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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: November 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-14779
MEDIA 100 INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2532613
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
290 DONALD LYNCH BOULEVARD
MARLBOROUGH, MASSACHUSETTS 01752-4748
(Address of principal executive offices, including zip code)
(508) 460-1600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on January 31, 2000
as reported on the Nasdaq National Market System, was approximately
$143,278,740. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of January 31, 2000, registrant had 8,599,823 Common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in response to certain portions of Part III of
Form 10-K is hereby incorporated by reference to the specified portions of the
registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
in April 2000.
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PART I
This Report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors That
May Affect Future Results" and elsewhere in this Report, that could cause actual
results to differ materially from historical results of those currently
anticipated. In this Report, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undo reliance on these forward-looking
statements, which speak only as of the date hereof.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Media 100 Inc., a Delaware corporation, (the "Company") develops,
markets, sells, and supports digital video and web-based streaming media
software and systems, or tools, that enable new Internet broadcasters and
traditional broadcasters, corporate marketing professionals, and educators to
create and deliver high-quality video programs quickly, easily, and with great
creative flexibility. The Company markets and delivers its products to end users
through its web sites as well as through a worldwide channel of specialized
value-added resellers ("VARs") that sell, assemble, and install turnkey systems
using personal computers, disk drives, and ancillary video equipment. Since the
Company began first shipments of its products in 1993, it has shipped over
170,000 software applications and 25,000 systems to users in over 50 countries.
The customers of the Company's digital video and streaming media software
and systems include organizations that use video, including web-based streaming
media, to teach, train, promote, communicate, document, and entertain. Many
adopt the Company's tools for streaming media applications in which digital
video is processed into specialized data streams that can be delivered from a
web site. In addition, the Company is adding new customers who use its tools to
edit and compress video for authoring DVD's. The Company's customers include
major Internet-based networks and portals, traditional broadcasters and media
companies, regional cable television stations, web site design and advertising
agencies, film and video post-production facilities, independent production
companies, performing arts facilities, professional sports organizations,
university media departments, corporate training and marketing communications
departments, as well as government, hospital, religious, and charity
organizations.
The Company's software and systems typically cost less than
videotape-based systems and other computer-based products. Because of this lower
cost, and because of their personal computer-based open architecture; their ease
of use, and their support of Internet standards such as DV, RealNetworks'
RealSystem G2, Microsoft's Windows Media, Apple Computer's QuickTime 4, and the
variants of MPEG (Motion Pictures Experts Group), including MPEG1, MPEG2, MP3,
and MPEG4, make the Company's products attractive to web site designers, media
professionals, and educators. Many in the Internet and video industries consider
the picture and sound output quality of the Company's products to be superior to
other compression-based digital tools. This makes the Company's products
attractive to advanced users at web-based, cable-based, and over-the-air
television networks. The Company's strategy is to further simplify content
creation and delivery by introducing additional streaming media capabilities
that allow a large market of consumer, corporate, educational, and professional
content creators to create and send a video over the Internet. The Company's
Internet strategy includes introducing more products that are low cost, easy for
consumers to use, easy to upgrade, and deliver high picture and sound quality
regardless of media format or bit rate.
The Company's products consist of software and, in the case of its
advanced integrated systems, specialized hardware and embedded video processors
that give users higher picture and sound quality and greater real-time
capability. The high output quality in both Internet-based streaming media and
traditional video applications,
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combined with real-time performance, simplifies the process of creating and
delivering a video. In comparison, traditional video creation and delivery
methods, which rely on recording, storing, manipulating, and distributing a
video using video tape; neither support real-time editing nor allow content
creators to deliver video digitally over the Internet. Video tape-based systems
also require content creators to separately purchase, assemble, learn to
operate, and maintain numerous pieces of equipment, including multiple video
tape recorders, time base correctors, an edit controller, switcher, separate
effects devices, and a sound mixing console. This equipment is more expensive,
difficult, and often results in lower quality output than creating and
delivering video using personal computer-based tools from the Company. The
Company's software and systems allow users to both create and deliver a
high-quality video using disk storage and the Internet instead of video tape.
Viewers can watch an Internet video using free media player software that lets
them click on a web site and deliver video to their personal computer. The
Company believes the simplicity of Internet video will allow it to succeed in a
market of many new consumer, corporate, institutional, and professional media
users.
MARKET
The Company believes that digital techniques for video editing, effects
creation, and sound mixing, along with emerging Internet-specific techniques for
delivering video, are changing how audio-visual content is created and
distributed. Much as personal computer-based desktop publishing changed the
technology and economics of offset printing, and made it possible for
individuals to create and distribute their own publications easily and
affordably, the Company's personal computer-based software and systems permit
virtually any personal computer user to be a broadcaster. With the Company's
products, individuals can both create and deliver a video themselves, especially
through streaming, using the Internet as a broadcasting medium. The Company
believes that as digital video (DV) camcorders, personal computers, and Internet
access decrease in cost and increase in popularity, millions of businesses,
schools, new media companies, and individuals will adopt digital video and
streaming media technology.
The Company classifies the digital video and streaming media market into
three broad categories: consumers, the middle market; and media professionals.
The consumer segment is new and driven by the convergence of DV camcorders, home
PCs, and the Internet. The middle market consists of businesses and institutions
adding Internet video to their web sites. The media professionals segment
consists of new Internet-based broadcasters that are building streaming media
web sites, which they plan to expand into commerce-oriented entertainment and
communications powerhouses.
CONSUMERS
The Company uses the term, "consumers," to include individuals,
businesses, and institutions that need to edit video at low cost and without
complication. The Company believes this segment will grow rapidly in the future
as consumers increase their purchases of DV camcorders that connect directly and
easily to personal computers. The DV camcorder format allows consumers to
capture video at high quality, then transfer the video digitally using an
interface (cable and connector) standard, called IEEE 1394, that DV camcorders
and a growing number of personal computers share. The Company believes that as
more consumers adopt DV camcorders and personal computers, particularly for home
Internet access, and as more personal computers incorporate the IEEE 1394
interface, this segment will grow to represent a significant opportunity.
THE MIDDLE MARKET
The middle market segment comprises businesses, schools, the government,
self-employed independent producers, and small post-production facilities that
provide video editing services to businesses and broadcast facilities.
Businesses create video programs for internal purposes, like employee training,
and external purposes such as corporate and marketing communications. Schools
create video programs to support classroom instruction, create curricula, or
capture a guest speaker or football game. Post-production facilities and
independent producers create professional, broadcast-quality video programs for
large corporate clients and regional and national broadcasting facilities.
Middle market users are often computer and video literate, and invest in new
personal computer-based technology to advance productivity, increase quality,
and lower costs. Increasingly, these users are adopting video editing and
streaming to add audio-visual content to their web sites. For web site
developers at
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schools, streaming media provides a low cost means to support distance learning
and curriculum development using personal computers. Many of the Company
corporate customers are creating web sites with streaming media to support
marketing promotions and e-commerce.
MEDIA PROFESSIONALS
The media professionals segment comprises media companies, advertising
agencies, specialized firms that design corporate web sites, and independent
post-production facilities that service all of these groups as well as
traditional broadcasters. Media companies include corporations like Disney,
Viacom, and Time Warner that create original programming (content) for video,
film, and print, as well as a new generation of web-based networks creating
video content for deployment on a web site. Post-production companies are
facilities that own state-of-the-art content creation equipment and employ
full-time editors, graphic designers, and engineers, which they "rent out" to
corporate, broadcast, agency, and film clients at hourly rates based on the
sophistication of the selected people and equipment. Internet-based networks
comprise new web sites that permit Internet users to stream video.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards, and frequent new product
introductions. The Company's future success will depend in part upon its ability
to enhance its 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 the Company's existing products
obsolete. For a further discussion of the risks and uncertainties associated
with new product development and product introductions and transitions, see
"Certain Factors That May Affect Future Results" included in Part II, Item 7 of
this Annual Report on Form 10-K.
STRATEGY
Media 100's mission is to be the leading supplier of digital video and
streaming media tools to businesses, schools, institutions, and media
organizations, particularly ones that are adopting the Internet as a medium for
distributing audio-visual content. In 1999, the Company established a leading
position in the market for streaming media tools. The Company introduced
software and systems that allow web site designers, IT professionals, and new
web-based broadcasters to create digital audio and digital video content, then
stream this content over the Internet. The Company's products encompass support
for multiple major streaming formats, both audio and video; and the Company
intends to continue adding new support for emerging formats.
To help accelerate its entry into the streaming media market place, the
Company completed two acquisitions in calendar 1999 and announced a third. The
first acquisition was Terran Interactive, Inc., which the Company closed in June
1999.
On December 17, 1999, the Company announced it has entered into a
definitive agreement to acquire the assets of Wired, Inc. Wired, Inc. is a fast
growing supplier of MPEG streaming media production tools for the Internet and
DVD authoring. The Company completed the acquisition at the end of December
1999.
On December 28, 1999, the Company announced it had entered into a
definitive agreement to acquire Digital Origin, Inc. Digital Origin, Inc. is a
leading developer of digital video editing and effects software applications
designed to support the new low-cost, high-quality DV camcorders used for
acquiring video for Internet applications. The Company expects that the merger
will be completed as a pooling of interest for accounting purposes, and a
tax-free transaction. Under the agreement, the Company will issue 0.5347 shares
of its common stock for each share of Digital Origin, Inc. common stock. The
transaction is subject to the approval of the stockholders of Media 100 Inc. and
Digital Origin, Inc. and other customary closing conditions. The merger is
expected to be completed in the first half of calendar 2000. In addition, the
company entered into a non-exclusive, four year OEM development and license
agreement with Digital Origin by which Media 100 will use Digital Origin's
consumer level editing and effects software with the Company's Internet
streaming media software in exchange for royalty payments.
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To increase its range of customers, the Company has developed
relationships with popular content sites on the Internet while it also added
thousands of corporate, educational, and government Internet users to its
installed base. In 1999, the Company also announced new partnerships with major
Internet developers like Apple Computer, encoding.com (renamed Loudeye.com),
ExciteAtHome, and Microsoft that the Company believes will help further promote
and distribute its solutions, services, and technology.
An important element of the Company's strategy is that its software and
systems tools support all three of the major competing streaming media player
standards--these are Real Networks' RealSystem G2, Microsoft's Windows Media,
and Apple's QuickTime 4--each can be downloaded by Internet users quickly,
easily, and free of charge. The Company plans to continue to work directly with
RealNetworks, Microsoft, and Apple Computer to help develop and popularize each
of their respective media player standards, and to provide users with the
capability to convert between the formats, which are all incompatible. The
Company believes that this strategy gives it the advantage of being able to
offer to customers--web site designers adding video to their web sites--the
ability to create video programs that can be streamed--viewed--by the largest
possible Internet audience. The Company estimates over 100 million individuals
to date play audio and video content on the web using media players from
RealNetworks, Microsoft, and Apple Computer.
PRODUCTS
The Company's product lines consist of digital video streaming media
software and systems and a service line called Platinum. The first product line,
Media Cleaner, comprises mainly cross-platform software applications used by web
site designers for processing video into streams that web viewers can access
with any standard media player. The second product line, sold under the iFinish
and Media 100 names, comprises advanced, integrated, Windows NT-based and
advanced Macintosh-based workstations that permit web site designers, corporate
communicators, educators, and media professionals to digitally edit video,
create effects, mix sound, and process finished video programs into standard
media player-compatible or MPEG-compatible streams. The Company's Platinum
service line comprises service and support packages that give users access to
free, automatic software upgrades, 24-hour-per-day support, and other benefits
such as extended warranties and fast turn-around on hardware swaps.
INTERNET TOOLS
MEDIA CLEANER PRODUCT LINE - WINDOWS AND MACINTOSH
Product Date of First Shipment by Product Features
Media 100
Media Cleaner November 1999 Advanced system with
Power Suite hardware-based streaming media
acceleration
Media Cleaner Pro June 1999 Flagship streaming media
software application
Media Cleaner EZ June 1999 Novice streaming media software
application--"Wizard" based
MEDIA CLEANER PRODUCT LINE
The Media Cleaner product line gives web site designers software tools to
process audio and video originating from virtually anywhere into streams that
they can host on their web sites for Internet users to click on and download
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(stream) with the free media player software available from RealNetworks,
Microsoft, and Apple Computer. The Media Cleaner products support the Windows
and Macintosh platforms. In addition to supporting Internet video applications,
the Media Cleaner tools also give video editors and content creators the ability
to output video to CD-ROM and DVD. The software is easy to use and makes
creating Internet video streams in multiple, different, incompatible formats--at
multiple data rates--an easy, automated process, which saves time, money, and
reduces complexity for the content creator. Today, the Company believes the
picture and sound output quality of the streams that users can deliver using
Media Cleaner products is the best in the industry, per format and bit rate.
Media Cleaner is compatible with many third-party digital video systems, and
gives iFinish and Media 100 users, in particular, interoperability features that
simplify using the products together
DIGITAL VIDEO SYSTEMS
iFINISH PRODUCT LINE - WINDOWS NT PLATFORM
Product Date of First Shipment by Product Features
Media 100
iFinish V80 December 1999 (1) High performance streaming
media production with built-in
DV, real-time editing, effects,
and sound mixing
iFinish V60 December 1999 (1) Complete streaming media
production system with built-in
DV, real-time audio processing,
static chroma and luma key
iFinish V40 December 1999 (1) Long-form editing system
iFinish V20 DV December 1999 (1) Assembly system
SDI Option June 1999 Add-on for serial digital I/O
equipment
MPEG Option February 2000 Add-on for real-time MPEG2
encoding
- ----------------
(1) Version 3.0 release
iFINISH PRODUCT LINE
iFinish is the name of the Company's new product line of high performance
Windows NT streaming media production systems, which the Company began shipping
in December 1999. These systems give middle market users and media professionals
advanced content creation--video editing, effects, graphics, and sound
mixing--along with integrated features for creating streams, based on technology
in Media Cleaner. These systems are designed to allow content creators to
assemble video programs using source material from virtually anywhere, analog or
digital, then output their finished productions anywhere--to the web, to DVD, to
tape, to cable, or to air. This workflow flexibility means iFinish users can
invest themselves in creating valuable content once, then deliver
it--"repurpose" it--in many different forms as traditional or new media. The
iFinish products give content creators advanced performance, including real-time
editing, effects design and processing in real time, and real-time sound mixing
of numerous, CD-quality audio tracks. The systems are fully integrated, which
means users find them easy to set up, easy to learn, and highly reliable in the
field.
6
MEDIA 100 PRODUCT LINE - MACINTOSH PLATFORM
Product Date of First Shipment by Product Features
Media 100
Media 100 xr November 1999 (2) High performance streaming
media production with built-in
DV, real-time editing, effects,
and sound mixing
Media 100 xs November 1999 (2) Complete streaming media
production system with built-in
DV, real-time audio processing,
static chroma and luma key
Media 100 xe November 1999 (2) Real-time graphics system:
insert/assemble editing;
uncompressed alpha channel; EDL
support
Media 100 lx November 1999 (2) Editing with component video
connections
Media 100 le November 1999 (2) Entry-level real-time editing
SDI Option June 1999 Add-on for serial digital I/O
equipment
- ---------------
(2) Version 6.0 release.
MEDIA 100 PRODUCT LINE
The Company began first shipments of the version 6.0 release of the
Media 100 product line in November 1999, giving Macintosh users new effects
design capabilities, especially improved interoperability with Adobe's After
Effects, and for the first time new streaming media features, based on
technology in Media Cleaner. Version 6.0 also supports Apple Computer's latest
generation of computers called "G4," giving users faster host-based processing.
Like the iFinish systems, the Media 100 systems give a wide range of middle
market users and media processionals high-quality, real-time content creation
capability. The Company has shipped greater than 25,000 Media 100 systems
worldwide since the version 1.0 release in 1993; the Media 100 installed base is
active and purchases new releases of the Company's system software.
SERVICES
Platinum Support Services comprise technical support and service
packages offered to customers for an annual fee. Customers purchase Platinum
packages with options such as: toll-free telephone technical support (either
during business hours, five days a week, or 24 hours per day, seven days a
week); automatic free software updates; temporary replacement hardware; extended
warranty; and a quarterly newsletter. In addition, the Company has from time to
time offered hardware upgrades, replacement hardware, and new products to
Platinum subscribers at preferred prices. The Company has also introduced the
Platinum One-Stop service, in which subscribers can obtain telephone technical
support for compatible third-party products integrated with their digital video
system.
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The Company develops all its software and systems tools with an open
design to permit them to work directly, easily, reliably, and at high quality
with other software applications, different host computer systems, peripherals,
and video equipment. For its systems products, the Company's open system design
strategy also facilitates utilization of value-added resellers ("VAR") as a
sales channel. The VAR's regard as a business opportunity the configuration and
sales of turnkey solutions to meet end user requirements. Therefore, although it
sells hardware that integrates with personal computers, the Company does not
typically resell the commodity personal computers and peripherals itself that
are integral to digital video workstations. However, to ensure its systems are
configured properly with the highest quality and latest computers and
peripherals, the Company employs a formal continuous process of working with
computer, disk storage, and various other peripherals suppliers to test,
authorize, and promote specific configurations to the reseller channel. The
Company believes this process fosters integral relations between the Company and
its channel as well as a positive reputation for reliability among end users. In
addition, the Company sells its Platinum services, which enables the Company to
talk directly to the end users of its products all over the world, and provide a
direct means for capturing and quantifying end user satisfaction with its
products, channel partners, and services.
TECHNOLOGY AND PRODUCT FEATURES
The Company has designed its products as software applications or
integrated software and hardware systems that offer high performance on a
Windows or Macintosh personal computer. The basic performance of its tools
produces broadcast-quality picture and compact disc-quality sound, with an open
system design. The Company's control of the development, design and
manufacturing of the software and hardware of its products allows it to conform
one to the other, specifically and solely to support the user requirements of
the target market.
The Company's iFinish and Media 100 systems comprise two general
categories of software: a user interface application level of software; and
embedded system software, which controls real-time data movement in concert with
the host computer operating system, while also serving to control hardware
functions as an intermediary between the application and the hardware circuits.
This software design shields users from technical concerns while providing
efficient, reliable management over numerous, simultaneous low-level computing
tasks. In addition, the Company's user interface provides a means for accessing
other applications to bring graphics or specialized video and audio effects
processing into the hub editing environment. The Company believes its
application software is strategically valuable because it is at the center of
its users' workflow.
Each of the Company's systems use a digital video hardware engine
designed and manufactured by the Company specifically to support essential video
and audio processing functions. The hardware engine comprises one or two PCI
cards that fit into the backplane of either a Windows NT or Macintosh computer.
The hardware includes broadcast-quality video input and output decoder/encoder
subsystems, a proprietary, dynamically-variable compression subsystem, a 16-bit
eight-track compact disc-quality digital audio subsystem, and two high-speed
32-bit microprocessors responsible for transferring digital audio and video
data, at throughput rates of up to 30 megabytes per second, inside the host
computer's central processing unit ("CPU"). The Company's hardware engine is the
primary technical facilitator of real-time, nonlinear performance with output
that provides broadcast-quality video and compact disc-quality audio. The
Company's auxiliary HDRfx effects card, when used in conjunction with a core
digital video hardware engine, enables the processing of a second stream of
video of similar quality. The output video is 30 frames per second, 60 fields
per second (NTSC) or 25 frames per second, 50 fields per second (PAL) and
synchronized with up to eight tracks of audio.
SALES AND DISTRIBUTION
The Company markets and delivers its products to end users through a
worldwide channel of specialized value-added resellers ("VARs"), distributors,
and direct to end users through its telemarketing group and its website. VARs
and distributors account for the majority of the Company's sales and VARs
typically sell, assemble, and install turnkey systems using personal computers,
disk drives, and ancillary video equipment. For a further discussion of the
risks and uncertainties associated with the Company's dependence on an indirect
sales channel of independent VAR's, see "Certain Factors That May Affect Future
Results" included in Part II, Item 7 of this Annual Report on Form 10-K.
8
Internationally, the Company has adopted the same sales channels. In the
United Kingdom, France, Germany and Italy, the Company has subsidiaries which
manage web site sales, VAR networks, and contract with distributors who may sell
directly to end users or through VAR networks of their own. Elsewhere, the
Company sells through distributors, which may sell directly to end users, or act
as VARs, or manage VAR networks in their respective territories. Sales of Media
100 products outside of the United States represented approximately 39%, 44% and
44% of the Company's net sales for fiscal years 1999, 1998, and 1997,
respectively. For additional information as to revenue by geographic location,
see Note 12 in the Notes to Consolidated Financial Statements. For a further
discussion of the risks and uncertainties associated with international
operations, see "Certain Factors That May Affect Future Results" included in
Part II, Item 7 of this Annual Report on Form 10-K.
COMPETITION
The digital video and streaming media software and systems market is
highly competitive. A large number of suppliers provide different types of
products, including video tape-based analog systems and disk-based digital
systems such as the Company's products to different segments of the market. In
the market, there is continuous pressure to reduce prices, incorporate new
features, and improve functionality.
The Company encounters competition primarily from Accom, Inc., Apple
Computer, Avid Technology, Inc., Discreet Logic, Inc., a division of Autodesk
("Discreet"), Matrox Electronic Systems Ltd., Pinnacle Systems, Inc.,
RealNetworks, and Sonic Foundry. Competition also comes from Matsushita Electric
Industrial Company Ltd. ("Matsushita") and Sony Corporation ("Sony"), which have
either introduced or announced plans to introduce disk-based digital video
systems. Because the digital video and streaming media market is constantly
changing, it is difficult to predict future sources of competition; however,
competitors are likely to continue to include larger vendors, such as Apple
Computer, Matsushita, and Sony. Many of these competitors have substantially
greater financial, technical and marketing resources than the Company. For a
further discussion of the risks and uncertainties associated with the
competitive landscape for the Company's products, see "Certain Factors That May
Affect Future Results" included in Part II, Item 7 of this Annual Report on Form
10-K.
RESEARCH AND DEVELOPMENT
The Company invests in research and development for new products and for
enhancements to its existing products. The Company employed, as of January 14,
2000, 80 full-time employees whose primary duties relate to product development
and research on potential new products and technologies. Outside firms and
consultants are selectively engaged to develop or assist with development of
products when favorable opportunities exist. In order to compete successfully,
the Company believes it must attract and retain qualified personnel and maintain
a program of improvement of existing products, as well as the research and
development of new products. For a further discussion of the risks and
uncertainties associated with new product development, see "Certain Factors That
May Affect Future Results" included in Part II, Item 7 of this Annual Report on
Form 10-K.
For the fiscal years ended November 30, 1999, 1998 and 1997, the
Company invested approximately $13,074,000, $16,414,000 and $8,508,000,
respectively, on the development of enhancements to its existing products and
for the research and development of new products and technologies.
MANUFACTURING
The Company's manufacturing operations consist primarily of manufacturing
and testing of printed circuit assemblies, final product assembly, quality
assurance and shipping, and are conducted at its facility located in Marlboro,
Massachusetts. The Company believes that its control of manufacturing
significantly contributes to hardware design improvements, allows for quicker
development of products for shipment to market, results in superior product
quality, and lowers the total cost of goods for products manufactured by the
Company. The Company periodically assesses its production efficiencies against
the benefits of out-sourcing certain hardware production and has, on occasion,
out-sourced certain products to third parties when it was determined to be more
cost effective than internally manufacturing the product.
9
Components used in the assembly of the Company's hardware products are
generally available from several distributors and manufacturers. However, 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 the Company's ability to provide suppliers with
accurate forecasts of its future requirements, and certain components used by
the Company have been subject to industry-wide shortages. For a further
discussion of the risks and uncertainties associated with the Company's
dependence on single or limited source suppliers, see "Certain Factors That May
Affect Future Results" included in Part II, Item 7 of this Annual Report on Form
10-K.
PROPRIETARY RIGHTS
The Company's ability to compete successfully and achieve future revenue
growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company
relies on a combination of patent, copyright, trademark and trade secret laws
and other intellectual property protection methods to protect its proprietary
technology. In addition, the Company generally enters into confidentiality
agreements with its employees and with third parties with which it shares its
proprietary information, and limits access to and distribution of such
information. The Company owns seven United States patents, beginning to expire
in 2012, and has nine pending patent applications in the United States, none of
which the Company believes are material. Although the Company pursues a policy
of obtaining patents for appropriate inventions, the Company believes that its
success depends primarily on the proprietary know-how, innovative skills,
technical competence and marketing abilities of its employees, rather than upon
the ownership of patents.
Certain technology used in the Company's products is licensed from third
parties on a royalty-bearing basis. Generally, such agreements grant to the
Company non-exclusive, worldwide rights to the subject technology and are either
renewable on a periodic basis or provide for fully paid-up non-cancellable
rights upon the receipt of certain aggregate payments. In certain cases the
licensor may terminate the license for convenience, although the Company
believes that the effect of any such termination would not be material.
For a further discussion of the risks and uncertainties associated with
proprietary rights in the Company's industry and certain pending litigation, see
Item 3 and "Certain Factors That May Affect Future Results" included in Part II,
Item 7 of this Annual Report on Form 10-K.
BACKLOG
Most customers (VARs) order products on an as-needed basis relying, in
the case of most products, on the Company's five-day delivery capability. As a
result, the Company believes that its backlog at any point in time is not
indicative of its future sales.
EMPLOYEES
As of January 14, 2000, the Company employed approximately 272 persons
worldwide. None of the employees is represented by a labor union. The Company
believes it has good relations with its employees.
Competition for employees with the skills required by the Company is
intense in the geographic areas in which the Company's operations are located.
The Company believes that its future success will depend on its continued
ability to attract and retain qualified employees, especially in research and
development.
OTHER
Media 100, Finish, P6000, Vincent, HDRfx, Terran Interactive, Media Cleaner and
Platinum are trademarks of Media 100 Inc. and may be registered in certain
jurisdictions. All other trademarks and registered trademarks are the property
of their respective holders, and are hereby acknowledged.
10
ITEM 2. PROPERTIES
The Company's headquarters are located at 290 Donald Lynch Boulevard,
Marlboro, Massachusetts where it occupies approximately 56,500 square feet in a
leased facility and includes executive and manufacturing operations, along with
certain engineering, and sales and marketing operations. The lease for this
facility terminates on March 31, 2002. Prior to moving into its current facility
on May 2, 1997, the Company's operations occupied approximately 31,000 square
feet in a facility that it shared with Data Translation, Inc. located in
Marlboro, Massachusetts. Total rental expense including operating expenses
pursuant to the lease agreement with respect to the Company's current Marlboro
facility for fiscal years 1999, 1998, and 1997 was $879,000, $822,000, and
$542,000, respectively, and with respect to its former Marlboro facility the
amount was $527,000 in fiscal year 1997. Rental expense with respect to the
former Marlboro facility for fiscal 1997 reflected the Company's pro rata
portion of the rental charges and operating expenses associated with that
facility and the use by the Company of certain manufacturing equipment belonging
to Data Translation, Inc.
As part of the acquisition of Terran in June 1999, the Company occupies
additional office space located at 15951 Los Gatos Boulevard, Suite 6, Los
Gatos, California. The Company operates its Terran subsidiary out of this
location where a majority of the engineering and sales and marketing for the
Terran Interactive subsidiary is conducted. As part of the acquisition of Wired
in December 1999, the Company also occupies additional space located at 1040-155
Grant Road, Building 155, Mountain View, California. Currently, the Company
operates its Wired subsidiary out of this location where a majority of the
distibution, engineering and sales and marketing is conducted. The Company also
occupies sales and customer support facilities in or near Paris, France;
Bracknell, England; Munich, Germany; and Brescia, Italy.
ITEM 3. LEGAL PROCEEDINGS
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. There can be no assurance that the Company will
prevail in the lawsuit asserted by Avid or that the expense or other effects of
the lawsuit, whether or not the Company prevails, will not have a material
adverse effect on the Company's business, operating results and financial
condition.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
fourth quarter of fiscal year 1999.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company trades on the National Market tier of The
Nasdaq Stock Market under the symbol "MDEA." The following table sets forth, for
the periods indicated, the high and low sales prices per share of the Company's
common stock as reported on the Nasdaq National Market:
Fiscal year ended November 30, HIGH LOW
1998:
First Quarter............................................ $ 5 7/8 3 1/4
Second Quarter........................................... $ 5 5/16 3 6/32
Third Quarter............................................ $ 4 1/4 3 1/8
Fourth Quarter........................................... $ 4 13/16 2 1/2
1999:
First Quarter............................................ $ 6 5/16 4 3/16
Second Quarter........................................... $ 6 3/4 4 5/16
Third Quarter............................................ $ 7 1/16 4 11/16
Fourth Quarter........................................... $ 17 7/8 5 1/4
The last reported sale price per share of the Company's common stock as
reported on the Nasdaq National Market on January 31, 2000 was $22.50. As of
January 31, 2000, there were 217 stockholders of record, and the Company
believes that as of such date there were approximately 2,700 beneficial owners
of the Company's common stock, based upon information provided by the Company's
transfer agent. The Company has never paid a cash dividend on its common stock,
and the Board of Directors does not anticipate paying cash dividends in the
foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with, and are
qualified in their entirety by, the Company's consolidated financial statements,
related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
FISCAL YEARS ENDED NOVEMBER 30,
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Net sales:
Products $42,624 $ 34,597 $ 41,950 $ 48,739 $ 29,872
Services 8,855 7,191 4,710 2,087 406
-------- --------- --------- --------- ---------
Total net sales 51,479 41,788 46,660 50,826 30,278
Cost of sales 19,704 17,367 19,184 20,782 12,879
-------- --------- --------- --------- ---------
Gross profit 31,775 24,421 27,476 30,044 17,399
Operating expenses:
Research and development 13,074 16,414 8,508 6,227 4,806
Selling and marketing 14,208 13,870 15,115 14,330 8,920
General and administrative 4,225 3,810 4,330 5,034 2,024
Amortization of intangible assets 231 - - - -
Acquired in-process research and
development 430 - - - -
Restructuring expense 424 - 526 - -
-------- --------- --------- --------- ---------
Total operating expenses 32,592 34,094 28,479 25,591 15,750
-------- --------- --------- --------- ---------
Operating income (loss) (817) (9,673) (1,003) 4,453 1,649
Interest income 1,387 1,622 1,781 1,588 771
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations before tax provision 570 (8,051) 778 6,041 2,420
Tax provision - - 161 1,208 75
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations 570 (8,051) 617 4,833 2,345
-------- --------- --------- --------- ---------
Discontinued operations:
Income (loss) from discontinued
operations - - - (6,672) 2,426
-------- --------- --------- --------- ---------
Net income (loss) $ 570 $(8,051) $ 617 $ (1,839) $ 4,771
======== ========= ========= ========= =========
Basic earnings (loss) per share:
Continuing operations $ 0.07 $ (0.97) $ 0.07 $ 0.60 $ 0.39
Discontinued operations - - - (0.83) 0.40
-------- --------- --------- --------- ---------
Basic earnings (loss) per share $ 0.07 $ (0.97) $ 0.07 $ (0.23) $ 0.79
======== ========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations $ 0.06 $ (0.97) $ 0.07 $ 0.57 $ 0.35
Discontinued operations - - - (0.79) 0.36
-------- --------- --------- --------- ---------
Diluted earnings (loss) per share $ 0.06 $ (0.97) $ 0.07 $ (0.22) $ 0.71
======== ========= ========= ========= =========
Weighted average common shares
outstanding:
Basic 8,347 8,273 8,148 7,993 6,058
======== ========= ========= ========= =========
Diluted 8,807 8,273 8,247 8,470 6,701
======== ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
FISCAL YEARS ENDED NOVEMBER 30,
(IN THOUSANDS) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Cash, cash equivalents and
marketable securities $ 28,400 $ 32,434 $ 32,934 $ 30,716 $ 35,161
Working capital 22,750 21,797 29,146 34,496 42,798
Total assets 45,843 48,472 50,759 59,990 60,984
Total stockholders' equity 31,249 30,473 37,843 50,065 46,909
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements, including,
but not limited to, statements with respect to the Company's future financial
performance, operating results, plans and objectives, and actual results may
differ materially from those currently anticipated depending upon a variety of
factors, including those described below. See "Certain Factors That May Affect
Future Results" herein.
OVERVIEW
Media 100 Inc., a Delaware corporation, (the "Company") engineers,
markets, sells, and supports digital video and web-based streaming media
software and systems--tools--that enable new Internet broadcasters and
traditional broadcasters, corporate marketing professionals, and educators to
create and deliver high-quality video programs quickly, easily, and with great
creative flexibility. The Company markets and delivers its products to end users
through its web sites as well as through a worldwide channel of specialized
value-added resellers ("VARs") that sell, assemble, and install turnkey systems
using personal computers, disk drives, and ancillary video equipment. Since the
Company began first shipments of its products in 1993, it has shipped over
170,000 software applications and 25,000 systems to users in over 50 countries.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP 97-2
provides revised and expanded guidance on software revenue recognition and
applies to all entities that earn revenue from licensing, selling and otherwise
marketing computer software. The Company adopted the provisions of SOP 97-2 as
of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a
material impact on the Company. 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. The Company provides for
estimated returns 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.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain
consolidated statements of operations data as a percentage of net sales.
FISCAL YEARS ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
Net sales:
Products 82.8% 82.8% 89.9%
Services 17.2 17.2 10.1
---------- ---------- ----------
Total net sales 100.0 100.0 100.0
Cost of sales 38.3 41.6 41.1
---------- ---------- ----------
Gross profit 61.7 58.4 58.9
---------- ---------- ----------
Operating expenses:
Research and development expenses 25.4 39.3 18.2
Selling and marketing expenses 27.6 33.2 32.4
General and administrative expenses 8.2 9.1 9.3
Amortization of intangible assets 0.5 - -
Acquired in-process research and development 0.8
Restructuring expense 0.8 - 1.1
---------- ---------- ----------
Total operating expenses 63.3 81.6 61.0
Operating loss (1.6) (23.2) (2.1)
Interest income 2.7 3.9 3.8
---------- ---------- ----------
Income (loss) from operations before tax
provision 1.1 (19.3) 1.7
Tax provision - - 0.4
---------- ---------- ----------
Net income (loss) 1.1% (19.3)% 1.3%
========== ========== ==========
COMPARISON OF FISCAL 1999 TO FISCAL 1998
14
Net sales. The Company's total net sales for fiscal 1999 increased 23.2%
to $51.5 million from $41.8 million for fiscal 1998. Net sales from products for
fiscal 1999 increased 23.2% to $42.6 million from $34.6 million for fiscal 1998.
The increase in net sales from products is due primarily to the shipment of
Finish, the Company's high performance Windows NT-based product line, along with
internet tools sales from the Company's wholly-owned subsidiary Terran
Interactive. Internet tools sales increased to $4.1 million in fiscal 1999 from
$0 in fiscal 1998. The Company completed the acquisition of Terran Interactive,
Inc., ("Terran") a leading developer of streaming media tools for preparing
high-quality video for broadcast on the Internet in June 1999. Net sales from
services for fiscal 1999 increased 23.1% to $8.9 million from $7.2 million for
fiscal 1998. The increase in net sales from services is due to new customers
purchasing and current customers renewing their support contracts.
Net sales from customers outside of the United States accounted for
approximately 39% and 44% of net sales in fiscal 1999 and fiscal 1998,
respectively. The Company is continuing to develop its indirect distribution
channels in the United States, Canada, Europe and Asia and currently anticipates
that customers outside the United States will continue to account for a
substantial portion of its net sales, and as a percentage of net sales, to
remain approximately the same. No customer accounted for more than 10% of the
Company's total net sales in fiscal 1999.
Gross profit. The Company's gross profit increased 30.1% to $31.8 million
in fiscal 1999 from $24.4 million in fiscal 1998. In the first quarter of fiscal
1999, the Company reclassified certain costs associated with its Platinum
support services. The Company now classifies these costs as part of cost of
goods sold. The change in presentation had the affect of increasing cost of
goods sold and reducing selling and marketing expenses by the same amount.
Certain amounts in the comparable period last year have been reclassified to
conform to the current year's presentation. Overall gross profit as a percentage
of net sales increased to 61.7% in fiscal 1999 from 58.4% in fiscal 1998. Gross
profit as a percentage of net sales of products increased to 56.7% in fiscal
1999 from 53.0% in fiscal 1998, while gross profit as a percentage of net sales
of services increased to 85.7% in fiscal 1999 from 84.2% in fiscal 1998. The
increase in gross profit in fiscal 1999 over fiscal 1998 is due primarily to
increased service revenue, which generate higher gross profit than products, and
standalone software sales as a result of the acquisition of Terran in June 1999.
Research and development. Research and development expenses decreased
20.3% to $13.1 million in fiscal 1999 from $16.4 million in fiscal 1998. The
majority of the decrease in research and development expenses represented lower
development costs due to the completion of Finish, the Company's
high-performance Windows NT-based product line, which began shipping in the
first quarter of fiscal 1999. The Company currently anticipates research and
development expenses will increase in absolute dollars in fiscal 2000 versus
fiscal 1999 due to the acquisitions of Terran and Wired, Inc. and the planned
development of their products.
Selling and marketing. Selling and marketing expenses increased 2.4% to
$14.2 million in fiscal 1999 from $13.9 million in fiscal 1998. 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 increase in selling and marketing expenses resulted
primarily from the acquisition of Terran and the Company's promotion of the
streaming media tools acquired as part of the transaction. The Company currently
anticipates that its selling and marketing expenses will increase in absolute
dollars in fiscal 2000 versus fiscal 1999 as the Company increases its focus on
the Internet and the related support of the Company's promotion of its streaming
media tools.
General and administrative. General and administrative expenses increased
10.9% to $4.2 million in fiscal 1999 from $3.8 million in fiscal 1998. General
and administrative expenses include the cost of human resources, finance,
information technology, legal and other administrative functions of the Company.
The increase in general and administrative expenses resulted primarily from
increased personnel costs in support of higher net sales. The Company currently
anticipates that its general and administrative expenses will increase modestly
in fiscal 2000 compared to fiscal 1999 in support of higher anticipated net
sales.
Amortization of intangible assets. The Company recorded an expense for
the amortization of intangible assets of $231,000 in fiscal 1999 as a result of
the acquisition of Terran. In fiscal 2000 the Company will record additional
amortization expense for Terran and for the acquisition of Wired, Inc., an
acquisition that closed in early fiscal 2000. There was no similar expense
recorded in fiscal 1998.
15
Acquired in-process research and development. In connection with the
acquisition, the Company allocated $430,000 of the purchase price to in-process
research and development projects. These allocations represented the estimated
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. In fiscal 2000, the Company
anticipates it will incur additional acquired in-process research and
development expense related to the acquisition of Wired, Inc.
Restructuring expense. In the third quarter of fiscal 1999, the Company
implemented a restructuring plan to better align its organization with its
corporate strategy. The major component of the restructuring charge relates to
the elimination of approximately 12 employees across the following functions:
research and development (4), selling and marketing (7) and general and
administration (1). At November 30, 1999 approximately $232,000 of the accrued
restructuring charge remained, which is entirely comprised of severance-related
costs. The total cash impact of the restructuring amounted to approximately
$424,000. The total cash paid as of November 30, 1999 was $192,000 and the
remaining amount will be paid by the end of the first quarter in fiscal 2000.
Interest income. Interest income decreased 14.5% to $1.4 million in
fiscal 1999 from $1.6 million in fiscal 1998. The decrease in interest income is
due primarily to lower cash and cash equivalent balances in fiscal 1999 versus
1998. The Company currently anticipates interest income will decline in fiscal
2000 versus 1999 due to a reduction in cash early in fiscal year 2000 resulting
from the acquisition of Wired, Inc., which the Company completed in December
1999, and due to an additional cash payment due to the shareholders of Terran.
Tax provision. The Company did not provide for a tax provision in fiscal
1999 due to the utilization of net operating loss carryforwards and tax credits
available to the Company to offset against operating income.
Net income (loss). As a result of the above factors, the Company had net
income in fiscal 1999 in the amount of $570,000, or $0.06 per diluted share,
compared to a net loss of ($8,051,000), or ($0.97) per share, in fiscal 1998.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net sales. The Company's net sales for fiscal 1998 decreased 10.4% to
$41.8 million from $46.7 million for fiscal 1997. The decline is due primarily
to decreased unit sales of Macintosh product and the Company not having a
product available for sale on the Windows NT platform until late in the year.
Net sales from the Company's products running on the Macintosh platform declined
in 1998 from 1997 due to lower unit sales as more customers opted to either wait
until the Company introduces products running on the Windows NT platform or
chose other products from the Company's competitors. Net sales from Platinum
Support Services, the Company's technical support and service products,
increased 52.7% to $7.2 million from $4.7 million for fiscal 1997 as new
customers purchased support contracts and existing customers renewed their
support contracts.
Net sales from customers outside of the United States accounted for
approximately 44% of net sales in both fiscal 1998 and fiscal 1997. The Company
is continuing to develop its indirect distribution channels in the United
States, Canada, Europe and Asia and currently anticipates that customers outside
the United States will continue to account for a substantial portion of its net
sales, and as a percentage of net sales, to remain approximately the same. No
customer accounted for more than 10% of the Company's total net sales in fiscal
1998.
Gross profit. The Company's gross profit decreased 11.1% to $24.4 million
in fiscal 1998 from $27.5 million in fiscal 1997. In the first quarter of fiscal
1999, the Company reclassified certain costs associated with its Platinum
support services. The Company now classifies these costs as part of cost of
goods sold. The change in presentation had the affect of increasing cost of
goods sold and reducing selling and marketing expenses by the same amount.
Certain amounts in fiscal 1998 and fiscal 1997 have been reclassified to conform
to the current year's presentation. Overall gross profit as a percentage of net
sales decreased to 58.4% in fiscal 1998 from 58.9% in fiscal 1997. Gross profit
as a percentage of net sales of products decreased to 53.0% in fiscal 1998 from
56.5% in fiscal 1997, while gross profit as a percentage of net sales of
services increased to 84.2% in fiscal 1998 from 79.9% in fiscal 1998. The
decrease in the gross profit as a percentage of net sales from products is due
to a decrease in the average selling price for the Company's products.
16
Research and development. Research and development expenses increased
92.9% to $16.4 million in fiscal 1998 from $8.5 million in fiscal 1997. Early in
1998, the Company announced a major research and development expansion to
develop multiple new Windows NT products, while continuing to develop its
products that use Macintosh as a platform. Research and development expenses
consist primarily of the cost of personnel, outside consulting services,
depreciation on capital equipment, and occupancy.
Selling and marketing. Selling and marketing expenses decreased 8.2% to
$13.9 million in fiscal 1998 from $15.1 million in fiscal 1997. 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.
General and administrative. General and administrative expenses decreased
12.0% to $3.8 million in fiscal 1998 from $4.3 million in fiscal 1997. 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 personnel costs due to attrition.
Interest income. Interest income decreased 8.9% to $1.6 million in fiscal
1998 from $1.8 million in fiscal 1997. The decrease in interest income is due to
slightly lower cash and cash equivalent balances in fiscal 1998 versus 1997 and
to a reduction in interest rates for the securities in held in the portfolio.
Tax provision. The Company did not provide for a tax provision in fiscal
1998 due to the significant net loss.
Net income (loss). As a result of the above factors, the Company incurred
a net loss for fiscal 1998 in the amount of ($8,051,000), or ($0.97) per share,
compared to net income of $617,000, or $0.07 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily from public
offerings of equity securities and cash flows from operations. As of November
30, 1999 the Company's principal sources of liquidity included cash and cash
equivalents and marketable securities totaling approximately $28,400,000.
During fiscal 1999, cash used in operating activities was approximately
$653,000 compared to cash provided by operating activities of approximately
$1,922,000 for the same period a year ago. Cash used in operations during fiscal
1999 resulted from increases in accounts receivable of $831,000, inventories of
$511,000, prepaid expenses of $93,000, other assets of $69,000, reductions in
accounts payable of $709,000, accrued expenses of $2,515,000 primarily related
to the payment of certain consulting fees, deferred revenue of $855,000. Net
cash provided by investing activities was approximately $2,947,000 in fiscal
1999 compared to approximately $957,000 for the same period a year ago. Cash
provided by investing activities during 1999 was derived from the proceeds of
sales of marketable securities, net of purchases of approximately $6,556,000.
This was offset by approximately $1,571,000 of capital expenditures for
equipment and purchased software for internal use, purchase of intangible assets
of $147,000 and the acquisition of Terran Interactive, Inc. of $1,890,000. Cash
provided by financing activities during 1999 was approximately $700,000 compared
to $278,000 for the same period a year ago. In 1999, cash provided by financing
activities resulted from the proceeds from the sale of treasury shares and stock
plans of $990,000 and was partially offset by the repurchases of the Company's
common stock of $290,000.
The Company believes its existing cash balance, including cash
equivalents and marketable securities, will be sufficient to meet the Company's
cash requirements for at least the next twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking statements, and are based on current
expectations, and involve known and unknown risks, uncertainties and other
17
factors which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from those expressed in
such forward-looking statements. The risks and uncertainties associated with
such statements include the following:
ACQUISITION RELATED RISKS. During fiscal year ended November 30, 1999, the
Company completed the Terran acquisition. In addition, the Company has completed
the acquisition of Wired, Inc. and has also signed a definitive agreement to
acquire Digital Origin, Inc. The transaction is subject to the approval of the
stockholders of Media 100 Inc. and Digital Origin, Inc. and other customary
closing conditions. The Company anticipates the merger will be completed in the
first half of calendar 2000. The Company's business and results of operations
could be materially adversely affected in the event the Company fails to
complete publicly announced acquisitions or to successfully integrate the
business and operations of these acquisitions. The Company may continue in the
future to acquire existing businesses, products, and technologies to enhance and
expand its line of products. Such acquisitions may be material in size and in
scope. There can be no assurance that the Company will be able to identify,
acquire, or profitably manage additional business or successfully integrate any
acquired businesses into the Company 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 the Company's 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. Some or all of these special risks and factors may have a material
adverse impact on the Company's business, operating results, and financial
condition.
SIGNIFICANT FLUCTUATIONS AND UNPREDICTABILITY OF OPERATING RESULTS. The
Company's quarterly operating results may vary significantly for a number of
reasons, including new product announcements and introductions by the Company or
its competitors, changes in pricing, and the volume and timing of orders
received during the quarter. The Company has also in the past 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 the Company's 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. Therefore, if quarterly
revenue levels fail to meet internal expectations, the Company's operating
results would be adversely affected.
EMERGING MARKETS. The Company is 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. The
Company's success in this emerging market will depend on the rate at which the
market develops and the Company's ability to penetrate that market. In addition,
in fiscal 2000, the Company plans to begin targeting consumers who are looking
to edit video at low cost and without complication. The Company believes this
market will grow rapidly in the future as consumers increase their purchases of
DV camcorders that connect directly to personal computers. Using a DV camcorder,
a home PC and the Internet, the Company believes consumers will be able to
capture, edit and stream video simply and easily. The Company's future growth
will depend, in part, on the rate at which consumers purchase DV camcorders and
adopt editing and streaming technology. There can be no assurance that the use
of digital video editing and streaming products, like the ones offered by the
Company, will expand among existing users of video production processes or the
market for new users. Any failure of the Company's products to achieve market
acceptance in these markets, as a result of competition, technological change or
other factors, could have a material adverse effect on the Company's business
and operating results.
RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. New product
announcements by the Company's competitors and by the Company itself could have
the effect of reducing customer demand for the Company's existing products. The
introduction of new or enhanced products by the Company also requires the
Company to manage the transitions from existing products. New product
introductions require the Company to devote time and resources to the training
of its sales channel in the features and target customers for such new
18
products, which efforts could result in less selling efforts being made by the
sales channel during such training period. 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.
RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions. The Company's future success will depend in
part upon its ability to enhance its 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 the Company's
existing products obsolete. The Company plan in fiscal 2000 is to continue its
investment in research and development, in connection with the Company's
development strategy. Any delay or failure of the Company 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 the Company's business and operating results.
COMPETITION. The market for the Company's 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 the Company's products,
including Accom, Inc., Apple Computer Inc., Avid Technology, Inc., Discreet (a
division of Autodesk, Inc.), FAST Electronic GmbH, Matrox Electronic Systems
Ltd., Pinnacle Systems, Inc., Real Networks Inc., and Sonic Foundry, Inc. In
addition, the Company expects 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 the Company's
products. Many of these current and potential competitors have greater
financial, technical and marketing resources than the Company. As a result, such
competitors may be able to develop products comparable to or superior to the
Company's products, adapt more quickly than the Company 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 the Company could not
operate profitably, the occurrence of any of which could have a material adverse
effect on the Company's business and operating results. In this regard, the
Company believes that it will continue to experience competitive pressure to
reduce prices, particularly for its high data rate systems. The Company has
historically realized higher gross profit on the sale of its high data rate
systems than its entry-level systems, and such continued competitive pricing
pressure could result in lower sales and gross margin, which in turn could
adversely affect the Company's operating results.
DEPENDENCE ON AND COMPETITION WITH APPLE COMPUTER, INC. As a competitor, Apple
Computer, Inc. ("Apple") could, in the future, inhibits the Company's ability to
develop its 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 the Company's 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 the Company's products. The
Company relies on access to key information from Apple to continue development
of its products and any failure to continue supplying the Company's engineers
with this information could have a material adverse affect on the Company's
business and financial results.
DEPENDENCE ON MICROSOFT CORPORATION. Many of the Company's products operate in
the Windows environment and the Company's engineers depend upon access to
information in advance from Microsoft Corporation ("Microsoft"). Any failure to
continue supplying the Company's engineers with this information could have a
material adverse affect on the Company's business and financial results.
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. The availability of many of these components is dependent on the
Company's ability to provide suppliers with accurate forecasts of its future
requirements, and certain components used by the Company have been subject to
industry-wide shortages. The Company does not carry significant inventories of
these components and has no guaranteed supply arrangements with such suppliers.
There can be no assurance that the Company's inventories would be adequate to
meet the Company's production needs during any interruption of supply. The
Company's inability to develop alternative supply sources, if required,
19
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
the Company's business and operating results in any given period.
DEPENDENCE ON PROPRIETY TECHNOLOGY. The Company's ability to compete
successfully and achieve future revenue growth will depend, in part, on its
ability to protect its proprietary technology and operate without infringing the
rights of others. The Company has in the past received, and may in the future
continue to receive, communications suggesting that its products may infringe
patents or other intellectual property rights of third parties. The Company's
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 the Company 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.
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 the Company or to enforce trade secrets,
trademarks and other intellectual property rights owned by the Company, to
defend the Company 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 3, Legal Proceedings and Note 7(b) to the Consolidated Financial Statements
included herein. Any such litigation could be costly and a diversion of
management's attention, which could adversely affect the Company's business,
operating results and financial condition. Adverse determinations in any such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any of which could adversely affect the Company's business, operating
results and financial condition.
DEPENDENCE ON RESELLERS. The Company relies primarily on its worldwide network
of independent VARs to distribute and sell its content creation products to
end-users. The Company's resellers generally offer products of several different
companies, including in some cases products that are competitive with the
Company's products. In addition, many of these VARs are small organizations with
limited capital resources. There can be no assurance that the Company's
resellers will continue to purchase the Company's products or provide them with
adequate levels of support, or that the Company's efforts to expand its VAR
network will be successful, any significant failure of which could have a
material adverse effect on the Company's business and operating results.
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. The Company's international sales are also subject to more
seasonal fluctuation than domestic sales. In this regard, the traditional summer
vacation period, which occurs during the Company's 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 the Company's future
international operations and consequently, on the Company's business and
operating results.
INTERNET-BASED SALES. In fiscal 1999, the Company implemented e-commerce systems
allowing customers to purchase the Company's products directly from its web
site. Although the portion of revenue derived from its e-commerce web site was
less than five percent in fiscal 1999, the Company anticipates revenue derived
from its e-commerce web site to ramp up in fiscal 2000. There can be no
assurances that the Company's customers will continue to purchase the Company's
products from its web site or that the web site will not experience technical
difficulties thereby causing customers to delay purchases. Any significant
technical difficulties could have a material adverse effect on the Company's
business and operating results.
DEPENDENCE ON KEY PERSONNEL. Competition for employees with the skills required
by the Company is intense in the geographic areas in which the Company's
operations are located. The Company believes that its future success
20
will depend on its continued ability to attract and retain qualified employees,
especially in research and development.
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. The Company has operations within the European Union and
has prepared for the euro conversion. The Company does 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 the Company's
business, financial condition and financial results.
ITEM 7A. 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 US 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, together with the auditors' report
thereon, appear on pages F-1 through F-21 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
21
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Company will furnish to the Securities and Exchange Commission not
later than 120 days after the close of its fiscal year ended November 30, 1999 a
definitive Proxy Statement (the "Proxy Statement") for the Annual Meeting of
Stockholders to be held in April 2000. The information required by this Item is
incorporated herein by reference to "Election of Directors," "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to "Election of Directors" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference
to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to "Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
PAGE
----
(a) (1) Consolidated Financial Statements.
MEDIA 100 INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of November 30, 1999 and 1998........................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended
November 30, 1999, 1998 and 1997............................................... F-4
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended
November 30, 1999, 1998 and 1997............................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
November 30, 1999, 1998 and 1997............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
(a) (2) Financial Statement Schedules.
Not applicable.
(a) (3) List of Exhibits.
3.1 Restated Certificate of Incorporation of Media 100 Inc. (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996 and incorporated by reference herein).
3.2 By-laws of Media 100 Inc., as amended through June 17, 1998 (filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31,1998 and incorporated by reference herein).
22
4 Specimen Certificate representing the Company's Common Stock (filed as
Exhibit 4 to the Company's Registration Statement on Form S-1, File No.
2-94121 and incorporated by reference herein).
10.1* Key Employee Incentive Plan (1982), as amended through November 15,
1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996 and incorporated by reference
herein).
10.2* 1986 Employee Stock Purchase Plan, as amended through April 14,
1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 1999 and incorporated by
reference herein).
10.3* Key Employee Incentive Plan (1992), as amended through April 14,
1999 (filed as Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 1999 and incorporated by
reference herein).
10.4* Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended November
30, 1997 and incorporated by reference herein).
10.5.1 Lease dated January 31, 1997 relating to 290 Donald Lynch
Boulevard, Marlboro, MA (filed as Exhibit 10.5.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1996 and
incorporated by reference herein).
10.5.2 License Agreement dated as of January 31, 1997 relating to 290
Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended November
30, 1996 and incorporated by reference herein).
10.6.1 Distribution Agreement dated as of November 19, 1996 with Data
Translation II, Inc. (DTI) (filed as Exhibit 10.8.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1996
and incorporated by reference herein).
10.6.2 Intellectual Property Agreement dated as of December 2, 1996 with
DTI (filed as Exhibit 10.8.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996 and incorporated by reference
herein).
10.6.3 Corporate Services Agreement dated as of December 2, 1996 with DTI
(filed as Exhibit 10.8.3 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1996 and incorporated by reference
herein).
10.6.4 Amendment to Corporate Services Agreement dated November 18, 1997
(filed as Exhibit 10.6.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended November 30, 1997 and incorporated by reference
herein).
10.9 Offer Letter from the Company to B. Robert Feingold (filed as
Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31,1998 and incorporated by reference
herein).
10.10 Agreement and Plan of Merger and Reorganization, dated May 6, 1999
with Terran Interactive, Inc. (files as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999
and incorporated by reference herein).
10.11 Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc.
(files as Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the year ended November 30, 1999 and incorporated by reference herein).
10.12 Agreement and Plan of Merger By and Among Media 100 Inc. and
Digital Origin, Inc., dated December 28, 1999.
23
10.13 OEM Development and License Agreement, dated December 28, 1999 with
Digital Origin, Inc.
21 Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1997
and incorporated by reference herein).
23 Consent of Arthur Andersen LLP.
24 Power of Attorney (included in the signature page of this Annual
Report on Form 10-K).
27 Financial Data Schedule.
* Identifies a management contract or compensatory plan or
arrangement in which an executive officer or director of the
Company participates.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Media 100 Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 25, 2000.
Media 100 Inc.
By: /s/ John A. Molinari
--------------------------------
John A. Molinari
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Media 100 Inc., a Delaware corporation (the "Company"), hereby
constitutes and appoints John A. Molinari and Steven D. Shea, and each of them,
with full power to act without the other, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities (until revoked in writing)
to sign the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1999, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully for all intents
and purposes as he might or could do in person, thereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John A. Molinari Chief Executive Officer, President February 25, 2000
- ---------------------------------- and Director
John A. Molinari (Principal Executive Officer)
/s/ Steven D. Shea Vice President of Finance February 25, 2000
- ---------------------------------- and Treasurer
Steven D. Shea (Principal Financial Officer)
/s/ Maurice L. Castonguay Director February 25, 2000
- ----------------------------------
Maurice L. Castonguay
/s/ Roger W. Redmond Director February 25, 2000
- ----------------------------------
Roger W. Redmond
/s/ Bruce Sachs Director February 25, 2000
- ----------------------------------
Bruce Sachs
/s/ Paul J. Severino Director February 25, 2000
- ----------------------------------
Paul J. Severino
25
INDEX TO FINANCIAL STATEMENTS
PAGE
MEDIA 100 INC. AND SUBSIDIARIES
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of November 30, 1999 and 1998.......................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended
November 30, 1999, 1998 and 1997................................................. F-4
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended
November 30, 1999, 1998 and 1997................................................. F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
November 30, 1999, 1998 and 1997................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Media 100 Inc.:
We have audited the accompanying consolidated balance sheets of Media 100 Inc.
(a Delaware corporation) and subsidiaries as of November 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended November 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Media 100 Inc. and subsidiaries
as of November 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 4, 2000
F-2
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
November 30, November 30,
1999 1998
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,231 $ 7,249
Marketable securities 18,169 25,185
Accounts receivable, net of allowance for doubtful
accounts of $402 in 1999 and $395 in 1998 6,381 5,372
Income tax refund receivable 149 280
Inventories 1,478 967
Prepaid expenses 936 743
-------------- --------------
Total current assets 37,344 39,796
Property and equipment, net 6,509 8,363
Intangible assets, net 1,560 -
Other assets, net 430 313
-------------- --------------
Total assets $ 45,843 $ 48,472
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,892 $ 2,259
Accrued expenses 7,509 9,692
Deferred revenue 5,193 6,048
-------------- --------------
Total current liabilities 14,594 17,999
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value,
Authorized - 1,000,000 shares, none issued - -
Common stock, $.01 par value,
Authorized - 25,000,000 shares
Issued - 8,485,835 and 8,327,847 shares at
November 30, 1999 and 1998, respectively
Outstanding - 8,485,714 and 8,279,847 shares at
November 30, 1999 and 1998, respectively 85 83
Capital in excess of par value 41,452 40,917
Accumulated deficit (10,028) (10,598)
Treasury stock, at cost - 121 and 48,000 shares at
November 30, 1999 and 1998 - (163)
Accumulated other comprehensive income (loss) (260) 234
-------------- --------------
Total stockholders' equity 31,249 30,473
-------------- --------------
Total liabilities and stockholders' equity $ 45,843 $ 48,472
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
------------ ------------ -------------
Net sales:
Products $ 42,624 $ 34,597 $41,950
Services 8,855 7,191 4,710
------------ ------------ -------------
Total net sales 51,479 41,788 46,660
Cost of sales 19,704 17,367 19,184
------------ ------------ -------------
Gross profit 31,775 24,421 27,476
------------ ------------ -------------
Operating expenses:
Research and development 13,074 16,414 8,508
Selling and marketing 14,208 13,870 15,115
General and administrative 4,225 3,810 4,330
Amortization of intangible assets 231 - -
Acquired in-process research and
development 430 - -
Restructuring expense 424 - 526
------------ ------------ -------------
Total operating expenses 32,592 34,094 28,479
------------ ------------ -------------
Operating loss (817) (9,673) (1,003)
Interest income 1,387 1,622 1,781
------------ ------------ -------------
Income (loss) from operations before
tax provision 570 (8,051) 778
Tax provision - - 161
------------ ------------ -------------
Net income (loss) $ 570 $ (8,051) $ 617
============ ============ =============
Basic earnings (loss) per share $ .07 $ (0.97) $ 0.07
============ ============ =============
Diluted earnings (loss) per share $ .06 $ (0.97) $ 0.07
============ ============ =============
Weighted average common shares
outstanding:
Basic 8,347 8,273 8,148
============ ============ =============
Diluted 8,807 8,273 8,247
============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Stock Retained Accumulated
$.01 Par Value Capital in Earnings/ Other
Comprehensive -------------------- Excess of (Accumulated Treasury Comprehensive
Income (loss) Shares Amount Par Value Deficit) Stock Income (loss)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, November 30,
1996 - 8,087,884 $ 81 $ 40,035 $ 9,826 $ - $ 123
Issuance of common
stock under stock
plans - 104,470 1 442 - - -
Dividend of Data
Translation II, Inc.
stock to stockholders - - - - (12,990) - -
Comprehensive Income:
Net income 617 - - - 617 - -
Unrealized loss on
available for sale
securities (82) - - - - - (82)
Translation
adjustment (210) - - - - - (210)
-------
Comprehensive income 325 - - - - - -
------- ------------- ------ --------- --------- ------ -------
Balance, November 30,
1997 - 8,192,354 $ 82 $ 40,477 $ (2,547) $ - $ (169)
Issuance of common stock
under stock plans - 135,493 1 440 - - -
Purchase of treasury
stock - (48,000) - - - (163) -
Comprehensive loss:
Net loss (8,051) - - - (8,051) - -
Unrealized gain on
available for sale
securities 353 - - - - - 353
Translation
adjustment 50 - - - - - 50
-------
Comprehensive loss (7,648) - - - - - -
------- ------------- ------ --------- --------- ------ -------
Balance, November 30,
1998 - 8,279,847 $ 83 $ 40,917 $ (10,598) $ (163) $ 234
Issuance of common stock
under stock plans - 261,867 3 535 - 452 -
Purchase of treasury
stock - (56,000) (1) - - (289) -
Comprehensive income:
Net income 570 - - - 570 - -
Unrealized loss on
available for sale
securities (482) - - - - - (482)
Translation
adjustment (12) - - - - - (12)
-------
Comprehensive income 76 - - - - - -
------- ------------- ------ --------- --------- ------ -------
Balance, November 30,
1999 - 8,485,714 $ 85 $ 41,452 $ (10,028) $ - $ (260)
============= ====== ========= ========= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 570 $(8,051) $ 617
Adjustments to reconcile net income (loss)
from operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,590 2,925 1,614
Acquired in-process research and development 430 - -
Amortization of acquisition-related intangible assets 231 - -
(Gain) loss on sale of marketable securities (22) (81) 19
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable (831) 2,317 3,976
Income tax refund receivable 131 (280) -
Inventories (511) (271) 777
Prepaid expenses (93) - (175)
Other assets (69) 280 (481)
Accounts payable (709) 306 (28)
Accrued expenses (2,515) 2,734 1,167
Deferred revenue (855) 2,043 1,852
-----------------------------------
Net cash (used in) provided by operating activities (653) 1,922 9,338
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Terran Interactive, Inc., net of cash
acquired (1,890) - -
Purchase of equipment (1,572) (3,184) (7,251)
Purchase of intangible assets (147) - -
Purchases of marketable securities (40,504) (76,675) (65,716)
Proceeds from sales of marketable securities 47,060 80,816 64,706
-----------------------------------
Net cash provided by (used in) investing activities 2,947 957 (8,261)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to stock plans 990 441 442
Purchase of treasury stock (290) (163) -
-----------------------------------
Net cash provided by financing activities 700 278 442
EFFECT OF EXCHANGE RATE CHANGES ON CASH (12) 50 (210)
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,982 3,207 1,309
CASH AND CASH EQUIVALENTS, beginning of period 7,249 4,042 2,733
-----------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 10,231 $ 7,249 $ 4,042
===================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 13 $ 349 $ 92
===================================
OTHER TRANSACTIONS NOT PROVIDING (USING) CASH:
Dividend of Data Translation II, Inc. stock to stockholders $ - $ - $(12,990)
======== ======= =========
Change in value of marketable securities $ 482 $ 353 $ (82)
======== ======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(SEE NOTE 3):
In connection with the acquisition of Terran Interactive, Inc., the
following transaction occurred:
Fair value of assets acquired $ 2,558 - -
Liabilities assumed 668 - -
-----------------------------------
Cash paid for acquisition and acquisition costs $ 1,890 - -
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Media 100 Inc., a Delaware corporation, (the "Company") develops,
markets, sells, and supports digital video and web-based streaming media
software and systems, or tools, that enable new Internet broadcasters and
traditional broadcasters, corporate marketing professionals, and educators to
create and deliver high-quality video programs quickly, easily, and with great
creative flexibility. The Company markets and delivers its products to end users
through its web sites as well as through a worldwide channel of specialized
value-added resellers ("VARs") that sell, assemble, and install turnkey systems
using personal computers, disk drives, and ancillary video equipment. Since the
Company began first shipments of its products in 1993, it has shipped over
170,000 software applications and 25,000 systems to users in over 50 countries.
In June 1999, the Company acquired Terran Interactive Inc. ("Terran") of
Los Gatos, CA, a leading supplier of software tools for high quality Internet
and DVD video. With this acquisition, the Company develops, markets, sells and
supports software tools for streaming media for the Internet. In addition to
delivering Terran's products to end users through the Company's worldwide
channel of VARs and distributors, the Company sells the products acquired from
the Terran acquisition direct to end users using the Company's telemarketing
groups and its website. In connection with the acquisition, the Company paid
$1,890,000 in cash for all outstanding shares of Terran's common stock. The
acquisition was accounted for under the purchase method of accounting and is
described further in Note 3.
Subsequent to year-end, the Company entered into definitive agreements to
acquire two additional companies (See Note 13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial statements.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
(b) Cash and 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.
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.
F-7
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Cash and Cash Equivalents and Marketable Securities (continued)
Marketable securities held as of November 30, 1999 and 1998 consist of the
following (in thousands):
MATURITY 1999 1998
-------- ---- ----
Investments available for sale:
U.S. Treasury Notes less than 1 year $ - $ 1,535
U.S. Treasury Notes 1 - 5 years 4,538 5,760
------------- -----------
Total U.S. Treasury Notes 4,538 7,295
Municipal Bonds less than 1 year 1,797 3,837
Municipal Bonds 1 - 5 years - 1,067
------------- -----------
Total Municipal Bonds 1,797 4,904
U.S. Agency Bonds less than 1 year - 4,298
U.S. Agency Bonds 1 - 5 years 3,008 4,136
------------- -----------
Total U.S. Agency Bonds 3,008 8,434
Money Market Instruments less than 1 year 3,689 3,395
Corporate Obligations less than 1 year 4,042 516
Corporate Obligations 1 - 5 years 4,784 6,847
------------- -----------
Total Corporate Obligations 8,826 7,363
Total Investments available for sale 21,858 31,391
Less: Cash equivalents (3,689) (6,206)
------------- -----------
Total marketable securities $ 18,169 $ 25,185
============= ===========
Marketable securities had a cost of $18,380 and $24,914 at November 30,
1999 and 1998, respectively, and a market value of $18,169 and $25,185,
respectively. To adjust the carrying amount of the November 30, 1999 and 1998
marketable securities portfolio to market value, an unrealized gain (loss) has
been reflected as a separate component of stockholders' equity pursuant to the
provisions of SFAS No. 115.
(c) Inventories
Inventories at November 30, 1999 and 1998 are stated at the lower of
first-in, first-out (FIFO) cost or market and consist of the following (in
thousands):
1999 1998
----------- -----------
Raw materials $ 556 $ 230
Work-in-process 424 336
Finished goods 498 401
----------- -----------
$ 1,478 $ 967
=========== ===========
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.
(d) Depreciation and Amortization
The Company provides for depreciation and amortization, using the
straight-line method by charges to operating expenses in amounts that allocate
the cost of the equipment over the following estimated useful lives:
DESCRIPTION USEFUL LIVES
--------------------------------------------------------
Machinery and equipment 3 to 5 years
Purchased software 3 to 5 years
Furniture and fixtures 7 years
Vehicles 3 years
Leasehold Improvements Life of Lease
F-8
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Property and equipment, net
Property and equipment, net at November 30, 1999 and 1998 is stated at
cost, less accumulated depreciation and amortization, and consists of the
following (in thousands):
1999 1998
-------------- ----------------
Machinery and equipment $ 8,212 $ 7,174
Purchased software 4,162 3,616
Furniture and fixtures 1,252 1,240
Vehicles 11 12
Leasehold improvements 1,554 1,482
------------- ----------------
$ 15,191 $ 13,524
Less accumulated depreciation and
amortization (8,682) (5,161)
------------- ----------------
$ 6,509 $ 8,363
============= ================
(f) Intangible Assets
Intangible assets consist of the following as of November 30, 1999 and
1998:
1999 1998
---------------- --------------------
Patents and Trademarks 169 $ -
Acquired Technology 1,560 -
Goodwill 101 -
---------------- --------------------
$ 1,830 $ -
Less accumulated amortization (270) -
---------------- --------------------
$ 1,560 $ -
================ ====================
The Company is amortizing goodwill and acquired technology related to the
acquisition of Terran (See Note 3) using a straight-line method over 3 years,
their estimated useful lives. Patents and trademarks are being amortized over
periods ranging from 3 to 5 years, their estimated useful lives.
The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
Accounting Principles Board (APB) Opinion No. 17, INTANGIBLES ASSETS. SFAS No.
121 and APB No. 17 require that long-lived and intangible assets be reviewed for
impairment. Any write-downs are to be treated as permanent reductions in the
carrying amount of the assets and are determined based on fair value of the
assets. The Company believes that the carrying values of its long-lived and
intangible assets are realizable as of November 30, 1999.
(g) Foreign Currency
The financial statements of the Company's subsidiaries are translated
from their functional currency into U.S. dollars using the current rate method
in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly,
assets and liabilities of the Company's foreign subsidiaries are translated at
the rates of exchange in effect at year-end. Revenues and expenses are
translated using exchange rates in effect during the year. Gains and losses from
foreign currency translation are credited or charged to "Cumulative translation
adjustment" included in stockholders' equity in accumulated other comprehensive
income (loss) in the accompanying consolidated balance sheets. The Company
realized net foreign currency transaction gains (losses) of ($77,000), $81,000
and ($215,000) in 1999, 1998 and 1997, respectively.
F-9
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP
97-2 provides revised and expanded guidance on software revenue recognition and
applies to all entities that earn revenue from licensing, selling and otherwise
marketing computer software. The Company adopted the provisions of SOP 97-2 as
of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a
material impact on the Company. 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. The Company provides for
estimated returns 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.
(i) Net Income (Loss) Per Common Share
Effective December 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128). 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 (loss) per
share is computed using the weighted-average number of common shares outstanding
and potential common shares from the assumed exercise of options outstanding
during the period, if any, using the treasury stock method. Prior periods have
been restated to reflect the new standard.
The following is a reconciliation of the shares used in the computation of basic
and diluted earnings per share (in thousands):
- ----------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Basic net income - weighted average shares of common
stock outstanding 8,347 8,273 8,148
Effect of potential common shares - stock options
outstanding (unless antidilutive) 460 - 99
-----------------------------------------
Diluted net income - weighted average shares and
potential common shares outstanding 8,807 8,273 8,247
=========================================
The Company excludes potentially dilutive securities from its diluted net
income (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 reported net losses and the effect of including such securities would be
antidilutive. During fiscal year 1999, options to purchase approximately 234,000
weighted average shares of common stock were excluded because the options'
exercise price was greater than the average market price of the common stock.
Options to purchase approximately 1,032,000 weighted average shares of common
stock were outstanding at November 30, 1998, but were not included in the
computation of diluted net income (loss) per share as a result of their
antidilutive effect due to the loss available to common stockholders. During
fiscal year 1997, options to purchase approximately 1,022,000 weighted average
shares of common stock were excluded because the options' exercise price was
greater than the average market price of the common stock.
(j) 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
and $89,000 as of November 30, 1999 and 1998, respectively, 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. Amortization expense,
included in cost of sales in the accompanying consolidated statements of
operations, was approximately $60,000, $60,000 and $80,000 in 1999, 1998 and
1997, respectively.
F-10
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Restructuring Expense
In the third quarter of fiscal 1999, the Company implemented a
restructuring plan to better align its organization with its corporate strategy.
Substantially all of the restructuring charge of $424,000 relates to the
elimination of approximately 12 employees across the following functions:
research and development (4), selling and marketing (7) and general and
administration (1). At November 30, 1999, approximately $232,000 of the accrued
restructuring charge remained, which is entirely comprised of severance-related
costs. The total cash impact of the restructuring amounted to approximately
$424,000. The total cash paid as of November 30, 1999 was $192,000 and the
remaining amount will be paid by the end of the first quarter in fiscal 2000.
In the third quarter of fiscal 1997, the Company incurred restructuring
expenses of $526,000 for severance and related costs associated with a reduction
of the Company's workforce. All of these expenses have been paid as of the end
of the Company's first quarter of fiscal 1998.
(l) Use of Estimates in the Preparation of Financial Statements
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 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.
(m) Concentration of Credit Risk and Significant Customers
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
such as foreign exchange contract, options contracts or other foreign hedging
arrangements. The Company maintains its cash, cash equivalents and marketable
securities with established financial institutions. The Company does not believe
it has accounts receivable collection risk in excess of existing reserves. For
the years ended November 30, 1999, 1998 and 1997, no customer accounted for more
than 10% of the Company's total net sales.
(n) Single of Limited Source Suppliers
The Company currently 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. These
components are purchased through purchase orders from time to time. The Company
generally does not carry significant inventories of these single or limited
source components and has no guaranteed supply arrangements for them. Although
there are a limited number of manufactures of the key components, management
believes that the other suppliers could provide similar components on comparable
terms. An extended interruption in its source of supply, however, could cause a
delay in manufacturing and a possible loss of sales, which would affect
operating results adversely.
(o) Recent Accounting Pronouncements
In July 1997, the Financial Accounting Standards Board issued SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 establishes standards for public companies to report operating segment
information in annual financial statements and requires those enterprises to
report selected operating segment information in interim financial reports
issued to shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. The Company has adopted SFAS No. 131 in its fiscal 1999
annual consolidated financial statements (See Note 12).
(p) Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
F-11
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q) Financial Instruments
The estimated fair values of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable and
accounts payable, approximate their carrying value.
3. ACQUISITION OF TERRAN
On June 28, 1999, the Company acquired Terran of Los Gatos, CA, a leading
supplier of software tools for high quality Internet and DVD video. In
connection with the acquisition, the Company paid $1,850,000 in cash for all
outstanding shares of Terran's common stock. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of Terran's
operations and the fair market value of the acquired assets and assumed
liabilities have been included in the financial statements of the Company as of
the acquisition date. In connection with the acquisition, the purchase price
could increase depending on Terran's net sales and operating income over the
next two years. Any contingent payments based on meeting the earn-out conditions
will be considered additional goodwill and amortized over the appropriate useful
life.
The aggregate purchase price consisted of the following (in thousands):
DESCRIPTION AMOUNT
Cash $ 1,850
Liabilities assumed 668
Acquisition costs 40
-------
Total purchase price: $ 2,558
-------
The purchase price has been allocated to the acquired assets and assumed
liabilities as follows (in thousands):
Current assets $ 278
Equipment and other assets 189
Acquired technology 1,560
In-process research and development 430
Goodwill 101
-------
$ 2,558
-------
Amounts allocated to tangible and intangible assets, including acquired
in-process research and development, were based on results of an independent
appraisal. The amount allocated to developed technology is being amortized on a
straight-line basis over an expected useful life of three years. In connection
with the acquisition, the Company allocated $430,000 of the purchase price to
in-process research and development projects. This allocation represented the
estimated 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.
The Company allocated values to the in-process research and development
based on an in depth assessment of the R&D projects. The value assigned to these
assets were limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired
next-generation technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected
F-12
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors.
The resulting net cash flows from such projects are based on management's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from such projects. Aggregate
revenues for Terran were estimated to grow at a compounded annual growth rate of
approximately 60% through 2003, at which time revenue growth is expected to
gradually decline to a normalized long-term growth rate.
The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental Terran
technologies met their design specifications including functional, technical,
and economic performance requirements. Anticipated completion dates ranged from
6 to 12 months, at which times the Company expected to begin selling the
developed products. Development costs to complete the R&D were estimated at
approximately $1.2 million.
Terran's primary in-process R&D projects involved designing a technology
and application platform for a next-generation Media Cleaner product and the
development of new live broadcast software technologies. The estimated revenues
for the in-process projects were expected to peak within two years of
acquisition and then decline sharply as other new products and technologies are
expected to enter the market.
Operating expenses were estimated based on historical results and
discussions with management regarding anticipated profit margin improvements.
Due to purchasing power increases and general economies of scale, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 35% was considered appropriate
for the in-process R&D, and discount rates of 25% were appropriate for the
existing products and technologies. These discount rates were commensurate with
the Terran's stage of development and the uncertainties in the economic
estimates described above.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Terran prior to the
close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.
Management's estimate of net cash flow was discounted to present value.
The discount rate used in discounting the net cash flows from purchased
in-process technology is 35%. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model. The discount
rate utilized for the in-process technology was higher than Media 100's WACC due
to the inherent uncertainties in the financial forecasts, including the
uncertainty surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability levels of such
technology and the uncertainty of technological advances that are unknown at
this time.
If these projects are not successfully developed the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
The following unaudited pro forma financial information presents the
combined results of operations of Media 100 and Terran as if the acquisition
occurred as of December 1, 1997. The pro forma data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations for future periods or the results
that actually would have occurred had Media 100 and Terran been a
F-13
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
combined company during the specified periods. The pro forma results include the
effects of the amortization of acquisition-related intangible assets and exclude
the charge for the purchased in-process technology.
(IN THOUSANDS) 1999 1998
------------ ---------------
Net sales $ 53,061 $ 44,271
Net income (loss) $ 237 $ (8,529)
Net income (loss) per common share - basic $ 0.03 $ (1.03)
Net income (loss) per common share - diluted $ 0.03 $ (1.03)
Weighted average common share outstanding - basic 8,347 8,273
Weighted average common share outstanding - diluted 8,807 8,273
4. STOCK OPTIONS
Prior to April 1992, options were granted under the Company's 1982 Key
Employee Inventive Plan (the "1982 Plan"). Subject to certain limitations
imposed by the 1982 Plan, options were granted at a price determined by the
Board. The Board resolved to issue options under the 1982 Plan at not less than
100% of fair market value. The options expire six years from the date of grant
and become exercisable at the rate of 20% per year beginning one year from the
date of grant. No further options may be granted under the 1982 Plan.
In 1992, the Company adopted the 1992 Key Employee Incentive Plan (the
"1992 Plan"). The number of shares of common stock reserved for issuance under
the 1992 Plan is 2,200,000. Options granted pursuant to the 1992 Plan may, at
the discretion of the Board, be incentive stock options as defined by the
Internal Revenue Code. Subject to the provisions of the 1992 Plan, options
granted are at a price as specified by the Board. The Board has, to date, issued
options under the 1992 Plan at not less than 100% of fair market value. The
options become exercisable at a rate of 25% per year beginning one year from the
date of grant unless otherwise specified by the Board. The Board will determine
when the options will expire, but in no event will the option period exceed ten
years. No options may be granted under the 1992 Plan on or after February 29,
2002.
Information concerning stock options for each of the three years ended
November 30, 1999 follows:
Weighted Average
Number of Option Price
Options Price Ranges per Share
- --------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1996 1,215,830 $ 1.73 - 16.91 $ 10.20
Granted 474,225 4.19 - 10.00 8.48
Exercised (37,940) 1.73 - 4.72 3.72
Expired/canceled (504,189) 1.73 - 16.91 9.93
- --------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1997 1,147,926 $ 1.73 - 16.91 $ 9.80
Granted 1,262,180 2.75 - 5.00 3.72
Exercised (42,420) 1.73 - 4.29 2.57
Expired/canceled (978,570) 1.73 - 16.91 8.54
- --------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1998 1,389,116 $ 2.68 - 15.48 $ 5.34
Granted 654,715 5.13 - 16.25 6.26
Exercised (149,803) 3.22 - 4.29 3.83
Expired/canceled (167,180) 3.25 - 10.48 4.46
- --------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1999 1,726,848 $ 2.68 - 16.25 $ 5.91
====================================================================================================================
Exercisable at November 30, 1999 534,065 $ 2.68 - 15.48 $ 6.73
====================================================================================================================
Exercisable at November 30, 1998 389,453 $ 2.68 - 15.48 $ 6.79
====================================================================================================================
Exercisable at November 30, 1997 315,204 $ 1.73 - 16.91 $ 5.31
====================================================================================================================
Available for grant at November 30, 1999 77,779
====================================================================================================================
F-14
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair market value of the options as of the date of
grant for the periods ended November 30, 1999, 1998 and 1997, is $6.10, $2.83,
and $6.03, respectively.
The Company also issues shares of common stock to employees pursuant to
the terms of the 1986 Employee Stock Purchase Plan (the "Plan"). The Company has
reserved 1,000,000 shares of common stock for issuance under the Plan, as
amended. Effective July 1, 1995, employees who have worked for the Company for
at least one month are eligible to participate in the Plan. The Plan allows
participants to purchase common stock of the Company at 85% of the fair market
value as defined. Under the Plan, the Company issued 112,064, 93,073 and 67,311
shares in fiscal years 1999, 1998 and 1997, respectively. At November 30, 1999,
there were 294,194 shares available for issuance under the Plan.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION (SFAS No. 123), which requires the measurement of the fair market
value of stock options or warrants to be included in the statement of operations
or disclosed in the notes to the financial statements. As permitted by SFAS No.
123, the Company will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and has elected the
disclosure-only alternative under SFAS No. 123 for options granted using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted
average assumptions are as follows:
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
---------------- ----------------- -------------------
Risk-free interest rate........ 4.6% - 6.0% 4.2% - 5.8% 6.0% - 6.1%
Expected dividend yield........ - - -
Expected lives................. 6 years 6 years 6 years
Expected volatility............ 152.0% 73.3% 75.9%
The table below presents pro forma net income (loss) and earnings per
share, had compensation cost for the Company's stock-based employee compensation
plans been determined using the provisions of SFAS No. 123 (in thousands, except
per share amounts).
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
------------- ------------ -------------
Income (loss) from operations:
As reported $ 570 $ (8,051) 617
Pro forma $ (953) $ (9,157) (153)
Income (loss) per share from operations:
Basic:
As reported $ 0.07 $ (0.97) $ 0.07
Pro forma $ (0.11) $ (1.11) $ (0.02)
Diluted:
As reported $ 0.06 $ (0.97) $ 0.07
Pro forma $ (0.11) $ (1.11) $ (0.02)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at November
30, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Average Weighted Average Weighted Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Price Outstanding Contractual Life per Share Outstanding per Share
- ---------------- -------------- --------------------- -------------------- --------------- --------------------
$2.68 - 3.57 321,518 4.4 $2.93 98,414 $2.90
3.94 412,470 4.1 3.94 222,552 3.94
4.25 - 5.56 319,799 6.5 4.95 36,175 4.25
5.63 - 6.31 387,175 5.4 5.73 12,000 5.84
9.25 - 16.25 285,886 2.6 13.84 164,924 13.40
-------------- ---------------
1,726,848 534,065
============== ===============
F-15
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1998, the Company offered employees the opportunity to
participate in an option-repricing program, pursuant to which each employee
could elect to replace his or her then outstanding, options with new options on
a one-for-one basis. The per share exercise price of the replacement options is
$3.94. The replacement options are exercisable as follows: replacement options
that were granted in exchange for exercisable old options become exercisable six
months following the new grant date; replacement options that were granted in
exchange for unexercisable old options become exercisable over four years from
the new grant date, 12.5% six months following the new grant date and 6.25%
quarterly thereafter; and all replacement options expire ten years after the new
grant date. An aggregate of 694,810 options were granted in exchange for options
cancelled in connection with this program. The option-repricing program resulted
in a new measurement date for all options replaced. Since the new exercise price
was equal to the fair market value of the Company's common stock on the new
measurement date, the Company did not record any compensation cost in connection
with this program.
5. RETIREMENT PLAN
In November 1985, the Company adopted an employee savings plan (the
"Savings Plan") in compliance with Section 401(k) of the Internal Revenue Code.
Effective April 1, 1995, the Savings Plan provides for annual Company
contributions of up to 15% of the first 6% of total compensation per
participant. Effective January 1, 1998, these contributions vest in full after a
three-year period of service. Effective January 1, 1999, the Savings Plan was
amended to provide for annual contributions of up to 40% of the first 6% of
total compensation, with a maximum matching contribution of $3,000 annually. The
Company's contributions to the Savings Plan were $203,000, $86,000 and $98,000
in 1999, 1998 and 1997, respectively.
The Company does not provide postretirement benefits to any employees as
defined under Statement of Financial Accounting Standards No. 106, EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.
6. BANK FACILITIES
The Company renewed an irrevocable standby letter of credit agreement for
a sum not to exceed $196,808 effective April 1, 1999 and terminating March 31,
2000. This facility was entered into in connection with the lease of the
Company's office and manufacturing facility (Note 7(a)). This letter of credit
is automatically extended without amendment annually from the termination date,
unless written notice is provided electing not to renew for any such additional
period. Notwithstanding the above, this letter of credit expires on March 31,
2002.
7. COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company's principal executive, engineering, manufacturing and sales
operations occupy approximately 56,500 square feet in a leased facility located
at 290 Donald Lynch Boulevard, Marlboro, Massachusetts. The lease for this
facility terminates on March 31, 2002, but is renewable at the Company's option
through March 31, 2007. Prior to moving into its current facility on May 2,
1997, the Company's operations occupied approximately 31,000 square feet in a
facility which it shared with Data Translation, Inc. ("DTI") located in
Marlboro, Massachusetts. Total rent expense including operating expenses
pursuant to the lease agreement charged to operations with respect to the
Company's current Marlboro facility for fiscal years 1999, 1998 and 1997 was
$879,000, $822,000 and $542,000, and with respect to its former Marlboro
facility was $527,000 for the fiscal year 1997. Rent expense with respect to the
former Marlboro facility for fiscal 1997 reflected the Company's pro rata
portion of the rental charges and operating expenses associated with that
facility and the use by the Company of certain manufacturing equipment belonging
to DTI. Rent expense including operating expenses pursuant to the lease
agreement charged to operations for the consolidated Company for fiscal years
1999, 1998, and 1997 was $1,187,000, $999,000, and $1,249,000, respectively.
F-16
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments, excluding operating costs, under all
operating leases are as follows (in thousands):
FISCAL YEARS ENDING NOVEMBER 30,
AMOUNT
2000 $959
2001 959
2002 579
2003 392
2004 350
- ----------------------------------------------------------------------------
Total minimum lease payments $3,239
============================================================================
(b) Contingencies
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. There can be no assurance that the Company will
prevail in the lawsuit asserted by Avid or that the expense or other effects of
the lawsuit, whether or not the Company prevails, will not have a material
adverse effect on the Company's business, operating results and financial
condition.
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.
8. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. The components of the net deferred tax asset recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net operating loss carryforwards $ 4,933 $ 3,866 $ -
Other temporary differences, principally nondeductible accruals 1,662 3,112 1,587
Research and development credit carryforwards 1,666 1,119 685
Acquired technology (624) - -
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 7,637 8,097 2,272
- ----------------------------------------------------------------------------------------------------------------------------
Valuation allowance (7,637) (7,873) (1,768)
- ----------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ 224 $ 504
====================================================================================================================================
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future income tax returns, the Company has placed a
valuation allowance against its deferred tax assets, except for previously paid
taxes that the Company believes are refundable. These deferred tax assets are
included as a component of other assets, net on the accompanying consolidated
balance sheets.
The tax credit carryforwards expire at various dates through 2019. The
Tax Reform Act of 1986 contains provisions that may limit the tax credit
carryforwards available to be used in any given year in the event of significant
changes in ownership, as defined.
F-17
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income (loss) from continuing operations before tax provision in the
accompanying consolidated statements of operations consisted of the following
(in thousands):
- ------------------------------------ ----------------- ----------------- -----------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- ------------------------------------ ----------------- ----------------- -----------------
United States $ 503 $ (8,039) $ 792
Foreign 67 (12) (14)
----------------- ----------------- -----------------
$ 570 $ (8,051) $ 778
================= ================= =================
The income tax provision shown in the accompanying consolidated
statements of operations consists of the following (in thousands):
- --------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
Federal:
Current $ (224) $ (280) $ 581
Deferred - 280 (504)
- --------------------------------------------------------------------------------------------------
- - 77
- --------------------------------------------------------------------------------------------------
State:
Current - - 24
Deferred - - -
- --------------------------------------------------------------------------------------------------
- - 24
- --------------------------------------------------------------------------------------------------
Foreign - Current - - 60
- --------------------------------------------------------------------------------------------------
$ - $ - $ 161
- --------------------------------------------------------------------------------------------------
The effective income tax rate varies from the amount computed using the
statutory U.S. income tax rate as follows:
- ------------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Tax provision (benefit) at statutory rate 34.0% (34.0)% 34.0%
Federal benefit from loss carryforward - - -
Utilization of research and development
credits - - (30.5)
State taxes 6.0 (6.0) 3.1
Change in valuation allowance (40.0) 40.0 -
Foreign taxes - - 7.7
Tax credits - - 1.8
Other permanent differences - - 4.5
- ------------------------------------------------------------------------------------------------------
-% -% 20.6%
======================================================================================================
9. ACCRUED EXPENSES
Accrued expenses at November 30, 1999 and 1998 consist of the following
(in thousands):
1999 1998
-------------- --------------
Payroll and payroll related taxes $ 2,576 $ 1,691
Accrued warranty 463 463
Accrued product development 40 2,220
Accrued selling and marketing 296 878
Accrued legal and other 4,134 4,440
- -------------------------------------------------------------------------------
$7,509 $9,692
===============================================================================
F-18
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account (in thousands):
- ------------------------------------------------------------------------------------------------
Balance at Charges to Cost and Deductions Balance at
Beginning of Expense End of
Fiscal Year Fiscal Year
- ------------------------------------------------------------------------------------------------
For the Fiscal Year Ended $328 $187 $104 $411
November 30, 1997
================================================================================================
For the Fiscal Year Ended $411 $340 $356 $395
November 30, 1998
================================================================================================
For the Fiscal Year Ended $395 $154 $147 $402
November 30, 1999
11. SELECTED QUARTERLY INFORMATION (UNAUDITED)
Fiscal 1999 (in thousands, except per share amounts) February 28 May 31 August 31 November 30
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ 12,139 $ 12,537 $ 13,116 $ 13,687
Gross profit $ 7,375 $ 7,674 $ 8,102 $ 8,624
Net income (loss) $ (689) $ 177 $ (172) $ 1,254
Net income (loss) per share - basic $ (0.08) $ .02 $ (0.02) $ 0.15
Net income (loss) per share - diluted $ (0.08) $ .02 $ (0.02) $ 0.14
Shares - net income (loss) per share - basic 8,294 8,300 8,342 8,454
Shares - net income (loss) per share - diluted 8,294 8,609 8,342 9,257
=============================================================================================================================
Fiscal 1998 (in thousands, except per share amounts) February 28 May 31 August 31 November 30
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ 10,521 $ 9,637 $ 10,124 $ 11,506
Gross profit $ 6,428 $ 5,878 $ 6,173 $ 7,076
Net income (loss) $ (752) $ (3,350) $ (2,419) $ (1,530)
Net income (loss) per share - basic $ (0.09) $ (0.41) $ (0.29) $ (0.18)
Net income (loss) per share - diluted $ (0.09) $ (0.41) $ (0.29) $ (0.18)
Shares - net income (loss) per share - basic 8,232 8,258 8,306 8,297
Shares - net income (loss) per share - diluted 8,232 8,258 8,306 8,297
=============================================================================================================================
12. SEGMENT INFORMATION
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). SFAS No. 131 establishes
standards for public companies to report operating segment information in annual
and interim financial statements filed with the SEC and shareholders effective
for fiscal years beginning after December 15, 1997. 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 internet tools, digital video
systems and services.
F-19
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years November 30, 1999, 1998 and 1997 is as follows:
Digital
Internet Video
1997 Tools Services Systems Corporate Total
- ---- ----------- -------------- --------------- ------------ ---------------
Net sales from external customers $ - $ 4,710 $ 41,950 $ - $ 46,660
=========== ============== =============== ============ ===============
Gross profit - 3,764 23,712 - 27,476
=========== ============== =============== ============ ===============
Depreciation - 42 1,572 - 1,614
=========== ============== =============== ============ ===============
Restructuring - - - 526 526
=========== ============== =============== ============ ===============
Interest income - - - 1,781 1,781
=========== ============== =============== ============ ===============
Income taxes $ - $ - $ - $ 161 $ 161
=========== ============== =============== ============ ===============
1998
----
Net sales from external customers $ - $ 7,191 $ 34,597 $ - $ 41,788
=========== ============== =============== ============ ===============
Gross profit - 6,057 18,364 - 24,421
=========== ============== =============== ============ ===============
Depreciation - 40 2,885 - 2,925
=========== ============== =============== ============ ===============
Interest income $ - $ - $ - $ 1,622 $ 1,622
=========== ============== =============== ============ ===============
1999
----
Net sales from external customers $ 4,058 $ 8,855 $ 38,566 $ - $ 51,479
=========== ============== =============== ============ ===============
Gross profit $ 2,793 $ 7,592 $ 21,390 $ - $ 31,775
=========== ============== =============== ============ ===============
Depreciation 20 71 3,499 - 3,590
=========== ============== =============== ============ ===============
Amortization of intangibles assets $ - $ - $ - $ 231 $ 231
=========== ============== =============== ============ ===============
Acquired in-process research
and development 430 430
=========== ============== =============== ============ ===============
Restructuring $ - $ - $ - $ 424 $ 424
=========== ============== =============== ============ ===============
Interest income $ - $ - $ - $ 1,387 $ 1,387
=========== ============== =============== ============ ===============
Interest income, restructuring, 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 years ended November 30, 1999, 1998
and 1997 were as follows (in thousands):
1999 1998 1997
--------------- ----------------- ---------------
United States 31,260 $ 23,353 $ 26,556
United Kingdom, Sweden, Denmark and Norway 5,169 4,168 3,710
Germany, Austria and Switzerland 2,825 2,168 1,812
France, Spain and Benelux 3,475 2,822 2,274
Japan 2,072 1,440 2,274
Other foreign countries 6,678 7,837 10,034
--------------- ----------------- ---------------
$ 51,479 $ 41,788 $ 46,660
=============== ================= ===============
F-20
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived tangible assets by geographic area were as follows for the
years ended November 30, 1999, 1998 and 1997 were as follows (in thousands):
1999 1998
--------------- ---------------
United States 6,151 $ 7,935
United Kingdom 146 186
Germany 97 80
Italy 26 54
France 89 108
--------------- ---------------
$ 6,509 $ 8,363
=============== ===============
13. SUBSEQUENT EVENTS
On December 21, 1999, the Company completed its acquisition of Wired,
Inc. Wired, Inc. is a fast-growing supplier of Moving Pictures Experts Group
("MPEG") streaming media production tools for the Internet and digital video
disk ("DVD") authoring. In connection with the acquisition, the Company will pay
$3,000,000 in cash for all outstanding shares of Wired, Inc. common stock. The
first payment in the amount of $1,500,000 was paid upon completion of the
acquisition and the remaining $1,500,000 to be paid on the first anniversary of
the closing. In connection with the acquisition, the purchase price could
increase depending on Wired's net sales and operating income over the next two
years. Any contingent payments based on meeting the earn-out conditions will be
considered additional goodwill and amortized over the appropriate useful life.
The Company will treat the acquisition as a purchase for accounting purposes.
On December 28, 1999, the Company announced it has entered into a
definitive agreement to acquire Digital Origin, Inc. Digital Origin, Inc. is a
leading developer of digital video editing and effects software applications
designed to support the new low-cost, high-quality digital video ("DV")
camcorders used for acquiring video for Internet applications. The Company
expects that the merger will be completed as a pooling of interest for
accounting purposes, and a tax-free transaction. Under the agreement, the
Company will issue 0.5347 shares of its common stock for each share of Digital
Origin, Inc. common stock. The transaction is subject to the approval of the
stockholders of Media 100 Inc. and Digital Origin, Inc. and other customary
closing conditions. The merger is expected to be completed in the Company's
second fiscal quarter of 2000. In addition, the company entered into a
non-exclusive, four year OEM development and license agreement with Digital
Origin by which Media 100 will use Digital Origin's consumer level editing and
effects software with the Company's Internet streaming media software in
exchange for royalty payments.
F-21
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation of Media 100 Inc. (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1996 and incorporated by reference
herein).
3.2 By-laws of Media 100 Inc., as amended through June 17, 1998 (filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended May 31,1998 and incorporated by reference
herein).
4 Specimen Certificate representing the Company's Common Stock
(filed as Exhibit 4 to the Company's Registration Statement on
Form S-1, File No. 2-94121 and incorporated by reference herein).
10.1* Key Employee Incentive Plan (1982), as amended through November
15, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996 and
incorporated by reference herein).
10.2* 1986 Employee Stock Purchase Plan, as amended through April 14,
1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1999 and
incorporated by reference herein).
10.3* Key Employee Incentive Plan (1992), as amended through April 14,
1999 (filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1999 and
incorporated by reference herein).
10.4* Media 100 Inc. 401(k) Savings Plan (filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997 and incorporated by reference herein).
10.5.1 Lease dated January 31, 1997 relating to 290 Donald Lynch
Boulevard, Marlboro, MA (filed as Exhibit 10.5.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended November 30,
1996 and incorporated by reference herein).
10.5.2 License Agreement dated as of January 31, 1997 relating to 290
Donald Lynch Boulevard, Marlboro, MA (filed as Exhibit 10.5.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996 and incorporated by reference herein).
10.6.1 Distribution Agreement dated as of November 19, 1996 with Data
Translation II, Inc. (DTI) (filed as Exhibit 10.8.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1996 and incorporated by reference herein).
10.6.2 Intellectual Property Agreement dated as of December 2, 1996 with
DTI (filed as Exhibit 10.8.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996 and
incorporated by reference herein).
10.6.3 Corporate Services Agreement dated as of December 2, 1996 with DTI
(filed as Exhibit 10.8.3 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1996 and incorporated
by reference herein).
10.6.4 Amendment to Corporate Services Agreement dated November 18, 1997
(filed as Exhibit 10.6.4 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1997 and incorporated
by reference herein).
10.9 Offer Letter from the Company to B. Robert Feingold (filed as
Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31,1998 and incorporated by
reference herein).
10.10 Agreement and Plan of Merger and Reorganization, dated May 6, 1999
with Terran Interactive, Inc. (files as Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 31, 1999 and incorporated by reference herein).
10.11 Asset Purchase Agreement, dated December 17, 1999 with Wired, Inc.
(files as Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended November 30, 1999 and incorporated by
reference herein).
10.12 Agreement and Plan of Merger By and Among Media 100 Inc. and
Digital Origin, Inc., dated December 28, 1999.
10.13 OEM Development and License Agreement, dated December 28,
1999 with Digital Origin, Inc.
21 Subsidiaries of Media 100 Inc. (filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1997 and incorporated by reference herein).
23 Consent of Arthur Andersen LLP.
24 Power of Attorney (included in the signature page of this Annual
Report on Form 10-K).
27 Financial Data Schedule.
* Identifies a management contract or compensatory plan or
arrangement in which an executive officer or director of
the Company participates.