<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
For Quarter Ended: March 31, 1999
Commission File No. 1-14559
MUSE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
- --------------------------------------------------------------------------------
Delaware 85-0437001
(State of Incorporation) (IRS Employer Identification No.)
1601 Randolph, SE
Albuquerque, New Mexico
87106
(Address of principal executive office)
(Zip code)
(505) 843-6873
Issuer's telephone number, including area code
- --------------------------------------------------------------------------------
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of May 14, 1999, there were issued and outstanding 10,143,893 shares
of Common Stock, $.015 par value per share, and Class A Redeemable Common Stock
Purchase Warrants to purchase 1,113,881 shares of Common Stock.
Transitional Small Business Disclosure Format
Yes No X
--- ---
<PAGE>
MUSE TECHNOLOGIES, INC.
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements
(unaudited)
Balance sheet as of March 31, 1999 3
Statements of operations for the three and six months
ended March 31, 1999 and 1998 4
Statements of cash flows for the six months
ended March 31, 1999 5
Notes to financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 9
INDEX TO EXHIBITS 11
SIGNATURES 12
2
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MUSE TECHNOLOGIES, INC.
BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 15,674,150
Accounts receivable 454,939
Prepaids 37,287
------------------
TOTAL CURRENT ASSETS 16,166,376
PROPERTY AND EQUIPMENT - NET 1,150,729
NOTES RECEIVABLE (including $225,000 from officers) 1,280,000
OTHER ASSETS 125,607
------------------
TOTAL ASSETS $ 18,722,712
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 104,902
Accrued liabilities 132,417
Due to shareholders 840,000
Current portion lease payable 2,512
------------------
TOTAL CURRENT LIABILITIES 1,079,831
==================
STOCKHOLDERS' EQUITY:
Common stock, $.015 par value, authorized
50,000,000 shares; issued and outstanding
10,299,156 shares 154,487
Additional paid-in capital 23,942,807
Stock subscription receivable (87,000)
Accumulated deficit (5,591,018)
Less treasury stock at cost (776,395)
------------------
TOTAL STOCKHOLDERS' EQUITY 17,642,881
------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 18,722,712
==================
See notes to financial statements
3
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 714,994 $ 216,410 $ 1,113,875 $ 521,676
------------- -------------- -------------- -------------
EXPENSES:
Selling, general and administrative 1,020,054 474,460 1,863,609 939,622
expenses
Research and development 390,697 334,351 744,290 525,987
Depreciation 139,366 168,775 259,436 242,755
Costs in excess of value of 563,605 -- 563,605 --
repurchased stock ------------- -------------- -------------- -------------
TOTAL EXPENSES 2,113,722 977,586 3,430,940 1,708,364
------------- -------------- -------------- -------------
NET LOSS $ (1,398,728) $ (761,176) $ (2,317,065) $ (1,186,688)
============= ============== ============== =============
NET LOSS PER SHARE:
Basic and assuming dilution $ (.14) $ (.10) $ (0.24) $ (0.16)
======== ======== ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 10,143,893 7,335,843 9,765,431 7,306,239
========== ========= ========= =========
</TABLE>
See notes to financial statements
4
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31
----------------------------------------
1999 1998
------------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,317,065) $(1,186,688)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 259,436 242,755
Amortization of discount 25,521 184,844
Changes in assets and liabilities:
Decrease in accounts receivable 3,909,061 186,264
Decrease (increase) in prepaid assets (14,410) 18,902
(Increase) decrease in other assets (96,365) 3,600
(Decrease) in accounts payable (30,197) (105,340)
Decrease (increase) in accrued liabilities (719,241) (193,774)
Due to shareholder 563,605 --
------------------ ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 1,580,345 $ (849,437)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (972,773) (17,287)
------------------ ----------------
NET CASH USED IN INVESTING ACTIVITIES (972,773) (17,287)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock 9,885,605 --
Net proceeds from issuance of notes -- 875,000
(Increase) decrease in notes receivable (1,225,000) --
Collection of stock subscription receivable 4,000,000 --
Principal payments on capital leases (8,430) (12,486)
Repayments of notes payable affiliates (625,000) --
Acquisition of treasury stock (500,000) --
------------------ ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,527,175 862,514
------------------ ----------------
NET INCREASE (DECREASE) IN CASH 12,134,747 (4,209)
CASH - BEGINNING OF PERIOD 3,539,403 287,436
------------------ ----------------
CASH - END OF PERIOD $ 15,674,150 $ 283,227
================== ================
</TABLE>
See notes to financial statements
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
MUSE Technologies, Inc. (the "Company") was incorporated in Delaware
on October 24, 1995 to develop and market software products designed to enhance
the user's ability to understand and analyze data and information and to provide
solutions to complex data integration and data management problems. The
multisensory capabilities of the software ("MuSE"), enables the user to present
information in real time using visual, auditory, tactical and other analytical
tools. MuSE is based on software licensed to the Company by Sandia Corporation
("Sandia") pursuant to a license agreement dated October 9, 1995 (the "License
Agreement"). The Company has also developed a proprietary software product,
"Continuum", designed for multiuser, real-time collaboration within the MuSE
environment.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
full fiscal year ended September 30, 1999. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended September 30, 1998.
3. NOTES RECEIVABLE
In December 1998 and January 1999, the Company loaned an aggregate of
$225,000 to two executive officers pursuant to their employment contracts in
connection with their relocation to New Mexico.
4. COSTS IN EXCESS OF VALUE OF REPURCHASED STOCK
In March 1999, the Company's Chief Technical Officer resigned as an
employee of the Company and entered into a consulting arrangement with the
Company. Pursuant to the terms of the Termination Agreement with such officer,
the Company paid such officer an aggregate of $1,340,000 in exchange for, among
other things, certain restrictions relating to such officer's common stock, a
non-compete provision, repurchase of 155,263 shares of common stock and a right
of first refusal on future sales of common stock by such officer. The excess of
the consideration paid over the value of the shares purchased of $563,605 is
reflected as costs in excess of the value of repurchased stock on the Statement
of Operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of
the Company's financial condition and results of operations should be read in
conjunction with the Company's financial statements, the accompanying notes
thereto and other financial information appearing elsewhere in this Report. This
section and other parts of this Report contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Readers are encouraged to review the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors Affecting
Operating Results and Market Price of Stock" commencing on page 9 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1998 for a discussion of these risks and uncertainties.
Operational Overview
The Company receives revenues from sales and licensing of its MUSE and
Continuum products and providing consulting and maintenance services related
thereto and from its strategic reselling partner ("SRP") program.
In June 1998, the Company entered into an SRP agreement (the "CRI
Agreement") with Continuum Resources International ASA, a Norwegian Company
("CRI"), with respect to distribution of the Company's products and services in
the oil and gas industry worldwide. In exchange for such exclusive rights, CRI
paid the Company a non-refundable license fee of $5,000,000 and will pay minimum
sales commitments totaling $12,000,000 through 2001. The Company has recognized
the $5,000,000 license fee under the CRI Agreement as revenue for the fiscal
year ended September 30, 1998.
In December 1998, the Company entered into a non-exclusive SRP
agreement with Intergraph Corp., an automated business solutions company with
customers worldwide in a variety of commercial sectors and government. The
agreement with Intergraph provides Intergraph with the non-exclusive right to
resell the Company's products and services worldwide in exchange for minimum
annual sales commitments aggregating $4 million through 2001.
In February 1999, the Company entered into non-exclusive reseller
agreements under its SRP program with Analytical Mechanics Associates, a
technical consulting firm, and Federal Data Corporation, an information
technology provider serving primarily the Federal government. Each agreement is
for a term of three years with minimum sales commitments of $3 million over the
term of the agreement.
Although the Company's existing SRP agreements provide for minimum
annual sales commitments, failure to satisfy such commitments will permit the
Company to terminate such SRP agreement. Accordingly, there can be no assurance
that the threat of termination of any SRP agreement will be an effective
deterrant against any breach thereof or that such minimum sales commitments will
be realized.
The Company's primary strategy is to seek to enter into similar SRP
arrangements in other markets. As a result of the significant lead time
necessary to market and consummate such distribution and reseller agreements,
the Company's quarterly results are expected to fluctuate significantly
depending on the timing of completion of such arrangements and any upfront fees
and sales commitments associated therewith. Accordingly, results in any one
quarter are not indicative of results to be experienced in subsequent quarters.
In March 1999, the Company's Chief Technical Officer and Chairman of
the Board resigned as an employee and director of the Company and entered into a
consulting arrangement with the Company. Pursuant to the terms of the
Termination Agreement with such officer, the Company paid such officer an
aggregate of $1,340,000 in exchange for, among other things, certain
restrictions relating to such officer's common stock, a non-compete provision,
repurchase of 155,263 shares of common stock and a right of first refusal on
future sales of common stock by such officer. The excess of the consideration
paid over the value of the shares purchased of $563,605 is reflected as costs in
excess of the value of repurchased stock on the Statement of Operations.
7
<PAGE>
Results of Operations
Revenues for the three and six month periods ended March 31, 1999 were
$714,994 and $1,113,875, respectively, as compared to revenues of $216,410 and
$521,676, respectively, for the three and six month periods ended March 31,
1998. The increases of $498,584 or 230% for the three month period and $592,199
or 113% for the six month period are primarily attributable to increased product
sales and interest income of $220,000 and $343,000 for the three and six months
periods, respectively, as a result of the equity investment in the Company of $8
million from CRI in July 1998 and the proceeds from the Company's initial public
offering ("IPO") in November 1998.
Total expenses for the three and six month periods ended March 31, 1999
were $2,113,722 and $3,430,940, respectively, as compared to total expenses of
$977,586 and $1,708,364, respectively, for the three and six month periods ended
March 31, 1998. The increases of $1,136,136 or 116% for the three month period
and $1,722,576 or 100% for the six month period are primarily attributable to
increases in selling, general and administrative expenses as a result of
increases in engineering personnel, increases in professional fees related to
the IPO and the Company's obligations as a public reporting company, capital
expenditures for equipment of $972,773, an increase in research and development
and marketing expenses, and a charge of $563,605 related to costs in excess of
the value of repurchased stock as described above.
Accordingly, the net loss for the three and six month periods ended
March 31, 1999 of $1,398,728 and $2,317,065, respectively, as compared to the
net loss of $761,176 and $1,186,688, respectively, for the three and six month
periods ended March 31, 1998, reflected the significant increases in costs
related to the Company's IPO, the hiring of additional personnel, increased
capital expenditures for equipment and the $563,605 charge related to costs in
excess of the value of repurchased stock without a proportional increase in
revenues for such periods.
Liquidity and Capital Resources
The Company's capital needs have been funded through a series of debt
and equity financings and revenues received through the SRP program.
In July 1998, the Company sold 1,000,000 shares of Common Stock and
warrants to purchase 1,000,000 shares of Common Stock (the "CRI Warrants") to
CRI for an aggregate purchase price of $8,000,000.
In October, 1998, in order to assist CRI with its short term cash
requirements in connection with CRI's commencement of marketing efforts with
respect to the Company's products, the Company approved certain loans to CRI in
the principal amount of up to $1,000,000 payable on demand with interest at 12%
per annum accruing and payable monthly following 60 days from the draw-down
date. As of the date hereof, $1,000,000 is outstanding under such loan
arrangement.
On November 19, 1998, the Company consummated its IPO through the sale
of 1,200,000 shares of Common Stock and warrants to purchase 600,000 shares of
Common Stock (the "Warrants") and received gross proceeds of $9,600,000.
Additionally, on December 2, 1998, the underwriter of the Company's IPO
exercised its over-allotment option in full and the Company received gross
proceeds of $1,440,000. Total net proceeds to the Company approximated
$9,000,000.
Pursuant to their employment agreements, in December 1998 and January
1999, respectively, Curtiz J. Gangi, the Company's President, and Brian Clark,
the Company's Chief Financial Officer, were given loans in the principal amounts
of $150,000 and $75,000, respectively, in connection with their relocation to
New Mexico. The loans bear interest at the rate of 5% per annum and are secured
by a pledge of vested stock options having a value equal to the principal amount
of the loans.
The Company anticipates that it will expend approximately $300,000 for
the purchase of computer hardware and software during the third quarter of
fiscal 1999.
8
<PAGE>
The Company's capital requirements depend on numerous factors,
including the progress of its product development programs, the ability of the
Company to enter into strategic arrangements or other marketing arrangements
which result in the commercialization of its products, the need to purchase or
lease additional capital equipment and the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights. Based upon its current plans, the Company believes that the net proceeds
of its IPO, together with the net proceeds from the sale of securities to CRI in
July 1998 and funds generated from operations, including payments and royalties
under the Company's various strategic reselling partner agreements, will be
sufficient to satisfy the Company's operations for at least the next 12 months.
The foregoing sentence is considered a forward-looking statement for purposes of
the Private Securities Litigation Reform Act of 1995 and is subject to the risks
and factors set forth under "Factors Affecting Operating Results and Market
Price of Securities" commencing on page 9 of the Company's Quarterly Report of
Form 10-QSB for the quarter ended December 31, 1998. However, if the Company's
current and projected needs change due to unanticipated events or otherwise, the
Company may be required to obtain additional capital and there can be no
assurance that additional financing will be available or that the terms of any
financing will be acceptable to the Company.
Year 2000 Compliance
There are issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "year 2000 problem" is
pervasive and complex, as virtually every computer operation will be affected in
some way by the rollover of the two digit year value of 00. The issue is whether
computer systems will properly recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company has not
verified that companies doing business with it or devices that may be used with
the Company's products by an end-user are year 2000 compliant. The Company does
not anticipate that it will incur significant operating expenses or be required
to invest heavily in computer systems improvements to be year 2000 compliant.
The Company believes that its products are currently year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects associated with year 2000 compliance. Any year 2000 compliance problem
of either the Company or its customers or strategic partners could have a
material adverse effect on the Company's business, results of operations and
financial condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 2. Changes in Securities And Use of Proceeds
(c) The information required by this item is incorporated by reference to
Item 26 of Part II of the Company's Registration Statement No.
333-62495 filed with the SEC on November 13, 1998.
(d) The following information is provided with respect to the use of
proceeds from the Company's IPO:
1. Name of issuer: Muse Technologies, Inc.
2. a. Effective date of the registration statement: November 16, 1998
b. Commission file number assigned to issuer: 333-62495
3. Offering commencement date: November 16, 1998
4. Managing underwriter: H.D. Brous & Co., Inc.
5. Title of each class of security:
a. Common Stock, par value $.015 per share ("Common Stock").
b. Class A Redeemable Common Stock Purchase Warrants (the "Warrants").
Each Warrant is exerciseable into one-half share of Common Stock at
an exercise price of $9.60 per whole share at any time up until
November 15, 2003.
9
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6. Amount and aggregate offering price:
a. Common Stock and Warrants:
Amount registered: 1 2,250,000 Shares
Aggregate price of offering
amount registered: 2 $11,040,000
Amount sold: 1,200,000 Units
Aggregate offering price of amount sold: 2 $11,040,000
<TABLE>
<CAPTION>
For the period ending March 31, 1999
Direct or indirect payments
to directors, officers,
general partners of the
issuer or their associates; to
persons owning ten percent
or more of any class of
equity securities of the Direct or indirect
issuers; and to affiliates payments to others
<S> <C> <C>
7. Costs of offering:
(01) Underwriting discounts and
commissions /_/ /_/ $ 1,104,000
(02) Finder's fees /_/ /_/ 0
(03) Expenses paid to or for underwriters /_/ /_/ $ 331,200
(04) Other expenses /_/ /_/ $ 603,000
(05) Total expenses /_/ /_/ $ 2,038,200
8. Net offering proceeds after expenses in item 7: /_/ $ 9,001,800
9. Use of net offering proceeds:
(01) Construction of plants, building and
facilities /_/ /_/ 0
(02) Purchase of machinery and equipment /_/ /_/ $ 972,773
</TABLE>
- --------
1 Includes 1,200,000 units (the "Units") (consisting of 1,200,000
shares of Common Stock and Warrants to purchase 600,000 shares of Common Stock),
the underwriter's over-allotment option (which was exercised) for 180,000 Units,
and an option to purchase 120,000 Units at $13.20 per Unit that was issued to
the underwriter. The amount registered includes 750,000 shares of Common Stock
underlying Warrants contained in the Units (including the over-allotment
option). Does not include 423,881 shares of Common Stock and Warrants to
purchase 423,881 shares of Common Stock registered on behalf of certain selling
stockholders, none of which may be sold prior to November 16, 1999.
2 Does not include exercise price of Warrants outstanding, none of
which have been exercised to date.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(03) Purchase of real estate /_/ /_/ 0
(04) Acquisition of other business(es) /_/ /_/ 0
(05) Repayment of indebtedness /_/ /_/ $ 270,000
(06) Working capital /_/ /_/ $ 1,200,000
(07) Government securities-greater than 90
days /_/ /_/ 0
(08) Cash and investments-less than 90
days /_/ /_/ $ 5,289,737
(09) Research & development /_/ /_/ $ 744,290
(10) Relocation Loans to Officers /_/ $ 225,000 /_/
(11) Marketing Activities /_/ /_/ $ 300,000
10. Do the use(s) of proceeds in Item 9 represent Yes /_/ No |X|
a material change in the use(s) of proceeds
described in the prospectus?
</TABLE>
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
27.1 Financial Data Schedule
(b) The following Current Reports on Form 8-K have been filed during the
period:
(i) Current Report on Form 8-K filed on April 13, 1999 reporting
the resignation of an executive officer and the terms and
conditions relating thereto.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 19, 1999
MUSE TECHNOLOGIES, INC.
By: s/ Curtiz J. Gangi
-----------------------------------
Curtiz J. Gangi, President
By: s/ Brian Clark
-----------------------------------
Brian Clark, Chief Financial Officer
(Principal Financial and Accounting
Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,674,150
<SECURITIES> 0
<RECEIVABLES> 454,939
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,166,376
<PP&E> 2,391,284
<DEPRECIATION> 1,240,555
<TOTAL-ASSETS> 18,722,712
<CURRENT-LIABILITIES> 1,079,831
<BONDS> 0
0
0
<COMMON> 154,487
<OTHER-SE> 17,488,394
<TOTAL-LIABILITY-AND-EQUITY> 18,722,712
<SALES> 770,875
<TOTAL-REVENUES> 1,113,875
<CGS> 0
<TOTAL-COSTS> 3,430,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,272
<INCOME-PRETAX> (2,317,065)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,317,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,317,065)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
