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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended September 30, 1996 Commission File Number 33-16416-LA
- ------------------------------------ ----------------------------------
International Meta Systems, Inc.
100 N. Sepulveda Blvd., Suite 601
El Segundo, CA 90245
(Exact name of registrant as specified in its charter)
Delaware 0146747
-------- -------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
Registrant's telephone number, including area code: (310) 524-9300
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 12(g) 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
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International Meta Systems, Inc.
("Company" or "Registrant")
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date.
Common Stock, $.0001 Par Value - 37,418,325 as of September 30, 1996.
PART I.
FINANCIAL INFORMATION
Item 1 - Financial Statements
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INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEETS
September 30, 1996 and December 31, 1995
ASSETS
September 30 Dec. 31
1996 1995
------------ ----------
(unaudited) (unaudited)
Current Assets
Cash and Cash Equivalents $ 6,025,254 $ 919,417
Accounts Receivable 300,000 0
Inventory 20,818 20,818
Prepaid expenses and other
current assets 15,902 38,311
------------ ----------
TOTAL CURRENT ASSETS 6,361,974 978,546
Furniture and Equipment
at cost less accumulated
depreciation 738,788 237,672
Computer Software Costs, at cost,
less accumulated amortization 665,957 1,081,061
Patents 65,048 56,131
------------ ----------
TOTAL ASSETS $ 7,831,767 $2,353,410
------------ ----------
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2
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INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEETS
September 30, 1996 and December 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30 Dec. 31
1996 1995
------------ ----------
(unaudited) (unaudited)
Current Liabilities
Accounts Payable $ 88,069 $ 66,380
Accrued Payroll and payroll taxes 83,762 69,481
Capitalized lease payable - current portion 3,823 13,581
Dividends payable 20,500 27,850
------------ ----------
TOTAL CURRENT LIABILITIES 196,154 177,292
Shareholders' Equity
Preferred stock: $.0001 par value authorized
1,000,000 shares
Series A convertible preferred stock,
10,000 shares issued and outstanding 1 1
Series B convertible preferred stock,
250 shares issued and outstanding 1 1
Common stock $.0001 par value,
authorized 50,000,000 shares; issued
and outstanding 27,395,455 shares (1995)
37,418,325 (1996) 3,742 2,739
Additional paid-in capital 18,293,124 8,653,679
Subscription Receivable (28,570) 0
Deferred Compensation 0 (89,072)
Accumulated deficit (10,632,685) (6,391,230)
------------ ----------
TOTAL SHAREHOLDERS' EQUITY 7,635,613 2,176,118
------------ ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 7,831,767 $2,353,410
------------ ----------
------------ ----------
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INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1996 1995 1996 1995
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Sales 0 10,000 0 310,000
Contract Payment 300,000 200,000 300,000 300,000
----------- ----------- ----------- ----------
300,000 210,000 300,000 610,000
Cost and Expenses
Research and Development 1,093,989 97,936 2,507,275 242,886
Selling, general and admin. 483,646 265,431 1,665,567 555,690
Depreciation and Amort. 164,673 156,797 484,972 331,132
----------- ----------- ----------- ----------
Loss from Operations (1,442,308) (310,164) (4,357,814) (519,708)
Other Income (Expenses)
Interest Net 102,468 32 230,292 799
Unrealized Capital Loss (8,308) 0 (52,552) 0
----------- ----------- ----------- ----------
NET LOSS $(1,348,148) $ (310,132) $(4,180,074) $ (518,909)
----------- ----------- ----------- ----------
Net Loss per share $ (.04) $ (.00) $ (.12) $ (.02)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Weighted average number of
shares outstanding 37,386,790 26,611,873 34,327,838 26,577,308
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
4
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INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,180,074) $(518,909)
Reconciliation of net loss to net cash
used in operating activities
Amortization of deferred compensation 89,072 92,241
Issuance of common stock for services 23,140 27,671
Depreciation and amortization 484,972 331,132
(Increase) decrease in:
Accounts Receivable (300,000)
Inventory 0 (10,877)
Prepaid expenses and other current assets 22,409 4,453
Increase in:
Accounts payable and accrued expenses 35,970 4,977
----------- ---------
Net cash used in operating activities (3,824,511) (63,312)
----------- ---------
Cash flows from investing activities
Increase in deferred software development cost 0 (533,139)
Acquisition of furniture and equipment (570,984) (165,638)
Increase in patent costs (8,917) (8,170)
----------- ---------
Net cash used in investing activities (579,901) (706,947)
----------- ---------
Cash flows from financing activities
Proceeds from issuance of common stock, net 9,520,007 19,619
Proceeds from issuance of preferred stock, net 0 980,000
Payments on capitalized leases payable (9,758) (4,348)
----------- ---------
Net cash provided by financing activities 9,510,249 995,271
----------- ---------
Net increase (decrease) in cash and cash equivalents 5,105,837 (219,012)
Cash and cash equivalents, beginning of period 919,417 409,812
----------- ---------
Cash and cash equivalents, end of period $ 6,025,254 $ 628,824
----------- ---------
----------- ---------
</TABLE>
5
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INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and nine month periods ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. 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 December 31, 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
THE COMPANY
IMS designs and develops microprocessor chip technologies, focusing on
ways to raise the performance and functionality of industry-standard
microprocessors while lowering their cost. IMS intends to sell its technologies
through licensing arrangements with industry leaders or will sell end products
directly to consumers.
IMS has established a focused business strategy to achieve future growth.
It includes:
- Develop proprietary technology for leading-edge designs.
- Establish partnerships and joint development or marketing arrangements
with select, industry leaders.
- Market a diverse product line that targets mainstream industry-
compatible devices to meet the needs of major computer, entertainment
and telecommunications markets and the high end of the emerging
Internet access market.
This strategy, coupled with the Company's plan to leverage and reuse its
technology, is intended to permit IMS to develop and market products that are
anticipated to have substantial consumer demand.
6
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IMS PRODUCTS
IMS is currently focusing on completion of the Meta 6000, an
Intel-compatible processor, and conducting prototype development and market
acceptance studies for an Internet language accelerator, the Meta Expresso.
INTEL-COMPATIBLE PROCESSORS
Over the past decade, IMS has designed and produced a series of
microprocessors, the Meta 3230, 3240 and 3250, that emulate both high-level
languages and industry-standard machine languages. The Meta 3240 emulated
Motorola's 68000 instruction set, while the Meta 3250 could emulate both the
Motorola 68040 and the Intel 486 instruction sets. These emulators performed
well and exhibited good fidelity, running industry-standard software like DOS
and Windows.
In partnership with a major international semiconductor manufacturer, the
development partner, IMS is developing the Meta 6000, a fully custom socket-
compatible version of the Intel Pentium-TM-. Performance is targeted to
approximate that of a 300 MHz Pentium-TM-. Special features include:
- - Deep pipeline with multiple execution units with out-of-sequence execution.
- - On-chip MMX (Intel's Multimedia Unit) calculated to be 30% more powerful
than Intel's P55C MMX, on a clock-for-clock basis.
- - Process accelerator mechanisms. IMS-proprietary branch prediction and
memory structures help avoid pipeline breakage due to control transfers or
memory access delays, increasing the number of instructions that can be
executed in a single cycle. Each of these design elements is individually
reusable.
The Meta 6000 will be manufactured using a .35 micron production process,
The Company anticipates migrating the design to a .25 micron process. This
can result in a chip called the Meta 6500 that may have a substantial
performance increase over the Meta 6000. No assurances can be provided that the
Meta 6000 will achieve all of its performance objectives. Also, no assurances
can be given that IMS will be successful in obtaining agreement from the
development partner for the Meta 6500 project or that the anticipated
performance increase will be achieved.
In July, Dr. Hanan Potash joined the Company as Vice President, Operations
with the responsibility of coordinating and directing the efforts of the
Meta 6000 team and synchronizing the Company's efforts with the requirements of
our development partner. He is located in the Austin Design Center.
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INTERNET LANGUAGE ACCELERATORS
IMS has deep roots in designing very high level language engines -- the
Meta 3230 and 3240. These products were developed to execute SMALLTALK byte-
codes in addition to standard machine languages, such as C, C++ and FORTRAN.
Indeed, the Meta 3240 ran SMALLTALK programs 10-30 times faster than competing
microprocessors.
The mechanisms and techniques developed by IMS for supporting these early
products are directly applicable to JAVA, a simple, general purpose programming
language for Internet applications. The JAVA language is designed so that
applications written in it will run in a network of computers made by different
manufacturers, or using different microprocessors. Typically, the JAVA
instructions are interpreted in these machines using their own native
instructions which often significantly slows down their execution time. Many
companies are looking for ways to accelerate JAVA and obtain much higher levels
of performance. When applied to JAVA, the existing 3240 design yields
substantially improved performance over software interpretation of JAVA on
standard Reduced Instruction Set ( RISC) engines.
IMS is using this technology to develop a prototype of a high-performance
JAVA chip, the Meta Expresso-TM-, which will support inexpensive JAVA -
programmable devices. The Company is currently evaluating potential approaches
for marketing a Java capability and is seeking a development partner.
As more elaborate multimedia human interfaces and broader use of JAVA as a
general-purpose language create the need for even greater performance, IMS may
develop an even higher performance engine, the Meta Double-Expresso-TM-, by
applying the super-scalar technologies and mechanisms under development for the
Meta 6000. No assurance can be given that IMS will be successful in developing
or marketing either of these processors.
RESULTS OF OPERATIONS, 3RD QUARTER, 1996
The operating loss for the quarter increased by $1,132,144 compared to the
same period in 1995, while the net loss increased by $1,038,016. The Meta 6000
Microprocessor Design Project was at nearly full staffing during this reporting
period, while in the same 1995 period, the contract had just been awarded in
April and the staffing effort was underway. A Design Center was opened in
Austin, TX, in November, 1995. The expenses incurred in this expansion, which
focused on supporting the Meta 6000 project, accounts for the vast majority of
the increase in net loss for the period.
The Company received $300,000 in revenue from sales or development contract
payments during the reporting period. This is an increase of $90,000 from 1995.
Due to the uneven phasing of development contract payments, there can be
substantial variations from period to period.
8
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Research and Development expense during the reporting period increased by
$996,053 over the comparable period in 1995. This increase was primarily due to
the increase in technical staffing from 10 to 55. The staff of 55 consists of
mostly full time employees and a number of part-time and full-time consultants
to support the Meta 6000 development and the other Company projects. Many of
the expenses associated with completing the expansion of the Austin Design
Center from 4376 square feet to 5704 square feet were incurred in this quarter.
There were no expenses associated with the Austin Center during the comparable
period in 1995.
Selling, general and administrative expense during the reporting period
increased by $218,215 over the comparable period in 1995. This increase was due
to the addition of administrative staff to support the increase of 45 engineers
and the creation of the Austin Design Center. There were also increases in
travel and communications charges required to coordinate the Meta 6000
development between headquarters and the Austin Design Center, recruiting fees
for staffing, relocation fees for new employees, consulting fees for product
studies. Also, Federal and state taxes and insurance associated with employee
headcount increased proportionately with the increase in staffing.
Depreciation and Amortization increased during the reporting period by
$7,876 over the comparable period in 1995. Amortization of the Meta 3250
software represents the largest item in the increase.
Interest Income increased by $102,436 during the reporting period over the
comparable period in 1995. This increase was earned on the remaining balance of
the $10,000,000 that was raised at the end of 1995 and during the first quarter
of 1996.
Unrealized capital loss of $8,308 occurred due to the impact of the
fluctuation of interest rates on the temporary investments of the Company.
There were no corresponding expenses in 1995.
RESULTS OF OPERATIONS, NINE MONTHS ENDING SEPT 30, 1996
The loss for the nine months increased by $3,661,165 compared to the same
period in 1995. During the same period in 1995, the Company was operating at a
much lower staffing level. The Meta 6000 Microprocessor Design Project was
started in April of 1995. In addition, in April of 1995, the Company relocated
from Torrance to larger offices near the Los Angeles Airport, and the Austin
Design Center was opened in November, 1995. During the first nine months of
1996, the Company was fully focused, staffed, equipped and working to complete
the Meta 6000 project.
There was $300,000 from sales or development contract payments during the
reporting period. This is a decrease of $310,000 from 1995 when the Company
received $300,000 of development contract payments, and the Company sold a non-
exclusive license for rights to the Meta 3250 for $300,000. Due to the uneven
phasing of development contract payments, there can be substantial variations
from period to period.
9
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Research and Development expense during the reporting period increased by
$2,264,369 over the comparable period in 1995. This increase was primarily due
to the significant increase in technical staffing from 4 at the beginning of
1995 to the current 55. The staff of 55 consists of mostly full time employees
and a number of part-time and full-time consultants to support the Meta 6000
development and the other company projects. In addition, the 4376 square foot
Austin Design Center, which was opened in November of 1995, was expanded to
5704 square foot during second quarter of 1996. There were no expenses
associated with the Austin Center during the comparable period in 1995.
Selling, general and administrative expense during the reporting period
increased by $1,109,877 over the comparable period in 1995. This increase was
due to the addition of administrative staff to support the increase of
51 engineers, the relocation from Torrance to larger offices near the Los
Angeles Airport, and the creation of the Austin Design Center. There were also
increases in travel and communications charges required to coordinate the
Meta 6000 development between headquarters and the Austin Design Center,
recruiting fees for staffing, relocation fees for new employees, consulting fees
for product studies. Also, Federal and state taxes and insurance associated
with employee headcount increased proportionately with the increase in staffing.
Depreciation and Amortization increased during the reporting period by
$153,840 over the comparable period in 1995. Amortization of the Meta 3250
software began in this period and represents the largest item in the increase.
Interest Income increased by $229,493 during the reporting period over the
comparable period in 1995. This increase was earned on the remaining balance of
the $10,000,000 that was raised at the end of 1995 and during the first quarter
of 1996.
Unrealized capital loss of $52,552 occurred due to the impact of the
fluctuation of interest rates on the temporary investments of the Company.
There were no corresponding expenses in 1995.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's cash or cash equivalent position was $6,025,254 at the end of
the quarter compared to $919,417 at the end of 1995. This cash, combined with
anticipated progress payments from its Meta 6000 development contract should
allow the Company's activities related to the Meta 6000 Project to proceed
through initial chip production. The anticipated progress payments are tied to
milestone achievements, and no assurance can be given that all or any of such
milestones will be achieved.
Additional funding will be required for IMS to market and inventory the
chip for the retrofit market or for direct sales to Original Equipment
Manufacturers for inclusion in computer
10
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systems. No assurances can be given that the Company will be able to obtain
such funding on acceptable terms. Business opportunities related to follow-on
chips such as the Meta 6500, Java products or other projects would require
additional funds to initiate these new projects. No assurances can be given
that any new project will be initiated or that funding for such projects can be
obtained.
The Company elected to pay interest, due June 30, 1996, on its Series A and
Series B Convertible Preferred Stock in shares of Common Stock. The amount of
such interest aggregated $41,000, and resulted in the issuance of 20,752 shares
of Common Stock. The company may elect to satisfy interest due on December 31,
1996 and June 30, 1997 on both series of stock, and on November 30, 1997 on the
Series B in cash or through the issuance of additional shares of Common Stock.
AVAILABILITY OF NOLS
The Company estimates that it had, for federal income tax purposes, net
operating loss carryforwards ("NOLs") amounting to approximately $8,028,000 at
December 31, 1995, which expire at various amounts through the year 2010 if not
utilized before then to offset taxable income.
Section 382 of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder, impose limitations on the ability of corporations
to use NOLs, if the corporation experiences a more than 50% change in ownership
during certain periods. The determination of whether an ownership change with
in the meaning of Section 382 has occurred during the most recent period has not
yet been made. The detailed information necessary to determine testing dates
and percentage ownership increases of five percent owners, if any, is not
readily available; therefore, a determination of the testing dates and
percentage ownership increases will not be made until the NOL is utilized.
"SAFE HARBOR" STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The forward-looking statements in this quarterly report may be affected by
a number of factors including but not limited to changes in the market for
microprocessors, competitive actions taken by competitors, the ability of the
Company to recruit the necessary technical staff, or the availability of
financing. No assurance can be given that any projected schedule can be met or
that the specifications required for the products to be successfully marketed
can be achieved.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
11
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Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS IN SENIOR SECURITIES
There have been no defaults in any security issued by IMS.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ANNUAL MEETING
At the Company's annual meeting on July 10th, 1996, the shareholders
approved all proposals presented by the Company. They included:
a) Adoption and approval of the amendment to the Company's Certificate
of Incorporation to increase the amount of authorized shares of Common Stock
from 50,000,000 to 70,000,000 and to reduce from 8 to 6 the threshold at which
directors of the Company must be elected to staggered terms of office.
For Against Abstain
------------------------------------------------------
24,162,761 834,907 152,325
b) Ratification of the appointment of Singer, Lewak, Greenbaum &
Goldstein, certified Public Accountants, as auditors of the Company for the
fiscal year ending December 31, 1996.
For Against Abstain
------------------------------------------------------
32,394,658 26,911 159,015
c) Adoption and approval to elect to the Board of Directors five (5)
directors, to serve until the next Annual Meeting of Stockholders of the Company
or until their successors are elected and qualify, subject to their prior death,
resignation or removal. The directors are: George W. Smith, Masahiro Tsuchiya,
Frank LaChapelle, Sigmund Hartmann, and Martin S. Albert.
For Against Abstain
------------------------------------------------------
32,458,008 58,413 64,163
d) Adoption and approval of the form of indemnity agreements between
the Company and the members of the Company's Board of Directors.
For Against Abstain
------------------------------------------------------
31,541,517 781,872 234,695
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e) Adoption and approval of the Company's 1996 Stock Option Plan and
to reserve up to 4,500,000 shares of the Company's Common Stock for issuance
under the 1996 Stock Option Plan.
For Against Abstain
------------------------------------------------------
28,464,080 729,912 403,780
Item 5. Other Information.
In connection with a private placement of common stock in 1994, 460,000
warrants to purchase common stock at $2.50 per share were issued, which were to
expire in October 1996. The Board of Directors voted at their September 5, 1996
meeting to extend the expiration date of the common stock purchase warrants from
October 31, 1996 to April 30, 1997.
At the November 4, 1996 Board of Directors meeting, Dr. Philip M. Neches
was elected to fill a vacant seat on the International Meta Systems, Inc., Board
of Directors. Dr. Neches was a founder, Chief Scientist, and Vice President of
Teradata Corporation from 1979 to 1988. He served as Vice President and Chief
Scientist of NCR Corporation from 1989 to 1994. From 1994 to 1996, Dr. Neches
was enlisted by AT&T as their Vice President and Group Technical Officer of
Multimedia Products and Services
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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.
INTERNATIONAL META SYSTEMS, INC.
Date: November 13, 1996
/s/ Paul Sefchek
- ----------------------------------------
Paul Sefchek, Vice President Finance and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,025,254
<SECURITIES> 0
<RECEIVABLES> 315,902
<ALLOWANCES> 0
<INVENTORY> 20,818
<CURRENT-ASSETS> 6,361,974
<PP&E> 1,469,793
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,831,767
<CURRENT-LIABILITIES> 196,154
<BONDS> 0
2
0
<COMMON> 3,742
<OTHER-SE> 7,631,869
<TOTAL-LIABILITY-AND-EQUITY> 7,831,767
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,742,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,160
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,348,148)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
