<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000 Commission File No. 000-26363
INTERNET PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2213841
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1009 COMMERCE PARK DRIVE
OAK RIDGE, TENNESSEE 37830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
Registrant's telephone number, including area code: (865) 482-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
60,341,832 shares of $0.001 par value common stock outstanding as of July 31,
2000
Page 1 of 1
Exhibit Index on Page 19
<PAGE> 2
INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION..........................................................................
Item 1. Consolidated Financial Statements.........................................................3-8
Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations.....8-15
PART II -- OTHER INFORMATION.............................................................................
Item 1. Legal Proceedings......................................................................... 15
Item 2. Changes In Securities And Use Of Proceeds................................................. 16
Item 3. Defaults Upon Senior Securities........................................................... 16
Item 4. Submission Of Matters To A Vote Of Security Holders....................................... 16
Item 5. Other Information......................................................................... 17
Item 6. Exhibits And Reports On Form 8-K.......................................................... 17
Signatures............................................................................................... 18
Exhibit Index............................................................................................ 19
</TABLE>
2
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNET PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
In thousands, except per share data (1) (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,627 $ 26,659
Securities available-for-sale 42,739 44,037
Accounts receivable, less allowance for doubtful accounts of
$198 at December 31, 1999 and $1,211 at June 30,
2000 (unaudited) 3,356 8,640
Inventory, less reserve for obsolescence of $55 at December
31, 1999 and $268 at June 30, 2000 (unaudited) 1,059 888
Prepaid expenses and other current assets 7,211 6,550
--------- ---------
Total current assets 72,992 86,774
--------- ---------
Long-term securities available-for-sale 12,000 --
Property and equipment, net 9,135 18,940
Other assets 1,676 2,001
Goodwill and other intangible assets -- 218,623
--------- ---------
Total assets $ 95,803 $ 326,338
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,711 $ 3,874
Accrued liabilities 6,203 20,210
Deferred revenue 5,262 8,333
Current portion of promissory note and obligations under
capital lease 199 1,558
--------- ---------
Total current liabilities 14,375 33,975
--------- ---------
Promissory note and obligations under capital lease, net
of current portion 387 1,630
Commitments and contingencies (Note 6)
Stockholders' equity:
Class B common stock, $0.001 par value; 7,422 shares authorized
at December 31, 1999 and June 30, 2000 (unaudited); 7,013
and 5,635 shares issued and outstanding at
December 31, 1999 and June 30, 2000 (unaudited), respectively 1 1
Common stock, $0.001 par value; 150,000 shares authorized at
December 31, 1999 and June 30, 2000 (unaudited); 38,231
and 54,402 shares issued and outstanding at December 31,
1999 and June 30, 2000 (unaudited), respectively 38 54
Additional paid-in capital 187,829 492,885
Notes receivable from stockholders (181) (2,315)
Unearned stock-based compensation (2,955) (11,307)
Accumulated deficit (103,701) (188,525)
Accumulated other comprehensive income 10 (60)
--------- ---------
Total stockholders' equity 81,041 290,733
--------- ---------
Total liabilities and stockholders' equity $ 95,803 $ 326,338
========= =========
</TABLE>
(1) The December 31, 1999 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements
3
<PAGE> 4
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
In thousands, except per share data
Revenues $ 2,224 $ 15,489 $ 3,542 $ 23,772
Cost of revenues 1,275 8,018 1,936 12,784
--------- --------- --------- ---------
Gross profit 949 7,471 1,606 10,988
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 7,651 22,992 11,709 38,499
Research and development 1,151 4,072 1,943 6,437
General and administrative 2,649 5,815 4,662 11,293
Stock-based compensation (Note 5) 5,086 4,806 8,649 7,580
Amortization of intangible
assets -- 18,710 -- 18,710
Merger expenses -- -- -- 15,175
--------- --------- --------- ---------
Total operating expenses 16,537 56,395 26,963 97,694
--------- --------- --------- ---------
Loss from operations (15,588) (48,924) (25,357) (86,706)
Other income (expense), net 290 990 328 1,882
--------- --------- --------- ---------
Net loss (15,298) (47,934) (25,029) (84,824)
Beneficial conversion feature of
Series B convertible preferred
stock (1,000) -- (1,000) --
--------- --------- --------- ---------
Net loss attributable to common
stockholders $ (16,298) $ (47,934) $ (26,029) $ (84,824)
========= ========= ========= =========
Basic and diluted net loss per
common share $ (1.17) $ (0.84) $ (1.90) $ (1.64)
========= ========= ========= =========
Shares used to calculate basic and
diluted net loss per share 13,910 56,841 13,668 51,742
========= ========= ========= =========
Net loss, excluding merger
expenses and non-cash charges
related to stock-based
compensation and amortization
of intangible assets $ (11,212) $ (24,418) $ (17,380) $ (43,359)
========= ========= ========= =========
Basic and diluted net loss per
common share, excluding
merger expenses and non-cash
charges related to stock-based
compensation and amortization
of intangible assets $ (0.81) $ (0.43) $ (1.27) $ (0.84)
========= ========= ========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements
4
<PAGE> 5
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
--------- ---------
In thousands (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (26,029) $ (84,824)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 378 20,214
Provision for doubtful accounts receivable 64 1,013
Gain on disposal of fixed asset (6) --
Issuance of preferred stock in settlement of interest payable 9 --
Issuance of options for common stock for services 1,412 --
Interest redeemable on preferred stock 81 --
Accretion of available-for-sale discounts and premiums (212) 261
Provision for inventory obsolescence 10 213
Stock-based compensation 8,263 7,580
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (853) (5,233)
Inventory (634) (42)
Prepaid expenses and other current assets (447) 1,044
Other assets (208) (195)
Accounts payable 875 (2,421)
Accrued expenses 309 12,346
Deferred revenue 654 2,658
--------- ---------
Net cash used in operating activities (16,334) (47,386)
--------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment (1,693) (7,558)
Purchases of securities available-for-sale (19,585) (18,063)
Maturities of securities available-for-sale 4,500 28,408
Proceeds from disposal of equipment 42 --
Acquisitions, net of cash acquired -- (6,123)
--------- ---------
Net cash used in investing activities (16,736) (3,336)
--------- ---------
Cash flow from financing activities:
Proceeds from issuance of convertible notes payable 1,800 --
Net proceeds from issuance of common stock 6,733 69,601
Net proceeds from issuance of preferred stock 42,844 --
Proceeds on capital lease obligations 205 --
Repayments of capital lease obligation and notes payable (33) (10,001)
Proceeds from exercise of stock options 6 1,062
Notes payable to stockholders (8) (1,934)
--------- ---------
Net cash provided by financing activities 51,547 58,728
--------- ---------
Effect of exchange rate changes on cash (1) 26
--------- ---------
Net increase (decrease) in cash and cash equivalents 18,476 8,032
Cash and cash equivalents, beginning of period 1,494 18,627
--------- ---------
Cash and cash equivalents, end of period $ 19,970 $ 26,659
========= =========
Non-cash investing and financing activities:
During May 2000, the Company purchased $2,597 of equipment
through capital lease.
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
5
<PAGE> 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements include
the accounts of Internet Pictures Corporation and its wholly-owned subsidiaries,
Interactive Pictures Corporation, Interactive Pictures UK Limited, Internet
Pictures (Canada), PictureWorks Technology, Inc., TBI Acquisition Sub, Inc. and
Opticom Acquisition Sub, Inc. The consolidation of these entities will
collectively be referred to as the Company. All significant intercompany
balances and transactions have been eliminated. These financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
audited financial statements of the Company as of and for the period ended
December 31, 1999. The information furnished reflects all adjustments which
management believes are necessary for a fair presentation of the Company's
financial position as of June 30, 2000, and the results of its operations and
its cash flows for the three month periods and six month periods ended June 30,
1999 and 2000. All such adjustments are of a normal recurring nature.
2. RESULTS OF OPERATIONS
The results of operations for the three month periods and six month periods
ended June 30, 1999 and 2000, are not necessarily indicative of the results to
be expected for the respective full years.
3. EQUITY AND RELATED TRANSACTIONS
On April 3, 2000, the Company acquired all of the capital stock of PictureWorks
Technology, Inc. The Company issued 4,644,334 shares to the current stockholders
of PictureWorks, based on the average price of our common stock for the ten days
ending the second business day prior to March 31, 2000. The Company accounted
for this transaction under the purchase method of accounting and accordingly,
allocated the purchase price to cash, accounts receivable, prepaid expenses,
fixed assets and intangibles including goodwill. The Company will amortize the
related goodwill over three years. The following pro forma information presents
the results of operations of the Company as if the acquisition of PictureWorks
had been completed as of January 1, 2000 and January 1, 1999, respectively:
<TABLE>
<CAPTION>
Six Months ended June 30, 2000
------------------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Revenue $ 23,772 $ 25,200
Net loss $ (84,824) $(109,187)
Basic and diluted
loss per share $ (1.64) $ (2.02)
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Revenue $ 12,523 $ 16,346
Net loss $ (76,603) $(153,819)
Basic and diluted
loss per share $ (3.01) $ (5.20)
</TABLE>
During April 2000, the Company acquired all of the capital stock of TBI Imaging,
Inc. and Opticom Corporation. The Company issued 222,232 shares to TBI and
Opticom based on a 10-day average price of our common stock in addition to
$2,130,000 in cash considerations. The Company accounted for these transactions
under the purchase method of accounting and accordingly, allocated the purchase
price primarily to fixed assets and goodwill.
On May 4, 2000, the Company raised net proceeds of $67.5 million from our
follow-on offering of 6,000,000 shares of our common stock. On June 7, 2000, the
underwriters exercised an over-allotment option to purchase an additional
115,000 shares of common stock. As a result of this exercise, the Company
received net proceeds of $1.3 million.
4. LOSS PER SHARE
NET LOSS PER SHARE. The Company computes net loss per share in accordance with
SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
share excludes potential common shares if the effect is antidilutive. Potential
common shares are composed of incremental shares of common stock
6
<PAGE> 7
issuable upon the exercise of potentially dilutive stock options and warrants
and, in 1999, upon conversion of the Company's preferred stock and convertible
debenture.
The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
In thousands, except per share data 1999 2000 1999 2000
----------------------------------- -------- -------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss $ (16,298) $ (47,934) $ (26,029) $ (84,824)
DENOMINATOR:
Weighted average shares 13,910 56,841 13,668 51,742
NET LOSS PER SHARE:
Basic and diluted $ (1.17) $ (0.84) $ (1.90) $ (1.64)
</TABLE>
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consists of the amortization of deferred
compensation related to stock options issued with an exercise price below the
deemed fair market value of our common stock on the date of grant and to
warrants issued to non-employees (Note 11). Following are the charges that have
been excluded from the following captions for each of the periods:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1999
-------------------------- ---------------------------
1999 2000 1999 2000
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cost of revenues $ 112 $ 199 $ 5 $ 85
Sales and marketing 3,306 5,610 4,679 6,238
Research and development 1,191 2,090 67 905
General and administrative 477 750 55 352
--------- --------- ---------- ---------
$ 5,086 $ 8,649 $ 4,806 $ 7,580
========= ========= ========== =========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
In October 1998, a lawsuit was filed against the Company. This lawsuit alleged
that the Company breached a duty of confidence, made misrepresentations and
misappropriated trade secrets. The court removed this action to arbitration upon
the Company's motion and the Company cross-claimed alleging various affirmative
claims. The court dismissed the lawsuit in May 1999, upon motion of the
plaintiffs. However, arbitration is expected to take place in the fall of 2000.
In May 1999, one of the original plaintiffs filed a second lawsuit against the
Company alleging patent infringement. Management believes that the claims are
without merit and intends to vigorously defend against such claims. Since the
plaintiffs have not specified in their lawsuit the amount of damages they seek,
an estimate of the ultimate potential liability of the Company cannot be made.
If the Company does not effectively defend against the claims, the Company's
financial condition, results of operations and cash flows could be materially
adversely affected.
The Company is subject to claims in the ordinary course of business. Management
believes the ultimate resolution of these matters will have no material impact
on the financial condition, results of operations or cash flows of the Company.
7. SEGMENTS
The Company has two reportable segments: 1) iPIX products, and 2) research and
development services for others. The accounting policies of the segments are the
same as those of the Company. The Company evaluates the performance of its
segments and allocates resources to them based solely on evaluation of gross
profit. There are no inter-segment revenues. The Company does not make
allocations of corporate costs to the individual segments and does not identify
separate assets of the segments in making decisions regarding performance or
allocation of resources to them. Management believes the Company's future growth
will occur in the iPIX products segment. We did not have research and
development services revenues in the first six months of 1999 or 2000.
7
<PAGE> 8
8. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for fiscal years beginning after
June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if so, the type of hedge transaction. We do not expect that the adoption of
SFAS No. 133 will have a material effect on our financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101 or SAB
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Commission. SAB 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that the impact of SAB 101 will not have a
material effect on our financial position, results of operations or cash flows.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), which clarifies the application of
Accounting Principles Board Opinion 25 for certain transactions. The
interpretation addresses many issues related to granting or modifying stock
options including changes in accounting for modifications of awards (increased
life, reduction of exercise price, etc.). It is effective July 1, 2000 but
certain conclusions cover specific events that occur after either December 15,
1998 or January 12, 2000. The effects of applying the interpretation are to be
recognized on a prospective basis from July 1, 2000. FIN 44 has not had a
material impact on the Company.
9. INCOME TAXES
Internal Revenue Code Section 382 stipulates an annual limitation on the amount
of Federal and State net operating losses incurred prior to a change in
ownership which can be utilized to offset the Company's future taxable income.
An ownership change occurred as a result of the consummation of the initial
public offering in August 1999, and as a result of the merger between
Interactive Pictures Corporation and bamboo.com, Inc.
10. BARTER REVENUES
Barter revenues. Barter revenues come from barter sales of the Company's
products that are similar in nature to the Company's cash sales for the same
products. Barter revenues have resulted from the exchange by the Company of
certain products for advertising. Barter revenues are recognized in accordance
with APB 29, "Accounting for Nonmonetary Transactions." The Company records
barter revenue at fair value of the products exchanged for advertising.
Revenues and sales and marketing expenses arising from those transactions are
recorded at fair value as the Company has an established historical practice of
receiving cash for similar sales. In the second quarter of 1999 and 2000, the
Company recorded barter revenues of $0 and $1,134, respectively, which
represented approximately 0% and 7.4%, respectively, of total revenues for those
periods. In the first six months of 1999 and 2000, the Company recorded barter
revenues of $0 and $2,346, respectively, which represented approximately 0% and
9.9%, respectively, of total revenues for those periods. Sales and marketing
expense arising from these barter transactions is recognized when the
advertising takes place, which is typically the same period in which the
products are delivered.
11. WARRANTS
On January 6, 2000, the Company issued warrants to purchase a total of 200,000
shares of common stock at an exercise price of $15.47. The warrants vest as
follows: 100,000 six months after the incorporation of immoeuro B.V., 50,000 on
September 30, 2000 and 50,000 on December 31, 2000. The fair value of warrants
was calculated to be approximately $2.7 million, which is being recognized as
expense over the two year term of the related agreement. The non-cash charge
for these warrants totaled approximately $1.6 million for the three month period
and six month period ended June 30, 2000.
On April 17, 2000, the Company granted a warrant to purchase 3,397 shares of
common stock at an exercise price of $4.00. The warrant is fully vested and
exercisable. The non-cash charge for the warrant totaled approximately $96,000,
which is being recognized as expense over the 15 month term of the related
agreement. The non-cash charge for the warrant totaled approximately $50,000 for
the three months ended June 30, 2000.
On April 19, 2000, the Company issued a warrant to purchase 600,000 shares of
common stock at an exercise price of $20.38. The warrant vests and becomes
exercisable at a rate of 66,667 at the end of each of the following nine
quarters. The fair value of the warrant was calculated to be approximately $9.7
million, which is being recognized as expense over the 3.5 year term of the
related agreement. The non-cash charge for the warrant totaled approximately
$1.8 million for the three months ended June 30, 2000.
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
25,000 on June 30, 2000, 25,000 on September 30, 2000, 25,000 on December 31,
2000, 25,000 on March 31, 2001 and 100,000 on the date the warrant holder is a
publicly traded company. The fair value of the warrant was calculated to be
approximately $1.5 million, which is being recognized as expense over the 25
month term of the related agreement. The non-cash charge for the warrant totaled
approximately $400,000 for the three months ended June 30, 2000.
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
50,000 on June 30, 2000, 50,000 on September 30, 2000, 50,000 on December 31,
2000, and 50,000 on March 31, 2001. The fair value of the warrant was calculated
to be approximately $1.5 million, which is being recognized as expense over the
11 month term of the related agreement. The non-cash charge for the warrant
totaled approximately $700,000 for the three months ended June 30, 2000.
As most of the shares subject to these warrants are unvested, the unvested
shares will be revalued at each reporting date, and the revised fair value will
be expensed upon the vesting of the remaining shares. As a result, the charge is
subject to substantial increase or decrease based on future changes in the fair
value of the underlying common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
8
<PAGE> 9
iPIX is a leading Internet infrastructure company that provides visual content
and other digital media solutions to facilitate commerce, communication and
entertainment. We offer both businesses and consumers complete end-to-end
solutions that include the capture, processing, hosting and distribution of
visual content and other digital media for the Internet. Our infrastructure
enables us to deliver digital media content to web sites accessed from a variety
of platforms, including personal computers and wireless devices. Our solutions
help businesses increase the relevance and enjoyment of users' web site visits,
resulting in increased traffic and repeat usage. This, in turn, provides our
customers with increased e-commerce and advertising revenue opportunities
without requiring significant investment in digital media infrastructure.
We are the result of the merger of Interactive Pictures and bamboo.com on
January 19, 2000. Interactive Pictures was founded in 1986 at the Oak Ridge
National Laboratory in Tennessee to develop remote robotic systems for the
United States Department of Defense, the Department of Energy, NASA and other
governmental agencies. bamboo.com was founded in 1995 in Toronto, Canada to
provide virtual tours of online residential real estate listings.
Since the completion of our merger, we have continued to establish new vertical
markets for our solutions by positioning ourselves to take advantage of the
demand for compelling digital media content on web sites. We have targeted the
following global vertical markets: real estate, travel and hospitality,
automotive, e-retail, electronic publishing, education and entertainment.
In April 2000, the Company acquired all the capital stock of PictureWorks
Technology, Inc. for 4,644,344 shares of our common stock. Also, in April 2000,
the Company acquired all of the capital stock of TBI Imaging, Inc. and Opticom
Corporation for 222,232 shares of our common stock and $2,130,000 in cash
considerations.
We generate revenues principally from our sale of digital media content as well
as iPIX keys and iPIX kits. Revenues from the sale of real estate immersive
images are recognized at the time an image is distributed to web sites selected
by the customer. Sales of iPIX kits and iPIX keys are recognized upon delivery
to the customer. We calculate a provision for returns based on historical
experience and make appropriate reserves at the time revenues are recognized. To
date, returns have been insignificant. We intend to provide end-to-end solutions
to customers who request digital media content to be hosted and distributed to
the Internet for extended time periods. Revenues generated from the delivery of
digital media content would be recognized net of the fair value of the hosting
services. Revenues associated with the hosting services would be recognized
ratably over the extended hosting and distribution term. Research and
development services revenues were historically generated under research and
development arrangements for others. We have de-emphasized these activities, and
have not engaged in any of those types of arrangements since 1998.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
--------------------- --------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 57.3 51.8 54.7 53.8
------ ------ ------ ------
Gross profit 42.7 48.2 45.3 46.2
Operating expenses
Sales and marketing 344.0 148.5 330.6 161.9
Research and development 51.8 26.3 54.8 27.1
General and administrative 119.1 37.5 131.6 47.5
Stock-based compensation 228.7 31.0 244.2 31.9
Amortization of intangible assets -- 120.8 -- 78.7
Merger expenses -- -- -- 63.8
------ ------ ------ ------
Total operating expenses 743.6 364.1 761.2 410.9
------ ------ ------ ------
Loss from operations (700.9) (315.9) (715.9) (364.7)
Other income (expense), net 13.0 6.4 9.2 7.9
Beneficial conversion feature of
Series B convertible preferred
stock (44.9) -- (28.2) --
------ ------ ------ ------
Net loss 732.8% 309.5% 734.9% 356.8%
====== ====== ====== ======
</TABLE>
10
<PAGE> 11
QUARTER ENDED JUNE 30, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999
Revenues. Total revenues increased to $15,489,000 in the second quarter of 2000,
compared to $2,224,000 in the second quarter of 1999, an increase of $13,265,000
or 596.4%. This increase was due primarily to an increase of $6,214,000 in sales
of virtual tours and an increase of $3,186,000 in sales of iPIX kits and iPIX
keys, primarily to e-commerce and real estate customers. Additional revenue of
$3,484,000 was a result of acquisitions in the second quarter of 2000, including
$2,007,000 from the Rimfire technology.
Cost of Revenues. Cost of revenues consists of our direct expenses associated
with the capture, processing, hosting and distribution of virtual tours and the
costs of the digital camera and related components included in an iPIX kit. In
addition, cost of revenues include transaction fees paid to affiliates who
display our virtual tours on their web sites and fees paid to resellers of our
virtual tours. Cost of revenues increased to $8,018,000 in the second quarter of
2000, compared to $1,275,000 in the second quarter of 1999, an increase of
$6,743,000. This increase was primarily due to the sale of a higher volume of
virtual tours. Cost of revenues as a percentage of total revenues decreased from
57.3% in the second quarter of 1999 to 51.8% in the second quarter of 2000.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales, business development and field operations personnel. Sales
and marketing expenses also include commissions and related benefits for sales
personnel and consultants, traditional advertising and promotional expenses,
trademark licensing and technology access and sponsorship fees paid to
affiliates in order to facilitate availability of our tours on their web sites.
Sales and marketing expenses increased to $22,992,000 in the second quarter of
2000, compared to $7,651,000 in the second quarter of 1999, an increase of
$15,341,000, or 200.5%. This increase is due primarily to a significant increase
in our sales force, increased costs relating to technology access and
sponsorship fees and increased advertising and branding expenses. Sales and
marketing expenses also increased due to the acquisitions in the second quarter
of 2000.
Research and Development. Research and development expenses consist primarily of
personnel costs and fees paid to third party developers. Research and
development expenses increased to $4,072,000 in the second quarter of 2000,
compared to $1,151,000 in the second quarter of 1999, an increase of $2,921,000,
or 253.8%. This increase was due primarily to increased staffing associated with
expanding our research and development efforts to build and enhance our digital
media infrastructure.
General and Administrative Expenses. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for professional services and general office and occupancy expenses.
General and administrative expenses increased to $5,815,000 in the second
quarter of 2000, compared to $2,649,000 in the second quarter of 1999, an
increase of $3,166,000 or 119.5%. This increase was due primarily to an increase
in personnel and related expenses required to support our growth, professional
services, expansion of our leased facilities and other costs associated with
being a public company.
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Stock-based Compensation. Stock-based compensation expense consists of the
amortization of deferred compensation related to stock options issued with an
exercise price below the deemed fair market value of our common stock on the
date of grant and to the amortization of fair value of warrants issued to
non-employees. The compensation related to stock options is amortized over the
vesting period of the options. Expense related to the warrants is amortized over
the term of the agreements to which they relate Stock-based compensation expense
decreased from $5,086,000 in the second quarter of 1999, compared to $4,806,000
in the second quarter of 2000, a decrease of $280,000 or 5.5%.
Amortization of Intangible Assets. Amortization of intangible assets was
$18,710,000 in the second quarter of 2000. The amortization is a result of the
acquisitions during the second quarter of 2000.
Merger Expenses. Merger expenses consist of direct costs incurred as a result of
the merger of Interactive Pictures and bamboo.com that occurred on January 19,
2000. There were no merger expenses in the second quarter of 2000 or 1999.
Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments. Net interest and other income increased to
$990,000 in the second quarter of 2000, compared to $290,000 in the second
quarter of 1999, an increase of $700,000 or 241.4%. This increase was primarily
public offerings.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased to $23,772,000 in the six months ended June
30, 2000, compared to $3,542,000 in the six months ended June 30, 1999, an
increase of $20,230,000 or 571.1%. This increase was due primarily to an
increase of $10,296,000 in sales of virtual tours and an increase of $5,452,000
in sales of iPIX kits and iPIX keys, primarily to e-commerce and real estate
customers. Additional revenue of $3,484,000 was a result of acquisitions in the
second quarter of 2000, including $2,007,000 from the Rimfire technology.
Cost of Revenues. Cost of revenues increased to $12,784,000 in the first half of
2000, compared to $1,936,000 in the first half of 1999, an increase of
$10,848,000. This increase was primarily due to the sale of a higher volume of
virtual tours. Cost of revenues as a percentage of total revenues decreased from
54.7% in the first half of 1999 to 53.8% in the first half of 2000.
Sales and Marketing. Sales and marketing expenses increased to $38,499,000 in
the six months ended June 30, 2000, compared to $11,709,000 in the six months
ended June 30, 1999, an increase of $26,790,000, or 228.8%. This increase is due
primarily to a significant increase in our sales force, increased costs relating
to technology access and sponsorship fees and increased advertising and branding
expenses. Sales and marketing expenses also increased due to the acquisitions in
the second quarter of 2000.
Research and Development. Research and development expenses increased to
$6,437,000 in the first half of 2000, compared to $1,943,000 in the first half
of 1999, an increase of $4,494,000, or 231.3%. This increase was due primarily
to increased staffing
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associated with expanding our research and development efforts to build and
enhance our digital media infrastructure.
General and Administrative Expenses. General and administrative expenses
increased to $11,293,000 in the six months ended June 30, 2000, compared to
$4,662,000 in the six months ended June 30, 1999, an increase of $6,631,000 or
142.2%. This increase was due primarily to an increase in personnel and related
expenses required to support our growth, professional services, expansion of our
leased facilities and other costs associated with being a public company.
Stock-based Compensation. Stock-based compensation expense decreased from
$8,649,000 in the first half of 1999 to $7,580,000 in the first half
of 2000, a decrease of $1,069,000 or 12.4%.
Amortization of Intangible Assets. Amortization of intangible assets was
$18,710,000 in the first half of 2000. The amortization is a result of the
acquisitions during the second quarter of 2000.
Merger Expenses. Merger expenses consist of direct costs incurred as a result of
the merger of Interactive Pictures and bamboo.com that occurred on January 19,
2000. Merger expenses in the first half of 2000 were $15,175,000 and consisted
primarily of underwriting, legal, accounting, and printer's fees.
Other Income (Expense). Net interest and other income increased to $1,882,000 in
the six months ended June 30, 2000, compared to $328,000 in the six months ended
June 30, 1999, an increase of $1,554,000. This increase was primarily due to
interest income earned on higher average cash balances as a result of our public
offerings.
WARRANTS
On January 6, 2000, the Company issued warrants to purchase a total of 200,000
shares of common stock at an exercise price of $15.47. The warrants vest as
follows: 100,000 six months after the incorporation of immoeuro B.V., 50,000 on
September 30, 2000 and 50,000 on December 31, 2000. The fair value of warrants
was calculated to be approximately $2.7 million, which is being recognized as
expense over the two year term of the related agreement. The non-cash charge
for these warrants totaled approximately $1.6 million for the three month period
and six month period ended June 30, 2000.
On April 17, 2000, the Company granted a warrant to purchase 3,397 shares of
common stock at an exercise price of $4.00. The warrant is fully vested and
exercisable. The non-cash charge for the warrant totaled approximately $96,000,
which is being recognized as expense over the 15 month term of the related
agreement. The non-cash charge for the warrant totaled approximately $50,000 for
the three months ended June 30, 2000.
On April 19, 2000, the Company issued a warrant to purchase 600,000 shares of
common stock at an exercise price of $20.38. The warrant vests and becomes
exercisable at a rate of 66,667 at the end of each of the following nine
quarters. The fair value of the warrant was calculated to be approximately $9.7
million, which is being recognized as expense over the 3.5 year term of the
related agreement. The non-cash charge for the warrant totaled approximately
$1.8 million for the three months ended June 30, 2000.
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
25,000 on June 30, 2000, 25,000 on September 30, 2000, 25,000 on December 31,
2000, 25,000 on March 31, 2001 and 100,000 on the date the warrant holder is a
publicly traded company. The fair value of the warrant was calculated to be
approximately $1.5 million, which is being recognized as expense over the 25
month term of the related agreement. The non-cash charge for the warrant totaled
approximately $400,000 for the three months ended June 30, 2000.
On May 26, 2000, the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $12.06. The warrant vests as follows:
50,000 on June 30, 2000, 50,000 on September 30, 2000, 50,000 on December 31,
2000, and 50,000 on March 31, 2001. The fair value of the warrant was calculated
to be approximately $1.5 million, which is being recognized as expense over the
11 month term of the related agreement. The non-cash charge for the warrant
totaled approximately $700,000 for the three months ended June 30, 2000.
As most of the shares subject to these warrants are unvested, the unvested
shares will be revalued at each reporting date, and the revised fair value will
be expensed upon the vesting of the remaining shares. As a result, the charge is
subject to substantial increase or decrease based on future changes in the fair
value of the underlying common stock.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through our
registered public offerings, the private placements of capital stock and a
convertible debenture. At June 30, 2000, we had $26,659,000 of cash and cash
equivalents and $44,037,000 in securities available-for-sale.
Net cash used in operating activities was $16,334,000 for the six months ended
June 30, 1999 and $47,386,000 for the six months ended June 30, 2000. Net cash
used for operating activities in each of these periods is primarily a result of
net losses and changes in net operating assets. Net loss included $8,263,000 and
$7,580,000 for stock-based compensation and $378,000 and $20,214,000 for
depreciation and amortization for the six month periods ended June 30, 1999 and
2000 respectively.
Net cash used in investing activities was $16,736,000 for the six months ended
June 30, 1999 and $3,336,000 for the six months ended June 30, 2000. Net cash
used in investing activities was related to the net purchases and maturities of
short-term investments and the purchase of computer software, hardware and other
equipment. In addition, cash was used in the second quarter of 2000 for
acquisitions.
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Net cash provided by financing activities was $51,547,000 for the six months
ended June 30, 1999 and $58,728,000 for the six months ended June 30, 2000. The
net cash provided by financing activities in 1999 was due primarily to the
private sale of shares of our common and preferred stock and the issuance of
convertible subordinated promissory notes of $1,800,000 that converted into
preferred stock during the first quarter of 1999. The net cash provided by
financing activities in 2000 was due primarily to the public sale of our common
stock and exercise of stock options, offset by repayments of capital leases and
notes payable, and retirement of debt assumed in an acquisition.
Although we have no material commitments for capital expenditures, we anticipate
an increase in the rate of capital expenditures and other expenses consistent
with our anticipated growth in personnel, operations and marketing activities.
We anticipate expanding our sales and marketing activities and enhancing our
research and development. We may also use our cash resources to acquire or
license technology, products or business related to our current business. We
anticipate that our operating expenses will continue to grow as we make
investments in our sales and marketing and distribution capabilities and that
our operating expenses will be a material use of our cash resources for the
foreseeable future.
We believe that the net proceeds from our recently completed follow-on offering
of our common stock, together with existing cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. However, during this time and
thereafter, we may require additional funds to support our working capital
requirements or for other purposes and may seek to raise additional funds
through public or private equity financing, bank debt financing or from other
sources. There can be no assurance that this capital will be available in
amounts or on terms acceptable to us, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if so, the type of hedge
transaction. We do not expect that the adoption of SFAS No. 133 will have a
material effect on our financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No. 101 or SAB
101 "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Commission. SAB 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. We believe that the impact of SAB 101 will not have a
material effect on our financial position or results of operations.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), which clarifies the application of Accounting
Principles Board Opinion 25 for certain transactions. The interpretation
addresses many issues related to granting or modifying stock options including
changes in accounting for modifications of awards (increased life, reduction of
exercise price, etc.). It is effective July 1, 2000 but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The effects of applying the interpretation are to be recognized on a
prospective basis from July 1, 2000. FIN 44 has not had a material impact on
the Company.
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FORWARD-LOOKING STATEMENTS
This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our management's beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may cause
our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. We encourage
you to read our prospectus dated May 4, 2000, particularly the section entitled
"Risk Factors," for a discussion of the factors that could contribute to any
differences.
The words "believe", "may", "will", "should", "anticipate", "estimate",
"expect", "intends", "objective" or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
On October 28, 1998, Minds-Eye-View, Inc. and Mr. Ford Oxaal filed a lawsuit
against us in the United States District Court for the Northern District of New
York. Minds-Eye alleged in its lawsuit that we breached a duty of confidence to
them, made misrepresentations and misappropriated trade secrets. The plaintiffs
alleged that our technology wrongfully incorporated trade secrets and other
know-how gained from them in breach of various duties. The court removed this
action to arbitration upon our motion, and we cross-claimed alleging various
affirmative claims, including trade secret theft. Minds-Eye and Mr. Oxaal filed
a motion to dismiss the suit, and the court dismissed the lawsuit on May 19,
1999. Although the lawsuit was dismissed, we anticipate that the arbitration
will proceed in Knoxville, Tennessee in the fall of 2000 to decide our
affirmative claims against Mr. Oxaal.
On May 20, 1999, Mr. Oxaal filed a lawsuit against us, Kodak, Nikon and Cendant
in the same court alleging that our technology infringes upon a patent claim for
360(degrees)
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spherical visual technology held by him. Mr. Oxaal claims that this alleged
infringement is deliberate and willful and is seeking treble damages against us
in an unspecified amount plus interest, an accounting by us, costs and
attorney's fees, in addition to a permanent injunction prohibiting the alleged
infringement of his patent by us. We have asserted defenses to Mr. Oxaal's
claims as we believe we did not infringe any valid claims of his patent. We
believe that Mr. Oxaal's claims are without merit and we intend to vigorously
defend against his claims. However, if Mr. Oxaal were to prevail in this
lawsuit, our financial condition, results of operations and cash flows could be
materially adversely affected.
We are not currently a party to any other legal proceedings the adverse outcome
of which, individually or in the aggregate, we believe could have a material
adverse effect on our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2000 we held the annual meeting of our stockholders to vote upon the
following proposals. First, the stockholders voted to elect two directors to
serve until 2003. John S. Hendricks was elected to the Board of Directors by a
vote of 32,650,228 for, 0 against, and 164,523 abstentions and broker nonvotes.
John Trezevant was elected to the Board of Directors by a vote of 32,671,124
for, 0 against and 143,627 abstentions and broker nonvotes. James Phillips,
Kevin McCurdy and Michael Easterly continue serving as directors until the
annual meeting of stockholders in the year 2002 (Class III directors). Laban
Jackson, Jr., Leonard McCurdy and John Moragne continue serving as directors
until the annual meeting of stockholders in the year 2001 (Class II directors).
Leonard McCurdy resigned from the Board of Directors on June 22, 2000 to pursue
other individual interests. Second, the stockholders approved and adopted the
2000 Equity Incentive Plan by a vote of 25,043,562 for, 7,674,524 against and
96,665 abstentions and
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broker nonvotes. Third, the stockholders approved and adopted an amendment to
the Amended and Restated 1998 Employee, Director and Consultant Plan by a vote
of 26,530,091 for, 6,158,312 against and 126,348 abstentions and broker
nonvotes. Finally, the stockholders voted to ratify the selection of
PricewaterhouseCoopers LLP as our independent auditors by a vote of 32,778,952
for, 31,232 against and 4,567 abstentions and broker nonvotes.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27.1 Financial Data Schedule
b. Reports on Form 8-K
(1) April 6, 2000; Items 2 and 5
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INTERNET PICTURES CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 14, 2000 INTERNET PICTURES CORPORATION
(Registrant)
/s/ John J. Kalec
-------------------------------------------
John J. Kalec
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer
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INTERNET PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
19
