-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FHpJYUVx2FOFvMQQ2OwW/u2virmfVaj2Hj+OxIydDjmnRqO9okJKbpi4NT15n1fN fk1260I/kMLLL25UDFZBRw== 0000950144-01-505958.txt : 20010815 0000950144-01-505958.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950144-01-505958 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET PICTURES CORP CENTRAL INDEX KEY: 0001088022 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 522213841 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26363 FILM NUMBER: 1713435 BUSINESS ADDRESS: STREET 1: 1009 COMMERCE PARK DR CITY: OAK RIDGE STATE: TN ZIP: 37830 BUSINESS PHONE: 8654823000 MAIL ADDRESS: STREET 1: 1009 COMMERCE PARK DR CITY: OAK RIDGE STATE: TN ZIP: 37830 FORMER COMPANY: FORMER CONFORMED NAME: BAMBOO COM INC DATE OF NAME CHANGE: 19990604 10-Q 1 g71149e10-q.txt INTERNET PICTURES CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 Commission File No. 000-26363 INTERNET PICTURES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 52-2213841 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3160 CROW CANYON ROAD SAN RAMON, CALIFORNIA 94583 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) Registrant's telephone number, including area code: (925) 242-4002 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 67,054,970 shares of $0.001 par value common stock outstanding as of July 31,2000 Page 1 of 24 Exhibit Index on Page 24 2 INTERNET PICTURES CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX PART I--FINANCIAL INFORMATION.................................................3 Item 1. Consolidated Financial Statements..............................3 Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations..................................12 PART II -- OTHER INFORMATION.................................................20 Item 1. Legal Proceedings.............................................20 Item 2. Changes In Securities And Use Of Proceeds.....................20 Item 3. Defaults Upon Senior Securities...............................21 Item 4. Submission Of Matters To A Vote Of Security Holders...........22 Item 5. Other Information.............................................22 Item 6. Exhibits And Reports On Form 8-K..............................22 Signatures...................................................................23 Exhibit Index................................................................24
2 3 PART I--FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS INTERNET PICTURES CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, June 30, 2000 2001 --------- --------- (1) (unaudited) (In thousands, except share and per share amounts) ASSETS CURRENT ASSETS: Cash and cash equivalents ........................................................... $ 5,322 $ 5,620 Securities available-for-sale ....................................................... 5,713 -- Accounts receivable, net of allowance for doubtful accounts of $4,617 at December 31, 2000 and $2,790 at June 30, 2001 (unaudited) ............. 13,732 4,554 Inventory, net of reserve for obsolescence of $203 at December 31, 2000 and $404 at June 30, 2001 (unaudited) ............................................... 1,061 361 Prepaid expenses and other current assets ........................................... 6,790 4,697 --------- --------- Total current assets ......................................................... 32,618 15,232 Property and equipment, net ......................................................... 20,965 6,872 Other assets ........................................................................ 1,555 152 Goodwill and other intangible assets ................................................ 5,476 4,259 --------- --------- Total assets ................................................................. $ 60,614 $ 26,515 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable .................................................................... $ 4,077 $ 3,988 Accrued liabilities ................................................................. 16,682 15,930 Deferred revenue .................................................................... 9,077 889 Current portion of promissory note and obligations under capital leases ............. 1,608 1,550 --------- --------- Total current liabilities .................................................... 31,444 22,357 --------- --------- Promissory notes and obligations under capital leases, net of current portion ....... 957 897 Commitments and contingencies (Note 8) -- -- Warrants and beneficial conversion feature of convertible note ...................... -- 10,000 STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $0.001 par value: .................................................. -- -- Authorized: 5,001,100 at December 31, 2000 and June 30, 2001 (unaudited) No shares issued or outstanding at December 31, 2000 and June 30, 2001 (unaudited) Class B common stock, $0.0001 par value: ............................................ -- -- Authorized: 7,421,536 at December 31, 2000 and June 30, 2001 (unaudited) Issued and outstanding: 4,041,725 at December 31, 2000 and June 30, 2001 (unaudited) Common stock, $0.001 par value: ..................................................... 59 63 Authorized: 150,000,000 at December 31, 2000 and June 30, 2001 (unaudited) Issued and outstanding: 59,464,024 at December 31, 2000 and 63,013,245 at June 30, 2001 (unaudited) Additional paid-in capital .......................................................... 484,098 482,098 Notes receivable from stockholders .................................................. (2,349) (225) Unearned stock-based compensation ................................................... (3,361) (800) Accumulated deficit ................................................................. (450,296) (487,019) Accumulated other comprehensive income (loss) ....................................... 62 (856) --------- --------- Total stockholders' equity (deficit) ......................................... 28,213 (6,739) --------- --------- Total liabilities and stockholders' equity (deficit) ......................... $ 60,614 $ 26,515 ========= =========
(1) The December 31, 2000 balances were derived from the audited financial statements. See accompanying notes to the unaudited condensed consolidated financial statements. 3 4 INTERNET PICTURES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended June 30, June 30, -------------------- -------------------- In thousands, except per share data 2000 2001 2000 2001 -------- -------- -------- -------- (unaudited) (unaudited) Revenues: Products $ 13,482 $ 4,203 $ 21,765 $ 11,825 Services 2,007 3,760 2,007 5,661 -------- -------- -------- -------- 15,489 7,963 23,772 17,486 Cost of revenues: Products 7,288 2,036 12,054 5,502 Services 730 1,386 730 2,665 -------- -------- -------- -------- 8,018 3,422 12,784 8,167 Gross profit 7,471 4,541 10,988 9,319 -------- -------- -------- -------- Operating expenses: Sales and marketing 22,992 5,207 38,499 14,926 Research and development 4,072 1,515 6,437 3,987 General and administrative 5,711 2,726 11,059 6,384 Stock-based compensation 4,806 2,819 7,580 4,037 Goodwill amortization 18,710 608 18,710 1,216 Restructuring and impairment -- 7,193 -- 10,193 Bad debt expense 104 3,057 234 3,213 Loss on disposal of assets -- -- -- 1,769 Merger expenses -- -- 15,175 -- -------- -------- -------- -------- Total operating expenses 56,395 23,125 97,694 45,725 Other income(expense): Interest expense (187) (938) (207) (1005) Other 1,177 (93) 2,089 (213) -------- -------- -------- -------- Loss before extraordinary items (47,934) (19,615) (84,824) (37,624) Extraordinary gain -- -- -- 901 -------- -------- -------- -------- Net loss $(47,934) $(19,615) $(84,824) $(36,723) ======== ======== ======== ======== Basic and diluted loss per common share: Loss before extraordinary items $ (0.84) $ (0.30) $ (1.64) $ (0.58) Extraordinary gain -- -- -- $ .01 -------- -------- -------- -------- Net loss (Note 3) $ (0.84) $ (0.30) $ (1.64) $ (0.57) ======== ======== ======== ========
See accompanying notes to the unaudited condensed consolidated financial statements. 4 5 INTERNET PICTURES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 2001 -------- -------- In thousands (unaudited) Cash flows from operating activities: Net loss $(84,824) $(36,723) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 20,214 3,146 Provision for doubtful accounts receivable 1,013 (1,827) Loss on disposal of assets -- 1,769 Accretion of available-for-sale securities 261 (5) Non-cash interest expense related to amortization of discount attributable to beneficial conversion feature of debt and warrants -- 805 Provision for inventory obsolescence 213 201 Non-cash compensation expense 7,580 6,161 Impairment loss -- 1,122 Extraordinary gain -- (901) Changes in operating assets and liabilities: Accounts receivable (5,233) 4,161 Inventory (42) 499 Prepaid expenses and other current assets 1,044 (990) Other assets (195) 1,019 Accounts payable (2,421) (210) Accrued expenses 12,346 1,779 Deferred revenue 2,658 (545) -------- -------- Net cash used in operating activities (47,386) (20,539) -------- -------- Cash flows from investing activities: Purchases of furniture and equipment (7,558) (154) Proceeds from sale of assets -- 8,577 Purchases of securities available-for-sale (18,063) -- Maturities of securities available-for-sale 28,408 6,000 Acquisitions, net of cash acquired (6,123) -- -------- -------- Net cash (used in) provided by investing activities (3,336) 14,423 -------- -------- Cash flow from financing activities: Repayments of capital lease obligation and notes payable (10,001) (849) Net Proceeds from convertible promissory note and warrants -- 9,277 Proceeds from issuance of common stock 69,601 -- Proceeds from exercise of stock options 1,062 25 Distribution to stockholders -- (839) Notes payable to stockholders (1,934) -- -------- -------- Net cash provided by financing activities 58,728 7,614 -------- -------- Effect of exchange rate changes on cash 26 (1,200) -------- -------- Net increase in cash and cash equivalents 8,032 298 Cash and cash equivalents, beginning of period 18,627 5,322 -------- -------- Cash and cash equivalents, end of period $ 26,659 $ 5,620 ======== ========
No income tax payments were made in either period presented. Interest paid for the six months ending June 30, 2000 and 2001 was $206 and $119, respectively. 5 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., PW Technology, Inc. and Internet Pictures Japan KK. The consolidation of these entities will collectively be referred to as the Company. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as of and for the period ended December 31, 2000. The information furnished reflects all adjustments which management believes are necessary for a fair presentation of the Company's financial position as of June 30, 2001 and the results of its operations and its cash flows for the six month periods ended June 30, 2000 and 2001. All such adjustments are of a normal recurring nature. 2. RESULTS OF OPERATIONS The results of operations for the three month periods and the six months periods ended June 30, 2000 and 2001, are not necessarily indicative of the results to be expected for the respective full years. 3. LOSS PER SHARE LOSS PER SHARE BEFORE EXTRAORDINARY ITEM. The Company computes net loss per share in accordance with SFAS No.128, Earnings Per Share. Under the provisions of SFAS No. 128, basic and diluted net loss per share is computed by dividing the net loss applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of incremental shares of common stock issuable upon the exercise of potentially dilutive stock options and warrants. 6 7 The following table sets forth the computation of basic and dilutive net loss per share for the periods indicated: In thousands, except per share data
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 2001 2000 2001 --------- --------- --------- --------- NUMERATOR: Loss before extraordinary item applicable to common stock $(47,934) $(19,615) $(84,824) $(37,624) DENOMINATOR: Weighted average shares outstanding 56,841 65,351 51,742 64,548 LOSS PER SHARE BEFORE EXTRAORDINARY ITEM: Basic and diluted $ (0.84) $ (0.30) $ (1.64) $ (0.58)
4. RESTRUCTURING AND IMPAIRMENT During the first quarter of 2001, the Company recorded a restructuring charge of $1,878,000 consisting of expenses associated with a reduction in our workforce, lease obligations for vacated offices and a write down of abandoned office equipment of $1,122,000 to its net realizable value. During the second quarter of 2001, the Company recorded a restructuring charge of $7,193,000 as a result of continued efforts to align our business strategy toward higher margin business. The costs primarily consist of severance payments, termination benefits associated with a reduction in our work force, facility closure costs and other contractual obligations. Included in the second quarter restructuring is $1,300,000 related to a severance liability for our former Chief Executive Officer, James M. Phillips. At June 30, 2001 the unpaid liability is $1,100,000, which is to be paid in installments ending in September of 2003. As further consideration for Mr. Phillips' separation agreement, the Company forgave a loan from the Company to Mr. Phillips and the related interest aggregating $2,193,000. 5. DISPOSAL OF ASSETS A subsidiary of Homestore.com purchased certain assets from us pursuant to the terms of an acquisition agreement dated January 12, 2001. Under the terms of the acquisition agreement, the subsidiary of Homestore.com purchased certain computers, furniture, fixtures and equipment and certain sales contracts with residential real estate brokers and agents. We used these assets in our operations providing virtual tours of residential real estate properties. As part of the acquisition, Homestore.com's subsidiary hired certain sales force and customer service personnel. The purchase price for these assets was $12,000,000 in cash, of which $155,000 was paid directly to a lessor for certain capital lease obligations, $7,454,000 was deposited into control accounts for deferred revenue obligations and the remainder, $4,391,000, was paid to the Company. We also granted 7 8 Homestore.com's subsidiary an exclusive domestic license of certain of iPIX's virtual tour technology for the residential real estate market. In accordance with the January 12, 2001 purchase transaction, we agreed to negotiate one remaining residential real estate contract with RETT f/k/a National Reality Trust. Homestore.com's subsidiary, and IPIX settled on March 3, 2001 the remaining obligation of the contract for which we received $1,935,500. The Company recorded an extraordinary gain of $901,000 resulting in the disposal of assets used to provide tours of residential real estate properties that were related to the pooling of the Interactive Pictures Corporation and bamboo.com and the cash received from the January 12, 2001 agreement. The remaining residential real estate related assets that were unrelated to the pooling of Interactive Pictures Corporation and bamboo.com were recorded as a loss on the disposal of assets of $1,769,000. 6. STOCK-BASED COMPENSATION Stock-based compensation expense consists of the amortization of deferred compensation related to stock options granted to employees and others prior to our initial public offering with an exercise price below the deemed fair market value of our common stock on the date of grant, to the amortization of the fair value of warrants issued to non-employees and to the amortization of the fair value of restricted stock granted to employees. The related compensation is amortized over the vesting period of the options or stock grants. Expenses related to the warrants are amortized over the term of the agreements to which they relate. The following presents, for the periods indicated, the charges that have been excluded from the following captions:
Three months ended Six months ended June 30, June 30, ------------------ ------------------ In thousands 2000 2001 2000 2001 ------- ------- ------- ------- (unaudited) (unaudited) Cost of revenues $ 5 $ 15 $ 85 $ 104 Sales and marketing 4,679 641 6,238 1,358 Research and development 67 251 905 539 General and administrative 55 1,912 352 2,035 ------- ------- ------- ------- $ 4,806 $ 2,819 $ 7,580 $ 4,037 ======= ======= ======= =======
8 9 7. DISTRIBUTION TO STOCKHOLDERS On May 10, 2001, the Company issued one million nine hundred (1,900,000) shares of iPIX common stock to six iPIX stockholders (the "Stockholders") in exchange for the termination of certain obligations arising under (i) the merger agreement between Internet Pictures Corporation and TBI Imaging, Inc. and (ii) the merger agreement between Internet Pictures Corporation and Opticom Corporation, each dated March 16, 2000. Concurrent with the above transaction, the Company distributed all of the outstanding shares of Imaging Services Corporation, a wholly-owned subsidiary, and certain related assets to the Stockholders. As a result of the transaction, the Company recorded a distribution to stockholders of $2,979,000 which resulted in a reduction in additional paid in capital. 8. COMMITMENTS AND CONTINGENCIES On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg, Patrick Oliver and related entities, all of whom are former stockholders of PictureWorks Technology, Inc. (which the Company acquired in April 2000) filed a lawsuit in the Delaware Chancery Court alleging causes of action for failure to timely issue stock certificates and breach of contract. An unspecified amount of damages is sought. We believe that the plaintiffs' claims are without merit, and we intend to vigorously defend against these claims. Please reference Legal Proceedings in our Annual Report on Form 10K for the fiscal year ended December 31, 2000 for additional disclosures. The Company is subject to claims in the ordinary course of business. Management believes the ultimate resolution of these matters will have no material impact on the financial condition, results of operations or cash flows of the Company. If the plaintiffs in any of these cases were to prevail in their action, our financial condition, results of operations and cash flows could be materially adversely affected. 9. SEGMENTS The Company has two reportable segments: 1) products, and 2) services. The accounting policies of the segments are the same as those of the Company. The Company evaluates the performance of its segments and allocates resources to them based solely on evaluation of gross profit. There are no inter-segment revenues. The Company does not make allocations of corporate costs to the individual segments and does not identify separate assets of the segments in making decisions regarding performance or allocation of resources to them. 9 10 Information about reported segments is as follows:
Three months ended Six months ended June 30, June 30, ----------------- ----------------- In thousands 2000 2001 2000 2001 ------- ------- ------- ------- (unaudited) (unaudited) Revenues: Products $13,482 $4,203 $21,765 $11,825 Services 2,007 3,760 2,007 5,661 Total ------- ------- ------- ------- $15,489 $7,963 $23,772 $17,486 ======= ======= ======= ======= Cost of revenues: Products $7,288 $2,036 $12,054 $5,502 Services 730 1,386 730 2,665 Total ------- ------- ------- ------- $8,018 $3,422 $12,784 $8,167 ======= ======= ======= =======
Long-lived asset information by geographic area is as follows: In thousands
December 31, June 30, 2000 2001 ------ ------- LONG-LIVED ASSETS: Foreign.......... $ 3,285 $ 60 United States.... 17,680 6,812 ------ ------- $20,965 $ 6,872 ====== =======
10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FAB issued Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS142), Goodwill and Other Intangible Assets. FAS 141 supercedes APB 16, Business Combinations and primarily addresses the accounting for the cost of an acquired business (i.e., the purchase price allocation), including any subsequent adjustments to its cost. The most significant changes made by FAS 141 involve the requirement to use the purchase method of accounting for all business combinations, thereby eliminating use of the pooling-of-interests method along with the establishment of new criteria for determining whether intangible assets acquired in a business combinations should be recognized separately from goodwill. FAS 141 is effective for all business combinations (as defined in the statement) initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 1, 2001 or later). The Company does not expect adoption of FAS 141 to have a material impact on the Company's reported results of operations, financial position or cash flows. FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142 supercedes AFB 17, Intangible Assets. Under FAS 142, goodwill and indefinite lived 10 11 intangible assets will no longer be amortized and will be tested for impairment at least annually at a reporting unit level. Additionally, the amortization period of intangible assets with finite lives is no longer limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been issued previously. The Company does not expect adoption of FAS 142 to have a material impact on the Company's reported results of operations, financial position or cash flows. 11. CONVERTIBLE PROMISSORY NOTE AND WARRANTS On May 14, 2001, the Company executed definitive agreements with Paradigm Capital Partners and Memphis Angels, LLC for an investment by the parties into the Company of up to $30 million. The agreement calls for the investment to occur in two tranches (the "Purchase Agreement"). Tranche A consists of a $10 million convertible note and warrants, Tranche B is scheduled to close after the annual shareholder meeting that will occur on August 22, 2001 and may include up to an additional $20 million in convertible preferred stock, which may convert into common stock at a rate of 80 common shares per preferred share. Proceeds of the investment will be used for sales and marketing efforts, research and development and general working capital purposes. Pursuant to the Purchase Agreement, the Company issued to Image Investor Portfolio, a separate series of Memphis Angels, LLC its $10,000,000 convertible promissory note (the "Note"). The Note is due and payable with accrued interest at a rate of 8% on the earlier of (a) August 14, 2002 or (b) the termination of the Purchase Agreement. The Note and accrued interest are scheduled to convert into preferred stock as part of the closing of Tranche B. The Company has also issued three warrants (Warrant 1, Warrant 2 and Warrant 3) to Paradigm Capital Partners and Memphis Angels, LLC. Warrant 1 entitles the holder to subscribe for and purchase 150,000 shares of Series B Preferred Stock at $20 per share and is exercisable at any time before the expiration date of May 14, 2006. Warrant 2 entitles the holder to subscribe for and purchase 100,000 shares of Series B Preferred Stock at $40 per share and is exercisable at any time before the expiration date of May 14, 2006. Warrant 3 entitles the holder to subscribe for and purchase 1,000,000 shares of Series B Preferred Stock at $20 per share and is exercisable at any time before the expiration date of August 29, 2002. Due to the warrants issued in conjunction with the convertible promissory note, based on APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants and EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features, the entire proceeds from the convertible promissory note, $10,000,000, were allocated to the warrants and the beneficial conversion feature based on a calculation using the Black-Scholes model. During the second quarter of 2001, the Company 11 12 recorded $805,000 as interest expense related to the accretion of the convertible promissory note to its face value over the fifteen month period on the note. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Internet Pictures Corporation (iPIX(R)) provides mission critical imaging solutions to facilitate commerce, communication and entertainment. The Company's solutions include the capture, processing, management and distribution of images and related data. iPIX solutions create and manage a rich variety of media including still images, 360(degree) by 360(degree) immersive images, video, animation, text and audio. A broad array of industries -- including real estate, auctions, travel, government, education, automotive, sports and entertainment -- are capitalizing on iPIX dynamic imaging to give viewers more information, more interaction and a richer online experience. 80% of Media Metrix's top ten Web properties use iPIX to make their sites more dynamic. The Company is headquartered in Oak Ridge, Tennessee, with co-headquarters in San Ramon, California. We are the result of the merger of Interactive Pictures and bamboo.com on January 19, 2000. Interactive Pictures was founded in 1986 at the Oak Ridge National Laboratory in Tennessee to develop remote robotic systems for the United States Department of Defense, the Department of Energy, NASA and other governmental agencies. bamboo.com was founded in 1995 in Toronto, Canada to provide virtual tours of online residential real estate listings. In April of 2000, we acquired PictureWorks Technology, which developed our open imaging platform, Rimfire, which allows business to business and business to consumer internet sites to quickly and easily capture, manage and distribute images and other forms of media directly from site viewers via live Web pages. With Rimfire, site end-users can easily publish still digital media to the Web with simple drag-and-drop image submission. The iPIX open imaging platform solves the most common problems associated with user-supplied media by simplifying the tasks and the process for the user and the Web site. For example, with Rimfire, eBay is able to allow their users to instantly add photos directly to their listings from the "Sell Your Item" form online. The photos are automatically sized, formatted and delivered to the eBay Web site to the standards pre-set by eBay. Utilizing our Rimfire infrastructure products and services, we provide end-to-end solutions to customers who request digital media content to be hosted and distributed to the Internet. Revenues associated with the hosting services are recognized ratably over the hosting and distribution term. We also generate revenues from our sale of digital media content as well as iPIX keys and iPIX kits. Sales of immersive images, iPIX kits and iPIX keys are recognized upon delivery to the customer. We calculate a provision for returns based on historical experience and make appropriate reserves at the time revenues are recognized. To date, returns have been insignificant. 12 13 RESULTS OF OPERATIONS The following table presents, for the periods indicated, the percent relationship to total revenues of select items in our statements of operations.
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 2001 2000 2001 ------- ------- ------- ------- (unaudited) (unaudited) Revenues 100% 100% 100% 100% Cost of revenues 52% 43% 54% 47% ------- ------- ------- ------- Gross profit 48% 57% 46% 53% ------- ------- ------- ------- Operating expenses: Sales and marketing 148% 65% 162% 85% Research and development 26% 19% 27% 23% General and administrative 37% 34% 47% 37% Stock-based compensation 31% 35% 32% 23% Goodwill amortization 121% 8% 79% 7% Restructuring and impairment 0% 90% 0% 58% Bad debt expense 1% 38% 1% 18% Loss on disposal of assets 0% 0% 0% 10% Merger expenses 0% 0% 64% 0% ------- ------- ------- ------- Total operating expenses 364% 290% 411% 261% Loss from operations (316)% (233)% (365)% (208)% Other income(expense), net 6% (13)% 8% (7)% ------- ------- ------- ------- Loss before extraordinary items (310)% (246)% (357)% (215)% Extraordinary gain 0% 0% 0% 5% ------- ------- ------- ------- Net loss (310)% (246)% (357)% (210)% ======= ======= ======= =======
QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000 Revenues. Total revenues decreased to $7,963,000 in the second quarter of 2001, compared to $15,489,000 in the second quarter of 2000, a decrease of $7,526,000 or 49%. This decrease was due primarily to a decrease of $6,791,000 in sales of full service virtual tours. As part of the sale of assets to Homestore.com during the first quarter of 2001, we no longer directly sell full service virtual tours of iPIX keys to customers in the residential real estate market. The second quarter 2001 revenues of $7,963,000 included $5,806,000 from the sale of our technology products and services and $2,157,000 related to full service virtual real estate tours. We do not expect to generate significant future revenues from the sale of virtual real estate tours in the US residential markets. Instead, we have an agreement with Homestore.com whereby we will provide certain processing, hosting and distribution services for Homestore.com and we will receive transaction fees and royalties. 13 14 Cost of Revenues. In the three months ended June 30, 2000, cost of revenues consisted of our direct expenses associated with the capture, processing, hosting and distribution of virtual tours, the costs of the digital camera and related components included in an iPIX kit and infrastructure and bandwidth costs related to Rimfire revenues. Cost of revenues decreased to $3,422,000 in the second quarter of 2001, compared to $8,018,000 in the second quarter of 2000, a decrease of $4,596,000. Cost of revenues as a percentage of total revenues decreased from 52% in the second quarter of 2000 to 43% in the second quarter of 2001. This decrease was the result of a lower volume of virtual tour deliveries and the increase in higher margin Rimfire based revenue. Sales and Marketing. Sales and marketing expenses consist primarily of salaries for marketing, sales, business development and field operations personnel. Sales and marketing expenses also include commissions and related benefits for sales personnel and consultants, traditional advertising and promotional expenses and trademark licensing. Sales and marketing expenses decreased to $5,207,000 in the second quarter of 2001, compared to $22,992,000 in the second quarter of 2000, a decrease of $17,785,000, or 77%. This decrease is due primarily to our decision to sell more of our products and services through various third parties, such as equipment manufactures, and become less reliant upon a worldwide direct sales force. As a result, we had a significant reduction in our sales force and field operations personnel, decreased costs relating to technology access and sponsorship fees and decreased advertising and branding expenses. Research and Development. Research and development expenses consist primarily of personnel costs and fees paid to third party developers. Research and development expenses decreased to $1,515,000 in the second quarter of 2001, compared to $4,072,000 in the second quarter of 2000, a decrease of $2,557,000, or 63%. This decrease was due primarily to decreased personnel and related costs as a result of our reduction in work force and the exit of the full service real estate business. General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related benefits for administrative and executive staff, fees for professional services and general office and occupancy expenses. General and administrative expenses decreased to $2,726,000 in the second quarter of 2001, compared to $5,711,000 in the second quarter of 2000, a decrease of $2,985,000 or 52%. This decrease was due primarily to a decrease in personnel and related costs and professional services. Stock-based Compensation. Stock-based compensation expense consists of the amortization of deferred compensation related to stock options granted to employees and others prior to our initial public offering with an exercise price below the deemed fair market value of our common stock on the date of grant. In addition, it also includes the amortization of the fair value of warrants and options issued to non-employees and restricted stock granted to employees. The related compensation is amortized over the vesting period of the options or stock grants. Expenses related to the warrants are amortized over the term of the agreements to which they relate. Stock-based compensation expense decreased from $4,806,000 in the second quarter of 2000, 14 15 compared to $2,819,000 in the second quarter of 2001. The decrease is primarily related to the decrease in our stock price. Goodwill Amortization. Amortization of intangible assets was $608,000 in the second quarter 2001, compared to $18,710,000 in the second quarter of 2000. The amortization was a result of goodwill associated with the acquisitions during the second quarter of 2000. The decrease is related to the impairment charge taken in the fourth quarter of 2000 of $176,831,000 related to the goodwill. Restructuring and Impairment Charges. During the second quarter of 2001, the Company recorded a restructuring charge of $7,193,000 as a result of continued efforts to align our business strategy toward higher margin business. The costs primarily consist of severance payments, termination benefits associated with a reduction in our work force, lease terminations and facility closure costs. Included in the restructuring charges is $1,300,000 related to a severance liability with former Chief Executive Officer, James M. Phillips. At June 30, 2001 the unpaid liability is $1,100,000, which is to be paid in installments ending in September of 2003. As further consideration for Mr. Phillips' separation agreement, the Company forgave a loan from the Company to Mr. Phillips and the related interest aggregating $2,193,000. Bad Debt Expense. Bad debt expense was $3,057,000 in the second quarter of 2001, compared to $104,000 in the second quarter of 2000. The increase in bad debt expense was the result of non-payment by customers, now in financial difficulty, and our belief that certain former customers will not pay all of their obligations. Other Income (Expense). Other income (expense) consists primarily of interest earned on cash and investments, interest paid on capital leases, interest accrued for the convertible promissory note and the accretion of the promissory note towards its face value. Other income (expense) decreased to $(1,031,000) in the second quarter of 2001, compared to $990,000 in the second quarter of 2000, a change of $2,021,000. This change was due primarily to decreased earnings on our cash investments related to a lower cash balance and interest expense related to the accretion of the promissory note. In the second quarter of 2001, the Company recorded non-cash interest expense of $805,000 related to the accretion of the promissory note to its face value. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 Revenues. Total revenues decreased to $17,486,000 in the six months ended June 30, 2001, compared to $23,772,000 in the six months ended June 30, 2000, a decrease of $6,286,000 or 26%. This decrease was due primarily to a decrease of $7,333,000 in sales of full service virtual tours coupled with an increase of $1,044,000 in non-real estate related revenues. For the six months ended June 30, 2001, revenues of $17,486,000 included $10,415,000 from the sale of our technology products and services and $7,071,000 related to full service virtual real estate tours. We do not expect to generate significant future revenues from the sale of virtual real estate tours in the US residential markets. Instead, we have an agreement with Homestore.com whereby we will provide 15 16 certain processing, hosting and distribution services for Homestore.com and we will receive transaction fees and royalties. Cost of Revenues. Cost of revenues decreased to $8,167,000 in the first half of 2001, compared to $12,784,000 in the first half of 2000, a decrease of $4,617,000. Cost of revenues as a percentage of total revenues decreased from 54% in the first half of 2000 to 47% in the first half of 2001. This decrease was the result of a lower volume of virtual tour deliveries and the increase in higher margin Rimfire based revenues. Sales and Marketing. Sales and marketing expenses decreased to $14,926,000 in the six months ended June 30, 2001, compared to $38,499,000 in the six months ended June 30, 2000, a decrease of $23,573,000, or 61%. This decrease is due primarily to our decision to sell more of our products and services through various third parties, such as equipment manufacturers, and become less reliant upon a worldwide direct sales force. As a result, we had a significant reduction in our sales force and field operations personnel, decreased costs relating to technology access and sponsorship fees and decreased advertising and branding expenses. Research and Development. Research and development expenses decreased to $3,987,000 in the first half of 2001, compared to $6,437,000 in the first half of 2000, a decrease of $2,450,000, or 38%. This decrease was due primarily to decreased personnel and related costs as a result of our reduction in work force and the exit of the full service real estate business. General and Administrative Expenses. General and administrative expenses decreased to $6,384,000 in the six months ended June 30, 2001, compared to $11,059,000 in the six months ended June 30, 2000, a decrease of $4,675,000 or 42%. This decrease was due primarily to a decrease in personnel and related costs and professional services. Stock-based Compensation. Stock-based compensation expense consists of the amortization of deferred compensation related to stock options granted to employees and others prior to our initial public offering with an exercise price below the deemed fair market value of our common stock on the date of grant, to the amortization of the fair value of warrants and options issued to non-employees and to the amortization of the fair value of restricted stock granted to employees. The related compensation is amortized over the vesting period of the options or stock grants. Expenses related to the warrants are amortized over the term of the agreements to which they relate. Stock-based compensation expense decreased from $7,580,000 in the first half of 2000, compared to $4,037,000 in the first half of 2001. The primary reason for the decrease is related to the decrease in our stock price. Goodwill Amortization. Amortization of intangible assets was $1,216,000 in the first half of 2001, compared to $18,710,000 in the first half of 2000. The amortization was a result of goodwill associated with the acquisitions during the second quarter of 2000. The decrease is related to the impairment charge taken in the fourth quarter of 2000 of $176,831,000 related to the goodwill. 16 17 Merger Expenses. Merger expenses consist of costs incurred as a result of the merger of Interactive Pictures and bamboo.com that occurred on January 19, 2000. Merger expenses in the first half of 2000 were $15,175,000 and consisted primarily of underwriting, legal, accounting and printer's fees. Extraordinary Gain. The extraordinary gain during the first six months of 2001 of $901,000 results from the sale of assets used to provide residential real estate virtual tours that were related to the pooling of Interactive Pictures Corporation and bamboo.com. The sale transaction took place within a year of the 2000 pooling transaction. Loss on Disposal of Assets. The loss during the first six months of 2001 on the disposal of assets of $1,769,000 is the result of the sale of assets used to provide residential real estate virtual tours that consisted of the remaining residential real estate assets that were unrelated to the 2000 pooling of Interactive Pictures Corporation and bamboo.com. Restructuring and Impairment Charges. During the first half of 2001, we recorded a restructuring charge of $9,071,000 consisting of expenses associated with a reduction in our workforce, lease obligations for vacated office and other contractual obligations. In addition to the restructuring, the Company wrote down abandoned office equipment of $1,122,000 to its net realizable value. Included in the restructuring is $1,300,000 related to a severance liability with our former Chief Executive Officer, James M. Phillips. At June 30, 2001 the unpaid liability is $1,100,000, which is to be paid in installments ending in September of 2003. As further consideration for Mr. Phillips' separation agreement, the Company forgave a loan from the Company to Mr. Phillips and the related interest aggregating $2,193,000. Bad Debt Expense. Bad debt expense was $3,213,000 in the first half of 2001, compared to $234,000 in the first half of 2000. The increase in bad debt expense was the result of non-payment by customers, now in financial difficulty, and our belief that certain former customers will not pay all of their obligations. Other Income (Expense). Other income (expense) decreased to $(1,218,000) in the six months ended June 30, 2001, compared to $1,882,000 in the six months ended June 30, 2000, a change of $3,100,000. This change was due primarily to decreased earnings on our cash investments related to a lower cash balance and interest expense related to the promissory note. In the first half of 2001, the Company recorded non-cash interest expense of $805,000 related to the accretion of the promissory note to its face value LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations through our registered public offerings, the private placements of capital stock, a convertible debenture and a convertible promissory note. At June 30, 2001, we had $5,620,000 of cash and cash equivalents. 17 18 Net cash used in operating activities was $20,539,000 for the six months ended June 30, 2001 and $47,386,000 for the six months ended June 30, 2000. Net cash used for operating activities in each of these periods is primarily a result of net losses offset by changes in net operating assets. Our net loss for the six-month periods ended June 30, 2000 and 2001 included $20,214,000 and $3,146,000, respectively, for non-cash depreciation and amortization. Net cash provided by/(used in) investment activities was $(3,336,000) for the six months ended June 30, 2000 and $14,423,000 for the six months ended June 30, 2001. Net cash provided by/(used in) investing activities was related to the net purchases and maturities of short-term investments, the acquisition of computer software and hardware and other equipment and the proceeds from the sale of assets. Net cash provided by financing activities was $58,728,000 for the six months ended June 30, 2000 and $7,614,000 for the six months ended June 30, 2001. The net cash provided by financing activities for these periods was due primarily to the sale of shares of our common stock, the exercise of stock options and the issuance of a convertible promissory note, off-set by the repayment of capital lease obligations and other notes payable. Although we have no material commitments for capital expenditures, we anticipate that the rate of capital expenditures and other expenses consistent with our operations, personnel and marketing activities will be a material use of our cash resources for the foreseeable future. We may also use our cash resources to acquire or license technology, products or business related to our current business. We believe that the net proceeds from our second quarter 2001 convertible promissory note and warrants, together with existing cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through August 31, 2001. We will require additional funds to support our working capital requirements and for other purposes and we are in the process of raising additional funds through public or private equity financing, bank debt financing or from other sources. There can be no assurance that this capital will be available in amounts or on terms acceptable to us, if at all. On May 14 2001, we executed definitive agreements with Paradigm Capital Partners and Memphis Angels, LLC for an investment by the parties of up to $30 million. The agreement calls for the investment to occur in two tranches. Tranche A consists of $10 million in convertible notes and warrants. Tranche B is scheduled to close after the annual shareholder meeting that will occur on August 22, 2001 and will include up to an additional $20 million in convertible preferred stock. Although the documents contemplate the sale of up to $30 million of our Series B Preferred Stock, there is no assurance that we will sell the entire amount. If we do not sell the entire amount of Series B Preferred Stock, we may need to raise additional funds to support our operations. We may seek these funds through the issuance of debt or equity securities. Any of the equity securities may result in additional substantial dilution to our stockholders. There can be no assurance that our capital requirements will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise the needed funds, we may be forced to sell assets or discontinue operations. 18 19 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FAB issued Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS142), Goodwill and Other Intangible Assets. FAS 141 supercedes APB 16, Business Combinations and primarily addresses the accounting for the cost of an acquired business (i.e., the purchase price allocation), including any subsequent adjustments to its cost. The most significant changes made by FAS 141 involve the requirement to use the purchase method of accounting for all business combinations, thereby eliminating use of the pooling-of-interests method along with the establishment of new criteria for determining whether intangible assets acquired in a business combinations should be recognized separately from goodwill. FAS 141 is effective for all business combinations (as defined in the statement) initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 1, 2001 or later). The Company does not expect adoption of either FAS 141 to have a material impact on the Company's reported results of operations, financial position or cash flows. FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142 supercedes AFB 17, Intangible Assets. Under FAS 142, goodwill and indefinite lived intangible assets will no longer be amortized and will be tested for impairment at least annually at a reporting unit level. Additionally, the amortization period of intangible assets with finite lives is no longer limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been issued previously. The Company does not expect adoption of FAS 142 to have a material impact on the Company's reported results of operations, financial position or cash flows. INFLATION Inflation has not had a significant impact on our operations to date. FORWARD-LOOKING STATEMENTS This quarterly report contains statements about future events and expectations which are characterized as forward-looking statements. Forward-looking statements are based on our management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks 19 20 and uncertainties that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Factors that could contribute to these differences include those discussed in "Risk Factors" of our annual report on Form 10-K filed on April 2, 2001 and those under Additional Factors That May Affect Our Future Results. The words "believe", "may", "will", "should", "anticipate", "estimate", "expect", "intends", "objective" or similar words or the negatives of these words are intended to identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS LITIGATION Reference is hereby made to Item 3, Legal Proceedings in our Annual Report on Form 10K for the fiscal year ended December 31, 2000 for additional disclosures. On May 10, 2001, Stanley Fry, Woodhaven Venture Partners, L.P., Cyrus Greg, Patrick Oliver and related entities, all of whom are former stockholders of PictureWorks Technology, Inc. (which the Company acquired in April 2000) filed a lawsuit in the Delaware Chancery Court alleging causes of action for failure to timely issue stock certificates and breach of contract. An unspecified amount of damages is sought. We believe that the plaintiffs' claims are without merit, and we intend to vigorously defend against these claims. If the plaintiffs were to prevail in their action, however, our financial condition, result of operations in cash flows could be materially adversely affected. We are not currently a party to any other legal proceedings the adverse outcome of which, individually or in the aggregate, we believe could have a material adverse effect on our business, financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 14, 2001, we announced that the we had entered into a definitive agreement with Paradigm Capital Partners and Memphis Angels, LLC (the "Investors") for the sale by the Company, and purchase by the Investors, of up to $30 million of the Company's Series B Preferred Stock. Pursuant to the terms of a securities purchase agreement between the Company and the Investors dated as of May 14, 2001, the Investors purchased $10 million of the Company's convertible senior secured notes (the "Notes") and received warrants to purchase the Company's Series B Preferred Stock. The Notes bear interest at 8% per annum. The Investors may elect to receive interest either in cash or additional shares. The Notes are convertible into the Company's Series B Preferred Stock at the rate 20 21 of fifty (50) shares of Series B Preferred Stock for each $1,000 of Notes. The Investors received (i) Tranche A warrants to purchase a number of shares of Series B Preferred Stock equal to one-half the number of shares of Series B Preferred Stock into which the Notes may be converted and (ii) Tranche B warrants to purchase up to $20 million of Series B Preferred Stock at the Tranche B closing. Sixty percent of the Tranche A warrants have an exercise price of $20.00 per share and the remaining forty percent have an exercise price of $40.00 per share. The Tranche B closing will occur, if at all, after a number of conditions have been met. The Company expects the Tranche B closing to occur after the Company's annual meeting of stockholders, currently scheduled for August 22, 2001. Under the terms of the May 14, 2001 securities purchase agreement, the Investors will consummate the purchase of the Notes in two stages. The first closing, which occurred on May 14, 2001, was for $3 million of the Company's Notes. The second closing, which occurred on May 29, 2001, was for $7 million of the Company's Notes. Effective as of the second closing date, the board of directors of the Company was reduced from nine (9) members to seven (7), and, pursuant to the securities purchase agreement, the Investors will have the right to appoint four (4) of the seven (7) directors. In addition, as of the second closing date, the Chairman and Chief Executive Officer of the Company stepped down and assumed the position of Chairman Emeritus. Pursuant to the terms of a Certificate of Designation filed with the Secretary of State of the State of Delaware on May 14, 2001, the Series B Preferred Stock will convert into the Company's common stock at a conversion rate of eighty (80) shares of common stock for each share of Series B Preferred Stock. The Series B Preferred Stock bears dividends at an annual rate of 8% of the original issue price payable quarterly in cash or as an increase to the Series B Preferred Stock liquidation preference. In addition to significant matters requiring a class vote, Series B Preferred Stock is entitled to vote on matters submitted to holders of common stock on an as-converted basis and, so long as at least 25% of the shares of the Series B Preferred Stock issued in connection with the Tranche A and Tranche B closings is outstanding, is entitled to elect four (4) members of the Board of Directors of the Company. These modifications to the Series B Preferred Stock made pursuant to the Certificate of Designation limit the rights of the current holders of our common stock. For example, the common stock holders will be entitled to elect only three (3) directors, and the Company is required to obtain the separate approval of Series B Preferred holders in order to consummate certain transactions. The Company relied on the exemption from registration provided in Section 4(2) and Rule 506 of the Securities Act when effecting the private placement to Image Investor Portfolio. All of the securities were purchased by one (1) accredited investor and no general advertising or solicitations were used. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 21 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 10.1 Internet Pictures Corporation 2001 Equity Incentive Plan Exhibit 10.2 Employment Agreement between Internet Pictures Corporation and Donald W. Strickland dated July 1, 2001 Exhibit 10.3 Employment Agreement between Internet Pictures Corporation and Paul Farmer dated July 1, 2001 b. Reports on Form 8-K (1) May 14, 2001; Item 7 and Item 9. (2) May 29, 2001; Item 1 and Item 7. 22 23 INTERNET PICTURES CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: August 14, 2001 INTERNET PICTURES CORPORATION (Registrant) /s/ Paul Farmer -------------------------------------------- Paul Farmer Authorized Officer Chief Financial Officer and Chief Accounting Officer 23 24 INTERNET PICTURES CORPORATION INDEX TO EXHIBITS FOR FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.1 Internet Pictures Corporation 2001 Equity Incentive Plan 10.2 Employment Agreement between Internet Pictures Corporation and Donald W. Strickland dated July 1, 2001 10.3 Employment Agreement between Internet Pictures Corporation and Paul Farmer dated July 1, 2001
24 EX-10.1 3 g71149ex10-1.txt 2001 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.1 INTERNET PICTURES CORPORATION 2001 EQUITY INCENTIVE PLAN The purpose of the Internet Pictures Corporation 2001 Equity Incentive Plan (the "Plan") is to provide (i) designated employees (including employees who are also officers or directors) of Internet Pictures Corporation and its subsidiaries (the "Company"), (ii) certain consultants and advisors to the Company and (iii) non-employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options and nonqualified stock options ("Options") and restricted stock awards ("Restricted Stock Awards") and Stock Appreciation Rights, Performance Shares, Dividend Equivalent Payments and Other Stock Based Awards ("Options" and "Restricted Stock Awards" and "Stock Appreciation Rights," "Performance Shares," "Dividend Equivalent Payments" and "Other Stock Based Awards" are collectively referred to herein as "Awards"). The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company's stockholders, and will align the economic interests of the participants with those of the stockholders. 1. Administration (a) The Plan will be administered by a compensation committee (the "Committee") of two or more directors appointed by the Board. If no compensation committee is appointed, all references in the Plan to the "Committee" shall be deemed to refer to the Board. (b) The Committee shall have the sole authority to (i) determine the individuals to whom Awards shall be granted under the Plan, (ii) determine the type, size and terms of the Awards to be granted to each such individual, (iii) determine the time when the Awards will be granted and the duration of any applicable exercise period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan. (c) The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2 2. Shares Subject to the Plan (a) Subject to the adjustment specified below, the aggregate number of shares of common stock of the Company ("Company Stock") that may be issued under the Plan is 20,000,000 shares plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to 5% of the outstanding shares on such date or a lesser amount determined by the Committee. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Awards granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, the shares subject to such Awards shall again be available for purposes of the Plan. (b) If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin off, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin-off or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Awards, the maximum number of shares of Company Stock for which any individual participating in the Plan may receive Awards in any year, the number of shares covered by outstanding Awards, the kind of shares issued under the Plan, and the price per share of such Awards shall be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Awards; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. 3. Eligibility for Participation (a) All employees of the Company ("Employees"), including Employees who are officers or members of the Board, and members of the Board who are not Employees ("Non-Employee Directors") shall be eligible to participate in the Plan. Consultants and advisors who perform services to the Company ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide services and such services are not in connection with the offer or sale of securities in a capital-raising transaction. (b) The Committee shall select the Employees, Non-Employee Directors and Key Advisors to receive Awards and shall determine the number of shares of Company Stock subject to a particular grant in such manner as the Committee determines. The Board must approve the grant and terms of any Awards granted to Non-Employee Directors and to any other directors who are members of the Committee. Employees, 2 3 Key Advisors and Non-Employee Directors who receive Awards under this Plan shall hereinafter be referred to as "Grantees". 4. Options (a) Options granted under the Plan may be incentive stock options ("Incentive Stock Options") or nonqualified stock options ("Nonqualified Stock Options") as described in Section 4(b). All Awards shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with the Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the "Grant Instrument") or an amendment to the Grant Instrument. The Committee shall approve the form and provisions of each Grant Instrument. (b) (i) The Committee may grant Incentive Stock Options that are intended to qualify as "incentive stock options" within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Nonqualified Stock Options that are not intended so to qualify, or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees. Nonqualified Stock Options may be granted to Employees, Non-Employee Directors and Key Advisors. (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of such Stock on the date the Option is granted; provided, however, that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted, (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant and (z) in no circumstances will the Exercise Price be less than 90% of the per share price of a share of Company Stock established in the stock placement transaction immediately preceding such determination. (iii) If Company Stock is publicly traded, then the Fair Market Value per share shall be determined as follows: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or, if there were no trades on that date, the latest preceding date upon which a sale was reported, or (y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, not subject to reported 3 4 transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option (i) in cash, (ii) by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or (iii) by such other method as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 11) at the time of exercise. Shares of Company Stock shall not be issued upon exercise of an Option until the Exercise Price is fully paid and any required withholding is made. (d) Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). If and to the extent that an Option designated as an Incentive Stock Option fails so to qualify under the Code, the Option shall remain outstanding according to its terms as a Nonqualified Stock Option. 5. Restricted Stock Awards (a) The Committee may grant Restricted Stock Awards pursuant to the Plan. Restricted Stock Awards may be granted to Employees, Non-Employee Directors and Key Advisors. Such Restricted Stock Awards shall be in any form the Committee deems appropriate, including but not limited to, stock for converted options, stock bonuses and stock purchase rights. Each Restricted Stock Award shall be evidenced by a Grant Instrument. (b) A Grantee's right to retain a Restricted Stock Award shall be subject to such restrictions, including, but not limited to, his continuous employment by the Company for a specified period. The Committee may, in its sole discretion, require different periods of employment and objectives with respect to different Grantees, different Restricted Stock Awards or designated portions of a single Restricted Stock Award. 4 5 (c) Company Stock subject to a Restricted Stock Award shall be issued and delivered at the time of the grant or as otherwise determined by the Committee, but shall be subject to forfeiture until provided otherwise in the Grant Instrument or the Plan. (d) A Grantee may exercise a Restricted Stock Award that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company. (e) Grants of Restricted Stock Awards shall be made at such cost to the Grantee as the Committee shall determine and may be issued in consideration for past services actually rendered to or for the benefit of the Company. 6. Stock Appreciation Rights (a) The Committee may grant Stock Appreciation Rights under the Plan. A Stock Appreciation Right is a right to receive a payment equal to the excess of the (i) Fair Market Value of the shares of Common Stock covered by such right as of the date of exercise or termination over (ii) such amount as is determined by the Committee at the time the Stock Appreciation Right is granted; such grants may be made individually or in tandem with Options. Each Stock Appreciation Right shall be evidenced by an Agreement and shall be in such form and shall contain such terms and conditions as the Committee shall deem appropriate. (b) If Stock Appreciation Rights are granted in tandem with an Option, the exercise of the Option shall cause a proportional reduction in Stock Appreciation Rights standing to a Grantee's credit; the payment of Stock Appreciation Rights shall cause a proportional reduction of the number of shares of Common Stock exercisable under such Option. If Stock Appreciation Rights are granted in tandem with an Incentive Stock Option, the Stock Appreciation Rights shall have such terms and conditions as shall be required for the Incentive Stock Option to qualify as an Incentive Stock Option. (c) Upon electing to receive payment of a Stock Appreciation Right, a Grantee shall receive payment in cash, in Common Stock, in any combination of cash and Common Stock, or in such other form as the Committee shall determine. Stock Appreciation Rights shall be paid by the Company to a Grantee, to the extent payment is elected by the Grantee (and is otherwise due and payable), as soon as practicable after the date on which such election is made. 7. Performance Shares (a) The Committee may Award Performance Share Units pursuant to the Plan. Each Award of Performance Share Units shall be evidenced by an Agreement and shall be in such form and shall contain such terms and conditions as the Committee shall deem appropriate. (b) Performance Shares Units represent the right of a Grantee to receive Common Stock or the cash equal to the Fair Market Value of such Common Stock at a future date in accordance with the terms and conditions of the Award. The terms and 5 6 conditions shall be determined by the Committee, in its sole discretion, but are generally expected to be based substantially upon the attainment of targeted financial performance objectives. (c) When the Committee certifies that the performance goals required by the Award have been attained or otherwise satisfied, the Committee shall authorize the payment of cash in lieu of Performance Shares or the issuance of Performance Shares registered in the name of the Grantee. 8. Dividend Equivalent Payments The Committee may authorize the payment of dividend equivalents on some or all of the shares of Common Stock covered by an Award pursuant to the Plan, in an amount equal to, and commensurate with, dividends declared by the Committee and paid on Common Stock. Dividend equivalents payable on Awards under this Section 8 may be paid in cash or in Common Stock at the discretion of the Committee. 9. Other Stock Based Awards and Other Benefits (a) The Committee shall have the right to grant Other Stock Based Awards which may include, without limitation, the grant of Common Stock based on certain conditions, the payment of cash based on the market performance of the Common Stock, and the grant of securities convertible into Common Stock. (b) The Committee shall have the right to provide other types of Awards under the Plan in addition to those specifically listed, if the Committee believes that such Awards would further the purposes for which the Plan has been established. 10. Granting of Awards (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each grant of Awards to Employees, Non-Employee Directors and Key Advisors, subject to approval of the Board with respect to Awards granted to Non-Employee Directors or members of the Committee. (b) Award Term. The Committee shall determine the term of each Award, subject to approval of the Board with respect to Awards granted to Non-Employee Directors or members of the Committee. The term of any Award shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant. (c) Exercisability of Awards. Awards shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument or an amendment to the Grant 6 7 Instrument, subject to approval of the Board with respect to Awards granted to Non-Employee Directors or members of the Committee. The Committee may accelerate the exercisability of any or all outstanding Awards at any time for any reason. (d) Termination of Employment, Disability or Death. (i) Except as provided below, an Award may only be exercised while the Grantee is employed by, or providing service to, the Company as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by, or provide service to, the Company for any reason other than "disability", death, or "termination for cause", any Award which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days of the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Award term. Unless otherwise specified by the Committee, any of the Grantee's Awards that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of a "termination for cause" by the Company, any Award held by the Grantee shall terminate as of the date the Grantee ceases to be employed by, or provide service to, the Company. (iii) In the event the Grantee ceases to be employed by, or provide service to, the Company because the Grantee is "disabled", any Award which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Award term. Any of the Grantee's Awards which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (iv) If the Grantee dies while employed by, or providing service to, the Company or within 90 days after the date on which the Grantee ceases to be employed, or provide service, on account of a termination of employment or service specified in Section 10(d)(i) above (or within such other period of time as may be specified by the Committee), any Award that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Award term. Any of the Grantee's Awards that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (v) For purposes of this Section 10(d): 7 8 (A) The term "Company" shall mean the Company and its parent and subsidiary corporations. (B) "Employed by, or providing service to, the Company" shall mean employment as an Employee or the provision of services to the Company as a Key Advisor or member of the Board (so that, for purposes of exercising Awards, a Grantee shall not be considered to have terminated employment or ceased to provide services until the Grantee ceases to be an Employee, Key Advisor or member of the Board). (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (D) "Termination for cause" shall mean a finding by the Committee that the Grantee has breached his or her employment or service contract with the Company, or has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, or has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information. In the event a Grantee's employment or service is terminated for cause, in addition to the immediate termination of all Awards, the Grantee shall automatically forfeit all shares underlying any exercised portion of an Award for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Grantee for such shares. 11. Withholding of Taxes (a) Required Withholding. All Awards under the Plan shall be granted subject to any applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from wages paid to the Grantee any federal, state or local taxes required by law to be withheld with respect to Awards, or the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to withhold. (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to an Award by having shares withheld up to an amount that does not exceed the Grantee's maximum marginal tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. 8 9 12. Transferability of Awards. (a) Except as provided below, only the Grantee or his or her authorized representative may exercise rights under an Award. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Nonqualified Options, if permitted in any specific case by the Committee in its sole discretion, pursuant to a qualified domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder). When a Grantee dies, the representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members or other persons or entities according to such terms as the Committee may determine. 13. Change of Control of the Company As used herein, a "Change of Control" shall be deemed to have occurred if: (a) After the effective date of the Plan, any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the voting power of the then outstanding securities of the Company, except where the acquisition is approved by the Board; provided, however, that the acquisition of securities of the Company pursuant to the terms of that certain Securities Purchase Agreement dated May 14, 2001 between the Company and Image Investor Portfolio, a separate series of Memphis Angels, LLC shall not be deemed a Change of Control within the meaning of this Section 13; (b) The stockholders of the Company approve (or, if stockholder approval is not required, the Board approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the stockholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such stockholders to a majority of all votes to which all stockholders of the surviving corporation would be entitled in the election of directors, or where the members of the Board, immediately prior to the merger or consolidation, would not, immediately after the merger or consolidation, constitute a majority of the board of directors of the surviving corporation, (ii) a sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company; (c) Any person has commenced a tender offer or exchange offer for 35% or more of the voting power of the then outstanding shares of the Company; or 9 10 (d) After this Plan is approved by the stockholders of the Company, directors are elected such that a majority of the members of the Board shall have been members of the Board for less than two years, unless the election or nomination for election of each new director who was not a director at the beginning of such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 14. Consequences of a Change of Control (a) Upon a Change of Control, unless the Committee determines otherwise, (i) the Company shall provide each Grantee with outstanding Awards written notice of such Change of Control and (ii) all outstanding Awards shall automatically accelerate and become fully exercisable. (b) In addition, upon a Change of Control described in Section 13(b)(i) where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Awards that are not exercised shall be assumed by, or replaced with comparable options, restricted stock awards stock appreciation rights, performance shares, dividend equivalent payments or other stock based awards by, the surviving corporation. Any replacement options or restricted stock or stock appreciation rights, performance shares, dividend equivalent payments or other stock based awards shall entitle the Grantee to receive the same amount and type of securities as the Grantee would have received as a result of the Change of Control had the Grantee exercised the Awards immediately prior to the Change of Control. (c) Notwithstanding the foregoing, in the event of a Change of Control, the Committee may require that Grantees surrender their outstanding Awards in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's outstanding Awards exceeds the Exercise Price of the Awards. (d) Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (c) above) that would make the Change of Control ineligible for pooling of interest accounting treatment or that would make the Change of Control ineligible for desired tax treatment if, in the absence of such right, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 15. Amendment and Termination of the Plan (a) Amendment. The Board may amend or terminate the Plan at any time; provided, however, that any amendment to the Plan that requires stockholder approval shall be submitted to a vote of stockholders in order to comply with Section 162(m) of the Code if such Section is applicable to the Plan. 10 11 (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date unless terminated earlier by the Board or unless extended by the Board with the approval of the stockholders. (c) Termination and Amendment of Outstanding Awards. A termination or amendment of the Plan that occurs after an Award is granted shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 22(b). The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Award. Whether or not the Plan has terminated, an outstanding Award may be terminated or modified under Sections 14 and 22(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 16. Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Awards under this Plan. In no event shall interest be paid or accrued on any Awards. 17. Rights of Participants Nothing in this Plan shall entitle any Employee, Key Advisor or other person to any claim or right to be granted an Award under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 18. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 19. Requirements for Issuance of Shares No Company Stock shall be issued or transferred in connection with any Award hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Award granted to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official 11 12 interpretation thereof and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and interpretations, including any requirement that a legend or legends be placed thereon. 20. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a section, the content of the section shall control. 21. Effective Date of the Plan. This Plan was adopted by the Board of Directors on June 28, 2001. 22. Miscellaneous (a) Awards in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to grant Awards under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Awards granted to employees thereof who become Employees of the Company, or for other proper corporate purpose, or (ii) limit the right of the Company to grant stock options or restricted stock awards or to grant stock appreciation rights, performance shares, dividend equivalent payments or other stock based awards or make other awards outside of this Plan. Without limiting the foregoing, the Committee may grant Awards to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company in substitution for a stock option or restricted stock award made by such corporation. The Committee shall prescribe the provisions of the substitute Awards. (b) Compliance with Law. The Plan, the grant and exercise of Awards, and the obligations of the Company to issue or transfer shares of Company Stock under Awards shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. The Committee may revoke any grant if it is contrary to law or modify a grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this section. (c) Ownership of Stock. A Grantee or Successor Grantee shall have no rights as a stockholder with respect to any shares of Company Stock covered by an Award until the shares are issued or transferred to the Grantee or Successor Grantee on the stock transfer records of the Company. Once an Award is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the 12 13 Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Award is exercised, except as provided in Section 2 of the Plan. (d) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the laws of the State of Delaware. 13 EX-10.2 4 g71149ex10-2.txt EMPLOYMENT AGREEMENT / DON STRICKLAND 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement is made and entered into effective as of July 1, 2001 by and between Internet Pictures Corporation, a Delaware corporation having an office at 3160 Crow Canyon, Fourth Floor, San Ramon, California 94583, and the individual named in Exhibit A ("Executive"). WHEREAS, the Company wishes to employ Executive with the title in Exhibit A and upon the terms and conditions hereinafter set forth, and Executive desires to serve in such capacities upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and of the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. Term. Executive's employment under this Agreement shall commence on the Effective Date set forth in Exhibit A and shall continue indefinitely as set forth herein until termination of Executive's employment as provided in Section 6 hereof. If Executive's employment is terminated pursuant to Section 6 hereof, the Term of Employment shall expire as of the Termination Date (as defined in Section 6 hereof). 2. Duties and Activities. During the Term of Employment, Executive will faithfully perform those duties and responsibilities commensurate with the position set forth in Exhibit A. Executive shall participate and perform such other responsibilities and duties as may be reasonably determined in the future by the Company's Board of Directors ("the Board"). Executive will devote Executive's entire business time, attention and energy and use best efforts to advance the business and welfare of the Company in furtherance of the policies established by the Board. Executive shall not engage in any other employment activities for any direct of indirect remuneration, except that Executive may continue to devote reasonable time to the management of personal investments, participation in community and charitable affairs, and the activities as further set forth in Exhibit B hereto, so long as such activities do not interfere with Executive's performance of his duties under this Agreement. 3. Former Employers. Executive represents and warrants that employment by the Company will not conflict with and will not be constrained by any prior or current employment, consulting or other relationship. Executive represents and warrants that Executive does not possess confidential information arising out of any such employment, consulting or other relationship, which in Executive's best judgment, would be utilized in connection with employment by the Company. Executive has documented in Exhibit C any prior inventions claimed by Executive. 2 4. Compensation. 4.1 Base Salary. In consideration for Executive's services under this Agreement, Executive will be paid a salary at an annual rate set forth in Exhibit A, or at such other annual salary rate as determined by the Board or its Compensation Committee, but in any event at least equal to the salary rate in effect immediately preceding any change thereto. Executive's annual salary rate in effect from time to time is referred to herein as the "Base Salary". Executive's Base Salary shall be paid in periodic installments at such times as salaries are generally paid to other senior executives of the Company. 4.2 Earned Bonus, Performance Bonus and Other Compensation. Executive shall be eligible to receive Bonus Compensation equal to the Bonus Rate set forth in Exhibit A at target and based on objectives to be mutually defined. Bonus Compensation shall be paid on terms agreed to and documented in writing. Executive's compensation by payments of Base Salary and Bonus Compensation shall not be deemed exclusive and shall not prevent Executive from participating in any other incentive compensation, profit sharing or benefit plan made available by the Company to its executive Executives generally. The Base Salary payments hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay Executive's Base Salary. 4.3 Stock Option Grant. The Company shall grant to Executive an incentive stock option (the "Option"), (to the extent permitted by the applicable provisions of Section 422 of the Internal Revenue Code) to purchase the number of shares of the common stock of the Company as set forth in Exhibit A. Executive shall be entitled to option shares in an amount and consistent with option shares being granted to the Company's other senior executive officers, which option shares will be issued pursuant to the Company's employee stock option plans, subject to approval by the Board of Directors, and shall include the following terms: (1) The option shares will vest as set forth in Exhibit A. (2) The exercise price for the option shall be at the closing price on the date the Board of Directors approves the option (the "Date of Grant"), as appropriately adjusted for stock splits, stock dividends, and the like. (3) The option shall be exercisable upon vesting or within 90 days after termination of Executive's employment with the Company. Termination shall occur after all Continuation Payments, as defined in Section 7, have been made by the Company to Executive. 2 3 (4) Issuance of the option shall be in accordance with all applicable securities laws and the other terms and conditions of the Company's Stock Option Plan and form of the Stock Option Agreement. (5) The Option will have a term of ten years. (6) In the event of a Change of Control (as defined in the Company's 2001 Equity Incentive Plan), all unvested options will vest and become fully exercisable. In the event of the death of the Executive; or the Permanent Disability of Executive (as defined in Section 6.1 (b) hereof), vesting of options will continue for the 90-day period thereafter. In the event of the termination of Executive without Cause (as defined in Section 6.1 (c) hereof) or termination by Executive for Good Reason (as defined in Section 6.1(e), then vesting of options will continue in accordance with their terms over the 6 month severance period. 5. Benefits. 5.1 Participation. Executive shall be entitled to participate in all fringe benefit programs maintained by the Company and made available to its executive officers from time to time. The Company shall maintain for Executive disability, health, vision, dental and prescription drug coverage comparable to that provided to executives of the Company. Executive shall be entitled to four (4) weeks of paid vacation per year, which vacation time shall accrue in accordance with the Company's policies. 5.2 Expenses. The Company will pay or reimburse Executive for such reasonable travel, entertainment or other business expenses incurred on behalf of the Company in connection with the performance of Executive's duties hereunder but only to the extent that such expenses were either specifically authorized by the Company or incurred in accordance with policies established by the Company for executives and provided that Executive shall furnish the Company with such evidence relating to such expenses as the Company may reasonably require to substantiate such expenses for tax purposes. 6. Termination of Employment. 6.1 Circumstances of Termination. Notwithstanding the terms set forth in Section 1 hereof, Executive's employment shall terminate under any of the following circumstances and the date of such an occurrence, unless otherwise provided below, shall be Executive's "Termination Date": (a) Death. Immediately, in the event of Executive's death. (b) Permanent Disability. At the option of the Company, if Executive becomes physically or mentally incapacitated or disabled so that (i) Executive is unable 3 4 to perform for the Company substantially the same services as Executive performed prior to incurring such incapacity or disability or to devote a substantial portion of Executive's business time or use Executive's best efforts to advance the business and welfare of the Company or otherwise to perform Executive's duties under this Agreement, (ii) such condition exists for an aggregate of six (6) months in any twelve (12) month consecutive calendar months, and (iii) such incapacity or disability is incapable of reasonable accommodations under applicable law, including but not limited to the Americans with Disabilities Act of 1990, as amended (a "Permanent Disability"), the Company, at its option and expense, is entitled to retain a physician reasonably acceptable to Executive to confirm the existence of such incapacity or disability, and the determination of such physician is binding upon the Company and Executive. (c) Cause. At the option of the Company, if Executive: (i) has been convicted of a felony; or (ii) has embezzled or misappropriated Company funds or property or that of the Company's customers, suppliers or affiliates; or (iii) has violated any material term of this Employment Agreement; or (iv) has demonstrated gross negligence or willful misconduct in connection with the performance of Executive's duties hereunder; provided, however, that with respect to subsections (iii) and (iv) above, the Company's right to terminate Executive shall be conditioned on (A) the Company giving Executive written notice specifically referring to the pertinent subsection above and describing the specific circumstances and/or actions purportedly giving rise to the occurrence of such item; and (B) failure by Executive, within ten (10) days after receipt of any such notice to cease the actions and/or reinstate or rectify the circumstances described in such notice to the reasonable satisfaction of the Board. With respect to these subsections, the Company shall have the right to place Executive on administrative leave pending investigation of the circumstance(s) or action(s) purportedly giving rise to the occurrence of such items. (d) Without Cause. At the option of the Company at any time for any reason other than those referred to above or for no reason at all, whereupon the Company shall be obligated to make those payments set forth in Section 7 hereof but if, and only if, Executive executes a mutual, valid and comprehensive release of any and all claims that the Executive may have against the Company in a form provided by the Company. (e) Resignation for Good Reason. (i) Executive, at Executive option, may resign for "Good Reason": 4 5 (1) because the Company has unreasonably reduced the role or responsibilities of Executive; (2) because the Company has reduced Executive's Base Salary from the level in effect immediately prior to such change, with the exception of a company-wide reduction of compensation due to economic considerations, provided that the foregoing shall not limit or derogate from the Company's obligations set forth in Section 4 above; (3) because the Company has breached any material term of this Agreement other than as noted in subsections (1) and (2) above; (4) because the Company requests Executive to relocate; or (5) the Company has relocated Executive's principal office location more than 20 miles from its current location. In the event that Executive terminates this Agreement for Good Reason, the Company shall become obligated to make those payments set forth in Section 7 hereof. 6.2 Notice of Termination. Any intent to terminate employment by Executive pursuant to Section 6.1(e) shall be communicated by written notice to the Company setting forth in detail the specific actions deemed to constitute Good Reason. If the Company does not respond within ten (10) days from such notice, the resignation shall be deemed effective. The Company may, within the ten (10) day period, correct such condition giving rise to Executive's notice or dispute Executive's claims by giving written notice of such dispute. 6.3 At-Will Employment. Notwithstanding the Company's obligation described in Sections 6 and 7, Executive's employment with the Company will be on an "at will" basis, meaning that either Executive or the Company may terminate Executive's employment at any time for any reason or no reason, without further obligation or liability. 6.4 Resignation. Upon termination of employment, Executive shall be deemed to have resigned from the Board of Directors of the Company if Executive was a director. 6.5 Cooperation. After notice of termination and the 60 days thereafter, Executive shall cooperate with the Company, as reasonably requested by the Company, to effect a transition of Executive's responsibilities and to ensure that the Company is aware of all matters being handled by Executive. 5 6 7. Payments Upon Termination of Employment. 7.1 Payments. In addition to any rights Executive may have under Section 4.3 on the Termination Date: (a) If the Company terminates Executive's employment for Cause or if Executive voluntarily terminates employment without Good Reason, the Company's obligation to compensate Executive shall in all respects cease as of the Termination Date, except that the Company shall pay to Executive within 30 days the Base Salary accrued under Section 4.1, a pro-rata amount of any Bonus or other compensation earned under Section 4.3, the value of accrued vacation time pursuant to Section 5.1 hereof, and the reimbursable expenses incurred under Section 5.2 of this Agreement up to such Termination Date (the "Accrued Obligations"). (b) If Executive's employment is terminated due to the death of Executive, the Company's obligation to compensate Executive shall in all respects cease as of the Termination Date, except that within thirty (30) days after the Termination Date, the Company shall pay Executive's estate or legal representative the Accrued Obligations. (c) If Executive's employment is terminated upon the Permanent Disability of Executive, the Company's obligation to compensate Executive with respect to Base Salary (as in effect on the Termination Date) shall continue for up to six (6) months or until Executive is eligible for long-term disability payments from the Company's insurance provider, whichever is sooner. In addition, the Company shall pay Executive any Accrued Obligations within 30 days of termination; and (d) If Executive's employment is terminated by the Company pursuant to Section 6.1(d), or by Executive pursuant to Section 6.1(e) the Company's obligation to compensate Executive shall in all respects cease, except that within thirty (30) days after the Termination Date the Company shall pay Executive the Accrued Obligations and during the period ending on the expiration of the sixth month following the Termination Date the Company shall pay to Executive each month one-twelfth (1/12th) of the annual Base Salary of Executive in effect at the Termination Date (the "Continuation Payments"). The Company shall be excused from the obligations of this Section 7.1(d) if Executive breaches Executive's obligations under this Agreement or the Confidentiality Agreement. Notwithstanding the foregoing, in the event such termination occurs within two (2) years of a Change of Control of the Company, the full amount of the Continuation Payments will be paid in a lump sum within ten (10) days of such Change of Control. 6 7 7.2 Medical Benefits. If Executive's employment is terminated by the Company pursuant to Section 6.1(d) or by Executive pursuant to Section 6.1(e), the Company shall reimburse the Executive for the amount of Executive's premium payments for group health coverage, if any, elected by the Executive pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"); provided, however, that the Executive shall be solely responsible for all matters relating to Executive's continuation of coverage pursuant to COBRA, including (without limitation) Executive's election of such coverage and Executive's timely payment of premiums; provided further , that upon the earlier to occur of (C) the time that the Executive no longer constitutes a Qualified Beneficiary (as such term is defined in Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended) and (D) the date six (6) months following the Executive's termination, the Company's obligations to reimburse the Executive under this subsection (ii) shall cease. 7.3 Effect on this Agreement. Any termination of Executive's employment under this Agreement shall not affect the continuing operation and effect of this Section and Section 8 hereof, which shall continue in full force and effect with respect to the Company and Executive, and their heirs, successors and assigns. Nothing in Section 6 hereof shall be deemed to operate as a release, settlement or discharge of any liability of Executive to the Company or others from any action or omission by Executive enumerated in Section 6.1 (c) hereof as a possible basis for termination of Executive's employment for Cause. 7.4 No Duty to Mitigate. Subject to the provisions of the Confidentiality Agreement and Section 8 of this Agreement, Executive shall be free to accept such employment and engage in such business as Executive may desire following the termination of employment hereunder, and no compensation received by Executive therefrom shall reduce or affect any payments required to be made by the Company hereunder except to the extent expressly provided herein or in the benefit plans of the Company. 8. Post-Employment Activities. 8.1 Conditional Nature of Severance Payments; Non-Competition. Executive acknowledges that the nature of the Company's business is such that during the term of employment and for twelve (12) months following termination of Executive's employment with the Company (the "Noncompete Period"): 8.1.1 if Executive were to become employed by, or substantially involved in, the business of a Competitor, it would be very difficult for the Executive not to rely on or use the Company's trade secrets and confidential information. A "Competitor" is defined as any person, entity or division, 7 8 whether now existing or hereafter established, which directly competes with the products and services of the Company. To avoid the inevitable disclosure of the Company's trade secrets and confidential information, Executive agrees and acknowledges that the Executive's right to receive the severance payments and other benefits set forth in Section 7 (to the extent the Executive is otherwise entitled to such payments) shall be conditioned upon (a) the Executive not directly or indirectly engaging in (whether as an employee, consultant, proprietor, partner, director or otherwise), nor having any ownership interest directly or indirectly in more than 1% in, or participating in the financing, operation, management or control of, a Competitor; and (b) Executive continuing to observe, and not be in breach of, the provisions of the Confidentiality Agreement and Invention Assignment Agreement (the "Confidential Agreement") entered into by Executive and the Company. Upon any breach of this Section or the Confidentiality Agreement, all severance payments pursuant to Section 7 shall immediately cease. The obligations under the Confidential Agreement shall survive termination of this Agreement for any reason. 8.1.2 Executive shall not, without the prior written consent of the Company, directly or indirectly, (i) solicit, request, cause or induce any person who is at the time, or 12 months prior thereto had been, an employee of or a consultant of the Company to leave the employ of or terminate such person's relationship with the Company or (ii) attempt to limit or interfere with any business agreement or relationship existing between the Company and/or its affiliates with a third party. 8.1.3 Executive shall not disparage the business reputation of the Company (or its management team) or take any actions that are harmful to the Company's goodwill with its customers, content providers, bandwidth or other network infrastructure providers, vendors, employees, the media or the public. Executive recognizes that such actions would cause irreparable harm for which there is no adequate remedy at law and that the Company may seek in state or federal court, and is entitled to a temporary restraining order and to preliminary and permanent injunctive relief in state or federal court to stop any such conduct or statements for any breach or threatened breach of this Section 8 during 8 9 the term of employment and for a period of two years thereafter. 8.1.4 The Company spends considerable amounts of time, money and effort in developing and maintaining good will in its industry. Executive agrees the covenants contained within this Section 8: (i) are reasonable and necessary in all respects to protect the goodwill, trade secrets, confidential information, and business interests of Company; (ii) are not oppressive to Executive; and (iii) do not impose any greater restraint on Executive than is reasonably necessary to protect the goodwill, trade secrets, confidential information and legitimate business interests of Company. 8.1.5 Executive acknowledges and agrees that promises made by the Company in this Agreement such as (i) the establishment of an employment relationship and (ii) the commitment to provide severance compensation in the event of the termination of Executive's employment for reasons other than Cause (subject to certain requirements on the part of Executive), constitute one form of consideration for Executive's agreement to and compliance with the restrictive covenants in this Agreement. Executive acknowledges and agrees that Company's agreement to provide Executive with access to Company's confidential and proprietary information is a separate form of consideration supporting the restrictive covenants in this Agreement. Executive acknowledges and agrees that the Company's agreement to permit the use of the Company's goodwill with the Company's customers, investors and content providers is a separate form of consideration supporting the restrictive covenants in this Agreement. Executive acknowledges and agrees that the Company's commitment to providing Executive with unique skill development and training is a separate form of consideration supporting the restrictive covenants in this Agreement. 8.2 Exclusions. No provision of this Agreement shall be construed to preclude Executive from performing the same services which the Company hereby retains Executive to perform for any person or entity which is not a Competitor of the Company upon the expiration or termination of Executive's employment (or any post-employment consultation) so long as Executive does not thereby violate any term of the Confidentiality Agreement. 9 10 9. Remedies. Executive's obligations under the Confidentiality Agreement under Section 8 of this Agreement shall survive the expiration or termination of Executive's employment (whether through Executive's resignation or otherwise) with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of the Confidentiality Agreement or Section 8 would be inadequate and Executive therefore agree that the Company shall be entitled to injunctive relief in any court of competent jurisdiction in the case of any such breach or threatened breach. Executive acknowledges that this Section does not limit the Company's right to seek monetary damages for breach of this Agreement. 10. Miscellaneous. 10.1 Notice. All notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telecopy, (iii) send by overnight courier, or (iv) sent by registered or certified mail, return receipt required, postage prepaid. If to the Company: Internet Pictures Corporation 3160 Crow Canyon Road Fourth Floor San Ramon, CA 94583 If to Executive: Home address of Executive as maintained in the Company's personnel records. 10.2 Modification and No Waiver of Breach. No waiver or modification of this Agreement shall be binding unless it is in writing signed by the parties hereto. No waiver by a party of a breach hereof by the other party shall be deemed to constitute a waiver of a future breach, whether of a similar or dissimilar nature, except to the extent specifically provided in any written waiver under this Section. 10.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA EXCLUDING ITS CONFLICT OF LAW PRINCIPALS. ALL QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE HEREOF AND REMEDIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW. 10 11 10.4. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement. 10.5 Captions. The captions used herein are for ease of reference only and shall not define or limit the provisions hereof. 10.6 Assistance in Litigation. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become a party; provided, however, that such assistance following termination shall be furnished at mutually agreeable times and for mutually agreeable compensation. 10.7 Entire Agreement. This Agreement, any written agreement referred to herein and the Exhibits hereto constitute the entire agreement between the parties hereto relating to the matters encompassed herby and supersede any prior or contemporaneous written or oral agreements. 10.8 Successors. (a) Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under the Agreement, the term "Company" shall include successor to the Company's business and assets that executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) The terms of this Agreement and all rights of Executive hereunder shall insure to the benefit or, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, devisees and legatees. 10.9 Arbitration. Any dispute, controversy, or claim arising out of, in connection with, or in relation to this Agreement and its exhibits, except as provided in Section 9 hereof, shall be settled by arbitration in California pursuant to the Commercial Rules then in effect of the American Arbitration Association and in no other place. Any award or 11 12 determination shall be final, binding and conclusive upon the parties, and a judgment rendered may be entered in any court having jurisdiction thereof. Executive and the Company knowingly waive any and all rights to a jury trial in any form. The parties hereby expressly waive punitive damages, and under no circumstances shall an award contain any amount that in any way reflects punitive damages. Each party shall bear its own expenses relating to the arbitration, unless otherwise determined in arbitration. It is intended that controversies or claims submitted to arbitration under this Section shall remain confidential, and to that end it is agreed by the parties that neither the facts disclosed in the arbitration, the issues arbitrated, nor the views or opinions of any persons concerning them, shall be disclosed to third person at any time, except to the extent necessary to enforce an award or judgment or as require by law or in response to legal process or in connection with such arbitration. Nothing in this Section shall limit the Company's right to seek equitable remedies in any court of competent jurisdiction for breach of this Agreement. IN WITNESS HEREOF, this Agreement has been duly executed as of the Effective date written in Exhibit A. INTERNET PICTURES CORPORATION By: /s/ William J. Razzouk ---------------------------------------- Name: William J. Razzouk -------------------------------------- Title: Chairman of the Board ------------------------------------- /s/ Don Strickland ------------------------------------------- Executive 12 13 EXHIBIT A EFFECTIVE DATE OF EMPLOYMENT AGREEMENT: JULY 01, 2001 NAME: DON STRICKLAND TITLE: PRESIDENT AND CEO DIRECT SUPERVISOR: BOARD OF DIRECTORS ANNUAL BASE SALARY: 335,000 TARGET BONUS RATE: 50% OPTIONS: NUMBER: 750,000 VESTING START DATE: JUNE 28TH, 2001 VESTING TERMS: 25% VESTING IMMEDIATELY ON GRANT DATE, 25% ON JANUARY 1, 2002 25% JULY 1, 2002, THEN 1/12TH EACH MONTH THEREAFTER FOR FULL VESTING TWO YEARS FROM GRANT DATE. OTHER (STATE "NONE" IF NO OTHER ITEMS SHOULD BE NOTED): NONE 13 14 EXHIBIT B OTHER POSITIONS 14 15 EXHIBIT C PRIOR INVENTIONS 15 EX-10.3 5 g71149ex10-3.txt EMPLOYMENT AGREEMENT / PAUL FARMER 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT This Employment Agreement is made and entered into effective as of July 1, 2001 by and between Internet Pictures Corporation, a Delaware corporation having an office at 3160 Crow Canyon, Fourth Floor, San Ramon, California 94583, and the individual named in Exhibit A ("Executive"). WHEREAS, the Company wishes to employ Executive with the title in Exhibit A and upon the terms and conditions hereinafter set forth, and Executive desires to serve in such capacities upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and of the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive hereby agree as follows: 1. Term. Executive's employment under this Agreement shall commence on the Effective Date set forth in Exhibit A and shall continue indefinitely as set forth herein until termination of Executive's employment as provided in Section 6 hereof. If Executive's employment is terminated pursuant to Section 6 hereof, the Term of Employment shall expire as of the Termination Date (as defined in Section 6 hereof). 2. Duties and Activities. During the Term of Employment, Executive will faithfully perform those duties and responsibilities commensurate with the position set forth in Exhibit A. Executive shall participate and perform such other responsibilities and duties as may be reasonably determined in the future by the Company's Chief Executive Officer ("CEO") or other officer designated in Exhibit A as Executive's Direct Supervisor. Executive will devote Executive's entire business time, attention and energy and use best efforts to advance the business and welfare of the Company in furtherance of the policies established by the CEO. Executive shall report to officers on the Senior Executive level (Senior Vice President, Executive Vice President, President, CEO) as the CEO may determine. Executive shall not engage in any other employment activities for any direct of indirect remuneration, except that Executive may continue to devote reasonable time to the management of personal investments, participation in community and charitable affairs, and the activities as further set forth in Exhibit B hereto, so long as such activities do not interfere with Executive's performance of his duties under this Agreement. 3. Former Employers. Executive represents and warrants that employment by the Company will not conflict with and will not be constrained by any prior or current employment, consulting or other relationship. Executive represents and warrants that Executive does not possess confidential information arising out of any such employment, consulting or other relationship, which in Executive's best judgment, would be utilized in connection with employment by the Company. Executive has documented in Exhibit C any prior inventions claimed by Executive. 2 4. Compensation. 4.1 Base Salary. In consideration for Executive's services under this Agreement, Executive will be paid a salary at an annual rate set forth in Exhibit A, or at such other annual salary rate as determined by the CEO, the Board or its Compensation Committee, but in any event at least equal to the salary rate in effect immediately preceding any change thereto. Executive's annual salary rate in effect from time to time is referred to herein as the "Base Salary". Executive's Base Salary shall be paid in periodic installments at such times as salaries are generally paid to other senior executives of the Company. 4.2 Earned Bonus, Performance Bonus and Other Compensation. Executive shall be eligible to receive Bonus Compensation equal to the Bonus Rate set forth in Exhibit A at target and based on objectives to be mutually defined. Bonus Compensation shall be paid on terms agreed to and documented in writing. Executive's compensation by payments of Base Salary and Bonus Compensation shall not be deemed exclusive and shall not prevent Executive from participating in any other incentive compensation, profit sharing or benefit plan made available by the Company to its executive Executives generally. The Base Salary payments hereunder shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay Executive's Base Salary. 4.3 Stock Option Grant. The Company shall grant to Executive an incentive stock option (the "Option"), (to the extent permitted by the applicable provisions of Section 422 of the Internal Revenue Code) to purchase the number of shares of the common stock of the Company as set forth in Exhibit A. Executive shall be entitled to option shares in an amount and consistent with option shares being granted to the Company's other senior executive officers, which option shares will be issued pursuant to the Company's employee stock option plans, subject to approval by the Board of Directors, and shall include the following terms: (1) The option shares will vest as set forth in Exhibit A. (2) The exercise price for the option shall be at the closing price on the date the Board of Directors approves the option (the "Date of Grant"), as appropriately adjusted for stock splits, stock dividends, and the like. (3) The option shall be exercisable upon vesting or within 90 days after termination of Executive's employment with the Company. Termination shall occur after all Continuation Payments, as defined in Section 7, have been made by the Company to Executive. 2 3 (4) Issuance of the option shall be in accordance with all applicable securities laws and the other terms and conditions of the Company's Stock Option Plan and form of the Stock Option Agreement. (5) The Option will have a term of ten years. (6) In the event of a Change of Control (as defined in the Company's 2001 Equity Incentive Plan), all unvested options will vest and become fully exercisable. In the event of the death of the Executive; or the Permanent Disability of Executive (as defined in Section 6.1 (b) hereof), vesting of options will continue for the 90 day period thereafter. In the event of the termination of Executive without Cause (as defined in Section 6.1 (c) hereof) or termination by Executive for Good Reason (as defined in Section 6.1(e), then vesting of options will continue in accordance with their terms over the 6 month severance period. 5. Benefits. 5.1 Participation. Executive shall be entitled to participate in all fringe benefit programs maintained by the Company and made available to its executive officers from time to time. The Company shall maintain for Executive disability, health, vision, dental and prescription drug coverage comparable to that provided to executives of the Company. Executive shall be entitled to four (4) weeks of paid vacation per year, which vacation time shall accrue in accordance with the Company's policies. 5.2 Expenses. The Company will pay or reimburse Executive for such reasonable travel, entertainment or other business expenses incurred on behalf of the Company in connection with the performance of Executive's duties hereunder but only to the extent that such expenses were either specifically authorized by the Company or incurred in accordance with policies established by the CEO for executives and provided that Executive shall furnish the Company with such evidence relating to such expenses as the Company may reasonably require to substantiate such expenses for tax purposes. 6. Termination of Employment. 6.1 Circumstances of Termination. Notwithstanding the terms set forth in Section 1 hereof, Executive's employment shall terminate under any of the following circumstances and the date of such an occurrence, unless otherwise provided below, shall be Executive's "Termination Date": (a) Death. Immediately, in the event of Executive's death. (b) Permanent Disability. At the option of the Company, if Executive becomes physically or mentally incapacitated or disabled so that (i) Executive is unable 3 4 to perform for the Company substantially the same services as Executive performed prior to incurring such incapacity or disability or to devote a substantial portion of Executive's business time or use Executive's best efforts to advance the business and welfare of the Company or otherwise to perform Executive's duties under this Agreement, (ii) such condition exists for an aggregate of six (6) months in any twelve (12) month consecutive calendar months, and (iii) such incapacity or disability is incapable of reasonable accommodations under applicable law, including but not limited to the Americans with Disabilities Act of 1990, as amended (a "Permanent Disability"), the Company, at its option and expense, is entitled to retain a physician reasonably acceptable to Executive to confirm the existence of such incapacity or disability, and the determination of such physician is binding upon the Company and Executive. (c) Cause. At the option of the Company, if Executive: (i) has been convicted of a felony; or (ii) has embezzled or misappropriated Company funds or property or that of the Company's customers, suppliers or affiliates; or (iii) has violated any material term of this Employment Agreement; or (iv) has demonstrated gross negligence or willful misconduct in connection with the performance of Executive's duties hereunder; provided, however, that with respect to subsections (iii) and (iv) above, the Company's right to terminate Executive shall be conditioned on (A) the Company giving Executive written notice specifically referring to the pertinent subsection above and describing the specific circumstances and/or actions purportedly giving rise to the occurrence of such item; and (B) failure by Executive, within ten (10) days after receipt of any such notice to cease the actions and/or reinstate or rectify the circumstances described in such notice to the reasonable satisfaction of the CEO. With respect to these subsections, the Company shall have the right to place Executive on administrative leave pending investigation of the circumstance(s) or action(s) purportedly giving rise to the occurrence of such items. (d) Without Cause. At the option of the Company at any time for any reason other than those referred to above or for no reason at all, whereupon the Company shall be obligated to make those payments set forth in Section 7 hereof but if, and only if, Executive executes a mutual, valid and comprehensive release of any and all claims that the Executive may have against the Company in a form provided by the Company. (e) Resignation for Good Reason. (i) Executive, at Executive option, may resign for "Good Reason": 4 5 (1) because the Company has unreasonably reduced the role or responsibilities of Executive; (2) because the Company has reduced Executive's Base Salary from the level in effect immediately prior to such change, with the exception of a company-wide reduction of compensation due to economic considerations, provided that the foregoing shall not limit or derogate from the Company's obligations set forth in Section 4 above; (3) because the Company has breached any material term of this Agreement other than as noted in subsections (1) and (2) above; (4) because the Company requests Executive to relocate; or (5) the Company has relocated Executive's principal office location more than 20 miles from its current location. (6) In the event that Executive terminates this Agreement for Good Reason, the Company shall become obligated to make those payments set forth in Section 7 hereof. 6.2 Notice of Termination. Any intent to terminate employment by Executive pursuant to Section 6.1(e) shall be communicated by written notice to the Company setting forth in detail the specific actions deemed to constitute Good Reason. If the Company does not respond within ten (10) days from such notice, the resignation shall be deemed effective. The Company may, within the ten (10) day period, correct such condition giving rise to Executive's notice or dispute Executive's claims by giving written notice of such dispute. 6.3 At-Will Employment. Notwithstanding the Company's obligation described in Sections 6 and 7, Executive's employment with the Company will be on an "at will" basis, meaning that either Executive or the Company may terminate Executive's employment at any time for any reason or no reason, without further obligation or liability. 6.4 Resignation. Upon termination of employment, Executive shall be deemed to have resigned from the Board of Directors of the Company if Executive was a director. 6.5 Cooperation. After notice of termination and the 60 days thereafter, Executive shall cooperate with the Company, as reasonably requested by the Company, to effect a transition of Executive's 5 6 responsibilities and to ensure that the Company is aware of all matters being handled by Executive. 7. Payments Upon Termination of Employment. 7.1 Payments. In addition to any rights Executive may have under Section 4.3 on the Termination Date: (a) If the Company terminates Executive's employment for Cause or if Executive voluntarily terminates employment without Good Reason, the Company's obligation to compensate Executive shall in all respects cease as of the Termination Date, except that the Company shall pay to Executive within 30 days the Base Salary accrued under Section 4.1, a pro-rata amount of any Bonus or other compensation earned under Section 4.3, the value of accrued vacation time pursuant to Section 5.1 hereof, and the reimbursable expenses incurred under Section 5.2 of this Agreement up to such Termination Date (the "Accrued Obligations"). (b) If Executive's employment is terminated due to the death of Executive, the Company's obligation to compensate Executive shall in all respects cease as of the Termination Date, except that within thirty (30) days after the Termination Date, the Company shall pay Executive's estate or legal representative the Accrued Obligations. (c) If Executive's employment is terminated upon the Permanent Disability of Executive, the Company's obligation to compensate Executive with respect to Base Salary (as in effect on the Termination Date) shall continue for up to six (6) months or until Executive is eligible for long-term disability payments from the Company's insurance provider, whichever is sooner. In addition, the Company shall pay Executive any Accrued Obligations within 30 days of termination; and (d) If Executive's employment is terminated by the Company pursuant to Section 6.1(d), or by Executive pursuant to Section 6.1(e) the Company's obligation to compensate Executive shall in all respects cease, except that within thirty (30) days after the Termination Date the Company shall pay Executive the Accrued Obligations and during the period ending on the expiration of the sixth month following the Termination Date the Company shall pay to Executive each month one-twelfth (1/12th) of the annual Base Salary of Executive in effect at the Termination Date (the "Continuation Payments"). The Company shall be excused from the obligations of this Section 7.1(d) if Executive breaches Executive's obligations under this Agreement or the Confidentiality Agreement. Notwithstanding the foregoing, in the event such termination occurs within two (2) years of a Change of Control of the Company, the full amount of the 6 7 Continuation Payments will be paid in a lump sum within ten (10) days of such Change of Control. 7.2 Medical Benefits.If Executive's employment is terminated by the Company pursuant to Section 6.1(d) or by Executive pursuant to Section 6.1(e), the Company shall reimburse the Executive for the amount of Executive's premium payments for group health coverage, if any, elected by the Executive pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"); provided, however, that the Executive shall be solely responsible for all matters relating to Executive's continuation of coverage pursuant to COBRA, including (without limitation) Executive's election of such coverage and Executive's timely payment of premiums; provided further , that upon the earlier to occur of (C) the time that the Executive no longer constitutes a Qualified Beneficiary (as such term is defined in Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended) and (D) the date six (6) months following the Executive's termination, the Company's obligations to reimburse the Executive under this subsection (ii) shall cease. 7.3 Effect on this Agreement. Any termination of Executive's employment under this Agreement shall not affect the continuing operation and effect of this Section and Section 8 hereof, which shall continue in full force and effect with respect to the Company and Executive, and their heirs, successors and assigns. Nothing in Section 6 hereof shall be deemed to operate as a release, settlement or discharge of any liability of Executive to the Company or others from any action or omission by Executive enumerated in Section 6.1 (c) hereof as a possible basis for termination of Executive's employment for Cause. 7.4 No Duty to Mitigate. Subject to the provisions of the Confidentiality Agreement and Section 8 of this Agreement, Executive shall be free to accept such employment and engage in such business as Executive may desire following the termination of employment hereunder, and no compensation received by Executive therefrom shall reduce or affect any payments required to be made by the Company hereunder except to the extent expressly provided herein or in the benefit plans of the Company. 8. Post-Employment Activities. 8.1 Conditional Nature of Severance Payments; Non-Competition. Executive acknowledges that the nature of the Company's business is such that during the term of employment and for twelve (12) months following termination of Executive's employment with the Company (the "Noncompete Period"): 8.1.1 if Executive were to become employed by, or substantially involved in, the business of a Competitor, it would be very 7 8 difficult for the Executive not to rely on or use the Company's trade secrets and confidential information. A "Competitor" is defined as any person, entity or division, whether now existing or hereafter established, which directly competes with the products and services of the Company. To avoid the inevitable disclosure of the Company's trade secrets and confidential information, Executive agrees and acknowledges that the Executive's right to receive the severance payments and other benefits set forth in Section 7 (to the extent the Executive is otherwise entitled to such payments) shall be conditioned upon (a) the Executive not directly or indirectly engaging in (whether as an employee, consultant, proprietor, partner, director or otherwise), nor having any ownership interest directly or indirectly in more than 1% in, or participating in the financing, operation, management or control of, a Competitor; and (b) Executive continuing to observe, and not be in breach of, the provisions of the Confidentiality Agreement and Invention Assignment Agreement (the "Confidential Agreement") entered into by Executive and the Company. Upon any breach of this Section or the Confidentiality Agreement, all severance payments pursuant to Section 7 shall immediately cease. The obligations under the Confidential Agreement shall survive termination of this Agreement for any reason. 8.1.2 Executive shall not, without the prior written consent of the Company, directly or indirectly, (i) solicit, request, cause or induce any person who is at the time, or 12 months prior thereto had been, an employee of or a consultant of the Company to leave the employ of or terminate such person's relationship with the Company or (ii) attempt to limit or interfere with any business agreement or relationship existing between the Company and/or its affiliates with a third party. 8.1.3 Executive shall not disparage the business reputation of the Company (or its management team) or take any actions that are harmful to the Company's goodwill with its customers, content providers, bandwidth or other network infrastructure providers, vendors, employees, the media or the public. Executive recognizes that such actions would cause irreparable harm for which there is no adequate remedy at law and that the Company may seek in state or federal court, and is entitled to a temporary restraining 8 9 order and to preliminary and permanent injunctive relief in state or federal court to stop any such conduct or statements for any breach or threatened breach of this Section 8 during the term of employment and for a period of two years thereafter. 8.1.4 The Company spends considerable amounts of time, money and effort in developing and maintaining good will in its industry. Executive agrees the covenants contained within this Section 8: (i) are reasonable and necessary in all respects to protect the goodwill, trade secrets, confidential information, and business interests of Company; (ii) are not oppressive to Executive; and (iii) do not impose any greater restraint on Executive than is reasonably necessary to protect the goodwill, trade secrets, confidential information and legitimate business interests of Company. 8.1.5 Executive acknowledges and agrees that promises made by the Company in this Agreement such as (i) the establishment of an employment relationship and (ii) the commitment to provide severance compensation in the event of the termination of Executive's employment for reasons other than Cause (subject to certain requirements on the part of Executive), constitute one form of consideration for Executive's agreement to and compliance with the restrictive covenants in this Agreement. Executive acknowledges and agrees that Company's agreement to provide Executive with access to Company's confidential and proprietary information is a separate form of consideration supporting the restrictive covenants in this Agreement. Executive acknowledges and agrees that the Company's agreement to permit the use of the Company's goodwill with the Company's customers, investors and content providers is a separate form of consideration supporting the restrictive covenants in this Agreement. Executive acknowledges and agrees that the Company's commitment to providing Executive with unique skill development and training is a separate form of consideration supporting the restrictive covenants in this Agreement. 8.2 Exclusions. No provision of this Agreement shall be construed to preclude Executive from performing the same services which the Company hereby retains Executive to perform for any person or entity which is not a Competitor of the Company upon the expiration or termination of Executive's employment (or any post-employment 9 10 consultation) so long as Executive does not thereby violate any term of the Confidentiality Agreement. 9. Remedies. Executive's obligations under the Confidentiality Agreement under Section 8 of this Agreement shall survive the expiration or termination of Executive's employment (whether through Executive's resignation or otherwise) with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of the Confidentiality Agreement or Section 8 would be inadequate and Executive therefore agree that the Company shall be entitled to injunctive relief in any court of competent jurisdiction in the case of any such breach or threatened breach. Executive acknowledges that this Section does not limit the Company's right to seek monetary damages for breach of this Agreement. 10. Miscellaneous. 10.1 Notice. All notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telecopy, (iii) send by overnight courier, or (iv) sent by registered or certified mail, return receipt required, postage prepaid. If to the Company: Internet Pictures Corporation 3160 Crow Canyon Road Fourth Floor San Ramon, CA 94583 If to Executive: Home address of Executive as maintained in the Company's personnel records. 10.2 Modification and No Waiver of Breach. No waiver or modification of this Agreement shall be binding unless it is in writing signed by the parties hereto. No waiver by a party of a breach hereof by the other party shall be deemed to constitute a waiver of a future breach, whether of a similar or dissimilar nature, except to the extent specifically provided in any written waiver under this Section. 10.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA EXCLUDING ITS CONFILICT OF LAW PRINCIPALS. ALL QUESTIONS RELATING TO THE VALIDITY AND PERFORMANCE 10 11 HEREOF AND REMEDIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW. 10.4. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same agreement. 10.5 Captions. The captions used herein are for ease of reference only and shall not define or limit the provisions hereof. 10.6 Assistance in Litigation. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become a party; provided, however, that such assistance following termination shall be furnished at mutually agreeable times and for mutually agreeable compensation. 10.7 Entire Agreement.This Agreement, any written agreement referred to herein and the Exhibits hereto constitute the entire agreement between the parties hereto relating to the matters encompassed herby and supersede any prior or contemporaneous written or oral agreements. 10.8 Successors. (a) Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under the Agreement, the term "Company" shall include successor to the Company's business and assets that executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) The terms of this Agreement and all rights of Executive hereunder shall insure to the benefit or, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, devisees and legatees. 10.9 Arbitration. Any dispute, controversy, or claim arising out of, in connection with, or in relation to this Agreement and its exhibits, except as 11 12 provided in Section 9 hereof, shall be settled by arbitration in California pursuant to the Commercial Rules then in effect of the American Arbitration Association and in no other place. Any award or determination shall be final, binding and conclusive upon the parties, and a judgment rendered may be entered in any court having jurisdiction thereof. Executive and the Company knowingly waive any and all rights to a jury trial in any form. The parties hereby expressly waive punitive damages, and under no circumstances shall an award contain any amount that in any way reflects punitive damages. Each party shall bear its own expenses relating to the arbitration, unless otherwise determined in arbitration. It is intended that controversies or claims submitted to arbitration under this Section shall remain confidential, and to that end it is agreed by the parties that neither the facts disclosed in the arbitration, the issues arbitrated, nor the views or opinions of any persons concerning them, shall be disclosed to third person at any time, except to the extent necessary to enforce an award or judgment or as require by law or in response to legal process or in connection with such arbitration. Nothing in this Section shall limit the Company's right to seek equitable remedies in any court of competent jurisdiction for breach of this Agreement. IN WITNESS HEREOF, this Agreement has been duly executed as of the Effective date written in Exhibit A. INTERNET PICTURES CORPORATION By: /s/ Sarah Pate --------------------------------------- Name: Sarah Pate ------------------------------------- Title: SVP/GM ------------------------------------ /s/ Paul Farmer ------------------------------------------ Executive 12 13 EXHIBIT A EFFECTIVE DATE OF EMPLOYMENT AGREEMENT: JULY 01, 2001 NAME: PAUL FARMER TITLE: CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT DIRECT SUPERVISOR: DONALD STRICKLAND ANNUAL BASE SALARY: $225,000 TARGET BONUS RATE: 50% OPTIONS: NUMBER: 750,000 VESTING START DATE: JUNE 28TH, 2001 VESTING TERMS: 33.3% VESTING ONE YEAR FROM GRANT DATE, THEN 1/24TH EACH MONTH THEREAFTER FOR FULL VESTING THREE YEARS FROM GRANT DATE. OTHER (STATE "NONE" IF NO OTHER ITEMS SHOULD BE NOTED): NONE 13 14 EXHIBIT B OTHER POSITIONS 14 15 EXHIBIT C PRIOR INVENTIONS 15 -----END PRIVACY-ENHANCED MESSAGE-----