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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, 2001 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)
3160 CROW CANYON ROAD
SAN RAMON, CALIFORNIA 94583
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
Registrant's telephone number, including area code: (925) 242-4002
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 [ ]
67,054,970 shares of $0.001 par value common stock outstanding as of July
31,2000
Page 1 of 24
Exhibit Index on Page 24
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INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
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..................................12
PART II -- OTHER INFORMATION.................................................20
Item 1. Legal Proceedings.............................................20
Item 2. Changes In Securities And Use Of Proceeds.....................20
Item 3. Defaults Upon Senior Securities...............................21
Item 4. Submission Of Matters To A Vote Of Security Holders...........22
Item 5. Other Information.............................................22
Item 6. Exhibits And Reports On Form 8-K..............................22
Signatures...................................................................23
Exhibit Index................................................................24
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTERNET PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2001
--------- ---------
(1) (unaudited)
(In thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 5,322 $ 5,620
Securities available-for-sale ....................................................... 5,713 --
Accounts receivable, net of allowance for doubtful accounts of
$4,617 at December 31, 2000 and $2,790 at June 30, 2001 (unaudited) ............. 13,732 4,554
Inventory, net of reserve for obsolescence of $203 at December 31, 2000 and
$404 at June 30, 2001 (unaudited) ............................................... 1,061 361
Prepaid expenses and other current assets ........................................... 6,790 4,697
--------- ---------
Total current assets ......................................................... 32,618 15,232
Property and equipment, net ......................................................... 20,965 6,872
Other assets ........................................................................ 1,555 152
Goodwill and other intangible assets ................................................ 5,476 4,259
--------- ---------
Total assets ................................................................. $ 60,614 $ 26,515
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .................................................................... $ 4,077 $ 3,988
Accrued liabilities ................................................................. 16,682 15,930
Deferred revenue .................................................................... 9,077 889
Current portion of promissory note and obligations under capital leases ............. 1,608 1,550
--------- ---------
Total current liabilities .................................................... 31,444 22,357
--------- ---------
Promissory notes and obligations under capital leases, net of current portion ....... 957 897
Commitments and contingencies (Note 8) -- --
Warrants and beneficial conversion feature of convertible note ...................... -- 10,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.001 par value: .................................................. -- --
Authorized: 5,001,100 at December 31, 2000 and June 30, 2001 (unaudited)
No shares issued or outstanding at December 31, 2000 and June 30, 2001 (unaudited)
Class B common stock, $0.0001 par value: ............................................ -- --
Authorized: 7,421,536 at December 31, 2000 and June 30, 2001 (unaudited)
Issued and outstanding: 4,041,725 at December 31, 2000 and June 30, 2001
(unaudited)
Common stock, $0.001 par value: ..................................................... 59 63
Authorized: 150,000,000 at December 31, 2000 and June 30, 2001 (unaudited)
Issued and outstanding: 59,464,024 at December 31, 2000 and 63,013,245 at June
30, 2001 (unaudited)
Additional paid-in capital .......................................................... 484,098 482,098
Notes receivable from stockholders .................................................. (2,349) (225)
Unearned stock-based compensation ................................................... (3,361) (800)
Accumulated deficit ................................................................. (450,296) (487,019)
Accumulated other comprehensive income (loss) ....................................... 62 (856)
--------- ---------
Total stockholders' equity (deficit) ......................................... 28,213 (6,739)
--------- ---------
Total liabilities and stockholders' equity (deficit) ......................... $ 60,614 $ 26,515
========= =========
(1) The December 31, 2000 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements.
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INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
In thousands, except per share data 2000 2001 2000 2001
-------- -------- -------- --------
(unaudited) (unaudited)
Revenues:
Products $ 13,482 $ 4,203 $ 21,765 $ 11,825
Services 2,007 3,760 2,007 5,661
-------- -------- -------- --------
15,489 7,963 23,772 17,486
Cost of revenues:
Products 7,288 2,036 12,054 5,502
Services 730 1,386 730 2,665
-------- -------- -------- --------
8,018 3,422 12,784 8,167
Gross profit 7,471 4,541 10,988 9,319
-------- -------- -------- --------
Operating expenses:
Sales and marketing 22,992 5,207 38,499 14,926
Research and development 4,072 1,515 6,437 3,987
General and administrative 5,711 2,726 11,059 6,384
Stock-based compensation 4,806 2,819 7,580 4,037
Goodwill amortization 18,710 608 18,710 1,216
Restructuring and impairment -- 7,193 -- 10,193
Bad debt expense 104 3,057 234 3,213
Loss on disposal of assets -- -- -- 1,769
Merger expenses -- -- 15,175 --
-------- -------- -------- --------
Total operating expenses 56,395 23,125 97,694 45,725
Other income(expense):
Interest expense (187) (938) (207) (1005)
Other 1,177 (93) 2,089 (213)
-------- -------- -------- --------
Loss before extraordinary items (47,934) (19,615) (84,824) (37,624)
Extraordinary gain -- -- -- 901
-------- -------- -------- --------
Net loss $(47,934) $(19,615) $(84,824) $(36,723)
======== ======== ======== ========
Basic and diluted loss per common share:
Loss before extraordinary items $ (0.84) $ (0.30) $ (1.64) $ (0.58)
Extraordinary gain -- -- -- $ .01
-------- -------- -------- --------
Net loss (Note 3) $ (0.84) $ (0.30) $ (1.64) $ (0.57)
======== ======== ======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements.
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INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30,
2000 2001
-------- --------
In thousands (unaudited)
Cash flows from operating activities:
Net loss $(84,824) $(36,723)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 20,214 3,146
Provision for doubtful accounts receivable 1,013 (1,827)
Loss on disposal of assets -- 1,769
Accretion of available-for-sale securities 261 (5)
Non-cash interest expense related to amortization of discount attributable
to beneficial conversion feature of debt and warrants -- 805
Provision for inventory obsolescence 213 201
Non-cash compensation expense 7,580 6,161
Impairment loss -- 1,122
Extraordinary gain -- (901)
Changes in operating assets and liabilities:
Accounts receivable (5,233) 4,161
Inventory (42) 499
Prepaid expenses and other current assets 1,044 (990)
Other assets (195) 1,019
Accounts payable (2,421) (210)
Accrued expenses 12,346 1,779
Deferred revenue 2,658 (545)
-------- --------
Net cash used in operating activities (47,386) (20,539)
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (7,558) (154)
Proceeds from sale of assets -- 8,577
Purchases of securities available-for-sale (18,063) --
Maturities of securities available-for-sale 28,408 6,000
Acquisitions, net of cash acquired (6,123) --
-------- --------
Net cash (used in) provided by investing activities (3,336) 14,423
-------- --------
Cash flow from financing activities:
Repayments of capital lease obligation and notes payable (10,001) (849)
Net Proceeds from convertible promissory note and warrants -- 9,277
Proceeds from issuance of common stock 69,601 --
Proceeds from exercise of stock options 1,062 25
Distribution to stockholders -- (839)
Notes payable to stockholders (1,934) --
-------- --------
Net cash provided by financing activities 58,728 7,614
-------- --------
Effect of exchange rate changes on cash 26 (1,200)
-------- --------
Net increase in cash and cash equivalents 8,032 298
Cash and cash equivalents, beginning of period 18,627 5,322
-------- --------
Cash and cash equivalents, end of period $ 26,659 $ 5,620
======== ========
No income tax payments were made in either period presented. Interest paid for
the six months ending June 30, 2000 and 2001 was $206 and $119, respectively.
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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), Inc., PW Technology, Inc. and Internet Pictures Japan KK. 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, 2000. 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, 2001 and the results of its
operations and its cash flows for the six month periods ended June 30, 2000 and
2001. All such adjustments are of a normal recurring nature.
2. RESULTS OF OPERATIONS
The results of operations for the three month periods and the six months periods
ended June 30, 2000 and 2001, are not necessarily indicative of the results to
be expected for the respective full years.
3. LOSS PER SHARE
LOSS PER SHARE BEFORE EXTRAORDINARY ITEM. The Company computes net loss per
share in accordance with SFAS No.128, Earnings Per Share. Under the provisions
of SFAS No. 128, basic and diluted net loss per share is computed by dividing
the net loss applicable 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.
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The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:
In thousands, except per share data
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 2001 2000 2001
--------- --------- --------- ---------
NUMERATOR:
Loss before extraordinary item applicable
to common stock $(47,934) $(19,615) $(84,824) $(37,624)
DENOMINATOR:
Weighted average shares outstanding 56,841 65,351 51,742 64,548
LOSS PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and diluted $ (0.84) $ (0.30) $ (1.64) $ (0.58)
4. RESTRUCTURING AND IMPAIRMENT
During the first quarter of 2001, the Company recorded a restructuring charge of
$1,878,000 consisting of expenses associated with a reduction in our workforce,
lease obligations for vacated offices and a write down of abandoned office
equipment of $1,122,000 to its net realizable value.
During the second quarter of 2001, the Company recorded a restructuring charge
of $7,193,000 as a result of continued efforts to align our business strategy
toward higher margin business. The costs primarily consist of severance
payments, termination benefits associated with a reduction in our work force,
facility closure costs and other contractual obligations.
Included in the second quarter restructuring is $1,300,000 related to a
severance liability for our former Chief Executive Officer, James M. Phillips.
At June 30, 2001 the unpaid liability is $1,100,000, which is to be paid in
installments ending in September of 2003. As further consideration for Mr.
Phillips' separation agreement, the Company forgave a loan from the Company to
Mr. Phillips and the related interest aggregating $2,193,000.
5. DISPOSAL OF ASSETS
A subsidiary of Homestore.com purchased certain assets from us pursuant to the
terms of an acquisition agreement dated January 12, 2001. Under the terms of the
acquisition agreement, the subsidiary of Homestore.com purchased certain
computers, furniture, fixtures and equipment and certain sales contracts with
residential real estate brokers and agents. We used these assets in our
operations providing virtual tours of residential real estate properties. As
part of the acquisition, Homestore.com's subsidiary hired certain sales force
and customer service personnel. The purchase price for these assets was
$12,000,000 in cash, of which $155,000 was paid directly to a lessor for certain
capital lease obligations, $7,454,000 was deposited into control accounts for
deferred revenue obligations and the remainder, $4,391,000, was paid to the
Company. We also granted
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Homestore.com's subsidiary an exclusive domestic license of certain of iPIX's
virtual tour technology for the residential real estate market.
In accordance with the January 12, 2001 purchase transaction, we agreed to
negotiate one remaining residential real estate contract with RETT f/k/a
National Reality Trust. Homestore.com's subsidiary, and IPIX settled on March 3,
2001 the remaining obligation of the contract for which we received $1,935,500.
The Company recorded an extraordinary gain of $901,000 resulting in the disposal
of assets used to provide tours of residential real estate properties that were
related to the pooling of the Interactive Pictures Corporation and bamboo.com
and the cash received from the January 12, 2001 agreement.
The remaining residential real estate related assets that were unrelated to the
pooling of Interactive Pictures Corporation and bamboo.com were recorded as a
loss on the disposal of assets of $1,769,000.
6. 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, to the amortization of the fair
value of warrants issued to non-employees and to the amortization of the fair
value of restricted stock granted to employees. The related compensation is
amortized over the vesting period of the options or stock grants. Expenses
related to the warrants are amortized over the term of the agreements to which
they relate. The following presents, for the periods indicated, the charges that
have been excluded from the following captions:
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
In thousands 2000 2001 2000 2001
------- ------- ------- -------
(unaudited) (unaudited)
Cost of revenues $ 5 $ 15 $ 85 $ 104
Sales and marketing 4,679 641 6,238 1,358
Research and development 67 251 905 539
General and administrative 55 1,912 352 2,035
------- ------- ------- -------
$ 4,806 $ 2,819 $ 7,580 $ 4,037
======= ======= ======= =======
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7. DISTRIBUTION TO STOCKHOLDERS
On May 10, 2001, the Company issued one million nine hundred (1,900,000) shares
of iPIX common stock to six iPIX stockholders (the "Stockholders") in exchange
for the termination of certain obligations arising under (i) the merger
agreement between Internet Pictures Corporation and TBI Imaging, Inc. and (ii)
the merger agreement between Internet Pictures Corporation and Opticom
Corporation, each dated March 16, 2000. Concurrent with the above transaction,
the Company distributed all of the outstanding shares of Imaging Services
Corporation, a wholly-owned subsidiary, and certain related assets to the
Stockholders. As a result of the transaction, the Company recorded a
distribution to stockholders of $2,979,000 which resulted in a reduction in
additional paid in capital.
8. COMMITMENTS AND CONTINGENCIES
On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg,
Patrick Oliver and related entities, all of whom are former stockholders of
PictureWorks Technology, Inc. (which the Company acquired in April 2000) filed a
lawsuit in the Delaware Chancery Court alleging causes of action for failure to
timely issue stock certificates and breach of contract. An unspecified amount of
damages is sought. We believe that the plaintiffs' claims are without merit, and
we intend to vigorously defend against these claims.
Please reference Legal Proceedings in our Annual Report on Form 10K for the
fiscal year ended December 31, 2000 for additional disclosures.
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.
If the plaintiffs in any of these cases were to prevail in their action, our
financial condition, results of operations and cash flows could be materially
adversely affected.
9. SEGMENTS
The Company has two reportable segments: 1) products, and 2) services. 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.
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Information about reported segments is as follows:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
In thousands 2000 2001 2000 2001
------- ------- ------- -------
(unaudited) (unaudited)
Revenues:
Products $13,482 $4,203 $21,765 $11,825
Services 2,007 3,760 2,007 5,661
Total ------- ------- ------- -------
$15,489 $7,963 $23,772 $17,486
======= ======= ======= =======
Cost of revenues:
Products $7,288 $2,036 $12,054 $5,502
Services 730 1,386 730 2,665
Total ------- ------- ------- -------
$8,018 $3,422 $12,784 $8,167
======= ======= ======= =======
Long-lived asset information by geographic area is as follows:
In thousands
December 31, June 30,
2000 2001
------ -------
LONG-LIVED ASSETS:
Foreign.......... $ 3,285 $ 60
United States.... 17,680 6,812
------ -------
$20,965 $ 6,872
====== =======
10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FAB issued Statement No. 141 (FAS 141), Business Combinations,
and Statement No. 142 (FAS142), Goodwill and Other Intangible Assets. FAS 141
supercedes APB 16, Business Combinations and primarily addresses the accounting
for the cost of an acquired business (i.e., the purchase price allocation),
including any subsequent adjustments to its cost.
The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby eliminating
use of the pooling-of-interests method along with the establishment of new
criteria for determining whether intangible assets acquired in a business
combinations should be recognized separately from goodwill. FAS 141 is effective
for all business combinations (as defined in the statement) initiated after June
30, 2001 and for all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 1, 2001 or later). The Company does not expect adoption of FAS 141 to have
a material impact on the Company's reported results of operations, financial
position or cash flows.
FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142
supercedes AFB 17, Intangible Assets. Under FAS 142, goodwill and indefinite
lived
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intangible assets will no longer be amortized and will be tested for
impairment at least annually at a reporting unit level. Additionally, the
amortization period of intangible assets with finite lives is no longer limited
to forty years. FAS 142 is effective for fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. Early application is permitted for entities with
fiscal years beginning after March 15, 2001 provided that the first interim
period financial statements have not been issued previously. The Company does
not expect adoption of FAS 142 to have a material impact on the Company's
reported results of operations, financial position or cash flows.
11. CONVERTIBLE PROMISSORY NOTE AND WARRANTS
On May 14, 2001, the Company executed definitive agreements with Paradigm
Capital Partners and Memphis Angels, LLC for an investment by the parties into
the Company of up to $30 million. The agreement calls for the investment to
occur in two tranches (the "Purchase Agreement"). Tranche A consists of a $10
million convertible note and warrants, Tranche B is scheduled to close after the
annual shareholder meeting that will occur on August 22, 2001 and may include up
to an additional $20 million in convertible preferred stock, which may convert
into common stock at a rate of 80 common shares per preferred share. Proceeds of
the investment will be used for sales and marketing efforts, research and
development and general working capital purposes. Pursuant to the Purchase
Agreement, the Company issued to Image Investor Portfolio, a separate series of
Memphis Angels, LLC its $10,000,000 convertible promissory note (the "Note").
The Note is due and payable with accrued interest at a rate of 8% on the earlier
of (a) August 14, 2002 or (b) the termination of the Purchase Agreement. The
Note and accrued interest are scheduled to convert into preferred stock as part
of the closing of Tranche B. The Company has also issued three warrants (Warrant
1, Warrant 2 and Warrant 3) to Paradigm Capital Partners and Memphis Angels,
LLC. Warrant 1 entitles the holder to subscribe for and purchase 150,000 shares
of Series B Preferred Stock at $20 per share and is exercisable at any time
before the expiration date of May 14, 2006. Warrant 2 entitles the holder to
subscribe for and purchase 100,000 shares of Series B Preferred Stock at $40 per
share and is exercisable at any time before the expiration date of May 14, 2006.
Warrant 3 entitles the holder to subscribe for and purchase 1,000,000 shares of
Series B Preferred Stock at $20 per share and is exercisable at any time before
the expiration date of August 29, 2002.
Due to the warrants issued in conjunction with the convertible promissory note,
based on APB 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants and EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features, the entire proceeds from the convertible
promissory note, $10,000,000, were allocated to the warrants and the beneficial
conversion feature based on a calculation using the Black-Scholes model. During
the second quarter of 2001, the Company
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recorded $805,000 as interest expense related to the accretion of the
convertible promissory note to its face value over the fifteen month period on
the note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Internet Pictures Corporation (iPIX(R)) provides mission critical imaging
solutions to facilitate commerce, communication and entertainment. The Company's
solutions include the capture, processing, management and distribution of images
and related data. iPIX solutions create and manage a rich variety of media
including still images, 360(degree) by 360(degree) immersive images, video,
animation, text and audio. A broad array of industries -- including real estate,
auctions, travel, government, education, automotive, sports and entertainment --
are capitalizing on iPIX dynamic imaging to give viewers more information, more
interaction and a richer online experience. 80% of Media Metrix's top ten Web
properties use iPIX to make their sites more dynamic. The Company is
headquartered in Oak Ridge, Tennessee, with co-headquarters in San Ramon,
California. 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.
In April of 2000, we acquired PictureWorks Technology, which developed our open
imaging platform, Rimfire, which allows business to business and business to
consumer internet sites to quickly and easily capture, manage and distribute
images and other forms of media directly from site viewers via live Web pages.
With Rimfire, site end-users can easily publish still digital media to the Web
with simple drag-and-drop image submission. The iPIX open imaging platform
solves the most common problems associated with user-supplied media by
simplifying the tasks and the process for the user and the Web site. For
example, with Rimfire, eBay is able to allow their users to instantly add photos
directly to their listings from the "Sell Your Item" form online. The photos are
automatically sized, formatted and delivered to the eBay Web site to the
standards pre-set by eBay.
Utilizing our Rimfire infrastructure products and services, we provide
end-to-end solutions to customers who request digital media content to be hosted
and distributed to the Internet. Revenues associated with the hosting services
are recognized ratably over the hosting and distribution term. We also generate
revenues from our sale of digital media content as well as iPIX keys and iPIX
kits. Sales of immersive images, 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.
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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.
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2000 2001 2000 2001
------- ------- ------- -------
(unaudited) (unaudited)
Revenues 100% 100% 100% 100%
Cost of revenues 52% 43% 54% 47%
------- ------- ------- -------
Gross profit 48% 57% 46% 53%
------- ------- ------- -------
Operating expenses:
Sales and marketing 148% 65% 162% 85%
Research and development 26% 19% 27% 23%
General and administrative 37% 34% 47% 37%
Stock-based compensation 31% 35% 32% 23%
Goodwill amortization 121% 8% 79% 7%
Restructuring and impairment 0% 90% 0% 58%
Bad debt expense 1% 38% 1% 18%
Loss on disposal of assets 0% 0% 0% 10%
Merger expenses 0% 0% 64% 0%
------- ------- ------- -------
Total operating expenses 364% 290% 411% 261%
Loss from operations (316)% (233)% (365)% (208)%
Other income(expense), net 6% (13)% 8% (7)%
------- ------- ------- -------
Loss before extraordinary items (310)% (246)% (357)% (215)%
Extraordinary gain 0% 0% 0% 5%
------- ------- ------- -------
Net loss (310)% (246)% (357)% (210)%
======= ======= ======= =======
QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000
Revenues. Total revenues decreased to $7,963,000 in the second quarter of 2001,
compared to $15,489,000 in the second quarter of 2000, a decrease of $7,526,000
or 49%. This decrease was due primarily to a decrease of $6,791,000 in sales of
full service virtual tours. As part of the sale of assets to Homestore.com
during the first quarter of 2001, we no longer directly sell full service
virtual tours of iPIX keys to customers in the residential real estate market.
The second quarter 2001 revenues of $7,963,000 included $5,806,000 from the sale
of our technology products and services and $2,157,000 related to full service
virtual real estate tours. We do not expect to generate significant future
revenues from the sale of virtual real estate tours in the US residential
markets. Instead, we have an agreement with Homestore.com whereby we will
provide certain processing, hosting and distribution services for Homestore.com
and we will receive transaction fees and royalties.
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Cost of Revenues. In the three months ended June 30, 2000, cost of revenues
consisted of our direct expenses associated with the capture, processing,
hosting and distribution of virtual tours, the costs of the digital camera and
related components included in an iPIX kit and infrastructure and bandwidth
costs related to Rimfire revenues. Cost of revenues decreased to $3,422,000 in
the second quarter of 2001, compared to $8,018,000 in the second quarter of
2000, a decrease of $4,596,000. Cost of revenues as a percentage of total
revenues decreased from 52% in the second quarter of 2000 to 43% in the second
quarter of 2001. This decrease was the result of a lower volume of virtual tour
deliveries and the increase in higher margin Rimfire based revenue.
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 and
trademark licensing. Sales and marketing expenses decreased to $5,207,000 in the
second quarter of 2001, compared to $22,992,000 in the second quarter of 2000, a
decrease of $17,785,000, or 77%. This decrease is due primarily to our decision
to sell more of our products and services through various third parties, such as
equipment manufactures, and become less reliant upon a worldwide direct sales
force. As a result, we had a significant reduction in our sales force and field
operations personnel, decreased costs relating to technology access and
sponsorship fees and decreased advertising and branding expenses.
Research and Development. Research and development expenses consist primarily of
personnel costs and fees paid to third party developers. Research and
development expenses decreased to $1,515,000 in the second quarter of 2001,
compared to $4,072,000 in the second quarter of 2000, a decrease of $2,557,000,
or 63%. This decrease was due primarily to decreased personnel and related costs
as a result of our reduction in work force and the exit of the full service real
estate business.
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 decreased to $2,726,000 in the second
quarter of 2001, compared to $5,711,000 in the second quarter of 2000, a
decrease of $2,985,000 or 52%. This decrease was due primarily to a decrease in
personnel and related costs and professional services.
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. In
addition, it also includes the amortization of the fair value of warrants and
options issued to non-employees and restricted stock granted to employees. The
related compensation is amortized over the vesting period of the options or
stock grants. Expenses related to the warrants are amortized over the term of
the agreements to which they relate. Stock-based compensation expense decreased
from $4,806,000 in the second quarter of 2000,
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compared to $2,819,000 in the second quarter of 2001. The decrease is primarily
related to the decrease in our stock price.
Goodwill Amortization. Amortization of intangible assets was $608,000 in the
second quarter 2001, compared to $18,710,000 in the second quarter of 2000. The
amortization was a result of goodwill associated with the acquisitions during
the second quarter of 2000. The decrease is related to the impairment charge
taken in the fourth quarter of 2000 of $176,831,000 related to the goodwill.
Restructuring and Impairment Charges. During the second quarter of 2001, the
Company recorded a restructuring charge of $7,193,000 as a result of continued
efforts to align our business strategy toward higher margin business. The costs
primarily consist of severance payments, termination benefits associated with a
reduction in our work force, lease terminations and facility closure costs.
Included in the restructuring charges is $1,300,000 related to a severance
liability with former Chief Executive Officer, James M. Phillips. At June 30,
2001 the unpaid liability is $1,100,000, which is to be paid in installments
ending in September of 2003. As further consideration for Mr. Phillips'
separation agreement, the Company forgave a loan from the Company to Mr.
Phillips and the related interest aggregating $2,193,000.
Bad Debt Expense. Bad debt expense was $3,057,000 in the second quarter of 2001,
compared to $104,000 in the second quarter of 2000. The increase in bad debt
expense was the result of non-payment by customers, now in financial difficulty,
and our belief that certain former customers will not pay all of their
obligations.
Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments, interest paid on capital leases, interest
accrued for the convertible promissory note and the accretion of the promissory
note towards its face value. Other income (expense) decreased to $(1,031,000) in
the second quarter of 2001, compared to $990,000 in the second quarter of 2000,
a change of $2,021,000. This change was due primarily to decreased earnings on
our cash investments related to a lower cash balance and interest expense
related to the accretion of the promissory note. In the second quarter of 2001,
the Company recorded non-cash interest expense of $805,000 related to the
accretion of the promissory note to its face value.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
Revenues. Total revenues decreased to $17,486,000 in the six months ended June
30, 2001, compared to $23,772,000 in the six months ended June 30, 2000, a
decrease of $6,286,000 or 26%. This decrease was due primarily to a decrease of
$7,333,000 in sales of full service virtual tours coupled with an increase of
$1,044,000 in non-real estate related revenues. For the six months ended June
30, 2001, revenues of $17,486,000 included $10,415,000 from the sale of our
technology products and services and $7,071,000 related to full service virtual
real estate tours. We do not expect to generate significant future revenues from
the sale of virtual real estate tours in the US residential markets. Instead, we
have an agreement with Homestore.com whereby we will provide
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certain processing, hosting and distribution services for Homestore.com and we
will receive transaction fees and royalties.
Cost of Revenues. Cost of revenues decreased to $8,167,000 in the first half of
2001, compared to $12,784,000 in the first half of 2000, a decrease of
$4,617,000. Cost of revenues as a percentage of total revenues decreased from
54% in the first half of 2000 to 47% in the first half of 2001. This decrease
was the result of a lower volume of virtual tour deliveries and the increase in
higher margin Rimfire based revenues.
Sales and Marketing. Sales and marketing expenses decreased to $14,926,000 in
the six months ended June 30, 2001, compared to $38,499,000 in the six months
ended June 30, 2000, a decrease of $23,573,000, or 61%. This decrease is due
primarily to our decision to sell more of our products and services through
various third parties, such as equipment manufacturers, and become less reliant
upon a worldwide direct sales force. As a result, we had a significant reduction
in our sales force and field operations personnel, decreased costs relating to
technology access and sponsorship fees and decreased advertising and branding
expenses.
Research and Development. Research and development expenses decreased to
$3,987,000 in the first half of 2001, compared to $6,437,000 in the first half
of 2000, a decrease of $2,450,000, or 38%. This decrease was due primarily to
decreased personnel and related costs as a result of our reduction in work force
and the exit of the full service real estate business.
General and Administrative Expenses. General and administrative expenses
decreased to $6,384,000 in the six months ended June 30, 2001, compared to
$11,059,000 in the six months ended June 30, 2000, a decrease of $4,675,000 or
42%. This decrease was due primarily to a decrease in personnel and related
costs and professional services.
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, to
the amortization of the fair value of warrants and options issued to
non-employees and to the amortization of the fair value of restricted stock
granted to employees. The related compensation is amortized over the vesting
period of the options or stock grants. Expenses related to the warrants are
amortized over the term of the agreements to which they relate. Stock-based
compensation expense decreased from $7,580,000 in the first half of 2000,
compared to $4,037,000 in the first half of 2001. The primary reason for the
decrease is related to the decrease in our stock price.
Goodwill Amortization. Amortization of intangible assets was $1,216,000 in the
first half of 2001, compared to $18,710,000 in the first half of 2000. The
amortization was a result of goodwill associated with the acquisitions during
the second quarter of 2000. The decrease is related to the impairment charge
taken in the fourth quarter of 2000 of $176,831,000 related to the goodwill.
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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.
Merger expenses in the first half of 2000 were $15,175,000 and consisted
primarily of underwriting, legal, accounting and printer's fees.
Extraordinary Gain. The extraordinary gain during the first six months of 2001
of $901,000 results from the sale of assets used to provide residential real
estate virtual tours that were related to the pooling of Interactive Pictures
Corporation and bamboo.com. The sale transaction took place within a year of the
2000 pooling transaction.
Loss on Disposal of Assets. The loss during the first six months of 2001 on the
disposal of assets of $1,769,000 is the result of the sale of assets used to
provide residential real estate virtual tours that consisted of the remaining
residential real estate assets that were unrelated to the 2000 pooling of
Interactive Pictures Corporation and bamboo.com.
Restructuring and Impairment Charges. During the first half of 2001, we recorded
a restructuring charge of $9,071,000 consisting of expenses associated with a
reduction in our workforce, lease obligations for vacated office and other
contractual obligations. In addition to the restructuring, the Company wrote
down abandoned office equipment of $1,122,000 to its net realizable value.
Included in the restructuring is $1,300,000 related to a severance liability
with our former Chief Executive Officer, James M. Phillips. At June 30, 2001 the
unpaid liability is $1,100,000, which is to be paid in installments ending in
September of 2003. As further consideration for Mr. Phillips' separation
agreement, the Company forgave a loan from the Company to Mr. Phillips and the
related interest aggregating $2,193,000.
Bad Debt Expense. Bad debt expense was $3,213,000 in the first half of 2001,
compared to $234,000 in the first half of 2000. The increase in bad debt expense
was the result of non-payment by customers, now in financial difficulty, and our
belief that certain former customers will not pay all of their obligations.
Other Income (Expense). Other income (expense) decreased to $(1,218,000) in the
six months ended June 30, 2001, compared to $1,882,000 in the six months ended
June 30, 2000, a change of $3,100,000. This change was due primarily to
decreased earnings on our cash investments related to a lower cash balance and
interest expense related to the promissory note. In the first half of 2001, the
Company recorded non-cash interest expense of $805,000 related to the accretion
of the promissory note to its face value
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture and
a convertible promissory note. At June 30, 2001, we had $5,620,000 of cash and
cash equivalents.
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Net cash used in operating activities was $20,539,000 for the six months ended
June 30, 2001 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 offset by changes in net operating assets. Our net loss for the
six-month periods ended June 30, 2000 and 2001 included $20,214,000 and
$3,146,000, respectively, for non-cash depreciation and amortization.
Net cash provided by/(used in) investment activities was $(3,336,000) for the
six months ended June 30, 2000 and $14,423,000 for the six months ended June 30,
2001. Net cash provided by/(used in) investing activities was related to the net
purchases and maturities of short-term investments, the acquisition of computer
software and hardware and other equipment and the proceeds from the sale of
assets.
Net cash provided by financing activities was $58,728,000 for the six months
ended June 30, 2000 and $7,614,000 for the six months ended June 30, 2001. The
net cash provided by financing activities for these periods was due primarily to
the sale of shares of our common stock, the exercise of stock options and the
issuance of a convertible promissory note, off-set by the repayment of capital
lease obligations and other notes payable.
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 the net proceeds from our second quarter 2001 convertible
promissory note and warrants, together with existing cash and cash equivalents,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures through August 31, 2001. We will require additional funds
to support our working capital requirements and for other purposes and we are in
the process of raising 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.
On May 14 2001, we executed definitive agreements with Paradigm Capital Partners
and Memphis Angels, LLC for an investment by the parties of up to $30 million.
The agreement calls for the investment to occur in two tranches. Tranche A
consists of $10 million in convertible notes and warrants. Tranche B is
scheduled to close after the annual shareholder meeting that will occur on
August 22, 2001 and will include up to an additional $20 million in convertible
preferred stock. Although the documents contemplate the sale of up to $30
million of our Series B Preferred Stock, there is no assurance that we will sell
the entire amount. If we do not sell the entire amount of Series B Preferred
Stock, we may need to raise additional funds to support our operations. We may
seek these funds through the issuance of debt or equity securities. Any of the
equity securities may result in additional substantial dilution to our
stockholders. There can be no assurance that our capital requirements will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to raise the needed funds, we may be forced to sell assets or discontinue
operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FAB issued Statement No. 141 (FAS 141), Business Combinations,
and Statement No. 142 (FAS142), Goodwill and Other Intangible Assets. FAS 141
supercedes APB 16, Business Combinations and primarily addresses the accounting
for the cost of an acquired business (i.e., the purchase price allocation),
including any subsequent adjustments to its cost.
The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby eliminating
use of the pooling-of-interests method along with the establishment of new
criteria for determining whether intangible assets acquired in a business
combinations should be recognized separately from goodwill. FAS 141 is effective
for all business combinations (as defined in the statement) initiated after June
30, 2001 and for all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 1, 2001 or later). The Company does not expect adoption of either FAS 141
to have a material impact on the Company's reported results of operations,
financial position or cash flows.
FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142
supercedes AFB 17, Intangible Assets. Under FAS 142, goodwill and indefinite
lived intangible assets will no longer be amortized and will be tested for
impairment at least annually at a reporting unit level. Additionally, the
amortization period of intangible assets with finite lives is no longer limited
to forty years. FAS 142 is effective for fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. Early application is permitted for entities with
fiscal years beginning after March 15, 2001 provided that the first interim
period financial statements have not been issued previously. The Company does
not expect adoption of FAS 142 to have a material impact on the Company's
reported results of operations, financial position or cash flows.
INFLATION
Inflation has not had a significant impact on our operations to date.
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
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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 annual report on Form 10-K filed on April 2,
2001 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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
Reference is hereby made to Item 3, Legal Proceedings in our Annual Report on
Form 10K for the fiscal year ended December 31, 2000 for additional disclosures.
On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg,
Patrick Oliver and related entities, all of whom are former stockholders of
PictureWorks Technology, Inc. (which the Company acquired in April 2000) filed a
lawsuit in the Delaware Chancery Court alleging causes of action for failure to
timely issue stock certificates and breach of contract. An unspecified amount of
damages is sought. We believe that the plaintiffs' claims are without merit, and
we intend to vigorously defend against these claims. If the plaintiffs were to
prevail in their action, however, our financial condition, result of operations
in 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
On May 14, 2001, we announced that the we had entered into a definitive
agreement with Paradigm Capital Partners and Memphis Angels, LLC (the
"Investors") for the sale by the Company, and purchase by the Investors, of up
to $30 million of the Company's Series B Preferred Stock. Pursuant to the terms
of a securities purchase agreement between the Company and the Investors dated
as of May 14, 2001, the Investors purchased $10 million of the Company's
convertible senior secured notes (the "Notes") and received warrants to purchase
the Company's Series B Preferred Stock. The Notes bear interest at 8% per annum.
The Investors may elect to receive interest either in cash or additional shares.
The Notes are convertible into the Company's Series B Preferred Stock at the
rate
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of fifty (50) shares of Series B Preferred Stock for each $1,000 of Notes. The
Investors received (i) Tranche A warrants to purchase a number of shares of
Series B Preferred Stock equal to one-half the number of shares of Series B
Preferred Stock into which the Notes may be converted and (ii) Tranche B
warrants to purchase up to $20 million of Series B Preferred Stock at the
Tranche B closing. Sixty percent of the Tranche A warrants have an exercise
price of $20.00 per share and the remaining forty percent have an exercise price
of $40.00 per share. The Tranche B closing will occur, if at all, after a number
of conditions have been met. The Company expects the Tranche B closing to occur
after the Company's annual meeting of stockholders, currently scheduled for
August 22, 2001.
Under the terms of the May 14, 2001 securities purchase agreement, the Investors
will consummate the purchase of the Notes in two stages. The first closing,
which occurred on May 14, 2001, was for $3 million of the Company's Notes. The
second closing, which occurred on May 29, 2001, was for $7 million of the
Company's Notes. Effective as of the second closing date, the board of directors
of the Company was reduced from nine (9) members to seven (7), and, pursuant to
the securities purchase agreement, the Investors will have the right to appoint
four (4) of the seven (7) directors. In addition, as of the second closing date,
the Chairman and Chief Executive Officer of the Company stepped down and assumed
the position of Chairman Emeritus.
Pursuant to the terms of a Certificate of Designation filed with the Secretary
of State of the State of Delaware on May 14, 2001, the Series B Preferred Stock
will convert into the Company's common stock at a conversion rate of eighty (80)
shares of common stock for each share of Series B Preferred Stock. The Series B
Preferred Stock bears dividends at an annual rate of 8% of the original issue
price payable quarterly in cash or as an increase to the Series B Preferred
Stock liquidation preference. In addition to significant matters requiring a
class vote, Series B Preferred Stock is entitled to vote on matters submitted to
holders of common stock on an as-converted basis and, so long as at least 25% of
the shares of the Series B Preferred Stock issued in connection with the Tranche
A and Tranche B closings is outstanding, is entitled to elect four (4) members
of the Board of Directors of the Company. These modifications to the Series B
Preferred Stock made pursuant to the Certificate of Designation limit the rights
of the current holders of our common stock. For example, the common stock
holders will be entitled to elect only three (3) directors, and the Company is
required to obtain the separate approval of Series B Preferred holders in order
to consummate certain transactions.
The Company relied on the exemption from registration provided in Section 4(2)
and Rule 506 of the Securities Act when effecting the private placement to Image
Investor Portfolio. All of the securities were purchased by one (1) accredited
investor and no general advertising or solicitations were used.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 10.1 Internet Pictures Corporation 2001
Equity Incentive Plan
Exhibit 10.2 Employment Agreement between
Internet Pictures Corporation and
Donald W. Strickland dated
July 1, 2001
Exhibit 10.3 Employment Agreement between
Internet Pictures Corporation and
Paul Farmer dated July 1, 2001
b. Reports on Form 8-K
(1) May 14, 2001; Item 7 and Item 9.
(2) May 29, 2001; Item 1 and Item 7.
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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, 2001 INTERNET PICTURES CORPORATION
(Registrant)
/s/ Paul Farmer
--------------------------------------------
Paul Farmer
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, 2001
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.1 Internet Pictures Corporation 2001
Equity Incentive Plan
10.2 Employment Agreement between
Internet Pictures Corporation and
Donald W. Strickland dated
July 1, 2001
10.3 Employment Agreement between
Internet Pictures Corporation and
Paul Farmer dated July 1, 2001
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