-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Src5u5HuYEnmsbSQ2eha2CSD86S7XP4wiKkBKiJwiaag4Ty+PTYKRAK29thEjoDL fPZLPh7UWa1+3lPCP8MgTQ== 0000944209-97-001544.txt : 19971115 0000944209-97-001544.hdr.sgml : 19971115 ACCESSION NUMBER: 0000944209-97-001544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METACREATIONS CORP CENTRAL INDEX KEY: 0000919794 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954102687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27168 FILM NUMBER: 97717555 BUSINESS ADDRESS: STREET 1: 6303 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 MAIL ADDRESS: STREET 1: 6303 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 10-Q 1 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 and Exchange Act of 1934 For the quarterly period ended September 30, 1997 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from _________ to _________. Commission file number 0-27168 METACREATIONS CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-4102687 (State of incorporation) (I.R.S. Employer Identification Number) 6303 Carpinteria Ave, Carpinteria, CA 93013 (Address of principal executive offices) (805) 566-6200 (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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 7, 1997, there were outstanding 23,560,506 shares of the registrant's Common Stock, $0.001 par value per share, which is the only outstanding class of common or voting stock of the registrant. 1 METACREATIONS CORPORATION FORM 10-Q Table of Contents
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements.............................................. 3 Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 Consolidated Statements of Operations - Three and nine months ended September 30, 1997 and 1996 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................................. 18 SIGNATURES................................................................. 19
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements METACREATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents............................................. $ 11,409 $ 21,605 Short-term investments................................................ 40,873 44,688 Accounts receivable, net.............................................. 25,343 16,619 Inventories........................................................... 1,569 1,512 Prepaid income taxes ................................................. 1,685 -- Deferred income taxes................................................. 3,727 2,827 Prepaid expenses...................................................... 3,125 3,826 -------- -------- Total current assets................................................ 87,731 91,077 Property and equipment, net............................................ 7,169 5,581 Other assets........................................................... 1,586 1,277 -------- -------- Total assets........................................................ $ 96,486 $ 97,935 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 5,393 $ 4,490 Accrued expenses...................................................... 5,073 6,427 Income taxes payable.................................................. -- 150 Royalties payable..................................................... 1,198 756 -------- -------- Total current liabilities........................................... 11,664 11,823 Stockholders' equity: Preferred stock, $.001 par value, 5,000,000 shares authorized - no shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively..................................... -- -- Common stock, $.001 par value; 75,000,000 shares authorized 23,434,758 and 22,274,398 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively............... 23 22 Paid-in capital....................................................... 108,428 100,956 Notes receivable from stockholders.................................... (3,127) (3,000) Cumulative translation adjustment..................................... (126) (158) Accumulated deficit................................................... (20,376) (11,708) -------- -------- Total stockholders' equity.......................................... 84,822 86,112 -------- -------- Total liabilities and stockholders' equity.......................... $ 96,486 $ 97,935 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 METACREATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- -------------------- 1997 1996 1997 1996 ------------------- -------------------- Net revenues.............................................. $21,008 $18,175 $ 53,009 $47,012 Cost of revenues.......................................... 3,023 3,284 9,254 8,695 ------- ------- -------- ------- Gross profit.............................................. 17,985 14,891 43,755 38,317 Operating expenses: Sales and marketing...................................... 8,272 7,879 24,153 21,224 General and administrative............................... 1,603 1,424 4,644 4,104 Research and development................................. 3,713 2,100 10,333 6,005 Write-off of acquired in-process technology and other merger costs................................. -- 733 16,185 2,598 ------- ------- -------- ------- Total operating expenses.................................. 13,588 12,136 55,315 33,931 ------- ------- -------- ------- Income (loss) from operations............................. 4,397 2,755 (11,560) 4,386 Interest and investment income, net....................... 827 811 2,416 2,558 ------- ------- -------- ------- Income (loss) before provision for income taxes........... 5,224 3,566 (9,144) 6,944 Provision for income taxes................................ 1,619 781 37 2,124 ------- ------- -------- ------- Net income (loss)......................................... $ 3,605 $ 2,785 $ (9,181) $ 4,820 ======= ======= ======== ======= Net income (loss) per common share........................ $0.15 $0.12 $(0.40) $0.21 ======= ======= ======== ======= Weighted average number of shares outstanding............. 24,853 22,727 22,757 22,741 ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 4 METACREATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net income (loss)...................................................... $ (9,181) $ 4,820 Adjustment to retained earnings as a result of business combination.... 513 -- Adjustments to reconcile net income to net cash used in operating activities: Write-off of acquired in-process technology.......................... 5,575 363 Deferred incomes taxes............................................... -- (483) Depreciation and amortization........................................ 1,822 1,047 Reserves for receivables and product returns......................... 3,354 4,731 Reserves for inventory............................................... 445 452 Accrued interest income.............................................. (127) -- Loss on disposal of property and equipment........................... (93) -- Changes in operating assets and liabilities: Accounts receivable................................................ (12,038) (10,701) Inventories........................................................ (459) (363) Prepaid expenses and other assets.................................. 1,207 (816) Accounts payable and accrued expenses.............................. (1,543) (1,484) Royalties payable.................................................. 442 68 Income taxes payable............................................... (746) 1,075 -------- -------- Net cash used in operating activities............................. (10,829) (1,291) Cash flows from investing activities: Purchases of short-term investments.................................... (37,079) (86,842) Proceeds from sales and maturities of short-term investments........... 40,894 48,262 Purchases of property and equipment.................................... (2,836) (2,801) Purchases of software technology and product rights.................... (110) (125) Payments in connection with acquisition................................ (1,233) (139) -------- -------- Net cash used in investing activities............................. (364) (41,645) Cash flows from financing activities: Repayment of notes payable............................................. (274) (417) Proceeds from exercise of stock options................................ 1,239 627 -------- -------- Net cash provided by financing activities......................... 965 210 Effect of exchange rate changes on cash................................. 32 (61) -------- -------- Net decrease in cash and cash equivalents............................... (10,196) (42,787) Cash and cash equivalents at beginning of period........................ 21,605 54,038 -------- -------- Cash and cash equivalents at end of period.............................. $ 11,409 $ 11,251 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 METACREATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation In May 1997, the stockholders of MetaTools, Inc. ("MetaTools") approved the Amendment to Restated Articles of Incorporation, changing the name of the Company to MetaCreations Corporation ("MetaCreations"). Accordingly, the term "Company," as used herein, refers to either MetaTools or MetaCreations, depending on the context of the discussion. The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. In the opinion of management, the accompanying consolidated balance sheets and related interim consolidated statements of operations and cash flows include all adjustments (consisting only of normal recurring items) considered necessary for their fair presentation. The 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, liabilities, revenues and expenses. Actual results could differ from those estimates. The consolidated results of operations for the period ended September 30, 1997 are not necessarily indicative of results to be expected for the year ending December 31, 1997. The information included in this Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, as filed on Form 8-K/A. In May 1997, the stockholders of MetaCreations and Fractal Design Corporation ("Fractal") approved the merger of the two companies. As a result of the merger, the Company issued approximately 9,055,000 shares of MetaCreations common stock for all of the outstanding shares of Fractal. The merger was accounted for as a pooling of interests and, accordingly, the consolidated financial statements were restated to include the accounts of Fractal for all periods presented. The Company charged approximately $9.8 million against earnings during the three months ended June 30, 1997 related to transaction costs and other costs associated with integrating the two companies. The Company reports its financial results on a December 31 fiscal year end basis, whereas Fractal reported its financial results on a March 31 fiscal year end basis. For the purposes of pooling-of-interests accounting, the balance sheet of the Company as of December 31, 1996 has been combined with that of Fractal as of March 31, 1997. The statements of operations of the Company for the three and nine months ended September 30, 1996 have been combined with 6 METACREATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) those of Fractal for the three and nine months ended December 30, 1996. As a result of the presentation above, Fractal's net loss of $513,000 for the three months ended March 31, 1997 is reflected as an adjustment to retained earnings. Separate results of operations for the periods presented are as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1996 ------------- ------------- Net revenues: MetaCreations......................... $ 7,241 $19,115 Fractal............................... 10,934 27,897 ------- ------- $18,175 $47,012 ======= ======= Net income: MetaCreations......................... $ 992 $ 2,718 Fractal............................... 1,793 2,102 ------- ------- $ 2,785 $ 4,820 ======= =======
Net Income Per Common Share Net income (loss) per common share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding. Common equivalent shares related to stock options, warrants and preferred stock are excluded from the computation when their effect is antidilutive. Statement of Financial Accounting Standards Not Yet Adopted In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires companies to adopt its provisions for fiscal years ending after December 15, 1997 and requires restatement of all prior period earnings per share ("EPS") data presented. Earlier application is not permitted. SFAS No. 128 specifies the computation, presentation, and disclosure requirements for EPS. The implementation of SFAS No. 128 is not expected to have a material effect on the EPS data previously presented by the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130, which requires companies to adopt its provisions for fiscal years ending after December 15, 1997, establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130 has not been determined by the Company. 7 METACREATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131, which requires companies to adopt its provisions for fiscal years ending after December 15, 1997, requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. The impact on the Company of adopting SFAS No. 131 has not been determined. 2. INVENTORIES Inventories consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ Finished goods........................ $1,178 $ 814 Materials and supplies................ 391 698 ------ ------ $1,569 $1,512 ====== ======
3. INCOME TAXES The provisions for income taxes for the three and nine months ended September 30, 1997 and 1996 are based on the Company's estimated annualized effective tax rate for the respective years, after giving effect to the utilization of available net operating losses and tax credits and available tax planning opportunities. In addition, the provision for income taxes for the nine months ended September 30, 1997 is net of tax benefits relating to deductible expenses incurred in connection with the merger with Fractal and the acquisition of Specular International Ltd. ("Specular"). 4. ACQUISITIONS On April 15, 1997, the Company completed the acquisition of Specular, a privately held software development company based in Amherst, Massachusetts, which develops and markets 3-D animation and graphic design tools for professionals and prosumers. Under the terms of the Purchase Agreement, the stockholders of Specular received approximately 547,000 shares of the Company's common stock, valued at approximately $4.1 million, and $1 million in cash in exchange for all of the outstanding shares of Specular. The Company also issued 450,000 non-qualified stock options to purchase shares of the Company's common stock to Specular employees at an exercise price of $7 per share, the fair market value of the Company's common stock on April 16, 1997. The Company has relocated Specular's existing engineering and product management personnel to its Real Time Geometry ("RTG") facilities in Princeton, New Jersey, closed Specular's Amherst headquarters, and laid-off and provided severance to Specular's administrative and sales personnel. In addition, the Company assumed the net liabilities of Specular, which totaled $1.6 million at April 15, 1997. The Company charged approximately 8 METACREATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) $6.4 million against earnings during the three months ended June 30, 1997, comprised of the write-off of acquired in-process technology of $5.6 million, transaction costs of $300,000, and relocation and severance costs of $555,000. In addition, the Company recognized a deferred income tax asset of $900,000 relating to Federal net operating losses and tax credits of Specular. In accordance with SFAS No. 109, the tax benefits were first applied to reduce to zero goodwill totaling $280,000, with the remainder applied against current technology acquired from Specular. After recognition of the deferred tax asset, acquired current technology totaled $280,000. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto. The discussion and analysis below contains trend analysis and other forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Factors That May Affect Future Operating Results," as well as those discussed elsewhere in the Company's SEC reports, including without limitation, the Company's audited consolidated financial statements and notes thereto as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, as filed on Form 8-K/A. OVERVIEW In connection with the merger of Fractal with MetaCreations in May 1997 and MetaCreations' acquisition of Specular in April 1997, the Company has significantly expanded its product line. However, the Company's future revenues are substantially dependent upon the continued market acceptance of the Company's existing leading products: Art Dabbler, Bryce, Kai's Photo Soap, Kai's Power GOO, Kai's Power Tools, Painter, Poser, and Ray Dream Studio. In this regard, revenue from the sale of these products represented a substantial majority of revenues during the three and nine months ended September 30, 1997. The Company also has a number of new product and technology development efforts under way, and a significant portion of future revenues is dependent upon the success of these activities. The Company develops substantially all of its products internally and occassionally through co-development arrangements with third parties. These co- development arrangements generally provide the Company with certain exclusive proprietary, copyright or marketing rights for developed products in exchange for the payment of one-time and/or ongoing royalties. The Company expects to continue fostering arrangements with external developers as part of its strategy of expanding its product portfolio. There can be no assurance, however, that the Company will be able to continue to supplement its product development efforts in the future through such relationships. The Company sells its products primarily to domestic and international distributors, including mail order resellers and retail outlets. The Company also sells its products to Original Equipment Manufacturers ("OEMs") for bundling with their hardware or software products and directly to end users, generally through telesales and direct mail campaigns. Fluctuations in distributor purchases can cause significant volatility in the Company's revenues. Distributors generally stock the Company's products at levels which may fluctuate significantly for a variety of reasons, including the distributors' ability to finance the purchase of products and to devote shelf space, catalog space or attention to the products. Distributor purchases may also be affected by the Company's introduction of a new product or new version of a product, the Company's end user promotions programs, anticipated product price increases, the Company's purchases of display space at retail outlets and other factors. Further, OEM agreements, which generally provide for minimum guaranteed non-refundable payments to the Company, typically coincide with the planned introduction of OEM bundled products and are often entered into at 10 the end of the quarter. The timing of the execution of such agreements can fluctuate substantially throughout the year, causing volatility in the Company's revenues, operating results, and cash flows. Since its inception, the Company has focused on building its product portfolio and establishing brandname awareness of its products. These activities have resulted in significant increases in all expense categories. The Company's recent product development efforts have also entailed significant research and development expenditures. These higher expense levels combined with the write- off of acquired in-process research and development and other costs associated with periodic mergers and acquisitions and quarterly fluctuations in net revenues have contributed to the Company's periodic annual and quarterly losses, as well as fluctuations in its operating results. The Company intends to continue to invest significant amounts both in expanding its product portfolio and in maintaining and enhancing brand awareness of its products, and accordingly may continue to experience losses and volatility of net revenues and operating results in future periods. OPERATING RESULTS The following table sets forth certain selected financial information expressed as a percentage of net revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------------------------- --------------------------------- Net revenues................................. 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues............................. 14.4 18.1 17.5 18.5 --------------------------------- --------------------------------- Gross margin................................ 85.6 81.9 82.5 81.5 Operating expenses: Sales and marketing......................... 39.4 43.4 45.6 45.1 General and administrative.................. 7.6 7.8 8.8 8.7 Research and development.................... 17.7 11.6 19.5 12.8 Write-off of acquired in-process technology and other merger costs..................... - 4.0 30.5 5.6 --------------------------------- --------------------------------- Total operating expenses.................. 64.7 66.8 104.4 72.2 --------------------------------- --------------------------------- Income (loss) from operations................ 20.9 15.1 (21.9) 9.3 Interest and investment income, net.......... 3.9 4.5 4.6 5.5 --------------------------------- --------------------------------- Net income (loss) before provision for income taxes................................ 24.8 19.6 (17.3) 14.8 Provision for income taxes................... 7.7 4.3 0.1 4.5 --------------------------------- --------------------------------- Net income (loss)............................ 17.1 % 15.3 % (17.4)% 10.3 % ================================= =================================
11 NET REVENUES Net revenues increased 16% from $18.2 million for the three months ended September 30, 1996 to $21.0 million for the three months ended September 30, 1997. Net revenues increased as a result of the Company's release of new versions of its existing products, increased expansion of sales through OEM's, and increased international sales. The Company released Painter 5, Kai's Photo Soap, and Infini-D 4.0 in the second quarter of 1997, and Art Dabbler, Ray Dream Studio 5, and Ray Dream 3D in the third quarter of 1997. International sales accounted for $7.4 million, or 35% of net revenues, for the three months ended September 30, 1997, compared to $6.2 million, or 34% of net revenues, for the three months ended September 30, 1996. Net revenues totaled $53.0 million for the nine months ended September 30, 1997, compared to $47.0 million for the nine months ended September 30, 1996, an increase of 13%. The increase in net revenues is attributed to the development and release of new products, the enhancement and release of new versions of the Company's existing products, increased expansion of sales through OEM's, increased marketing activities, and increased international sales. International sales accounted for $20.3 million, or 38% of net revenues, for the nine months ended September 30, 1997, compared to $16.4 million, or 35% of net revenues, for the nine months ended September 30, 1996. The Company recognizes revenue from the sale of its products upon shipment to the customer and satisfaction of significant Company obligations, if any. The Company provides an allowance for estimated returns at the time of product shipments and adjusts this allowance as needed based on actual return history. Such reserves as a percentage of net revenues have varied over recent years, reflecting the Company's experience in product returns as it has significantly expanded the proportion of its sales through third-party distribution channels and increased its product portfolio. The Company expects reserves will continue to vary in the future. The Company's agreements with its distributors generally provide the distributors with limited rights to return unsold inventories under a stock balancing program. The Company monitors the activities of its distributors in an effort to minimize excessive returns and establishes its reserves based on its estimates of expected returns. While historically the Company's returns have been within management's expectations, the establishment of reserves requires judgments regarding such factors as future competitive conditions and product life cycles, which can be difficult to predict. As a result, there can be no assurance that established reserves will be adequate to cover actual future returns. COST OF REVENUES Cost of revenues includes the costs of goods sold, royalties due to external developers, inventory management costs, freight and handling costs and reserves for inventory obsolescence. Cost of revenues decreased from $3.3 million, or 18% of net revenues, for the three months ended September 30, 1996, to $3.0 million, or 14% of net revenues, for the three months ended September 30, 1997. The decrease in cost of revenues resulted from the changing mix of product sales and increased sales through OEM's. Royalties represented 4% of net revenues for both the three months ended September 30, 1996 and 1997. Cost of revenues increased from $8.7 million for the nine months ended September 30, 1996, to $9.3 million for the nine months ended September 30, 1997, but decreased as a percentage of net revenues from 18% to 17%, primarily due to the increase in OEM revenues and to reduced manufacturing costs. Royalties represented 4% of net revenues for both the nine months ended 12 September 30, 1996 and 1997. The Company expects that cost of revenues will increase in the future commensurate with the increase in net revenues, but may vary as a percentage of net revenues. SALES AND MARKETING Sales and marketing expenses include advertising, promotional materials, mail campaigns, trade shows and the compensation costs of sales, marketing, customer service and public relations personnel who promote the Company's products, including related facilities costs. Sales and marketing expenses increased from $7.9 million for the three months ended September 30, 1996 to $8.3 million for the three months ended September 30, 1997, but decreased as a percentage of net revenues from 43% to 39%, respectively. The increase in sales and marketing expenses resulted from the continued efforts to expand sales and marketing activities and distribution channels, both domestically and internationally, and through the hiring of additional personnel. Sales and marketing expenses increased from $21.2 million, or 45% of net revenues, for the nine months ended September 30, 1996, to $24.2 million, or 46% of net revenues, for the nine months ended September 30, 1997. The increase reflected the Company's efforts to expand its sales and marketing presence and distribution channels through the hiring of additional personnel and increased advertising, mail campaigns, and public relations expenditures. The Company intends to continue such expansion and anticipates that sales and marketing expenses will continue to increase significantly in future periods as the Company's product offerings expand, although they may vary as a percentage of net revenues. GENERAL AND ADMINISTRATIVE General and administrative expenses include compensation costs related to executive management, finance, and administration personnel of the Company along with other administrative costs including legal and accounting fees, insurance, and bad debt expenses. General and administrative expenses increased from $1.4 million for the three months ended September 30, 1996 to $1.6 million for the three months ended September 30, 1997, but remained flat at 8% of net revenues. The increase in expenses is due to increased administrative expenses related to the continued growth of the Company. For the nine months ended September 30, 1997, general and administrative expenses totaled $4.6 million, or 9% of net revenues, an increase of 13% over general and administrative expenses of $4.1 million, or 9% of net revenues, for the nine months ended September 30, 1996. The increase in general and administrative expenses resulted from increased internal staffing to support the Company's growth since the second quarter of 1996. The Company expects that its general and administrative expenses will continue to increase in the future as the Company expands its staffing to support expanded operations, but may vary as a percentage of net revenues. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of personnel costs, consultant fees and required equipment and facilities costs related to the Company's product development efforts. Research and development expenses increased from $2.1 million, or 12% of net revenues, for the three months ended September 30, 1996, to $3.7 million, or 18% of net revenues, for the three months ended September 30, 1997. The increase was attributed to increased personnel resulting 13 from the acquisitions of RTG in December 1996 and Specular in April 1997, in addition to increased personnel associated with the expansion of the Company's product portfolio. For the nine months ended September 30, 1997, research and development expenses totaled $10.3 million, or 20% of net revenues, an increase of 72% over research and development expenses of $6.0 million, or 13% of net revenues, for the nine months ended September 30, 1997. The increase was attributed to the additional RTG and Specular employees as well as additional personnel hired to expand the Company's product portfolio, enhance its existing products, and translate its products to foreign languages. The Company expects research and development expenses will continue to increase in future periods, but may vary as a percentage of net revenues. WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY AND OTHER MERGER COSTS In May 1997, the stockholders of MetaCreations and Fractal approved the merger of the two companies. As a result of the merger, the Company issued approximately 9,055,000 shares of MetaCreations common stock for all of the outstanding shares of Fractal. The Company charged approximately $9.8 million against earnings during the three months ended June 30, 1997 related to transaction costs and other costs associated with integrating the two companies. On April 15, 1997, the Company completed the acquisition of Specular, a privately held software development company based in Amherst, Massachusetts, which develops and markets 3-D animation and graphic design tools for professionals and prosumers. Under the terms of the Purchase Agreement, the stockholders of Specular received approximately 547,000 shares of the Company's common stock, valued at approximately $4.1 million, and $1 million in cash in exchange for all of the outstanding shares of Specular. The Company also issued 450,000 non-qualified stock options to purchase shares of the Company's common stock to Specular employees at an exercise price of $7 per share, the fair market value of the Company's common stock on April 16, 1997. The Company has relocated Specular's existing engineering and product management personnel to its RTG facilities in Princeton, New Jersey, closed Specular's Amherst headquarters, and laid-off and provided severance to Specular's administrative and sales personnel. In addition, the Company assumed the net liabilities of Specular, which totaled $1.6 million at April 15, 1997. The Company charged approximately $6.4 million against earnings during the three months ended June 30, 1997, comprised of the write-off of acquired in-process technology of $5.6 million, transaction costs of $300,000, and relocation and severance costs of $555,000. In addition, the Company recognized a deferred income tax asset of $900,000 relating to Federal net operating losses and tax credits of Specular. In accordance with SFAS No. 109, the tax benefits were first applied to reduce to zero goodwill totaling $280,000, with the remainder applied against current technology acquired from Specular. After recognition of the deferred tax asset, acquired current technology totaled $280,000. PROVISION FOR INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The provisions for income taxes for the three and nine months ended September 30, 1997 and 1996 are based on the Company's estimated annualized effective tax rate for the respective years, after giving effect to the utilization of available net operating loss and tax credit carryforwards. In addition, the provision for income taxes for the nine months ended September 30, 1997 is net of tax benefits relating to 14 deductible expenses incurred in connection with the merger with Fractal and the acquisition of Specular. NET INCOME Net income was $3.6 million, or $0.15 per share, for the three months ended September 30, 1997, compared to net income of $2.8 million, or $0.12 per share, for the three months ended September 30, 1996. For the nine months ended September 30, 1997, net loss was $9.2 million, or $0.40 per share, compared to net income of $4.8 million, or $0.21 per share, for the nine months ended September 30, 1996. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Factors that may affect future operating results include, but are not limited to, those discussed below, as well as those discussed elsewhere in the Company's SEC reports, including without limitation, the Company's audited consolidated financial statements and notes thereto as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, as filed on Form 8-K/A. INTEGRATION OF OPERATIONS; MANAGEMENT OF POTENTIAL GROWTH, INTEGRATION OF POTENTIAL ACQUISITIONS, ADVERSE EFFECT OF FINANCIAL RESULTS In recent years, the Company has experienced expansion of its operations that have placed significant demands on its administrative, operational and financial resources. In addition, the Company's acquisitions of RTG in December 1996 and Specular in April 1997 and its merger with Fractal in May 1997, have placed significant demands on these resources. The Company has substantially assimilated its acquired operations and is currently in the process of improving its financial and management controls, management processes, business and management information systems and procedures, and expanding, training and managing its work force. There can be no assurance that the Company will be able to perform such actions successfully. The realization of the benefits sought from the merger of MetaCreations with Fractal depends on the ability of the Company to utilize product development capabilities, sales and marketing capabilities, administrative organizations, and facilities better that either company could do separately. The inability of the Company to better utilize resources and to achieve integration in a timely and coordinated fashion could result in a material adverse effect on the Company's financial condition, results of operations, and cash flows. There can be no assurance that these steps actually will reduce costs to the extent, or as quickly, as planned or that these steps will not adversely affect future revenues and results of operations. FLUCTUATIONS IN QUARTERLY RESULTS The Company has experienced in the past and expects in the future to continue to experience significant fluctuations in quarterly operating results. There can be no assurance that the Company's future revenues, operating results and cash flows will not also vary substantially. The Company generally ships products as orders are received and, therefore, has little or no backlog. As a result, quarterly revenues, operating results and cash flows of the Company will generally depend on a number of factors that are difficult to forecast, including, among others, the volume and timing of and ability to fulfill orders received within a quarter. Quarterly revenues, operating results and cash flows also may fluctuate due to factors such as demand for the Company's 15 products; introduction, localization or enhancement of products by the Company and its competitors; customer or distributor order deferrals in anticipation of new versions of products; market acceptance of new products; reviews in the industry press concerning the products of the Company or its competitors; changes or anticipated changes in pricing by the Company or its competitors; the mix of distribution channels through which products are sold; the mix of products sold; returns from distributors; and general economic conditions. Revenues, operating results and cash flows from the Company's products also may be negatively affected by delays in the introduction or availability of new hardware and software products from third parties. The Company experiences some effect of seasonality in its business, as demand for its products tends to increase during the quarter ending December 31 as a result of timing of year-end holiday season buying. As is common in the software industry, the Company's experience has been that a disproportionately large percentage of revenues in each fiscal quarter occurs in the third month of that quarter. Because the Company's staffing and other operating expenses are based in part on anticipated net revenues, a substantial portion of which may not be realized until shortly before the end of each fiscal quarter, delays in the receipt and shipment of orders, including delays that may be occasioned by failures of third party product fulfillment firms to produce and ship products, and delays or deferrals in the execution of OEM arrangements can cause significant variations in the Company's financial position, results of operations, and cash flows from quarter to quarter. The Company will most likely be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues from the Company's products in relation to expectations could have an immediate adverse impact on Company's financial position, results of operations, and cash flows. In addition, the Company currently intends to increase its operating expenses to fund greater levels of research and product development, to increase its sales and marketing operations and to expand its distribution channels. To the extent that such expenses precede, or are not subsequently followed by, increased revenues, the Company's financial position, results of operations, and cash flows will be materially and adversely affected. Due to the foregoing factors, it is likely that the operating results of the Company for some future quarters may fall below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock could be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES Historically, net cash used in operating activities and investing activities of the Company has been significant due to operating losses from acquisitions and mergers and working capital requirements resulting from the growth of the Company, including increases in accounts receivable. Net cash used in operating activities of the Company totaled $10.8 million and $1.3 million for the nine months ended September 30, 1997 and 1996, respectively. The increase in cash used in operating activities is primarily attributed to the approximately $11 million paid in connection with the merger with Fractal and the acquisition of Specular, the increase in accounts receivable resulting from increased product offerings and the growth in revenues since September 30, 1996, and the increase in income taxes receivable relating to tax benefits resulting from deductible expenses incurred in connection with the $16.2 million write-off of acquired in- process technology and other costs resulting from the merger with Fractal and acquisition of Specular. Net cash used in investing activities totaled $364,000 and $41.6 million for the nine months ended September 30, 1997 and 1996. The change resulted primarily from net sales and purchases of short-term investments and purchases of property and equipment. Net cash 16 provided by financing activities totaled $965,000 and $210,000 for the nine months ended September 30, 1997 and 1996, respectively. The increase in cash provided by financing activities resulted from proceeds from the exercise of stock options by the Company's employees during the respective periods. The Company expects that its working capital requirements will continue to increase to the extent the Company continues to grow. The Company believes that its current cash balances, cash provided by future operations, if any, and available borrowings under the Company's line of credit are sufficient to meet its working capital needs and anticipated capital expenditure requirements through at least the next twelve months. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS No. 128 requires companies to adopt its provisions for fiscal years ending after December 15, 1997 and requires restatement of all prior period earnings per share ("EPS") data presented. Earlier application is not permitted. SFAS No. 128 specifies the computation, presentation, and disclosure requirements for EPS. The implementation of SFAS No. 128 is not expected to have a material effect on the EPS data previously presented by the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130, which requires companies to adopt its provisions for fiscal years ending after December 15, 1997, establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The impact of adopting SFAS No. 130 has not been determined by the Company. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131, which requires companies to adopt its provisions for fiscal years ending after December 15, 1997, requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments include profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. The impact on the Company of adopting SFAS No. 131 has not been determined. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Exhibit Title ------- ------------- 11.1 Statement Regarding Computation of Net Income (Loss) per Common Share 27.1 Financial Data Schedule (b) Reports on Form 8-K On August 12, 1997, the Company filed a report on Form 8-K/A to file the consolidated financial statements of Fractal as of March 31, 1997 and 1996, and for the two years in the period ended March 31, 1997, and the consolidated financial statements of MetaCreations as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, reflecting its merger with Fractal. 18 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. METACREATIONS CORPORATION (Registrant) Date: November 13, 1997 /s/TERANCE A. KINNINGER ----------------------- Terance A. Kinninger Sr. Vice President and Chief Financial Officer 19 EX-11.1 2 STATEMENT OF NET INCOME (LOSS) PER COMMON SHARE Exhibit 11.1 METACREATIONS CORPORATION STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ -------------------------- 1997 1996 1997 1996 ------------------------ -------------------------- PRIMARY AND FULLY DILUTED (1) Weighted average shares outstanding for the period............................... 23,175 20,649 22,757 20,488 Common equivalent shares, including items pursuant to Staff Accounting Bulletin No. 83................................... 1,678 2,078 -- 2,253 ------------------------ -------------------------- Shares used in per share calculation...... 24,853 22,727 22,757 22,741 ======================== ========================== Net income (loss)......................... $ 3,605 $ 2,785 $(9,181) $ 4,820 ======================== ========================== Net income (loss) per common share........ $ 0.15 $ 0.12 $ (0.40) $ 0.21 ======================== ==========================
(1) Primary and fully diluted calculations are substantially the same. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUL-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 11,409 11,409 40,873 40,873 25,343 25,343 0 0 1,569 1,569 87,731 87,731 11,240 11,240 4,071 4,071 96,486 96,486 11,664 11,664 0 0 0 0 0 0 23 23 84,799 84,799 96,486 96,486 21,008 53,009 21,008 53,009 3,023 9,254 3,023 9,254 13,588 55,315 0 0 0 0 5,224 (9,144) 1,619 37 3,605 (9,181) 0 0 0 0 0 0 3,605 (9,181) 0.15 (0.40) 0.15 (0.40)
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