<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-24087
ITERATED SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1741516
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3525 Piedmont Road
Seven Piedmont Center
Suite 600 30305-1530
Atlanta, Georgia (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (404) 264-8000
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 was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the issuer's class of capital stock as of September 30,
1999, the latest practicable date, is as follows: 13,073,025 shares of Common
Stock, $.01 par value.
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<PAGE>
ITERATED SYSTEMS, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1999
and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998
(unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
Financial Information
Item 1. Financial Statements.
Iterated Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- -----------
Assets (unaudited)
<S> <C> <C>
Current assets
Cash and equivalents $ 3,706,070 $ 459,782
Short term investments 4,270,444 1,731,000
Accounts receivable 214,088 249,634
Prepaid expenses and other assets 212,132 205,933
----------- -----------
Total current assets 8,402,734 2,646,349
Property and equipment
Computer equipment and software 2,872,013 2,955,978
Furniture and equipment 390,158 389,775
Leasehold improvements 135,566 143,756
----------- -----------
Total property and equipment 3,397,737 3,489,509
Accumulated depreciation (2,761,119) (3,088,374)
----------- -----------
Net property and equipment 636,618 401,135
Other assets 44,699 44,354
----------- -----------
Total Assets $ 9,084,051 $ 3,091,838
=========== ===========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 153,670 $ 44,053
Accrued liabilities 353,086 639,466
Deferred revenue 5,126 118,534
Current maturities of long-term debt 4,873 1,295
Other current liabilities 34,572 23,048
------------ ------------
Total current liabilities 551,327 826,396
Non-current liabilities
Other liabilities 14,405 0
------------ ------------
Total non-current liabilities 14,405 0
Shareholders' equity
Common stock 130,731 130,731
Additional paid-in capital 29,806,036 29,806,036
Accumulated deficit (21,461,547) (27,777,820)
Currency translation adjustments 43,099 106,495
------------ ------------
Total shareholders' equity 8,518,319 2,265,442
------------ ------------
Total liabilities and shareholders' equity $ 9,084,051 $ 3,091,838
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Iterated Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Development fees $ 113,506 $ 18,750 $ 341,831 $ 303,900
Product license fees 14,566 742,766 174,667 981,111
Other revenues 20,969 1,702 66,873 7,510
------------- ------------- ------------- -------------
Total revenue 149,041 763,218 583,371 1,292,521
Costs and expenses:
Sales and marketing 1,054,657 876,220 3,295,838 2,639,661
Research, development and engineering 1,233,784 1,277,678 4,148,847 3,898,351
General and administrative 513,991 354,748 1,690,425 1,215,627
------------- ------------- ------------- -------------
Total costs and expenses 2,802,432 2,508,646 9,135,110 7,753,639
Operating loss (2,653,391) (1,745,428) (8,551,739) (6,461,118)
Other income (expense):
Interest income 153,476 38,300 587,647 190,118
Interest expense (352) (89) (16,052) (416)
Foreign currency exchange gain (loss) 27,781 (15,269) (2,816) (44,849)
------------- ------------- ------------- -------------
Total other income (expense) 180,905 22,942 568,779 144,853
Net loss ($2,472,486) ($1,722,486) ($7,982,960) ($6,316,265)
============= ============= ============= =============
Basic and diluted loss per share ($0.19) ($0.13) ($0.61) ($0.48)
============= ============= ============= =============
Weighted average shares outstanding 13,073,125 13,073,025 13,087,778 13,073,025
============= ============= ============= =============
</TABLE>
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Operating activities
Net loss ($7,982,960) ($6,316,265)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 696,911 335,513
Gain on disposal of property and equipment (30,095) (6,195)
Loss on foreign currency transactions 29,504 44,842
Changes in operating assets and liabilities:
Accounts receivable 276,943 (11,648)
Prepaid expenses and other assets 159,004 10,104
Accounts payable (12,439) (109,474)
Accrued expenses 0 282,583
Deferred revenue 0 113,408
Other liabilities (25,929) (25,929)
--------------- ---------------
Net cash used in operating activities (6,889,061) (5,683,061)
Investing activities
Purchases of property and equipment (263,383) (103,787)
Proceeds from sale of property and equipment 0 8,616
Sales of short-term investments 1,359,420 2,539,444
--------------- ---------------
Net cash provided by investing activities 1,096,037 2,444,273
Financing activities
Payments on capital lease obligations (118,518) (3,578)
Issuance of common stock 2,293 0
Repurchase of common stock (236,002) 0
Issuance of warrants 31,597 0
--------------- ---------------
Net cash used in financing activities (320,630) (3,578)
Effect of exchange rate fluctuation on cash 27,800 (3,922)
--------------- ---------------
Decrease in cash and cash equivalents (6,085,854) (3,246,288)
Cash and cash equivalents at beginning of period 7,633,283 3,706,070
--------------- ---------------
Cash and cash equivalents at end of period $ 1,547,429 $ 459,782
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(unaudited)
1. Presentation of Interim Information
The accompanying condensed consolidated financial statements include all
adjustments consisting of normal recurring adjustments that Iterated Systems,
Inc. and its wholly owned subsidiary, Iterated Systems, Limited (collectively,
the "Company") consider necessary for a fair presentation of its unaudited
results of operations for the nine months ended September 30, 1998 and 1999.
Results for the nine months ended September 30, 1999 are not necessarily
indicative of the results for the year.
2. Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned United Kingdom subsidiary, Iterated Systems, Limited.
Significant inter-company accounts and transactions have been eliminated in
consolidation.
3. Purchases and Sales of Common Stock
During the nine months ended September 30, 1998, the Company repurchased 36,100
shares of its common stock on the open market for a cost of approximately
$236,000. The Company also issued 7,200 shares upon the exercise of stock
options by employees for net proceeds of $2,300.
4. Segment Information
In accordance with the requirements of Financial Accounting Standards Board
Statement No. 131, Disclosure About Segments of an Enterprise and Related
Information, the following disclosure represents the information used by
management when evaluating the operating performance of its business units. The
information reviewed by management includes the operating revenue, net loss and
identifiable assets for the Company's two geographic areas, the United States
and the United Kingdom. Both operating segments are involved in developing and
marketing patented digital image science technology. The long-term assets of the
United States geographic area exclude inter-company accounts receivable.
Nine Months Ended
September 30,
-----------------------------
1998 1999
------------ ------------
Operating revenue
United States $ 580,000 $ 1,279,000
United Kingdom 3,000 14,000
------------ ------------
$ 583,000 $ 1,293,000
============ ============
Net Loss
United States $(7,583,000) $(5,870,000)
United Kingdom (399,000) (446,000)
------------ ------------
$(7,982,000) $(6,316,000)
============ ============
At September 30,
-----------------------------
1998 1999
------------ ------------
Identifiable assets, net
United States $10,687,000 $ 2,372,000
United Kingdom (129,000) (107,000)
------------ ------------
$10,558,000 $ 2,265,000
============ ============
<PAGE>
5. Comprehensive Income
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("Statement 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. Statement 130 is effective for fiscal years beginning
after December 15, 1997. The Company adopted Statement 130 in 1998 and has not
presented a statement of comprehensive income because the effect of the
components of comprehensive income is not material to its consolidated financial
statements.
<PAGE>
Item 2.
Iterated Systems, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
Historically, the Company has derived its revenues from development fees,
license fees, and packaged software products. The Company expects that revenues
from development fees and packaged software products will continue its recent
decline as business efforts are focused on developing and licensing software
based on its digital image science technology to users of high quality digital
image systems. During 1997-1999, the Company has restructured its workforce to
focus on a more effective implementation of this market strategy. If this plan
is successful, the Company believes that a majority of its future revenues will
be derived from license fees for its software.
The Company recognizes revenue from development fees based on the Company's
estimate of the percentage of completion using actual costs incurred as a
percentage of expected total costs of individual development agreements. License
fee revenues are recognized either upon delivery of the software product or in a
manner similar to the method for revenue recognition of development fees,
depending upon the degree of customization required for a specific customer.
This method is in accordance with current software revenue recognition as
discussed below (see "Software Revenue Recognition"). Revenues from the sales of
packaged software products are recognized upon the shipment of the products to
the customer.
In September 1994 the Company entered into an agreement with MCI
Telecommunications Corporation (1994 MCI Agreement) to provide for the
development of certain advanced compression technology for use in
telecommunications applications. MCI paid the Company approximately $36,000,000
over the next three years for development of specific technology and the
exclusive rights to use and sublicense specified technology in
telecommunications markets until September 1997. The 1994 MCI Agreement expired
in September 1997. In August 1998, the Company and MCI entered into a new
agreement (1998 MCI Agreement) that provides MCI with a non-exclusive, royalty-
free license to use certain deliverables developed by the Company under the 1994
MCI Agreement. In addition the Company granted MCI warrants with a term of four
years to purchase up to 1,452,570 shares of common stock at $5.00 per share.
Under the terms of the Warrant, the exercise price was adjusted to $4.00 and
number of warrants was adjusted to 1,797,609 in conjunction with the Rights
Offering conducted by the Company in 1999. See Item 5 Other Information.
Liquidity and Financial Condition
Since October 1997 the Company has financed its operations primarily from the
$18,600,000 net proceeds of its initial public offering on the Oslo Stock
Exchange. At September 30, 1999, the Company had cash and short-term investments
of $2,191,000, which represents a decrease of $5,786,000 from December 31, 1998.
In the first nine months of 1998 and 1999, the Company used cash in operating
activities of $6,889,000 and $5,683,000, respectively. This cash was used to
fund the net loss for the respective periods.
In the first nine months of 1998 and 1999, the Company's investing activities
provided cash of $1,096,000 and $2,444,000, respectively. The funds were
provided primarily from sales of short-term investments.
<PAGE>
In the first nine months of 1998 and 1999, the Company used cash in financing
activities of $321,000 and $4,000, respectively. During 1998, the Company used
funds to repurchase Company shares on the Oslo Stock Exchange and in both 1998
and 1999 to make payments on capital lease obligations.
The Company will require significant increases in revenue to cover operating
costs and achieve a profitable level of operations. If adequate funds are not
available, or are not available on acceptable terms, its ability to fund its
operations, take advantage of unanticipated opportunities, or otherwise respond
to competitive pressure would be significantly limited. There can be no
assurance that it will be able to raise funds on favorable terms.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Total revenues increased 412% to $763,000 in the three months ended
September 30, 1999, compared to $149,000 in the same period in 1998. This
resulted from the increase in license fees as the Company shifts its emphasis
away from development fees and toward license fees including initial licenses
for the Company's MediaBin platform and the initial payment for a long term
license of its ViO technology.
Sales and Marketing. Sales and marketing expenses decreased 17% to $876,000 in
the three months ended September 30, 1999, from $1,055,000 in the same period in
1998. This reduction resulted primarily from a significant reduction in
expenditures for outside contractors, travel, and trade shows, partially offset
by an increase in salary expense.
Research, Development and Engineering. Research, development and engineering
expenses increased 4% to $1,278,000 in the three months ended September 30,
1999, from $1,234,000 in the same period in 1998. The increase is the net effect
of a reduction in salary expense offset by increased use of independent
contractors working on specific projects.
General and Administrative. General and administrative expenses decreased 31% to
$355,000 in the three months ended September 30, 1999, from $514,000 in the same
period in 1998. This decrease is primarily due to the decreased personnel costs
associated with the Company's revised business focus and legal fees associated
with the 1998 MCI Agreement.
Interest Income. Interest income decreased 75% to $38,000 in the three months
ended September 30, 1999, from $153,000 in the same period in 1998. In September
1997 the Company received approximately $18,600,000 in net proceeds from an
initial public offering of Common Stock on the Oslo Stock Exchange. The decrease
in interest income is due to lower interest earnings on the decreased cash and
short-term investment balances resulting from the use of these proceeds to fund
the Company's operations.
Income Taxes. The Company does not currently pay United States income taxes as
it has net operating loss carryforwards. These are not recorded as a deferred
tax asset. For financial reporting purposes, a valuation allowance has been
recognized to reduce the net deferred tax assets to zero due to uncertainties
with respect to the Company's ability to generate taxable income in the future
sufficient to realize the benefit of such deferred income tax assets.
At December 31, 1998, the Company has net operating loss carryforwards in the
United States of $20,992,000, which begin expiring in 2007. The Company also has
net operating loss carryforwards of $2,052,000 in the United Kingdom. In
addition, at December 31, 1998, the Company has $1,087,000 of research and
<PAGE>
development tax credits to offset against future United States taxable income.
Utilization of net operating losses and credits may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
Nine Months Ended September 30, 1999, Compared to Nine Months Ended September
30, 1998
Revenues. Total revenues increased 122% to $1,293,000 in the nine months ended
September 30, 1999, compared to $583,000 in the same period in 1998. This
resulted from the increase in license fees as the Company shifts its emphasis
away from development fees and toward license fees, and from the final
development billing on a completed research contract.
Sales and Marketing. Sales and marketing expenses decreased 20% to $2,640,000 in
the nine months ended September 30, 1999, from $3,296,000 in the same period in
1998. This reduction resulted primarily from a significant reduction in
expenditures for outside contractors, travel, and trade shows, partially offset
by an increase in salary expense.
Research, Development and Engineering. Research, development and engineering
expenses decreased 6% to $3,898,000 in the nine months ended September 30, 1999,
from $4,149,000 in the same period in 1998. The decrease is primarily the result
of reductions in workforce as the Company shifts part of its development to
independent contractors working on specific projects, and a reduction in
depreciation expense.
General and Administrative. General and administrative expenses decreased 28% to
$1,216,000 in the nine months ended September 30, 1999, from $1,690,000 in the
same period in 1998. This decrease is primarily due to the decreased personnel
costs associated with the Company's revised business focus and a reduction in
the level of legal and professional costs in 1999 from the levels required in
1998 for the Company's initial registration on the Oslo Stock Exchange and as an
SEC reporting company in the United States and legal fees associated with the
1998 MCI Agreement.
Interest Income. Interest income decreased 68% to $190,000 in the nine months
ended September 30, 1999, from $588,000 in the same period in 1998. In September
1997 the Company received approximately $18,600,000 in net proceeds from an
initial public offering of Common Stock on the Oslo Stock Exchange. The decrease
in interest income is due to lower interest earnings on the decreased cash and
short-term investment balances resulting from the use of these proceeds to fund
the Company's operations.
Impact of Year 2000
The Company is in the process of evaluating the potential impact of what is
commonly referred to as the year 2000 issue, concerning the inability of certain
computer systems to properly recognize and process dates starting with the year
2000 and beyond. The Company is taking steps to ensure that its business systems
software and equipment will continue to function properly after December 31,
1999. In doing so, the Company has established a team, which will work directly
with management to (1) assess and test all internal information systems and
other systems that may be affected by the year 2000 date change; (2) assess and
test its products that may be affected by the year 2000 date change; (3)
communicate with third parties that supply its products to ensure they are
addressing the year 2000 issue; and (4) compose a contingency and disaster
recovery plan to ensure resolution of problems that may arise as a result of the
year 2000 date change. Until this assessment is completed, the Company will not
be able to determine the costs of becoming year 2000 compliant, the risks of
non-compliance, and its ability to conduct its business under a contingency
plan.
The Company's products do not contain any real-time clocks and, therefore, the
products themselves do not present any year 2000 issues.
<PAGE>
With respect to its information technology accounting systems, the assessment of
equipment and software was started in June 1998. The Company has completed the
upgrade of these systems to versions that are stated to be 2000 compliant.
The Company has completed testing and established compliance with respect to all
of its systems and products, subject to possible equipment upgrades during 1999
and ongoing communications with third parties.
The Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner. Based upon current estimates, the Company
believes that its direct costs for year 2000 compliance will consist primarily
of costs related to the staff time devoted to year 2000 compliance. The Company
does not expect material capital expenditures will be necessary for year 2000
related compliance costs and capital expenditures in these areas have not been
material for historical periods.
Regardless of the year 2000 compliance of its systems and products, the Company
may be adversely affected by disruptions in the operations of the enterprises
with which it interacts. These business enterprises include suppliers, corporate
partners, both domestic and international, government agencies, and other third
parties. The Company cannot reasonably predict the impact on its operations and
financial condition if any such businesses are adversely affected by the year
2000 issue.
Statements made herein about the implementation of various phases of the
Company's year 2000 program, the costs expected to be associated with that
program, and the results it expects to achieve constitute forward-looking
information. There are many uncertainties involved in the year 2000 issue and
the following important factors, among others, could affect the impact of the
year 2000 issue: (1) the inherent uncertainty of the costs and timing of
achieving compliance on the wide variety of systems used by the Company; (2) the
reliance on the efforts of vendors, customers, government agencies, and other
third parties beyond its control to achieve adequate compliance and avoid
disruption of its business in early 2000; and (3) the uncertainty of the
ultimate costs and consequences of any unanticipated disruption of its business
resulting from the failure of one of its applications or of a third party's
systems.
New Accounting Pronouncements
Software Revenue Recognition. The American Institute of Certified Public
Accountants issued Statement of Position 97-2 (SOP 97-2), SOP 98-4, and SOP 98-9
Software Revenue Recognition, to clarify guidance on applying generally accepted
accounting principles to software transactions and to provide guidance on when
revenue should be recognized and in what amounts for licensing, selling,
leasing, or otherwise marketing computer software. The Company adopted SOP 97-2
during 1997. Such adoption had no effect on the Company's methods of recognizing
revenue.
Earnings Per Share of Common Stock. In February 1997 the Financial Accounting
Standards Board (FASB) issued Statement No. 128, Earnings Per Share (Statement
128), which establishes standards for computing and presenting earnings per
share (EPS) for entities with publicly held common stock or potential common
stock. Statement 128 requires the presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
The Company adopted Statement 128 in 1997 and, in accordance with the
requirements thereof, restated its net loss per share for all prior periods. The
effect of adoption was not material to the accompanying Consolidated Financial
Statements. Net loss per share of common stock is computed based on the
weighted-average number of shares outstanding during each period.
<PAGE>
Inflation
The effects of inflation on the Company's operations were not significant during
the periods presented in the consolidated financial statements, and the effects
thereof are not considered to be of significance in the future. Generally,
throughout the periods discussed above, the changes in revenue have resulted
primarily from fluctuations in sales levels, rather than price changes.
Market Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of short-term investments,
trade accounts receivable, and accounts payable.
The Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. Company policy is designed to
limit exposure at any one institution. Certain investments are in excess of
Federal Deposit Insurance Corporation ("FDIC") guaranteed amounts. The Company
performs periodic evaluations of the relative credit standing of those financial
institutions that are considered in the Company's investment strategy.
The carrying amounts reported in the balance sheet for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable, and
notes payable approximate their estimated fair values.
Risk Factors
The following factors may affect the Company's future performance.
We Have a History of Losses. We have incurred net operating losses since 1991
and as of September 30, 1999, we have had an accumulated deficit of
approximately $27,778,000. We will need significant increases in revenue to
meet our projected development, selling, marketing and other operating costs and
to achieve a profitable level of operations. There can be no assurance,
however, as to when or if such increases in revenues will be achieved.
Our Revenues Have Decreased Following Expiration of the 1994 MCI Agreement.
From September 1994 until September 1997, approximately 84% of our revenue was
derived from MCI Telecommunications Corporation under the 1994 MCI Agreement.
Due to the expiration of the 1994 MCI Agreement in September 1997, our revenue
has decreased dramatically. There can be no assurance that we will be
successful in replacing revenues at the same level in the future.
We Have Changed Our Business Focus. We have revised our business plan to focus
on the development and delivery of technology to the digital imaging market. As
a result of this shift in focus and the expiration of our agreement with MCI,
total revenues decreased 92% in the year ended December 31, 1998 compared to
1997. Our future financial performance will depend in large part on the
successful implementation of our new business focus. There can be no assurance
that we will succeed in implementing our business strategy and any failure to do
so may have a material adverse effect on our business, financial condition and
results of operations.
We Depend on Emerging Markets to Utilize our Products. Currently, only a
limited number of applications incorporating our products or technologies are in
commercial production. Our ability to generate significant revenues will be
dependent on the development of new opportunities for digital images in the
<PAGE>
computer and photography markets and/or the adoption of our technologies by
producers and users of such images. The potential size of these new market
opportunities and the timing of their development are uncertain.
Our Results of Operations May Fluctuate. Our quarterly operating results have
in the past and may in the future vary significantly depending on factors such
as:
. revenue from software licenses;
. the timing of new product and service announcements;
. market acceptance of new and enhanced versions of our products;
. the size and timing of significant orders;
. changes in operating expenses;
. changes in our strategy; and
. general economic factors.
We have limited or no control over many of these factors. We operate with
virtually no service or software license order backlog because our services are
purchased on demand and our software licenses typically are installed shortly
after orders are received. As a result, revenues in any quarter are
substantially dependent on the quantity of orders received in that quarter.
Quarterly revenues also are difficult to forecast because the market for our
products is evolving and our revenues in any period are significantly affected
by the announcements and product offerings of our competitors as well as
alternative technologies. As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
Our Success Depends Upon the New Products We Develop and Improving our
Technology. Our operating results depend upon our ability to successfully
introduce new products and improve our core technology on a timely basis and/or
reduce costs of existing products. As a result, we believe that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that new products will be successfully
developed or will achieve market acceptance.
Our Markets are Highly Competitive. The development and marketing of digital
image products and technologies are extremely competitive. Many of the
companies developing and marketing competitive technologies have competitive
advantages over us, because they have established positions in the market, brand
name recognition or established ties with OEMs. Further, there can be no
assurance that our competitors will not succeed in developing products or
technologies that are more effective than those being developed by us or that
would render our products and technologies obsolete. In addition, many of our
competitors have substantially greater financial, technical, marketing and human
resources capabilities than us.
Our Ability to Generate a Sufficient Amount of Capital is Uncertain. We
anticipate that, in order to maintain a competitive position in our market, we
must expend substantial resources to continue research and development relating
to potential applications and new technologies. We must also expand our sales,
marketing and distribution activities. There can be no assurance that we will
be able to generate internally the funds necessary to continue such research and
development efforts or to expand sales and marketing activities, or that
additional funds from outside sources will be available for such purposes.
Our Success Depends Upon Management, Directors and Key Employees. We are
substantially dependent upon the efforts and abilities of our officers,
directors and certain key employees. The loss or unavailability of any of our
executive officers, directors or key employees could have a material adverse
effect on our business. We have employment agreements with certain key
employees. However, we do not maintain key man life insurance policies on any
of our key employees.
<PAGE>
Our Success Depends on Our Patents and Proprietary Rights. Our ability to
compete effectively will depend in part on our ability to maintain the
proprietary nature of our technology through a combination of copyright, patent
and trade secret protection and contractual provisions and non-disclosure
agreements. Competition in our market is intense and there can be no assurance
that our competitors will not independently develop or obtain patents on
technologies that are substantially equivalent or superior to our technology. We
could incur substantial costs in defending Iterated Systems in patent
infringement lawsuits brought by others and in prosecuting patent infringement
lawsuits against third party infringers. We also rely on trade secrets and
proprietary know-how that we seek to protect, in part, by non-disclosure
agreements with our employees, suppliers, consultants and potential strategic
partners and customers. There can be no assurance that these agreements will
not be breached, that we will have adequate remedies for any such breach or that
our trade secrets and proprietary know-how will not otherwise become known or be
independently developed by competitors.
Forward-Looking Statements
The discussions herein contain trend information and other forward-looking
statements that involve a number of risks and uncertainties. The actual results
of the Company could differ materially from its historical results of operations
and those discussed in the forward-looking statements. The forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company's
management. When used herein, the words "anticipate," "believe," "estimate,"
"expect" and "intend" and words or phrases of similar import, as they relate to
the Company or the Company's management, are intended to identify forward-
looking statements.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Special Shareholders Meeting. On October 28, 1999, a special meeting
of the stockholders of Iterated was held, in Oslo Norway, for the
purpose of voting on a proposal by Iterated's Board of Directors to
amend Iterated's Articles of Incorporation to increase the number of
authorized shares of common stock from 20,000,000 shares to 40,000,000
shares. Holders of 7,677,219 shares were represented at the meeting.
Holders of 7,674,384 shares voted in favor of the proposal, holders of
2,835 shares voted against the proposal and holders of 0 shares
abstained. Thus, the proposal to amend the Articles of Incorporation
was approved.
Item 5. Other Information.
Rights Offering. The Company is issuing to all shareholders of record
as of November 1, 1999, Rights to subscribe for additional shares of
common stock at a price of $0.50 per share. Each shareholder is being
issued one transferable Right for each two shares held on the record
date. In addition each subscriber is being allowed to request any
additional shares that have not been subscribed. The Rights entitle
each shareholder to acquire, at the subscription price, one share of
common stock for each Right held. The Rights will be freely tradable
on the Oslo Stock Exchange, where the Company's common stock is also
traded, November 8 - 19, 1999.
The Company will accept a minimum of 2,000,000 and a maximum of
6,000,000 subscription Rights and raise between $1,000,000 -
$3,000,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed with this Report:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITERATED SYSTEMS, INC.
Date: November 12, 1999 /s/ John C. Bacon
-------------------------- ---------------------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: November 12, 1999 /s/ Haines H. Hargrett
-------------------------- ---------------------------------------------
Haines H. Hargrett
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
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<PERIOD-START> JAN-01-1999
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