<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, 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 (I.R.S. Employer Identification No.)
Organization)
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 Registrant's capital stock as of September 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
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2000 (unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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.
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Iterated Systems, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-----------------------------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 53,700 $ 2,288,300
Accounts receivable 381,200 332,600
Subscription receivable 0 255,000
Prepaid expenses and other assets 147,800 99,100
-----------------------------------
Total current assets 582,700 2,975,000
Property and equipment
Computer equipment and software 3,060,300 2,968,400
Furniture and equipment 444,600 388,900
Leasehold improvements 145,500 143,600
-----------------------------------
Total property and equipment 3,650,400 3,500,900
Accumulated depreciation (3,327,500) (3,166,500)
-----------------------------------
Net property and equipment 322,900 334,400
Other assets 21,700 43,600
-----------------------------------
Total assets $ 927,300 $ 3,353,000
===================================
Liabilities and shareholders' equity (deficit)
Current liabilities
Accounts payable $ 168,700 $ 258,400
Accrued liabilities 510,000 426,300
Deferred revenue 68,200 106,800
Current maturities of loans from shareholders 333,300 0
Current maturities of capital leases 43,600 0
Other current liabilities 53,800 14,400
-----------------------------------
Total current liabilities 1,177,600 805,900
Non-current liabilities
Loans from shareholders 1,666,700 0
Capital leases 12,500 0
-----------------------------------
Total non-current liabilities 1,679,200 0
Shareholders' equity (deficit)
Common stock 175,300 175,200
Additional paid-in capital 31,812,700 31,805,700
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Accumulated deficit (33,992,500) (29,520,400)
Currency translation adjustments 75,000 86,600
------------- --------------
Total shareholders' equity (deficit) (1,929,500) 2,547,100
------------- --------------
Total liabilities and shareholders' equity (deficit) $ 927,300 $ 3,353,000
============= ==============
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September
-----------------------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 250,000 $ 667,300 $ 1,414,900 $ 905,600
Services 172,600 95,900 404,000 386,900
------------- ------------ ------------- ------------
Total revenues 422,600 763,200 1,818,900 1,292,500
Costs and expenses:
Sales and marketing 787,500 876,200 2,440,000 2,639,700
Research and development 892,100 1,277,700 2,732,200 3,898,300
General and administrative 341,100 354,700 1,107,700 1,215,600
------------- ------------ ------------- ------------
Total costs and expenses 2,020,700 2,508,600 6,279,900 7,753,600
Operating loss (1,598,100) (1,745,400) (4,461,000) (6,461,100)
Other income (expense):
Interest income 19,300 38,300 69,300 190,100
Interest expense (53,900) (100) (80,400) (400)
Foreign exchange gain (loss) 0 (15,300) 0 (44,900)
------------- ------------ ------------- ------------
Total other income (expense) (34,600) 22,900 (11,100) 144,800
------------- ------------ ------------- ------------
Net loss $ (1,632,700) $ (1,722,500) $ (4,472,100) $ (6,316,300)
============= ============ ============= ============
Basic and diluted loss per share $ (0.09) $ (0.13) $ (0.26) $ (0.48)
============= ============ ============= ============
Basic and diluted weighted
average shares outstanding 17,529,100 13,073,000 17,528,000 13,073,000
============= ============ ============= ============
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Operating activities
Net loss $ (4,472,100) $ (6,316,300)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 188,200 335,500
Loss (gain) on disposal of property and equipment 16,600 (6,200)
Loss on foreign currency transactions 0 44,800
Changes in operating assets and liabilities:
Accounts receivable (48,600) (11,600)
Prepaid expenses and other assets (26,900) 10,100
Accounts payable (89,700) (109,500)
Accrued expenses 83,700 282,600
Deferred revenue (38,600) 113,400
Other liabilities 39,400 (25,900)
------------- ----------------
Net cash used in operating activities (4,348,000) (5,683,100)
Investing activities
Purchases of property and equipment (138,100) (103,800)
Proceeds from sale of property and equipment 9,600 8,600
Proceeds from sales of short-term investments 0 2,539,500
------------- ----------------
Net cash (used in) provided by investing activities (128,500) 2,444,300
Financing activities
Proceeds of loans from shareholders 2,000,000 0
Payments on capital lease obligations (10,700) (3,600)
Issuance of common stock 262,100 0
------------- ----------------
Net cash provided by (used in) financing activities 2,251,400 (3,600)
Effect of exchange rate fluctuation on cash (9,500) (3,900)
Decrease in cash and cash equivalents (2,234,600) (3,246,300)
Cash and cash equivalents at beginning of period 2,288,300 3,706,100
------------- ----------------
Cash and cash equivalents at end of period 53,700 $ 459,800
============== ================
Non-cash activities
Equipment acquired through capital lease 66,800
=============
</TABLE>
See accompanying notes.
<PAGE>
Iterated Systems, Inc.
Notes to Condensed Consolidated Financial Statements
September 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 nine months ended September 30, 2000 and
1999. Results for the three and nine months ended September 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------- ---------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Operating revenue
United States $ 422,600 $ 754,000 $ 1,660,200 $ 1,278,100
United Kingdom 0 9,200 158,700 14,400
------------------- --------------------- -------------- -----------------
$ 422,600 $ 763,200 $ 1,818,900 $ 1,292,500
=================== ===================== ============== =================
Net loss
United States $ (1,574,800) $ (1,583,100) $ (4,388,300) $ (5,870,200)
United Kingdom (57,900) (139,400) (83,800) (446,400)
------------------- --------------------- -------------- -----------------
$ (1,632,700) $ (1,722,500) $ (4,472,100) $ (6,316,300)
=================== ===================== ============== =================
</TABLE>
At September 30, At December 31,
<PAGE>
2000 1999
-------------------- ----------------------
Identifiable assets, net
United States $ 911,600 $ 2,646,100
United Kingdom 15,700 (99,000)
-------------------- ----------------------
$ 927,300 $ 2,547,100
==================== ======================
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.
8. Subsequent Event.
In October 2000, the Company executed loan agreements for a total of $1,500,000
with two major shareholders. The terms of the loans call for the Company to
repay the loans in twelve equal installments beginning December 31, 2001. In the
event the Company sells additional shares of common stock in the aggregate
amount of at least $2,000,000, then the balance of the loans then outstanding
will automatically convert 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%.
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 license, service
and maintenance fees on its MediaBin software.
<PAGE>
The Company recognizes license fee revenues when its software products are
delivered and collectibility of fees is probable, provided no significant
obligations remain under the contract. Revenue from service fees is recognized
based on the Company's estimate of the percentage of completion using actual
costs incurred as a percentage of expected total costs of individual service
agreements. Maintenance revenue is recognized pro-rata throughout the period
covered by the maintenance agreement.
Liquidity and Financial Condition
In the first nine months of 2000 and 1999, operating activities used cash of
$4,348,000 and $5,683,100, respectively.
In the first nine months of 2000 and 1999, investing activities (used) provided
cash of $(128,500) and $2,444,300, respectively. During 2000, funds were used to
purchase computer equipment. In 1999 funds were provided primarily by the sale
of short-term investments.
In the first nine months of 2000 and 1999, financing activities provided (used)
cash of $2,251,400 and $(3,600) respectively. In 2000, funds were provided
primarily by loans from shareholders and the sale of common stock. 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 balance of
the loans then outstanding will automatically convert 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%.
In October 2000 (not reflected in the accompanying financial statements), the
Company executed loan agreements for a total of $1,500,000 with two major
shareholders. The terms of the loans call for the Company to repay the loans in
twelve equal installments beginning December 31, 2001. In the event the Company
sells additional shares of common stock in the aggregate amount of at least
$2,000,000, then the balance of the loans then outstanding will automatically
convert 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 September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Revenues decreased 45% to $422,600 in the three months ended September
30, 2000, from $763,200 in 1999. This decrease was primarily the result of a
one-time software license fee of $500,000 reported during 1999.
Sales and Marketing. Sales and marketing expenses decreased 10% to $787,500 in
the three months ended September 30, 2000, from $876,200 in the same period in
1999. This resulted primarily from the reduction in operations of the Company's
United Kingdom subsidiary that more than offset an increase in salary expenses
for additional sales personnel in the United States.
<PAGE>
Research and Development. Research and development expenses decreased 30% to
$892,100 in the three months ended September 30, 2000, from $1,277,700 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 4% to
$341,100 in the three months ended September 30, 2000, from $354,700 in 1999.
This decrease is primarily due to a slight reduction in administrative salaries
in 2000 over 1999 and the expiration of an equipment lease.
Other Income (Expense). Other income (expense) decreased to $(34,600) in the
three months ended September 30, 2000, from $22,900 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.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues. Revenues increased 41% to $1,818,900 in the nine months ended
September 30, 2000, from $1,292,500 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 8% to $2,440,000 in
the nine months ended September 30, 2000, from $2,639,700 in 1999. This resulted
primarily from the reduction in operations of the Company's United Kingdom
subsidiary that more than offset an increase in salary expenses for additional
sales personnel in the United States.
Research and Development. Research and development expenses decreased 30% to
$2,732,200 in the nine months ended September 30, 2000, from $3,898,300 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 9% to
$1,107,700 in the nine months ended September 30, 2000, from $1,215,600 in 1999.
This is primarily due to a one-time property tax assessment paid during 1999
that was refunded on appeal during 2000, a reduction in administrative salaries
and the expiration of an equipment lease.
Other Income (Expense). Other income (expense) decreased to $(11,100) in the
nine months ended September 30, 2000, from $144,800 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.
<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 and expenditure 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 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. 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, 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.
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: October 9, 2000 /s/ John C. Bacon
---------------------- ----------------------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date: October 9, 2000 /s/ Haines H. Hargrett
---------------------- ----------------------------------------------
Haines H. Hargrett
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
