10.14 Internet Services and Co-Location Agreement, dated March 15, 1999 by and
between AboveNet Communications, Inc. and the Registrant (Incorporated by
Reference to Exhibit 10.27 of the Form 10-SB).
10.15 Representation Agreement, dated April 26, 1999, by and between ADSmart
Network and the Registrant (Incorporated by Reference to Exhibit 10.29 of
the Form 10-SB).
10.16 Agreement, dated July 31, 1998, by and between Digital Equipment
Corporation and the Registrant (Incorporated by Reference to Exhibit 10.32
of the Form 10-SB).
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10.17 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant (Incorporated by Reference to
Exhibit 10.33 of the Form 10-SB).
10.18 Loan and Security Agreement, dated September 27, 1999 by and between
Aerofund Financial, Inc. and the Registrant (Incorporated by Reference to
Exhibit 10.34 of the Form 10-SB).
10.19 Subscription Agreement, dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by Reference
to Exhibit 10.35 of the Form 10-SB).
10.20 Warrant Agreement dated December 1999, by and between John C. Marshall,
Martha Ann Marshall and the Registrant (Incorporated by Reference to
Exhibit 10.36 of the Form 10-SB).
10.21 Subscription Agreement, dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.37 of
the Form 10-SB).
10.22 Warrant Agreement dated December 1999, by and between Barbara Marshall and
the Registrant (Incorporated by Reference to Exhibit 10.38 of the Form
10-SB).
10.23 Subscription Agreement, dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit 10.39 of
the Form 10-SB).
10.24 Warrant Agreement dated December 1999, by and between Lisa Marshall, Don
Welsh and the Registrant (Incorporated by Reference to Exhibit 10.40 of the
Form 10-SB).
10.25 Stock Option Agreement dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit 10.41 of
the Form 10-SB).
10.26 Securities Purchase Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and the
Registrant (Incorporated by Reference to Exhibit 10.26 of the Form 10KSB).
10.27 Registration Rights Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and the
Registrant (Incorporated by Reference to Exhibit 10.27 of the Form 10KSB).
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<PAGE>
10.28 Placement Agency Agreement dated March 3, 2000 by and between May Davis
Group, Inc. and the Registrant (Incorporated by Reference to Exhibit 10.28
of the Form 10KSB).
10.29 Form of Warrant Agreement to Purchase Common Stock issued to May Davis
Group, Inc. as of March 3, 2000 (Incorporated by Reference to Exhibit 10.29
of the Form 10KSB).
10.30 Financial Management Support Services Agreement dated November 29, 1999 by
and between Asher Investment Group, Inc. and the Registrant 2000
(Incorporated by Reference to Exhibit 10.30 of the Form 10KSB).
10.31 Stock Purchase Agreement, dated as of April 18, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.31 of the Form 8-K).
10.32 Registration Rights Agreement, dated June 8, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.32 of the Form 8-K).
10.33 Loan and Security Agreement, dated May 18, 2000, by and between the
Registrant and Intellect Capital Group, LLC shareholders (Incorporated by
Reference to Exhibit 10.33 of the Form 8-K).
10.34 Promissory Note, dated May 18, 2000, by the Registrant in favor of
Intellect Capital Group, LLC shareholders (Incorporated by Reference to
Exhibit 10.34 of the Form 8-K).
10.35 Side Letter, dated May 22, 2000, by and between the Registrant and
Intellect Capital Group, LLC shareholders (Incorporated by Reference to
Exhibit 10.35 of the Form 8-K).
10.36 Form of Shareholder Agreement, dated June 8, 2000, by and among Registrant
and certain shareholders (Incorporated by Reference to Exhibit 10.36 of
the Form 8-K).
21.1 Subsidiaries of the Company (Incorporated by Reference to Exhibit 21.1 of
the Form 10-SB)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Silicon Valley Law Group (included in Exhibit 5.1)
24 Power of Attorney (included on signature page)
* To be filed by Amendment
</TABLE>
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<PAGE>
