Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G Registration of Securities of a Small-Business 84 323K
Issuer
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 21 66K
Liquidation or Succession
3: EX-3.1 Articles of Incorporation/Organization or By-Laws 5 21K
4: EX-3.2 Articles of Incorporation/Organization or By-Laws 3 16K
5: EX-3.3 Articles of Incorporation/Organization or By-Laws 12 39K
6: EX-4.1 Instrument Defining the Rights of Security Holders 2 14K
7: EX-10.1 Material Contract 10 52K
16: EX-10.10 Material Contract 6 28K
17: EX-10.11 Material Contract 23 78K
18: EX-10.12 Material Contract 53 150K
19: EX-10.13 Material Contract 19 58K
20: EX-10.14 Material Contract 2 17K
21: EX-10.15 Material Contract 20 55K
22: EX-10.16 Material Contract 1 12K
23: EX-10.17 Material Contract 7 48K
24: EX-10.18 Material Contract 2 15K
25: EX-10.19 Material Contract 15 62K
8: EX-10.2 Material Contract 17 53K
26: EX-10.20 Material Contract 8± 42K
27: EX-10.21 Material Contract 10 35K
28: EX-10.22 Material Contract 5 32K
29: EX-10.23 Material Contract 5 33K
30: EX-10.24 Material Contract 5 34K
31: EX-10.25 Material Contract 5 20K
32: EX-10.26 Material Contract 3 21K
33: EX-10.27 Material Contract 17± 78K
34: EX-10.28 Material Contract 3 23K
35: EX-10.29 Material Contract 8 41K
9: EX-10.3 Material Contract 8 30K
36: EX-10.30 Material Contract 4 27K
37: EX-10.31 Material Contract 16 76K
10: EX-10.4 Material Contract 4 23K
11: EX-10.5 Material Contract 6± 33K
12: EX-10.6 Material Contract 10 40K
13: EX-10.7 Material Contract 13 51K
14: EX-10.8 Material Contract 8 24K
15: EX-10.9 Material Contract 2 17K
38: EX-21.1 Subsidiaries of the Registrant 1 10K
39: EX-27.1 Financial Data Schedule (Pre-XBRL) 1 14K
10SB12G — Registration of Securities of a Small-Business Issuer
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
Registration No.__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER
UNDER SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
____________________
PHOTOLOFT.COM
(Name of Small Business Issuer in its Charter)
NEVADA 87-0431036
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
300 ORCHARD CITY DRIVE, SUITE 142 CAMPBELL, CALIFORNIA 95008
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (408) 364-8777
Securities to be registered pursuant to Section 12(b) of the Act:
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
[Enlarge/Download Table]
PHOTOLOFT.COM
FORM 10-SB
Table of Contents
Item 1 Description of Business 2
Item 2 Management's Discussion and Analysis or Plan of Operations 21
Item 3 Description of Properties 36
Item 4 Security Ownership of Certain Beneficial Owners and Management 38
Item 5 Directors, Executive Officers, Promoters and Control Persons 40
Item 6 Executive Compensation 44
Item 7 Certain Relationships and Related Transactions 49
Item 8 Legal Proceedings 52
Item 9 Market For Common Equity and Related Stockholder Matters 52
Item 10 Recent Sales of Unregistered Securities 54
Item 11 Description of Registrant's Securities to be Registered 58
Item 12 Indemnification of Directors and Officers 62
Item 13 Financial Statements 63
Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 63
Item 15 Financial Statements and Exhibits 64
2
INFORMATION REQUIRED IN REGISTRATION STATEMENT
"Photoloft" and "HOWDY" are trademarks and service marks of PhotoLoft.com.
All other trademarks, service marks or tradenames referred to in this
Registration Statement on Form 10-SB ("Registration Statement") are the property
of their respective owners. Except as otherwise required by the context, all
references in this Registration Statement to (a) "we," "us," "our" or
"PhotoLoft.com" refer to the consolidated operations of PhotoLoft.com, a Nevada
corporation, and its wholly-owned subsidiary, PhotoLoft.com, Inc., a California
corporation, (b) "you" refer to prospective investors in our common stock and
other readers of this Registration Statement, (c) the "Web" refer to the World
Wide Web, and (d) the "site" refer to our Web site.
This Registration Statement contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act"), and Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and is subject to the safe harbors created by those
sections. These forward-looking statements are subject to significant risks and
uncertainties, including information included under Items 1 and 2 of this
Registration Statement, which may cause actual results to differ materially from
those discussed in such forward-looking statements. The forward-looking
statements within this Registration Statement are identified by words such as
"believes," "anticipates," "expects," "intends," "may," "will" and other similar
expressions regarding our intent, belief and current expectations. However,
these words are not the exclusive means of identifying such statements. In
addition, any statements which refer to expectations, projections or other
characterizations of future events or circumstances and statements made in the
future tense are forward-looking statements. Readers are cautioned that actual
results may differ materially from those projected in the forward looking
statements as a result of various factors, many of which are beyond our control.
We undertake no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Registration Statement
with the Securities and Exchange Commission ("SEC"). Readers are urged to
carefully review and consider the various disclosures made by us in this
Registration Statement.
This Registration Statement includes statistical data regarding
Photoloft.com and the markets in which it operates. Such data is based on our
records or are taken or derived from information published by various sources,
including Dataquest, Reuters Technology Survey, New Media, Jupiter
Communications, and International Data Corporation. Although these companies
specialize in providing market and strategic information for the information
technology industry, and we believe that data from these companies is generally
reliable, this type of data is inherently imprecise. You are cautioned not to
place undue reliance on this data.
1
ITEM 1. DESCRIPTION OF BUSINESS
PhotoLoft.com is a leading photo-sharing and digital imaging e-commerce
community. Our revolutionary viewing and printing technology allows users to
view, share, and print personal images quickly, easily and inexpensively. Users
can choose from over 90 categories in which to catalogue their images and view
others. This growing list provides users with a quick reference point to access
images of interest to them, while at the same time giving potential advertisers
and sponsors on the site the opportunity to ultra-target their audience. We are
also developing a multi-faceted e-commerce program, including a complete line of
photo-personalized gifts and customized electronic greeting cards, consumables
such as ink, paper and other digital imaging items, and photos offered by
professional photographers.
BACKGROUND
Our predecessor company, AltaVista Technology, Inc. ("AltaVista"), was
formed in November 1993 to take advantage of the burgeoning need for fun and
creative applications for the Internet. The market place was rapidly leaving
behind cumbersome computers that required highly trained operators and was
turning to PC-based computing that allowed people with average computer skills
to enter a new world. AtlaVista began developing imaging software that made
computing even more fun, and the various products that the company designed and
marketed brought images to life on the computer. In 1995 the company introduced
Howdy!, the world's first ever multi-media e-mail tool. Still being shipped
today, the software was an instant success because it was engaging, fun and easy
to use. As a component of this product, AltaVista also established web pages
via e-mail. Over the years, AltaVista developed and marketed the following
products:
Howdy! - an electronic postcard maker for Windows PCs
Howdios - additional postcards for Howdy! owners available on line
Webcannon! - a template-driven Web page authoring "system"
Media Wrangler - a multimedia authoring tool
SmartNet Singles - thematic Internet access kits (27 titles)
Internet Suite - a suite of products designed to get users up and
Running quickly and easily on the Internet
As a software developer, AltaVista followed the traditional revenue model
of bundling its software with Original Equipment Manufacturers ("OEMs"). As
that market evolved into a non-revenue source, we began exploring new ways to
bring products to market at a profit. This coincided with the phenomenal growth
of the Internet and the evolution of Internet users who were rapidly beginning
to utilize the medium as a source of entertainment as well as information. The
expertise of the company was clearly in Internet imaging technology and the
decision was made to aggregate images into a photo-sharing community.
2
We adopted our new business model in June 1998. In August 1998 we sold our
URL (AltaVista.com) to Digital Equipment (Compaq Computer) and changed our name
to PhotoLoft.com, Inc. ("PhotoLoft-California"). The official launch of our new
Web site was in February 1999, the same month that PhotoLoft-California entered
into a reorganization with Data Growth, Inc. ("DGI"), a non-operating public
company incorporated in Nevada. Under the terms of the reorganization,
PhotoLoft-California shareholders received shares of DGI in exchange for their
shares of PhotoLoft-California common stock, PhotoLoft-California became a
wholly-owned subsidiary of DGI, all of the executive officers and directors of
DGI resigned and the executive officers and directors of PhotoLoft-California
became the executive officers and directors of DGI, and DGI changed its name to
PhotoLoft.com. See "Item 7. Certain Relationships and Related Transactions."
All of our business is currently conducted through PhotoLoft-California, and our
principal executive offices are located at 300 Orchard City Drive, Suite 142,
Campbell, California. Our telephone number at this address is (408) 364-8777.
Photo Processing Technology
The continuing evolution of the Internet as an entertainment medium coupled
with rapid advances in technology are working together to create a very
different photo processing model that the traditional chemical film based model.
Typically, photographers drop their used film at a photo processor, return at a
later date to retrieve it, make decisions for additional copies of certain
photos and then return several days later to get those as well. Digital
photography, the Internet and advances in printing technology are making that
model obsolete.
According to Dataquest Inc. nearly 50% of all U.S. households owned a PC at
the end of 1998, versus 43% and 36% in 1997 and 1996, respectively. Two thirds
of new PC buyers purchase for entertainment purposes. The Ziff-Davis Technology
User Profile estimates that 61% of those households with a PC also access the
Internet. Reuters Technology Survey reports that Internet usage doubles every
100 days.
The digital capture market continues to explode as well. Digital camera
prices dropped 40 percent to 50 percent during 1998, making them more accessible
to more people. According to New Media, the digital camera market is currently
enjoying a boom that is expected to reach $5.4 billion in sales by 2002. In
Japan today, sales of digital cameras exceed those of film-based cameras.
Printer technology continues to focus on crisp, clear prints delivered via
the home printer at affordable prices. Companies like Hewlett-Packard derive
more revenue from ink sales than printer sales, and printers that provide
consumers with excellent images (and use a lot of ink in the process) help to
drive the technology.
In this new world, digital images are directly uploaded to the Internet
where the owner can view and share them with others. Traditional photos can
easily be scanned onto the Internet. The owner can then choose to print the
photo(s) of his choice from the comfort of his own PC. This avoids getting
unwanted photos, provides an excellent storage place for the images, and ensures
that photos can be found and reprinted at any time. Using our revolutionary
software, the prints made will be to the highest resolution of the printer,
which typically provides photo-finish quality prints. All printers shipped by
Epson and Hewlett-Packard in the U.S. in 1999 have this capability. The printer
prices start at $250. In addition, users can designate what standard
photographic size they prefer, anything from wallet to 8"x10".
3
The Internet
The move from a chemical-based photo solution to a digital one coincides
with the explosive growth of the Internet into a significant global medium for
entertainment, communications, news, information and commerce.
Commercialization of the Internet began in the mid-1980s, with e-mail providing
the primary means of communication. However, it was the Internet's World Wide
Web, which provided a means to link text and pictures, that has led to the
blossoming of e-commerce and sparked the explosive growth of the Internet in the
1990s. Today, at least 100 million people in 135 countries send and receive
information, and purchase products and services, through the Internet.
While a number of factors have contributed to the continued growth of the
Internet, several specific trends have been particularly important. The first
has been the emergence of community Web sites. Community sites provide a
platform for publishing and aggregating the rapidly increasing volume of
personalized content created by Internet users. Online communities also provide
a single online destination where like-minded users can interact and quickly
find pertinent information, products and services related to their particular
needs. Community sites generally offer free services including access to e-mail
accounts, chat rooms, message boards, news and entertaining. Through these
features, community sites can provide Internet users with the same opportunities
for expression, interaction, sharing, support and recognition that they seek in
the everyday world. A successful community will accomplish these goals and
create a base of loyal members who will collaborate in the evolution of the site
as their needs and interests change and expand.
Online communities also provide advertisers an attractive means of
promoting and selling products and services. According to Jupiter
Communications, the amount of advertising dollars spent on the Web is expected
to grow from approximately $1.8 billion in 1998 to $7.7 billion by 2002, a
compound annual growth rate of 42%. To date, advertisers have typically used
traditional navigational sites and professionally created content sites to
promote their products and services online. However, online communities allow
them to reach highly targeted audiences within a more personalized context, thus
providing the opportunity to increase advertising efficiency and improve the
likelihood of a successful sale. Moreover, advertisers can track more
accurately the effectiveness of their advertising messages by receiving reports
of the number of advertising "impressions" delivered to consumers and the
resulting "click-through" rate to their Web sites.
According to Jupiter Communications, traditional on-line banner
advertising, while still strong, is beginning to give way to sponsorships. In
1998, 61% of ad inventory sold was banners and 27% was sponsorships. Jupiter
expects sponsorships to gain in popularity at the expense of banner advertising
for the next few years.
4
The second trend of interest in the Internet world has been the advent of
e-commerce. According to International Data Corporation, worldwide commerce
revenue on the Internet is expected to increase from approximately $32 billion
in 1998 to approximately $130 billion in 2000. Surveys indicate that 35% of
people utilizing the Internet to purchase goods driven by price - shopping for
the best deal. The remaining 65% of the users are driven by convenience and
selection.
OUR SOLUTION
For Internet consumers, PhotoLoft.com provides a photo-sharing community
that continues to meet the evolving needs of the marketplace. It is attractive
to photographers of all types, from professional to neophyte, who want to share
their images, solicit comments on their photos, browse others' pictures and
participate in photo-personalized e-commerce or simply take advantage of a
convenient solution for purchasing digital imaging supplies. In addition, our
advanced viewing technology allows users to study photos from a number of
different angles and our printing technology allows them to print photo-finish
quality prints from their home or office printers. For business partners,
PhotoLoft.com brings a unique solution to the questions of how to make their
sites more interesting and ultimately more appealing to their users. No other
photo-sharing web site on the Internet offers this broad combination of products
and services to meet all of these needs.
Consumers
Our solution is well timed to take advantage of the growing popularity of
online communities. Jupiter Communications has reported that facilitating the
sharing of photos among communities will be the primary application for on-line
consumer digital imaging. Our response has been to offer a vertical portal for
digital imaging, replete with photo-sharing opportunities, photo chats,
contests, targeted advertising and a unique e-commerce solution. In addition,
our efforts to develop an entertaining community site are positioning us well to
capture a share of the next generation of Internet users who will be looking to
the Internet for reasons other than information. Internal statistics show that
as an entertainment medium and Web site, we are not only successful at
attracting users, but we also keep them on the site for long periods of time and
keep members once they upload their images. Sharing photos with family and
friends; being able to browse other photos and comment on them; and enjoying a
community of photography buffs, all combine to make us a popular community with
a promising future with new members.
In addition, PhotoLoft.com offers a highly focused Web site, which is
particularly attractive to advertisers. Through our 98 different categories,
advertisers can choose to target their audience as much or little as possible.
Combined with PhotoLoft.com's community, which sponsors contests and provides
information and news about digital imaging, the Web site is a very attractive
option for advertisers, that can choose traditional banner advertising on
ultra-targeted pages or sponsorships of the various activities available at the
site.
5
We have also developed a multi-faceted e-commerce solution that will appeal
to users looking for photo-personalized gifts and greeting cards, as well as
those choosing to take advantage of the "ease of doing business" that
PhotoLoft.com affords them. The first component of the e-commerce program is in
place today and offers customers a choice of over 150 photo-personalized gift
items. Because these gifts are always unique, they can never be commoditized
and are proving to be an excellent opportunity for repeat sales to users. The
second component of the e-commerce program is photo-personalized cards, which
have the additional feature of customized greetings. The unique design of this
program allows PhotoLoft.com to generate both advertising and e-commerce
revenues. The third component of the e-commerce solution includes on-line sales
of digital imaging products such as cameras, scanners and printers. In
addition, we will offer printing paper and ink cartridges for sale at costs
competitive with more traditional retail outlets.
Business Partners
Jupiter Communications research also indicates the photos "anchor" a
community. As a photo-sharing community, PhotoLoft.com attracts members that
are actively looking for the "community" experience with a "photographic" slant.
As members join PhotoLoft.com they upload images and remain with us, as opposed
to some communities where it is easy to switch to a competitive site. In
addition, statistics show that PhotoLoft.com is an extremely "sticky" site, a
very important point for advertisers on the web site. Examining photos takes
more time than simply scanning most web sites. Also, PhotoLoft.com users then
zoom in on or pan the image they have chosen an average of three times. This
feature is very important because each time it is accessed it increases the
total amount of time a user is on the site. These two factors combined have
made PhotoLoft.com very attractive to other Web sites that are constantly
looking for ways to increase the potential of their communities. Utilizing
PhotoLoft.com's unique co-branding and private label opportunities, sites like
PowWow (owned by Tribal Voice) are able to further cement their relationship
with users.
The final component of the e-commerce solution involves PhotoLoft.com-enabled
e-commerce. This product was developed on demand from professional
photographers, who will utilize PhotoLoft.com to display photos taken for
events. Potential customers can browse the photos in a PhotoLoft.com album
created by the photographer and then print directly from the web site. The
photographer will be reimbursed based upon the number of photos printed.
Technology
What makes our site truly popular with all users is the technology. Our
leading-edge software greatly simplifies the task of displaying images on the
Internet, offering automatic creation of thumb-nails; auto-generation of a
perfectly sized viewable image; transparent image compression; the photo album
metaphor, and many other uses. We have also taken Internet digital imaging a
step further with our advanced viewing capabilities. Users can zoom in on or
pan an image, allowing them to observe even the tiniest details or enjoy the
full panorama of a photo. This technology, which is compatible with all on-line
auction sites, makes us particularly popular with bidders closely scrutinizing
their potential purchases. In addition, to take full advantage of the digital
revolution, we allow users to print their pictures at home. This home photo
processing is comparable to the current photo finish quality, and is cost
competitive with the traditional model of film processing with the added
advantages of allowing users the convenience of printing only the photos they
want, at the sizes they designate from the comfort of their homes.
6
STRATEGY
In order to achieve our goal of becoming the most complete photo-sharing
e-commerce community on the Internet, we have implemented a multi-faceted
strategy to enhance the content and features available on our Web site, increase
the amount of traffic on our site, expand advertising sales and sponsorships,
and develop a variety of e-commerce solutions.
Enhance Our Online Community
We continue to evolve our site to offer the latest in technology as well as
the latest trends in Internet communities. To be successful in the rapidly
developing market, we need to be pacesetters at all times.
Recently, we began to aggressively upgrade the look and feel of our site,
creating new and popular contests, encouraging users to comment on photos via
the "guest books" feature, and bringing new users to the site through an
e-invitation e-mail program. By virtue of the photos, our site is inherently
"sticky," meaning that users visiting the site tend to be there a while. Users
study photos for a period of time before moving on and, due to the company''
advanced viewing technology, for every image served on our site, users zoom or
pan the image an average of three times. In addition, once users upload their
photos to the Loft, they are reluctant to move them. These are extremely
important features for potential partners as well as advertisers.
New developments trend into two distinct arenas: technology and
entertainment. Technically, we are working to add new features that enhance our
current product, such as advanced image editing - cropping, red eye, image
manipulation, etc., -- simplified image uploading, and the addition of audio.
We realize that to be successful, we must have an extremely easy, user-friendly
site. We recently instituted a "feedback" page on the site that allows users to
communicate their ideas easily and quickly with the company. Many of our new
enhancements will be derived from this user interface. We are also working to
cut the costs of technology. As our Web site continues to grow we can achieve
many cost efficiencies. In addition, our engineers are working to lower the
cost even more through new developing technologies for image hosting. Finally,
we are devoted to Internet image hosting, and as that develops, we plan to
remain on the forefront of the technology. For example, we are constantly
monitoring the state of web-based video.
7
Perhaps even more important is the entertainment component of the site. We
are constantly on the lookout for new ideas that will enhance the community
experience for our users. In the very near term we anticipate adding additional
contests, an automated address book for emailing purposes and private chat
(communication) between members versus the public forum available today through
Guest Books.
Traffic Generation
We have made a strategic decision to make traffic generation our top
priority. In order to accomplish this, we intend to enter into co-branding
relationships with original equipment manufacturers (OEMs) of digital imaging
equipment. We currently enjoy successful partnerships with OEMs of digital
cameras, scanners, printers and other digital photography equipment, including
UMAX, Epson, and Hewlett-Packard. Our partners ship copies of our software with
new equipment; advertise PhotoLoft.com on their boxes; feature our site in box
inserts and/or user guides; and create links from their Web sites.
Typically OEM relationships are manifested as co-branded Web sites, whereby
users on the OEM partner's home page can click through to a page featuring the
OEM's branding along with PhotoLoft.com. As users browse through the site and
take advantage of all our unique features, they constantly see both brands-the
OEM and PhotoLoft.com. This solution, unique to PhotoLoft.com, is very popular
with OEM's that are understandably are reluctant to send potential customers to
another Web site. PhotoLoft.com, the OEM and the user are all winners: we grow
our user base and image bank; the OEM is perceived as offering a value-added
service; both companies share in the revenue generated by advertising sales and
e-commerce; and the user has an opportunity to join our community. See
"Marketing and Promotion--Co-Branding Agreements."
Another promising strategy for traffic generation is the development of
private label sites. This concept was pioneered when we developed a private
label site for the Walt Disney Company in conjunction with Disney's launch of "A
Bug's Life." Under this concept, a partner company, such as Disney, can
commission us to create a Web site that is branded exclusively for them, giving
users the impression they have never left the original site. As an added
feature, the private label partner can specify parameters for the site,
including content and advertising. The advantages of a private label site are
numerous for both the partner and us. The partner has total control over the
site, including tight security, the chance to communicate with visitors and
reinforce its brand. We add to our image bank, enjoy additional traffic and
participate in revenues generated via e-commerce and advertising sales.
Our private label program allows partners to choose how to feature
PhotoLoft.com or offer its services. That way, we are not a competitor, but a
value-added supplier and partner. As we add private label agreements,
PhotoLoft.com will quickly become the digital imaging host for the Internet.
See "Marketing and Promotion--Private Labeling Agreements."
8
We are also maximizing relationships with other Web sites to drive traffic
from an entirely different population - Internet surfers. We already have
agreements in place with Compaq Computer; Lycos; Hylas; Tribal Voice and
Netopia, and are actively pursuing additional agreements with high traffic Web
sites. See "Marketing and Promotion--Web Site Partnering."
Advertising Sales
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the look out for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
ultra-targeted advertising and we are an ideal Web site, acting as an
electronic alternative to printed photo magazines. Our unique design allows
users to generate numerous impressions based on just one image. Users
publishing complete albums create an exponential number of impressions. Each
impression allows advertisers to reach an increasingly targeted audience, an
advantage not lost upon cost-conscious advertisers looking for value. Also, the
unique nature of our greeting card program creates multiple impressions as users
create their own cards. In addition, the community nature of our Web site
creates opportunities to further segment the audience, giving advertisers an
even more targeted buy.
To further our advertising strategy, we have partnered with Adsmart as our
advertising representation company. Adsmart is the industry's largest
site-focused on-line advertising representation firm, and the relationship
provides us with a tremendous opportunity to grow advertising sales. In
addition, we are aggressively pursuing partnering arrangements with advertisers
interested in sponsorship opportunities on our Web site. See "Advertising."
E-Commerce
E-commerce is a growing phenomenon of the Internet and we intend to take
advantage of this opportunity by offering convenience and quality to buyers. We
currently offer a wide selection of photo-personalized gifts, and plans are in
place for phased introduction of additional products and services, including
photo-personalized greeting cards, consumables, and photos offered by
professional photographers. See "Products and Services--E-Commerce."
PRODUCTS AND SERVICES
Our Web Site
Our Web site at Photoloft.com was created to give our members a place to
store their pictures; a way to categorize their memories; and a mechanism for
sharing their photos. Members can store photos; utilize the site's album
metaphor to organize the photos; and either view them on-line, through high
quality output devises such as television, or print them using our revolutionary
print technology.
9
Once users arrive at our site, navigating the different areas is quite simple.
Immediately, users can opt to sign up, upload their photos or search for a
specific album. Following this lead navigation bar, users can scroll through
the 98 photographic categories ranging from animals to news to travel. Views of
photos are only a click away. Users choosing to upload a photo must first join
PhotoLoft.com by completing a very brief registration form and agreeing to the
site's terms and conditions. Once that is handled, users can load their images
three ways, via the digital camera, scanning or emailing the image. They are
automatically stored in an "album" which can be edited and manipulated very
easily at any time. Also available on the home page are buttons to display the
current stock quote (through a link with Yahoo Finance); contest winners;
contest entries; and gift ordering.
One of the unique and attractive features of our Web site is the community
experience. The importance of community cannot be underestimated: Internet users
are looking for interaction and the "community" experience fulfills that need.
The longer users stay on the site, the more opportunity Web sites have to be
successful. Our site currently features 98 categories of images that users can
browse through. These categories represent the top subjects that photographers
typically photograph. In addition to giving users a convenient way to view
photos, the segmentation is attractive to potential advertisers that can use the
categories to ultra-target audiences. For example, pet food ads can be featured
on the "Pet" section of our site. The categories also help draw viewers deeper
into the site, increasing the number of impressions received and the number of
images served. This, in turn, makes our site particularly attractive for
advertisers, thereby increasing opportunities for advertising revenues. See
"Advertising."
Other features on our site that contribute to the community experience
include photo comments, photo sharing, and user participation via contests.
Using our Guest Books feature, users can comment on various images throughout
the site. Those comments can then be viewed by anyone accessing the photo.
This is a particularly popular feature for professional models, who use the site
to post their portfolios, and professional photographers. A unique component to
the Guest Books feature that is scheduled to launch during the third quarter of
1999, is an e-mail service that will alert users when comments about their
images have been received.
According to a Jupiter Communications study, sharing is one of the top
reasons that people choose digital images. Our site provides the perfect
vehicle to do that easily through its e-invitation feature. Members simply
e-mail their friends and family when they post a photo or album they want to
share. Rather than tie up the recipient's computer with large e-mail files
carrying photos, our system invites the recipient to "click here" to view the
photo or album. This system is extremely easy and popular; is very fast since
it does not download actual photos to the recipient's PC; and brings more users
to our site.
Another important aspect of our community experience is the contents and
other forms of entertainment on our site. Currently, our users can participate
in two contests on our site: "image of the week" and "album of the week." Users
are invited to submit their work for these contests and all interested users are
allowed to vote. These contests offer substantial promotional opportunities for
advertisers willing to "sponsor" a contest on our site. See "Advertising."
10
Technology
One of our competitive advantages is our unique advanced viewing and
printing technologies. They are both based on Hewlett-Packard's FlashPix
technology, but take the concept a step further, allowing for the simplicity of
viewing and ease of printing.
Our advanced viewing capability is unique to our site and allows users to
zoom in on or out of a photo and examine the tiniest details of an image.
Conversely, users can also pan an image to enjoy the full panorama of the photo.
These features are available directly from the user's browser, requiring no
special down loads or add-ons and are particularly popular with users of on-line
auction sites.
Our proprietary printing technology allows users to print to the highest
quality of their printer, giving them crisp, clear photos. Most technology only
allows users to print 72 dots per inch (dpi) using the "screen print" feature on
their PCs. With our technology and the appropriate printer (prices for these
printers start at $250; every Hewlett-Packard printer shipped after 1998 has
this ability) users can easily print photos that rival those printed at the top
photo finishers. In addition, the technology allows users to grab and print the
identified image (versus printing the entire page) and gives users a variety of
size options ranging from 8"x10" to wallet sizes. This technology directly
rivals the traditional photo processing model. It is revolutionizing photo
printing, allowing photographers to bypass the local photo finishers.
E-commerce
We have taken a multi-faceted approach to e-commerce and expect that it
will become an important revenue stream in the future. The first phase of our
e-commerce solution, photo-personalized gifts, is already in place. Users
currently have a choice of over 120 gift items, ranging from T-shirts to coffee
mugs, all emblazoned with the image of their choice. This service is currently
provided to us through an arrangement with Pix.com, a leader in Web-based
e-commerce. Under terms of the agreement, we share the generated revenues with
Pix.com; however, we retain the right to utilize other services or implement
this program itself at any time.
The next phase of our e-commerce solution is photo-personalized greeting
cards. Other sites offering online greeting cards have generated a significant
amount of traffic, and printed photo-personalized greeting cards have also
become quite popular. Our greeting card solution will combine both of these
successful approaches into an easy Internet solution. Initially our members
will be able to choose from over 140 exclusive card designs, ranging from
birthdays to bar mitzvahs, that can not only be photo-personalized, but also
customized with the greeting of the members' choice. The cards can be e-mailed
or printed and mailed. Because of our proprietary printing technology, the home
printed greeting cards will be of the same quality as those purchased in stores
with the added bonus of being photo-personalized. In addition, the user can
provide us with the appropriate address and we will print and mail the card for
them. Users can order up to 500 copies of a greeting card to be printed and
either mailed to them or distributed to a mailing list provided to us. Adding
to the convenience is a value-added service that will trigger an e-mail reminder
when an important "card giving" occasion, such as a birthday or anniversary, is
approaching. Our greeting card products and services will be rolled out in
stages over the next three month and should be fully operational by the end of
the third quarter of 1999.
11
The next phase of our e-commerce solution will be a wide array of
consumables. By simply clicking a mouse button, users will be able to order
paper, ink, cameras, scanners and other digital imaging and photo sharing
equipment on our site. A helpful reminder service will prompt users to
periodically check their ink and paper volumes to ensure they have a continuous
supply. Once ordered, the item will be delivered to the address indicated
within a specified time frame. We expect to launch this service during the
fourth quarter of 1999 and anticipate entering into resale agreements with
wholesalers of digital imaging products.
Prior to the end of 1999, we will expand our e-commerce opportunities to
professional photographers choosing to partner with us. Under this scenario,
professional photographers will upload photos from a specific event to their
album and utilize our e-invitation email system to notify customers that the
photos are available for viewing. Customers can then view the photos, choose
those they'd like to purchase, indicate the size and number they want and place
the order, all on-line. This option is particularly attractive to wedding and
special event photographers. This component of our service will have a "lock
out" provision on the printing technology to deter users from simply printing
their own images.
Product Development
Product development on our site continues at a rapid pace. We hired a site
producer in May 1999 and have identified 58 additional features that will be
added to the community by the end of the third quarter 1999. These include
advanced image editing (cropping, "red eye," spinning); introduction of
additional contests, such as a Treasure Hunt; an audio feature for slide shows;
introduction of a newsletter focusing on digital imaging and photography;
customized album designs; and much more.
Membership Plans
We currently offer two membership plans. Our free membership allows
members to access up to 20 megabytes of storage (approximately 200 photos). We
also offer members a premium account at a price of $29.95 annually. This
service gives users an additional 30 megabytes of storage, password protection
if the user opts for privacy; and merchandise discounts. The true benefit of
the Premium Account to us is that is allows partners (such as co-brand partners)
to bundle the Premium Account (which brings value to the co-brand and branding
to our site) with the other products creating a perception of value for the
consumer. See "Marketing and Promotion--Co-Branding Agreements."
12
ADVERTISING
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the lookout for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
ultra-targeted advertising and our Web site an ideal program, acting as an
electronic alternative to printed photo magazines. Our unique design allows
users to generate numerous impressions based on just one picture. Users
publishing complete albums create an exponential number of impressions. Each
impression allows advertisers to reach an increasingly targeted audience, an
advantage not lost upon cost-conscious advertisers looking for value. Also, the
unique nature of our site brings a virtually unlimited number of viewers to the
site each day to view the photos.
In addition, the community nature of Web site creates opportunities to
further segment the audience, giving advertisers an even more targeted buy.
Similar to the already successful community sites, our community encompasses 98
categories of popular targets ranging from astrology to zoos. Enthusiasts
simply post their photo albums to these communities, where they can share images
while seeing the latest from advertisers in that field.
We have recently entered into an agreement with Adsmart, an advertising
representation firm, to ensure that we maximize the opportunities available via
advertising sales. Adsmart is the industry's largest site-focused online
advertising representation firm. It has more than 175 premier Web brands
totaling 1.2 billion impressions per month. The contract guarantees that 100%
of our inventory will be sold each month. The CPM (cost per thousand)
impressions is based on a sliding scale. This number will increase as we
continue to increase the volume of traffic to our site. In addition, we can
receive more revenue per CPM by providing numerous ultra-targeted channels, such
as the categories. Working with Adsmart, we have begun to target key affinity
networks that will utilize our site as an advertising venue.
Recognizing that the traditional banner advertising will, by definition,
eventually reach a cap, we are beginning to explore more creative advertising
sales opportunities. Forrester Research speculates that over the next five
years, between 50%-70% of Internet marketing budgets will be spent on
promotional activities versus traditional banner advertising. Our promotions
are primarily taking the form of sponsorship opportunities. Under this
scenario, advertisers can "sponsor" a contest or other form of entertainment on
our Web site. The advantages to the sponsor are that it gets a more focused
audience, since visitors want to participate in the event and will not "click
through" the message; the message can be more advertorial, usually carrying more
credibility with the target audience; and it is not "competing" with the myriad
of other messages typically found on Web sites. The advantage to us is that it
allows us to work in conjunction with advertisers as business partners to create
venues that will enhance the community facet of our Web site and, ultimately,
increase our membership. Sponsorships also have the potential to generate more
revenue than most banner ads.
13
Typical advertisers and sponsors on our site include Visa, Intel,
About.com, TravelNow, and Hewlett-Packard. Our contract with Adsmart will
increase the number of advertisers and allow us to target certain advertisers
that will benefit by the site's unique community set up.
MARKETING AND PROMOTION
We market our site through three primary channels: links to other sites
(Web site partnering); co-branding agreements; and private labeling agreements.
Web Site Partnering
Web site partnering arrangements allow us to recruit members from the
broadest of populations - Internet surfers. We already have agreements in place
with Compaq Computer (through the AltaVista search service); Hylas, Tribal
Voice, and Netopia, guaranteeing exposure to approximately 30 million potential
users per day, and we are actively pursuing additional agreements with high
traffic Web sites. To that end, we are actively utilizing banner swaps in our
advertising program. Under this scenario, we gain advertising space on targeted
Web sites in exchange for running that Web site's banner ads for free. This
barter arrangement allows us to advertise without incurring the expense that is
usually associated with Internet advertising.
Co-Branding Agreements
Co-branding agreements are particularly popular with original equipment
manufacturers (OEMs). Typically these agreements call for a co-branded home
page, featuring the look and feel of our site along with the brand of the
partner company. Usually this brand is found in the upper right corner of the
home page. The partner companies also advertise PhotoLoft.com through their
packaging by including our logo on the box, inserts in the packaging, and
mentions in the users' manuals or newsletters. Users are directed to our site
via a link at the partner company's Web site. As an added inducement to utilize
our site, all purchasers are offered premium accounts at no extra charge. We
share with our partners any revenues generated via advertising sales and
e-commerce from the co-branded site.
The OEM views adding our software to its package of products as a value
added benefit for the consumer. In addition, depending upon the OEM partner, we
can help to increase sales (as in the case of Hewlett-Packard, which can
increase sales of ink as consumers print high resolution photos--enabled by our
proprietary printing technology--on their HP printers). Currently we have
co-brand agreements in place with UMAX (which ships approximately 50% of the
scanners sold in the U.S.), Epson, Casio, Hewlett-Packard and others. We are
actively engaged in discussions to develop additional co-branding agreements
with other Web sites and Internet companies.
14
As our business development team grows, co-branding agreements are being
marketed to other sectors as well. A recently signed agreement is with PowWow,
a fully integrated instant messaging and online community with over four million
users, that was developed by Tribal Voice. Under terms of the arrangement,
PowWow users will be notified that they have received a free one-year Premium
Account with PhotoLoft.com. Announcements in the online newsletter will further
explain the program and a direct link from the PowWow Web site will bring users
to our site. Tribal Voice was searching for a photo sharing solution for its
site, photos being a critical component in the success of a community site.
PhotoLoft.com was an excellent solution as our model of co-branded sites allowed
PowWow to keep its branding program in tact while offering an additional value
added service to its users.
Private Label Agreements
Our unique web site architecture allows the company to offer private label
agreements to partner companies. To date, no other photo sharing community has
integrated this component into its marketing strategy. In these agreements, the
partner company pays an initial development fee and we create a private photo
sharing community for that company. While the entire space is branded by the
partner company, a tag line reads "powered by PhotoLoft.com" and the uploaded
images become part of the our image bank. Typically we share with the partner
company any revenues generated by advertising sales and e-commerce on the
private label site.
The most prominent example of a private label site is the one created by
PhotoLoft.com for the Walt Disney Company in conjunction with its launch of "A
Bug's Life." As our marketing efforts mature, we are finding more and more
opportunities to create private label sites. They are particularly appealing to
online portals that are reluctant to lose their branding but want a photo
sharing community as a component of their portfolio.
OPERATIONS AND SYSTEMS
Administrative Operations
To provide our members with the most efficient, flexible, and innovative
services possible, our administrative operations combine in-house and outsourced
services and functions. Our strategy is to keep our in-house staff small, with
a focus on core competencies in technical and research and development areas,
and to outsource other functions and projects on an as-needed basis. Internal
functions currently include account management, traffic management, and
managerial projects focusing on the development and management of business
partnerships with appropriate parties. At this point, outsourced functions
include e-commerce business services and maintenance of network hardware and
Internet connections.
15
Systems
Our Web site is located in a secured individual "cage" space at the San
Jose, California site hosting site operated by AboveNet Communications, Inc.
AboveNet is the architect of the global, one-hop Internet Service ExchangeTM
(ISXTM), a network delivering Internet connectivity and co-location solutions
for high-bandwidth, mission-critical applications. AboveNet's major networking
equipment includes Cisco 12000 and 7500 series routers and Cisco Catalyst
switches. The following carriers currently have fiber cabinets and connections
at the AboveNet San Jose Network Center: Brooks Fiber (OC-48 Connection),
Pacific Bell (OC-48 Connection), TCG (OC-12 Connection), and MFS (OC-48
Connection).
Our site is served on a series of Intel Pentium II - Dual Processor
Servers with high availability disk arrays for maximum uptime guarantee. Our
site currently utilizes several Single Processor Pentium 400's with 1Gb RAM for
the web servers. The Image servers are hosted by several Dual Processor Pentium
400's with 1Gb RAM. Currently, there is one dual Processor Pentium 400 with
512M RAM for the database engine. The combination of a database server, several
image servers, and several web servers is called a POD, and we add pods as our
community grows.
PhotoLoft.com's secure data management is through SQL Server version 7.0.
SQL Server Logs are generated every 24 hours to facilitate database
reconstruction in the case of hardware or software failure. These files are
written to the hard disk and the CD-ROM that is generated nightly. All data is
backed up on a daily basis utilizing CD-ROM Burner and software developed in
house. Currently, the average Photoloft.com web site serves .8 page views/sec
and the average peak load is 1.13 page views/sec. With the above referenced
software and hardware configurations, it has been determined that the current
peak load served is 15 page views per second per image server. With 6 image
servers, the site is capable of 90 page views per second. To scale the system,
additional web servers and image servers are added as needed. To scale the
database, a mirror copy is made of the database server and dedicated to a
particular account.
Since January 1998, our site has maintained an uptime service record of
99.6+%. This service time excludes outages that were due to "act of god" or
catastrophic failure of the hosting service unrelated to any specific
PhotoLoft.com software or hardware issues.
COMPETITION
Competition is the Internet photo sharing and digital imaging arena is
intensifying. When we began development of our site in 1998 there were
virtually no competitors. By the time that our site was officially launched in
February 1999, several potential competitors had emerged and we are aware of new
companies planning to enter the market in the near future. As one of the first
photo sharing communities in the marketplace, we have laid the groundwork for
many competitors to follow. In doing internal competitive analysis, it is clear
that we are seen as a leader in the space and that competitors have mimicked our
technology and marketing strategies in a number of ways. However, to date, none
of the competitors have successfully duplicated the unique combinations of
features and advanced technology that we offer.
16
PhotoNet, PhotoHighway, PhotoPoint.com, and ClubPhoto are among the first
wave of companies engaged in activities similar to ours. These companies allow
users to upload their images and share them via e-mail, and some offer online
greeting cards and photo-personalized gifts. Some of these sites have followed
the online community business model. These companies are also forging valuable
marketing relationships and some enjoy significant financial backing. However,
they have not introduced advanced viewing and high resolution printing
capabilities comparable to ours. Also, at present, PhotoNet, which is 50% owned
by Kodak, is primarily designed to help Kodak protect the traditional chemical
film based photography industry. But, we anticipate that this will change in the
future as the popularity of digital imaging increases.
There are many other smaller photo-sharing Web sites in various stages of
development. In a recent competitive analysis, we identified at least 15
additional companies beginning to get into the photo sharing/digital imaging
Internet business. The barriers to entry for a photo storing Web site are few.
However, to develop an interactive site with a large database of images that
also offers advanced technology is more costly and time consuming. A more real
threat could be traditional media companies, a number of which, including
Disney, CBS and NBC, have recently made significant acquisitions or investments
in Internet companies.
We believe that the principle competitive factors in our market are
community development, technology (easy uploading, fun manipulation of images,
the ability to host huge image files, etc.) number of images in the database,
rate of adding members, ability to partner with companies that can bring large
groups of pre-qualified (already interested in digital imaging) users to our
site. Certain of our current and many of our potential competitors have longer
operating histories, larger customer bases, greater brand recognition in other
business and Internet markets and significantly greater financial, marketing,
technical and other resources than us. In addition, other online services may
be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Therefore, certain of our
competitors with other revenue sources may be able to devote greater resources
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to Web site and systems development than
us or may try to attract traffic by offering services for free. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand. See "Item 2. Financial Information--Factors
Affecting Our Business, Operating Results and Financial Condition--We May Not Be
Able To Compete Successfully."
17
INTELLECTUAL PROPERTY
We have registered our trademark "Howdy" with, and our application for
registration of the mark "Photoloft" is currently pending before, the United
States Patent and Trademark Office.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with its suppliers and strategic partners in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by us to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-party development of similar
technologies. While we intend to pursue registration of our trademarks and
service marks in the U.S. and internationally, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online.
We also rely on certain technologies that we license from third parties,
such as the suppliers of key database technology, the operating system and
specific hardware components for our products and services. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
GOVERNMENTAL REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets certain standards and regulations regarding communications and
related equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
18
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
EMPLOYEES
As of May 31, 1999, we had 17 full time employees, including 2 in marketing
and advertising sales and customer support; 2 in business development; 2 in
administration; and 11 in product development (this includes engineering and
support; and e-commerce). We recently embarked on an active search to hire up to
six additional product development employees; three additional advertising sales
and customer support professionals; three additional business development
experts; and one administration employee. Although talented and qualified
employees are difficult to find in the current tight job market, we have
experienced relative success in attracting and retaining highly motivated and
talented employees. Digital imaging is a growing field and many employees
working in the Internet arena are attracted to a start-up company with a record
of success in such a dynamic field.
19
We believe that the future success of the company will depend in part on
our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service of
our senior management and key technical personnel. The competition for
qualified personnel in our industry and graphical location is intense, and there
can be no assurance that we will be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified personnel to conduct
its business in the future. From time to time, we also employ independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. We have never had a work stoppage,
and no employees are represented under collective bargaining agreements. We
consider our relations with our employees to be good.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
SELECTED FINANCIAL DATA
The following table contains certain selected financial data of the Company
and is qualified by the more detailed financial statements and the notes thereto
provided in this Registration Statement. The financial data as of and for the
years ended December 31, 1998 and 1997, have been derived from the Company's
financial statements, which statements were audited by BDO Seidman, LLP. The
financial data as of March 31, 1999 and for the three-month periods ended March
31, 1999 and 1998, has been derived from the Company's unaudited financial
statements.
The comparisons made between the noted periods should be evaluated in light
of the following significant factors: (1) During 1997 and 1998, the Company's
primary source of revenue was derived from selling software. As the gross
margin from selling software began to decline, the Company explored other means
of generating revenue. Beginning in early 1998, the Company shifted focus and
began selling advertising on the AltaVista web page, (2) The sale of the
AltaVista URL in July 1998 resulted in a significant increase to net income but
eliminated the advertising revenue generated by the web site, which is
calculated based on the number of impressions the web site receives. With the
sale of AltaVista, the Company began developing PhotoLoft.com as a new source of
generating advertising revenue, (3) During 1999, the Company has begun to focus
on building the PhotoLoft.com brand name and increasing the number of daily
impressions to the site. As a means of achieving this, the Company has made a
strategic decision to focus on increasing traffic to the PhotoLoft.com web site
instead of generating revenue. To accomplish this, the Company has increased
its marketing efforts by trading advertising space with other Internet companies
and attending trade shows. As a result, the number of impressions to the
PhotoLoft.com web site has increased, which should ultimately increase revenues.
21
Statement of Operations Data
[Download Table]
Three Months Ended Fiscal Year Ended
March 31, December 31,
------------------------ ----------------------
1999 1998 1998 1997
-------------- -------- ---------- ----------
(unaudited) (unaudited)
Revenues $ 21,800 $204,100 $ 674,300 $ 574,200
Net Income (loss) (360,500) 300 1,663,600 (165,500)
Net Income (loss) per share to
Common Shareholders:
Basic $ (0.04) $ 0.00 $ .26 $ (0.03)
Diluted $ (0.04) $ 0.00 $ .18 $ (0.03)
Balance Sheet Data
March 31, December 31,
------------------------ ----------------------
1999 1998 1998 1997
-------------- -------- ---------- ----------
(unaudited) (unaudited)
Current Assets $ 2,093,000 $103,800 $1,211,100 $ 93,900
Total Assets $ 3,651,200 $132,700 $2,939,000 $ 123,900
Current Liabilities $ 542,400 $131,700 $ 502,900 $ 151,000
Long Term Debt
Total Liabilities $ 1,122,900 $131,700 $1,169,600 $ 151,000
Shareholders Equity $ 2,528,300 $ 1,000 $1,769,400 $ (27,100)
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this Registration Statement.
The matters discussed in this Registration Statement contain forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below in "Factors Affecting Our Business, Operating Results, and Financial
Condition" as well as those discussed in this section and elsewhere in this
Registration Statement.
Overview
PhotoLoft.com is an Internet web site community that is revolutionizing
data imaging and photo processing. PhotoLoft.com is the fastest growing
photographic imaging community on the Internet, and its unique software allows
consumers to share and print personal images quickly, easily and inexpensively.
Users can create a "virtual photo album," which is impossible to lose; instantly
accessible and easily reproducible; easily transported; easily displayed on high
quality output devices, such as television; and completely personalized.
Members can automatically invite others to view their albums via e-mail and give
users the opportunity to comment on other images. PhotoLoft.com is also taking
advantage of the rise in e-commerce, offering a wide array of gift items that
have been imprinted with a PhotoLoft.com image selected by the user. The site
has been carefully designed to be user friendly and the community aspect of
PhotoLoft.com makes for a highly entertaining experience for visitors and
members.
PhotoLoft.com was founded in 1993 as AltaVista Technology, Inc.
("AltaVista"). In July 1998, the URL (AltaVist.com) was sold to Digital
Equipment (Compaq) and the company name changed to Photoloft.com. Since then,
we have continued to upgrade the site, offering better and faster user
components to PhotoLoft.com. Through February 1999, revenues have been derived
primarily through the sale of advertising. With the latest release of
PhotoLoft.com in February 1999, we began focusing on increasing e-commerce sales
and advertising sales. Anticipated success in these areas will come from the
increased membership base (estimated to increase from 24,000 to 123,000 in 1999)
and increased impressions per day (estimated to increase from 20,000 per day in
1998 to 500,000 per day in 1999).
In 1998, PhotoLoft.com began developing a new product, ID4Life. Designed
as a preventative service to aid in finding missing persons, ID4Life has
developed as a different product than the rest of PhotoLoft.com. We are seeking
to sell ID4Life and expect to complete a transaction during 1999.
Operating Results
23
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues for the three months ended March 31, 1999 were $21,800, a decrease
of $182,300, or approximately 89%, compared to $204,100 for the three months
ended March 31, 1998. Revenues decreased primarily due to a change in the
Company's operations from selling software to selling advertising. This event
did not occur until the latter half of 1998 contemporaneously with the sale of
the URL to Compaq Computer. The new business plan is focused on advertising
sales and e-commerce revenues. The first quarter results reflect less than one
year operations under the new model.
The negative gross margin for the three months ended March 31, 1999 was
($14,500), a decrease of $186,400 or approximately 108%, compared to the gross
profit of $171,900 for the three months ended March 31, 1998. This decrease in
gross margin is due primarily to the transition of the Company's business from
software sales to advertising sales resulting in an inability to cover the fixed
cost component of the cost of revenues during the three months ended March 31,
1999 due to the significant decrease in revenues.
Selling, general, and administrative expenses for the three months ended
March 31, 1999 were $623,900, an increase of $453,500 or 266%,compared to
$170,400 for the three months ended March 31, 1998. This increase reflects the
growth phase of the Company's new business model, which includes a strategy for
aggressive growth immediately. Included in the costs are additional equipment
to handle increased image volume; necessary staffing increases, particularly in
the engineering and sales areas; and additional facilities. The growth plan
calls for a ramp up of all operations throughout 1999, leveling off in 2000
Loss from operations for the three months ended March 31, 1999 was
($638,400), a decrease of $639,900 compared to income from operations of $1,500
for the three months ended March 31, 1998. This decrease is primarily due to the
change in the Company's product and the costs incurred to develop the
PhotoLoft.com web site.
Interest income for the three months ended March 31, 1999 was $40,100, an
increase of 100% compared to $0 for the three months ended March 31, 1998.
Interest income increased due to the note receivable related to the sale of the
AltaVista URL in July 1998.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Revenues for fiscal 1998 were $674,300, an increase of $100,100 or
approximately 17%, compared to $574,200 for fiscal 1997. Revenues increased due
to the Company generating advertising revenue in addition to software sales.
24
Gross profit for fiscal 1998 was $561,300, an increase of $47,900 or 9%,
compared to $513,400 for fiscal 1997. However, there was a decrease in the
gross profit as a percentage of sales to 8.3% for fiscal 1998 from 8.9% in
fiscal 1997 which was due primarily to a reduction in the sales price of
software bundled with OEM product.
Selling, general, and administrative expenses for fiscal 1998 were
$1,324,000, an increase of $649,600 or 96% compared to $674,400 for fiscal 1997.
As a percentage of revenue, selling, general and administrative expenses
increased to 196% in fiscal 1998 from 117% in fiscal 1997, primarily as a result
of investment in the technology required to generate web page advertising and
the increase in employee headcount.
Loss from operations for fiscal 1998 was ($762,700), an increase of
$601,700 compared to a loss from operations of ($161,000) for fiscal 1997. The
increase is due primarily to the higher selling, general and administrative
expenses resulting from the increased number of employees and the Company's
investment in technology.
Net income for fiscal 1998 was $1,663,300, an increase of $1,828,800
compared to the net loss of ($165,500) for fiscal 1997. The increase is
primarily due to the sale of the AltaVista URL in July 1998.
Liquidity and Capital Resources
Net cash used in operating activities during the three months ended March
31, 1999 was $527,300, which reflected the net effect of the net loss for the
period, decreases in deferred income taxes and deferred revenues and an increase
in prepaid expenses and other current assets, which was partially offset by an
increase in accounts payable. Net cash used in operating activities during
fiscal 1998 was $361,000, a decrease of $374,800 compared to net cash provided
by operating activities of $13,800 in fiscal 1997. The net cash used in
operating activities in fiscal 1998 reflects the gain on the sale of the
AltalVista URL that was partially offset by the net income for the year and an
increase in deferred income taxes.
Net cash used in investing activities was $47,700 for the three months
ended March 31, 1999, primarily reflecting cash used for the acquisition of
property and equipment. Net cash used in investing activities in fiscal 1998
was $54,300 compared with net cash used in fiscal 1997 of $14,200, with both
years reflecting cash used for the acquisition of property and equipment.
Net cash provided by financing activities was $1,286,900 for the three
months ended March 31, 1999, primarily reflecting cash received from the sale of
stock and exercise of stock options, and the proceeds from the note receivable
relating to the AltaVista URL sale. Net cash provided by financing activities
for fiscal 1998 was $785,300 due to the proceeds from the AltaVista URL sale.
25
Our capital requirements are dependent on several factors, including market
acceptance of our services, the amount of resources devoted to investments in
the Company's Web site, the resources devoted to marketing and selling the
Company's services and brand promotions and other factors. Fueling the
Company's need for cash currently is the development of rival technology and new
Internet sites and portals offering similar products. See "Item 1.
Business-Competition." As we enjoy continued growth we must work to stay at the
forefront of technology and continue to grow in sales. This will necessitate a
substantial increase in capital expenditures consistent with its growth. In
addition, PhotoLoft.com will continue to evaluate possible investments in
businesses, products and technologies and plans to expand its sales and
marketing programs and conduct more aggressive brand promotions. We anticipate
that additional financing of $10 million will be needed to grow as contemplated.
At March 31, 1999, the Company had cash and cash equivalents totaling
$1,081,900, resulting principally from the sale of common stock in a private
placement during March 1999, and working capital of $1,550,600. The Company
believes that additional debt or equity financing will be needed, along with the
receipt of scheduled principal payments on its outstanding note receivable, in
order to satisfy the Company's capital requirements to support its expansion
plans.
We believe that our current cash and cash equivalents, as well as the
proceeds from scheduled payments from the sale of AltaVista.com to Compaq in
August 1998, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures through 2001. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. The
sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. The incurrence of indebtedness would
result in an increase in our fixed obligations and could result in operating
covenants that would restrict its operations. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
If financing is not available when required or is not available on acceptable
terms, we may be unable to develop or enhance our products or services. In
addition, we may be unable to take advantage of business opportunities or
respond to competitive pressures. Any of these events could have a material and
adverse effect on our business, results of operations and financial condition.
Impact of the Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. The third-party vendor upon which we materially rely
is AboveNet Communications, Inc. which co-locates our Web equipment and provides
our connection to the Internet. We have sought confirmation from AboveNet
Communications, Inc. that its system is Year 2000 compliant and AboveNet
Communications, Inc. has informed us that its system is Year 2000 compliant.
26
In addition, we plan to seek verification from other key vendors,
distributors and suppliers that they are Year 2000 compliant or, if they are not
presently compliant, to provide a description of their plans to become so. To
the extent that vendors fail to provide certification that they are Year 2000
compliant by September 1999, we will seek to terminate and replace these
relationships. Until our vendors, distributors and suppliers have provided
verification of their compliance, we will not be able to completely evaluate
whether our systems will need to be revised or replaced.
We are conducting an internal assessment of all material information
technology and non-information technology systems at our headquarters. Until we
complete the assessment, we will not know whether these systems are or will be
Year 2000 compliant by September 1999.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. There can be no assurance that we will not discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the operational facilities that support our
business, or our Web-hosting facilities, are not Year 2000 compliant, we may be
unable to deliver goods or services to our customers and portions of our Web
site may become unavailable. In addition, there can be no assurance that
third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be
Year2000-compliant. The failure by these entities to be Year 2000-compliant
could result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
27
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that might occur if technologies on which we depend are not
Year 2000-compliant and fail to operate effectively after the Year 2000. The
results of our Year 2000 compliance evaluation and the responses received from
distributors, suppliers and other third parties with which we conduct business
will be taken into account in determining the need for and nature and extent of
any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
This is a Year 2000 readiness disclosure statement within the meaning of
the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).
Effects of Inflation
Due to relatively low levels of inflation in 1997 and 1998, inflation has
not had a significant effect on our results of operations since inception.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. SFAS
No.131 requires that public companies report certain information about operating
segments in their annual financial statements and in subsequent condensed
financial statements of interim periods issued to shareholders. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate and their
major customers. Reportable operating segments are determined based on the
management approach, as defined by SFAS No. 131. The management approach is
based on the way that the chief operating decision-maker organizes the segments
within an enterprise for making operating decisions and assessing performance.
We have determined that we do not have any separately reportable business
segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000.
Historically, we have not used derivatives and therefore this new pronouncement
is not applicable.
28
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
The following risk factors should be considered in conjunction with the
other information included in this Registration Statement. This Registration
Statement may include forward-looking statements that involve risks and
uncertainties. In addition to those risk factors discussed elsewhere in this
Registration Statement, we have identified the following risk factors which
could affect our actual results and cause actual results to differ materially
from those in the forward looking statements.
We Have A Limited Operating History On Which To Evaluate Our Potential For
Future Success.
We launched our current business model in October, 1998 and therefore we
have only a limited operating history upon which you can evaluate our business
and prospects. You must consider the risks and uncertainties frequently
encountered by early stage companies in new and rapidly evolving markets, such
as e-commerce. If we are unsuccessful in addressing these risks and
uncertainties, our business, results of operations and financial condition will
be materially and adversely affected.
We Expect Losses For The Foreseeable Future.
Since 1997, we have incurred losses from operations, resulting primarily
from costs related to developing our Web site, attracting users to our Web site,
and establishing our brand. Because of our plans to invest heavily in marketing
and promotion, to hire additional employees, and to enhance our Web site and
operating infrastructure, we expect to incur net losses for the foreseeable
future. We believe these expenditures are necessary to build and maintain the
technical infrastructure necessary to host multiple images and to strengthen our
brand recognition, attract more users to our Web site and ultimately, generate
greater online revenues. If our revenue growth is slower than we anticipate or
our operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability.
Our Future Revenues Are Unpredictable And Our Quarterly Operating Results May
Fluctuate Significantly.
Our revenues for the foreseeable future will remain primarily dependent on
the number of users that we are able to attract to our Web site, and on
sponsorship and advertising revenues. We cannot forecast with any degree of
certainty the number of visitors to our Web site or the amount of sponsorship
and advertising revenues.
We expect our operating results to fluctuate from quarter to quarter. We
believe that sponsorship and advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If similar seasonal and cyclical patterns emerge in
Internet sponsorship and advertising spending, these revenues may vary based on
these patterns. See "Management's Discussion and Analysis of Financial Condition
and Operations-Seasonality."
29
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat visitors to our Web site and
convert them into users;
- our ability to keep current with the evolving tastes of our target
market;
- our ability to manage the number of items listed on our services;
- the ability of our competitors to offer new or enhanced Web site
features, products or services;
- the demand for sponsorship and advertising on our Web site;
- the level of use of the Internet and online services;
- consumer confidence in the security of transactions over the Internet;
- unanticipated delays or cost increases with respect to product and
service introductions; and
- the costs, timing and impact of our marketing and promotion
initiatives.
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
Your Holdings May be Diluted in the Future.
We are authorized to issue up to 50,000,000 shares of common stock. See
"Item 11. Description of Registrant's Securities to be Registered." To the
extent of such authorization, our Board of Directors will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
in the future for such consideration as our Board of Directors may consider
sufficient. The issuance of additional common stock in the future will reduce
the proportionate ownership and voting power of our common stock held by
existing stockholders. We are also authorized to issue up to 500,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by our Board of Directors. To the extent of such authorization, such
designations may be made without stockholder approval. The designation and
issuance of series of preferred stock in the future would create additional
securities that would have dividend and liquidation preferences over our common
stock.
30
We May Fail To Establish An Effective Internal Advertising Sales Organization To
Attract Sponsorship And Advertising Revenues.
To date, we have relied principally on outside parties to develop
sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal advertising sales organization. Our internal
sales team currently has 2 members. We will need to increase this sales force in
the coming year in order to execute our business plan. Our ability to increase
our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected. See "Item 1. Business--Employees."
We Are Growing Rapidly, And Effectively Managing Our Growth May Be Difficult.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management systems and resources. To manage
our growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. We cannot be certain that we will be
able to integrate new executives and other employees into our organization
effectively. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
See "Item 1. Business-Employees" and "Item 5. Directors and Executive
Officers."
We Depend On Our Key Personnel To Operate Our Business, And We May Not Be Able
To Hire Enough Additional Management And Other Personnel As Our Business Grows.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Jack Marshall, our Chief Executive Officer, President and Treasurer. The loss of
the services of any of our executive officers could materially and adversely
affect our business. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future. See "Item 1. Business-Employees" and "Item 5. Directors
and Executive Officers."
We May Not Be Able To Compete Successfully.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost. We currently or potentially compete with a
number of other companies, including a number of large online communities and
services that have expertise in developing online commerce, and a number of
other small services, including those that serve specialty markets. Competitive
pressures created by any one of these companies, or by our competitors
collectively, could have a material adverse effect on our business, results of
operations and financial condition. See "Item 1. Business--Competition."
31
We May Need Further Capital.
We currently anticipate that our available funds will be sufficient to meet
our anticipated needs for working capital, capital expenditures and business
expansion through September, 1999. Thereafter, we will need to raise additional
funds. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and such securities
may have rights, preferences and privileges senior to those of our common stock.
There can be no assurance that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to fund expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services or products or respond to competitive pressures. Such inability could
have a material adverse effect on our business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Operations-Liquidity and Capital Resources."
We May Fail To Establish And Maintain Strategic Relationships With Other Web
Sites To Increase Numbers Of Web Site Users And Increase Our Revenues.
We intend to establish numerous strategic alliances with popular Web sites
to increase the number of visitors to our Web site. There is intense competition
for placement on these sites, and we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances with other Web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships or strategic alliances and expand our existing ones could have a
material and adverse effect on our business.
We Would Lose Revenues And Incur Significant Costs If Our Systems Or Material
Third-Party Systems Are Not Year 2000-Compliant.
We have not devised a Year 2000 contingency plan. The failure of our
internal systems, or any material third-party systems, to be Year 2000-compliant
could have a material and adverse effect on our business, results of operations
and financial condition.
32
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. However, we may fail to discover Year
2000 compliance problems in our systems that will require substantial revisions
or replacements. In the event that the operational facilities that support our
business, or our Web-hosting facilities, are not Year 2000-compliant, portions
of our Web site may become unavailable and we would be unable to deliver
services to our users. In addition, there can be no assurance that third-party
software, hardware or services incorporated into our material systems will not
need to be revised or replaced, which could be time-consuming and expensive. Our
inability to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs and other
business interruptions, any of which could have a material and adverse effect on
our business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in our software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services,
any of which would have a material and adverse effect on our business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Statements and Results of Operations- Impact of the Year 2000."
Acquisitions May Disrupt Or Otherwise Have A Negative Impact On Our Business.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding, nor are we having any discussions relating to any such
acquisition or investment. If we buy a company, then we could have difficulty in
assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. An acquisition
could distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
shareholders.
Unforeseen Developments May Occur With Respect To Digital Imaging Technology.
Digital imaging is a relatively new phenomenon and the slower than expected
acceptance of the new technology could affect our ability to grow as rapidly as
we need to in order to meet our financial targets. Digital camera manufacturers
have made great strides in the past two years improving the functionality of
their cameras and pricing them in a range that is attractive to many consumers.
The continued refinement of the technology and commoditization of the price will
help to move acceptance of the technology along. Full acceptance of digital
imaging technology will require a move on the part of the photographic
population away from traditional chemical-based photo processing to the new
paradigm of home printed photos. The costs remain competitive for digital
imaging, however, there is no guarantee the general population will make this
shift rapidly, if at all.
33
We Are Dependent On The Continued Development Of The Internet Infrastructure.
Our industry is new and rapidly evolving. Our business would be adversely
affected if Web usage and e-commerce does not continue to grow. Web usage may be
inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, Web sites have experienced a variety of interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, Web usage, including usage of our Web site, could grow slowly or
decline.
Our Long-Term Success Depends On The Development Of The E-Commerce Market, Which
Is Uncertain.
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce by consumers.
Rapid growth in the use of the Web and commercial online services is a recent
phenomenon. Demand for recently introduced services and products over the Web
and online services is subject to a high level of uncertainty. The development
of the Web and online services as a viable commercial marketplace is subject to
a number of factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
- adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and
growth.
34
Adoption Of The Internet As An Advertising Medium Is Uncertain.
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our Web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Our
business, financial condition and operating results would be adversely affected
if the market for Internet advertising fails to develop or develops slower than
expected. See "Item 1. Business--Advertising."
We Face Risks Associated With Government Regulation Of And Legal Uncertainties
Surrounding The Internet.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad. See
"Item 1. Business - Government Regulation."
Shares Eligible For Future Sale By Our Current Stockholders May Adversely Affect
Our Stock Price.
To date, we have had a very limited trading volume in our common stock.
See "Item 9. Market Price and Dividends on the Registrant's Common Equity and
Related Stockholder Matters." Sales of substantial amounts of common stock,
including shares issued upon the exercise of outstanding options and warrants,
under SEC Rule 144 or otherwise could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities.
Anti-Takeover Provisions And Our Right To Issue Preferred Stock Could Make A
Third-Party Acquisition Of Us Difficult.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our Board of Directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock. See "Item 11.
Description of Registrant's Securities to be Registered -- Nevada Anti-Takeover
Laws and Certain Charter Provisions."
35
Our Common Stock Price Is Likely To Be Highly Volatile.
The market price of our common stock is likely to be, highly volatile as
the stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. See "Item 9. Market Price
and Dividends on the Registrant's Common Equity and Related Stockholder
Matters." Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the same
period, these companies' stocks have also been highly volatile and have recorded
lows well below historical highs. We cannot assure you that our stock will trade
at the same levels of other Internet stocks or that Internet stocks in general
will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
ITEM 3. DESCRIPTION OF PROPERTIES
Our executive offices, comprising approximately 2,628 square feet, are
located at 300 Orchard City Drive, Suite 142, Campbell, California 95008. These
facilities are leased pursuant to a lease expiring August 31, 2001. The monthly
rent is $5,519. We sublease approximately 1,288 square feet of additional space
in the same building under a sublease that expires in September 1999. We also
sublease approximately 1,430 square feet of space in another building located in
Campbell, California under a sublease that expires in September 2000.
36
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. See "Item 1. Business--Operations and Systems." Our
operations are dependent in part on our ability to protect our operating systems
against physical damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins or other similar events. Furthermore,
despite our implementation of network security measures, our servers are also
vulnerable to computer viruses, break-ins and similar disruptive problems. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to our users which could have a material adverse effect on
our business, results of operations and financial condition.
37
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 7, 1999, the ownership of our
common stock by (i) each of our directors and executive officers; (ii) all of
our executive officers and directors as a group; and (iii) all persons known by
us to beneficially own more than 5% of our common stock.
Unless otherwise indicated in the footnotes to the table, (1) the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and (2) the address of each beneficial owner listed
below is c/o 300 Orchard City Drive, Suite 142, Campbell, California 95008.
[Enlarge/Download Table]
NAME AND ADDRESS OF BENEFICIAL OWNER. . . . . . . . . . . . AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
EXECUTIVE OFFICERS AND DIRECTORS: . . . . . . . . . . . . . OWNERSHIP (1) CLASS (1)
----------------------------------------------------------- ------------------ -----------
Jack Marshall (2)(3). . . . . . . . . . . . . . . . . . . . 2,448,329 19.7%
----------------------------------------------------------- ------------------ -----------
Christopher McConn (4). . . . . . . . . . . . . . . . . . . 832,346 6.7%
------------------ -----------
Lisa Marshall (2)(5). . . . . . . . . . . . . . . . . . . . 155,963 1.3%
----------------------------------------------------------- ------------------ -----------
Patrick Dane (6). . . . . . . . . . . . . . . . . . . . . . 102,411 0.8%
----------------------------------------------------------- ------------------ -----------
John Marshall(2)(7) . . . . . . . . . . . . . . . . . . . . 772,080 6.2%
----------------------------------------------------------- ------------------ -----------
Gary Kremen (8) . . . . . . . . . . . . . . . . . . . . . . 251,294 2.0%
----------------------------------------------------------- ------------------ -----------
All directors and executive officers as a group (6 Persons) 4,492,933 36.1%
----------------------------------------------------------- ------------------ -----------
OTHER 5% STOCKHOLDERS:
-----------------------------------------------------------
George Perlegos . . . . . . . . . . . . . . . . . . . . . . 2,270,063 18.2%
----------------------------------------------------------- ------------------ -----------
Keith Queeney . . . . . . . . . . . . . . . . . . . . . . . 700,759 5.6%
----------------------------------------------------------- ------------------ -----------
<FN>
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the purpose of calculating
the number and percentage owned by such person, but are not deemed outstanding for the
purpose of calculating the percentage owned by each other person listed.
(2) John Marshall is the father of Jack and Lisa Marshall, who are brother and sister.
(3) Includes 331,051 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.
(4) Includes 132,420 shares of Common Stock subject to options that are
exercisable within 60 days of the date hereof.
38
(5) Includes 6,120 shares of Common Stock subject to options that are exercisable
within 60 days of the date hereof.
(6) Includes 88,911 shares of Common Stock subject to options that are currently
exercisable.
(7) Includes 88,911 shares of Common Stock subject to options that are currently
exercisable.
(8) Includes 88,911 shares of Common Stock subject to options that are currently
exercisable.
39
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and positions of our directors and
executive officers:
[Download Table]
NAME. . . . . . . . . . . AGE POSITION
------------------------- --- -------------------------------------
President, Treasurer, Chief Executive
Jack Marshall (1) (3) (4) 37 Officer and Director
------------------------- --- -------------------------------------
Chief Technology Officer
Christopher McConn. . . . 39 Director
------------------------- --- -------------------------------------
Lisa Marshall (1) . . . . 40 Secretary
------------------------- --- -------------------------------------
Patrick Dane (2) (3) (4). 49 Director
------------------------- --- -------------------------------------
Gary Kremen (2) (3) (4) . 35 Director
------------------------- --- -------------------------------------
John Marshall (1) (2) . . 69 Director
------------------------- --- -------------------------------------
<FN>
(1) John Marshall is the father of Jack and Lisa Marshall, who are brother and
sister.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Finance Committee
The following sets forth biographical information concerning our directors
and executive officers for at least the past five years:
JACK MARSHALL has been developing Internet applications since 1993. After
assignments at Texas Instruments and Honeywell, Mr. Marshall worked as a sales
manager for Teradyne (formerly MegaTest), a leading developer of high-end,
state-of-the-art semiconductor test equipment. Mr. Marshall founded Photoloft
in 1993 under the name AltaVista Technology. Inc. Mr. Marshall received his
bachelor's degree in electrical engineering and computer engineering from
Michigan State University and has taught electric circuit analysis at Highland
Community College in Illinois. He has also completed several masters level
courses in computer engineering at Santa Clara University.
CHRISTOPHER MCCONN has been the Chief Technology Officer of Photoloft.com
since February 1994. Prior to our adoption of the Photoloft.com business
strategy, he served as our webmaster and developed web-based multimedia and
imaging programs. He has extensive expertise in programming C++ and served as a
consultant to Borland International, a leading producer of C++ and software
development tools from July 1995 to July 1996. In this role, Mr. McConn helped
develop the Object Windows Library (OWL), a foundation for PhotoLoft.com. Mr.
McConn received his bachelor's degree in electrical engineering from UC Davis in
1982. Mr. McConn has over 13 years of industry experience including stints at
Ford Aerospace and Teradyne, where he oversaw the company's software QA
development.
40
LISA MARSHALL has over 20 years of strategic and tactical communications
experience, focused primarily on investor relations, media communications and
marketing and brand development. Working in a number of diverse industries, she
helped spearheaded nationwide efforts to deregulate the airline, natural gas
transportation, and most recently, electric generation industries, working to
establish strong, deregulated competitors in the various marketplaces. In
addition, she handled the communications efforts of the Vastar Resources Initial
Public Offering, which was the largest to date on the New York Stock Exchange
when implemented in 1994. From 1985 to 1988 she served in various managerial
positions at Continental Airlines. From 1988 to 1993 she served in various
managerial positions at Tenneco Inc. From February 1993 to June 1997 she served
as director of Communications for ARCO/Vastar Resources. From July 1997 to
October 1998 she served as director of Communications for Southern Company. Ms.
Marshall earned her bachelor's degree from the University of Wyoming in American
Studies in 1980 and her bachelors degree from the University of Houston in
journalism in 1984.
PATRICK DANE has spent more than twenty years in the high technology
industry. He spent fifteen years in sales and marketing at Xerox where he was
responsible for bringing the "Alto" Computer Ethernet and File, Print &
Communication Servers out to the public from the Palo Alto Research center
(PARC) in 1980. Additionally, he was the creator of the award winning slogan
"Team Xerox" and other pioneering efforts. As Vice President, Sales & Marketing
at Dove Computer Corp. he introduced the MacWorld World Class Award Winning Dove
Fax Modem. As a General Manager with Calera Recognition Systems from 1991 to
1992 Dane was responsible for bringing Fax Grabber to there tail and OEM
marketplace. While President and CEO of SoftNet in from July 1992 to August 1993
he launched the category-leading Fax Works for Windows. Dane co-founded and ran
Pipeline Communications which introduced online warranty registration to the
computer industry. This service is used by over seventy five of the top PC
manufacturers and ISV's in the marketplace today. In the spring of1996, Dane
founded Tuneup.com an online PC service center, Quarterdeck Corporation acquired
his "Pioneer" among the Internet subscription-based businesses in May of 1997.
In September1996, Dane and Mike Walter began broadcasting a weekly radio show
devoted to the Internet called, "Pat & Mike's World Wide Web Radio Show". The
show, sponsored by CompuServe, Yahoo! IZift Davis, Hewlett-packard, Office
Depot.com, McAfee and USA Today, has a growing worldwide audience on the
Internet and in twenty seven real radio markets. The show was picked up for
national syndication by Premiere Radio Networks in mid 1997. Mr. Dane graduated
from Broom Comm College in 1969.
GARY KREMEN has been a member of the Board of Directors of Photoloft since
August, 1997. advisor and has over 12 years experience with emerging growth
companies and developing information technology. Mr. Kremen is a private
investor in companies such as: Resonate, Pinpoint Golf, Argus Software, ProShot,
Upside Media, Axicon, Tut Systems, Digital Technology Partners, and Electric
Classifieds, Inc. From 1995 to 1996 Mr. Kremen founded and served as president
of NetAngels.com, Inc., a company focused on Internet profiling and
personalization. In 1993, he founded the Board of Electric Classifieds, Inc.,
whose on-line personals service Match.com - is the leading community of its
kind. Mr. Kremen received his masters degree in business and administration from
Stanford University in 1989 and received bachelor's degrees in computer science
and electric engineering from Northwestern University in 1985.
41
JOHN C. MARSHALL began his career in 1952 with Shell Oil Company, where he
held various management positions until 1975, when he was named General Manager
of Land Operations, North America. He left the company in 1979 to join Patrick
Petroleum (NYSE:PPC) as senior vice president. A year later he was named
executive vice president responsible for all operations (domestic and
international), and all merger and acquisition activity. After negotiating the
sale of all PPC assets to General Electric, he founded Kleenburn Energy in 1984
a privately held independent oil and gas concern. Mr. Marshall earned his
bachelor's degree in business from the University of Wyoming in 1952.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders
following their election or until their successors have been elected and
qualified. Executive officers are appointed by and serve at the pleasure of the
Board of Directors. We may adopt provisions in our By-laws and/or Articles of
Incorporation to divide the board of directors into more than one class and to
elect each class for a certain term. These provisions may have the effect of
discouraging takeover attempts or delaying or preventing a change of control of
Photoloft.
BOARD COMMITTEES
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our Stock Option Plan. The current
members of the Compensation Committee are Messrs. Dane, Kremen and John
Marshall. Prior to April 8, 1999, we did not have a Compensation Committee or
any other committee of the Board of Directors that performed any similar
functions. See "Compensation Committee Interlocks and Insider Participation."
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The current members of the
audit committee are Messrs. Dane, Kremen and Jack Marshall.
The Finance Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various financing matters. The
current members of the audit committee are Messrs. Dane, Kremen and Jack
Marshall.
The Board of Directors does not have a nominating committee.
42
DIRECTORS' COMPENSATION
Directors who are also employees of Photoloft.com receive no compensation
For serving on the Board of Directors. With respect to directors who are not
employees ("Non-Employee Directors"), we intend to reimburse such directors for
all travel and other expenses incurred in connection with attending meetings of
the Board of Directors and any committees of the Board. Non-Employee Directors
are also eligible to receive and have received grants of non-qualified stock
options under our Stock Option Plan, and we intend to establish a Non-Employee
Director Stock Option Plan which will provide for initial option grants of a
fixed number of shares of our common stock to Non-Employee Directors and
successive annual option grants to such Non-Employee Directors covering an
additional fixed number of shares to provide us with an effective way to recruit
and retain qualified individuals to serve as members of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the Board of
Directors performing similar functions during the fiscal years ending December
31, 1997 and 1998. Messrs. Jack Marshall and Chris McConn are each officers of
Photoloft.com and, as members of the Board of Directors, participated in
deliberations of the Board of Directors relating to the compensation of our
executive officers. The Board of Directors established a Compensation Committee
as of April 8, 1999. See "Board Committees."
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ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the year ended December 31,
1998:
SUMMARY COMPENSATION TABLE (1)(2)
[Download Table]
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- --------------------------------
NAME AND PRINCIPAL NUMBER OF SECURITIES UNDERLYING
POSITION. . . . . . . . SALARY ($) OPTIONS (#)
Jack Marshall, CEO,
President and Treasurer 156,864 1,135,032
Christopher E. McConn
Chief Technology
Officer. . . . . . . . 127,229 454,013
<FN>
(1) Information set forth herein includes services rendered by the Named
Executives while employed by Photoloft.com, Inc. prior to the Reorganization and
by Photoloft.com following the Reorganization.
(2) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock
Awards", "LTP Payouts" and "All other Compensation" have been omitted because
there is no compensation required to be reported.
The following table sets forth certain information concerning options
granted to the Named Executives during 1998.
[Enlarge/Download Table]
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998(1)
NAME Number of % of Total Exercise Expiration Potential Realizable Value at
Securities Options Price Per DATE(5) Assumed Annual Rates of Stock
Underlying Granted to Share Price Appreciation for Option
Options Employees ($/SH)(4) Term (6)
Granted (#) IN 1998 (3)
(2)
-------------------------------
0% 5% 10%
--------------------- ----------- ----------- --------- ----------- ---------- -------- ---------
Jack
Marshall 1,135,032 42.2% 0.48 July, 2007 ($181,605) $11,350 $306,459
--------------------- ----------- ----------- --------- ----------- ---------- -------- ---------
Christopher E. McConn
454,013 16.9% 0.48 July, 2007 ($72,642) $ 4,540 $122,584
----------- ----------- --------- ----------- ---------- -------- ---------
<FN>
(1) No SARs were granted to the Named Executives during 1998.
(2) Each option represents the right to purchase one share of our common stock.
(3) In 1998, we granted officers, employees and consultants options to purchase an aggregate of
2,690,706 shares of our common stock.
(4) The fair market value of our common stock on the date of grant for each of the listed options,
as determined by our board of directors, was $0.32 per share.
(5) Options may terminate before their expiration dates if the optionee's status as an employee or
consultant is terminated or upon the optionee's death or disability.
(6) Amounts represent hypothetical gains that could be achieved for the respective options if
exercised at their end of their respective terms. The 0%, 5%, and 10% assumed annual rates of
compounded stock price appreciation are mandated by rules of the SEC and do not represent our estimate
or projection of the future prices of the common stock. Actual gains, if any, on any exercises of
options are dependent upon the future performance of the common stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be achieved.
44
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executives concerning exercisable and unexercisable stock options held by
them as of December 31, 1998. None of these executive officers exercised options
to purchase common stock in 1998.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR END OPTION VALUES(1)
[Download Table]
Name
Number of Unexercised Value of Unexercised In-the-
Options at Year End(#) Money Optionsat Year End (2)
--------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- ----------- -------------- -------------- -----------------
Jack Marshall
1,270,726 1,016,799 $ 635,363 $ 508,399
-------------- ----------- -------------- -------------- -----------------
Christopher E.
McConn 657,474 406,720 $ 328,737 $ 203,360
-------------- ----------- -------------- -------------- -----------------
<FN>
(1) No SARs were owned or exercised by any of the Named Executives during 1998.
(2) Based on a per share fair market value of our common stock equal to $0.50
per share, the fair market value as determined by our Board of Directors at
December 31, 1998.
45
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On February 26, 1999 we entered into an employment agreement (the
"Executive Employment Agreement") with Jack Marshall ("Executive"). Under the
Executive Employment Agreement, Jack Marshall is to serve as our Chief Executive
Officer, President and Treasurer and perform such duties as may be reasonably
assigned to him by the Board of Directors. The Executive Employment Agreement
provides for an annual base salary of $120,000 which shall be reviewed at least
annually. Under the Executive Employment Agreement, the executive is also
eligible for annual bonus compensation in the minimum amount of $60,000 if
Photoloft reaches certain specific milestones. The Executive Employment
Agreement also provides that Mr. Marshall is to receive options to purchase
between 250,000 and 750,000 shares of our Common stock if traffic to our Web
Site reaches between 500,000 and 1,000,000 hits in any particular month.
Executive is eligible to receive vacation in accordance with the Company's
policies. He is also eligible to participate in the health, life insurance,
medical, retirement and other benefit programs which we may offer from time to
time. He also is to receive a car allowance of $500 per month.
The term of the Executive Employment Agreement lasts until December 31,
2001 and continues thereafter on a year to year basis unless terminated pursuant
to the terms thereof. We may terminate Executive at any time with or without
cause. The term "cause" is defined in the Executive Employment Agreement as:
(i) the willful neglect of duties reasonably assigned by the Board of Directors;
(ii) material breach of the agreement; or (iii) willful gross misconduct. If
Executive is terminated without cause, he is to receive severance pay through
December 31, 2001 equal to: (i) the base salary; (ii) bonus compensation; (iii)
vested options to purchase Common stock; (iv) health insurance; (v) car
allowance; and (vi) any unused vacation time. pre payment of all automobile
allowance for the remaining period of the term. If the Executive resigns from
his position for good cause, including a substantial reduction in his position,
duties or a material breach of the agreement by us, he is to be deemed
terminated without cause and is eligible to receive severance.
EMPLOYEE BENEFIT PLANS
Stock Option Plan
Our Stock Option Plan (the "Plan") was adopted by the Board of Directors,
and ratified and approved by our stockholders, as of the closing of the
Reorganization. The Board of Directors amended the Plan in June 1999. The
following description of our Stock Option Plan is a summary and qualified in its
entirety by the text of the plan, which is filed as an exhibit to this
Registration Statement.
46
The purpose of the Plan is to enhance our profitability and stockholder
value by enabling us to offer stock based incentives to employees, directors and
consultants. The Plan authorizes the grant of options to purchase shares of
common stock to employees, directors and consultants of Photoloft and its
affiliates. Under the Plan, we may grant incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 and non-qualified
stock options. Incentive stock options may only be granted our employees.
The number of shares available for options under the Plan is 3,800,000. The
Plan is administered by the Compensation Committee of the board. Subject to the
provisions of the Plan, the Compensation Committee has authority to determine
the employees, directors and consultants of Photoloft who are to be awarded
options and the terms of such awards, including the number of shares subject to
such option, the fair market value of the common stock subject to options, the
exercise price per share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
(110% if the grant is to a stockholder holding more than 10% of our voting
stock) of the fair market value of a share on the date of the award and
generally cannot have a duration of more than 10 years (five years if the grant
is to a stockholder holding more than 5% of our voting stock). Terms and
conditions of awards are set forth in written agreements between Photoloft.com
and the respective option holders. Awards under the Plan may not be made after
the tenth anniversary of the date of its adoption but awards granted before that
date may extend beyond that date.
If the employment with Photoloft of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the Plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability.
As of July 7, 1999 225,000 shares had been issued as the result of the
exercise of options previously granted under the Plan, 3,390,641 shares were
subject to outstanding options and 409,359 shares were available for future
grants. The exercise prices of the outstanding options ranged from $0.48 to
approximately $5.25. The options under the Plan vest over varying lengths of
time pursuant to various option agreements that we have entered into with the
grantees of such options.
We have not registered the Plan, or the shares subject to issuance
thereunder, pursuant to the Securities Act. Absent registration, such shares,
when issued upon exercise of options, would be "restricted securities" as that
term is defined in Rule 144 under the Securities Act.
47
Optionees have no rights as stockholders with respect to shares subject to
options prior to the issuance of shares pursuant to the exercise thereof.
Options issued to employees under the Plan shall expire no later than ten years
after the date of grant. An option becomes exercisable at such time and for
such amounts as determined at the discretion of the Board of Directors or the
Compensation Committee at the time of the grant of the option. An optionee may
exercise a part of the option from the date that part first becomes exercisable
until the option expires. The purchase price for shares to be issued to an
employee upon his exercise of an option is determined by the Board of Directors
or the Compensation Committee on the date the option is granted. The purchase
price is payable in full in cash, by promissory note, by net exercise or by
delivery of shares of our Common stock when the option is exercised.
The Plan provides for adjustment as to the number and kinds of shares
covered by the outstanding options and the option price therefor to give effect
to any stock dividend, stock split, stock combination or other reorganization of
or by Photoloft.
48
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Unless otherwise indicated, information in this Item 7 regarding shares of
our Common Stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of Photoloft-California Common Stock at the time of the reorganization.
ISSUANCES TO FOUNDER. Upon his founding of Photoloft-California in
November, 1993, we issued 756,688 shares of Common Stock to Jack Marshall in
exchange for $500.00. At that time, we also issued him options to purchase up to
1,152,493 shares of Common Stock which vested over a four year period and had an
exercise price of $0.001 per share. He exercised his options and elected to
purchase 1,152,493 shares of Common Stock in February, 1999. During the Series
A Preferred Stock Offering described below, he purchased 125,000 shares in
exchange for $25,000. He transferred 50,000 shares of Common Stock by gift in
February 1999. In March, 1999 his shares of Photoloft-California Common Stock
and his options to purchase shares of Photoloft-California Common Stock were
converted into shares of Photoloft.com Common Stock, and options to purchase
Photoloft.com Common Stock as a result of the Reorganization.
SERIES A PREFERRED OFFERING. From 1994 to 1998 we conducted a private
offering of Photoloft-California Series A Preferred Stock. As a result, we sold
the aggregate amount of 2,275,625 shares of Series A Preferred Stock in exchange
for $455,125. Under this offering, Messrs. John Marshall and Chris McConn
purchased 295,000 and 25,000, shares of stock, respectively. Ms. Lisa Marshall
purchased 12,500 shares for $2,500. As described above, Mr. Jack Marshall also
participated in the offering. Each outstanding share of Series A Preferred
Stock was converted into 1.5 shares of Common Stock of Photoloft-California
in February, 1999.
SERIES B PREFERRED OFFERING. In August 1996, conducted a private offering
of Photoloft-California Series B Preferred Stock. As a result, we sold 150,000
shares of our Series B Preferred Stock to Mr. Kris Chellum for $45,000. Each
outstanding share of Series B Preferred Stock was converted into 1.5 shares of
Common Stock of Photoloft-California in February, 1999.
1996 CONSULTING SERVICES. In 1996 we issued 53,472 shares of Common Stock to Mr.
Keith Queeney and Mr. Chris McConn in exchange for services provided to us.
SERIES C PREFERRED OFFERING. In October, 1997 we entered into an agreement
with Kremen, Father & Partners to provide us with financial consulting services
and assist us with obtaining financing. One of our directors, Gary Kremen, is a
principal of Kremen, Father & Partners. In exchange for $59,500 worth of
services, we issued, from 1997 to 1998, 63,384 shares of Series C Preferred
Stock to Mr. Kremen. Each outstanding share of Series C Preferred Stock was
converted into 1.5 shares of Common Stock of Photoloft-California in February,
1999. Currently, we no longer contract with Kremen, Father & Partners for any
services.
1998 CONSULTING SERVICES. In 1998 we issued 176,006 shares of Common Stock
to consultants and employees who provided services to us. Under this offering,
Ms. Lisa Marshall received 15,739 shares of Common Stock.
49
EXERCISED STOCK OPTIONS. In February, 1999 we issued the aggregate amount
of 2,844,112 shares of Common Stock upon the exercise of options to purchase
Common Stock which were granted to employees, directors and consultants of the
Company between 1993 and 1998. Under this issuance, Messrs. Jack Marshall and
Chris McConn exercised options to purchase 1,152,493 and 610,181 shares of
Common Stock, respectively.
STOCK OPTION PLAN. In 1998, we issued options to purchase the aggregate
amount of 2,690,706 shares of Common Stock to employees, directors and
consultants of the Company pursuant to the Company's Stock Option Plan. These
options have an exercise price of $0.48 per share. Under this offering, Mr. Jack
Marshall and Mr. Chris McConn received options to purchase up to 1,135,032 and
454,013 shares of Common Stock, respectively, with exercise prices of $0.48 per
share. These options vest in 48 monthly installments. Additionally, from
January to July 1999, we have issued options to purchase the aggregate amount of
699,936 shares of Common Stock to employees, directors and consultants of the
Company pursuant to the Company's Stock Option Plan. These options were issued
at their fair market value on the date of grant and have exercise prices ranging
from $0.48 to $5.25.
In addition to the above, in March 1999, we issued the aggregate amount of
225,000 shares of Common Stock upon the exercise of options to purchase Common
Stock which were granted to certain employees, directors, and consultants of the
Company in March 1999 under the Company's Stock Option Plan. These options had
an exercise price of $0.50 per share. Under this offering, Mr. John Marshall
exercised options to purchase 13,500 shares of Common Stock.
REORGANIZATION. In February 1999, Photoloft-California entered into the
Reorganization with a non-operating public company, Data Growth, Inc., a Nevada
corporation incorporated in January, 1996 ("DGI"). Under the Reorganization
Agreement, the Photoloft-California stockholders received 1.5133753 shares of
DGI Common Stock in exchange for each of their shares of Photoloft-California
Common Stock. Additionally, the holders of options to purchase shares of Common
stock of Photoloft-California terminated their options and received options to
purchase shares of Common Stock of DGI. As a result of the Reorganization,
Photoloft-California became a wholly-owned subsidiary of DGI. DGI adopted the
Photoloft-California Stock Option Plan. An aggregate of 9,579,266 shares of
Common stock and options to purchase an aggregate of 2,795,734 shares of Common
stock were issued to the former Photoloft-California stockholders and option
holders, respectively, in the Reorganization and the Photoloft-California
stockholders owned approximately 77% of DGI immediately after the
Reorganization. As part of the Reorganization, all of the executive officers and
directors of DGI resigned and the executive officers and directors of
Photoloft-California became the executive officers and directors of DGI which
changed its name to Photoloft.com
50
BAYTREE CAPITAL ASSOCIATES, LLC. In February, 1999 Photoloft-California
entered into an agreement with Baytree Capital Associates, LLC which we assumed
after the Reorganization. Under the agreement, Baytree provided financial
consulting and assistance to Photoloft-California which including the
structuring and negotiation of a loan, the identification of a merger candidate
and the assistance with the Reorganization. For their services, Baytree
received 25,000 shares of our Common Stock and was paid $10,000 in
non-accountable expense reimbursement. In addition, Baytree has been granted a
24 month right of first refusal with respect to any subsequent financings.
Baytree also has unlimited "piggyback" registration rights as to its 25,000
shares. Lynn Dixon, a shareholder of DGI was instrumental in locating DGI as an
entity to be used in the Reorganization. Mr. Dixon was also involved in the
negotiation of the terms of the transaction.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
51
ITEM 8. LEGAL PROCEEDINGS
There is presently two pending legal proceedings to which we are a party.
James Vierra has filed an action against us alleging, among other things,
breaches of fiduciary duties, violation of securities laws, and employment
related claims arising out of the disputed ownership of the ID4Life division and
the termination of Mr. Vierra's employment with us. We have answered the
complaint and asserted a counterclaim comprising of claims for declaratory
relief, breach of fiduciary duty and breach of contract against Mr. Vierra. We
believe that Mr. Vierra's claims are without merit and intend to defend our
position vigorously.
Hewlett-Packard, Co. has filed an action against us alleging trade secret
misappropriation, unfair competition, and breach of contract arising out of the
activities of one of our employees. Hewlett-Packard is seeking injunctive
relief and damages. We are presently in settlement negotiations with
Hewlett-Packard with regard to this matter. We have a preexisting relationship
with Hewlett-Packard with respect to the development and use of certain aspects
of our advanced viewing and printing technologies. See "Item 1. Business --
Products and Services."
To the best of our knowledge, there are presently no other legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of its knowledge, no such actions
against us are contemplated or threatened.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
No shares of our common stock have previously been registered with the SEC
or any state securities agency or authority. Our common stock has been trading
on the National Association of Security Dealers Over-The-Counter Market Bulletin
Board ("OTCBB") since March 1, 1999 under the symbol "LOFT". The following table
sets forth the range of high and low bid prices of the common stock for each
calendar quarterly period since trading commenced as reported by the National
Quotation Bureau, Inc. ("NQB"). Prices reported by the NQB represent prices
between dealers, do not include retail markups, markdowns or commissions and do
not represent actual transactions.
[Download Table]
1999 High Low
----------------------------------- ------ ------
First Quarter (March 1 to March 31) $7.375 $4.500
Second Quarter (April 1 to June 30) $5.500 $3.625
Third Quarter (July 1 to July 7) $5.375 $5.062
As of July 7, 1999 there were approximately 325 holders of record of our
common stock, which figure does not take into account those stockholders whose
certificates are held in the name of broker-dealers or other nominees.
52
Dividend Policy
We have not declared or paid cash dividends or made distributions in
the past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intend to retain and
invest future earnings to finance our operations.
Transfer Agent
Our transfer agent for our common stock is Interwest Transfer Co., Inc.,
1981 East 4800 South, Salt Lake City, Utah 84117.
53
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act, or rule of the SEC under which exemption from
registration was claimed.
Transactions described in Items (1) through (10) below refer to the
securities of PhotoLoft.Com, Inc., a California corporation which was the
predecessor entity of the filer of this Registration Statement, and transactions
described in Items (11) through (15) below refer to the securities of
Photoloft.com, a Nevada corporation which is the filer of this Registration
Statement.
Unless otherwise indicated, information in this Item 10 regarding shares of
our Common Stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of Photoloft-California Common Stock at the time of the reorganization.
(1) From 1994 to 1998 we sold the aggregate amount of 2,275,625 shares
of Series A Preferred Stock in exchange for $430,125 valued in cash and services
provided to the Company pursuant to a private offering of our Series A Preferred
Stock. The issuances were made in reliance on Section 4(2) of the Securities
Act and/or Regulation D promulgated under the Securities Act and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(2) In August 1996, we sold the aggregate amount of 150,000 shares of
our Series B Preferred Stock for $45,000 pursuant to a private offering of our
preferred stock. The issuance was made in reliance on Section 4(2) of the
Securities Act without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment, and who represented to the Company that the shares were
being acquired for investment.
(3) In 1996 and 1997 we issued 67,244 shares of Common Stock to
consultants and employees of the Company in exchange for services rendered to
the company valued at $8,667. The issuances were made in reliance on Section
4(2) of the Securities Act and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
54
(4) From 1997 to 1998, the Company issued 63,384 shares of Series C
Preferred Stock in exchange for services valued at $59,500 pursuant to a private
offering of our preferred stock. The issuance was made in reliance on Section
4(2) of the Securities Act and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to the Company that the shares were being acquired for investment.
(5) In 1998 we issued 176,006 shares of Common Stock to employees and
consultants of the Company in exchange for services rendered to the Company. The
issuances were made in reliance on Section 4(2) of the Securities Act and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(6) In 1998, we issued options to purchase up to 2,690,706 shares of
Common Stock to certain employees, directors and consultants of the Company with
an exercise price of $0.48 per share pursuant to the Company's Stock Option
Plan. These issuances were made in reliance on Section 4(2) of the Securities
Act and/or Rule 701 promulgated under the Securities Act and were made without
general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(7) From January 1999 to July 1999 the Company issued options to
purchase the aggregate amount of 924,936 shares of Common Stock in the Company
pursuant to the Company's Stock Option Plan with exercise prices from $0.48 per
share to $5.25 per share. These issuances were made in reliance on Section 4(2)
of the Securities Act and/or Rule 701 promulgated under the Securities Act and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(8) In February, 1999 we issued the aggregate amount of 2,844,112
shares of Common Stock upon the exercise of options to purchase Common Stock
which were granted to employees, directors and consultants of the Company
between 1993 and 1998 . The issuances were made in reliance on Section 4(2) of
the Securities Act and were made without general solicitation or advertising.
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate these investments, and who represented to the
Company that the shares were being acquired for investment.
(9) In February 1999, we issued 5,650,207 shares of Common Stock in
exchange and upon the conversion of shares of issued and outstanding Series A, B
and C Preferred Stock of the Company. The issuances were made in reliance on
Section 4(2) of the Securities Act and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
55
(10) In February 1999, the Company issued 85,011 shares of Common Stock
to employees and consultants of the Company in exchange for services valued at
$42,506. The issuances were made in reliance on Section 4(2) of the Securities
Act and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
(11) In March 1999, under the terms of the Reorganization, the Company
issued the aggregate amount of 9,579,266 shares of Common Stock to the
shareholders of Photoloft.com in exchange for their shares of Common Stock of
Photoloft-California. The issuances were made in reliance on Section 4(2) of the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
(12) In March 1999, under the terms of the Reorganization, the holders
of options to purchase Common Stock of Photoloft-California exchanged their
options for options to purchase the aggregate amount of 2,795,734 shares of
Common Stock of the Company. These issuances were made in reliance on Section
4(2) of the Securities Act and/or Rule 701 promulgated under the Securities Act
and were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(13) In March 1999, pursuant to the terms of the Reorganization
Agreement, the Company conducted a private offering of its Common stock.
Pursuant to that offering, a total of 2,000,000 shares of Common stock were sold
for total cash consideration of $1,000,000. The issuances were made in reliance
on Section 4(2) of the Securities Act and/or Regulation D promulgated under the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
(14) In March 1999, the Company issued 225,000 shares of Common Stock
upon the exercise of options to purchase Common stock held by certain employees,
directors and consultants of the Company. These options were issued in 1999 and
had exercise prices of $0.50 per share. These issuances were made in reliance on
Section 4(2) of the Securities Act and/or Rule 701 promulgated under the
Securities Act and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
56
(15) In March 1999, the Company issued 25,000 shares of Common stock to
Baytree Capital Associates pursuant to the terms of a Letter Agreement with
Baytree Capital Associates for financial business consulting services. The
issuance was made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated under the Securities Act and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment, and who
represented to the Company that the shares were being acquired for investment.
57
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The descriptions in this Item and in other sections of this Registration
Statement of our securities and various provisions of our Articles of
Incorporation and our Bylaws are summaries. Statements contained in this
Registration Statement relating to such provisions are not necessarily complete,
and reference is made to the Articles of Incorporation and Bylaws, copies of
which have been filed with the SEC as exhibits to this Registration Statement,
and provisions of applicable law.
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $.001 per share, and 500,000 shares of Preferred Stock, par value
$.001. As of July 7, 1999, 12,454,266 shares of our common stock were issued
and outstanding and 3,800,000 shares of common stock were reserved for issuance
upon exercise of outstanding options. Only our common stock is being registered
under the Exchange Act pursuant to this Registration Statement. As of July 7,
1999, no shares of our Preferred Stock were issued and outstanding. See "Item
2. Financial Information--Factors Affecting Our Business, Operating Results and
Financial Condition--Anti-Takeover Provisions And Our Right To Issue Preferred
Stock Could Make A Third-Party Acquisition Of Us Difficult."
Description of Common Stock
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when, as and if
declared by the Board of Directors from funds legally available therefor. No
holder of any shares of our common stock has a pre-emptive right to subscribe
for any of our securities, nor are any common shares subject to redemption or
convertible into other of our securities. Upon liquidation, dissolution or
winding up of Photoloft, and after payment of creditors and preferred
stockholders, if any, the assets will be divided pro-rata on a share-for-share
basis among the holders of the shares of common stock. All shares of common
stock now outstanding are fully paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the
election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of the common stock do not have
cumulative voting rights, so the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the Board of Directors.
Anti-Takeover Effects of Various Provisions of Nevada Law and Our Articles of
Incorporation and Bylaws
58
We are incorporated under the laws of the State of Nevada and are therefore
subject to various provisions of the Nevada corporation laws which may have the
effect of delaying or deterring a change in the control or management of
Photoloft.
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444, which applies to Nevada corporations like us having at
least 200 stockholders, prohibits an "interested stockholder" from entering into
a "combination" with the corporation, unless certain conditions are met. A
"combination" includes (a) any merger with an "interested stockholder," or any
other corporation which is or after the merger would be, an affiliate or
associate of the interested stockholder, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets, in one transaction or
a series of transactions, to an "interested stockholder," having (i) an
aggregate market value equal to 5% or more of the aggregate market value of the
corporation's assets, (ii) an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation, or (iii)
representing 10% or more of the earning power or net income of the corporation,
(c) any issuance or transfer of shares of the corporation or its subsidiaries,
to the "interested stockholder," having an aggregate market value equal to 5% or
more of the aggregate market value of all the outstanding shares of the
corporation, (d) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would have the effect of increasing the proportionate
share of outstanding shares of the corporation owned by the "interested
stockholder," or (f) the receipt of benefits, except proportionately as a
stockholder, of any loans, advances or other financial benefits by an
"interested stockholder." An "interested stockholder" is a person who (i)
directly or indirectly owns 10% or more of the voting power of the outstanding
voting shares of the corporation or (ii) an affiliate or associate of the
corporation which at any time within three years before the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the Board of Directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the Articles of Incorporation are met and either (a)(i) the
Board of Directors of the corporation approves, prior to such person becoming an
"interested stockholder," the combination or the purchase of shares by the
"interested stockholder" or (ii) the combination is approved by the affirmative
vote of holders of a majority of voting power not beneficially owned by the
"interested stockholder" at a meeting called no earlier than three years after
the date the "interested stockholder" became such or (b) the aggregate amount of
cash and the market value of consideration other than cash to be received by
holders of common shares and holders of any other class or series of shares
meets the minimum requirements set forth in Sections 78.411 through 78.443,
inclusive, and prior to the consummation of the combination, except in limited
circumstances, the "interested stockholder" will not have become the beneficial
owner of additional voting shares of the corporation.
59
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
(S)78.378-78.379, prohibits an acquiror, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While we do not currently exceed these thresholds, we may
well do so in the near future. In addition, although we do not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
we may do so in the future. Therefore, it is likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquiror crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquiror to consider the voting
rights of the acquiror's shares no more than 50 days (unless the acquiror agrees
to a later date) after the delivery by the acquiror to the corporation of an
information statement which sets forth the range of voting power that the
acquiror has acquired or proposes to acquire and certain other information
concerning the acquiror and the proposed control share acquisition. If no such
request for a stockholders' meeting is made, consideration of the voting rights
of the acquiror's shares must be taken at the next special or annual
stockholders' meeting. If the stockholders fail to restore voting rights to the
acquiror or if the acquiror fails to timely deliver an information statement to
the corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call certain of the acquiror's shares for redemption.
Our Articles of Incorporation and Bylaws do not currently permit us to call an
acquiror's shares for redemption under these circumstances. The Control Share
Acquisition Statute also provides that the stockholders who do not vote in favor
of restoring voting rights to the Control Shares may demand payment for the
"fair value" of their shares (which is generally equal to the highest price paid
in the transaction subjecting the stockholder to the statute).
Certain provisions of our Bylaws which are summarized below may affect
potential changes in control of Photoloft. The Board of Directors believes that
these provisions are in the best interests of stockholders because they will
encourage a potential acquiror to negotiate with the Board of Directors, which
will be able to consider the interests of all stockholders in a change in
control situation. However, the cumulative effect of these terms maybe to make
it more difficult to acquire and exercise control of Photoloft and to make
changes in management more difficult.
The Bylaws provide the number of directors of Photoloft shall be
established by the Board of Directors, but shall be no less than one. Between
stockholder meetings, the Board may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors.
60
The Bylaws further provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed all of the holders of common stock.
We are not aware of any proposed takeover attempt or any proposed attempt
to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of Photoloft.
Application of California GCL
Although we are incorporated in Nevada, our headquarters is in the State of
California. Section 2115 of the California GCL ("Section 2115") provides that
certain provisions of the California GCL shall be applicable to a corporation
organized under the laws of another state to the exclusion of the law of the
state in which it is incorporated, if the corporation meets certain tests
regarding the business done in California and the number of its California
stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations
with outstanding securities listed on the New York or American Stock Exchange,
or with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 60% of our outstanding voting securities
are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California GCL regarding the following matters are made applicable to the
exclusion of the law of the State of Nevada: (i) general provisions and
definitions; (ii) annual election of directors; (iii)removal of directors
without cause; (iv) removal of directors by court proceedings; (v)filling of
director vacancies where less than a majority in office were elected by the
stockholders; (vi) directors' standard of care; (vii) liability of directors for
unlawful distributions; (viii) indemnification of directors, officers and
others; (ix) limitations on corporate distributions of cash or property; (x)
liability of a stockholder who receives an unlawful distribution;(xi)
requirements for annual stockholders meetings; (xii) stockholders' right to
cumulate votes at any election of directors; (xiii) supermajority vote
requirements; (xiv) limitations on sales of assets; (xv) limitations on
mergers;(xvi) reorganizations; (xvii) dissenters' rights in connection with
reorganizations; (xviii) required records and papers; (xix) actions by the
California Attorney General; and (xx) rights of inspection.
61
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada limits the liability of officers and
directors for breach of fiduciary duty except in certain specified
circumstances, and also empowers corporations organized under Nevada Law to
indemnify officers, directors, employees and others from liability in certain
circumstances such as where the person successfully defended himself on the
merits or acted in good faith in a manner reasonably believed to be in the best
interests of the corporation.
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of a directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his (or
her) fiduciary duties as a director or officer except in certain specified
instances. We may also adopt by-laws which provide for indemnification to the
full extent permitted under law which includes all liability, damages and costs
or expenses arising from or in connection with service for, employment by, or
other affiliation with us to the maximum extent and under all circumstances
permitted by law.
There is presently one material pending legal proceeding to which a
director, officer and employee of ours is a party. See "Item 8 Legal
Proceedings". There is no other pending litigation or proceeding involving one
of our directors, officers, employees or other agents as to which
indemnification is being sought, and we are not aware of any pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
We have purchased directors and officers liability insurance to defend and
indemnify directors and officers who are subject to claims made against them for
their actions and omissions as directors and officers of Photoloft. The
insurance policy provides standard directors and officers liability insurance in
the amount of $5,000,000.
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses
(including attorneys' fees and disbursements) incurred in connection with, or in
any way arising out of, any claim, action or proceeding (whether civil or
criminal) against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons pursuant to the
foregoing provisions or otherwise, we have has been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
62
ITEM 13. FINANCIAL STATEMENTS
Reference is made to the Financial Statements together with the notes
thereto and the report thereon from BDO Seidman, LLP appearing on pages F-1
through F-16 of this Form 10-SB.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
63
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
[Enlarge/Download Table]
(A) Index to Financial Statements
Report of Independent Certified Public Accountants, BDO Seidman, LLP F-1
Financial Statements:
Balance sheets as of March 31, 1999 (Unaudited) and December 31, 1998 F-2
Statements of operations for the three months ended March 31, 1999 and 1998 F-3
(Unaudited) and the years ended December 31, 1998 and 1997
Statements of stockholders' equity (deficiency) for the three months ended F-4
March 31, 1999 (Unaudited) and the years ended December 31, 1998 and 1997
Statements of cash flows for the three months ended March 31, 1999 and 1998 F-5
(Unaudited) and the years ended December 31, 1998 and 1997
Notes to Financial Statements F-6 - F-16
64
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
PhotoLoft.com, Inc.
We have audited the accompanying balance sheet of PhotoLoft.com, Inc. (the
Company) as of December 31, 1998, and the related statements of operations,
shareholders' equity (deficiency), and cash flows for the years ended December
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
principles. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PhotoLoft.com, Inc. as of
December 31, 1998, and the results of its operations and cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
San Jose, California
April 2, 1999
F - 1
[Enlarge/Download Table]
PHOTOLOFT.COM
BALANCE SHEETS
MARCH 31, December 31,
1999 1998
(UNAUDITED)
--------------------------------------------------------------------------------------- ------------ -------------
ASSETS (Note 6)
CURRENT ASSETS:
Cash and cash equivalents (Note 10) $ 1,081,900 $ 370,000
Note receivable, current portion (Note 2) 658,000 658,000
Prepaid expenses and other current assets 15,900 -
Deferred income taxes 337,200 183,100
--------------------------------------------------------------------------------------- ------------ -------------
TOTAL CURRENT ASSETS 2,093,000 1,211,100
--------------------------------------------------------------------------------------- ------------ -------------
PROPERTY AND EQUIPMENT, net (Note 3) 106,500 65,700
NOTE RECEIVABLE, less current portion (Note 2) 1,441,200 1,656,700
OTHER ASSETS 10,500 5,500
--------------------------------------------------------------------------------------- ------------ -------------
$ 3,651,200 $ 2,939,000
======================================================================================= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 192,100 $ 129,500
Accrued expenses (Note 4) 64,900 73,500
Deferred revenue (Note 5) 21,800 36,300
Deferred income taxes (Note 9) 263,600 263,600
--------------------------------------------------------------------------------------- ------------ -------------
TOTAL CURRENT LIABILITIES 542,400 502,900
DEFERRED INCOME TAXES (Note 9) 580,500 666,700
--------------------------------------------------------------------------------------- ------------ -------------
TOTAL LIABILITIES 1,122,900 1,169,600
--------------------------------------------------------------------------------------- ------------ -------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 1, 6, 10 and 12)
SHAREHOLDERS' EQUITY: (Notes 1, 8 and 12)
Preferred stock, $0.001 par value; 500,000 shares authorized; no shares issued
and outstanding - -
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,454,268 and 6,650,145
shares issued and outstanding, respectively 12,400 6,700
Additional paid-in capital 1,761,900 648,200
Retained earnings 754,000 1,114,500
--------------------------------------------------------------------------------------- ------------ -------------
TOTAL SHAREHOLDERS' EQUITY 2,528,300 1,769,400
--------------------------------------------------------------------------------------- ------------ -------------
$ 3,651,200 $ 2,939,000
======================================================================================= ============ =============
See accompanying notes to financial statements.
F - 2
PHOTOLOFT.COM
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Three Months Ended March 31, Years Ended December 31,
-------------------------- ------------------------
1999 1998 1998 1997
------------ ------------ ----------- -----------
(UNAUDITED) (Unaudited)
REVENUES (Note 10) $ 21,800 $ 204,100 $ 674,300 $ 574,200
COST OF REVENUES 36,300 32,200 113,000 60,800
--------------------------------------- ------------ ------------ ----------- -----------
GROSS PROFIT (LOSS) (14,500) 171,900 561,300 513,400
--------------------------------------- ------------ ------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing 18,800 10,600 325,000 32,200
General and administrative (Note 7) 605,100 159,800 999,000 642,200
--------------------------------------- ------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES 623,900 170,400 1,324,000 674,400
--------------------------------------- ------------ ------------ ----------- -----------
(LOSS) INCOME FROM OPERATIONS (638,400) 1,500 (762,700) (161,000)
--------------------------------------- ------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Sale of trade name (Note 2) - - 3,100,000 -
Interest income 40,100 - 76,900 -
Interest expense - - (500) -
Other (2,500) (1,200) (2,400) (3,700)
--------------------------------------- ------------ ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 37,600 (1,200) 3,174,000 (3,700)
--------------------------------------- ------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (600,800) 300 2,411,300 (164,700)
--------------------------------------- ------------ ------------ ----------- -----------
INCOME TAX EXPENSE (BENEFIT) (Note 9) (240,300) - 748,000 800
--------------------------------------- ------------ ------------ ----------- -----------
NET INCOME (LOSS) $ (360,500) $ 300 $1,663,300 $ (165,500)
======================================= ============ ============ =========== ===========
Basic earnings (loss) per share $ (0.04) $ 0.00 $ 0.26 $ (0.03)
======================================= ============ ============ =========== ===========
Diluted earnings (loss) per share $ (0.04) $ 0.00 $ 0.18 $ (0.03)
======================================= ============ ============ =========== ===========
Basic weighted-average common shares
outstanding 9,063,500 6,360,300 6,488,300 6,297,000
Stock options - 2,799,400 2,799,400 -
--------------------------------------- ------------ ------------ ----------- -----------
Diluted weighted-average common shares
outstanding 9,063,500 9,159,700 9,287,700 6,297,000
======================================= ============ ============ =========== ===========
See accompanying notes to financial statements.
F - 3
PHOTOLOFT.COM
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
[Enlarge/Download Table]
(Accumulated
Common Stock Additional Deficit)
------------------- Paid-in Retained
Shares Amount Capital Earnings Total
-----------
---------------------------------------------------------------------- ---------- ------- ---------- ----------- -----------
BALANCES, January 1, 1997 6,267,448 $ 6,300 $ 497,200 $ (383,300) $ 120,200
Issuance of stock for services 59,025 100 18,200 - 18,300
Net loss - - - (165,500) (165,500)
---------------------------------------------------------------------- ---------- ------- ---------- ----------- -----------
BALANCES, December 31, 1997 6,326,473 6,400 515,400 (548,800) (27,000)
Issuance of stock for services 323,672 300 132,800 - 133,100
Net income - - - 1,663,300 1,663,300
---------------------------------------------------------------------- ---------- ------- ---------- ----------- -----------
BALANCES, December 31, 1998 6,650,145 6,700 648,200 1,114,500 1,769,400
Exercise of stock options (unaudited) 3,069,112 3,000 112,300 - 115,300
Issuance of common stock for services
(unaudited) 85,011 100 42,400 - 42,500
Issuance of common stock in connection with reverse merger (unaudited) 625,000 600 4,900 - 5,500
Sale of common stock, net of stock issuance
costs of approximately $56,500 (unaudited) 2,025,000 2,000 954,100 - 956,100
Net loss (unaudited) - - - (360,500) (360,500)
---------------------------------------------------------------------- ---------- ------- ---------- ----------- -----------
BALANCES, March 31, 1999 (unaudited) 12,454,268 $12,400 $1,761,900 $ 754,000 $2,528,300
====================================================================== ========== ======= ========== =========== ===========
See accompanying notes to financial statements.
F - 4
PHOTOLOFT.COM
STATEMENTS OF CASH FLOWS
(Note 11)
[Enlarge/Download Table]
Three Months Ended March 31, Years Ended December 31,
1999 1998 1998 1997
------------------------------------------------------------ ------------ ------------ ------------ ----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (360,500) $ 300 $ 1,663,300 $(165,500)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 7,400 2,400 13,200 8,600
Allowance for doubtful accounts - - (75,100) 82,800
Gain on sale of trade name - - (3,100,000) -
Issuance of stock for services 42,500 27,800 133,100 18,300
Deferred income taxes (240,300) - 747,200 -
Changes in operating assets and liabilities:
Accounts receivable - 2,800 170,700 (130,600)
Prepaid expenses and other current assets (15,900) 6,600 6,600 47,300
Accounts payable 62,600 (16,500) 65,000 58,100
Accrued expenses (8,600) (11,200) (21,300) 94,800
Deferred revenue (14,500) - 36,300 -
------------------------------------------------------------ ------------ ------------ ------------ ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (527,300) 12,200 (361,000) 13,800
------------------------------------------------------------ ------------ ------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase of business 5,500 - - -
Purchase of property and equipment (48,200) (1,500) (51,100) (12,200)
Other assets (5,000) 300 (3,200) (2,000)
------------------------------------------------------------ ------------ ------------ ------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (47,700) (1,200) (54,300) (14,200)
------------------------------------------------------------ ------------ ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal received under note receivable 215,500 - 785,300 -
Proceeds from issuances of stock 1,115,400 - - -
Payment of stock issuance costs (44,000) - - -
------------------------------------------------------------ ------------ ------------ ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,286,900 - 785,300 -
------------------------------------------------------------ ------------ ------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 711,900 11,000 370,000 (400)
CASH AND CASH EQUIVALENTS, beginning of period 370,000 - - 400
------------------------------------------------------------ ------------ ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,081,900 $ 11,000 $ 370,000 $ -
============================================================ ============ ============ ============ ==========
See accompanying notes to financial statements.
F - 5
1. SUMMARY OF ACCOUNTING POLICIES
The Company
PhotoLoft.com, Inc. (formerly AltaVista Technology, Inc.) (the Company) a
California corporation, was incorporated on November 17, 1993. The Company
provides users with advanced, easy-to-use technology to instantly create,
share and print Internet photo albums.
On March 1, 1999, 100% of the Company's outstanding common stock was
acquired by PhotoLoft.com (formerly Data Growth, Inc., a publicly traded
shell corporation) (PhotoLoft), a Nevada Corporation, in exchange for
9,579,268 shares of PhotoLoft's $.001 par value common stock. For
accounting purposes, the acquisition has been treated as the acquisition of
PhotoLoft, with the Company as the acquiror (reverse acquisition).
The shares held by the shareholders of PhotoLoft prior to the acquisition
(625,000 shares after reflecting a 2.46 to 1 reverse stock split effected
by PhotoLoft immediately prior to the acquisition) have been recognized as
if they were issued in connection with the acquisition of PhotoLoft by the
Company. Since PhotoLoft prior to the reverse acquisition was a public
shell corporation with no significant operations, pro forma information
giving effect to the acquisition is not presented. All shares and per share
data prior to the acquisition have been restated to reflect the stock
issuance as a recapitalization of the Company. The historical information
prior to March 1, 1999 is that of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated economic useful lives of the
assets, generally ranging from five to seven years.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles for impairment. When events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the asset was recorded at the lower of its book value or its
fair value.
F - 6
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value.
Note receivable:
The fair value for the note receivable is estimated based on current
interest rates available to the Company for investments with similar
terms and remaining maturities.
Short-term debt:
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
As of December 31, 1998, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
Revenue Recognition
The Company recognizes revenues when earned or upon product shipment,
provided no significant obligations remain, and collectibility is probable.
Advertising
The cost of advertising is expensed as incurred. Advertising costs for the
three month periods ended March 31, 1999 and 1998 aggregated $14,500 and
$3,000, respectively (unaudited). Advertising costs for the years ended
December 31, 1998 and 1997 aggregated $26,000 and $4,100, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires an asset and liability approach. This approach results in
the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets
and liabilities. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation allowance when
management believes it is more likely than not that the deferred tax assets
will not be realized.
F - 7
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged assets or liabilities, that
are attributable to the hedged risk, or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its
financial statements.
Earnings Per Common Share
During 1998, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. For the three months ended
March 31, 1999 and the year ended December 31, 1997, options to purchase
5,796,677 and 2,844,112 shares of common stock, respectively, were excluded
from computation of diluted earnings per share since their effect would be
antidilutive. For the three months ended March 31, 1998 and the year ended
December 31, 1998, options to purchase 37,834 and 2,728,539 shares of
common stock, respectively, were excluded from the computation of diluted
earnings per share because the options' exercise price was greater than the
estimated average fair market value of the common shares.
Basis of Presentation
The accompanying balance sheet as of March 31, 1999 and the statements of
operations and cash flows for each of the three month periods ended March
31, 1999 and 1998 have not been audited. However, they have been prepared
on the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the financial position
and the results of operations for the periods presented. The financial data
and other information disclosed in these notes to financial statements
related to these periods are unaudited. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of results
to be expected for any future period.
F - 8
2. SALE OF TRADE NAME
On July 31, 1998, the Company sold all its rights in and to the AltaVista
mark and the internet domain name "altavista.com" to Digital Equipment
Corporation for a total of $3,100,000, payable $350,000 in cash and
$2,750,000 in a promissory note. The note, payable in 12 quarterly
installments commencing October 1, 1998, bears interest at 7% annually.
Through April 2, 1999, all scheduled payments have been received.
A summary of future minimum receipts from this note receivable, follows:
[Download Table]
Years ending December 31, Amount
----------
1999 $ 768,300
2000 1,024,400
2001 749,600
----------
Future minimum receipts 2,542,300
Less amount representing interest (7.0%) 227,600
----------
Present value of future minimum receipts 2,314,700
Less current portion 658,000
----------
$1,656,700
==========
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
[Download Table]
MARCH 31, December 31,
1999 1998
------------ -------------
(UNAUDITED)
Office equipment $ 137,700 $ 90,500
Furniture and fixtures 10,300 9,300
------------ -------------
148,000 99,800
Less accumulated depreciation 41,500 34,100
------------ -------------
$ 106,500 $ 65,700
============ =============
4. ACCRUED EXPENSES
A summary of accrued expenses follows:
[Download Table]
MARCH 31, December 31,
1999 1998
------------ -------------
(UNAUDITED)
Vacation $ 24,900 $ 24,900
Consulting fees 20,000 20,000
Salaries and wages 19,900 19,900
Other 100 8,700
------------ -------------
$ 64,900 $ 73,500
============ =============
5. DEFERRED REVENUE
Deferred revenue consists of quarterly and annual subscriptions for web
hosting services. Revenue from the subscriptions is recognized ratably over
the term of the subscriptions.
F - 9
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain equipment under operating
leases. The facility leases require the Company to pay certain maintenance
and operating expenses, such as utilities, property taxes and insurance
costs. Rent expense for the three month periods ended March 31, 1999 and
1998 was $31,200 and $5,900, respectively (unaudited). Rent expense related
to these operating leases for the years ended December 31, 1998 and 1997
was $39,900 and $18,700, respectively.
A summary of the future minimum lease payments required under
non-cancelable operating leases with terms in excess of one year, follows:
[Download Table]
Years ending December 31, Amount
--------
1999 $ 95,700
2000 91,300
2001 51,600
2002 3,600
--------
Future minimum lease payments $242,200
========
In September 1998, the Company entered into an agreement whereby the
Company acts as guarantor of a third party in a sub-lease agreement. The
sub-lease agreement expires in September 2000.
Debt Agreement
The Company maintains a $200,000 revolving line of credit with a bank that
is secured by all corporate assets, including accounts receivable,
inventory and intangible assets. The loan is limited to $100,000 until the
Company fulfills certain milestone covenants and pays an additional loan
fee. The line of credit accrues interest at 2% over the Lender's Prime
Rate. Advances against the line of credit are limited to 70% of eligible
accounts receivable. As of March 31, 1999 and December 31, 1998, the line
of credit had no outstanding balance.
7. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company paid approximately
$20,000 for consulting services from a shareholder.
8. SHAREHOLDERS' EQUITY
Preferred Stock
The Company had authorized 5,000,000 shares of Preferred Stock that may be
issued in one or more series. As of December 31, 1998, the Company had
2,489,009 Preferred shares issued and outstanding, which are Series A, B
and C. Each series of Preferred Stock was identical in respect to rights
and preferences, as follows:
Each share of Preferred Stock was entitled to receive cash dividends equal
to $.20 per share per annum, payable prior and in preference to any
distribution to the holders of Common Stock. The rights to such dividends
were not cumulative.
Each share of Preferred Stock was convertible into such number of Common
Stock as determined by dividing $.20 by the then applicable conversion
price in effect at the time of the conversion. Due to the conversion of the
Company's preferred stock into common stock and a 1.513 stock split in
February 1999, as well as the recapitalization of the Company in connection
with the reverse acquisition in March 1999, the statements of shareholders'
equity (deficiency) and per share data have been restated (Note 12).
F - 10
Stock Option Plans
For its stock options, the Company applies APB Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation costs were
insignificant, as the exercise price of the options issued approximated or
was higher than the estimated fair value of the common stock at date of
grant.
While the Company continues to apply APB Opinion No. 25, SFAS No. 123,
Accounting for Stock-Based Compensation, requires the Company to provide
pro forma information regarding net income (loss) as if compensation cost
for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed by SFAS No. 123. The Company
estimates the fair value of stock options at the grant date by using the
minimum value method with the following assumptions used for the grants in
1998 and 1997, respectively: dividend yield of 0; risk-free interest rate
of 6.0% and 6.6%; and an expected life of five years for all plan options.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) would have been reduced (increased) to the pro forma amounts
indicated below:
1998 1997
----------- -----------
As reported $ 1,663,300 $ (165,500)
=========== ===========
Pro forma $ 1,317,800 $ (171,300)
=========== ===========
A summary of the status of the Company's stock option plan as of December
31, 1998 and 1997 and changes during the years then ended (restated to
reflect the 1.513 stock split in February 1999), is presented in the
following table:
[Download Table]
Options Outstanding
------------------------------------------------
December 31, 1998 December 31, 1997
----------------------- -----------------------
Wtd.-Avg. Wtd.-Avg.
------------
Shares Exer. Price Shares Exer. Price
--------- ------------ --------- ------------
Beginning 2,844,112 $ 0.007 2,806,278 $ 0.001
Granted 2,690,705 $ 0.480 37,834 $ 0.480
Exercised/forfeited - - - -
Ending 5,534,817 $ 0.237 2,844,112 $ 0.007
========= ============ ========= ============
Exercisable at year-end 3,194,587 2,795,400
========= =========
Wtd.-avg. fair value of options
granted during the year $ 0.480 $ 0.480
============ ============
F - 11
The following table summarizes information about stock options outstanding
as of December 31, 1998:
[Download Table]
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Wtd.-Avg.
Range of Number Remaining Wtd.-Avg. Number Wtd.-Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/98 Price
--------- ----------- ----------- ---------- ----------- ----------
0.001 2,806,278 5.26 years $ 0.001 2,806,278 $ 0.001
0.480 2,728,539 9.54 years $ 0.480 388,310 $ 0.480
----------- ---------- ----------- ----------
5,534,817 $ 0.237 3,194,588 $ 0.059
=========== ========== =========== ==========
9. INCOME TAXES
For the years ended December 31, 1998 and 1997, income tax expense
comprises:
[Download Table]
1998 CURRENT DEFERRED TOTAL
------- -------- --------- --------
FEDERAL $ - $ 628,600 $628,600
STATE 800 118,600 119,400
------- -------- --------- --------
$ 800 $ 747,200 $748,000
======= ======== ========= ========
1997 Current Deferred Total
------- -------- --------- --------
Federal $ - $ - $ -
State 800 - 800
------- -------- --------- --------
$ 800 $ - $ 800
======= ======== ========= ========
F - 12
The following summarizes the differences between the income tax expense
(benefit) and the amount computed by applying the Federal income tax rate
of 34% in 1998 and 1997 to income (loss) before income taxes:
[Download Table]
Years ended December 31, 1998 1997
---------- ---------
Federal income tax at statutory rate $ 819,800 $(56,000)
State income taxes, net of federal benefit 138,200 (9,400)
(Decrease) increase in valuation allowance (211,200) 65,700
Other, net 1,200 500
---------- ---------
$ 748,000 $ 800
========== =========
Deferred tax assets (liabilities) comprise the following:
[Download Table]
MARCH 31, December 31,
1999 1998
------------ --------------
(UNAUDITED)
Loss carryforwards $ 320,700 $ 166,600
Reserves not currently deductible 16,500 16,500
------------ --------------
Total deferred tax assets $ 337,200 $ 183,100
============ ==============
Installment sale of trade name $ (833,500) $ (919,700)
Depreciation (10,600) (10,600)
------------ --------------
Total deferred tax liabilities $ (844,100) $ (930,300)
============ ==============
As of December 31, 1998, the Company has net operating loss carryforwards
available to reduce future taxable income, if any, of approximately
$453,700 and $194,100 for Federal and California state tax purposes,
respectively. The benefits from these carryforwards expire in various years
through 2018.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryover may be
limited, if a cumulative change of ownership of more than 50% occurs within
any three-year period.
10. CONCENTRATIONS
Major Customers
During the three month periods ended March 31, 1999 and 1998 and the years
ended December 31, 1998 and 1997, the Company had no customers that
comprised more than 10% of net revenues.
Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents. The
Company places its cash and cash equivalents with high quality financial
institutions. As of December 31, 1998, the Company had deposits at one
financial institution that aggregated $350,000, of which $100,000 is
insured by the Federal Deposit Insurance Corporation.
11. STATEMENT OF CASH FLOWS
During the three month periods ended March 31, 1999 and 1998, non-cash
financing activities included the issuance of 85,011 and 67,604 shares of
common stock aggregating approximately $42,500 and $27,800, respectively
(unaudited). During the three month period ended March 31, 1999, additional
non-cash financing activities included the issuance of 25,000 shares of
common stock for the payment of stock issuance costs totaling $12,500
(unaudited). During the years ended December 31, 1998 and 1997, non-cash
financing activities included the issuance of 323,672 and 59,025 shares of
common stock for services aggregating approximately $133,100 and $18,300,
respectively.
F - 13
During the three month periods ended March 31, 1999 and 1998, there were no
interest or income tax payments (unaudited). During 1998 and 1997, the
Company paid $2,800 and $3,700 for interest, respectively, and $800 for
income taxes in both years.
12. SUBSEQUENT EVENTS
In February 1999, 1,879,317 stock options were exercised for common stock,
and 56,173 shares of common stock were issued for services. Also in
February 1999, the Company converted its preferred stock into common stock
on a 1 to 1.5 basis.
Immediately following these issuances of common stock and the conversion of
preferred stock into common stock, the Company did a 1 to 1.513 stock split
in anticipation of the Company entering into an acquisition agreement with
a publicly traded shell corporation. On a retroactive basis, the conversion
and stock split resulted in the Company having 6,650,145 shares of common
stock issued and outstanding as of December 31, 1998.
Due to the conversion of the preferred stock into common stock and the
1.513 stock split, the effective exercise price of the stock options
originally granted at $0.75 was now $0.33; therefore, on March 1, 1999, the
Company adjusted the exercise price to $0.48.
As more fully described in Note 1, the Company completed a reverse
acquisition with PhotoLoft.com on March 1, 1999.
Immediately following the closing of the acquisition, the Company completed
a Private Placement of 2,000,000 shares of common stock aggregating
$1,000,000. Additionally, the Company issued 25,000 shares of restricted
common stock as payment for a portion of the underwriter's commission and
adopted the 1999 Stock Option Plan (the Plan). The Company then granted
225,000 options under the Plan, which vested immediately and were exercised
in March 1999.
In March 1999, the Company invested $10,000 in the purchase of 10,000
shares of the common stock of a high tech company.
Also in March 1999, the Company entered into an agreement to obtain public
relations services valued at a minimum of $6,000 per month through March
2000. The Company expects to amend the agreement to include an additional
$4,000 per month in services. The services provided will aggregate
approximately $100,000 over the life of the agreement.
In April 1999, the Company became aware of an unasserted claim from a
former employee and co-founder of ID 4 Life, a product of the Company. It
is the opinion of management that the outcome of this matter will not
materially affect the consolidated operations or the consolidated financial
position of the Company.
F - 14
(A) EXHIBITS
The following exhibits are filed with this Registration Statement:
[Enlarge/Download Table]
Exhibit No. Exhibit Name
----------- ----------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated as of February 16, 1999 by and
among Data Growth, Inc. Gary B. Peterson and the Registrant.
3.1 Articles of Incorporation of the Registrant.
3.2 Certificate of Amendment to the Articles of Incorporation of the Registrant.
3.3 By-Laws of Registrant.
4.1 Sample Stock Certificate of the Registrant.
4.2 See Exhibit Nos. 3.1, 3.2 and 3.3.
10.1 Form of Series A Preferred Stock Purchase Agreement
10.2 Series B Preferred Stock Purchase Agreement dated August 1, 1996 by and
among Kris Chellam and the Registrant.
10.3 OEM/ Re-Marketing Agreement, dated November 15, 1996, by and between
ArcSoft, Inc. and the Registrant.
10.4 Software License Agreement, dated January 22, 1997 by and between Seattle
Filmworks, Inc, and the Registrant.
10.5 Online Distribution Agreement, dated April 24, 1997 by and between KC
Audio and the Registrant.
10.6 OEM License Agreement, dated May 22, 1998, by and between AITech
International and the Registrant.
10.7 Series C Preferred Stock Purchase Agreement dated June 5, 1997 by and
among Gary Kremen and the Registrant.
10.8 Distribution and Re-Publishing Agreement dated October 17, 1997 by and
between Softpool, a division of infoMedia GmbH and the Registrant.
10.9 Engagement letter dated October 24, 1997 between Gary Kremen and the
Registrant.
65
10.10 Letter Agreement dated February 12, 1998 by and between Venture Banking
Group and the Registrant.
10.11 Distribution Agreement dated March, 1998 by and between Kuni Research
International Corporation and the Registrant.
10.12 Lease Agreement dated July 8, 1998 by and between The Manufacturer's
Life Insurance Company, (U.S.A.) Company, Ltd., and the Registrant.
+10.13 Agreement, dated July 31, 1998, by and between Digital Equipment
Corporation and the Registrant.
10.14 Sublease Agreement dated September 1, 1998 by and between Surefire
Verification, Inc. and the Registrant.
+10.15 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant.
10.16 Amendment to an Agreement with Infomedia, dated January 15, 1999.
10.17 Sublease Agreement dated February 1, 1999 by and between Summit
Microelectronics and the Registrant.
10.18 Amendment No. 1 to Consulting Services Agreement (Exhibit 10.15 above),
dated February 9, 1999 by and between Hewlett-Packard Company and the
Registrant
10.19 Letter Agreement, dated February 10, 1999 by and between Bay Tree Capital
Associates, LLC and the Registrant.
10.20 Employment Agreement dated February 26, 1999 by and between Mr. Jack
Marshall and the Registrant.
10.21 Stock Option Plan of the Registrant.
10.22 Form of Stock Option Agreement issued under the Stock Option Plan of the
Registrant.
10.23 Stock Option Agreement dated July 1, 1999 by and between Chris McConn
and the Registrant
10.24 Stock Option Agreement dated July 1, 1999 by and between Jack Marshall
and the Registrant
10.25 Co-Branded Marketing Agreement, dated March 8, 1999, by and between
Picture Works and the Registrant.
66
10.26 Co-Branded Marketing Agreement, dated March 11, 1999 between Umax
Technologies, Inc. and the Registrant.
10.27 Internet Services and Co-Location Agreement, dated March 15, 1999 by and
between AboveNet Communications, Inc. and the Registrant.
10.28 Cowabunga Reciprocal Website Linking Agreement, dated April,1999 by and
between Cowabunga Enterprises, Inc., a wholly owned subsidiary of
Gateway 2000, Inc. and the Registrant.
10.29 Representation Agreement, dated April 26, 1999, by and between ADSmart
Network and the Registrant.
10.30 Co-Branded Marketing Agreement, dated May 3, 1999, by and between
Tribal Voice and the Registrant.
10.31 Co-Branded Marketing Agreement, dated May 12, 1999, by and between,
Netopia, Inc. and the Registrant.
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
<FN>
+ Confidential treatment requested.
67
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHOTOLOFT.COM
(Registrant)
Date: July 9, 1999 By: /s/ Jack Marshall
-------------------
Jack Marshall, Chief Executive
Officer, President and Treasurer
68
Dates Referenced Herein and Documents Incorporated by Reference
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