<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 September 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 [ ]
60,583,463 shares of $0.001 par value common stock outstanding as of October 31,
2000.
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Exhibit Index on Page 24
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<PAGE> 2
INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION............................................................................3
Item 1. Consolidated Financial Statements...........................................................3
Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations......11
PART II -- OTHER INFORMATION..............................................................................21
Item 1. Legal Proceedings..........................................................................21
Item 2. Changes In Securities And Use Of Proceeds..................................................21
Item 3. Defaults Upon Senior Securities............................................................21
Item 4. Submission Of Matters To A Vote Of Security Holders........................................21
Item 5. Other Information..........................................................................22
Item 6. Exhibits And Reports On Form 8-K...........................................................22
Signatures................................................................................................23
Exhibit Index.............................................................................................24
</TABLE>
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNET PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- -------------
(1) (unaudited)
<S> <C> <C>
In thousands, except per share data
ASSETS
Current assets:
Cash and cash equivalents $ 18,627 $ 1,668
Securities available-for-sale 42,739 30,025
Accounts receivable, less allowance for doubtful accounts of
$198 at December 31, 1999 and $1,356 at September 30,
2000 (unaudited) 3,356 15,939
Inventory, less reserve for obsolescence of $55 at December
31, 1999 and $204 at September 30, 2000 (unaudited) 1,059 694
Prepaid expenses and other current assets 7,211 8,042
--------- ---------
Total current assets 72,992 56,368
--------- ---------
Long-term securities available-for-sale 12,000 --
Property and equipment, net 9,135 21,118
Other assets 1,676 1,289
Goodwill and other intangible assets -- 201,460
--------- ---------
Total assets $ 95,803 $ 280,235
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,711 $ 3,017
Accrued liabilities 6,203 14,755
Deferred revenue 5,262 7,687
Current portion of promissory note and obligations under
capital lease 199 1,320
--------- ---------
Total current liabilities 14,375 26,779
--------- ---------
Promissory note and obligations under capital lease, net
of current portion 387 1,505
Commitments and contingencies (Note 6)
Stockholders' equity:
Class B common stock, $0.001 par value; 7,422 shares
authorized at December 31, 1999 and September 30, 2000 (unaudited);
7,013 and 4,403 shares issued and outstanding at
December 31, 1999 and September 30, 2000 (unaudited), respectively 1 1
Common stock, $0.001 par value; 150,000 shares authorized at
December 31, 1999 and September 30, 2000 (unaudited); 38,231
and 56,152 shares issued and outstanding at December 31,
1999 and September 30, 2000 (unaudited), respectively 38 56
Additional paid-in capital 187,829 483,737
Notes receivable from stockholders (181) (2,367)
Unearned stock-based compensation (2,955) (3,286)
Accumulated deficit (103,701) (226,237)
Accumulated other comprehensive income 10 47
--------- ---------
Total stockholders' equity 81,041 251,951
--------- ---------
Total liabilities and stockholders' equity $ 95,803 $ 280,235
========= =========
</TABLE>
(1) The December 31, 1999 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements
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<PAGE> 4
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- ---------------------------
1999 2000 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Revenues $ 3,663 $ 17,218 $ 7,205 $ 40,990
Cost of revenues 2,210 8,140 4,146 20,924
-------- -------- -------- ---------
Gross profit 1,453 9,078 3,059 20,066
-------- -------- -------- ---------
Operating expenses:
Sales and marketing 11,768 22,279 23,477 60,778
Research and development 1,394 3,649 3,337 10,086
General and administrative 4,048 4,209 8,710 15,502
Stock-based compensation 6,624 (1,811) 15,273 5,769
Amortization of intangible
assets -- 19,330 -- 38,040
Merger expenses -- -- -- 15,175
-------- -------- -------- ---------
Total operating expenses 23,834 47,656 50,797 145,350
-------- -------- -------- ---------
Loss from operations (22,381) (38,578) (47,738) (125,284)
Interest expense (6,442) (9) (6,641) (216)
Other income (expense), net 642 875 1,169 2,964
-------- -------- -------- ---------
Net loss (28,181) (37,712) (53,210) (122,536)
Beneficial conversion feature of
Series B convertible preferred
stock -- -- (1,000) --
-------- -------- -------- ---------
Net loss attributable to common
stockholders $(28,181) $(37,712) $(54,210) $(122,536)
======== ======== ======== =========
Basic and diluted net loss per
common share $ (1.08) $ (0.62) $ (3.24) $ (2.24)
======== ======== ======== =========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
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<PAGE> 5
INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 2000
--------- ---------
In thousands (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (53,210) $(122,536)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 700 41,210
Provision for doubtful accounts receivable 75 1,158
Gain on disposal of fixed asset (6) --
Issuance of common stock in exchange for services 6,629 --
Issuance of preferred stock in settlement of interest payable 9 --
Issuance of options for common stock for services 2,916 --
Accretion of available-for-sale discounts (424) 140
Provision for inventory obsolescence 40 149
Stock-based compensation 12,378 5,769
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (1,442) (12,677)
Inventory (855) 216
Prepaid expenses and other current assets (2,444) (448)
Other assets (356) 504
Accounts payable 1,304 (3,278)
Accrued expenses 1,720 6,891
Deferred revenue 1,962 2,012
--------- ---------
Net cash used in operating activities (31,004) (80,890)
--------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment (3,230) (11,389)
Purchases of securities available-for-sale (78,964) (44,522)
Maturities of securities available-for-sale 13,992 69,058
Proceeds from disposal of equipment 42 --
Acquisitions, net of cash received -- (8,290)
--------- ---------
Net cash provided by (used in) investing activities (68,160) 4,857
--------- ---------
Cash flow from financing activities:
Proceeds from issuance of convertible notes payable 1,800 --
Net proceeds from issuance of common stock 97,029 69,590
Net proceeds from issuance of preferred stock 42,844 --
Proceeds from capital lease obligations 205 --
Repayment of Series C (11,000) --
Repayments of capital lease obligations and notes payable (72) (10,364)
Repurchase of preferred and common stock (3,730) --
Proceeds from exercise of stock options and warrants 866 1,759
Issuance of notes receivable to stockholders (8) (1,986)
--------- ---------
Net cash provided by financing activities 127,934 58,999
--------- ---------
Effect of exchange rate changes on cash 14 75
--------- ---------
Net increase (decrease) in cash and cash equivalents 28,784 (16,959)
Cash and cash equivalents, beginning of period 1,494 18,627
--------- ---------
Cash and cash equivalents, end of period $ 30,278 $ 1,668
========= =========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
Page 5 of 24
<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), PW Technology, Inc., TBI Imaging, Inc., and Opticom Imaging
Corporation. 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 10-K of the Company as of and for the year
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 September 30, 2000, and the results of its operations
and its cash flows for the three month periods and nine month periods ended
September 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 nine month periods
ended September 30, 1999 and 2000, are not necessarily indicative of the results
to be expected for the respective full years.
3. EQUITY AND RELATED TRANSACTIONS
During April 2000, we acquired all of the capital stock of TBI Imaging, Inc.
and Opticom Corporation. We 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. We accounted for these transactions under the purchase method
of accounting.
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>
Nine Months ended September 30, 2000
------------------------------------
As Reported Pro Forma
----------- ----------
<S> <C> <C>
Revenue $ 40,990 $ 42,418
Net loss $(122,536) $(146,899)
Basic and diluted
loss per share $ (2.24) $ (2.64)
</TABLE>
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<PAGE> 7
<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>
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 issuable upon
the exercise of potentially dilutive stock options and warrants and upon
conversion of the Company's preferred stock and convertible debenture.
The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
In thousands, except per share data 1999 2000 1999 2000
(unaudited) (unaudited)
NUMERATOR:
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders $(28,181) $(37,712) $(54,210) $(122,536)
DENOMINATOR:
Weighted average shares 26,065 60,403 16,753 54,748
NET LOSS PER SHARE:
Basic and diluted $ (1.08) $ (0.62) $ (3.24) $ (2.24)
</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:
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<PAGE> 8
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ---------------------
1999 2000 1999 2000
------- -------- ------- ------
<S> <C> <C> <C> <C>
Cost of revenues $ 87 $ 5 $ 286 $ 90
Sales and marketing 5,270 (1,920) 10,880 4,317
Research and development 917 59 3,007 964
General and administrative 350 45 1,100 398
------- -------- ------- ------
$ 6,624 $ (1,811) $15,273 $5,769
======= ======== ======= ======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
On October 28, 1998, Minds-Eye-View, Inc. and Mr. Ford Oxaal filed a lawsuit
against the Company in the United States District Court for the Northern
District of New York. Minds-Eye alleged in its lawsuit that the Company breached
a duty of confidence to them, made misrepresentations and misappropriated trade
secrets. The plaintiffs alleged that the Company's 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 the Company's
motion, and the Company 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. The Company is
pursuing its affirmative claims against Oxaal, however, there has been no
activity in the arbitration since August 2000, when a request was submitted to
stay the arbitration pending resolution of the patent litigation. On May 20,
1999, Mr. Oxaal filed a lawsuit against the Company, Kodak, Nikon and Cendant in
the same court alleging that the Company's technology infringes upon patent no.
5,903,782 held by him. Mr. Oxaal claims that this alleged infringement is
deliberate and willful and is seeking treble damages against the Company 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 the Company. The Company has asserted defenses to Mr. Oxaal's
claims as the Company believes it did not infringe any valid claims of his
patent and that Mr. Oxaal's patent is invalid. The Company believes that Mr.
Oxaal's claims are without merit, and the Company intends to vigorously defend
against his claims. However, if Mr. Oxaal were to prevail in this lawsuit, 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 nine months of 1999 or 2000.
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, 2000. 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
Page 8 of 24
<PAGE> 9
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 became effective July 1, 2000 but certain conclusions
cover specific events that occurred 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. The adoption of 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
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<PAGE> 10
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 third quarter of 1999 and 2000, the
Company recorded barter revenues of $0 and $714, respectively, which represented
approximately 0% and 4.1%, respectively of total revenues for those periods. In
the first nine months of 1999 and 2000, the Company recorded barter revenues of
$0 and $3,060, respectively, which represented approximately 0% and 7.5%,
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 $2,700,000, which is being recognized as
expense over the two year term of the related agreement. The non-cash charge for
these warrants totaled approximately $(1,036,000) for the three month period
ended September 30, 2000, and $611,000 for the nine month period ended September
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 $0 for the three months
ended September 30, 2000, and approximately $50,000 for the nine month period
ended September 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
$9,700,000, 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
$(961,000) for the three months ended September 30, 2000, and $796,000 for the
nine months ended September 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
Page 10 of 24
<PAGE> 11
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
$1,500,000, which is being recognized as expense over the 25 month term of the
related agreement. The non-cash charge for the warrant totaled approximately
$(8,000) for the three months ended September 30, 2000, and $384,000 for the
nine months ended September 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 $(26,000) for the three months ended September 30, 2000,
and $680,000 for the nine months ended September 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.
12. SUBSEQUENT EVENTS
On October 3, 2000, the board of directors approved a restructuring plan to
reduce expenses. As part of the restructuring, the Company reduced its workforce
by approximately 175 positions. The Company expects to record a restructuring
charge during the fourth quarter of approximately $4.5 million.
On October 26, 2000, the board of directors declared a dividend distribution of
one preferred stock purchase right for each outstanding share of common stock to
shareholders of record at the close of business on November 9, 2000. Each right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A junior participating preferred stock, $0.001 par value, at a
purchase price of $15 per preferred share, subject to adjustment. The
description and terms are set forth in a Rights Agreement dated as of October
31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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
Page 11 of 24
<PAGE> 12
customers with increased e-commerce and advertising revenue opportunities
without requiring significant investment in digital media infrastructure.
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.
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<PAGE> 13
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 60.3 47.3 57.5 51.0
Gross profit 39.7 52.7 42.5 49.0
Operating expenses
Sales and marketing 321.3 129.4 325.8 148.3
Research and development 38.1 21.2 46.3 24.6
General and administrative 110.5 24.4 120.9 37.8
Stock-based compensation 180.8 (10.5) 212.0 14.1
Amortization of intangible assets -- 112.2 -- 92.8
Merger expenses -- -- -- 37.0
Total operating expenses 650.7 276.7 705.0 354.6
Interest expense
Loss from operations (611.0) (224.0) (662.5) (305.6)
Other income (expense), net (158.3) 5.0 (76.0) 6.7
Beneficial conversion feature of Series -- -- (13.9) --
B convertible preferred stock
Net loss (769.3%) (219.0%) (752.4%) (298.9%)
</TABLE>
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<PAGE> 14
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1999
Revenues. Total revenues increased to $17,218,000 in the third quarter of 2000,
compared to $3,663,000 in the third quarter of 1999, an increase of $13,555,000
or 370.1%. This increase was due primarily to an increase of $5,340,000 in sales
of virtual tours and an increase of $3,758,000 in sales of iPIX keys, primarily
to real estate and e-commerce customers. Additional revenue of $3,737,000 was a
result of acquisitions in the second quarter of 2000, including $1,894,000 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 $8,140,000 in the third quarter of
2000, compared to $2,210,000 in the third quarter of 1999, an increase of
$5,930,000. This increase is due primarily to the sale of a higher volume of
virtual tours. Cost of revenues as a percentage of total revenues decreased from
60.3% in the third quarter of 1999 to 47.3% in the third quarter of 2000. This
decrease is primarily related to productivity improvements in the virtual tours
and a favorable product mix toward higher margin products.
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 $22,279,000 in the third quarter of
2000, compared to $11,768,000 in the third quarter of 1999, an increase of
$10,511,000, or 89.3%. 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 $3,649,000 in the third quarter of 2000,
compared to $1,394,000 in the third quarter of 1999, an increase of $2,255,000,
or 161.8%. 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 $4,209,000 in the third quarter
of 2000, compared to $4,048,000 in the third quarter of 1999, an increase of
$161,000 or 4.0%. This increase was due primarily to costs associated with being
a public company.
Page 14 of 24
<PAGE> 15
Stock-based Compensation. Stock-based compensation expense consists of the
amortization of deferred compensation related to stock options granted to
employees and others prior to our initial public offering 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
related compensation 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 $6,624,000 in
the third quarter of 1999 to $(1,811,000) in the third quarter of 2000, a
decrease of 8,435,000 or 127.3%. This decrease was primarily due to a decrease
in the fair value of the underlying stock.
Amortization of Intangible Assets. Amortization of intangible assets was
$19,330,000 in the third quarter of 2000. The amortization is a result of
acquisitions during the second quarter of 2000.
Merger Expenses. Merger expenses consist of 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 third quarter of 2000.
Interest Expense. In June 1999, we entered into an agreement to sell 1,100
shares of our Series C mandatorily redeemable preferred stock and 1,251,830
shares of our common stock for total gross proceeds of $11,000,000. The
$11,000,000 of proceeds was allocated $4,394,000 to the Series C mandatorily
redeemable preferred stock and $6,606,000 to the common stock, based on their
relative fair values. The shares of the Series C mandatorily redeemable
preferred stock were redeemed in accordance with their original terms after
completion of our initial public offering by payment of their face value of
$11,000,000. Consequently we recorded interest expense of $6,606,000, which
represented primarily the original discount on the Series C mandatorily
redeemable preferred stock.
Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments. Other income (expense) increased to $875,000 in
the third quarter of 2000, compared to $642,000 in the third quarter of 1999.
This increase was primarily due to interest income earned on higher average cash
balances.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999.
Revenues. Total revenues increased to $40,990,000 in the nine months ended
September 30, 2000, compared to $7,205,000 in the nine months ended September
30, 1999, an increase of $33,785,000 or 468.9%. This increase was due primarily
to an increase of $15,636,000 in sales of virtual tours and an increase of
$8,162,000 in sales of iPIX keys, primarily to e-commerce and real estate
customers. Additional revenue of $7,221,000 was a result of acquisitions in the
second quarter of 2000, including $3,901,000 from the Rimfire technology.
Cost of Revenues. Cost of revenues increased to $20,924,000 in the first nine
months of 2000, compared to $4,146,000 in the first nine months of 1999, an
increase of $16,778,000. This increase was primarily due to the sale of a higher
volume of virtual
Page 15 of 24
<PAGE> 16
tours. Cost of revenues as a percentage of total revenues decreased from 57.5%
in the first nine months of 1999 to 51.0% in the first nine months of 2000.
Sales and Marketing. Sales and marketing expenses increased to $60,778,000 in
the nine months ended September 30, 2000, compared to $23,477,000 in the nine
months ended September 30, 1999, an increase of $37,301,000, or 158.9%. 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
$10,086,000 in the first nine months of 2000, compared to $3,337,000 in the
first nine months of 1999, an increase of $6,749,000, or 202.2%. 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
increased to $15,502,000 in the nine months ended September 30, 2000, compared
to $8,710,000 in the nine months ended September 30, 1999, an increase of
$6,792,000 or 78.0%. 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
$15,273,000 in the first nine months of 1999 to $5,769,000 in the first nine
months of 2000, a decrease of $9,504,000 or 62.2%.
Amortization of Intangible Assets. Amortization of intangible assets was
$38,040,000 in the first nine months 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 nine months of 2000 were $15,175,000 and
consisted primarily of investment banking, legal, accounting, and printer's
fees.
Interest Expense. Interest expense during the first nine months of 1999
primarily relates to the original discount on the Series C mandatorily
redeemable preferred stock for which we recorded an expense of $6,606,000.
Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments. Other income (expense) increased to $2,964,000
in the first nine months of 2000, compared to $1,169,000 in the first nine
months of 1999. This increase was primarily due to interest income earned on
higher average cash balances.
Page 16 of 24
<PAGE> 17
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 $2,700,000, which is being recognized as
expense over the two year term of the related agreement. The non-cash charge for
these warrants totaled approximately $(1,036,000) for the three month period
ended September 30, 2000, and $611,000 for the nine month period ended September
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 $0 for the three months
ended September 30, 2000, and approximately $50,000 for the nine month period
ended September 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
$9,700,000, 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
$(961,000) for the three months ended September 30, 2000, and $796,000 for the
nine months ended September 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 $1,500,000, which is being recognized as expense over the 25 month
term of the related agreement. The non-cash charge for the warrant totaled
approximately $(8,000) for the three months ended September 30, 2000, and
$384,000 for the nine months ended September 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 $(26,000) for the three months ended September 30, 2000,
and $680,000 for the nine months ended September 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
Page 17 of 24
<PAGE> 18
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 September 30, 2000, we had $1,668,000 of cash and cash
equivalents and $30,025,000 in securities available-for-sale.
Net cash used in operating activities was $31,004,000 for the nine months ended
September 30, 1999 and $80,890,000 for the nine months ended September 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
$15,273,000 and $5,769,000 for the nine month periods ended September 30, 1999
and 2000, respectively, for non-cash stock-based compensation expense. In
addition, net loss included $41,210,000 in depreciation and amortization for the
nine month period ended September 30, 2000.
Net cash provided by (used in) investing activities was $(68,160,000) for the
nine months ended September 30, 1999 and $4,857,000 for the nine months ended
September 30, 2000. Net cash provided by (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.
Net cash provided by financing activities was $127,934,000 for the nine months
ended September 30, 1999 and $58,999,000 for the nine months ended September 30,
2000. The net cash provided by financing activities in 1999 was due primarily to
the private and public 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
that the rate of capital expenditures and other expenses consistent with our
operations, personnel and marketing activities will be a
material use of our cash resources for the foreseeable future. We may also use
our cash resources to acquire or license technology, products or business
related to our current business.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
until the first quarter of 2001. We expect to experience operating losses and
negative cash flow for the next
Page 18 of 24
<PAGE> 19
four quarters and, as a result, we may be forced to rely on external financing
to meet future capital requirements. We are in the process of securing
additional funds to support our working capital requirements and may seek to
raise these funds through public or private equity financing, bank debt
financing or from other sources. Any of the equity securities may result in
additional dilution to our stockholders. There can be no assurance that this
capital will be available in amounts or on terms acceptable to us, if at all.
Page 19 of 24
<PAGE> 20
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, 2000. 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 became effective July 1, 2000 but certain conclusions
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The effects of applying the interpretation have been recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 has not had a
material impact on the Company.
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. Factors that
could contribute to these differences include those discussed in "Risk Factors"
of our prospectus dated May 4, 2000 and those under Additional Factors That May
Affect Our Future Results.
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.
Page 20 of 24
<PAGE> 21
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 the Company in the United States District Court for the Northern
District of New York. Minds-Eye alleged in its lawsuit that the Company breached
a duty of confidence to them, made misrepresentations and misappropriated trade
secrets. The plaintiffs alleged that the Company's 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 the Company's
motion, and the Company 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. The Company is
pursuing its affirmative claims against Oxaal, however, there has been no
activity in the arbitration since August 2000, when a request was submitted to
stay the arbitration pending resolution of the patent litigation. On May 20,
1999, Mr. Oxaal filed a lawsuit against the Company, Kodak, Nikon and Cendant in
the same court alleging that the Company's technology infringes upon patent no.
5,903,782 held by him. Mr. Oxaal claims that this alleged infringement is
deliberate and willful and is seeking treble damages against the Company 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 the Company. The Company has asserted defenses to Mr. Oxaal's
claims as the Company believes it did not infringe any valid claims of his
patent and that Mr. Oxaal's patent is invalid. The Company believes that Mr.
Oxaal's claims are without merit, and the Company intends to vigorously defend
against his claims. However, if Mr. Oxaal were to prevail in this lawsuit, the
Company's financial condition, results of operations and cash flows could be
materially adversely affected.
The Company is not currently a party to any other legal proceedings, the adverse
outcome of which, individually or in the aggregate, the Company believes could
have a material adverse effect on its 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
None.
Page 21 of 24
<PAGE> 22
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Amended and Restated Bylaws
10.1 Form of Amendment to Employment and
Non Competition Agreement
10.2 Form of Separation Agreement
27.1 Financial Data Schedule (for SEC
use only)
b. None.
Page 22 of 24
<PAGE> 23
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: November 13, 2000 INTERNET PICTURES CORPORATION
(Registrant)
/s/ JOHN J. KALEC
---------------------------
John J. Kalec
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer
Page 23 of 24
<PAGE> 24
INTERNET PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
3.1 Amended and Restated Bylaws
10.1 Form of Amendment to Employment and
Non Competition Agreement
10.2 Form of Separation Agreement
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
Page 24 of 24
