10-Q 1 a2045565z10-q.txt FORM 10-Q 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: FEBRUARY 28, 2001 ----------------- [ ] 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: 0-14779 ------- MEDIA 100 INC. --------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2532613 --------------------------------- ------------------------------ (State or other jurisdiction (I.R.S. Employer of organization or incorporation) Identification Number) 290 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS ----------------------------------------- (Address of principal executive offices) 01752-4748 ----------------------------------------- (Zip code) (508) 460-1600 ----------------------------------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, PAR VALUE $.01 PER SHARE 12,368,236 SHARES -------------------------------------- ------------------------------- Class Outstanding at March 31, 2001 MEDIA 100 INC. INDEX TO FORM 10-Q PAGE NUMBER PART I - FINANCIAL INFORMATION ------ ITEM 1 Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, 2001 and November 30, 2000 3 Consolidated Statements of Operations for the three months ended February 28, 2001 and February 29, 2000 4 Consolidated Statements of Cash Flows for the three months ended February 28, 2001 and February 29, 2000 5 Notes to Consolidated Financial Statements 6 - 13 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 20 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 21 PART II - OTHER INFORMATION ITEM 1 Legal Proceedings 22 ITEM 6 Exhibits and Reports on Form 8-K 23 SIGNATURES 24 EXHIBIT INDEX 25 2 PART I - FINANCIAL INFORMATION MEDIA 100 INC. CONSOLIDATED BALANCE SHEETS (in thousands)
(unaudited) February 28, November 30, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 11,609 $ 11,987 Marketable securities 593 5,674 Accounts receivable, net of allowance for doubtful accounts of $3,172 in 2001 and $3,812 in 2000 7,404 8,619 Inventories 4,226 4,314 Prepaid expenses and other current assets 1,258 1,180 --------- --------- Total current assets 25,090 31,774 Property and equipment, net 5,946 6,056 Intangible assets, net 6,314 8,316 Other assets, net 1,118 1,245 --------- --------- Total assets $ 38,468 $ 47,391 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,015 $ 4,561 Accrued expenses 7,397 8,231 Note payable - 1,492 Deferred revenue 4,960 5,272 --------- --------- Total current liabilities 14,372 19,556 Contingencies (Note 9) - - Stockholders' equity: Preferred stock - - Common stock 126 123 Capital in excess of par value 217,402 217,182 Accumulated deficit (193,376) (189,380) Accumulated other comprehensive loss (56) (90) --------- --------- Total stockholders' equity 24,096 27,835 --------- --------- Total liabilities and stockholders' equity $ 38,468 $ 47,391 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 MEDIA 100 INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended February 28, February 29, 2001 2000 ------------ ------------ Net sales: Products $ 11,317 $ 15,655 Services 2,532 2,265 --------- --------- Total net sales 13,849 17,920 Cost of sales 5,596 7,536 --------- --------- Gross profit 8,253 10,384 --------- --------- Operating expenses: Research and development 3,882 3,648 Selling and marketing 4,872 5,127 General and administrative 1,909 2,552 Amortization and write-down of intangible assets 2,006 273 Acquired in-process research and development - 470 --------- --------- Total operating expense 12,669 12,070 --------- --------- Operating loss (4,416) (1,686) Interest income, net 106 316 Other income (expense), net 314 (19) --------- --------- Loss before tax provision (3,996) (1,389) Tax provision - 30 --------- --------- Net loss $ (3,996) $ (1,419) ========= ========= Basic loss per share $ (0.32) $ (0.12) ========= ========= Diluted loss per share $ (0.32) $ (0.12) ========= ========= Weighted average common and potential common shares outstanding: Basic 12,333 11,700 ========= ========= Diluted 12,333 11,700 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 MEDIA 100 INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended February 28, February 29, 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,996) $ (1,419) Adjustments to reconcile net loss from operations to net cash used in operating activities: Depreciation and amortization 876 884 Non-cash interest expense - 17 Acquired in-process research and development 470 Amortization and write-down of acquisition-related intangible assets 2,006 275 Loss on sale of marketable securities 15 - Changes in assets and liabilities, excluding effects of acquisition: Accounts receivable 1,215 (61) Inventories 88 (1,926) Prepaid expenses and other current assets 49 (715) Accounts payable (2,546) 221 Accrued expenses (834) (1,170) Deferred revenue (312) (82) --------- ---------- Net cash used in operating activities (3,439) (3,506) --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Wired, Inc., net of cash acquired - (1,487) Net purchases of equipment (729) (599) Purchase of intangible assets (42) (103) Net proceeds from sales of marketable securities 5,067 83 --------- ---------- Net cash provided by (used in) investing activities 4,296 (2,106) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of note payable (1,492) - Proceeds from issuance of common stock pursuant to stock plans 223 1,695 --------- ---------- Net cash (used in) provided by financing activities (1,269) 1,695 --------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 34 1 NET DECREASE IN CASH OF DIGITAL ORIGIN, INC. FOR THE TWO MONTHS ENDED NOVEMBER 30, 1999 - (1,483) --------- ---------- NET DECREASE IN CASH AND CASH EQUIVALENTS (378) (5,399) CASH AND CASH EQUIVALENTS, beginning of period 11,987 13,858 --------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 11,609 $ 8,459 ========= ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes 7 2 ========= ========== OTHER TRANSACTIONS NOT USING CASH: Change in value of marketable securities 46 (103) ========= ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES : In connection with the acquisition of Wired, Inc., the following non-cash transaction occurred: Fair value of assets acquired - $ 3,180 Cash paid for acquisition and acquisition costs - 1,487 --------- ---------- Note payable and liabilities assumed - $ 1,693 ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 5 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) 1. Basis of Presentation The accompanying interim consolidated financial statements include the accounts of Media 100 Inc. ("the Company"), a Delaware corporation, and its wholly owned subsidiaries. The interim financial statements are unaudited. However, in the opinion of management, the interim consolidated financial statements and disclosures reflect all adjustments necessary for fair presentation. Interim results are not necessarily indicative of results expected for a full year or for any other interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest audited financial statements, which are included in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2000, filed with the Securities and Exchange Commission. The Company's preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company designs and sells software applications, systems (comprising software and hardware) and services (for encoding and hosting digital media) that allow Internet-based ("online") and traditional broadcasters, corporate marketing professionals and educators to create and deliver high-quality video programs as either traditional media or Internet-compatible streams ("streaming media"). 2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances. These consolidated financial statements reflect the use of the following significant accounting policies, as described below and elsewhere in the notes to the consolidated financial statements. These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. 6 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 3. Acquisitions DIGITAL ORIGIN, INC. On May 9, 2000, the Company completed its merger with Digital Origin, Inc. (Digital Origin). Under the terms of the agreement, Digital Origin's shareholders and option holders received 0.5347 equivalent shares, or approximately 3.7 million Media 100 common shares, to effect the business combination. The transaction has been accounted for as a pooling of interests. As a result, all periods presented have been restated to reflect the combined operations of the two companies. As part of the transaction, the Company incurred direct, merger-related costs of approximately $2.0 million, consisting primarily of investment banking fees, legal and accounting fees. All such costs were expensed in the quarter ended May 31, 2000, upon consummation of the Digital Origin merger. Separate and combined results of Media 100 and Digital Origin during the period preceding the merger were as follows (in thousands):
Digital Media 100 Origin Eliminations Combined --------- -------- ------------ -------- Three Months Ended February 29, 2000 (a) ---------------------------------------- Net sales $ 14,482 $ 3,576 $ (138) $17,920 Net loss 108 (1,435) (92) (1,419)
(a) Digital Origin results represent December 1, 1999 through February 29, 2000. 7 4. Cash Equivalents and Marketable Securities Cash equivalents are carried at cost, which approximates market value, and have original maturities of less than three months. Cash equivalents include money market accounts and repurchase agreements with overnight maturities. Approximately $0.5 million of the cash and cash equivalents were restricted under various letters of credit at February 28, 2001. The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under this standard, the Company is required to classify all investments in debt and equity securities into one or more of the following three categories: held-to-maturity, available-for-sale or trading. Available-for-sale securities are recorded at fair market value with unrealized gains and losses excluded from earnings and included as a component of stockholders' equity. All of the Company's marketable securities are classified as available-for-sale. Marketable securities held as of February 28, 2001 and November 30, 2000 consist of the following (in thousands):
Investments available for sale: Maturity February 28, November 30, 2001 2000 ------------ ------------ U.S. Treasury Notes less than 1 year $ - $ 509 U.S. Treasury Notes 1 - 5 years - 2,030 -------- ------- Total U.S. Treasury Notes - 2,539 U.S. Agency Bonds less than 1 year - 507 -------- ------- Total U.S. Agency Bonds 507 Money Market Instruments less than 1 year 122 1,044 Corporate Obligations less than 1 year 75 1,116 Corporate Obligations 1 - 5 years 518 1,512 -------- ------- Total Corporate Obligations 593 2,628 Total investments available for sale 715 6,718 Less: cash and cash equivalents (122) (1,044) -------- ------- Total marketable securities $ 593 $ 5,674 ======== =======
Marketable securities had a cost of $591 and $5,718, and a market value of $593 and $5,674 at February 28, 2001 and November 30, 2000, respectively. To adjust the carrying amount of the February 28, 2001 and November 30, 2000 marketable securities portfolio to market value, unrealized losses have been reflected as a component of accumulated other comprehensive loss in stockholders' equity pursuant to the provisions of SFAS No. 115. 5. Inventories Inventories are stated at the lower of first-in, first-out (FIFO) cost or market and consist of the following (in thousands):
February 28, November 30, 2001 2000 ------------ ------------ Raw materials $ 2,321 $ 2,814 Work-in-process 1,202 733 Finished goods 703 767 --------- ------- $ 4,226 $ 4,314 ========= =======
Work-in-process and finished goods inventories include material, labor and manufacturing overhead. Management performs periodic reviews of inventory and disposes of items not required by their manufacturing plan. 8 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 6. Property and Equipment, net Property and equipment, net, is stated at cost, less accumulated depreciation and amortization, and consists of the following (in thousands):
February 28, November 30, 2001 2000 ------------ ------------ Machinery and equipment $ 13,755 $ 13,308 Purchased software 6,052 6,062 Furniture and fixtures 1,766 1,733 Vehicles 9 9 Leasehold improvements 1,685 1,618 --------- --------- $ 23,267 $ 22,730 Less accumulated depreciation and amortization (17,321) (16,674) --------- --------- $ 5,946 $ 6,056 ========= =========
7. Intangible Assets Intangible assets consist of the following as of February 28, 2001 and November 30, 2000 (in thousands):
February 28, November 30, 2001 2000 ------------ ------------ Patents and Trademarks $ 473 $ 431 Acquired Technology 3,460 3,460 Goodwill 6,746 7,625 -------- -------- $ 10,679 $ 11,516 Less accumulated amortization (4,365) (3,200) -------- -------- $ 6,314 $ 8,316 ======== ========
Patents and trademarks are being amortized over periods ranging from three to five years, their estimated useful lives. The Company amortizes goodwill and developed acquired technology related to its acquisitions using a straight-line method over periods ranging from 2 to 3 years, their estimated useful life. The Company recorded an expense for the amortization and write-down of intangible assets of $2.0 million in the first fiscal quarter of 2001 compared to $.3 million in the first fiscal quarter of fiscal 2000. Included in the $2.0 million was a write-down of goodwill of $.9 million related to the acquisitions of 21st Century LLC and J2 Digital Media, Inc. These two acquisitions were combined to form Streamriver, which was launched in June 2000. During the first quarter of fiscal 2001, the goodwill from these two acquisitions was determined to be impaired due to continued operating losses in Streamriver and the uncertainty surrounding the Company's ability to recover the goodwill through future cash flows. The Company is currently considering the sale or disposition of the Streamriver division. 8. Net Loss Per Common Share The Company computes earnings per share pursuant to SFAS No. 128, EARNINGS PER SHARE. In accordance with SFAS No. 128, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted income per share is computed using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of stock options and warrants outstanding during the period, if any, using the treasury stock method. 9 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 8. Net Loss Per Common Share (continued) The following is a reconciliation of the shares used in the computation of basic and diluted loss per share (in thousands):
Three months ended February 28, February 29, 2001 2000 ------------- -------------- Weighted average shares of common stock Outstanding 12,333 11,700 Effect of potential common shares - stock options and warrants outstanding (unless antidilutive) - - --------- ---------- Weighted average shares and potential common shares outstanding 12,333 11,700 ========= =========
The Company excludes potentially dilutive securities from its diluted net loss per share computation when either the exercise price of the securities exceeds the fair value of the Company's common stock or when the Company reports a net loss and the effect of including such securities would be antidilutive. During the three months ended February 28, 2001 and February 29, 2000, options to purchase approximately 2,813,000 and 1,504,000 weighted average shares of common stock, respectively, were not included in the computation of diluted net loss per share as a result of their antidilutive effect. 9. Contingencies (i) The company provides accruals for all direct costs associated with the estimated resolution of known contingencies. The accrual is established at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. (ii) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. ("Avid") in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company's Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company intends to vigorously defend the lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office. On August 16, 2000, the U.S. Patent and Trademark Office issued an Office Action rejecting all of the claims made by Avid in their latest request for reexamination of the patent related to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Office designated the action as "final". On November 29, 2000, Avid filed a Notice of Appeal of the Examiner's rejections to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences. There can be no assurance that the Company will prevail in the appeal by Avid or that the expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company's business, operating results and financial condition. (iii) On January 13, 1999 and January 28, 1999, Digital Origin and one of its former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various directors and executives of Splash and certain selling shareholders of Splash. The lawsuit alleges, among other things, that the defendants made or were responsible for material misstatements, and failed to disclose information concerning Splash's business, finances and future business prospects in order to artificially inflate the price of Splash common stock. The complaint does not identify any statements alleged to have been made by Charles Berger or Digital Origin. The complaint further alleges that Digital Origin engaged in a scheme to artificially inflate the price of Splash common stock to reap an artificially large return on the sale of the common stock in order to pay off its debt. Digital Origin and the former director vigorously deny all allegations of wrongdoing 10 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 9. Contingencies (continued) and intend to aggressively defend themselves in these matters. Defendant's two initial motions to dismiss the action were granted with leave to amend, and plaintiffs have again amended the complaint. Defendants have now filed their third motion to dismiss. (iv) On July 18, 1997, Intelligent Electronics, Inc. filed a claim against Digital Origin alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that Digital Origin failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings. In 1997, Digital Origin filed an answer to the complaint and cross-claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of existing accounts receivable of approximately $1.8 million. During May 2000, the trial was completed and the Court entered two judgments in favor of Digital Origin, one in the amount of $314,000 plus interest against Intelligent Electronics and one in the amount of $1,491,000 plus interest against Deutsche Financial, Inc. In September 2000, Intelligent Electronics, Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costs in the amount of $20,000 to the Company. Deutsche Financial, Inc. has filed an appeal, which is expected to be heard during 2001. (v) On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. in the United States District Court for the Southern District of Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In November 1999, the Company filed an answer and counterclaim denying any infringement. The Company intends to vigorously defend the lawsuit. (vi) From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company's business, operating results or financial condition. 10. Capitalized Software Development Costs The Company capitalizes certain computer software development costs. Capitalization of costs commences upon establishing technological feasibility. Capitalized costs, net of accumulated amortization, were approximately $29,000, as of February 28, 2001 and November 30, 2000, and are included in other assets. These costs are amortized on a straight-line basis over two years, which approximates the economic life of the product. 11. Income Taxes The Company has not provided for a tax provision in the first fiscal quarter of 2001 due to the net loss incurred during the first three months of the fiscal year and its expectation for taxable income for the year. 11 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 12. Accrued Expenses Accrued expenses at February 28, 2001 and November 30, 2000 consist of the following (in thousands):
February 28, November 30, 2001 2000 ------------ ------------ Payroll, payroll taxes and other taxes $ 1,425 $ 2,242 Accrued warranty 561 559 Accrued restructuring 1 528 Accrued inventory 872 763 Accrued legal and professional services 864 692 Accrued selling and marketing 355 301 Accrued other 3,319 3,146 ------- ------- $ 7,397 $ 8,231 ======= =======
13. Comprehensive loss The Company records items of comprehensive income or loss in accordance with SFAS No.130, REPORTING COMPREHENSIVE INCOME, and presents such information in the statement of stockholders' equity. The components of accumulated other comprehensive loss are as follows (in thousands):
Three months ended February 28, February 29, 2001 2000 ------------ ------------ Net loss $ (3,996) $ (1,419) Cumulative translation adjustment (12) (1) Unrealized holding gain (loss) on Available-for-sale securities 46 (103) --------- -------- Total comprehensive loss $ (3,962) $ (1,523) ========= ========
14. Segment Information The Company applies the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes standards for public companies to report operating segment information in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-making group is composed of the Chief Executive Officer and members of senior management. The Company's reportable operating segments are software Internet tools, services and digital video systems. 12 MEDIA 100 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS) (Continued) 14. Segment Information (continued) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues are attributed to geographic areas based on where the customer is located. Segment information for the quarters ended February 28, 2001 and February 29, 2000 is as follows:
Software Digital Internet Video FEBRUARY 28, 2001 Tools Services Systems Corporate Total ----------------- -------- -------- ------- --------- ------- Net sales from external customers $ 4,889 $ 2,532 $ 6,428 $ - $ 13,849 ======= ======= ======= ===== ======== Gross profit 3,180 1,807 3,266 - 8,253 ======= ======= ======= ===== ======== Depreciation and amortization 153 67 656 - 876 ======= ======= ======= ===== ======== Interest income, net - - - 106 106 ======= ======= ======= ===== ======== FEBRUARY 29, 2000 ----------------- Net sales from external customers $ 7,416 $ 2,265 $ 8,239 $ - $ 17,920 ======= ======= ======= ===== ======== Gross profit 4,235 1,994 4,155 - 10,384 ======= ======= ======= ===== ======== Depreciation and amortization 151 18 715 - 884 ======= ======= ======= ===== ======== Interest income $ - $ - $ - $ 316 $ 316 ======= ======= ======= ===== ======== Tax provision $ $ $ $ 30 $ 30 ======= ======= ======= ===== ========
Interest income and income taxes are considered corporate level activities and are, therefore, not allocated to segments. Management believes transfers between geographic areas are accounted for on an arms length basis. Net sales by geographic area for the quarters ended February 28, 2001 and February 29, 2000 were as follows (in thousands):
February 28, February 29, 2001 2000 ------------ ------------ United States $ 9,458 $ 10,645 United Kingdom, Sweden, Denmark and Norway 1,222 1,486 Germany, Austria and Switzerland 552 1,544 France, Spain and Benelux 878 1,313 Japan 472 774 Other foreign countries 1,267 2,158 -------- -------- $ 13,849 $ 17,920 ======== ========
Long-lived tangible assets by geographic area for the quarters ended February 28, 2001 and November 30, 2000 consist of the following (in thousands):
February 28, November 30, 2001 2000 ------------ ------------ United States $ 5,614 $ 5,718 United Kingdom 182 194 Germany 42 33 Italy 13 16 France 95 95 ------- ------- $ 5,946 $ 6,056 ======= =======
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Media 100 Inc., a Delaware corporation, (the "Company") designs and sells software applications, systems (comprising software and hardware), and services (for encoding and hosting digital media) that allow Internet-based ("online") and traditional broadcasters, corporate marketing professionals, and educators to create and deliver high-quality video programs as either traditional media or Internet-compatible streams ("streaming media). The Company recognizes revenue in accordance with Statement of Position, "Software Revenue Recognition" (SOP 97-2) as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions". Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is fixed and determinable, delivery of product has occurred via physical shipment or electronically, a determination has been made by management that collection is probable and the Company has no remaining obligations. Revenues under multiple element arrangements, which typically include products and maintenance sold together, are allocated to each element using the residual method in accordance with SOP 98-9. Sales to certain resellers and distributors are subject to agreements allowing certain rights of return and price protection on unsold merchandise held by these resellers and distributors. The Company provides for estimated returns and refunds at the time of shipment. The Company recognizes maintenance revenue from the sale of post-contract support services ratably over the life of the contract. Revenue from hosting services is recognized ratably over the term of the contract. Revenue from encoding services is recognized as the services are performed using the percentage of completion method. Digital Origin Merger On May 9, 2000, the Company completed its merger with Digital Origin, Inc. ("Digital Origin"). Under the terms of the agreement, Digital Origin's shareholders and option holders received 0.5347 equivalent shares, or approximately 3.7 million Media 100 common shares, to effect the business combination. The transaction has been accounted for as a pooling of interests. As a result, all periods presented and Management's Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect the combined operations of the two companies. The Company also acquired Terran Interactive, Inc. ("Terran") in fiscal 1999 and Wired, Inc. ("Wired"), J2 Digital Media, Inc. ("J2"), 21st Century LLC ("21st Century") and certain strategic technology assets from Integrated Computing Engines, Inc. ("ICE") in fiscal year 2000. Each of these acquisitions was accounted for as a purchase pursuant to APB No. 16. As a result, the operations of each acquired entity are reflected in the Company's consolidated statement of operations from the date of acquisition. 14 Results of Operations The following table shows certain consolidated statements of operations data as a percentage of net sales.
Three months ended February 28, February 29, 2001 2000 ------------ ------------ Net sales: Products 81.7% 87.4% Services 18.3 12.6 -------- ------- Total net sales 100.0 100.0 Cost of sales 40.4 42.1 -------- ------- Gross profit 59.6 57.9 Operating expenses: Research and development 28.0 20.4 Selling and marketing 35.2 28.6 General and administrative 13.8 14.2 Amortization expense and write-down of intangible assets 14.5 1.5 Acquired in-process research and development - 2.6 -------- ------- Total operating expenses 91.5 67.4 Operating loss (31.9) (9.5) Interest income, net .7 1.8 Other income (expense), net 2.3 (0.1) -------- ------- Loss before tax provision (28.9) (7.8) Tax provision - .1 -------- ------- Net loss (28.9)% (7.9)% ======== =======
Comparison of First Fiscal Quarter of 2001 to First Fiscal Quarter of 2000 Net sales. Total net sales for the first fiscal quarter ended February 29, 2001 decreased 22.7% to $13.8 million from $17.9 million for the first quarter of fiscal 2000. Net sales from products for the first fiscal quarter ended February 28, 2001 decreased 27.7% to $11.3 million from $15.7 million for fiscal 2000. The decrease in net sales from products is due to a number of factors including lower sales of software editing products acquired through the merger with Digital Origin, Inc. ($2.1 million), lower unit sales and average selling prices for our digital video systems ($1.8 million), and lower sales of the MPEG-based products acquired in the acquisition of Wired, Inc. ($.6 million). Net sales of software Internet tools for the first fiscal quarter ended February 28, 2001 decreased 34.0% to $4.9 million from $7.4 million for the first quarter of fiscal 2000. Of the $2.5 million decrease in net sales of software Internet tools, $2.1 million was due to a reduction in sales of products acquired as part of the merger with Digital Origin, Inc. We anticipate this trend of lower year-over-year net sales to continue for the next several quarters. Net sales of digital video systems for the first fiscal quarter ended February 28, 2001 decreased 22.0% to $6.4 million from $8.2 million for the first quarter of fiscal 2000. We attribute the decrease in sales to lower unit and average selling prices of our digital video systems due to increased competition and anticipate this trend in lower year-over-year sales will continue for the remainder of fiscal 2001. Net sales from services for the first fiscal quarter ended February 28, 2001 increased 11.8% to $2.5 million from $2.3 million for the first quarter of fiscal 2000. The increase in net sales from services is due to increased sales of our encoding and hosting services offered through Streamriver. Streamriver was launched in June 2000 following the acquisitions of 21st Century Media LLP and J2 Digital Media, Inc. As discussed below, the Company is currently considering the sale or disposition of the Streamriver division. Gross profit. Gross profit decreased 20.5% to $8.3 million in the first fiscal quarter of 2001 from $10.4 million in the first quarter of fiscal 2000. Overall gross profit as a percentage of net sales increased to 59.6% in the first fiscal quarter of 2001 from 57.9% in the first quarter of fiscal 2000. Specifically, gross profit as a percentage of net product sales increased to 57.0% in the first fiscal quarter of 2001 from 53.6% in the first quarter of fiscal 2000, while gross profit as a percentage of net sales of services decreased to 71.4% in the first fiscal quarter of 2001 from 88.0% in the first quarter of fiscal 2000. The percentage decrease in services resulted from increased sales of encoding and hosting service which provide lower gross profit as a percentage of net sales than customer support contracts for digital video systems. Gross profit as a percentage of net product sales increased due to 15 higher gross profit from software Internet tools resulting from higher licensing fees for our streaming media products such as Cleaner EZ and Cleaner 5. We currently forecast overall gross profit as a percentage of net sales will be relatively stable over the next several quarters, however, due to potential fluctuations in the mix of products sold, gross profit as a percentage of net sales may vary from one quarter to another. Research and development. Research and development expenses increased 6.4% to $3.9 million in the first fiscal quarter of 2001 from $3.6 million in the first quarter of fiscal 2000. Research and development expenses consist primarily of salaries and related benefits, consultants, outside services, occupancy and depreciation. At this time, we anticipate research and development expenses will decrease over the next several quarters as we reduce the number of new and existing product development efforts currently under development in an effort to align our expense structure with our forecasted level of sales. Selling and marketing. Selling and marketing expenses decreased 5.0% to $4.9 million in the first fiscal quarter of 2001 from $5.1 million in the first quarter of fiscal 2000. Selling expenses consist primarily of salaries and related benefits, commissions, travel, occupancy and depreciation. Marketing expenses consist primarily of salaries and related benefits, trade shows, seminars, advertising, sales literature and lead generation activities. The decrease in selling and marketing expenses resulted primarily from reduced marketing expenses due to lower product sales of software Internet tools and digital video systems. We currently anticipates that our selling and marketing expenses will decrease over the next several quarters as we adjust our expense structure and align our selling and marketing expenses with our forecasted level of sales. General and administrative. General and administrative expenses decreased 25.2% to $1.9 million in the first fiscal quarter of 2001 from $2.6 million in the first quarter of fiscal 2000. General and administrative expenses include the cost of human resources, finance, information technology, legal and other administrative functions of the Company. The decrease in general and administrative expenses resulted primarily from lower legal expenses ($.3 million) and lower costs associated with doubtful accounts ($.2 million). We currently anticipates that our general and administrative expenses will decrease over the next several quarters as we adjust our expense structure and align our general and administrative expenses with our forecasted level of sales. As a result of the merger with Digital Origin, Inc. on May 9, 2000, we assumed a significant allowance for doubtful accounts balance of $3,803,000 related to several old, uncollected amounts owed to Digital Origin, Inc. As of November 30, 2000, the allowance for doubtful accounts totaled $3,812,000, of which $3,401,000 relates to Digital Origin. As of February 28, 2001, our allowance for doubtful accounts totals $3,172,000 of which $2,670,000 relates to Digital Origin. During the first quarter, we collected a portion of the previously uncollected amounts due to Digital Origin, and wrote-down approximately $731,000 of the remaining balance against the allowance for doubtful accounts. One account represents approximately $2.2 million allowance account and is awaiting resolution in pending litigation (See Note 9). Amortization and write-down of intangible assets. We recorded an expense for the amortization and write-down of intangible assets of $2.0 million in the first fiscal quarter of 2001 compared to $.3 million in the first fiscal quarter of fiscal 2000. Included in the $2.0 million was amortization expense associated with acquisitions which took place subsequent to Q1 2000, amortization on contingent purchase price associated with the Terran acquisition and a write-down of goodwill of $.9 million related to the acquisitions of 21st Century LLC and J2 Digital Media, Inc. These two acquisitions were combined to form Streamriver, which was launched in June 2000. During the first quarter of fiscal 2001, the goodwill from these two acquisitions was determined to be impaired due to continued operating losses in Streamriver and the uncertainty surrounding our ability to recover the goodwill through future cash flows. The Company is currently considering the sale or disposition of the Streamriver division. Acquired in-process research and development. In connection with the acquisition of Wired in the first quarter of fiscal 2000, we allocated $470,000 of the purchase price to in-process research and development projects. This allocation represented the fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. There was no similar expense recorded in the first fiscal quarter of 2001. Interest income, net. Interest income decreased 66.5% to $.1 million in the first fiscal quarter of 2001 from $.3 million in the first quarter of fiscal 2000. The decrease in interest income is due to lower cash and cash equivalent balances in fiscal 2001 versus 2000. During fiscal 2000, we purchased several companies utilizing our existing cash and cash equivalents to pay for these acquisitions. The Company currently anticipates interest income will decline in fiscal 2001 versus 2000 due to lower cash balances. Other income (expense), net. Other income was $.3 million in the first fiscal quarter of 2001 compared to other expense of $.02 million in the first quarter of fiscal 2000. The increase is due to foreign exchange gains on intercompany transactions with our foreign subsidiaries. 16 Tax provision. We did not provide for a tax provision in the first fiscal quarter of 2001 due to the net loss incurred during the first three months of the fiscal year and its expectation for taxable income for the year. Net loss. As a result of the above factors, we had a loss for the first fiscal quarter of 2001 in the amount of ($4.0) million, or ($0.32) per share, compared to a net loss of ($1.4) million, or ($0.12) per share, in the first quarter of fiscal 2000. Liquidity and Capital Resources We have funded our operations to date primarily from public offerings of equity securities and cash flows from operations. As of February 28, 2001, the Company's principal sources of liquidity included cash and cash equivalents and marketable securities totaling approximately $12.2 million. For the three months ended February 28, 2001, cash used in operating activities was approximately $3,439,000 compared to approximately $3,506,000 for the same period a year ago. The Company incurred a net loss of $3,996,000 offset by significant non-cash items, including depreciation and amortization, in the amount of $2,882,000. A significant portion of the cash used in operating activities is attributable to a significant reduction in accounts payable of $2,546,000. Accounts receivable provided cash in operating activities in the amount of $1,215,000 due to the timing of sales in the quarter and the subsequent collection of those sales, which resulted in days sales outstanding of 49 in the first quarter of fiscal 2001. Inventory provided cash in operating activities in the amount of $88,000 during the first quarter of fiscal 2001, compared with inventory utilizing cash in operating activities of $1,926,000 in the year ago period. Net cash provided by investing activities was approximately $4,2960,000 during the first three months of fiscal 2001, compared to cash used in investing activities of approximately $2,106,000 for the same period a year ago. Cash provided by investing activities during the first three months of fiscal 2001 consisted of net proceeds from the sale of marketable securities. The proceeds from the sales of marketable securities was used to fund purchases of equipment and working capital needs due to the net loss incurred the first three months of fiscal 2001. Cash used in financing activities during the first three months of fiscal 2001 was approximately $1,269,000, compared to cash provided by financing activities of $1,695,000 for the same period a year ago. Cash used in financing activities resulted from the non-recurring payment of an acquisition-related note payable in the amount of $1,492,000, offset by $223,000 from proceeds from the issuance of common stock pursuant to stock plans. The reduction in cash provided by financing activities that came from proceeds from the issuance of common stock pursuant to stock plans is due to a significantly lower price for the Company's common stock in the first quarter of fiscal 2001 versus the same period a year ago. Given the recent reduced price of the Company's common stock, we do not currently expect cash provided by proceeds from the issuance of common stock pursuant to stock plans to be a significant source of liquidity in fiscal 2001. As of February 28, 2001, the Company's principal sources of liquidity included cash and marketable securities. The Company believes that its current cash, marketable securities and cash provided by future operations will be sufficient to meet the Company's working capital and anticipated capital expenditures requirements for at least the next twelve months. Although operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, its operating and investing activities may require significant cash. Consequently, any such future growth may require the Company to obtain additional equity or debt financing. CAUTIONARY STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q. If any of the following risks were to occur, our business, financial condition, or results of operations would likely suffer. In that event, the trading price of our common stock would decline. MERGER AND ACQUISITION RELATED RISKS. During fiscal year ended November 30, 2000, we completed the merger with Digital Origin and the acquisitions of Wired, 21st Century, and J2. In addition, we completed the acquisition of certain assets of ICE. Our business and results of operations could be materially adversely affected in the event we fail to complete publicly announced acquisitions or to successfully integrate the business and operations of the merger or the acquisitions. In the future, we may continue to acquire or merge with existing businesses, products, and technologies to enhance and expand our line of products. 17 Such mergers and acquisitions may be material in size and in scope. There can be no assurance that we will be able to identify, acquire, or profitably manage additional business or successfully integrate any acquired businesses into our business without substantial expenses, delays, or other operational or financial problems. Acquisitions involve a number of special risks and factors, including increasing competition for attractive acquisition candidates in our markets, the technological enhancement and incorporation of acquired products into existing product lines and services, the assimilation of the operations and personnel of the acquired companies, failure to retain key acquired personnel, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the assumption of undisclosed liabilities of any acquired companies, the failure to achieve anticipated benefits such as cost savings and synergies, as well as the diversion of management's attention during the acquisition and integration process. We may not be able to operate the acquired businesses properly and may not be able to successfully recover amounts paid for such businesses. Some or all of these special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock. SIGNIFICANT FLUCTUATIONS AND UNPREDICTABILITY OF OPERATING RESULTS. Our quarterly operating results are difficult to predict, have varied significantly in the past and are likely to vary significantly in the future for a number of reasons, including new product announcements and introductions by ourselves or our competitors, changes in pricing, and the volume and timing of orders received during the quarter. Also, in the past, we have experienced delays in the development of new products and enhancements, and such delays may occur in the future. These factors make the forecasting of revenue inherently uncertain. Additionally, a significant portion of our operating expenses is relatively fixed, and operating expense levels are based primarily on internal expectations of future revenue. As a consequence, quarterly operating expense levels cannot be reduced rapidly in the event that quarterly revenue levels fail to meet internal expectations. For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations of securities analysts or investors. If quarterly revenue or earnings levels fail to meet internal or external expectations, the market price of our common stock may decline significantly. EMERGING MARKETS. The markets in which we offer our software and systems products and services are intensely competitive and rapidly changing. We are targeting the emerging market of new Internet-based broadcasters that are building streaming media web sites and businesses and institutions that are adding Internet video to their web sites. This market and the products utilized by these users are relatively new. Our success in this emerging market will depend on the rate at which the market develops and our ability to penetrate that market. We will not succeed if we cannot compete effectively in this market and, as a result, our business and operating results could be materially and adversely affected. RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. If we are not successful in developing and introducing new products to the markets we serve our business and operating results will suffer. In addition, new product announcements by our competitors and by us could have the effect of reducing customer demand for our existing products. Also, when we introduce new or enhanced products we must effectively manage the transitions from existing products to minimize disruption of orders from our customers. New product introductions require us to devote time and resources to the training of our sales channel in the features and target customers for such new products, which efforts could result in less selling efforts being made by the sales channel during such training period. Our failure to effectively manage new product announcements or introductions could contribute to significant quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline and, as a result, our operating results will suffer. RAPID TECHNOLOGICAL CHANGE. The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Our future success will depend in part upon our ability to enhance existing products and to introduce new products and features in a timely manner to address customer requirements, respond to competitive offerings, adapt to new emerging industry standards and take advantage of new enabling technologies that could render our existing products obsolete. We plan to continue to invest in research and development, in connection with our development strategy. Any delay or failure on our part in developing additional new products or features for existing products or any failure of such new products or features to achieve market acceptance, could have a material adverse effect on our business and operating results and our stock price will suffer. COMPETITION. The market for our products is highly competitive and characterized by pressure to reduce prices, incorporate new features and accelerate the release of new products. A number of companies currently offer products that compete directly or indirectly with our products, including Accom, Inc., AnyStream, Inc., Adobe Systems Inc., Apple Computer Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.), FAST Electronic GmbH, Loudeye Technologies, Inc., Matrix Electronic Systems Ltd., Pinnacle Systems, Inc., Real Networks Inc., and Sonic Foundry, Inc. In addition, we expect much larger vendors, such as Matsushita Electric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation, to develop and introduce digital editing systems that may compete with our products. Many of these current and potential competitors have greater financial, technical and marketing resources than us, including, without limitation, larger and more established selling and marketing capabilities, greater brand recognition and a larger installed base of customers, and well-established relationships with 18 our existing and potential customers, complementary technology vendors and other business partners. As a result, our competitors may be able to develop products comparable to or superior to our own products, adapt more quickly than us to new technologies, evolving industry standards or customer requirements, or lower their product costs and thus be able to lower prices to levels at which we could not operate profitably, the occurrence of any of which could have a material adverse effect on our business and operating results. In this regard, we believe that it will continue to experience competitive pressure to reduce prices, particularly for our high data rate systems. We have historically realized higher gross profit on the sale of these high data rate systems, and such continued competitive pricing pressure could result in lower sales and gross margin, which in turn could adversely affect our business and operating results and negatively affect the price of our common stock. DEPENDENCE ON AND COMPETITION WITH APPLE COMPUTER, INC. As a competitor, Apple Computer, Inc. ("Apple") could, in the future, inhibits our ability to develop our products that operate on the Macintosh platform. Additionally, new products and enhancements to existing products from Apple such as Final Cut Pro could cause customers to delay purchases of our products or alter their purchase decision altogether. Furthermore, as the sole supplier of Macintosh computers, any disruption in the availability of these computers could cause customers to defer or alter their purchase of our products. We rely on access to key information from Apple to continue development of our products and any failure to continue supplying our engineers with this information could have a material adverse affect on our business and financial results and negatively affect the price of our common stock. DEPENDENCE ON MICROSOFT CORPORATION. Many of our products operate in the Windows environment and our engineers depend upon access to information in advance from Microsoft Corporation ("Microsoft"). Any failure to continue supplying our engineers with this information could have a material adverse affect on our business and financial results and negatively affect the price of our common stock. DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS. The Company is dependent on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated circuits manufactured in each case only by Crystal Semiconductor Corp., Raytheon Company, LSI Logic Corp., Philips Semiconductors or Zoran Corp. The availability of many of these components is dependent on our ability to provide suppliers with accurate forecasts of our future requirements, and certain components we use to build our products have been subject to industry-wide shortages. We do not carry significant inventories of these components and have no guaranteed supply arrangements with such suppliers. There can be no assurance that our inventory levels will be adequate to meet production needs during any interruption of supply. Our inability to develop alternative supply sources, if required, or a reduction or stoppage in supply, could delay product shipments until new sources of supply become available, and any such delay could adversely affect our business and operating results in any given period and negatively affect the price of our common stock. DEPENDENCE ON PROPRIETY TECHNOLOGY. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. Previously, we have received, and may in the future continue to receive, communications suggesting that our products may infringe on the patents or other intellectual property rights of third parties. Our policy is to investigate the factual basis of such communications and negotiate licenses where appropriate. While it may be necessary or desirable in the future to obtain licenses relating to one or more products, or relating to current or future technologies, there can be no assurance that we will be able to do so on commercially reasonable terms or at all. There can be no assurance that these or other future communications can be settled on commercially reasonable terms or that they will not result in protracted and costly litigation. Any failure to secure the necessary intellectual property right of third parties on commercially reasonable terms may adversely affect our business and operating results and negatively affect the price of our common stock. RISKS OF THIRD-PARTY CLAIMS OF INFRINGEMENT. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to us or to enforce trade secrets, trademarks and other intellectual property rights owned by us, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. For a description of certain pending litigation instituted against the Company, see Item 1, Legal Proceedings of Part II, Other Information and Note 9 to the Consolidated Financial Statements included herein. Any such litigation could be costly and a diversion of management's attention, which could adversely affect our business and operating results and our financial condition. Adverse determinations in any such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could adversely affect our business and operating results and our financial condition. DEPENDENCE ON DISTRIBUTORS AND RESELLERS. We rely primarily on our worldwide network of independent distributors and VARs to distribute and sell our products to end-users. Our distributors and resellers generally offer products of several different 19 companies, including in some cases products that are competitive with our own products. In addition, many of the VARs are small organizations with limited capital resources. There can be no assurance that our distributors and resellers will continue to purchase products from us, or that our efforts to expand our network of distributors and resellers will be successful. Any significant failure on our part to maintain or expand our network or distributors and resellers could have a material adverse effect on our business and operating results and negatively affect the price of our common stock. RELIANCE ON INTERNATIONAL SALES. International sales and operations may be subject to risks such as the imposition of government controls, export license requirements, restrictions on the export of critical technology, less effective enforcement of proprietary rights; currency exchange fluctuations, generally longer collection periods, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, potential insolvency of international resellers and difficulty in collecting accounts receivable. Our international sales are also subject to more seasonal fluctuation than domestic sales. In this regard, the traditional summer vacation period, which occurs during our third fiscal quarter, may result in a decrease in sales, particularly in Europe. There can be no assurance that these factors will not have an adverse effect on our future international operations and consequently, on our business and operating results. This fluctuation may be material and negatively affect the price of our common stock. INTERNET-BASED SALES. In the second half of fiscal 1999, we implemented e-commerce systems allowing customers to purchase our products directly from one of our web sites. Since implementation of the e-commerce system, our sales through this channel have increased as a percentage of our total sales. There can be no assurances that our customers will continue to purchase our products from one of our web sites or that these web sites will not experience technical difficulties thereby causing customers to delay purchases. Any significant technical difficulties could have a material adverse affect on our business and operating results and negatively affect the price of our common stock. DEPENDENCE ON KEY PERSONNEL. Competition for employees with the skills required by us is intense in the geographic areas in which we maintain physical operations. We believe that our future success will depend on our continued ability to attract and retain qualified employees, especially in research and development. Any significant delay in hiring key personnel could have a material adverse affect on our business and operating results and negatively affect the price of our common stock. HISTORY OF LOSSES. We have incurred substantial operating losses in each of the past five fiscal years. We incurred operating losses of approximately $10.9 million, $2.0 million, $13.9 million, $27.2 million and $16.0 million for fiscal 2000, 1999, 1998, 1997 and 1996, respectively. As of February 28, 2001, we had an accumulated deficit of approximately $193.4 million. Over the past three years we have significantly increased our research and development expenses as a percentage of total sales and we plan to continue to invest in new technology, and as a result, we may incur operating losses in future periods. We will need to generate increases in our current sales levels to achieve profitability and we may not be able to do so. If our sales grow more slowly than we anticipate or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenue, our business will be significantly and adversely affected. Our failure to achieve profitability or achieve the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock. STOCK PRICE VOLATILITY. The trading price of our common stock has been highly volatile and has fluctuated significantly in the past. During fiscal 2000, our stock price fluctuated between a low of $2.125 per share and a high of $52.75 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our company, our competitors, and the market for our products and services, many of which are beyond our control, such as, variations in our quarterly operating results; changes in financial estimates and recommendations by securities analysts; changes in market valuations of companies in our markets; announcements by us or our competitors of significant products, acquisitions, or strategic partnerships; failure to complete significant business transactions; departures of key personnel; purchases or sales of common stock or other securities by us; or news relating to trends in our markets. In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme volatility over the past twelve months. This volatility has often been unrelated to the operating performance of particular companies. These broad and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. EURO CONVERSION. On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro. As of January 1, 2002, the transition to the Euro will be complete. We maintain operations within the European Union and have prepared for the Euro conversion. We do not expect the costs associated with the transition to be material. However, the overall effect of the transition to the Euro may have a material adverse affect on our business, financial condition and financial results. 20 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company is not a party to any derivative financial instruments or other financial instruments for which the fair value disclosure would be required under Statement of Financial Accounting Standards No. 107 DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY INSTRUMENTS ( SFAS No. 107). All of the Company's investments are in short-term, investment grade commercial paper, certificates of deposit and U.S. Government and agency securities that are carried at fair value on the Company's books. Accordingly, the Company believes that the market risk of such investments is minimal. Primary Market Risk Exposures. The Company's primary market risk exposures are in the area of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company's business in Europe is conducted in local currency. In Asia, business is conducted in U.S. currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. However, the Company estimates that any market risk associated with its foreign operations is not significant and is unlikely to have a material adverse effect on the Company's business, results of operations, or financial condition. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings (i) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. ("Avid") in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company's Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company intends to vigorously defend the lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office. On August 16, 2000, the U.S. Patent and Trademark Office issued an Office Action rejecting all of the claims made by Avid in their latest request for reexamination of the patent related to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Office designated the action as "final". On November 29, 2000, Avid filed a Notice of Appeal of the Examiner's rejections to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences. There can be no assurance that the Company will prevail in the appeal by Avid or that the expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company's business, operating results and financial condition. (ii) On January 13, 1999 and January 28, 1999, Digital Origin and one of its former directors, Charles Berger, were named as defendants in two shareholder class action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various directors and executives of Splash and certain selling shareholders of Splash. The lawsuit alleges, among other things, that the defendants made or were responsible for material misstatements, and failed to disclose information concerning Splash's business, finances and future business prospects in order to artificially inflate the price of Splash common stock. The complaint does not identify any statements alleged to have been made by Charles Berger or Digital Origin. The complaint further alleges that Digital Origin engaged in a scheme to artificially inflate the price of Splash common stock to reap an artificially large return on the sale of the common stock in order to pay off its debt. Digital Origin and the former director vigorously deny all allegations of wrongdoing and intend to aggressively defend themselves in these matters. Defendant's two initial motions to dismiss the action were granted with leave to amend, and plaintiffs have again amended the complaint. Defendants have now filed their third motion to dismiss. (iii) On July 18, 1997, Intelligent Electronics, Inc. filed a claim against Digital Origin alleging a breach of contract and related claims in the approximate amount of $800,000, maintaining that Digital Origin failed to comply with various return, price protection, inventory balancing and marketing development funding undertakings. In 1997, Digital Origin filed an answer to the complaint and cross-claimed against the plaintiffs and in October 1997 additionally cross claimed against Deutsche Financial, Inc., a factor in the account relationship between the Company and the plaintiffs, seeking the recovery of existing accounts receivable of approximately $1.8 million. During May 2000, the trial was completed and the Court entered two judgments in favor of Digital Origin, one in the amount of $314,000 plus interest against Intelligent Electronics and one in the amount of $1,491,000 plus interest against Deutsche Financial, Inc. In September 2000, Intelligent Electronics, Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costs in the amount of $20,000 to the Company. Deutsche Financial, Inc. has filed an appeal, which is expected to be heard during 2001. (iv) On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. in the United States District Court for the Southern District of Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In November 1999, we filed an answer and counterclaim denying any infringement. We intend to vigorously defend the lawsuit. (v) From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company's business, operating results or financial condition. 22 Item 6. Exhibits and Reports on Form 8-K a) Exhibits No exhibits were required as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K Form 8-K, dated December 29, 2000, was filed with the Commission on December 29, 2000, consisting of the following: Item 5. Other events, and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits detailing the acquisition of Digital Origin, Inc. 23 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. Media 100 Inc. Date: April 16, 2001 By: /S/ STEVEN D. SHEA --------------------- Steven D. Shea Chief Financial Officer and Treasurer (Principal Financial Officer) 24 EXHIBIT INDEX NUMBER DESCRIPTION 25