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, 2003 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
7,701,074 shares of $0.001 par value common stock outstanding as of October 31,
2003.
1
INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PART I-- FINANCIAL INFORMATION......................................... 3
Item 1. Condensed Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 22
Item 4. Controls and Procedures..................................... 22
PART II-- OTHER INFORMATION............................................ 23
Item 1. Legal Proceedings........................................... 23
Item 2. Changes In Securities And Use Of Proceeds................... 23
Item 3. Defaults Upon Senior Securities............................. 23
Item 4. Submission Of Matters To A Vote Of Security Holders......... 23
Item 5. Other Information........................................... 23
Item 6. Exhibits And Reports On Form 8-K............................ 23
Signatures............................................................. 24
Exhibit Index.......................................................... 25
2
PART I--FINANCIAL INFORMATION
Recalculation of Earnings Per Share
This Form 10-Q of Internet Pictures Corporation ("iPIX," "we," "us," "our," or
the "Company") reflects the Form 10-K/A filed August 14, 2003 to reflect the
recalculation of our earnings (loss) per common share for the year ended
December 31, 2002 and for each of the quarterly periods in the year then ended.
Other than as expressly stated herein, the information prior to April 1, 2003 in
this Form 10-Q does not reflect any subsequent information or events other than
the recalculation detailed below.
The Company has revised its unaudited financial statements for the three and
nine months ended September 30, 2002 to reflect the impact of the cumulative
dividend and participation rights of the Company's convertible preferred stock
on the calculation of earnings (loss) per common share for those periods. The
cumulative dividend, whether or not declared, has been reflected as a reduction
in net income (loss) to calculate net income (loss) available to common
shareholders. In addition, the participation right of the preferred stock has
been considered in the calculation of basic earnings (loss) per common share, if
dilutive, using the if converted method or the two class method, if more
dilutive. The revision of earnings (loss) per common share for the periods
indicated above had no effect on reported revenues, gross profit, net income
(loss) or cash balances in any of the periods. The effect of the restatement of
earnings (loss) per common share is as follows:
Three months Nine months
ended ended
September 30, 2002 September 30, 2002
------------------ ------------------
Earnings (loss) per common share:
Basic-- as reported........................ $ 0.08 $ (0.24)
Basic-- restated........................... $ 0.01 $ (0.44)
Diluted-- as reported...................... $ 0.03 $ (0.24)
Diluted-- restated......................... $ 0.01 $ (0.44)
3
Item 1. Condensed Consolidated Financial Statements
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2002 2003
------------ -------------
(1) (unaudited)
(In thousands)
ASSETS
Cash and cash equivalents......................................................................... $ 3,020 $ 8,836
Restricted cash and short term investments........................................................ 2,972 1,400
Accounts receivable, net.......................................................................... 3,535 2,263
Inventory, net.................................................................................... 181 207
Prepaid expenses and other current assets......................................................... 984 2,083
------------ -----------
Total current assets........................................................................ 10,692 14,789
Computer hardware, software and other, net........................................................ 4,631 2,789
Other long term assets............................................................................ 70 11
Goodwill.......................................................................................... 3,042 3,042
------------ -----------
Total assets................................................................................ $ 18,435 $ 20,631
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 360 $ 907
Accrued liabilities............................................................................... 5,426 3,936
Deferred revenue.................................................................................. 85 3,066
Current portion of obligations under capital leases............................................... 2,403 1,856
------------ -----------
Total current liabilities................................................................... 8,274 9,765
Obligations under capital leases, net of current portion.......................................... 1,459 112
Other long term liabilities....................................................................... 310 84
------------ -----------
Total liabilities........................................................................ 10,043 9,961
------------ -----------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock (Aggregate liquidation value: $24,560 in 2002, $25,633 in 2003)................... 1 1
Common stock...................................................................................... 65 66
Class B common stock.............................................................................. -- --
Additional paid-in capital........................................................................ 513,937 515,354
Accumulated deficit............................................................................... (505,117) (504,260)
Accumulated other comprehensive loss.............................................................. (494) (491)
------------ -----------
Total stockholders' equity.................................................................. 8,392 10,670
------------ -----------
Total liabilities and stockholders' equity.................................................. $ 18,435 $ 20,631
============ ============
______________________
(1) The December 31, 2002 balances were derived from the audited financial
statements.
See accompanying notes to the unaudited condensed consolidated financial
statements.
4
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
---------------------- -------------------------
2002 2003 2002 2003
----------- --------- ----------- -----------
(unaudited) (unaudited)
(In thousands, except per share data) (restated) (restated)
Revenue:
Transaction services............................................. $ 4,242 $ 5,811 $ 11,619 $ 17,471
Immersive still solutions........................................ 1,753 666 4,931 1,858
Immersive video solutions........................................ -- 146 -- 237
---------- -------- ---------- ----------
Total revenue................................................. 5,995 6,623 16,550 19,566
---------- -------- ---------- ----------
Cost of revenue:
Transaction services............................................. 1,738 1,876 5,238 5,426
Immersive still solutions........................................ 561 400 1,372 1,025
Immersive video solutions........................................ -- 75 -- 161
---------- -------- ---------- ----------
Total cost of revenue......................................... 2,299 2,351 6,610 6,612
---------- -------- ---------- ----------
Gross profit.................................................. 3,696 4,272 9,940 12,954
---------- -------- ---------- ----------
Operating expenses:
Sales and marketing.............................................. 1,881 1,899 6,074 5,704
Research and development......................................... 1,175 1,198 3,686 3,626
General and administrative....................................... 621 1,001 2,418 2,664
Restructuring ................................................... 687 -- 687 --
---------- -------- ---------- ---------
Total operating expenses...................................... 4,364 4,098 12,865 11,994
---------- -------- ---------- ---------
Income (loss) from operations.................................... (668) 174 (2,925) 960
Patent infringement award ....................................... 1,000 -- 1,000 --
Interest income (expense) and other.............................. 244 (20) 297 (103)
---------- --------- ----------- ----------
Net income (loss)................................................ 576 154 (1,628) 857
Preferred stock dividends (restated for 2002).................... (451) (454) (1,335) (1,345)
Participation of preferred stock (restated for 2002)............. (75) -- -- --
---------- --------- ----------- ----------
Net income (loss) available to common stockholders
(restated for 2002)........................................... $ 50 $ (300) $ (2,963) $ (488)
=========== ========= =========== ===========
Income (loss) per common share, basic and diluted
(restated for 2002)........................................... $ 0.01 $ (0.04) $ (0.44) $ (0.07)
Weighted average common shares, basic............................ 6,798 7,613 6,789 7,147
Weighted average common shares, diluted.......................... 6,798 7,613 6,789 7,147
See accompanying notes to the unaudited condensed consolidated financial
statements.
5
INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
---------------------
2002 2003
----------- --------
(In thousands) (unaudited)
Cash flows from operating activities:
Net income (loss)....................................................................................... $ (1,628) $ 857
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation............................................................................................ 2,469 2,725
Provision for doubtful accounts receivable.............................................................. (269) 8
Non-cash compensation expense........................................................................... 120 --
Changes in operating assets and liabilities:
Accounts receivable.................................................................................. (800) 1,264
Inventory............................................................................................ 95 (26)
Prepaid expenses and other current assets............................................................ (169) (1,099)
Other long term assets............................................................................... (110) 59
Accounts payable..................................................................................... (363) 547
Accrued expenses..................................................................................... (555) (144)
Deferred revenue..................................................................................... (1,558) 2,981
---------- ---------
Net cash provided by (used in) operating activities............................................ (2,768) 7,172
---------- ---------
Cash flow from investing activities:
Purchases of computer hardware, software and other...................................................... (3,258) (883)
Purchase of short term investments...................................................................... (1,400) --
---------- ---------
Net cash used in investing activities............................................................. (4,658) (883)
---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................................................................. 115 1,432
Dividends paid in connection with Series B Preferred Stock conversions.................................. -- (14)
Proceeds from obligations under capital lease........................................................... 3,870 --
Repayments of capital lease obligations................................................................. (1,458) (1,894)
Proceeds from notes receivable from stockholders........................................................ 179 --
---------- ---------
Net cash provided by (used in) financing activities..................................................... 2,706 (476)
---------- ---------
Effect of exchange rate changes on cash................................................................. (33) 3
---------- ---------
Net increase (decrease) in cash and cash equivalents.................................................... (4,753) 5,816
Cash and cash equivalents, beginning of period.......................................................... 11,103 3,020
---------- ---------
Cash and cash equivalents, end of period................................................................ $ 6,350 $ 8,836
=========== =========
See accompanying notes to the unaudited condensed consolidated financial
statements
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), Inc. and PW Technology, Inc. The consolidation of these
entities will collectively be referred to as the Company or iPIX. All
significant intercompany balances and transactions have been eliminated.
We have prepared these financial statements, 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 consolidated financial statements and notes thereto
included in our audited financial statements as of and for the year ended
December 31, 2002.
The information furnished reflects all adjustments which management believes are
necessary for a fair presentation of our financial position as of September 30,
2003 and the results of our operations for the three and nine month periods
ended September 30, 2002 and 2003 and our cash flows for the nine month periods
ended September 30, 2002 and 2003. All such adjustments are of a normal
recurring nature. The results of operations for the three and nine month periods
ended September 30, 2002 and 2003 are not necessarily indicative of the results
to be expected for the respective full years.
2. AGREEMENT WITH eBAY
On June 27, 2003, we signed an amended license agreement with eBay. The
following is a summary of the provisions of Amendment No. 3 to the Visual
Content Services Agreement between iPIX and eBay. Amendment No. 3 should be read
together with the Visual Content Services Agreement dated April 19, 2000,
Amendment No. 1 and Amendment No. 2 to the Visual Content Services Agreement,
all of which were filed as Exhibits to our Form 10-Q filed on October 31, 2001.
A copy of Amendment No. 3 is filed as an exhibit to our Form 8-K filed on June
27, 2003.
Our Visual Content Services Agreement with eBay was extended to October 31,
2003. Under the terms of Amendment No. 3, eBay will pay us $8.0 million and
other consideration based on certain service and licensing options granted to
eBay for a perpetual, non-exclusive license to the our Rimfire Imaging
technology. eBay paid us $3.0 million in the quarter ended June 30, 2003 upon
the execution of Amendment No. 3, as required. The $3.0 million is included in
deferred revenue at September 30, 2003 because certain obligations associated
with the license and services agreed to in Amendment No. 3 had not been
delivered at that date. The remaining $5.0 million due under Amendment No. 3 was
collected in October 2003 and substantially all remaining service delivery and
other obligations were completed in October 2003. We no longer provide any
products or services to eBay as of November 1, 2003.
eBay is the largest customer of the technology represented by our goodwill. Due
to Amendment No. 3 of our agreement with eBay, we preformed an impairment
analysis of goodwill at September 30, 2003 and no impairment existed. In the
quarter ending December 31, 2003, we collected the final amounts due under the
amended agreement with eBay and we may have incurred a significant impairment of
our goodwill. Also in the quarter ending December 31, 2003, eBay terminated
certain leases under which we leased computer equipment from eBay and we
returned the equipment to eBay.
Transaction fees from eBay have been a significant percentage of our total
revenue through September 30, 2003. eBay requested us to extend our services to
October 31, 2003. As a result, other than completing the final deliveries under
Amendment No. 3 in October 2003, we do not expect to provide any services to
eBay after October 31, 2003, which will have a material adverse effect on our
business, financial position, results of operations and cash flows.
In addition, if we experience significant changes in the terms of our
relationships with other current or prospective customers, delays in payments
from customers or the subsequent loss of another major customer, it may have a
material adverse effect on our business, financial position, results of
operations or cash flows.
7
3. CASH EQUIVALENTS, RESTRICTED CASH AND SHORT TERM INVESTMENTS
We consider all highly liquid debt instruments with an original or remaining
maturity at date of purchase of three months or less to be cash equivalents.
At September 30, 2003, we had a $1.4 million short term investment which matures
on June 19, 2004 and has been provided as collateral for certain capital lease
obligations and, accordingly, classified as restricted cash and short term
investments. We will renew the investment for successive short term periods
until the capital lease obligation restrictions are removed. At December 31,
2002, restricted cash also included $1.4 million related to accrued customer
deposits which were paid in full during the quarter ended March 31, 2003.
4. EQUITY
During the nine months ended September 30, 2003, we issued 752,178 shares of
common stock upon exercise of stock options and 12,767 shares under our employee
stock purchase program. The total proceeds from the option exercises and
employee stock purchases were $1.4 million.
In June and July 2003, certain investors converted Series B Preferred Stock into
103,583 shares of common stock in accordance with the conversion terms of the
Series B Preferred Stock. In conjunction with the conversion, we paid them $14
thousand of cash and 4,416 shares of common stock (with a value of $18 thousand)
in dividends accrued through the date of conversion as required under the
conversion terms of the Series B Preferred Stock. We do not receive any proceeds
upon the conversion of Series B Preferred Stock.
5. INCOME (LOSS) PER COMMON SHARE
Recalculation of Income (loss) per Common Share
We have revised our unaudited financial statements for the three and nine months
ended September 30, 2002 to reflect the impact of the cumulative dividend and
participation rights of the convertible preferred stock on the calculation of
earnings (loss) per common share for those periods. The cumulative dividend,
whether or not declared, has been reflected as a reduction in net income (loss)
to calculate net income (loss) available to common shareholders. In addition,
the participation right of the preferred stock has been considered in the
calculation of basic earnings (loss) per common share, if dilutive, using the if
converted method or the two class method, if more dilutive. The revision of
earnings (loss) per common share for the periods indicated above had no effect
on reported revenues, gross profit, net income (loss) or cash balances in any of
the periods. The effect of the restatement of earnings (loss) per common share
is as follows:
Three months ended Nine months ended
September 30, 2002 September 30, 2002
------------------ ------------------
Earnings (loss) per common share:
Basic-- as reported.............................................. $ 0.08 $ (0.24)
Basic-- restated................................................. $ 0.01 $ (0.44)
Diluted-- as reported............................................ $ 0.03 $ (0.24)
Diluted-- restated............................................... $ 0.01 $ (0.44)
Basic income (loss) per common share is computed by dividing net income (loss)
available to common stockholders for the period by the weighted average number
of shares of common stock outstanding. Net income (loss) available to common
stockholders is calculated as the net income (loss) less cumulative preferred
stock dividends for the period. If dilutive, the participation right of the
preferred stock is reflected in the calculation of basic income (loss) per share
using the if converted method or the two class method, if more dilutive. Diluted
income (loss) per common share is computed by dividing net income (loss)
available to common stockholders for the period by the weighted average number
of shares of common stock outstanding plus, if dilutive, potential common stock
outstanding during the period.
8
The following table sets forth the computation of basic and dilutive income
(loss) per common share for the periods indicated (restated for 2002):
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(In thousands, except per share) 2002 2003 2002 2003
---------- --------- ----------- ----------
(unaudited) (unaudited)
NUMERATOR:
Net income (loss).................................................... $ 576 $ 154 $ (1,628) $ 857
Preferred stock dividends............................................ (451) (454) (1,335) (1,345)
Participation of preferred stock..................................... ( 75) -- -- --
--------- --------- ---------- ---------
Net income (loss) available to common stockholders................... $ 50 $ (300) $ (2,963) $ (488)
========= ========= ========== =========
DENOMINATOR:
Weighted average shares outstanding-- Basic and diluted........... 6,798 7,613 6,789 7,147
========= ========= ========== =========
INCOME (LOSS) PER COMMON SHARE,
BASIC AND DILUTED.................................................... $ 0.01 $ (0.04) $ (0.44) $ (0.07)
========= ========= ========== =========
The following table sets forth potential common shares that are not included in
the diluted net income (loss) per common share calculation because to do so
would be antidilutive for the three and nine month periods:
(Shares in thousands) Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
------- -------- ------- --------
Stock options.................................................................... -- 1,573 305 936
Convertible preferred stock...................................................... 11,221 11,002 11,221 11,002
Warrants......................................................................... -- 492 -- 282
Not included in the table above, were the following rights to purchase common
stock where the average exercise price was greater than the average common share
price and accordingly excluded from diluted net income (loss) per common share
for the three and nine month periods:
(Shares in thousands) Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Average share price of common stock........................................ $ 1.38 $ 3.39 $ 1.96 $ 2.43
Stock options:
Average exercise price of options....................................... $ 10.53 $ 55.68 $ 15.34 $ 21.55
Shares excluded......................................................... 3,550 316 2,316 892
Series B Warrants (exercise price $2.17)................................... 1,381 -- 1,381 --
Series B Warrants (exercise price $4.34)................................... 921 921 921 921
Common Warrants (average exercise price $165.33)........................... 170 137 170 137
6. RESTRUCTURING AND OTHER
During the nine months ended September 30, 2003, the following payments were
made against the restructuring accrual:
Balance at Balance at
December 31, Expense in Payments in September 30,
(In thousands) 2002 2003 2003 2003
------------ ---------- ----------- -------------
Restructuring provisions:
Severance........................................................... $ 500 $-- $ 500 $ --
Lease obligations................................................... 549 -- 231 318
-------- --- ------ ------
Total................................................................. $ 1,049 $-- $ 731 $ 318
======== === ====== ======
9
7. STOCK-BASED COMPENSATION -- FAIR VALUE DISCLOSURES
We comply with the disclosure provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation" ("FAS 123"). We have elected, however, to continue accounting for
stock-based compensation issued to employees using Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Under APB 25, compensation expense is based on the difference, if any, on the
date of grant, between the fair value of our stock and the exercise price of the
option. Stock and other equity instruments issued to non-employees have been
accounted for in accordance with FAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods, or Services," and have been
valued using the Black-Scholes model.
Pro forma information regarding our net income (loss) is required by FAS 123 and
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation, Transition and Disclosure,"
and has been determined as if we had accounted for the stock options under the
fair value method of FAS 123.
The computations for pro forma basic and diluted loss per share follow (restated
for 2002):
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
(In thousands, except per share data) 2002 2003 2002 2003
------------ --------- ------------ ---------
(unaudited) (unaudited)
------------------------ ------------------------
Net income (loss) available for common stockholders.................. $ 50 $ (300) $ (2,963) $ (488)
Add: employee stock compensation expense
included in reported net income (loss)......................... 29 -- 120 --
Less: FAS 123 pro forma charges................................... (747) (347) (5,067) (1,213)
---------- --------- ----------- ---------
Adjusted net loss available for common stockholders.................. $ (668) $ (647) $ (7,910) $ (1,701)
========== ========= =========== =========
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2002 2003 2002 2003
---------- --------- ----------- ----------
(restated) (restated)
Basic and diluted income (loss) per common share:
Income (loss) available for common stockholders..................... $ 0.01 $ (0.04) $ (0.44) $ (0.07)
Net effect of pro forma charges..................................... (0.11) (0.04) (0.72) (0.17)
---------- --------- ----------- ----------
Adjusted loss per common share......................................... $ (0.10) $ (0.08) $ (1.16) $ (0.24)
========== ========= =========== ==========
Grants under the Employee Stock Purchase Plan ("ESPP") have a look-back feature
and a 15% discount and accordingly under FAS 123 would have had compensation
expense calculated as a result. The fair value disclosure associated with the
ESPP grants is included in the fair value pro-forma information above.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The table below shows our contractual obligations as of September 30, 2003:
(In thousands) Payments Due by Period
-------------------------------------------------------
Remainder 2004 & 2006 &
Total of 2003 2005 2007 After 2007
-------- --------- ------- ------ ----------
Capital leases...................................................... $ 1,968 $ 1,360 $ 608 $ -- $ --
Operating leases.................................................... 5,908 809 4,264 771 64
-------- ------- ------- ------ -----
Total............................................................... $ 7,876 $ 2,169 $ 4,872 $ 771 $ 64
======== ======= ======= ===== =====
Contingencies
See Item 3, Legal Proceedings, in our annual report on Form 10-K for discussion
of litigation that has been dismissed against us but is subject to appeal. We
are not currently a party to any 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, results of operations or cash
flows.
10
9. SEGMENTS
We currently have three reportable segments. The accounting policies of the
segments are the same as those of the Company. Management evaluates the
performance of the segments and allocates resources to them based on evaluations
of the segment's revenues and gross profit. There are no inter-segment revenues.
We do not make allocations of corporate costs to the individual segments and do
not identify separate assets of the segments in making decisions regarding the
performance or the allocation of resources to them.
Information about the reported segments is as follows:
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
(In thousands) 2002 2003 2002 2003
---------- --------- ---------- ----------
Revenue:
Transaction services........................................ $ 4,242 $ 5,811 $ 11,619 $ 17,471
Immersive still solutions................................... 1,753 666 4,931 1,858
Immersive video solutions................................... -- 146 -- 237
---------- --------- ---------- ----------
Total.......................................................... $ 5,995 $ 6,623 $ 16,550 $ 19,566
========== ========= ========== ==========
Cost of revenue:
Transaction services........................................ $ 1,738 $ 1,876 $ 5,238 $ 5,426
Immersive still solutions................................... 561 400 1,372 1,025
Immersive video solutions................................... -- 75 -- 161
---------- --------- ---------- ----------
Total.......................................................... $ 2,299 $ 2,351 $ 6,610 $ 6,612
========== ========= ========== ==========
10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We adopted this standard in the quarter
ended September 30, 2003 and the adoption did not have a material effect on our
financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities ("VIE"), an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for VIEs
created after February 1, 2003 and is effective for all other VIEs in the first
reporting period ending after December 31, 2003. The adoption of FIN 46 is not
expected to have a significant effect on our financial position or results of
operations.
In May 2003, the FASB issued FAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS 150").
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. In October 2003, FASB delayed the implementation of FAS 150. When
effective, it is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of FAS 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. While the effective date of
certain elements of FAS 150 has been deferred, the adoption of FAS 150, when
finalized, is not expected to have a material impact on our financial position,
results of operations or cash flows.
11
11. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to a concentration of credit
risk consist of cash, cash equivalents, short term investments and accounts
receivable. Cash, cash equivalents and short term investments are deposited with
high quality financial institutions. Our accounts receivable are derived from
revenue earned from customers located in the U.S. and abroad. We perform ongoing
credit evaluations of our customers' financial condition and we do not require
collateral from our customers.
The following table summarizes the revenue from customers in excess of 10% of
total revenues:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
------ ------ ------ ------
Homestore............................................................... 16% 3% 20% 3%
eBay.................................................................... 57% 84% 54% 85%
At September 30, 2003, Homestore and eBay represented 6% and 79% of accounts
receivable, respectively. All amounts due from Homestore and eBay as of
September 30, 2003, were collected during October 2003. At December 31, 2002,
Homestore and eBay represented 0% and 83% of accounts receivable, respectively.
12. LIQUIDATION PREFERENCE AND PREFERRED STOCK DIVIDENDS
On September 26, 2001, Image Investor Portfolio, a separate series of Memphis
Angels, LLC ("Image") and certain strategic investors completed the purchase of
1,115,080 shares of the Series B Preferred Stock for total consideration of
$22.3 million. As of September 30, 2003, 1,103,830 shares of the Series B
Preferred stock remain outstanding.
Each share of Series B Preferred Stock is convertible into approximately 9.2
shares of our Common Stock and is entitled to vote on matters submitted to
holders of Common Stock on an as-converted basis. At any time that the holders
of the Series B Preferred Stock hold more than 50% of our voting stock, a
voluntary liquidation, dissolution or winding up of the Company must be approved
by at least five of the seven members of our board of directors.
Holders of Series B Preferred Stock, in preference to holders of any other
series of Preferred Stock and in preference to the holders of Common Stock
(collectively, "Junior Securities"), accrue dividends at the rate of eight
percent (8%) of the price paid per annum on each outstanding share of Series B
Preferred Stock ("Series B Dividends"). The Series B Dividends are cumulative,
accrue daily and shall by payable, when and if declared by the Board, upon
conversion or as an accretion to the Liquidation Preference, as defined below.
Accrued Series B Dividends may be paid in cash or common stock, at the election
of the Series B Preferred stockholder. Holders of Series B Preferred Stock
participate on an as-if converted basis in any common stock dividends.
Upon any liquidation event, before any distribution or payment shall be made to
the holders of any Junior Securities, the holders of Series B Preferred Stock
shall be entitled to be paid out of the assets of the Company legally available
for distribution, or the consideration received in such Transaction, an amount
per share of Series B Preferred Stock equal to the price paid plus all accrued
and unpaid Series B Dividends for each share of Series B Preferred Stock held by
them (the "Liquidation Preference"). If, upon any such liquidation event, the
assets of the Company are insufficient to make payment in full to all holders of
Series B Preferred Stock of the Liquidation Preference, then such assets shall
be distributed among the holders of Series B Preferred Stock at the time
outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
As of September 30, 2003, the Liquidation Preference was $25.6 million, which
includes the $3.6 million in accrued dividends in arrears on the Series B
Preferred Stock which have not been declared to be paid. In June and July 2003,
certain investors converted Series B Preferred Stock into 103,583 shares of
common stock in accordance with the conversion terms of the Series B Preferred
Stock. In conjunction with the conversion, we paid them $14 thousand of cash and
4,416 shares of common stock (with a value of $18 thousand) in dividends accrued
through the date of conversion as required under the conversion terms of the
Series B Preferred Stock.
12
13. RELATED PARTY TRANSACTIONS
During 2001, our CEO at that time, Mr. James M. Phillips resigned as our
chairman and chief executive officer. Pursuant to a separation agreement, Mr.
Phillips received a severance payment in the amount of $1.3 million, in the
following increments: (i) $0.2 million was paid on May 25, 2001; (ii) $0.2
million was paid on September 1, 2001; (iii) $0.2 million was paid on January 1,
2002; (iv) $0.2 million was paid on June 1, 2002; (v) $0.2 million was paid on
January 2, 2003; (vi) $0.2 million was paid on June 2, 2003 and (vii) $0.1
million was paid on August 29, 2003.
IPIX International
In the third quarter of 2002, we entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based corporation
("Soroof"). Under the agreements, Soroof is the exclusive distributor for iPIX
immersive still products, including the iPIX GPS Mapping System, outside of
North America and Asia through its newly established entity, iPIX International
("iPIX-I"). The agreement, effective July 1, 2002, expires December 31, 2007,
unless renewed. iPIX-I has an exclusive license to develop integrated solutions
for markets including real estate, travel and tourism and other markets in which
online marketing is critical. We will also provide certain hosting services
during the term of the agreements. Soroof has committed to certain minimum
quarterly royalties during the term of the agreement. Should these minimum
royalties not be met, we have the right to terminate our agreements with Soroof.
We have a minority equity interest in iPIX-I, however, we do not have the
ability to exercise significant influence over iPIX-I operations. We account for
our investment in iPIX-I on the cost basis. We did not make any capital
contributions to iPIX-I and we have no commitments to fund iPIX-I. We do have
the right, however, but not the obligation, to purchase iPIX-I from Soroof after
December 31, 2005 for consideration as defined in the agreements. During the
three months ended September 30, 2003, we held discussions with Soroof relating
to the terms of these agreements. These discussions are continuing. We
recognized $41 thousand of revenue from iPIX-I in the three months ended
September 30, 2003. During the nine months ended September 30, 2003, we
recognized $0.3 million of revenue from iPIX-I. During the three months and nine
months ended September 30, 2002, we recognized $0.4 million of revenue from
Soroof.
Transactions with eBay, Inc.
Pursuant to an agreement dated April 19, 2000, as amended, we provide to eBay,
Inc., which currently beneficially owns more than 10% of our common stock (5%
fully diluted), image management services to eBay's online auction Web sites.
Pursuant to that agreement, we issued eBay a warrant to purchase 60,000 shares
of Common Stock at an exercise price of $203.80 per share. The warrant expires
on April 19, 2010. Under this agreement, we generated revenues of $9.0 million
and $16.6 million for the nine months ended September 30, 2002 and 2003,
respectively. We generated revenues of $3.4 million and $5.6 million for the
three months ended September 30, 2002 and 2003, respectively. Under this
agreement, we were required to pay marketing fees to eBay of $16.0 million over
a two-year period. As of September 26, 2001, we had paid $9.5 million of the
$16.0 million commitment and we agreed to extend the additional $6.5 million of
payments through September 2003. As of September 30, 2003, the commitment has
been paid in full. In accordance with EITF 01-09 "Accounting for consideration
given by a vendor to a customer (including a reseller of the vendor's
products)," $0.5 million of these fees were offset against each quarter's
revenue, which represented the excess over the fair value of the benefit
received, during each of the three quarters in the nine month period ended
September 30, 2003.
In 2001 and 2002, we sold to eBay, and eBay leased back to us, certain computer
equipment utilized to provide image management services to eBay and other
customers. The purchase price for the equipment was approximately $5.3 million.
The transactions resulted in no gain or loss to iPIX. Pursuant to lease
schedules covering this equipment, we would have paid eBay annual lease payments
of approximately $0.3 million, $0.8 million and $0.1 million in the duration of
2003, 2004 and 2005, respectively. In the nine months ended September 30, 2003,
we paid eBay $1.5 million pursuant to these lease schedules. As part of
Amendment No. 3 to our agreement with eBay, eBay agreed to exchange the
equipment underlying these leases as final payment after we satisfactorily
perform certain transition services, which occurred in October 2003. Such
transactions will be reflected in the financial statements for the quarter and
year ending December 31, 2003.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends related to our results of
operations and our financial condition together with our consolidated
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in our Annual
Report filed on Form 10-K and Form 10-K/A. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.
OVERVIEW
We are focused on three businesses providing:
(1) outsourced imaging services to facilitate online transactions in
the auction, classifieds and real estate markets ("Transaction
Services");
(2) immersive still imaging and movie solutions for the real estate,
travel and visual documentation markets ("Immersive still
solutions"); and
(3) 180-degree and 360-degree video surveillance for the security and
observation markets ("Immersive video solutions").
Our Transaction Services' products and services include the capture, processing,
management and distribution of images and related data. Revenues from online
auctions and classifieds are primarily transaction based. Historically, our
transaction services involved designing, building and managing an image
management infrastructure as well as leasing space from co-location facilities
with access to telecommunications bandwidth. During the quarter ending December
31, 2003, we are transitioning our transaction services to managed care services
from state-of-the-art co-location facilities with access to telecommunications
bandwidth. Payments for managed care services are primarily fixed and
accordingly the margins from transaction services will be highly dependent upon
our level of utilization of the services purchased.
Substantially all of our recurring revenue has been derived from transaction
fees generated by our Rimfire service. In particular, eBay and Homestore are our
largest Rimfire customers. eBay represented approximately 85% of our total
revenue and approximately 95% of Rimfire services revenue for the nine months
ended September 30, 2003 and 84% of total revenue and 96% of Rimfire service
revenue for the third quarter of 2003. eBay represented approximately 54% of our
total revenue for the nine months ended September 30, 2002 and 57% of total
revenue for the third quarter of 2002. Homestore represented approximately 19%
of total revenue and 17% of Rimfire service revenue for the first nine months of
2002 and 16% of total revenue and 16% of Rimfire service revenue for the three
months ended September 30, 2002, but less than 10% of total revenue and Rimfire
service revenue for the three months and nine months ended September 30, 2003.
On June 27, 2003, we signed an amended license agreement with eBay. Under the
terms of Amendment No. 3, eBay will pay us $8.0 million and other consideration
based on certain service and licensing options granted to eBay for a perpetual,
non-exclusive license to the our Rimfire Imaging technology. eBay paid us $3.0
million in the quarter ended June 30, 2003 upon the execution of Amendment No.
3, as required. The $3.0 million is included in deferred revenue at September
30, 2003 because certain obligations associated with the license and services
agreed to in the amendment had not been delivered at that date. eBay elected to
extend the Visual Content Serives Agreement to October 31, 2003. The remaining
$5.0 million due under Amendment No. 3 was collected in October 2003 and
substantially all remaining service delivery and other obligations were
completed in October 2003.
Transaction fees from eBay have been a significant percentage of our total
revenue through September 30, 2003. eBay requested us to extend our services
through October 31, 2003. As a result, other than completing substantially all
of the final deliveries under Amendment No. 3 in October 2003, we do not expect
to provide any services to eBay after October 31, 2003, which will have a
material adverse effect on our business, financial position, results of
operations and cash flows. We continue to diversify and add additional
Transaction Services customers and are currently targeting image management for
publications, online and off line classified advertising and other business
opportunities. If we fail to add significant customers and increase revenues in
this segment of our business, our results of operations and cash flows could be
adversely affected.
14
Our immersive technology primarily generates revenues in two ways: licenses of
software and re-sale of camera equipment. We utilize iPIX keys to license our
immersive still technology to capture and save a single immersive image. We also
offer time-based seat or user licenses which permit an unlimited number of
immersive images to be captured and saved within a specific time period, usually
a year. Our immersive video technology, which may be off-line or online, may be
purchased on a per-unit basis or a per-year license. We sell our immersive
products and services primarily into the real estate, security and observation
and visual documentation markets. The cost of sales for our licenses is low in
proportion to the related revenue. The cost of sales for the sale of camera
equipment has generally been 50% to 75% of related revenues. We continue to
develop our immersive imaging business for the security and observation market.
If we fail to add significant customers and increase revenues in these segments
of our business, our results of operations and cash flows could be adversely
affected. In addition, if our third-party suppliers are not able to deliver high
quality components to us in a timely manner, our business, results of operations
and cash flows could be adversely affected.
In the third quarter of 2002, we entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based corporation
("Soroof"). Under the agreements, Soroof is the exclusive distributor for iPIX
immersive still products, including the iPIX GPS Mapping System, outside of
North America and Asia through its newly established entity, iPIX International
("iPIX-I"). iPIX-I represented approximately 18% and 6% of Immersive revenue for
the third quarter of 2002 and 2003, respectively, and 7% and 14% of Immersive
stills revenue for the nine months ended September 30, 2002 and 2003,
respectively. Homestore represented approximately 16% and 19% of Immersive
stills revenue for the third quarter of 2002 and 2003, respectively, and 23% and
20% of Immersive stills revenue for the nine months ended September 30, 2002 and
2003, respectively.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release 60 issued by the Securities and Exchange Commission
("SEC") requires all registrants to discuss critical accounting policies or
methods used in the preparation of the financial statements. The notes to the
consolidated financial statements included in our Annual Report filed on Form
10-K and Form 10-K/A include a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
Further, we have made a number of estimates and assumptions that affect reported
amounts of assets, liabilities, revenues and expenses and actual results may
differ from those estimates. Those areas that require the greatest degree of
management judgment include revenue recognition, adequacy of the allowance for
doubtful accounts, goodwill and significant accruals.
We believe that full consideration has been given to all relevant circumstances
that we may be subject to, and our financial statements accurately reflect
management's best estimate of the results of operations, financial position and
cash flows for the periods presented. We believe the following represent our
critical accounting policies:
Revenue Recognition
We recognize revenue in accordance with SOP 97-2, "Software Revenue
Recognition," and SAB 101, "Revenue Recognition in Financial Statements."
Transaction revenues are recognized as transactions are performed provided there
was persuasive evidence of an arrangement, the fee was fixed or determinable and
collection of the resulting receivable was reasonably assured. Initial license
fees are recognized when a contract exists, the fee is fixed or determinable,
software delivery has occurred and collection of the receivable is reasonably
assured. As there are significant continuing undelivered obligations under the
Amendment No. 3 to the Visual Content Services Agreement with eBay, we have
deferred all license revenue under the amendment at June 30 and September 30,
2003.
Product revenue is recognized upon shipment or delivery provided there are no
uncertainties surrounding product acceptance or significant vendor obligations,
persuasive evidence of an arrangement exists, the fees are fixed or determinable
and collection is reasonably assured. Royalties derived from desktop imaging
products are recognized as revenues upon receipt of the royalty sell-through
reports from customers, which are generally in the quarter following the quarter
in which the sale by the customer took place.
Revenues generated from professional services are recognized as the related
services are performed. When such professional services are combined with
on-going transaction services or are deemed to be essential to the functionality
of the delivered software product, revenue from the entire arrangement is
recognized while the transaction services are performed, on a percentage of
completion method or not until the contract is completed in accordance with SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and ARB 45, "Long-Term Construction-Type Contracts."
15
Allowances for Doubtful Accounts
Significant management judgments and estimates must be made and used in
connection with establishing the doubtful account allowances in any accounting
period. Management specifically analyzes accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. Material differences could result in the
amount and timing of expense recorded if management had different judgment or
utilized different estimates.
Goodwill
Under United States generally accepted accounting principles, we evaluate
goodwill for impairment on an annual basis and on an interim basis if events or
changes in circumstances between annual impairment tests indicate that the asset
might be impaired. In assessing the recoverability of our goodwill, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the goodwill. These estimates include forecasted revenues and
operating expenses, which are inherently difficult to predict. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets. We believe that the accounting
estimate related to goodwill is a "critical accounting estimate" because it
requires us to make assumptions about fair values and the impact of recognizing
an impairment could be material to our financial position, as well as our
results of operations. Our assumptions about fair values require significant
judgment because broad economic factors, industry factors and technology
considerations can result in variable and volatile fair values. On June 27,
2003, our agreement with eBay was amended. eBay is the largest customer of the
technology represented by our goodwill. Due to Amendment No. 3 of our agreement
with eBay, we preformed an impairment analysis of goodwill at September 30, 2003
and no impairment existed. In the quarter ending December 31, 2003, we collected
the final amounts due under the amended agreement with eBay and may have
incurred a significant impairment of our goodwill. Our goodwill impairment may
be reflected in our financial statements for the quarter and year ending
December 31, 2003.
Significant Accruals, including Restructuring Charges and Sales Tax
We recorded restructuring charges associated with vacated facilities. The key
assumptions associated with these charges include the timing and amount of
sub-lease income. In addition, in establishing and providing for sales tax
accruals, we make judgments based on the actual tax laws and guidance. While
management believes that its judgments and interpretations regarding tax
liabilities are appropriate, significant differences in actual experience may
materially affect our future financial results.
RESTRUCTURING ACTIONS
During the nine months ended September 30, 2003, the following payments were
made against our restructuring accrual:
Balance at Balance at
December 31, Expense in Payments in September 30,
(In thousands) 2002 2003 2003 2003
------------ ---------- ----------- -------------
Restructuring provisions:
Severance.......................................................... $ 500 $ -- $ 500 $ --
Lease obligations.................................................. 549 -- 231 318
--------- ------ ------- -------
Total................................................................. $ 1,049 $ -- $ 731 $ 318
========= ====== ======= =======
16
RESULTS OF OPERATIONS
The following presents, for the periods indicated the percent relationship to
total revenues of items in our statements of operations.
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
------- ------ ------ ------
Revenue:
Transaction services.............................................. 70.7% 87.7% 70.2% 89.3%
Immersive still solutions......................................... 29.3 10.1 29.8 9.5
Immersive video solutions......................................... -- 2.2 -- 1.2
------ ------ ------ ------
Total revenue........................................................ 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of revenue:
Transaction services.............................................. 29.0 28.3 31.6 27.7
Immersive still solutions......................................... 9.3 6.1 8.3 5.3
Immersive video solutions......................................... -- 1.1 -- 0.8
---- ---- ---- ----
Total cost of revenue................................................ 38.3 35.5 39.9 33.8
---- ---- ---- ----
Gross profit......................................................... 61.7 64.5 60.1 66.2
---- ---- ---- ----
Operating expenses:
Sales and marketing............................................... 31.4 28.7 36.7 29.2
Research and development.......................................... 19.6 18.1 22.3 18.5
General and administrative........................................ 10.4 15.1 14.6 13.6
Restructuring..................................................... 11.5 -- 4.1 --
---- ---- ---- ----
Total operating expenses............................................. 72.9 61.9 77.7 61.3
---- ---- ---- ----
Income (loss) from operations........................................... (11.2) 2.6 (17.6) 4.9
Interest income (expense) and other..................................... 20.8 (0.3) 7.8 (0.5)
------ ----- ------- -----
Net income ............................................................. 9.6% 2.3% (9.8)% 4.4%
====== ===== ======= =====
Quarter Ended September 30, 2002 Compared to the Quarter Ended September 30, 2003
Three months ended
September 30,
--------------------
Percent
(Dollars in thousands) 2002 2003 Difference Change
--------- -------- ---------- -------
Revenue:
Transaction services..................................................... $ 4,242 $ 5,811 $ 1,569 37%
Immersive still solutions................................................ 1,753 666 (1,087) (62)
Immersive video solutions................................................ -- 146 146 100
--------- -------- ----------
Total revenue............................................................... 5,995 6,623 628 10
--------- -------- ----------
Cost of revenue:
Transaction services..................................................... 1,738 1,876 138 8
Immersive still solutions................................................ 561 400 (161) (29)
Immersive video solutions................................................ -- 75 75 100
--------- -------- ----------
Total cost of revenue....................................................... 2,299 2,351 (52) (2)
--------- -------- ----------
Gross profit................................................................ 3,696 4,272 576 16
--------- -------- ----------
Operating expenses:
Sales and marketing...................................................... 1,881 1,899 18 1
Research and development................................................. 1,175 1,198 23 2
General and administrative............................................... 621 1,001 380 61
Restructuring............................................................ 687 -- (687) (100)
--------- -------- ----------
Total operating expenses.................................................... 4,364 4,098 (266) (6)
--------- -------- ----------
Income (loss) from operations.................................................. (668) 174 842 126
Patent infringement award...................................................... 1,000 -- (1,000) (100)
Interest income (expense) and other............................................ 244 (20) (264) (108)
--------- -------- ----------
Net income..................................................................... $ 576 $ 154 $ (422) (73)%
========= ======== ==========
17
Revenue. Total revenue increased $0.6 million in the quarter ended September 30,
2003 over the quarter ended September 30, 2002 due to increased volumes of
images processed by Rimfire ($1.6 million), primarily related to on-line
auctions, partially offset by lower sales volumes of primarily immersive keys
and kits ($1.1 million). During 2002, we reduced our sales and marketing efforts
related to the sale of immersive kits and keys, which resulted in lower revenues
in order to increase operating margins related to these products. A portion of
this decrease is attributable to our sale of our international immersive imaging
operations to iPIX-I in the third quarter of 2002. In addition, in the quarter
ended September 30, 2003, we had $0.1 million of sales from our new immersive
video products.
Cost of Revenue. Cost of revenue consists of our direct expenses associated with
the processing, hosting and distribution of digital content and the costs of the
digital camera and related components included in an iPIX kit. Cost of revenue
remained at substantially the same dollar level, but as a percentage of total
revenues decreased to 36% in the quarter ended September 30, 2003 from 38% in
the quarter ended September 30, 2002. Cost of revenue as a percent of revenue
declined in 2003 primarily due to operational efficiencies and economies of
scale associated with the processing of transactions.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales and business development personnel. Sales and marketing
expenses also include commissions and related benefits for sales personnel and
consultants, traditional advertising and promotional expenses. Sales and
marketing expenses remained at substantially the same dollar level in the
quarter ended September 30, 2003 and the quarter ended September 30, 2002, but
as a percentage of total revenues decreased to 29% in the quarter ended
September 30, 2003 from 31% in the quarter ended September 30, 2002. Sales and
marketing expenses as a percent of revenue declined in 2003 primarily due to
operational efficiencies and the growth in transaction revenues from existing
customers.
Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media
infrastructure and immersive imaging technology. Research and development
expenses were essentially at the same dollar levels in the quarter ended
September 30, 2003 and the quarter ended September 30, 2002, but as a percentage
of total revenues decreased to 18% in the quarter ended September 30, 2003 from
20% in the quarter ended September 30, 2002. Research and development expenses
as a percent of revenue declined in 2003 primarily due to operational
efficiencies and cost controls.
General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services and other costs associated with
being a public company. General and administrative expenses were $0.4 million
more in the quarter ended September 30, 2003 over the quarter ended September
30, 2002 primarily because in 2002 we collected $0.3 million from previously
reserved receivables and $0.1 million in court costs were refunded to us as part
of the conclusion of legal actions in the third quarter of 2002. When taking
into account these two reductions to general and administrative expenses in
2002, the other expenses in this area were substantially at the same dollar
level in both years.
Restructuring. Restructuring expenses in the quarter ended September 30, 2002
consisted primarily of termination payments for abandoned office facilities.
There were no restructuring expenses in 2003.
Patent infringement award. Patent infringement award of $1.0 million in the
quarter ended September 30, 2002, is due to the collection of a previously
awarded court judgment for which all legal remedies for appeal have been
exhausted.
Interest Income (Expense). Interest income generally consists of interest earned
on cash and investments. Interest expense generally consists of interest charges
from capitalized lease obligations. Interest expense was $20 thousand in the
quarter ended September 30, 2003, compared to interest income of $0.2 million in
the quarter ended September 30, 2002. The difference was primarily due to
interest earned on the patent infringement award.
18
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2003
Nine months ended
September 30,
--------------------- Percent
(Dollars in thousands) 2002 2003 Difference Change
---------- -------- ---------- -------
Revenue:
Transaction services.......................................... $ 11,619 $ 17,471 $ 5,852 50%
Immersive still solutions..................................... 4,931 1,858 (3,073) (62)
Immersive video solutions..................................... -- 237 237 100
--------- --------- ----------
Total revenue.................................................... 16,550 19,566 3,016 18
--------- --------- ----------
Cost of revenue:
Transaction services.......................................... 5,238 5,426 188 4
Immersive still solutions..................................... 1,372 1,025 (347) (25)
Immersive video solutions..................................... -- 161 161 100
--------- --------- ----------
Total cost of revenue............................................ 6,610 6,612 2 (0)
--------- --------- ----------
Gross profit..................................................... 9,940 12,954 3,014 30
--------- --------- ----------
Operating expenses:
Sales and marketing................................................. 6,074 5,704 (370) (6)
Research and development............................................ 3,686 3,626 (60) (2)
General and administrative.......................................... 2,418 2,664 246 10
Restructuring....................................................... 687 -- (687) (100)
--------- --------- ----------
Total operating expenses......................................... 12,865 11,994 (871) (7)
--------- --------- ----------
Income (loss) from operations.......................................... (2,925) 960 3,885 133
Patent infringement award.............................................. 1,000 -- (1,000) (100)
Interest income (expense) and other.................................... 297 (103) (400) (135)
--------- --------- ----------
Net Income (loss)...................................................... $ (1,628) $ 857 $ 2,485 153%
========= ========= ==========
Revenue. Total revenue increased $3.0 million in the nine months ended September
30, 2003 over the nine months ended September 30, 2002 due to increased volumes
of images processed by Rimfire ($5.9 million), primarily related to on-line
auctions, partially offset by lower sales volumes of primarily immersive keys
and kits ($3.1 million). During 2002, we reduced our sales and marketing efforts
related to the sale of immersive kits and keys, which resulted in lower revenues
in order to increase operating margins related to these products. A portion of
this decrease is attributable to our sale of our international immersive imaging
operations to iPIX-I in the third quarter of 2002. In addition, in the nine
months ended September 30, 2003, we had $0.2 million of sales from our new
immersive video products.
Cost of Revenue. Cost of revenue consists of our direct expenses associated with
the processing, hosting and distribution of digital content and the costs of the
digital camera and related components included in an iPIX kit. Cost of revenue
remained at substantially the same dollar level, but as a percentage of total
revenues decreased to 34% in the nine months ended September 30, 2003 from 40%
in the nine months ended September 30, 2002. Cost of revenue as a percent of
revenue declined in 2003 primarily due to operational efficiencies and economies
of scale associated with the processing of transactions.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
for marketing, sales and business development personnel. Sales and marketing
expenses also include commissions and related benefits for sales personnel and
consultants, traditional advertising and promotional expenses. Sales and
marketing expenses decreased $0.4 million in the nine months ended September 30,
2003 over the nine months ended September 30, 2002, primarily due to our
decision to shift resources from international sales personnel costs in 2002 to
more domestic sales personnel in 2003. As a percentage of total revenues, sales
and marketing expenses decreased to 29% in the nine months ended September 30,
2003 from 37% in the nine months ended September 30, 2002. Sales and marketing
expenses as a percent of revenue declined in 2003 primarily due to reduced
spending, operational efficiencies and the growth in transaction revenues from
existing customers.
19
Research and Development. Research and development expenses consist primarily of
personnel costs related to building and enhancing our digital media
infrastructure and immersive imaging technology. Research and development
expenses were essentially at the same dollar levels in the nine months ended
September 30, 2003 and the nine months ended September 30, 2002, but as a
percentage of total revenues decreased to 19% in the nine months ended September
30, 2003 from 22% in the nine months ended September 30, 2002. Research and
development expenses as a percent of revenue declined in 2003 primarily due to
operational efficiencies and cost controls.
General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services, bad debt expenses and other costs
associated with being a public company. General and administrative expenses were
$0.2 million more in the nine months ended September 30, 2003 over the nine
months ended September 30, 2002. In the nine months ended September 30, 2002,
$0.3 million was collected from previously reserved receivables and $0.1 million
was collected as a refund of previously paid court costs. These collections were
recognized as reductions in general and administrative expenses in the nine
months ended September 30, 2002. These reductions were offset in 2003 by a $0.2
million increase in personnel and related costs.
Restructuring. Restructuring expenses in the nine months ended September 30,
2002 consisted primarily of termination payments for abandoned office
facilities. There were no restructuring expenses in 2003.
Patent infringement award. Patent infringement award of $1.0 million in the nine
months ended September 30, 2002, is due to the collection of a previously
awarded court judgment for which all legal remedies for appeal have been
exhausted.
Interest Income (Expense). Interest income generally consists of interest earned
on cash and investments. Interest expense generally consists of interest charges
from capitalized lease obligations. Interest expense was $0.1 million in the
nine months ended September 30, 2003, compared to interest income of $0.3
million in the quarter ended September 30, 2002. The difference was primarily
due to interest earned on the patent infringement award.
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, a
convertible promissory note and warrant and option exercises. At September 30,
2003, we had $10.2 million of cash, cash equivalents and short term investments,
of which $1.4 million was restricted.
Summary Consolidated Cash Flow Data
Three months ended Nine months ended
September 30, September 30,
---------------------- -------------------------
(In thousands) 2002 2003 2002 2003
---------- -------- ----------- ----------
Net cash provided by (used in) operating activities............... $ 1,106 $ 417 $ (2,768) $ 7,172
Net cash used in investing activities............................. (84) (75) (4,658) (883)
Net cash provided by (used in) financing activities............... 681 (185) 2,706 (476)
Effect of exchange rate changes on cash........................... (12) (1) (33) 3
---------- -------- ----------- ----------
Net increase (decrease) in cash and cash equivalents.............. 1,691 156 (4,753) 5,816
Cash and cash equivalents, beginning of period.................... 4,659 8,680 11,103 3,020
---------- -------- ----------- ----------
Cash and cash equivalents, end of period.......................... $ 6,350 $ 8,836 $ 6,350 $ 8,836
========== ======== =========== ==========
Cash flows from operating activities in the third quarter of 2002, reflects $1.4
million from the patent infringement award. After excluding the award proceeds,
cash flow from operations improved $0.7 million in the third quarter of 2003
over 2002 primarily as a result of a $0.6 million increase in revenues.
Net cash used in investing activities in the third quarter of 2003 and 2002 was
primarily related to the acquisition of computer software and hardware. We do
not currently expect any significant acquisitions of computer hardware and
software throughout the remainder of 2003.
20
Net cash provided by financing activities in the third quarter of 2003 was
primarily related to $0.6 million of payments made on capital lease obligations,
net of $0.4 million of proceeds from the exercise of stock options. Net cash
provided by financing activities in the third quarter of 2002 was primarily
related to proceeds from new capital lease obligations.
Cash flows from operating activities increased $9.9 million in the first nine
months of 2003 compared to the same period in 2002. The primary reasons for the
improvement were the following:
o In 2003, our net income was $0.9 million, compared to a net loss of
$1.6 million the first nine months of 2002 (a $2.5 million increase).
o Our net loss for the nine months ended September 30, 2002 included
non-cash amortization of deferred revenues of $1.6 million, whereas
net income for the nine months ended September 30, 2003 included no
material amortization of deferred revenues, but does include $3.0
million of deferred revenue collected in June 2003 (a $4.6 million
increase).
o During the first nine months of 2002, receivables increased $0.8
million, while in the same period of 2003, receivables decreased $1.3
million. The decrease in 2003 was primarily related to the timing of
collections in early 2003 (a $2.1 million increase).
Net cash used in investing activities in the first nine months of 2003 and 2002
was primarily related to the acquisition of computer software and hardware and
the purchase of short-term investments of $1.4 million in the first nine months
of 2002.
Net cash used in financing activities in the first nine months of 2003 was
primarily related to $1.9 million of payments made on capital lease obligations,
net of $1.4 million of proceeds from the exercise of stock options. Net cash
provided by financing activities in the first nine months of 2002 was primarily
related to proceeds from new capital lease obligations.
The table below shows our contractual obligations as of September 30, 2003:
(In thousands) Payments Due by Period
----------------------------------------------
Remainder 2004 & 2006 &
Total of 2003 2005 2007 After 2007
------- --------- ------- ------ ----------
Capital leases........................................................... $1,968 $ 1,360 $ 608 $ -- $ --
Operating leases......................................................... 5,908 809 4,264 771 64
------ ------- ------- ----- ----
Total.................................................................... $7,876 $ 2,169 $ 4,872 $ 771 $ 64
====== ======= ======= ===== ====
On June 27, 2003, we signed an amended license agreement with eBay. Our Visual
Content Services Agreement with eBay expired on October 31, 2003. Under the
terms of Amendment No. 3, eBay will pay us $8.0 million and other consideration
based on certain service and licensing options granted to eBay for a perpetual,
non-exclusive license to the our Rimfire Imaging technology. eBay paid us $3.0
million in the quarter ended June 30, 2003 upon the execution of Amendment No.
3, as required. The $3.0 million is included in deferred revenue at September
30, 2003 because certain obligations associated with the license and services
agreed to in the amendment had not been delivered at that date. The remaining
$5.0 million due under Amendment No. 3 was collected in October 2003 and
substantially all remaining service delivery and other obligations were
completed in October 2003.
Transaction fees from eBay have been a significant percentage of our total
revenue through September 30, 2003. eBay has not requested us to extend our
services after October 31, 2003. As a result, other than completing the final
deliveries under Amendment No. 3 in October 2003, we do not expect to provide
any services to eBay after October 31, 2003, which will have a material adverse
effect on our business, financial position, results of operations and cash
flows.
We finished the third quarter of 2003 with approximately $10.2 million in cash,
cash equivalents and short-term investments of which $1.4 million was restricted
cash. Our use, or generation, of cash will be largely influenced by revenues
from our major customers. Depending upon our growth in revenues from new and
existing customers and our ability to control or affect reductions in costs, we
are not expecting to, but may require additional equity or debt financing to
meet future working capital or capital expenditure needs for the next 12 months.
There can be no assurance that such additional financing will be available or if
available, that such financing can be obtained on terms satisfactory to us.
21
Management's focus is to manage our cash requirements and focus our operations
on revenue generation and controlled spending. Our long-term strategy remains
unchanged. We will continue to invest in research and development for Rimfire
and our immersive video products and will invest in the expansion of the offline
publications and online classified advertising businesses and in the development
of new security and observation products and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We adopted this standard in the quarter
ended September 30, 2003 and the adoption did not have a material effect on our
financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities ("VIE"), an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for VIEs
created after February 1, 2003 and is effective for all other VIEs in the first
reporting period ending after December 31, 2003. The adoption of FIN 46 is not
expected to have a significant effect on our financial position or results of
operations.
In May 2003, the FASB issued FAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS 150").
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. In October 2003, FASB delayed the implementation of FAS 150. When
effective, it is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of FAS 150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. While the effective date of
certain elements of FAS 150 has been deferred, the adoption of FAS 150, when
finalized, is not expected to have a material impact on our financial position,
results of operations or cash flows.
INFLATION
Inflation has not had a significant impact on our operations to date.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2003, we had $10.2 million of cash, cash equivalents,
restricted cash and short-term investments. Our interest income is sensitive to
changes in the general level of United States interest rates, particularly since
the majority of our investments are in short-term instruments. Due to the nature
of our short-term investments, we concluded that we do not have material market
risk exposure.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)) as of the date covered by this quarterly report.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded as of the date covered by this quarterly report that our
disclosure controls and procedures are effective to ensure that material
information relating to the Company and our consolidated subsidiaries is made
known to such officers by others within these entities, particularly during the
period this quarterly report was prepared, in order to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Controls. There have not been any significant changes in
our internal controls or in other factors that could significantly affect these
controls during the period covered by this report.
22
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 annual report on Form 10-K filed with the SEC on March 31, 2003.
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
See Item 3, Legal Proceedings, in our annual report on Form 10-K for discussion
of litigation that has been dismissed against us but is subject to appeal.
In June 2003, we filed a lawsuit against Ford Oxaal and Minds-Eye-View, Inc. in
the United States District Court for the Eastern District of Tennessee alleging
patent infringement of certain patents and other causes of action. The
defendants in the lawsuit have filed counterclaims against the Company in their
response to our action. The litigation is in the pre trial motion stage at the
current time.
We are not currently a party to any 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, results of operations or
cash flows.
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.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
a) Exhibits
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32 Certification pursuant 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
23
b) Reports On Form 8-K
A Form 8-K was filed on August 14, 2003, under Item 12, furnishing the Company's
press release for the Company's second quarter 2003 financial results.
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, 2003 INTERNET PICTURES CORPORATION
(Registrant)
/s/ Paul Farmer
----------------------------
Paul Farmer
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer
24
INTERNET PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2003
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
Exhibit 31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant 18 U.S.C. Section
1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
25
Exhibit 31.1
INTERNET PICTURES CORPORATION
SECTION 302 CERTIFICATIONS
(QUARTERLY REPORT)
CERTIFICATIONS
I, Donald Strickland, the President and Chief Executive Officer of Internet
Pictures Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Pictures
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
26
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Date November 13, 2003
/s/ Donald Strickland
------------------------------
Donald Strickland
President and Chief Executive Officer
27
Exhibit 31.2
INTERNET PICTURES CORPORATION
SECTION 302 CERTIFICATIONS
(QUARTERLY REPORT)
CERTIFICATIONS
I, Paul Farmer, Chief Financial Officer of Internet Pictures Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Pictures
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
and
28
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Date November 13, 2003
/s/ Paul Farmer
--------------------------
Paul Farmer
Chief Financial Officer
29
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Internet Pictures Corporation
(collectively, the "Company") on Form 10-Q for the period ending September 30,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), we, Donald Strickland and Paul Farmer, the Chief Executive
Officer and Chief Financial Officer, respectively, of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
/s/ Donald Strickland
--------------------------
Donald Strickland
Chief Executive Officer
November 13, 2003
/s/ Paul Farmer
---------------------------
Paul Farmer
Chief Financial Officer
November 13, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
30