<PAGE>
================================================================================
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 March 31, 2000
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)
<TABLE>
<S> <C>
Georgia 58-1741516
(State or other Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3525 Piedmont Road
Seven Piedmont Center 30305-1530
Suite 600 (Zip Code)
Atlanta, Georgia
(Address of principal executive offices)
</TABLE>
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 March 31,
2000, the latest practicable date, is as follows: 17,527,940 shares of Common
Stock, $.01 par value.
================================================================================
<PAGE>
ITERATED SYSTEMS, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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>
March 31, December 31,
2000 1999
------------------- ------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 1,351,278 $ 2,288,343
Short term investments 0 0
Accounts receivable 172,712 332,579
Subscription receivable 0 255,000
Prepaid expenses and other assets 210,023 99,065
------------------- ------------------
Total current assets 1,734,013 2,974,987
Property and equipment
Computer equipment and software 3,005,612 2,968,417
Furniture and equipment 374,166 388,900
Leasehold improvements 143,409 143,553
------------------- ------------------
Total property and equipment 3,523,187 3,500,870
Accumulated depreciation (3,249,504) (3,166,421)
------------------- ------------------
Net property and equipment 273,683 334,449
Other assets 23,492 43,567
------------------- ------------------
Total assets $ 2,031,188 $ 3,353,003
=================== ==================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 190,285 $ 258,359
Accrued liabilities 521,179 426,297
Deferred revenue 176,356 106,820
Other current liabilities 5,762 14,405
------------------- ------------------
Total current liabilities 893,582 805,881
Shareholders' equity
Common stock 175,280 175,204
Additional paid-in capital 31,809,405 31,805,681
Accumulated deficit (30,931,933) (29,520,411)
Currency translation adjustments 84,854 86,648
------------------- ------------------
Total shareholders' equity 1,137,606 2,547,122
------------------- ------------------
Total liabilities and shareholders' equity $ 2,031,188 $ 3,353,003
=================== ==================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Iterated Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
----------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
Revenue:
Development fees $ 0 $ 272,670
Product license fees 812,398 100,321
Other revenues 3,630 5,808
----------- -----------
Total revenue 816,028 378,799
Costs and expenses:
Sales and marketing 874,770 901,388
Research and development 945,566 1,282,958
General and administrative 431,683 423,944
----------- -----------
Total costs and expenses 2,252,019 2,608,290
Operating loss (1,435,991) (2,229,491)
Other income (expense):
Interest income 24,535 90,845
Interest expense (66) (188)
Foreign currency exchange gain (loss) 0 (35,146)
----------- -----------
Total other income (expense) 24,469 55,511
----------- -----------
Net loss $(1,411,522) $(2,173,980)
=========== ===========
Basic and diluted loss per share $ (0.08) $ (0.17)
=========== ===========
Weighted average shares outstanding 17,526,251 13,073,025
(basic and diluted) =========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Iterated Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
------------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Operating activities
Net loss $(1,411,522) $(2,173,980)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 85,732 133,373
Loss (gain) on disposal of property and equipment 4,556 (3,675)
Loss on foreign currency transactions 0 35,146
Changes in operating assets and liabilities:
Accounts receivable 159,867 (145,471)
Prepaid expenses and other assets (90,883) 78,662
Accounts payable (68,074) 59,511
Accrued expenses 94,882 35,764
Deferred revenue 69,536 6,362
Other liabilities (8,643) (8,643)
----------- -----------
Net cash used in operating activities (1,164,549) (1,982,951)
Investing activities
Purchases of property and equipment (39,685) (34,361)
Proceeds from sale of property and equipment 9,584 3,675
Purchases of short-term investments 0 (1,420,130)
----------- -----------
Net cash used in investing activities (30,101) (1,450,816)
Financing activities
Payments on capital lease obligations 0 (1,144)
Issuance of common stock 258,800 0
----------- -----------
Net cash provided by (used in) financing activities 258,800 (1,144)
Effect of exchange rate fluctuation on cash (1,215) (3,927)
----------- -----------
Decrease in cash and cash equivalents (937,065) (3,438,838)
Cash and cash equivalents at beginning of period 2,288,343 3,706,070
----------- -----------
Cash and cash equivalents at end of period $ 1,351,278 $ 267,232
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
Iterated Systems, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(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 three months ended March 31, 2000 and 1999.
Results for the three months ended March 31, 2000 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. Sales of Common Stock
In September 1997 and November 1999, the Company sold shares of common stock on
the Oslo Stock Exchange, resulting in net proceeds to the Company of
$20,367,000. In a continuation of the 1999 offering, the Company received an
additional $259,000 in January 2000.
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 ("SFAS 130"), 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
identifiable assets of the United States geographic area exclude inter-company
accounts receivable.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
<S> <C> <C>
2000 1999
----------- -----------
Operating revenue
United States $ 813,000 $ 374,000
United Kingdom 3,000 5,000
----------- -----------
$ 816,000 $ 379,000
=========== ===========
Net loss
United States $(1,297,000) $(2,030,000)
United Kingdom (115,000) (144,000)
----------- -----------
$(1,412,000) $(2,174,000)
=========== ===========
At March 31,
-----------------------------------
2000 1999
----------- -----------
Identifiable assets, net
United States $ 1,095,000 $ 6,532,000
United Kingdom 43,000 (135,000)
----------- -----------
$ 1,138,000 $ 6,397,000
=========== ===========
</TABLE>
<PAGE>
5. Comprehensive Income
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company adopted SFAS 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. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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.
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 to 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.
The Company believes that the majority of its future revenues will be derived
from license fees and maintenance 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.
Maintenance revenue is recognized pro-rata throughout the period covered by the
maintenance agreement.
Liquidity and Financial Condition
Since October 1997 the Company has financed its operations primarily from the
$20,626,000 net proceeds of sales of common stock on the Oslo Stock Exchange. At
March 31, 2000, the Company had cash and short-term investments of $1,351,000,
compared to $2,288,000 at December 31, 1999.
In the first three months of 2000 and 1999, the Company used cash in operating
activities of $1,165,000 and $1,983,000, respectively. This cash was used to
fund the net loss for the respective periods.
In the first three months of 2000 and 1999, the Company used cash in investing
activities of $30,000 and $1,451,000, respectively. The funds were used to
purchase computer equipment and short-term investments.
In the first three months of 2000 and 1999, financing activities provided (used)
cash of $259,000 and ($1,000), respectively. During 2000, funds were provided by
the sale of common stock in a continuation of its offering from November 1999,
and funds were used in 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. The Company is finalizing
the development of its new MediaBin software platform and expects to increase
revenues in 2000 over 1999. The Company may also seek to raise additional
investment capital in order to fund operations. The Company may undertake
certain cost cutting measures that could slow down its research and development
efforts. It is not possible to predict the outcome of the Company's efforts and
there is no assurance that the Company will be successful in increasing revenues
or obtaining financing sufficient to fund its operations.
<PAGE>
In the first three months of 2000, the Company executed a loan agreement for
$2,000,000 with a shareholder. This loan will be funded in the second quarter
of 2000. The terms of the loan call for the Company to repay the loan in twelve
equal quarterly installments beginning March 31, 2001. In the event the Company
sells additional shares of common stock in the amount of at least $2,000,000,
then the lender will convert the balance of the loan then outstanding into
common stock at a discount of 25% from the price per share of the offering.
Interest on the loan is calculated at prime plus 1%.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues. Revenues increased 115% to $816,000 in the three months ended March
31, 2000, compared to $379,000 in the same period in 1999. This resulted from an
increase in license fees of its MediaBin platform and its digital imaging
technology.
Sales and Marketing. Sales and marketing expenses decreased 3% to $875,000 in
the three months ended March 31, 2000, from $901,000 in the same period in 1999.
This resulted primarily from a reduction in travel and recruiting costs,
partially offset by an increase in outside consultant costs.
Research and Development. Research and development expenses decreased 26% to
$946,000 in the three months ended March 31, 2000, from $1,283,000 in the same
period in 1999. The decrease reflects a slight reduction in number of employees
and the decreased use of independent contractors working on specific projects.
General and Administrative. General and administrative expenses increased 2% to
$432,000 in the three months ended March 31, 2000, from $424,000 in the same
period in 1999. This is primarily due to a slight increase in shareholder
relations costs offset by a general decrease in other administrative costs.
Interest Income. Interest income decreased 73% to $25,000 in the three months
ended March 31, 2000, from $91,000 in the same period in 1999. In September 1997
and November 1999, the Company received a total of approximately $20,626,000 in
net proceeds from sales 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, 1999, the Company has net operating loss carryforwards in the
United States of $28,234,000, which begin expiring in 2007. The Company also has
net operating loss carryforwards of $3,997,000 in the United Kingdom. In
addition, at December 31, 1999, the Company has $1,237,000 of research and
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.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become year 2000 ready. In 1999, the Company completed its preparations and
testing of systems. As a result of those efforts, the Company experienced no
significant disruptions in any of its information technology or non-information
technology
<PAGE>
systems and believes those systems successfully responded to the year 2000 date
change. The Company is not aware of any material problems resulting from year
2000 issues, either with its internal systems or the services of third parties.
The Company's products do not contain any real-time clocks and, therefore, the
products themselves do not present any year 2000 issues. The Company will
continue to monitor its computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any year 2000 matters that may
arise are addressed promptly.
New Accounting Pronouncements
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, ("SFAS 130"). The Company reported comprehensive loss in its statement
of changes in shareholders' equity. The adoption of SFAS 130 resulted in revised
and additional disclosures but had no effect on the financial position, results
of operations, or liquidity of the Company.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("SFAS 131"), which establishes standards
for the way public business enterprises report information about operating
segments. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
disclosed its business segments in the footnotes to its financial statements.
The adoption of SFAS 131 resulted in additional disclosures but had no effect on
the financial position, results of operations, or liquidity of the Company.
In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use. The SOP, which was adopted
in 1998, requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. The SOP requires companies to
adopt its provisions as of the beginning of the year and restate previously
reported interim results. The adoption of SOP 98-1 did not have a material
effect on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 2000. Because the
Company has no derivatives, management does not anticipate that the adoption of
the SFAS 133 will have a significant effect on the financial position or results
of operations of the Company.
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.
Item 3. Quantitative and Qualitative Disclosures About 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. We do not use derivative financial
instruments in our operations or investments and do not have significant
operations subject to fluctuations in commodities prices or foreign currency
exchange rates.
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.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Rights Offering. In November 1999, the Company conducted a Rights Offering
in which rights to purchase additional shares of common stock were offered to
existing shareholders. In connection with this offering, the Company issued
4,445,000 shares of common stock with proceeds to the Company of $2,043,000, net
of expenses of $179,000. Included in these shares are 510,000 shares of common
stock issued in exchange for a subscription receivable of $255,000, which was
paid subsequent to year-end. In January 2000, an additional 7,600 shares were
issued in connection with this offering with net proceeds to the Company of
$3,800. No underwriting discounts or commissions were paid with respect to
these sales of securities. The issuance of shares of common stock pursuant to
the Rights Offering was made (i) with respect to offers and sales outside of the
United States, in reliance upon the exemption from registration provided by
Regulation S under the Securities Act of 1933, as amended, and (ii) with respect
offers and sales within the United States, in reliance upon the exemption
provided by Rule 506 of Regulation D under the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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
Exhibit 99.1 Risk Factors
(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: May 5, 2000 /s/ John C. Bacon
----------- --------------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer)
and Director
Date: May 5, 2000 /s/ Haines H. Hargrett
----------- -------------------------------------
Haines H. Hargrett
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,351,278
<SECURITIES> 0
<RECEIVABLES> 183,278
<ALLOWANCES> 11,159
<INVENTORY> 0
<CURRENT-ASSETS> 1,734,013
<PP&E> 3,523,187
<DEPRECIATION> 3,249,504
<TOTAL-ASSETS> 2,031,188
<CURRENT-LIABILITIES> 893,582
<BONDS> 0
0
0
<COMMON> 175,280
<OTHER-SE> 962,326
<TOTAL-LIABILITY-AND-EQUITY> 2,031,188
<SALES> 0
<TOTAL-REVENUES> 816,028
<CGS> 0
<TOTAL-COSTS> 945,566
<OTHER-EXPENSES> 1,306,453
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (1,411,522)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,411,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,411,522)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
<PAGE>
Exhibit 99.1
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 March 31, 2000, we have had an accumulated deficit of approximately
$30,932,000. 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 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;
. general economic factors.
We have limited or no control over many of these factors. We operate with
virtually no order backlog because 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.
