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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______________to________________.
COMMISSION FILE NUMBER 0-17945
INTERNATIONAL META SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0146747
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
100 N. SEPULVEDA BLVD., SUITE 601, EL SEGUNDO, CA 90245
Registrant's telephone number, including area code: (310) 524-9300
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant wasrequired to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO/ /
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation 8-SB not contained in this form and no disclosure will be
contained to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
Registrant's total revenues for the fiscal year ended December 31, 1996:
$575,075.90.
The number of shares outstanding of the issuer's common stock as of March
10,1997 was 37,497,100. The aggregate market value of the 21,279,471 shares
of the Company's Common Stock held by non-affiliates was approximately
$37,239,074 as of March 10, 1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
International Meta Systems, Inc. ("IMS" or the "Company"), designs and
develops high-performance, industry-standard, Intel X86 Compatible
Microprocessors and Internet Language Accelerators. The Company has
perfected design techniques that enable substantial increases in performance
and functionality while lowering production costs. In addition, the Company
has developed extensive design verification test suites to ensure compliance
with industry-standard X86 and Java processors.
The Company was founded by Mr. George W. Smith in 1986 to commercially
exploit the results of a $5 million computer research project begun at the
Aerospace Corporation. The Company acquired a royalty free exclusive license
for the technology from the Aerospace Corporation and adapted this advanced
design for use on personal computers with the development of its first
microprocessor chip, the Meta 3230, in 1988. This chip was successfully used
to implement high level computer languages on personal computers
that enabled scientists and engineers to migrate mainframe applications to
desktop computers. The Company sold over 200 computer boards containing this
chip to the aerospace and defense industries.
During the 1989 to 1990 time frame the Meta 3240 was developed as a
Smalltalk (Smalltalk is the precursor of Java) engine for Apple Computer
systems. The Company completed a development contract with NCR to demonstrate
the use of this technology in their product line. The market for this
application of IMS technology was not broad enough for the Company to achieve
its business goals. As a result, in 1989, IMS registered as a public
corporation to raise funding through the sale of equity to finance the
development of its microprocessor technology for the personal computer business
market.
In 1990, IMS initiated its design of a second-generation microprocessor
in response to a development contract with Apple Computer, Inc. The Company,
using the unique features of its previous designs, was able to develop and
prototype a microprocessor chip that could execute X86, 68040, and 6502
instruction sets, enabling it to run software programs written for both IBM
compatible and Applecomputer systems. The success of the Meta 3250 chip's
implementation validated IMS' ability to offer a technology to the industry
that could emulate (run programs written for one computer system on a
different computer system without modification) industry accepted
microprocessor chips and execute commodity operating systems, such as
Microsoft's DOS and Windows, and Apple's System 7 operating systems.
By 1993, IMS had successfully designed, developed, and prototyped the
Meta 3250 and the Meta 3250 A & B that were produced by major
semiconductor manufacturers. These products demonstrated IMS' capability to
produce state ofthe art microprocessors with X-86 compliance, and a thorough
understanding of Java and Internet language machines.
On April 27, 1995 the Company entered into an Agreement (the
"Agreement") with a multi-billion dollar internationally recognized and
respected computer and semiconductor manufacturer (the "Partner") whose global
chip development and fabrication resources are among the finest in the world.
The Agreement provides for the joint development by the Company, together with
the Partner, of the Meta6000 microprocessor. This microprocessor is jointly
owned by the Company and the Partner, with the Partner being granted a license
to manufacture and to sell the Meta 6000 Chips. Under the Agreement,
development fees and royalties are provided to the Company in
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exchange for the license to manufacture and sell the Meta 6000 Chips based on
the Company's designs. The specific terms of the Agreement and the Partner's
name are confidential and restricted from disclosure.
IMS PRODUCTS
Over the past decade, IMS has designed and prototyped 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 Motorola 68040 and 6805 and the Intel 486 instruction sets. These
emulators performed well and exhibited good fidelity, running industry
standard software like Microsoft DOS and Windows and Apple System 7 Operating
Systems. This technology evolution created the core elements of IMS' current
designs.
INTEL COMPATIBLE PRODUCTS
In partnership with a multi-billion dollar internationally recognized
and respected computer and semiconductor manufacturer, IMS is developing the
Meta 6000, a fully socket-compatible (pin-for-pin) version of the Intel
Pentium-TM-P55C microprocessor.
META 6000
This microprocessor will be a socket compatible version of the
Pentium-TM-P55C microprocessor. This product will have market demand for
both OEM and retrofit markets. IMS' proprietary superscaler architecture will
produce a Chip that operates at approximately 300 megahertz Pentium-TM-
performance. The Meta 6000 design utilizes state of the art superscalar
technologies such as: register renaming, out-of-order execution and
multi-level branch prediction. This IMS custom design will result in compact
size, resulting in high foundry yields and low fabrication costs per chip.
The licensing arrangements currently in place guarantee IMS access to chips,
dies and wafers from the foundry partner. The on-chip multimedia capability
of the Meta 6000 is compatible with Intel's MMX Multimedia extensions, and
processes instructions an estimated 30% faster than Intel's P55C.
Incorporated within the chip are advanced tag and cache designs that support a
very fast floating point unit with a cache capacity of 32K. The foundry
partner utilizes a proven advanced fabrication process to produce .35 micron,
5 layer metal design that enhances reliability and performance.
Completion of the Meta 6000 has been delayed due to difficulty in
meeting engineering staffing requirements and enhancements, such as
performance improvements and multimedia extensions (MMX). These changes and
delays to the scheduled completion to the product have been coordinated with
the development partner. They have advised IMS that the market window for
this product requires tapeout (initial design completion by IMS) of the chip
in June 1997. There maybe serious effects to the ability to market this
product if the above date is not achieved. IMS Management is confident that
the date will be achieved.
In response to scheduling concerns the Company hired Dr. Lee Hoevel as
its President, effective February 3, 1997. Dr. Hoevel has been serving as
a consultant to the Company in connection with the Meta 6000 Chip project.
Dr. Hoevel's primary responsibility will be to complete the development of the
Meta6000 Chip within the schedule that is currently being required by the
Partner. Additionally, the Company has hired eight integration engineers
since January 1,1997 and
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Cadence Design Systems has been retained to provide comprehensive services and
technology for the Meta 6000 project completion. Cadence is the largest
supplier of software tools and professional services used to accelerate and
manage the design of semiconductors. Although no assurances can be given,IMS
Management is confident that the current scheduled completion date will be
achieved.
IMS has extensive experience in designing very high-level language
engines. The Meta 3230 and 3240 were products developed to execute Smalltalk
byte-codes in addition to standard machine languages, such as C, C++ and
FORTRAN. These chips ran Smalltalk programs 10 to 30 times faster than
competing microprocessors. The mechanisms and techniques developed by IMS for
supporting these products are directly applicable to Java, today's general
purpose programming language for Internet and Intranet applications.
META EXPRESSO
IMS has leveraged its previously developed technology to design the
prototype of a high performance Java chip, the Meta Expresso. This Chip will
support inexpensive Java programmable devices that are now being introduced to
consumer markets, as well as a basis for low-cost Network Computers. Sun's
PicoJava chip executes five times faster than a dynamic compiler running on a
Pentium system and twenty times faster than an interpreter running on a 486
machine. Simulations predict that IMS' Meta Expresso chip executes fifteen
times faster than a dynamic compiler running on a Pentium system and sixty
times faster than an interpreter running on a 486 machine. The Company is
currently offering licensing opportunities to major electronics corporations
leading to the development and delivery of the Company's Meta Expresso-TM- Java
microprocessor.
The Company has developed, and will provide licensees with, an
Expresso Development Toolset. Included in the tools are the following
components: An EXPRESSO ASSEMBLER, a macro assembler for generating
Expresso Native Instructions, which is used to write the byte-code emulator;
the EXPRESSO CHIP EMULATOR, a modular, Visual C++ program which
provides: cycle-by-cycle simulation of the design, accurate representation of
all register, data paths, on-chip memories, and all other architectural
features of the chip, and is ready for use as a Verilog specification; and
the EXPRESSO RUN-TIME EMULATOR, which provides: a full run-time debug
system, including: Breakpoints, Run Until, Stepping controls, Trace mode, and
other conventional debugging capabilities together with Register, Stack and
Pipeline displays, plus the capability to generate validation test vectors,
providing a development environment for system software generation and
test.
EMPLOYEES AND CONSULTANTS
As of December 31, 1996 the Company employed a staff of 50 persons, 41
of whom are in engineering, and 9 of whom are in marketing and administration.
Twelve independent contractors have been retained to assist the Company
in development of the Meta 6000, the Meta Expresso-TM- and IMS speech and
voice compression products.
ITEM 2. DESCRIPTION OF PROPERTY
DESCRIPTION OF PROPERTY
As of December 31, 1996, the Company's principal offices, consisting of
7,954 square feet of general office space, are located in El Segundo,
California and leased from an unaffiliated third
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party. The six year lease extends to 2001 at a monthly rate of $8,352. During
the year, the Austin Design Center was expanded from 4376 square feet to 5704
square feet. This lease extends to February, 1999 at a current monthly rate of
$6,758. Both of these leases have provisions for cost of living increases.
PATENTS AND COPYRIGHTS
IMS intends to protect against other companies infringing upon its
technology through patent and copyright registration. In December, IMS
received its first U.S. Patent. This Patent (U.S. 5,574,927) was awarded for
Reduced Instruction Set (Risc) computer architecture. This unique design is
capable of interpreting the microcode and executing the instruction sets for
the Intel 80x86 (Pentium-TM-486), the Motorola 680x0 (Apple Macintosh-TM-)
or the MIPS R3000 processors. Patent applications are under development for
features of theMeta 6000 and Java chips. No assurances can be given that
such patent application will be granted, or even if granted, that it will
offer effective protection against competitors. No assurance can be give that
the Company will not have to enforce its rights against infringement or even
that it will have sufficient funds to finance such enforcement through
litigation. In such enforcement, no assurance can be given that such
enforcement will be successful, or even if it is successful, that the Company
will not be forced to expand substantial funds in legal fees.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCKHOLDER MATTERS
The Common Stock is traded in the over-the-counter market on the
OTC electronic bulletin board. As of March 10, 1997, the Company had
approximately 822 holders of record of its Common Stock. During the last two
fiscal years, no cash dividends have been declared on the Company's Common
Stock. For the years ended December 31, 1995 and 1996, the price of the
Company's Common Stock was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
For Quarter
Ended High Low High Low
----------- -------------- ---------------
<S> <C> <C> <C> <C>
March $2.43 $1.31 $1.43 $.55
June $2.43 $1.62 $1.69 $.87
September $2.31 $1.31 $3.06 $.87
December $1.78 $ .96 $2.12 $.96
</TABLE>
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As of March 10, 1997, the last reported sales price of the Company's
stock was Bid $1.75 and Asked $1.84. The above quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Report.
RESULTS OF OPERATION - 1996
The loss for the year from operations increased by $5,423,183 compared to
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 1996, the Company was focused,
staffed, equipped and working to complete the Meta 6000 project.
Revenue for the year totaled $300,000 from development contract payments
related to the Meta 6000 project. This is a decrease of $609,988 from 1995
when the Company received $600,000 of development contract payments related to
the Meta 6000 and the Company sold a non-exclusive license for rights to the
Meta 3250 for $309,988. Due to the uneven phasing of development contract
payments related to the Meta 6000 chip, there can be substantial variations
from period to period.
Research and Development expense during the year increased by $3,218,676
over 1995. This increase was primarily due to the significant increase in
technical staffing from 4 at the beginning of 1995 to the 1996 year end total
of 37 full time employees. In addition, twenty full-time or part-time
consultants were engaged to support the Meta 6000 development and the other
company projects at 1996 year end. There were no consultants on staff at 1995
year end. To support this growth in staff, the 4376 square foot Austin Design
Center, which was opened in November of 1995, was expanded to 5704 square foot
during the second quarter of 1996. There were minimal expenses associated with
the Austin Center during 1995.
Selling, general and administrative expense during the reporting
period increased by $1,270,636 over 1995. This increase was due to the
addition of administrative staff to support the increase of 53 engineers and
consultants, 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, as well as
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 1996 by $590,619 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 and Dividend Income increased by $301,883 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.
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Loss on marketable securities of $31,873 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.
INFLATION
The Company's business and operations have not been materially affected by
inflation during the past two years and the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash or cash equivalent position was $4,545,266 at the end
of the year compared to $919,417 at the end of 1995. This cash, combined
with anticipated progress payments from its Meta 6000 development contract
will not be sufficient, however, to allow the Company's activities related to
the Meta 6000 Project to proceed through initial chip production and sales.
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.
Although management is confident about the prospects of raising additional
capital through private placements of its securities, or other
means, to finance the Company's activities through initial chip production and
the commencement of sales, no assurances can be given that IMS will be able to
obtain such funding on acceptable terms.
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 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 convert interest, due June 30, 1996, on its Series
A and Series B Convertible Preferred Stock into 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 also elected to satisfy interest
due on December 31, 1996 on both series of stock, through the issuance of
additional shares of Common Stock. The amount of such interest aggregated
$41,000, and resulted in the issuance of 30,693 shares of Common Stock. The
company may also elect to satisfy interest due on 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
$15,250,000 at December 31, 1996, which expire at various amounts through the
year 2011 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 within 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
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determination of the testing dates and percentage ownership increases will not
be made until the NOL is utilized.
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Certified Public accountants for the fiscal years
ended December 31, 1996 and December 31, 1995.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OF THE REGISTRANT
The Directors and Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR/OFFICER
NAME AGE OFFICE COMPANY SINCE
- ----- --- ------ --------------
<S> <C> <C> <C>
George W. Smith 57 Chairman of the Board, December, 1987
Chief Executive Officer,
(and Acting Chief Financial
Officer)(1)
Lee W. Hoevel 51 President(2) February, 1997
Paul Sefchek 50 Chief Financial Officer April, 1996
Masahiro Tsuchiya 49 Director August, 1992
Frank LaChapelle 55 Director September, 1993
Sigmund Hartmann 67 Director September, 1995
Martin Albert 64 Director March 19, 1996
Philip Neches 45 Director November 4, 1996
</TABLE>
GEORGE W. SMITH, Chairman of the Board, Chief Executive Officer and acting
Chief Financial Officer, founded the predecessor of the Company in 1985. Mr.
Smith has served as Chairman of the Board and Chief Executive Officer of the
Company since its formation in 1987. From October 1967 to August 1985 he was
employed by the Aerospace Corporation where his positions included Principal
Director for DOD Space Shuttle Operations and Systems Director for Development
and Operations of several classified Air Force programs. While employed by the
Aerospace Corporation, he managed programs with budgets exceeding $300 million.
He has an
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extensive background in managing the design, development and manufacturing of
complex high-tech products. His awards include the Trustees' Distinguished
Achievement Award granted by the Aerospace Corporation in recognition of his
technical leadership and management and the Air Force Outstanding Service
Award. He received a Bachelor of Science degree in electrical engineering at
U.C.L.A.
DR. LEE W. HOEVEL, was employed as President of the Company on February
3, 1997. Prior to accepting this position, Dr. Hoevel had served as a
consultant with the Company in connection with the Meta 6000 Chip project for
seven months. Dr. Hoevel received his undergraduate degrees in
mathematics and economics at Rice University. He received graduate degrees in
electrical engineering and computer science at Johns Hopkins University. Dr.
Hoevel's career spans nearly two decades of technology development and
executive management. He was instrumental in the development of deep
pipelining, out-of-order execution, branch prediction and cache prefetch
mechanisms at IBM Research. During his tenure at AT&T/NCR he held numerous
positions of increased responsibility including director of Advanced
Architecture, chief architect for Workstation Products Division, vice
president for the Research and Development Division, NCR board-appointed
officer, chief technical officer for AT&T Global Information Solutions. Dr.
Hoevel left AT&T/NCR in 1996 as chief technical officer for the Computer
Systems Group, vice president of Technology and Development, and officer of
the NCR Corporation.
Dr. Hoevel holds seven U.S. Patents in technology design. He is
the contributing author on Human Interface Technologies to the CBEMA vision
book and is the author of 39 technical papers. He is a member in Sigma-Xi,
IEEE and ACM and served as the AT&T board member for the Micro-Computer
Corporation.
PAUL SEFCHEK, Chief Financial Officer of the Company, was appointed to
this position in April, 1996. Mr. Sefchek has over 25 years experience in
technical and business management. While in the Air Force, he was selected
and trained as a USAF astronaut for Space Shuttle Missions. After retiring
from the USAF in 1989, Mr. Sefchek was the Senior Director of the Government
Services Group of Trident Data Systems, and President of Advanced Computer
Technology. He holds a Bachelor Degree in Engineering from the Stevens
Institute of Technology, Hoboken NJ and a Masters in Business Administration
Degree from The University of Pennsylvania's Wharton School.
MASAHIRO TSUCHIYA, Director of the Company and acting marketing
representative of IMS in Japan. He received his Ph.D. degree in
computer sciences from the University of Texas at Austin. Currently he is
president of Sypex International Company, based in the U.S. and Japan. As
founder and president of Sypex, he has served as consultant to several
startups and major corporations in the U.S., Japan, and Korea on high
technology product development and marketing plans. From 1980 to 1988, he
worked on systems engineering of several major U.S. missile and space defense
programs at TRW Defense Systems Group, Redondo Beach, California. His
academic career includes a research associate at the University of California,
Berkeley in 1991, an adjunct professor of computer science at the University
of Southern California, Los Angeles, in 1986. From 1973 to 1979, he was an
associate professor at the University of Hawaii at Manoa, Honolulu, an
assistant professor at the University of California, Irvine, and at
Northwestern University, Evanston, Illinois. In 1975, he was a visiting
computer scientist for research in computer architecture at Arhus Universite,
Arhus, Denmark, and in 1972, he was a visiting lecturer at Konan University,
Japan. Masahiro Tsuchiya was an IEEE Computer Society's Distinquished Visitor
from 1983 to 1986. He is an editor of the IEEE TRANSACTIONS ON COMPUTERS, a
prestigious research journal in computer sciences and engineering. He is
listed in Who's Who in America. He has published many papers
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and made significant research contributions to the areas in computer
architecture, parallel processing, distributed systems, database and
operating systems.
FRANK LACHAPELLE is a founder of Interscience Computer corporation,
a reporting company under the Exchange Act of 1984, and has served as the
Chairman of the Board since its formation in 1983. Mr. LaChapelle served as
President of Interscience Computer Corporation from 1983 until January, 1991,
and has served as Chief Executive Officer since September, 1991. Interscience
Corporation filed a petition for reorganization pursuant to Chapter 11 of the
Bankruptcy Code in February, 1997. Mr. LaChapelle was Vice President-Technical
Director Interscience Systems, Inc., a publicly-held company principally
engaged in manufacturing and marketing mainframe computer compatible peripheral
subsystems, from 1973 until 1983. In 1983, Mr. LaChapelle and four other
investors formed Interscience Computer Corporation to purchase the computer
maintenance division on Interscience Systems, Inc. Mr. LaChapelle holds a
Bachelor of Science degree in mathematics from the University of Washington.
SIGMUND HARTMANN, Director of the Company, serves as a Strategic Advisor
to the CEO. From 1984 to 1989 he served as President of Software, Executive
Vice President Atari Corporation. At Atari, he turned the company from $500
million annual deficit to a profitable operation. From 1981 to 1984 and from
1970 to 1971 Mr. Hartmann was the President, Software, Vice President and
General Manager, Commodore. At Commodore, Mr. Hartmann was responsible for
developing the company from a $300 million, low-end computer business to a
$2.1 billion systems company. Prior to that Mr. Hartmann worked for 18 years
holding the positions of Vice President and Assistant General Manager of TRW,
Incorporated. He has a Masters of Science Degree in Mathematics from Liege
University, Belgium. He completed the Executive Management Program at
University of California, Los Angeles, in 1970.
MARTIN ALBERT, Director of the Company, is the President and
Chief Executive Officer of Dolphin Interconnect Solutions, Inc. and has been
adirector of Dolphin since incorporation. He also is a shareholder of
Amerscan A.S., Dolphin's largest shareholder and a shareholder and director of
Amerscan Capital Management, the general partner and investment advisor of
Amerscan Partners II. Mr. Albert has a bachelor's degree in Physics from the
City College of New York and carried out post graduate studies in Philosophy
of Science and Business at the University of California, Los Angeles, and
Columbia University. He has previously been involved in corporate investment
and consultancy work and has served as a director of numerous companies during
his career, particularly being involved with a number of small-to-medium
sized technology companies seeking funding to expand their strategic and
operational capabilities. He has also been involved in developing and
managing disk drive test and development systems companies and other
companies through their original public offerings and oversaw their future
acquisition by substantially larger firms.
PHILIP NECHES, Director of the Company, previously held positions as
Founder, Chief Scientist and Vice President, Teradata Corporation, Sr.
Vice President and Chief Scientist, NCR Corporation and Vice President and
Group Technical Officer, Multimedia Products and Services, AT&T Corporation.
At present Dr. Neches is an outside consultant and investor in several
companies. His current business affiliations include Trustee, California
Institute of Technology; Director, PeopleLink Corporation; Advisory Board,
EarthLink Network,Inc.; Advisor, AT&T Venture Capital; Consultant, NCR
Corporation; and Visiting Committee, Electrical Engineering and Computer
Science Department, Lehigh University. Dr. Neches holds a Bachelor of Science
degree (with honors) from the California Institute of Technology, a Masters
Degree in Engineering Science
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from the California Institute of Technology and a Ph.D. in Computer Science
from the California Institute of Technology.
(1)The Company's Board of Directors appointed Mr. Smith as acting Chief
Financial Officer of the Company, effective March 17, 1997, as a result of the
sudden and serious illness of Mr. Sefchek that occurred earlier in March. The
Company anticipates that Mr. Sefchek will be unable to return to work for
several months.
(2)The Company anticipates that Dr. Hoevel will be appointed by the Board as
a director of the Company at the next meeting of the Board, currently scheduled
for April 3, 1997.
ITEM 10. EXECUTIVE COMPENSATION
THE COMPANY
The only executive officer of the Company who received in excess
of $100,000 of compensation during the Company's fiscal year ended December
31,1996, was George W. Smith. Information regarding Mr. Smith's compensation
isset forth below.
<TABLE>
<CAPTION>
NAME AND FISCAL YEAR ENDED
POSITION DEC. 31 SALARY BONUS
- ---------- ----------------- --------- -----
<S> <C> <C> <C>
George W. Smith 1996 $139,230 0
Chairman of the Board 1995 $130,000 0
President, Chief 1994 $130,000 0
Executive Officer
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 10, 1997, information concerning
the ownership of Common Stock and Convertible Preferred Stock of the Company by
(i) each person who is known by the Company to own beneficially more than 5% of
its outstanding Common Stock; (ii) each director and officer of the Company;
and (iii) all directors and officers of the Company as a group. To the
Company's knowledge, based solely on its review of the copies of reports
furnished to the Company and representations from reporting persons that
no reports were required to be filed, all officers, directors and 10%
beneficial owners of the Company's Common Stock complied with the filing
requirements of Section 16(a) of the Securities Exchange Act of 1934 during
1996, except as setforth below.
Sigmund Hartmann, a director of the Company, inadvertently failed to file on
a timely basis a Form 4 with the Securities and Exchange Commission disclosing
his change in beneficial ownership when he acquired 53,334 shares of the
Company's Common Stock pursuant to the exercise of a stock option. The Form 3
disclosing his initial beneficial ownership of the option was filed on a timely
basis. Mr. Hartmann subsequently filed a Form 4 disclosing this transaction.
11
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME, POSITION OF BENEFICIAL PERCENT
ADDRESS OWNERSHIP(1) OWNED
- -------------- ----------------- -------
<S> <C> <C>
Paragon Capital Management LLC 10,000,000 26.5%
Martin Albert, Director (2)
3609 E. Thousand Oaks Blvd., #209
Westlake Village, CA 91362
Sypex International(3) 886,583 2.4%
1585 Kaminaka Drive
Honolulu, HI 96816
Masahiro Tsuchiya, Director 2,854,000 7.6%
1585 Kaminaka Drive
Honolulu, HI 96816
George W. Smith, Chairman 2,287,077 6.1%
of the Board, Chief Executive
Officer and President(4)
100 N. Sepulveda Blvd., #601
El Segundo, CA 90245
Paul Sefchek, Chief Financial 36,635 .10%
Officer
100 N. Sepulveda Blvd., #601
El Segundo, CA 90245
Frank LaChapelle, Director(5) 100,000 .27%
5171 Clareton Drive
Agoura Hills, CA 91301
Sigmund Hartmann, Director 53,334 .14%
100 N. Sepulveda Blvd., #601
El Segundo, CA 90245
All directors and executive
officers as a group 16,217,629 43%
</TABLE>
Paul Sefchek, Chief Financial Officer of the Company, is the only officer or
director who owns Convertible Preferred Shares of the Company. Mr. Sefchek
owns 100 Convertible Preferred Shares which represents less than 5% of the
outstanding Convertible Preferred Shares. No person owns 5% or more of the
outstanding Convertible Preferred Shares.
(1)Unless stated otherwise, all shares listed are owned directly by the
shareholder.
12
<PAGE>
(2)The shares owned by Mr. Martin Albert include 133,000 shares
owned directly by Mr. Albert, 2,000,000 owned by Paragon Capital Management
LLC, of which Mr. Albert is a director, and 7,867,000 shares under which the
following shareholders granted Paragon Capital Management LLC, of which Mr.
Albert is a director, its irrevocable proxy to vote such shares. Den Norsk
Krigsforsikring for Skib (2,000,000 shares), Investeringsselskapet Amandus AS
(2,000,000 shares), A/S/ Selvaag Invest (1,500,000 shares), Andreas Ugland
(1,500,000 shares), Woodbridge Asset Management Limited (266,667 shares),
Pollex A/S (200,000 shares), J. Arthur Olafsen (250,000 shares), Filab A/S
(100,000 shares), and Bent Aasnes (50,000 shares).
(3)Dr. Tsuchiya is a part owner of Sypex International.
(4)Included in the shares owned by Mr. Smith is an option to purchase
1,000,000 shares at $.30 per share and an option to purchase 160,000 shares
at $.75 per share, both options are immediately exercisable.
(5)The indicated shares owned by Mr. LaChapelle are an option to purchase
100,000 shares at $.40 per share which is immediately exercisable. Mr.
LaChapelle was elected to the Board of Directors in September, 1993.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 1, 1995, the Company entered into a consulting agreement with
Universal Microtechnology, Inc. ("Universal"), all of the shares of which are
beneficially owned by Sigmund Hartmann, a director of the Company, for
the provision of services related to the development of Speech and Voice
Technology. The President of Universal is Sigmund Hartmann. Pursuant to such
consulting agreement, the Company is obligated to pay the sum of $4,500 per
month in fees and reimbursement of relevant business expenses incurred by
Universal. The consulting agreement expired on August 31, 1996 but has been
extended by the parties. The consulting agreement may be terminated by either
party on 30 days notice.
Pursuant to the Stock Purchase Agreement with Paragon Capital Management
LLC, ("Paragon"), Mr. Martin Albert, a Director of Paragon, was elected to the
Company's board of directors on March 19, 1996. Paragon shall have a right of
first refusal to purchase or cause to be purchased from IMS any securities
of IMS which may be offered in a private placement pursuant to an exemption
from registration under the Securities Act on the same terms and conditions as
may be offered to any third party.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits and Reports are included with the 10KSB for filing
with the Securities and Exchange Commission only.
EXHIBIT 13. Forms 10Q for the quarters ended March 31, 1996, June 30, 1996
and September 30, 1996 incorporated by reference.
13
<PAGE>
ITEM 15. SUBSEQUENT EVENTS
On March 4, 1997, the Company announced the delivery of microcode to the
development partner. This constituted the achievement of a milestone
completion and an application of proprietary technology by IMS.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
INTERNATIONAL META SYSTEMS, INC.
March 24, 1997 By: /s/
----------------------------------
George W. Smith, Chief Executive Officer,
Principal Chief Financial Officer (acting)
14
<PAGE>
BOARD OF DIRECTORS
____________________________________
By: George W. Smith, Director
____________________________________
Masahiro Tsuchiya, Director
____________________________________
By: Martin Albert, Director
____________________________________
By: Philip Neches, Director
____________________________________
By: Sigmund Hartmann, Director
____________________________________
By: Frank LaChapelle, Director
15
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
CONTENTS
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5 - 6
Notes to Financial Statements 7 - 15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
International Meta Systems, Inc.
We have audited the accompanying balance sheet of International Meta Systems,
Inc. as of December 31, 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. 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
standards. Those standards require that we plan and perform the audit 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 International Meta Systems,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows, for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred net losses of $7,134,779 and $1,711,596 for
the years ended December 31, 1996 and 1995, respectively. This factor, as
discussed in Note 1 to the financial statements, raises substantial doubt
about the Company's ability to continue as a going concern. Management's plan
in regard to this matter is also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Singer Lewak Greenbaum & Goldstein LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 21, 1997
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 96,782
Marketable securities (Note 3) 4,448,484
Prepaid expenses and other current assets 40,824
----------
Total current assets 4,586,090
FURNITURE AND EQUIPMENT, net (Note 4) 717,123
PATENTS 98,707
----------
TOTAL ASSETS $5,401,920
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 257,972
Accrued payroll and payroll taxes 167,275
Dividends payable 40,000
----------
Total current liabilities 465,247
----------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Note 5)
Preferred stock, $.0001 par value: 1,000,000 shares authorized
Series A convertible preferred stock, 10,000 shares issued and
outstanding 1
Series B convertible preferred stock, 250 shares issued and
outstanding 1
Common stock, $.0001 par value: 70,000,000 shares authorized,
37,497,100 shares issued and outstanding 3,749
Additional paid-in capital 18,563,923
Subscription receivable (24,120)
Accumulated deficit (13,606,881)
-----------
Total stockholders' equity 4,936,673
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,401,920
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES (Note 1)
License $ - $ 309,988
Contract 300,000 600,000
----------- -----------
Total revenues 300,000 909,988
----------- -----------
OPERATING COSTS AND EXPENSES
Research and development 3,884,963 666,287
Selling, general, and administrative 2,612,600 1,341,964
Depreciation and amortization 1,208,232 617,613
----------- -----------
Total operating costs and expenses 7,705,795 2,625,864
----------- -----------
LOSS FROM OPERATIONS (7,405,795) (1,715,876)
OTHER INCOME (EXPENSE)
Interest income 21,829 5,066
Dividend income 285,120 -
Interest expense (4,060) (786)
Loss on marketable securities (31,873) -
----------- -----------
NET LOSS $(7,134,779) $(1,711,596)
----------- -----------
----------- -----------
NET LOSS PER COMMON SHARES $ (.20) $ (.06)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 35,117,725 26,651,601
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- --------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 26,517,792 $ 2,651 $ 7,033,720
ISSUANCE OF SERIES A
PREFERRED STOCK (Note 5) 9,800 1 979,999
ISSUANCE OF SERIES B
PREFERRED STOCK (Note 5) 250 1 24,999
ISSUANCE OF COMMON STOCK (Note 5) 540,000 54 519,946
OFFERING COSTS (58,121)
ISSUANCE OF SERIES A PREFERRED
STOCK FOR OFFERING COSTS (Note 5) 200
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 109,663 11 97,159
EXERCISE OF OPTIONS 228,000 23 55,977
AMORTIZATION OF DEFERRED
COMPENSATION
DIVIDENDS DECLARED
NET LOSS
--------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1995 10,250 2 27,395,455 2,739 8,653,679
ISSUANCE OF COMMON STOCK (Note 5) 9,500,000 950 9,499,050
OFFERING COSTS (62,078)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 37,461 4 51,216
EXERCISE OF OPTIONS 522,909 52 173,243
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK 41,275 4 68,718
AMORTIZATION OF DEFERRED
COMPENSATION
REPRICING OF STOCK OPTIONS (Note 5) 180,095
DIVIDENDS DECLARED
NET LOSS
--------- --------- --------- --------- ------------
BALANCE, DECEMBER 31, 1996 10,250 $ 2 37,497,100 $ 3,749 $ 18,563,923
--------- --------- --------- --------- ------------
--------- --------- --------- --------- ------------
<CAPTION>
COMMON
STOCK DEFERRED ACCUMULATED
SUBSCRIBED COMPENSATION DEFICIT TOTAL
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $(48,375) $ (212,000) $ (4,651,784) $ 2,124,212
ISSUANCE OF SERIES A
PREFERRED STOCK (Note 5) 980,000
ISSUANCE OF SERIES B
PREFERRED STOCK (Note 5) 25,000
ISSUANCE OF COMMON STOCK (Note 5) 520,000
OFFERING COSTS (58,121)
ISSUANCE OF SERIES A PREFERRED
STOCK FOR OFFERING COSTS (Note 5)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 97,170
EXERCISE OF OPTIONS 48,375 104,375
AMORTIZATION OF DEFERRED
COMPENSATION 122,928 122,928
DIVIDENDS DECLARED (27,850) (27,850)
NET LOSS (1,711,596) (1,711,596)
---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1995 - (89,072) (6,391,230) 2,176,118
ISSUANCE OF COMMON STOCK (Note 5) 9,500,000
OFFERING COSTS (62,078)
ISSUANCE OF COMMON STOCK
IN EXCHANGE FOR SERVICES 51,220
EXERCISE OF OPTIONS (24,120) 149,175
CONVERSION OF DIVIDENDS PAYABLE
TO COMMON STOCK 68,722
AMORTIZATION OF DEFERRED
COMPENSATION 89,072 89,072
REPRICING OF STOCK OPTIONS (Note 5) 180,095
DIVIDENDS DECLARED (80,872) (80,872)
NET LOSS (7,134,779) (7,134,779)
---------- ----------- ------------ ------------
BALANCE DECEMBER 31, 1996 $ (24,120) $ - $(13,606,881) $ 4,936,673
---------- ----------- ------------ ------------
---------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,134,779) $(1,711,596)
Reconciliation of net loss to net cash used in
operating activities
Issuance of common stock for services 51,220 97,170
Loss on repricing of stock options 180,095 -
Loss on sale of marketable securities 31,873 -
Depreciation 127,171 77,083
Amortization of software development costs 1,081,061 540,530
Amortization of deferred compensation 89,072 122,928
(Increase) decrease in
Inventory 20,818 (10,818)
Prepaid expenses and other current assets (2,513) (12,586)
Increase (decrease) in
Accounts payable and accrued expenses 289,386 24,828
----------- ----------
Net cash used in operating activities (5,266,596) (872,461)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (8,471,269) -
Proceeds from sale of marketable securities 3,990,912 -
Acquisition of furniture and equipment (606,622) (159,025)
Increase in patent costs (42,576) (9,637)
----------- ----------
Net cash used in investing activities (5,129,555) (168,662)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock - 1,005,000
Proceeds from issuance of common stock 9,649,175 624,375
Payments on capitalized leases payable (13,581) (20,526)
Offering costs (62,078) (58,121)
----------- ----------
Net cash provided by financing activities 9,573,516 1,550,728
----------- ----------
Net (decrease) increase in cash and
cash equivalents (822,635) 509,605
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 919,417 409,812
--------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 96,782 $ 919,417
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
In the years ended December 31, 1996 and 1995, interest paid was $4,060 and
$786, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1996, 81,425 shares of common stock from the exercise of options were
subscribed for with a subscription receivable in the amount of $24,120.
In 1996, the Company converted dividends payable in the amount of $68,722 into
41,275 shares of common stock.
In 1996, the Company declared dividends amounting to $80,872.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND LINE OF BUSINESS
International Meta Systems, Inc. (the "Company") was incorporated in
Delaware on May 4, 1987. The Company is engaged in the design and
development of microprocessors which are the heart of computers and many
other electronic devices.
FINANCIAL CONDITION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, the Company has
sustained substantial losses of $7,134,779 and $1,711,596 in 1996 and
1995, respectively. In addition, the Company has used, rather than
provided, cash from its operations. In view of the matters described
above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn, is dependent upon the Company's
ability to continue to meet its financing requirements and to succeed in
its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise capital during 1997 either through a private
placement or secondary public offering which it expects will provide
sufficient funding to continue present operations and support future
marketing and development activities.
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 disclosures of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
For purpose of the statements of cash flow, the Company considers all
highly liquid instruments purchased with original maturities of three
months or less or be cash equivalents.
NON-MONETARY TRANSACTIONS
The Company accounts for its non-monetary transactions based on the fair
value of the asset or liability that is received or surrendered,
whichever is more clearly evident.
7
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
The cost of patents acquired is being amortized on the straight-line
method over their useful lives of 17 years.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over estimated useful lives of two to five years.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility and is discontinued when the
product is available for sale. The establishment of technological
feasibility and the ongoing assessment for recoverability of capitalized
software development costs require considerable judgment by management
with respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies.
Amortization of capitalized software development costs is provided on a
product by product basis on the straight-line method over the remaining
estimated economic life of the product (not to exceed three years).
Management periodically compares estimated net realizable value by
product to the amount of software development costs capitalized for that
product to ensure the amount capitalized is not in excess of the amount
to be recovered through revenues. Any such excess of capitalized
software development cost to expected net realizable value is expensed
at that time. During 1996, management reevaluated the economic useful life
of the product and determined they should be amortizing the capitalized
software development costs over two years instead of three years.
Accordingly, as of December 31, 1996, software development costs of
$1,081,061 in aggregate were fully amortized.
REVENUE RECOGNITION
LICENSE
The Company recognizes revenues related to software licenses upon
shipment of the product, provided that no significant vendor or post-
contract support obligations remain outstanding.
8
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (Continued)
JOINT PRODUCTION AGREEMENT (CONTRACT)
The Company has a production agreement under which it is developing
certain computer processing products. Under this agreement, it can
receive a total of $2,500,000. Payments under this agreement will be
received upon reaching milestones that are defined in the agreement.
The Company recognizes income from its joint production agreement upon
the reaching of defined milestones. The agreement may be terminated
if milestones are not met, but payments already received are not
required to be returned. The party to this agreement has also provided
certain personnel and equipment for use during the development period.
Upon completion of the development phase, the products will be
manufactured by the partner to the agreement and the Company will
receive royalties based upon sales of the product.
In 1996 and 1995, the Company received $300,000 and $600,000,
respectively, of payments under this agreement.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. These
costs consist primarily of salaries and consulting fees.
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes." The
asset and liability method requires the recognition of deferred tax
assets and liabilities for the future tax consequences of temporary
differences between the financial statement basis and the tax basis of
assets and liabilities.
NET LOSS PER SHARE
Net loss per common share is based on the weighted-average number of
common shares outstanding during the year. The shares to be issued upon
exercise of outstanding stock options, warrants, and convertible
preferred stock are not included as they are anti-dilutive.
NOTE 2 - CASH
The Company maintains cash deposits at several banks located in
California. Deposits at each bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. In addition, the Company also had
deposits with an uninsured financial institution. As of December 31,
1996, uninsured portions of balances held at this financial institution
totaled $139,822. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
9
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 3 - MARKETABLE SECURITIES
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company classifies its investment in
marketable equity securities as trading. Trading securities are
carried at fair value with the unrealized gains and losses reported as a
separate component of other income/expenses. As of December 31, 1996, the
Company owned shares in a Merrill Lynch Institutional Fund.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<S> <C>
Machinery and equipment $ 883,130
Production tooling 323,649
Office equipment 39,138
Furniture and fixtures 46,293
Equipment under capitalized leases 49,670
---------
1,341,880
Less accumulated depreciation (including
($49,670 for capitalized leases) 624,757
---------
TOTAL $ 717,123
---------
---------
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 9,800 shares of Series A Convertible Preferred
Stock ("Series A Preferred") for a price of $100 per share. The Company
also issued 200 shares of Series A Preferred for offering costs. The
holders of the Series A Preferred are entitled to receive a cumulative
preferential dividend of $8.00 per share per annum, payable semi-annually
in cash or shares of common stock, at the option of the Company.
The Series A Preferred will be automatically converted into shares of
common stock at the conversion price of $0.95 per share on June 30, 1997.
In addition, the Company may convert the Series A Preferred into shares
of common stock at the conversion price after the common stock has been
trading at an average price of $3.00 per share for twenty consecutive
days. The Series A Preferred is convertible at the option of the holder
prior to June 30, 1997.
10
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
SERIES A CONVERTIBLE PREFERRED STOCK (Continued)
The Series A Preferred has a liquidation preference of $100 per share
plus all accrued and unpaid dividends prior to the payment of any amount
to holders of any other equity securities of the Company.
SERIES B CONVERTIBLE PREFERRED STOCK
In 1995, the Company sold 250 shares of Series B Convertible Preferred
Stock ("Series B Preferred") for a price of $100 per share. The holders
of the Series B Preferred are entitled to receive a cumulative
preferential dividend of $8.00 per share per annum, payable semi-annually
in cash or shares of common stock, at the option of the Company.
The Series B Preferred will be automatically converted into shares of
common stock at the conversion price of $1.25 per share on November 30,
1997. In addition, the Company may convert the Series B Preferred into
shares of common stock at the conversion price after the common stock has
been trading at an average price of $3.00 per share for twenty
consecutive days. The Series B Preferred is convertible at the option of
the holder prior to November 30, 1997.
The Series B Preferred has a liquidation preference of $100 per share
plus all accrued and unpaid dividends, following payment of accrued and
unpaid dividends and payment of the liquidation preferences of the Series
A Preferred.
ISSUANCE OF COMMON SHARES
In 1996, the Company sold 9,500,000 shares of common stock in two private
placements for a total of $9,437,922, net of offering costs.
In 1995, the Company sold 540,000 shares of common stock in a private
placement for a total of $520,000 before offering expenses.
In 1996 and 1995, the Company issued 37,461 and 109,663 shares of common
stock, respectively, in exchange for services rendered.
STOCK OPTION PLANS
The Company has adopted three stock option plans, the 1993 Incentive
Stock Option Plan, the 1993 Nonqualified Stock Option Plan, and the 1996
Stock Option Plan. Incentive and nonqualified options under these plans
may be granted to employees, officers, directors, and consultants of the
Company. There are 9,000,000 shares of common stock reserved for
issuance under these plans. The exercise price of the options are
determined by the board of directors, but in the case of an incentive
stock option, the exercise price may not be less than 100% of the fair
market value on the date of grant. Options vest over periods not to
exceed ten years.
11
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (Continued)
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to
outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss and loss per share would be reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
December 31,
Millions, except for share amounts 1996
------------
<S> <C>
Net loss
As reported $ 7,135
Pro forma $ 7,169
Loss per common share
As reported $ (.20)
Pro forma $ (.20)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. Pro forma amounts do take into
effect pro forma compensation expense relating to 1995 grants, which were
affected by the repricing in 1996 (see below). The fair value of these
options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
the year ended December 31, 1996: dividend yields of 0%; expected
volatility of 35%; risk-free interest rates of 7%; and expected life
of 1.5 years. The weighted-average fair value of options granted during
the year ended December 31, 1996 for which the exercise price equaled the
market price on the grant date, which were subsequently repriced (see
below) was $0.48, and the weighted-average exercise price (repriced) was
$1.00 (see below).
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
12
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (Continued)
The following summarizes the Company's stock option transactions under
the stock option plans:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------ ------------
<S> <C> <C>
Options outstanding, December 31, 1994 1,388,000 .125 - 1.37
Granted 1,165,000 .75 - 2.43
Canceled/Expired (235,000) .40 - 1.37
Exercised (228,000) .125 - 1.25
---------
Options outstanding, December 31, 1995 2,090,000 .125 - 2.43
Granted 1,760,000 1.06 - 2.31
Canceled/Expired (725,000) .87 - 1.93
Exercised (144,832) .01 - 1.75
---------
OPTIONS OUTSTANDING, DECEMBER 31, 1996 2,980,168 $ .40 - 2.43
---------
---------
</TABLE>
At December 31, 1996, 760,166 options were exercisable.
In 1996, the Company repriced options to employees which had exercise
prices of $1.00 or higher. The new exercise price for these options is
$1.00, which was below the market price at the repricing date. Since the
options vest over five years, the difference between the original option
price and $1.00 is expensed over five years. In 1996, the Company
recorded an additional expense of $180,095 and the remaining $981,005
will be expensed over the next four years.
OTHER OPTIONS
In addition to options issued pursuant to the stock option plans, the
Company has issued additional options to officers, directors,
consultants, and others. The following summarizes the Company's other
stock option transactions:
13
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
OTHER OPTIONS (Continued)
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------ ------------
<S> <C> <C>
Options outstanding, December 31, 1993 2,954,391 $ .01 - 1.25
Canceled/Expired (34,090) .22 - .30
Exercised (517,424) .01 - .10
---------
Options outstanding, December 31, 1994 and 1995 2,402,877 .01 - .75
Granted 315,000 .65 - .81
Canceled/Expired (331,850) .30 - .65
Exercised (378,077) .01 - .81
--------
OPTIONS OUTSTANDING, DECEMBER 31, 1996 2,007,950 $ .30 - .81
---------
---------
</TABLE>
At December 31, 1996, 1,717,950 options were exercisable.
In December 1994, the Company extended certain options until September
1996, resulting in deferred compensation being recognized in the amount
of $212,000. As of December 31, 1996, the above deferred compensation
was fully amortized.
WARRANTS
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
originally expired in October 1996. In 1996, the Company extended the
expiration date to April 30, 1997.
NOTE 6 - INCOME TAXES
No provision for income taxes has been provided due to the net loss. As
of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $15,250,000 which expire at various
amounts through 2011. The Company also has approximately $147,000 of
federal research and development tax credit carryforwards.
Significant components of the Company's deferred tax liabilities and
assets for federal and state income taxes are as follows as of December
31, 1996:
14
<PAGE>
INTERNATIONAL META SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS)
- ------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (CONTINUED)
<TABLE>
<S> <C>
Deferred tax assets
Net operating loss carryforwards $5,869,000
Tax credits 491,000
Other 6,000
-----------
Total deferred tax assets 6,366,000
Valuation allowance for deferred tax assets (6,366,000)
-----------
NET DEFERRED TAX ASSETS $ -
----------
----------
</TABLE>
The net change in the valuation allowance for the year ended December 31,
1996 was an increase of $3,528,000.
NOTE 7 - COMMITMENTS
The Company leases certain facilities for its corporate offices under
long-term lease agreements. Minimum annual rental commitments under these
leases are as follows:
<TABLE>
Year ending
DECEMBER 31,
---------------
<S> <C>
1997 $ 213,651
1998 218,585
1999 121,355
2000 101,909
Thereafter 42,462
---------
TOTAL $ 697,962
---------
---------
</TABLE>
Rent expense was $182,187 and $84,326 for 1996 and 1995, respectively.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 96,782
<SECURITIES> 4,448,484
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,586,090
<PP&E> 717,123
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,401,920
<CURRENT-LIABILITIES> 465,247
<BONDS> 0
2
0
<COMMON> 3,749
<OTHER-SE> 4,932,922
<TOTAL-LIABILITY-AND-EQUITY> 5,401,920
<SALES> 0
<TOTAL-REVENUES> 300,000
<CGS> 0
<TOTAL-COSTS> 7,705,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,933
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,134,779)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
