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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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 SPECIFIED IN ITS CHARTER)
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GEORGIA 58-1741516
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
3525 PIEDMONT ROAD 30305-1530
SEVEN PIEDMONT CENTER, SUITE 600 (zip code)
ATLANTA, GEORGIA
(Address of principal executive office)
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Registrant's telephone number, including area code: (404) 264-8000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of each class Name of exchange on which registered
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Common Stock, par value $.01 per share Oslo Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing price for the Common Stock on March
24, 2000 as reported by the Oslo Stock Exchange, was approximately $23,666,000.
The shares of Common Stock held by each officer and director and by each person
known to the Registrant who owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of March 24, 2000, Registrant had outstanding 17,527,940
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1999 are incorporated by reference in Parts II
and IV of this Form 10-K to the extent stated herein. The Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
April 28, 2000 is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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PART I
FORWARD-LOOKING STATEMENTS - CAUTIONARY 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. THE FORWARD-LOOKING STATEMENTS SHOULD BE READ IN
LIGHT OF THESE FACTORS AND THE FACTORS IDENTIFIED IN "ITEM 1. BUSINESS" AND IN
"ITEM 7. FINANCIAL INFORMATION--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ALL REFERENCES TO YEAR PERIODS
REFER TO THE COMPANY'S FISCAL YEAR ENDED DECEMBER 31, 1999.
ITEM 1. BUSINESS.
INTRODUCTION
Iterated Systems is focused on creating a commercial software product
line designed to dramatically improve the productivity, control and time to
market for the management, production, and delivery of digital product (or
brand) images. Iterated's target market is Global 1000 corporations that use
images to sell their products in e-commerce and in print. Such corporations
include major retailers with large brand product image collections and the
advertising agencies and print production companies that serve them. Iterated's
MediaBintm platform has been developed from the Company's research and
development expertise in digital image science and fractal-based mathematics,
which have evolved over more than twelve years in the digital image business.
The Company was founded in 1987 by Dr. Michael Barnsley and Dr. Alan
Sloan, who at that time were tenured members of the mathematics faculty at the
Georgia Institute of Technology. Their early work was based on the discovery
that real-world images could be generated by plotting fractal equations. An
early experiment produced the Iterated Systems fern logo from only a few bits of
data, using a fractal process known as an Iterated Function System. Iterated's
initial products provided fractal image compression based on Dr. Barnsley's
patented Fractal Transform algorithm method, which was used to store and display
fractal-compressed images in Microsoft's Encarta CD-ROM encyclopedia, the Great
Artists CD-ROM series, and other CD-ROM and screen saver titles.
The Company was organized under the laws of the State of Georgia on May
28, 1987. On May 20, 1991, Iterated Systems Limited (ISL) was incorporated in
the United Kingdom as a wholly owned subsidiary of the Company to function as
the Company's European sales office.
HISTORY
The Company's current strategies and business direction, including the
decision to focus its primary efforts on the development of software for the
corporate digital image management market, were developed during 1997 and 1998
based on internal and external factors affecting the Company and its markets.
Prior to that time one of its significant focuses was for the development of
software products to be sold to end users for use on the Internet. Developments
in that market lead the Company to believe that its expertise was better suited
to developing and delivering its technology to OEMs for inclusion in their
products. As a result of this shift, during 1997 the Company experienced a
significant reduction and restructuring in its workforce. During 1998 and 1999,
the Company continued to focus its development and marketing efforts to target
large corporate users of digital images with needs for cross-media production.
The Company expects its business plans to continue to evolve based on
competitive forces and the ongoing need to generate new and innovative products
on a continual basis. These external market factors make estimates of product
acceptance and financial performance of the Company difficult to predict, and in
response thereto the Company expects to make ongoing revisions to its business
plan.
In September 1994, the Company entered into an agreement (the 1994
Agreement) with MCI Telecommunications Corporation (MCI) to provide for
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 Agreement expired in
September 1997. Effective August 7, 1998, the Company and MCI entered into a new
agreement that provides MCI with a non-exclusive, royalty-free license to use
certain deliverables developed by the Company. In addition, MCI holds a warrant
to purchase up to 1,798,000 shares of common stock at $4 per share. The warrant
expires in August 2002.
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THE MEDIABIN PLATFORM
With the advent of e-commerce, brand-centered corporations are facing
an exploding number of images that are burdening their corporate information
technology infrastructures as they try to promote their brands in tightly
integrated Web/e-commerce and print campaigns. In mid-1999, Iterated announced
the MediaBin platform, a new, advanced approach to dealing with this
proliferation of images and the publication problems that have ensued.
Integrated print and online campaigns, known as cross-media or multi-channel
campaigns place a unique demand and burden on the workflow of images, which
MediaBin is designed to solve.
Specifically MediaBin is designed to address the image problems of
large, geographically dispersed corporations that have:
High consideration brands (brands that require significant
customer evaluation or review before purchase such as
automobiles, recreational products, clothing items, consumer
electronics, sporting goods, etc.) supported by large numbers of
high quality images. These corporations are typically in rapid
transition to control their brands as they launch e-commerce
business strategies while maintaining their print media needs.
In addition to the brand-centered corporations, there is a significant
set of associated companies that service these large corporations. These
organizations include Web/e-commerce site developers, advertising agencies,
marketing services firms, and printing agencies. MediaBin is designed to enhance
collaboration for all of these supporting groups and to complement the corporate
installations of MediaBin.
The MediaBin platform is a substantial extension to the existing value
and feature set provided by Iterated's earlier imaging software. MediaBin
delivers image automation services that are analogous to "just-in-time"
manufacturing methods that have been deployed with such great success in the
manufacturing marketplace. MediaBin provides image services on an extensible,
scalable, enterprise server platform that, in addition to providing resolution
management, can also transform images in any color space and image format. The
MediaBin platform is built on open, industry standards such as HTTP (Web
browser) and TCP/IP (file transfer) protocols, the ODBC (Open Data Base Connect)
standard that allows for the use of industry standard databases like Oracle,
Informix, SQL Server, and the Windows NT operating system. MediaBin is written
using the Microsoft Windows compatible approaches to programming known as DCOM
(Distributed Common Object Method) and C++ (the most common object oriented
programming language in use today).
MediaBin provides workflow automation in six critical areas:
o Automation of image production,
o Repurposing of images,
o Tracking and revision management,
o Collaboration for workgroups,
o Unique searching methods, and
o Image format independence.
AUTOMATION OF IMAGE PRODUCTION. Today, an ever increasing and significant amount
of image production or post-creative work is required to prepare images for use
in the print and Web environment. These tasks include time-consuming operations
that take a digital image that is artistically complete and prepare that image
for use in another medium. This process is typically tedious and repetitive and
includes such tasks such as flattening Adobe PhotoShop layers, filtering,
scaling, cropping, converting the color space, making the correct image format,
and transferring files to remote locations.
Creative professionals, whose time is both valuable and expensive, can
spend up to 70% of their time doing this post-creative work that does not
require their creative skills. As corporations move rapidly to place their
product images on the Web, the need for multiple copies of the same images, some
suited for print, some suited for the Web, becomes costly and very time
consuming. MediaBin relieves the creative professional of post-creative work and
moves it to automated processes on the MediaBin server. Organizations can
perform post-creative operations using a fraction of the time and effort.
REPURPOSING OF IMAGES. At its core, MediaBin is designed to enable universal
reuse, or REPURPOSING as is it called in the industry, of images so that one
image can serve the needs of any and all print or Web uses. Today, an image is
created for one specific use, then discarded. Any further use of that image
requires a complete re-work of the image from scratch. This approach is highly
inefficient when rapidly executing cross-media campaigns, where images must be
repurposed for use on the Web, in print ads, for store merchandising displays,
and even for billboards. MediaBin enables a highly efficient single image asset
approach, wherein a single image is captured, stored, and automatically
processed, so it can be used and then repurposed FOR ANY USE--on the Web, in
print ads, for store merchandising displays, and on billboards. This unique
approach is enabled by and automated through the MediaBin platform.
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TRACKING AND REVISION MANAGEMENT. One of the largest challenges facing
organizations with many images is tracking image usage and ensuring that the
images in use are the most current versions. Iterated has developed a
patent-pending method that provides automated tracking and revision of
DERIVATIVE images. Derivative images are images created from a single image
original (core asset) that are slightly different from the original to serve
different purposes. An example would be a small image needed on a Web site that
is created as a derivative of the original image that was used in a print
advertisement or catalog. MediaBin keeps track of the relationships between the
assets and derivatives, so that updates can be made automatically throughout an
entire collection of derivatives, simply by updating their common core asset.
Similarly, derivative images are tagged such that their parent core image source
can be located on MediaBin servers located anywhere--on a local network or on
the other side of the world across the Internet.
COLLABORATION FOR WORKGROUPS. As the global reach of brands and brand companies
expands, the need to rapidly and efficiently share brand images is increasing
dramatically. MediaBin is built to provide easy sharing and collaboration of
entire sets of images used in projects as well as single images or even a single
layer of multi-layered PhotoShop image file. MediaBin is designed to use highly
efficient compression methods to allow multiple MediaBin servers to share images
across geographically dispersed teams. MediaBin also uses a concept of
'just-in-time' image creation, where images are created only at the moment of
need. This not only provides significant savings in storage, but also insures
that the most current version of an image is used.
UNIQUE SEARCHING METHOD. To aid in the sharing and locating of images, MediaBin
has the ability to search for images in any local or remote MediaBin by image
metadata (the text information associated with an image) or by using images to
search for other like images based upon a match of color, texture, shape, and/or
content. This image searching method uses a unique, patented, fractal-based
image recognition algorithm and represents the third generation of work by
Iterated in the area of image only based searching.
IMAGE FORMAT INDEPENDENCE. The MediaBin platform is built so that all of the
MediaBin capabilities are available to all images entered into the MediaBin.
MediaBin is format independent (format agnostic) and can apply all the benefits
for the proprietary image technology without the burden of requiring users to
adopt a new image format into their workflow.
MEDIABIN MARKET SIZE AND OPPORTUNITY
The worldwide market for commercial publishing, which includes print
AND electronic-based media, generated approximately $260 billion in revenues in
1998. (GartnerGroup, "Commercial Publishing Transitions: A Blueprint Through
2002," C. Abrams, 1998). This huge market is undergoing dramatic and rapid
changes brought on by the substantial adoption of digital computer based methods
used to create, edit, distribute, and publish/print all types of media content.
The tumultuous effects of the Internet and Web based business are substantially
altering the traditional methods and workflows used to publish and distribute
media. The digital publishing tools that provided an efficient workflow in a
pre-Internet era just a few years ago are no longer sufficient to quickly and
efficiently handle the needs for cross-media publishing. These dramatic changes
have created a demand in the market for software solutions that can help deal
with the needs of both traditional print production and the explosive growth of
Web/e-commerce--the cross-media solution space.
So significant is this change that the GartnerGroup has characterized
this as "causing a revolution as great as that caused by Gutenberg's press." The
marketplace has responded to this need for improved productivity and cost
reductions by spending capital on automation products. The Delphi Group, a
leading industry analyst group, tracks a market known as Business to Business
(B2B) Tools. Within that grouping is a segment known as eContent - which
addresses the tools, like MediaBin needed to help corporations automate content
management and delivery. They expect the eContent segment to grow from $1.6
billions as of the end of 1999 to over $12.8 billions by 2002, a growth rate of
200%.
MEDIABIN SALES CHANNELS
The current sales model for MediaBin involves the license of MediaBin
to 'end users' or final, end customers for the MediaBin platform. This method,
known as a direct sales model, provides Iterated with the important direct
control over the entire sales process during the critical early stages of
product use in the market. This hands-on approach to the sale of the product
enables very important early market feedback to help define revisions and
improvements to the product.
During the initial launch period for the product, the sale of MediaBin
is typically being bundled with consulting and integration services. These
integration services are designed to ensure that the early MediaBin usage fits
well with the customer's existing workflows. As the MediaBin product matures in
the market, it is expected that the need for Iterated to provide these services
will diminish and result in the Company's ability to achieve more MediaBin
installations using fewer resources. At this time the direct selling model will
be augmented by expanding the sales channel to include a select set of System
Integration partners. These partners will add value in the sale of MediaBin
through services including integration into existing systems, training,
installation, and, potentially, total system support. In many cases the System
Integrators will sell the product directly to end users, but they may in some
cases act as aggregators and recommenders for the use of MediaBin to end users
in the market.
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Iterated has begun discussions with several partners and OEMs who are
considering the inclusion of MediaBin platform as an integral part of their
product. OEMs or Original Equipment Manufacturers resell other software products
by including or embedding those products into their own products. The lead-time
for the inclusion of products into OEM's products is typically long and revenue
associated with such relationships is very difficult to forecast. One such
product is the Media Asset Management (MAM) System. MAMs are computerized
storage and retrieval systems specifically designed for digital media.
COMPETITION
There are a few companies marketing products that perform some, but not
all, of the functions of the MediaBin Platform. These companies include Warp 10,
and Equilibrium.
The Digital Toolkit from Warp 10 is a media management system that
enables systems integrators, web developers and others to build applications to
manage their digital resources using a Digital Asset Management (DAM) system.
Since MediaBin reduces the number of files designers have to manage, and because
it enables more efficient archiving, MediaBin could be seen as a competitor of
Warp 10. However, MediaBin is really a complement to DAM systems. ISI recently
announced complimentary working relationships with a number of DAM vendors
(Canto and North Plains). DAM's track files, manage version control, and other
system-related issues, whereas MediaBin adds an ability to create any image form
needed by a client on demand and just-in-time image creation and delivery.
Equilibrium's DeBabelizer is an image conversion tool that enables
users to, among other tasks, scale images for different output. However,
DeBabelizer does not enable users to repurpose images automatically in many
different sizes while delivering the extremely high quality images clients
demand. DeBabelizer is also not an image storage or repository.
MAJOR CUSTOMERS
As discussed above, since the Company is refining its market to focus
on users of high quality digital imaging systems, its major customers in the
future will probably not be ones that have contributed significantly in the
past. A discussion of the contributions of major customers during 1996-1998 is
included in the footnotes to the Company's Financial Statements referred to in
Item 8 of this Form 10-K and incorporated by reference.
RESEARCH AND DEVELOPMENT/PATENTS
During 1997, 1998 and 1999, the Company has spent $8,261,000,
$5,237,000 and $4,891,000, respectively, in the research and development of new
technologies, refining and improving its technologies and the customization of
its technologies to the needs of specific customers. During 1996 and 1997, the
majority of these expenditures were made under the 1994 Agreement discussed
above. The Company expects that continued significant expenditures in this area
will be necessary to successfully introduce new products and improve its core
technology and no assurances can be made that these development efforts will be
successful.
Consistent with its emphasis on research and development, the Company
maintains an aggressive patent filing program. To date, the Company holds 20
issued U.S. patents with expiration dates from 2009-2017 and holds an exclusive
license to a seventh issued U.S. patent expiring in 2007.
The Company's patents and patent applications are intended to provide a
degree of patent protection of the Company's technology as applied to products
developed under the Company's Imaging Systems Architecture(TM) (ISA),
particularly as applied in the area of real time video codecs, store and forward
video codecs and still image codecs. The markets for these codecs are highly
competitive, and the Company believes that its research and development efforts
and resulting patents are essential to an effective market presence.
EMPLOYEES
The Company currently has approximately 50 full time employees based in
its offices in Atlanta, Georgia and Reading, England. The Company also makes
extensive use of independent contractors to fulfill short term specialized
needs.
ITEM 2. PROPERTIES.
The Company leases approximately 21,000 square feet of office space in
Atlanta, Georgia for its corporate, sales and development operations. The lease
runs through July 31, 2005.
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The Company also leases approximately 3,000 square feet of office space
near Reading, England. The lease runs through June 27, 2012 with an option to
terminate in June 2007. All of this space has been sublet for the term of the
lease.
The aggregate net monthly rental for these leased offices and
facilities is currently approximately $29,000, and the Company's management
believes that these facilities are adequate for its intended activities in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The nature of the Company's business exposes it to the risk of lawsuits
for damages or penalties relating to, among other things, breach of contract,
employment disputes and copyright, trademark or patent infringement. The Company
is not currently a party to any pending material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of Stockholders was held on October 28, 1999 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 the meeting and entitled to vote and voting for, against or
abstaining as to the matter.
To approve an amendment to Iterated's Articles of Incorporation to
increase the number of authorized shares of common stock, par value $.01 per
share, from 20,000,000 shares to 40,000,000 shares.
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Shares For Shares Against Shares Abstained
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7,674,384 2,835 0
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99.9% 0.1% 0.0%
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock has been traded on the Oslo Stock Exchange
under the symbol "ITR" since October 1,1997. Prior to that time there was no
established market for the shares. The Company has not registered any securities
with the United States Securities and Exchange Commission other than pursuant to
its Form S-8 Registration Statement filed on December 9, 1998. Securities of the
Company may not be offered for sale or sold in the U.S. or to or for the account
or benefit of any U.S. person unless the securities are registered or an
exemption from registration requirements is available.
The price per share reflected in the table below represents the range
of low and high closing sale prices for the Company's Common Stock as reported
by the Oslo Stock Exchange for the periods indicated:
FISCAL PERIOD HIGH PRICE LOW PRICE
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01/01/98 - 03/31/98 $ 9.24 $ 5.99
4/1/98 - 6/30/98 7.51 3.92
7/1/98 - 9/30/98 3.23 0.95
10/1/98 - 12/31/98 1.63 0.22
01/01/99 - 03/31/99 1.75 0.67
4/1/99 - 6/30/99 1.27 0.81
7/1/99 - 9/30/99 1.14 0.76
10/1/99 - 12/31/99 1.83 0.45
The closing sale price of the Company's Common Stock as reported by the
Oslo Stock Exchange on March 24, 2000, was U.S. $2.88.
The number of shareholders of record of the Company's Common Stock as
of February 29, 2000, was approximately 2,400.
The Company as of February 29, 2000, has options and warrants
outstanding to acquire 5,860,000 shares of Common Stock of the Company, of which
options and warrants as to 3,456,000 shares are currently exercisable.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain any earnings for use in the business and
does not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the section entitled "Summary
Consolidated Financial Data" on page 11 of the Company's 1999 Annual Report to
Shareholders is incorporated herein by reference and filed herewith as part of
Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth under the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 12 through 14 of the Company's 1999 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as a part of Exhibit 13.1.
RIGHTS OFFERING
From November 8, 1999 to November 19, 1999, the Company sold an
aggregate of 4,445,000 shares of Common Stock to its shareholders at $0.50 per
share pursuant to a rights offering ("Rights Offering").
Prior to the issuance and trading of the rights, pursuant to the Rights
Offering, certain U.S. shareholders did not receive a copy of the prospectus.
Therefore, it is possible that all applicable federal and state securities laws
were not complied with in all material respects. As a result, the Company
offered to those U.S. shareholders who purchased the Company's Common Stock
pursuant to the Rights Offering an opportunity to rescind their purchase. No
U.S. shareholders rescinded their purchase. The Company also extended the
effective date of the Rights Offering until January 28, 2000, for those U.S.
shareholders who did not receive a copy of the Prospectus prior to the issuance
and trading of rights. During this extended period an additional 7,600 shares
were sold at $0.50 per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Financial instruments that potentially subject the Company to
significant concentrations of market risk consist principally of short-term
investments, trade accounts receivable, and accounts payable.
ISL considers the British pound to be its functional currency. The
Company considers its functional currency to be the U.S. dollar. ISL's assets
and liabilities are translated at year-end rates of exchange and its revenues
and expenses are translated at the average rates of exchange during the year.
The Company believes that the potential effects of market risk is not
material to its operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The quarterly results of operations set forth on page 11 of the
Company's 1999 Annual Report to Shareholders and the following consolidated
financial statements, related notes thereto and report of independent auditors
set forth on pages 15 through 29 of the Company's 1999 Annual Report to
Shareholders are incorporated herein by reference and filed herewith as a part
of Exhibit 13.1.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is contained in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 1999 under the caption "Election of Directors" and
incorporated by reference herein.
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ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 1999 under the caption "Executive Compensation" and is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 1999 under the caption "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 1999 under the caption "Certain Transactions" and is
incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements of Iterated Systems, Inc. and reports of
independent auditors as set forth under Item 8 of this report on Form 10-K are
incorporated by reference herein.
2. Financial Statement Schedules
(i) The following Financial Statement Schedule of Iterated Systems,
Inc. for the Years Ended December 31, 1999, 1998 and 1997 is filed as a part of
this report on Form 10-K and should be read in conjunction with the Financial
Statements, and related notes thereto, of Iterated Systems, Inc.
ITERATED SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE
BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY
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Additions
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Balance at Charged to Charged to Balance at
Beginning Costs and Other End of Period
of Period Expenses Accounts Deductions
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Allowance for doubtful
accounts:
Year Ended:
December 31, 1999 $ 6 $ 24 $ 0 $ (25) $ 5
December 31, 1998 9 0 0 (3) 6
December 31, 1997 70 399 0 (460) 9
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of Period
of Period Expenses Accounts Deductions
------------- ----------------- ------------- -------------- --------------
Reserve for inventory obsolescence:
Year Ended:
-7-
<PAGE>
December 31, 1999 $ 0 $ 0 $ 0 $ 0 $ 0
December 31, 1998 0 0 0 0 0
December 31, 1997 581 0 0 (581) 0
Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of Period
of Period Expenses Accounts Deductions
------------- ----------------- ------------- -------------- --------------
Valuation allowance for deferred
income tax assets:
Year Ended:
December 31, 1999 $ 10,985 $ 3,169 $ 0 $ 0 $ 14,154
December 31, 1998 6,862 4,123 0 0 10,985
December 31, 1997 4,387 2,484 0 0 6,862
</TABLE>
(b) REPORTS ON FORM 8-K. None.
(c) EXHIBITS. The following exhibits are filed as part of, or are incorporated
by reference into, this report on Form 10-K:
-8-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of the Registrant
3.2* Restated Bylaws of the Registrant
4.1* Warrant for the Purchase of Shares of Common Stock of the Registrant
issued to Mosvold Farsund AS dated May 31, 1996
10.1* Loan Agreement between Mosvold Farsund AS and the Registrant, dated May
31, 1996, as amended June 30, 1997
10.2* Lease between California State Teachers' Retirement System and the
Registrant dated January 31, 1995 for premises situated at 3525
Piedmont Road, N.E., Seven Piedmont Center, Suite 600, Atlanta, Georgia
30305
10.3* Lease between T.A. Fisher & Sons Limited and Iterated Systems Limited
dated June 27, 1997 relating to land and office buildings forming Unit
No. 32 at Wellington Business Park, Dukes Ride, Crowthorne, Berkshire
10.4* Amended and Restated Executive Employment Agreement between the
Registrant and John C. Bacon, dated as of February 16, 1998
10.5* Executive Severance Agreement between the Registrant and John R. Festa,
dated February 16, 1998
10.6* Employment Agreement between the Registrant and Michael F. Barnsley,
dated May 1, 1994, as amended
10.7* Employment Agreement between the Registrant and Alan D. Sloan, dated
May 1, 1994, as amended
10.8* Iterated Systems, Inc. 1994 Amended and Restated Stock Option Plan
10.9* Iterated Systems, Inc. Amended and Restated 1994 Directors Stock Option
Plan
13.1 The following financial information included within the Company's
Annual Report to Shareholders for the fiscal year ended December 31,
1999:
(i) Summary Consolidated Financial Data;
(ii) Selected Quarterly Operating Results;
(iii) Management's Discussion and Analysis of Financial
Condition and Results of Operations; and
(iv) Financial Statements, Notes to Financial Statements, and
Independent Auditor's Report.
21* Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (SEC use only)
- ----------
* Incorporated by reference to Exhibits filed in response to Item 16(a),
"Exhibits" of the Company's Registration Statement on Form 10 (File No.
000-24087) filed on April 24, 1998, as amended.
(d) FINANCIAL STATEMENT SCHEDULES. None.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ John C. Bacon
--------------------------------------
John C. Bacon
President and Chief Executive Officer
(Principal Executive Officer) and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Bacon PRESIDENT, CHIEF EXECUTIVE March 29, 2000
-------------------------------- OFFICER; DIRECTOR (PRINCIPAL
John C. Bacon EXECUTIVE OFFICER)
/s/ Haines H. Hargrett CHIEF FINANCIAL OFFICER, March 29, 2000
-------------------------------- (PRINCIPAL FINANCIAL OFFICER;
Haines H. Hargrett PRINCIPAL ACCOUNTING OFFICER)
/s/ John R. Festa DIRECTOR AND VICE CHAIRMAN OF March 29, 2000
-------------------------------- THE BOARD OF DIRECTORS
John R. Festa
/s/ Terje Mikalsen DIRECTOR March 29, 2000
--------------------------------
Terje Mikalsen
/s/ Alan D. Sloan EXECUTIVE VICE PRESIDENT AND March 29, 2000
-------------------------------- DIRECTOR
Alan D. Sloan
/s/ Asmund R. Slogedal DIRECTOR AND CHAIRMAN OF THE March 29, 2000
-------------------------------- BOARD OF DIRECTORS
Asmund R. Slogedal
</TABLE>
-10-
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
ITERATED SYSTEMS, INC.
Pursuant to Sections 14-2-1001 and 14-2-1003 of the Georgia Business
Corporation Code, Iterated Systems, Inc. hereby amends and restates its Articles
of Incorporation in their entirety and substitutes the following in lieu
thereof:
The Amended and Restated Articles of Incorporation were adopted by the
Board of Directors and Shareholders on October 28, 1999.
ARTICLE ONE
NAME
The name of the corporation is Iterated Systems, Inc.
ARTICLE TWO
CAPITALIZATION
The corporation shall have authority, exercisable by its Board of
Directors, to issue up to 40,000,000 shares of common stock, $0.01 par value per
share.
ARTICLE THREE
LIMITATION ON DIRECTOR LIABILITY
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(i) any appropriation, in violation of the director's duties,
of any business opportunity of the corporation;
(ii) acts or omissions that involve intentional misconduct or
a knowing violation of law;
(iii) liability under Section 14-2-832 (or any successor
provision or redesignation thereof) of the Georgia Business Corporation
Code (the "Code"); and
(iv) any transaction from which the director received an
improper personal benefit.
If at any time the Code shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Code, as so amended, without further action
by the shareholders, unless the provisions of the Code, as amended, require
further action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article
Three shall not adversely affect the elimination or limitation of liability or
alleged liability pursuant hereto of any director of the corporation for or with
respect to any alleged act or omission of the director occurring prior to such a
repeal or modification.
IN WITNESS WHEREOF, the undersigned executes these Amended and Restated
Articles of Incorporation on October 28, 1999.
/s/ John C. Bacon
-----------------------------------
John C. Bacon
President & Chief Executive Officer
-11-
EXHIBIT 13.1
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands except per share data)
<TABLE>
<CAPTION>
<S> <C>
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues $ 14,430 $ 1,697 $ 753 $ 9,471 $ 15,558
Operating loss (8,226) (10,689) (6,551) (1,701) (612)
Net loss (8,059) (10,025) (6,329) (1,606) (509)
Basic and diluted net loss per share (0.61) (0.77) (0.56) (0.15) (0.05)
Weighted average shares outstanding 13,310 13,084 11,320 10,564 10,501
Cash and short-term investments 2,288 7,977 17,633 4,151 6,281
Total assets 3,353 9,084 19,775 7,487 10,032
Non-current liabilities 0 14 54 208 1,429
Stockholders' equity 2,547 8,518 18,716 3,211 2,514
SELECTED QUARTERLY OPERATING RESULTS
(in thousands except per share data)
QUARTER ENDED
--------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------- --------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- --------
Revenues $ 379 $ 151 $ 763 $ 405 $ 281 $ 153 $ 149 $ 170
Operating loss (2,229) (2,486) (1,745) (1,765) (3,037) (2,861) (2,653) (2,137)
Net loss (2,174) (2,420) (1,723) (1,743) (2,811) (2,670) (2,472) (2,042)
Basic and diluted net loss per share (0.17) (0.19) (0.13) (0.12) (0.21) (0.20) (0.19) (0.16)
Weighted average shares outstanding 13,073 13,073 13,073 14,025 13,106 13,084 13,073 13,073
</TABLE>
-12-
<PAGE>
ITERATED SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998, and 1997
CONTENTS
Report of Independent Auditors................................................14
Consolidated Balance Sheets...................................................15
Consolidated Statements of Operations.........................................16
Consolidated Statements of Shareholders' Equity and Comprehensive Loss........17
Consolidated Statements of Cash Flows.........................................18
Notes to Consolidated Financial Statements....................................19
-13-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Iterated Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Iterated Systems, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and comprehensive
loss and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Iterated Systems, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Atlanta, Georgia
February 23, 2000, except for Note 13
as to which the date is March 23, 2000
-14-
<PAGE>
ITERATED SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
DECEMBER 31
1999 1998
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,288,343 $ 3,706,070
Short-term investments -- 4,270,444
Accounts receivable, net of reserves for doubtful accounts
of $5,159 and $5,668, respectively 332,579 214,088
Subscription receivable from stockholder 255,000 --
Prepaid expenses and other assets 99,065 212,132
---------------------------
Total current assets 2,974,987 8,402,734
Property and equipment:
Computer equipment and purchased software 2,968,417 2,872,013
Furniture and equipment 388,900 390,158
Leasehold improvements 143,553 135,566
---------------------------
3,500,870 3,397,737
Accumulated depreciation and amortization (3,166,421) (2,761,119)
---------------------------
334,449 636,618
Other assets 43,567 44,699
---------------------------
TOTAL ASSETS $ 3,353,003 $ 9,084,051
============================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 258,359 $ 153,670
Accrued expenses 426,297 353,086
Deferred revenue 106,820 5,126
Current portion of capitalized lease obligations -- 4,874
Other liabilities 14,405 34,572
---------------------------
Total current liabilities 805,881 551,328
Non-current liabilities -- 14,405
Shareholders' equity:
Common stock, $.01 par value:
Authorized - 40,000,000;
Issued and outstanding - 17,520,340
and 13,073,025, respectively 175,204 130,730
Additional paid-in capital 31,805,681 29,806,036
Accumulated deficit (29,520,411) (21,461,546)
Currency translation adjustments 86,648 43,098
---------------------------
Total shareholders' equity 2,547,122 8,518,318
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,353,003 $ 9,084,051
============================
</TABLE>
SEE ACCOMPANYING NOTES.
-15-
<PAGE>
ITERATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Development and exclusive license fees $ 1,686,786 $ 671,161 $ 9,088,972
Software products 5,208 1,943 284,691
Other 5,373 80,000 97,500
---------------------------------------------------------------
1,697,367 753,104 9,471,163
Costs and expenses:
Costs of product revenues - - 128,392
Sales and marketing 3,495,132 4,172,443 4,993,471
Research and development 4,890,832 5,237,166 8,260,615
General and administrative 1,537,034 2,032,283 2,640,183
---------------------------------------------------------------
9,922,998 11,441,892 16,022,661
---------------------------------------------------------------
Operating loss (8,225,631) (10,688,788) ( 6,551,498)
Other income (expense):
Interest income 219,526 714,555 395,927
Interest expense ( 452) ( 16,287) ( 176,464)
Foreign currency exchange gain (loss) (52,308) (34,592) 2,986
---------------------------------------------------------------
166,766 663,676 222,449
---------------------------------------------------------------
Net loss $ (8,058,865) $ (10,025,112) $ ( 6,329,049)
===============================================================
Basic and diluted net loss per share of common stock
$ (0.61) $ (0.77) $ (0.56)
===============================================================
Weighted average shares outstanding -
basic and diluted 13,310,365 13,083,954 11,319,600
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
-16-
<PAGE>
ITERATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,714,600 $ 107,146 $ 8,193,984 $ (5,107,385) $ 17,484 $ 3,211,229
Comprehensive loss:
Net loss -- -- -- (6,329,049) -- (6,329,049)
Currency translation adjustment -- -- -- -- (8,640) (8,640)
Comprehensive loss
Initial public offering of stock, net of (6,337,689)
$1,821,000 of offering costs 2,040,000 20,400 18,558,746 -- -- 18,579,146
Conversion of note payable to stockholder to
common stock 300,000 3,000 2,997,000 -- -- 3,000,000
Issuance of common stock 2,600 26 25,974 -- -- 26,000
Exercise of stock options 44,825 448 132,211 -- -- 132,659
Compensation related to options for 570,200
shares of common stock -- -- 104,805 -- -- 104,805
-------------------------------------------------------------------------------
Balance at December 31, 1997 13,102,025 131,020 30,012,720 (11,436,434) 8,844 18,716,150
Comprehensive loss:
Net loss -- -- -- (10,025,112) -- (10,025,112)
Currency translation adjustment -- -- -- -- 34,254 34,254
Comprehensive loss (9,990,858)
Issuance of warrants -- -- 31,597 -- -- 31,597
Exercise of stock options 7,200 72 2,221 -- -- 2,293
Purchase and retirement of common stock (36,200) (362) (240,502) -- -- (240,864)
-------------------------------------------------------------------------------
Balance at December 31, 1998 13,073,025 130,730 29,806,036 (21,461,546) 43,098 8,518,318
Comprehensive loss:
Net loss -- -- -- (8,058,865) -- (8,058,865)
Currency translation adjustments -- -- -- -- 43,550 43,550
Comprehensive loss (8,015,315)
Exercise of stock options 2,500 25 771 -- -- 796
Rights offering of stock, net of $179,000 of
offering costs 4,444,815 44,449 1,998,874 -- -- 2,043,323
-------------------------------------------------------------------------------
Balance at December 31, 1999 17,520,340 $ 175,204 $ 31,805,681 $(29,520,411) $ 86,648 $ 2,547,122
===============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
-17-
<PAGE>
ITERATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (8,058,865) $ (10,025,112) $ (6,329,049)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 417,374 863,782 1,468,109
Gain on sales of property and equipment (6,006) (13,181) (180)
Compensatory stock options - - 104,805
Issuance of warrants - 31,597 -
Foreign currency transaction (gain) loss 52,308 34,592 (2,986)
Changes in operating assets and liabilities:
Accounts receivable (118,491) 281,579 ( 84,561)
Prepaid expenses and other assets 114,199 156,660 256,207
Accounts payable 104,689 (52,651) (102,219)
Accrued expenses 73,211 (286,375) (234,842)
Deferred revenue 101,694 - (2,552,000)
Other liabilities (34,572) (34,572) (34,572)
---------------------------------------------------------------
Net cash used in operating activities (7,354,459) (9,043,681) (7,511,288)
INVESTING ACTIVITIES
Purchases of property and equipment (114,441) (294,037) (445,971)
Proceeds from sale of property and equipment 8,620 39,574 400
(Purchases) sales of short-term investments 4,270,444 5,728,976 (9,999,420)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 4,164,623 5,474,513 (10,444,991)
FINANCING ACTIVITIES
Proceeds from note payable to stockholder - - 3,000,000
Payments on note payable to bank - (80,784) (138,487)
Principal payments on capital lease obligations ( 4,874) (38,829) (160,710)
Net proceeds from initial public offering of common
stock - - 18,579,146
Issuance of common stock 1,789,119 2,293 158,659
Repurchase of common stock - (240,864) -
---------------------------------------------------------------
Net cash provided by (used in) financing activities 1,784,245 (358,184) 21,438,608
Effect of exchange rate fluctuation on cash (12,136) 139 120
---------------------------------------------------------------
Change in cash and cash equivalents (1,417,727) (3,927,213) 3,482,449
Cash and cash equivalents at beginning of year 3,706,070 7,633,283 4,150,834
---------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,288,343 $ 3,706,070 $ 7,633,283
===============================================================
NON-CASH ITEMS
Issuance of common stock in return for subscription
receivable $ 255,000 $ - $ -
===============================================================
Conversion of proceeds on note payable to stockholder
to common stock $ - $ - $ 3,000,000
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
-18-
<PAGE>
ITERATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Iterated Systems, Inc. (the "Company") develops and markets MediaBin, a
cross media image production platform, to users of high quality digital image
systems needing innovative, high performance solutions that make workflows
faster and more efficient. The Company's patented technologies are based upon
its research and development expertise in digital image science and
fractal-based mathematics that have evolved over more than twelve years
experience.
As shown in the financial statements, the Company incurred a net loss
of $8,059,000 in 1999 and has an accumulated deficit of $29,520,000 at December
31,1999.
The Company used cash in operating activities of $7,354,000 in 1999 and
$9,044,000 in 1998. The funding of the Company's operations was generated
primarily by the proceeds of the September 1997 and November 1999 stock and
rights offerings and has enabled the Company to meet its obligations despite
negative cash flows. However, the Company may not be able to depend solely on
existing funds to meet its planned obligations during 2000. 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 and or debt capital in order to fund operations (see Note
13). 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned United Kingdom subsidiary, Iterated Systems Limited
("ISL"). Significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as held-to-maturity
and are stated at cost. These investments mature within one year and the
carrying amounts reported in the balance sheets for these investments
approximate their fair values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization expense is calculated over the estimated useful lives of the
related assets (three to seven years) using the straight-line method for
financial reporting purposes. Amortization of assets recorded under capital
leases is included with depreciation and amortization expense.
ADVERTISING COSTS
Advertising costs are expensed in the period incurred. Such costs
amounted to $6,700, $23,000, and $132,000 during 1999, 1998, and 1997,
respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period
incurred.
-19-
<PAGE>
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards ("SFAS") No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based upon the Company's
software development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between completion
of a working model and the point at which the product is ready for general
release have been insignificant.
SOFTWARE REVENUE RECOGNITION
The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position ("SOP") 97-2, SOP 98-4, and SOP 98-9 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.
Development fees are 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 development agreements or contracts. Exclusive license
fees are recognized over the exclusivity period, if applicable.
Revenues from the sale of hardware and packaged software products are
recognized upon the shipment of the products to the customers.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Such amounts are
measured using enacted tax rates and corresponding laws that are expected to be
in effect when the differences reverse.
FOREIGN CURRENCY TRANSLATION
ISL considers the British pound to be its functional currency. The
Company considers its functional currency to be the US dollar. ISL's assets and
liabilities are translated at year-end rates of exchange and its revenues and
expenses are translated at the average rates of exchange during the year.
Gains and losses resulting from currency translation are accumulated as
separate components of shareholders' equity and comprehensive loss. Gains and
losses resulting from foreign currency transactions are included in the
determination of net loss.
STOCK BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("SFAS 123"),
sets forth accounting and reporting standards for stock based employee
compensation plans. As permitted by SFAS 123, the Company accounts for stock
option grants in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations ("APB 25"). Under APB 25, no
compensation expense is recognized for stock options granted to employees at
fair market value.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SFAS 128 which
requires disclosure of basic and diluted earnings per share. Basic earnings per
share exclude any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share include the impact of potentially
dilutive securities. The Company's potentially dilutive securities were
anti-dilutive and therefore were not included in the computation of diluted loss
per share.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 Financial Accounting Standards Board (FASB) 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 adopted SFAS 131 in 1998, and
the effect of the adoption was not material to the consolidated financial
statements (see Note 8).
-20-
<PAGE>
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 FASB 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.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 financial statements to
conform to the 1998 presentation.
2. FINANCIAL INSTRUMENTS
Financial instruments which 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 balances are in excess of Federal
Deposit Insurance Corporation 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.
3. LONG-TERM DEBT AND CREDIT FACILITY
On May 31, 1996 (amended June 30, 1997), the Company entered into a
Bridge Financing Credit Facility (the "Credit Facility") with one of its
shareholders (the "Lender"). The Credit Facility allowed the Company to borrow
up to $6,000,000 at prime plus 1% (9.5% at December 31, 1997) from the Lender
until June 30, 1998, without collateral. On June 9, 1997, the Company borrowed
$3,000,000 under the Credit Facility. On October 31, 1997, the Lender exercised
the option to convert those borrowings into 300,000 shares of the Company's
common stock at $10 per share. The Company paid the Lender $112,000 in interest
on the outstanding borrowings during 1997 and commitment fees on amounts not
borrowed of $26,000 and $9,000 for 1997 and 1998, respectively. No further
borrowings occurred and the Credit Facility expired on June 30, 1998.
In addition, the Lender received a warrant to purchase 100,000 shares of the
Company's common stock at $10 per share. The warrant expired on May 31, 1999.
4. OPERATING LEASES
The Company leases certain office equipment and office space under
noncancellable agreements. The office equipment lease provides for an extension
of the lease term at fair rental value or a purchase option at fair market
value. One of the office space leases provides for a five-year extension through
2005 with rent escalation clauses linked to the Consumer Price Index. Subsequent
to year-end the Company exercised this extension. Rent expense under all
operating leases approximated $511,000, $643,000, and $695,000 during 1999,
1998, and 1997, respectively.
Future minimum lease payments under noncancellable operating leases,
with initial lease terms of at least one year at the time of inception, are as
follows at December 31, 1999:
2000 $ 602,000
2001 477,000
2002 477,000
2003 477,000
2004 and after 1,357,000
----------------------
3,390,000
Less: rental income from subleases (237,000)
----------------------
$ 3,153,000
======================
-21-
<PAGE>
5. SIGNIFICANT CONTRACTS
In 1994, the Company entered into a Development and License Agreement
(the "1994 Agreement") with a major international telecommunications company
(the "Licensee") to provide for further development of certain advanced
compression technology for use in telecommunications applications. The Licensee
supplied significant funding for development and had certain exclusive rights
until September 1997 for specified modules in telecommunications markets. During
1997, the Company recognized $5,752,000 in development fee revenues and
$1,350,000 in exclusive license fee revenues under the contract. Except for
certain provisions, notably with respect to the continuing licensing of specific
technology components referred to above, the Agreement expired in September
1997.
The Company and Licensee entered into a new agreement on August 7,
1998, that cancelled the 1994 Agreement and provides the Licensee with rights to
certain deliverables as defined in the agreement. Additionally, the Company
granted the Licensee warrants to purchase up to 1,453,000 shares of common
stock. The warrants expire four years from the issue date, were exercisable at
$5 per share, and had an appraised value of $32,000, for which the Company
recorded a charge to earnings. In conjunction with the Company's Rights Offering
discussed below, as required by the new agreement, the exercise price of the
warrants was reduced to $4 per share, and the number of shares that can be
purchased was increased to 1,798,000, and the expiration date was unchanged. The
warrants have not been exercised as of December 31, 1999.
6. COMMON STOCK
INITIAL PUBLIC OFFERING
On September 30, 1997, the Company sold 2,040,000 shares of common
stock in an initial public offering at $10.00 per share on the Oslo Stock
Exchange.
The Company has not registered any securities with the United States
Securities and Exchange Commission other than shares registered under Form S-8
for the Company's stock option plans. Securities of the Company may not be
offered for sale or sold in the United States, or to or for the account or
benefit of any "US person" unless the securities are registered or an exemption
from the registration requirements is available.
STOCK SPLIT
On September 2, 1997: (a) the Company's Board of Directors agreed to
effect a 100 for 1 stock split in the form of a stock dividend and to increase
the number of authorized shares of common stock from 10,000,000 shares to
20,000,000 shares, effective September 3, 1997; and (b) the Company's
shareholders approved such Board actions. All share and per share amounts have
been adjusted in the accompanying consolidated financial statements to reflect
such stock split.
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.
7. STOCK OPTION PLANS
The Company's 1994 Amended and Restated Stock Option Plan (the "Plan")
provides for the granting of either incentive or nonqualified options to
employees of the Company or key persons as defined by the Plan. The terms and
conditions of options granted under the Plan, including the number of shares,
the exercise price and the time at which such options become exercisable are
determined by the Board of Directors, but the term may not exceed 10 years.
The Company granted options as to 495,000, 3,143,000, and 553,000
shares under the Plan during 1999, 1998, and 1997, respectively, at exercise
prices ranging from $1 to $10 per share. Options as to 708,000 shares granted in
1994 resulted in $80,000 of compensation expense during 1997. This expense is
recorded over the vesting period and relates to the aggregate difference between
the estimated fair market value of the shares at the date of the grant and the
exercise price.
-22-
<PAGE>
At December 31, 1999, options as to 1,039,000 shares are available for
future grants under the Plan and the Company has reserved 4,291,000 shares for
issuance under the plan.
The Company's Directors Stock Option Plan provides for the grant of up
to 180,000 shares of common stock to non-employee directors. Options granted
under this plan vest over a three-year period. The Company granted options as to
15,000 shares at an exercise price of $10 per share in 1994 that resulted in
$25,000 of compensation expense during 1997. This expense is recorded over the
vesting period and relates to the aggregate difference between the estimated
fair market value of the shares at the date of the grant and the exercise price.
The Company has reserved 180,000 shares for issuance under this plan at December
31, 1999.
During 1998, options to purchase 1,758,000 shares of common stock were
canceled and reissued and options to purchase 40,000 shares of common stock were
repriced to lower prices.
A summary of stock option activity under both of the above-described
plans follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE WEIGHTED
SHARES PER SHARE AVERAGE PRICE
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at December 31, 1996 2,129,000 $0.32 - 10.00 $ 6.29
Options granted 553,000 7.40 - 10.00 9.42
Options exercised (45,000) 0.32 - 8.00 2.96
Options forfeited (634,000) 0.32 - 10.00 7.79
--------------------------------------------
Outstanding options at December 31, 1997 2,003,000 0.32 - 10.00 6.76
Options granted 3,143,000 2.00 - 7.48 5.12
Options exercised (7,000) 0.32 - 0.32 0.32
Options forfeited (177,000) 4.50 - 10.00 6.85
Options canceled (1,758,000) 4.50 - 10.00 7.77
--------------------------------------------
Outstanding options at December 31, 1998 3,204,000 0.32 - 8.00 4.40
Options granted 495,000 1.00 - 2.00 1.99
Options exercised (3,000) 0.32 - 0.32 0.32
Options forfeited (404,000) 2.00 - 6.00 4.58
--------------------------------------------
Outstanding options at December 31, 1999 3,292,000 $0.32 - 8.00 $ 4.22
============================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL NUMBER EXERCISE
PRICES OUTSTANDING LIFE EXERCISABLE PRICE
------ ----------- ---- ----------- -----
<S> <C> <C> <C> <C>
$ 0.32 2,000 3 2,000 $ 0.32
1.00-2.00 977,000 9 205,000 2.00
4.50-5.00 1,999,000 7 1,125,000 4.90
6.00-8.00 314,000 3 314,000 6.56
--------- ---- --------- ------
Total 3,292,000 7 1,646,000 $ 4.85
========= ==== ========= ======
</TABLE>
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
-23-
<PAGE>
Pro forma information regarding net income is required by Statement
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method. The fair values for these options were
estimated at the dates of grant using the minimum value method prior to the
Company's Initial Public Offering in September 1997 and the Black-Scholes method
thereafter, with the following weighted-average assumptions for 1999, 1998, and
1997; risk-free interest rates of 5.40%, 5.07%, and 6.20%, respectively; no
dividend yield; volatility of 3.33 in 1999, .740 in 1998, .01 prior to the
effective date of the Company's Initial Public Offering in September 1997, and
.421 for the remainder of 1997; and a weighted-average expected life of 6 years.
For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' vesting periods. The
Company's pro forma net loss, assuming Statement 123 had been adopted, would
have been approximately $8,742,000, $11,232,000, and $6,755,000 during 1999,
1998, 1997, respectively. The Company's pro forma net loss per share, assuming
Statement 123 had been adopted, would have been, $0.66, $0.86, and $0.60 during
1999, 1998, 1997, respectively.
The weighted-average fair values of options granted for the years ended
December 31, 1999, 1998, and 1997 were $0.95, $2.01, and $2.90, respectively.
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect was not fully reflected until 1999.
8. SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, 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 from external customers, 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 products.
The net assets of foreign operations exclude intercompany accounts
payable to the Company (for which settlement is not planned or anticipated in
the foreseeable future).
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31
1999 1998 1997
------------ ------------ ------------
Operating revenue
United States $ 1,680,000 $ 750,000 $ 9,425,000
United Kingdom 17,000 3,000 46,000
------------ ------------ ------------
Total $ 1,697,000 $ 753,000 $ 9,471,000
============ ============ ============
Net loss
United States $ 7,467,000 $ 9,371,000 $ 5,511,000
United Kingdom 592,000 654,000 818,000
------------ ------------ ------------
Total $ 8,059,000 $ 10,025,000 $ 6,329,000
============ ============ ============
Identifiable assets, net
United States $ 2,646,000 $ 8,630,000 $ 18,550,000
United Kingdom (99,000) (112,000) 166,000
------------ ------------ ------------
Total $ 2,547,000 $ 8,518,000 $ 18,716,000
============ ============ ============
</TABLE>
9. MAJOR CUSTOMERS
Several customers of the domestic operating segment comprised a
significant portion of consolidated revenues in each year. During 1999, revenues
from a government agency, a major automobile manufacturer, and a video
transmission company contributed $224,000, $373,000, and $600,000, respectively.
During 1998, revenues were derived from sales to a government agency and from
two different software development companies in the amounts of $478,000,
$105,000, and $72,000, respectively. During 1997, $7,102,000 in revenues was
recognized from a major international telecommunications company (as discussed
in Note 5), and $1,043,000 was recognized from a foreign satellite transmission
company.
10. SIGNIFICANT EMPLOYMENT AGREEMENTS
In 1994, the Company entered into an employment agreement of an
indefinite term with one of its founders, who currently serves as Executive Vice
President. The agreement provides for: (a) a grant of stock
-24-
<PAGE>
options; (b) ongoing annual base salary; and (c) salary continuation rights in
the event of employment termination under certain circumstances.
In December 1997, the Company restated the employment agreement with
its then President and Chief Executive Officer. The restated agreement
acknowledges his request to relinquish the President and Chief Executive Officer
titles and to become the Vice-Chairman of the Company's Board of Directors
together with: (a) a reduction of base salary to reflect his advisory role; (b)
an additional grant of 124,000 stock options; and (c) a performance-based cash
bonus in the amount of $150,000 which was paid in 1997. The restated agreement
also provides for the immediate vesting of options as to 706,000 shares of
common stock previously granted and the forfeiture of options as to 218,000
shares of common stock previously granted.
In February 1998, the Company entered into an employment agreement with
its new President and Chief Executive Officer. The agreement provides for: (a)
granting of immediate stock options; (b) granting of additional stock options
under certain circumstances; (c) granting of cash bonuses under certain
circumstances; and (d) salary continuation rights for 18 months in the event of
termination of employment under certain circumstances. There were no charges to
expense for bonuses or additional grants of stock options under this agreement
in 1999 or 1998.
11. INCOME TAXES
The Company and ISL file income tax returns in the United States and
the United Kingdom, respectively.
At December 31, 1999, and December 31, 1998, the Company has net
operating loss carryforwards in the United States of $28,234,000 and
$20,992,000, respectively, which begin expiring in 2007. In addition, at
December 31, 1999, and December 31, 1998, the Company has $1,237,000 and
$1,087,000, respectively, of research and development credits available for
offset against future United States income taxes which also begin expiring in
2007. The utilization of net operating loss carryforwards to offset future
taxable income may be limited in the event of any future changes in ownership of
the Company.
At December 31, 1999, and December 31, 1998, ISL has net operating loss
carryforwards in the United Kingdom of (pound)2,418,000 ($3,997,000) and
(pound)2,052,000 ($3,405,000), respectively, which are available for offset
against future United Kingdom taxable income.
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.
-25-
<PAGE>
The Company's deferred income tax liabilities and assets are as
follows:
DECEMBER 31
1999 1998
-------------------------
Deferred income tax liabilities:
Prepaid insurance $ 20,000 $ 14,000
-------------------------
Total deferred income tax liabilities 20,000 14,000
Deferred income tax assets:
Book over tax depreciation 230,000 255,000
Research and development credits 1,237,000 1,087,000
Allowance for bad debts 2,000 2,000
Net operating loss carryforwards-U.S 10,718,000 7,965,000
Net operating loss carryforwards-U.K 1,519,000 1,294,000
Contribution carryover 11,000 5,000
Compensatory stock options 250,000 250,000
Deferred revenue 41,000 2,000
Alternative minimum tax credit 115,000 115,000
Bonuses 20,000 24,000
Vacation accrual 19,000 --
Foreign exchange gain/loss 12,000 --
-------------------------
Total deferred income tax assets 14,174,000 10,999,000
Valuation allowance for deferred income tax assets 14,154,000 10,985,000
-------------------------
Net deferred income tax assets 20,000 14,000
-------------------------
Net deferred income taxes $ -- $ --
=========================
A reconciliation of the provision for income taxes to the federal statutory rate
is as follows:
1999 1998 1997
----------- ----------- -----------
Tax at statutory rate $(2,740,000) $(3,409,000) $(2,152,000)
State taxes, net of federal benefit (319,000) (401,000) (253,000)
Permanent differences and other (110,000) (313,000) (79,000)
Valuation allowance 3,169,000 4,123,000 2,484,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
12. RETIREMENT PLAN
The Company maintains a defined contribution plan (the "401(k) Plan")
covering all employees. The Company makes matching contributions equal to 50% of
eligible employees' contributions up to 4% of the employee's compensation,
increased to 6% effective June 1, 1998. The Company expensed $98,000, $100,000,
and $100,000 during 1999, 1998, and 1997, respectively, related to this plan.
13. SUBSEQUENT EVENT
On March 23, 2000, the Company entered into a loan agreement with a
company controlled by a member of its Board of Directors under which the Company
borrowed $2,000,000 for a term of four years. The terms of the loan call for the
Company to pay interest at the rate of prime plus 1%. Principal payments of
$167,000 begin June 2001 and are to be paid quarterly through March 2004. In the
event that the Company successfully completes a private placement or public
offering of common stock greater than $2,000,000, then the lender shall convert
the outstanding balance of the loan into shares of common stock at a discount of
25% from the offering price.
-26-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Iterated Systems, Inc. of our report dated February 23, 2000, except for Note
13 as to which the date is March 23, 2000, included in the 1999 Annual Report to
Stockholders of Iterated Systems, Inc.
Our audits also included the financial statement schedule of Iterated Systems,
Inc. listed in Item 14(a). This schedule is the responsibility of Iterated
Systems, Inc.'s management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-68593) pertaining to the 1994 Amended and Restated Directors
Stock Option Plan and the 1994 Amended and Restated Stock Option Plan of
Iterated Systems, Inc. of our report dated February 23, 2000, except for Note 13
as to which the date is March 23, 2000, with respect to the consolidated
financial statements of Iterated Systems, Inc. incorporated herein by reference,
and our report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report on Form 10-K for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
---------------------
Atlanta, Georgia
March 27, 2000
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,288,343
<SECURITIES> 0
<RECEIVABLES> 337,738
<ALLOWANCES> 5,159
<INVENTORY> 0
<CURRENT-ASSETS> 2,974,987
<PP&E> 3,500,870
<DEPRECIATION> 3,166,421
<TOTAL-ASSETS> 3,353,003
<CURRENT-LIABILITIES> 805,881
<BONDS> 0
0
0
<COMMON> 175,204
<OTHER-SE> 2,371,918
<TOTAL-LIABILITY-AND-EQUITY> 3,353,003
<SALES> 5,208
<TOTAL-REVENUES> 1,697,367
<CGS> 0
<TOTAL-COSTS> 4,890,832
<OTHER-EXPENSES> 5,032,166
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 452
<INCOME-PRETAX> (8,058,865)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,058,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,058,865)
<EPS-BASIC> (.61)
<EPS-DILUTED> (.61)
</TABLE>
