<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 June 30, 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)
Georgia 58-1741516
(State or Other Jurisdiction (I.R.S. Employer
of 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 Registrant's capital stock as of June 30, 2000, the
latest practicable date, is as follows: 17,529,067 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 June 30, 2000 (unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations
for the three months and six months ended June 30, 2000 and 1999
(unaudited)
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 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 and Use of Proceeds.
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>
June 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,296,100 $ 2,288,300
Short term investments 500,000 0
Accounts receivable 343,400 332,600
Subscription receivable 0 255,000
Prepaid expenses and other assets 127,900 99,100
------------- -------------
Total current assets 2,267,400 2,975,000
Property and equipment
Computer equipment and software 3,031,600 2,968,400
Furniture and equipment 415,600 388,900
Leasehold improvements 142,900 143,600
------------- -------------
Total property and equipment 3,590,100 3,500,900
Accumulated depreciation (3,298,100) (3,166,500)
------------- -------------
Net property and equipment 292,000 334,400
Other assets 22,500 43,600
------------- -------------
Total assets $ 2,581,900 $ 3,353,000
============= =============
Liabilities and shareholders' equity (deficit)
Current liabilities
Accounts payable $ 123,200 $ 258,400
Accrued liabilities 540,700 426,300
Deferred revenue 155,900 106,800
Current maturities of long-term debt 189,400 0
Other current liabilities 26,300 14,400
------------- -------------
Total current liabilities 1,035,500 805,900
Non-current liabilities
Long-term debt 1,844,100 0
Shareholders' equity (deficit)
Common stock 175,300 175,200
Additional paid-in capital 31,812,700 31,805,700
Accumulated deficit (32,359,800) (29,520,400)
Currency translation adjustments 74,100 86,600
------------- -------------
Total shareholders' equity (deficit) (297,700) 2,547,100
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 2,581,900 $ 3,353,000
============= =============
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Development fees $ 0 $ 12,500 $ 0 $ 285,200
Product license fees 576,600 138,000 1,389,000 238,300
Other revenues 3,700 0 7,300 5,800
----------- ----------- ----------- -----------
Total revenues 580,300 150,500 1,396,300 529,300
Operating expenses:
Sales and marketing 777,700 862,100 1,652,500 1,763,400
Research and development 894,600 1,337,700 1,840,100 2,620,700
General and administrative 334,900 436,900 766,600 860,900
----------- ----------- ----------- -----------
Total operating expenses 2,007,200 2,636,700 4,259,200 5,245,000
Operating loss (1,426,900) (2,486,200) (2,862,900) (4,715,700)
Other income (expense):
Interest income 25,500 61,000 50,000 151,800
Interest expense (26,500) (100) (26,500) (300)
Foreign currency exchange gain (loss) 0 5,500 0 (29,600)
----------- ----------- ----------- -----------
Total other income (1,000) 66,400 23,500 121,900
----------- ----------- ----------- -----------
Net loss $(1,427,900) $(2,419,800) $(2,839,400) $(4,593,800)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.08) $ (0.19) $ (0.16) $ (0.35)
=========== =========== =========== ===========
Basic and diluted weighted average shares
outstanding 17,528,600 13,073,000 17,527,200 13,073,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Operating activities
Net loss $ (2,839,400) $ (4,593,800)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 133,200 244,000
Loss (gain) on disposal of property and equipment 16,600 (6,200)
Loss on foreign currency transactions 0 29,600
Changes in operating assets and liabilities:
Accounts receivable (10,800) (103,000)
Prepaid expenses and other assets (7,800) 49,700
Accounts payable (135,200) (69,700)
Accrued expenses 114,400 145,800
Deferred revenue 49,100 21,900
Other liabilities 11,900 (17,300)
---------------- ---------------
Net cash used in operating activities (2,668,000) (4,299,000)
Investing activities
Purchases of property and equipment (85,000) (76,100)
Proceeds from sale of property and equipment 9,600 8,600
Sales (purchases) of short-term investments (500,000) 783,700
---------------- ---------------
Net cash (used in) provided by investing activities (575,400) 716,200
Financing activities
Proceeds of notes payable 2,000,000 0
Payments on capital lease obligations 0 (2,300)
Issuance of common stock 262,100 0
---------------- ---------------
Net cash provided by (used in) financing activities 2,262,100 (2,300)
Effect of exchange rate fluctuation on cash (10,900) (6,700)
---------------- ---------------
Decrease in cash and cash equivalents (992,200) (3,591,800)
Cash and cash equivalents at beginning of period 2,288,300 3,706,100
---------------- ---------------
Cash and cash equivalents at end of period $ 1,296,100 $ 114,300
---------------- ---------------
Non-cash investing and financing activities
Equipment acquired through capital lease $ 33,500 $ 0
================ ===============
</TABLE>
See Accompanying notes.
<PAGE>
Iterated Systems, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 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 and six months ended June 30, 2000 and 1999.
Results for the three and six months ended June 30, 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. Loan Agreements
In March 2000, the Company executed loan agreements for a total of $2,000,000
with two major shareholders. The loans were funded in May 2000. The terms of the
loans call for the Company to repay the loans in twelve equal installments
beginning June 30, 2001. In the event the Company sells additional shares of
common stock in the aggregate amount of at least $2,000,000, then the lenders
will automatically convert the balance of the loans then outstanding into common
stock at a discount of 25% from the price per share of the offering. Interest
on the loans accrues at an annual rate of prime plus 1%.
4. 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.
5. 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 131"), the following disclosure represents the information
required by SFAS 131 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue
United States $ 424,600 $ 150,500 $ 1,237,600 $ 524,100
United Kingdom 155,700 0 158,700 5,200
----------- ----------- ----------- -----------
$ 580,3000 $ 150,500 $ 1,396,300 $ 529,300
=========== =========== =========== ===========
Net income (loss)
United States $(1,516,500) $(2,256,900) $(2,813,500) $(4,286,800)
United Kingdom 88,600 (162,900) (25,900) (307,000)
----------- ----------- ----------- -----------
$(1,427,900) $(2,419,800) $(2,839,400) $(4,593,800)
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30, At June 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Identifiable assets, net
United States $ (311,700) $ 3,874,200 $ (311,700) $ 3,874,200
United Kingdom 14,000 92,400 14,000 92,400
------------- ------------- ------------- -------------
$ (297,700) $ 3,966,600 $ (297,700) $ 3,966,600
============= ============= ============= =============
</TABLE>
6. Comprehensive Income
In June 1997, the Financial Accounting Standards Board 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.
7. Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principals to revenue recognition in financial statements. Although
we are currently evaluating the impact of SAB 101, we believe that our current
practices comply with SAB 101. However, should we determine that a change in
accounting policy is necessary such a change will be made in fourth quarter of
2000.
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 the Company's MediaBin
software to users of high quality digital image systems. The Company believes
that the majority of its future revenues will be derived from MediaBin license
and service fees and from 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 when the software products are delivered and
collectibility of fees is probable, provided no significant obligations remain
under the contract. Maintenance revenue is recognized pro-rata throughout the
period covered by the maintenance agreement.
<PAGE>
Liquidity and Financial Condition
In the first six months of 2000 and 1999, the Company used cash in operating
activities of $2,668,000 and $4,299,000, respectively. This cash was used to
fund the net loss for the respective periods.
In the first six months of 2000 and 1999, investing activities (used) provided
cash of ($575,400) and $716,200, respectively. During 2000, funds were used to
purchase short-term investments and computer equipment. In 1999 funds were
provided by the sale of short-term investments.
In the first six months of 2000 and 1999, financing activities provided (used)
funds of $2,262,100 and ($2,300) respectively. In 2000, funds were provided
primarily by sale of common stock and loans from shareholders. In 1999, funds
were used to make payments on a capital lease.
In March 2000, the Company executed loan agreements for a total of $2,000,000
with two major shareholders. The loans were funded in May 2000. The terms of the
loans call for the Company to repay the loans in twelve equal installments
beginning June 30, 2001. In the event the Company sells additional shares of
common stock in the aggregate amount of at least $2,000,000, then the lenders
will automatically convert the balance of the loans then outstanding into common
stock at a discount of 25% from the price per share of the offering. Interest
on the loans accrues at an annual rate of prime plus 1%.
The Company will require significant increases in revenue to cover operating
costs and achieve a profitable level of operations. The Company is making
initial sales of its new MediaBin software platform and expects to significantly
increase revenues in 2000 over 1999. The Company may also seek to raise
additional investment capital in order to fund operations.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues. Revenues increased 286% to $580,300 in the three months ended June 30,
2000, from $150,500 in the same period in 1999. This resulted from a significant
increase in license and service fees relating to the Company's MediaBin
software.
Sales and Marketing. Sales and marketing expenses decreased 10% to $777,700 in
the three months ended June 30, 2000, from $862,100 in the same period in 1999.
This resulted primarily from the reduction in operations of the Company's United
Kingdom subsidiary.
Research and Development. Research and development expenses decreased 33% to
$894,600 in the three months ended June 30, 2000, from $1,337,700 in the same
period in 1999. The decrease reflects the lower costs involved in software
development, primarily due to the reduced level of outside contractors that were
used in 1999 to rapidly accelerate the development of the Company's MediaBin
platform.
General and Administrative. General and administrative expenses decreased 23% to
$334,900 in the three months ended June 30, 2000, from $436,900 in the same
period in 1999. This is primarily due to a one-time property tax assessment paid
during 1999 that was refunded on appeal during 2000.
Other Income (Expense). Other income (expense) decreased to ($1,000) in the
three months ended June 30, 2000, from $66,400 in the same period in 1999.
Interest income decreased due to the lower level of cash invested and interest
expense increased due to the interest on the loans executed in March 2000.
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues. Revenues increased 164% to $1,396,300 in the six months ended June 30,
2000, from $529,300 in the same period in 1999. This resulted from a significant
increase in license and service fees relating to the Company's MediaBin
software, which more than offset the planned reduction of non-MediaBin related
development fees.
Sales and Marketing. Sales and marketing expenses decreased 6% to $1,652,500 in
the six months ended June 30, 2000, from $1,763,400 in the same period in 1999.
This resulted primarily from the reduction in operations of the Company's United
Kingdom subsidiary.
Research and Development. Research and development expenses decreased 30% to
$1,840,100 in the six months ended June 30, 2000, from $2,620,700 in the same
period in 1999. The decrease reflects the lower costs involved in software
development, primarily due to the reduced level of outside contractors that were
used in 1999 to rapidly accelerate the development of the Company's MediaBin
platform.
General and Administrative. General and administrative expenses decreased 11% to
$766,600 in the six months ended June 30, 2000, from $860,900 in the same period
in 1999. This is primarily due to a one-time property tax assessment paid during
1999 that was refunded on appeal during 2000.
Other Income (Expense). Other income (expense) decreased 81% to $23,500 in the
six months ended June 30, 2000, from $121,900 in the same period in 1999.
Interest income decreased due to the lower level of cash invested and interest
expense increased due to the interest on the loans funded in May 2000.
New Accounting Pronouncements
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principals to revenue recognition in financial statements. Although
we are currently evaluating the impact of SAB 101, we believe that our current
practices comply with SAB 101. However, should we determine that a change in
accounting policy is necessary such a change will be made in fourth quarter of
2000.
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.
<PAGE>
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. The Company does 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.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on April 28, 2000 at which
time certain matters were submitted to such stockholders for a vote. Below is a
brief description of each such matter as well as the number of shares
represented at a meeting and entitled to vote and voting for, against or
abstaining as to each matter.
The following directors were elected to serve on a one-year term expiring in
2001:
Shares Shares
For Withheld
---------- -----------
Nominees:
John C. Bacon 8,729,007 38,500
John R. Festa 8,729,007 38,500
Terje Mikalsen 8,729,007 38,500
Alan D. Sloan 8,729,007 38,500
Asmund R. Slogedal 8,729,007 38,500
The stockholders approved an amendment to the Company's 1994 Amended and
Restated Stock Option Plan.
Shares Shares Shares
For Against Abstaining
========== ========== ============
8,739,307 200 5,700
The stockholders ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 2000.
Shares Shares Shares
For Against Abstaining
========== ========== ============
8,740,007 200 4,300
Item 5. Other Information.
----------------------------
None.
<PAGE>
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: August 10, 2000 /s/ John C. Bacon
------------------------ -----------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: August 10, 2000 /s/ Haines H. Hargrett
----------------------- -----------------------------------
Haines H. Hargrett
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
