<PAGE>
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 JUNE 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 stock, as of the latest practical date.
Common Stock, $.0001 Par Value -- 37,361,904 as of June 30, 1996.
Preferred Stock, $.0001 Par Value -- 10,250 as of June 30, 1996.
PART I.
FINANCIAL INFORMATION
Item 1 - Financial Statements
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INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
ASSETS
June 30 Dec. 31
1996 1995
----------- -----------
(unaudited) (unaudited)
Current Assets
Cash and Cash Equivalents $7,727,248 $ 919,417
Inventory 20,818 20,818
Prepaid expenses and other
current assets 23,239 38,311
---------- ----------
TOTAL CURRENT ASSETS 7,771,305 978,546
Furniture and Equipment
at cost less accumulated
depreciation 439,365 237,672
Computer Software Costs, at cost,
less accumulated amortization 804,325 1,081,061
Patents 63,205 56,131
---------- ----------
TOTAL ASSETS $9,078,200 $2,353,410
---------- ----------
---------- ----------
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INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30 Dec. 31
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Current Liabilities
Accounts Payable $ 36,413 $ 66,380
Accrued Payroll and payroll taxes 110,209 69,481
Capitalized lease payable - current portion 7,718 13,581
Dividends payable 40,176 27,850
----------- -----------
TOTAL CURRENT LIABILITIES 194,516 177,292
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) 37,361,904
(1996) 3,737 2,739
Additional paid-in capital 18,196,983 8,653,679
Subscription Receivable (27,945) 0
Deferred Compensation (27,698) (89,072)
Accumulated deficit (9,261,395) (6,391,230)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,883,684 2,176,118
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 9,078,200 $2,353,410
----------- -----------
----------- -----------
</TABLE>
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INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------ ------------------------
June 30 June 30 June 30 June 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Sales 0 300,000 0 300,000
Contract Payment 0 100,000 0 100,000
----------- ----------- ----------- -----------
0 400,000 0 400,000
Cost and Expenses
Research and Development 1,007,061 75,357 1,413,286 144,950
Selling, general and admin. 728,689 189,939 1,181,921 290,259
Depreciation and Amort. 164,514 159,749 320,299 174,335
----------- ----------- ----------- -----------
Loss from Operations (1,900,264) (125,045) (2,915,506) (309,544)
Other Income (Expenses)
Interest Net 127,824 58 129,586 767
Loss on Fund Account (44,244) 0 (44,244) 0
----------- ----------- ----------- -----------
NET LOSS $(1,816,684) $ (24,988) (2,830,164) $ (208,777)
----------- ----------- ----------- -----------
Net Loss per share $ (.05) $ (00) $ (.09) $ (.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding 37,049,373 26,558,754 32,781,554 26,555,195
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
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INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended
----------------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,830,164) $(208,777)
Reconciliation of net loss to net cash (used in) provided
by operating activities
Amortization of deferred compensation 61,374 60,554
Issuance of common stock for services 15,000 750
Depreciation and amortization 597,035 174,335
(Increase) decrease in:
Inventory 0 (10,877)
Prepaid expenses and other current assets 15,072 (925)
Increase (decrease) in:
Accounts payable and accrued expenses 10,761 122,928
------------- -------------
Net cash (used in) provided by operating activities (2,130,922) 137,988
------------- -------------
Cash flows from investing activities
Increase in deferred software development cost 0 (326,000)
Acquisition of furniture and equipment (521,992) (164,445)
Increase in patent costs (7,074) (4,049)
------------- -------------
Net cash used in investing activities (529,066) (494,494)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock, net 9,473,682 17,992
Payments on capitalized leases payable (5,863) (908)
------------- -------------
Net cash provided by financing activities 9,467,819 17,084
------------- -------------
Net increase (decrease) in cash and cash equivalents 6,807,831 (339,422)
Cash and cash equivalents, beginning of period 919,417 409,812
------------- -------------
Cash and cash equivalents, end of period $ 7,727,248 $ 70,390
------------- -------------
------------- -------------
</TABLE>
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INTERNATIONAL META SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 Regulation S-B.
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 six and three month period ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended 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 sells its technologies through licensing
arrangements with industry leaders or by selling end products directly to
consumers.
IMS has identified several business strategies to achieve future growth. They
include:
- Proprietary technology developed and patented by the Company for
leading-edge design.
- Diverse product line targeting 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.
- Partnerships and joint development or marketing arrangements with
select, industry leaders.
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These strategies, coupled with the Company's ability to leverage and reuse its
technology to meet anticipated consumer demands, should allow IMS to compete
effectively with major manufacturers.
INDUSTRY OVERVIEW
The last few years have seen a tremendous growth in world-wide PC shipments.
PC unit shipments reached 60 million in 1995, up 25% over 1994 according to San
Jose, California-based Dataquest. Although most analysts expect growth to slow
down in 1996, Dataquest estimates the world market will show a 19% increase.
The last few months have seen a tremendous drop in the average selling price of
memory chips (DRAM) which will increase the cost-effectiveness of PCs for
consumers and businesses, thus boosting demand for PCs and hence PC processors.
The broad demand for performance and new functionality - especially multimedia
and games - is accelerating the switch-over to Pentium-TM- processors instead of
486 processors or clones as the processor of choice for new PCs.
An industry expert projects Intel Pentium-TM- shipments will reach 49 million
in 1996. Intel is expected to introduce the P55C -- a variation of the Pentium-
TM- with built-in multimedia extensions (MMX) and a larger internal cache -- in
the first quarter of 1997. Next year is also expected to be a good year for
high-end Pentium-TM- processor shipments, particularly those with multimedia
extensions.
IMS PRODUCTS
Currently, IMS is focusing on three areas of product and technology
development which the Company expects to combine on a single chip. They are:
- Intel-Compatible Processors - the Meta 6000 family
- Internet Language Accelerators - the Meta Expresso and Double Expresso
- Speech and Media Processing - Research Studies and Prototypes
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, IMS is
developing the Meta 6000, a fully custom socket-compatible version of the Intel
Pentium-TM- with performance targeted to the equivalent of a 300 MHz
Pentium-TM-. Special features include:
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- 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.
Our Meta 6000 will be manufactured using a .35 micron production
processor, and we plan, with our development partner, to shrink it down to a
.25 micron process that they expect to have in 1998. This can result in a chip
called the Meta 6500 that has the equivalent performance of a 500 MHz Pentium.
INTERNET LANGUAGE ACCELERATORS
Since Sun announced JAVA in May, 1995, there has been tremendous industry
interest in it. JAVA addresses otherwise intractable problems of integration and
decentralized program development in a network environment. Sun is applying
substantial resources to promote JAVA. It has been recognized in the software
development industry as a language to consider for use in all future software
development.
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
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 as much
as 15 to 30 times improved performance over software interpretation of JAVA on
standard Reduced Instruction Set (RISC) engines.
IMS is using this technology to develop a high-performance JAVA chip, the
Meta Expresso-TM-, which will support inexpensive JAVA -programmable devices.
It is possible to raise performance for JAVA applications by using JIT (Just-In-
Time) compilers; however, this requires
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lots of DRAM memory and local mass storage disks. The Meta Expresso chip
will be an ideal platform for an inexpensive but high performance Internet
terminal, which can be included in future TV sets as well as low cost
Internet computer boxes.
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.
SPEECH AND MEDIA PROCESSING
Working with speech processing methods for voice compression, IMS and
Standard Object Systems began in 1995 to develop a way to use speaker-dependent
information to dramatically reduce the bandwidth needed for compressed speech.
By early 1996, IMS was able to demonstrate intelligible but noisy voice
transmission at less than 600 bps. This research effort is continuing at a low
level.
IMS demonstrated Japanese speech recognition using an early phonetic speech
recognition prototype in 1995. Although the technique is still in the research
phase, it has roots in the phonetic structure of the Japanese language and seems
well-suited to global application.
MPEG is the acronym for the compression standard in the industry for
multimedia transmission. IMS is tracking the developing MPEG-4 standards, which
will not only increase compression rates and improve quality, particularly in
low-bandwidth coding of speech, but also set a standard that will synchronize
lip movement to voice by synchronizing the variable video rate with the voice
compression rate. The MMX unit in the IMS Meta 6000 processor will contain many
elements applicable to an MPEG controller, and IMS is exploring a variety of
hardware assists for MPEG-4 audio/video standards based on the Company's
experience with related technologies. Future development of an MPEG-4 chip is
under consideration. IMS management believes that speech, graphics and video
are key parts of the new computing paradigm.
THE FUTURE
Sun Microsystems estimates the potential size of the JAVA chip market to grow
to a total of $15 billion by the year 2000. IMS should be able to
successfully compete for a portion of this business using the next chip in our
development progression, the Meta Double Expresso, which is expected to improve
the performance of the Meta Expresso.
As the Company adds MPEG capabilities to some chips, we will consider
incorporating this capability in the next generation Meta 7000. This
processor may be built at .18 microns. All three of the IMS technologies may
come together in this product and could be used in a variety of applications in
consumer network computers, wired and wireless telecommunications, single chips
imbedded in a television set allowing viewers to surf the Internet with their TV
or running JAVA.
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THE WORLD IS witnessing a spectacular growth in the use of the Internet. In
1980 there were 100 hosts on the Internet. In 1995 there were 10 million hosts
on the Internet. There are now over 16 million Web users in the US and Canada,
and the annual Internet population growth is estimated to be 100% per year for
the foreseeable future. JAVA will help fuel this growth by making it much
easier to develop programs and information presentations in a distributed and
independent manner. Indeed, this may be a major and irreversible paradigm shift
in the way programming is done.
IMS expects Java to proliferate throughout business. It is already being
used today in many applications that consumers are unaware of. The largest
growing segment of the business is companies that operate proprietary
"intranets" where they communicate within their own system or industry, such as
banking and airlines. Our vision for tomorrow is a combination of the three
technologies we are currently developing high performance Intel-compatible
processors, Internet language accelerators and speech compression and media
processing.
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.
RESULTS OF OPERATIONS, 2ND QUARTER, 1996
The loss for the quarter increased by $1,791,696 compared to the same period
in 1995. The Meta 6000 Microprocessor Design Project was at full staffing
during this reporting period, while in the same 1995 period, the contract was
just awarded in April and the staffing effort was just beginning. In April of
1995, the Company relocated from Torrance to larger offices near the Los Angeles
Airport, and subsequently opened a Design Center in Austin, TX in November,
1995. This expansion, focused on the Meta 6000 project, accounts for the vast
majority of the increase in net loss for the period.
There was no revenue from sales or development contract payments during the
reporting period. This is a decrease of $400,000 from 1995 when the Company
sold a non-exclusive license for rights to the Meta 3250 to an international
computer and semiconductor manufacturer for $300,000. In addition, $100,000 of
development contract payments were received in 1995. Due to the uneven phasing
of development contract payments, no revenue was received during this period.
Research and Development expense during the reporting period increased by
$931,704 over the comparable period in 1995. This increase was primarily due to
the increase in technical staffing from 5 to 51. The staff of 51 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
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November of 1995, was expanded to 5704 square foot during the 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 $538,750 over the comparable period in 1995. This increase was due
to the addition of administrative staff to support the increase of 46 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, and market development for voice compression and internet computer
products. Also, Federal and state taxes associated with employee headcount
increased proportionately with the increase in staffing.
Depreciation and Amortization increased during the reporting period by $4,765
over the comparable period in 1995. An increase in depreciation on capital
equipment accounted for the difference.
Interest Income (net) increased by $127,766 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.
Loss on Investment of $44,244 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, 1ST HALF, 1996
The loss for the first half increased by $2,621,387 compared to the same
period in 1995. During the first half of 1995, the company was in
negotiations which culminated in the Meta 6000 Microprocessor Design Project
kickoff in April of 1995. During the first half of 1996, the Company was
fully focused, staffed, equipped and working to complete the project. The
above discussion of operations for the Second Quarter of 1996 also accounts
for the vast majority of the increase in net loss for the first half.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's cash or cash equivalent position was $7,727,248 at the end of
the quarter compared to $919,417 at the end of the year. 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 achievement, and no assurance can be given that all or any of
such milestones will be achieved. Additional funding may be required to market
and inventory the chip for the retrofit market or for direct sales to Original
Equipment Manufacturers for inclusion in computer systems. If such funds are
required, no assurances can be given that the Company will be able to obtain
them on acceptable terms. Business opportunities related to follow-on chips such
as the Meta 6500 or the Meta 7000, Java or voice related projects would
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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.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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.
IMS held its annual Shareholder's Meeting on July 10, 1996. Please refer to
"Item 5. SUBSEQUENT EVENTS" for the matters presented to Security Holders.
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Item 5. SUBSEQUENT EVENTS.
Subsequent to the end of the reporting period, 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.
At the Company's annual meeting on July 10th, 1996, Mr. Smith announced that
the tapeout of the Meta 6000 is now scheduled for Feb., 1997. The shareholders
also 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.
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.
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.
d) 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.
Pursuant to the requirements of the Securities 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: August 12, 1996
/s/ Paul Sefchek
- -----------------------------------
Paul Sefchek, Vice President Finance and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,727,248
<SECURITIES> 0
<RECEIVABLES> 23,239
<ALLOWANCES> 0
<INVENTORY> 20,818
<CURRENT-ASSETS> 7,771,305
<PP&E> 1,306,895
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,078,200
<CURRENT-LIABILITIES> 194,516
<BONDS> 0
2
0
<COMMON> 3,737
<OTHER-SE> 8,879,945
<TOTAL-LIABILITY-AND-EQUITY> 9,078,200
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,900,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,580
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,816,684)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
